CPI International Holding Corp. - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - CPI International Holding Corp.	Financial_Report.xls
EX-10.1 - EXHIBIT 10.1 - CPI International Holding Corp.	cpih-2014070410qxex101.htm
EX-10.3 - EXHIBIT 10.3 - CPI International Holding Corp.	cpih-2014070410qex103.htm
EX-10.2 - EXHIBIT 10.2 - CPI International Holding Corp.	cpih-2014070410qxex102.htm
EX-31.1 - EXHIBIT 31.1 - CPI International Holding Corp.	cpih-2014070410qxex311.htm
EX-32.1 - EXHIBIT 32.1 - CPI International Holding Corp.	cpih-2014070410qxxex321.htm
EX-31.2 - EXHIBIT 31.2 - CPI International Holding Corp.	cpih-2014070410qxex312.htm
EX-32.2 - EXHIBIT 32.2 - CPI International Holding Corp.	cpih-2014070410qxxex322.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number: 333-173372-07

CPI INTERNATIONAL HOLDING CORP.

(Exact Name of Registrant as Specified in Its Charter)



Delaware (State or Other Jurisdiction of Incorporation or Organization)		90-0649687 (I.R.S. Employer Identification No.)
811 Hansen Way, Palo Alto, California 94303 (Address of Principal Executive Offices and Zip Code)
(650) 846-2900 (Registrant’s telephone number, including area code)
Not Applicable (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨ No ý

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding for each of the registrant’s classes of Common Stock, as of the latest practicable date: As of August 12, 2014, 1,110 shares of Common Stock, $0.01 par value, all of which are owned by CPI International Holding LLC, the registrant’s parent holding company, and are not publicly traded.

- 1 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

10-Q REPORT

INDEX



			Page

Part I:	FINANCIAL INFORMATION		4

	Item 1.	Unaudited Condensed Consolidated Financial Statements	4

		Condensed Consolidated Balance Sheets as of July 4, 2014 and September 27, 2013	4
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended July 4, 2014 and June 28, 2013	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 4, 2014 and June 28, 2013	6
		Notes to Unaudited Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
	Item 4.	Controls and Procedures	51

Part II:	OTHER INFORMATION		52

	Item 1.	Legal Proceedings	52
	Item 1A.	Risk Factors	52
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
	Item 3.	Defaults Upon Senior Securities	52
	Item 4.	Mine Safety Disclosures	52
	Item 5.	Other Information	52
	Item 6.	Exhibits	53

- 2 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

Cautionary Statements Regarding Forward-Looking Statements

This document contains 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, that relate to future events or our future financial performance. In some cases, readers can identify forward-looking statements by terminology, such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from the results projected, expected or implied by the forward-looking statements. These risk factors include, without limitation, competition in our end markets; our significant amount of debt; changes or reductions in the United States 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 and zoning laws and regulations; and inability to obtain raw materials and components. All written and oral forward-looking statements made in connection with this document that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing risk factors and other cautionary statements included herein and in our filings with the Securities and Exchange Commission (“SEC”). We are under no duty to update any of the forward-looking statements after the date of this document to conform such statements to actual results or to changes in our expectations.

The information in this report is not a complete description of our business or the risks and uncertainties associated with an investment in our securities. Prospective investors should carefully consider the various risks and uncertainties that impact our business and the other information in this report and in our filings with the SEC before deciding to invest in our securities or to maintain or increase such investment.

- 3 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

Part I: FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data – unaudited)



	July 4, 2014		September 27, 2013
Assets
Current Assets:
Cash and cash equivalents	$	40,496	$	67,051
Restricted cash	2,794		2,571
Accounts receivable, net	47,943		52,160
Inventories	98,365		89,832
Deferred tax assets	8,025		13,486
Prepaid and other current assets	10,527		7,068
Total current assets	208,150		232,168
Property, plant, and equipment, net	76,422		76,333
Deferred debt issue costs, net	13,153		9,713
Intangible assets, net	251,464		239,495
Goodwill	197,460		179,727
Other long-term assets	1,186		935
Total assets	$	747,835	$	738,371

Liabilities and stockholders’ equity
Current Liabilities:
Current portion of long-term debt	$	3,100	$	5,500
Accounts payable	25,143		26,742
Accrued expenses	32,027		27,348
Product warranty	4,795		4,706
Income taxes payable	201		98
Advance payments from customers	15,982		17,996
Total current liabilities	81,248		82,390
Deferred income taxes, non-current	93,591		89,178
Long-term debt, less current portion	515,344		353,233
Other long-term liabilities	11,684		5,818
Total liabilities	701,867		530,619
Commitments and contingencies
Stockholders’ equity
Common stock ($0.01 par value, 2 shares authorized: 1 share issued and outstanding)	—		—
Additional paid-in capital	25,322		199,575
Accumulated other comprehensive income	44		86
Retained earnings	20,602		8,091
Total stockholders’ equity	45,968		207,752
Total liabilities and stockholders’ equity	$	747,835	$	738,371

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 4 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands – unaudited)



	Three Months Ended						Nine Months Ended
	July 4, 2014			June 28, 2013			July 4, 2014			June 28, 2013
Sales	$	119,413		$	109,616		$	364,451		$	309,396
Cost of sales, including $0, $0, $1,539 and $261 of utilization of net increase in cost basis of inventory due to purchase accounting, respectively	83,502			75,704			258,875			220,810
Gross profit	35,911			33,912			105,576			88,586
Operating costs and expenses:
Research and development	4,069			3,850			11,686			11,081
Selling and marketing	5,911			5,618			17,655			16,455
General and administrative	7,754			7,227			22,927			20,805
Amortization of acquisition-related intangible assets	2,420			1,947			7,898			7,019
Total operating costs and expenses	20,154			18,642			60,166			55,360
Operating income	15,757			15,270			45,410			33,226
Interest expense, net	9,018			6,753			23,140			20,467
Loss on debt restructuring	7,235			—			7,235			—
(Loss) income before income taxes	(496		)	8,517			15,035			12,759
Income tax (benefit) expense	(3,966		)	2,366			2,524			3,857
Net income	3,470			6,151			12,511			8,902

Other comprehensive income (loss), net of tax
Unrealized income (loss) on cash flow hedges, net of tax	1,046			(490		)	(42		)	(1,524		)
Total other comprehensive income (loss), net of tax	1,046			(490		)	(42		)	(1,524		)
Comprehensive income	$	4,516		$	5,661		$	12,469		$	7,378

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 5 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands – unaudited)



	Nine Months Ended
	July 4, 2014			June 28, 2013
Cash flows from operating activities
Net cash provided by operating activities	$	39,641		$	30,627

Cash flows from investing activities
Capital expenditures	(4,596		)	(3,790		)
Acquisitions, net of cash acquired	(36,776		)	(5,371		)
Net cash used in investing activities	(41,372		)	(9,161		)

Cash flows from financing activities
Borrowings under new term loan facility	309,225			—
Payment of debt issue costs	(8,734		)	—
Payment of debt modification costs	(5,365		)	—
Repayment of borrowings under previous term loan facility	(144,175		)	(3,200		)
Repayment of borrowings under new term loan facility	(775		)	—
Dividends paid	(175,000		)	—
Net cash used in financing activities	(24,824		)	(3,200		)

Net (decrease) increase in cash and cash equivalents	(26,555		)	18,266
Cash and cash equivalents at beginning of period	67,051			43,006
Cash and cash equivalents at end of period	$	40,496		$	61,272

Supplemental cash flow disclosures
Cash paid for interest	$	15,707		$	14,426
Cash paid (received) for income taxes, net	$	6,827		$	(3,006	)
Decrease in accrued capital expenditures	$	360		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 6 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All tabular dollar amounts in thousands)


1.	The Company and a Summary of its Significant Accounting Policies

The Company

Unless the context requires otherwise, (i) “Holding LLC” refers to CPI International Holding LLC, (ii) “CPI International” or “Parent” refers to the issuer, CPI International Holding Corp., and (iii) “CPII” means CPI International, Inc. Holding LLC owns all of the outstanding common stock of CPI International, which in turn owns all of the outstanding common stock of CPII, which in turn owns all of the outstanding equity interests of Communications & Power Industries LLC (“CPI”) and Communications & Power Industries Canada Inc. (“CPI Canada”), CPI International’s main operating subsidiaries. The term “the Company” refers to CPI International and its direct and indirect subsidiaries on a consolidated basis. The Veritas Capital Fund IV, L.P. (“Veritas Capital”) and its affiliates and certain members of CPII’s management beneficially own shares of CPI International’s common stock indirectly through their holdings in Holding LLC. Holding LLC, CPI International and CPII are holding companies with no material assets or operations other than their respective direct or indirect equity interests in CPI and CPI Canada and activities related thereto.

The accompanying unaudited condensed consolidated financial statements represent the consolidated results and financial position of the Company. The Company develops, manufactures and distributes microwave and power grid electron devices, microwave amplifiers, modulators, antenna systems, advanced composite radomes and various other power supply equipment and devices. The Company has two reportable segments: RF (“radio frequency”) products (formerly “electron devices”) and satcom equipment (see Note 12, Segments, Geographic and Customer Information).

Basis of Presentation and Consolidation

The Company’s fiscal year is the 52- or 53-week period that ends on the Friday nearest September 30. Fiscal years 2014 and 2013 comprise the 53- and 52-week periods ending October 3, 2014 and September 27, 2013, respectively. Each of the three months ended July 4, 2014 and June 28, 2013 includes 13 weeks. The nine months ended July 4, 2014 and June 28, 2013 include 40 and 39 weeks, respectively. All other period references are to the Company’s fiscal periods unless otherwise indicated.

The accompanying unaudited condensed consolidated financial statements of the Company as of July 4, 2014 and for the three and nine months ended July 4, 2014 and June 28, 2013 are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2013 filed with the Securities and Exchange Commission on December 10, 2013. The condensed consolidated balance sheet as of September 27, 2013 has been derived from the audited financial statements at that date. The results of operations and cash flows for the interim period ended July 4, 2014 are not necessarily indicative of results to be expected for the full year.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated in consolidation.

- 7 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and costs and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; inventory and inventory valuation; business combinations (including contingent consideration); recoverability and valuation of recorded amounts of long-lived assets and identifiable intangible assets, including goodwill; and recognition and measurement of current and deferred income tax assets and liabilities. The Company bases its estimates on various factors and information, which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry, new related events, current economic conditions and information from third-party professionals that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.


2.	Recently Issued Accounting Standards

In December 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to enforceable master netting arrangements or similar agreements. This accounting standard update became effective for the Company in the first quarter of fiscal year 2014. The adoption of this accounting standard update did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In February 2013, the FASB issued an accounting standard update to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. This accounting standard update became effective for the Company in the first quarter of fiscal year 2014. As a result of the application of this accounting standard update, the Company has provided additional disclosures in Note 11.

In July 2013, the FASB issued an accounting standard update that clarifies the presentation of an unrecognized tax benefit as either a reduction of a deferred tax asset or as a liability depending on specific facts and circumstances. This accounting standard update is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2015. The adoption of this accounting standard update is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In April 2014, the FASB issued an accounting standard update that changes the threshold and amends the requirements for reporting discontinued operations. Under the amended guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. For disposals of individually significant components that do not qualify as discontinued operations, an entity must disclose pre-tax earnings of the disposed component. For public business entities, this guidance is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2016. The adoption of this accounting standard update is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

- 8 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

In May 2014, the FASB issued an accounting standard update that provides a single model for revenue arising from contracts with customers. This accounting standard update requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of goods or services. This accounting standard update, which will supersede current revenue recognition guidance, is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2018. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is currently evaluating the impact the adoption will have on its consolidated results of operations, financial position or cash flows and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.

In June 2014, the FASB issued an accounting standard update that clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under this accounting standard update, a performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the compensation cost of the award should be recognized prospectively over the remaining service period. This accounting standard update is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. However, early adoption is permitted. The provisions may be applied either prospectively to all awards granted or modified after the effective date of the accounting standard update or retrospectively to all awards with performance targets that are outstanding as of the earliest period presented as well as to all awards granted or modified after the beginning of the earliest period presented. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2017. The adoption of this accounting standard update is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.


3.	Business Combination

On October 1, 2013, the Company completed its purchase of the outstanding stock of Radant Technologies, Inc. (“Radant”), a Massachusetts corporation, for a payment of approximately $36.8 million in cash consideration, net of $0.6 million cash acquired. A maximum of $10.0 million in potential additional payments may be payable if certain financial targets are achieved by Radant over the two years following the date of acquisition. Radant designs, manufactures and tests advanced composite radomes, reflector antennas and structures for defense aerospace and naval applications as well as commercial aerospace applications. The acquisition of Radant provides the Company with advanced technology and specialized products for radar, electronic warfare and communications applications that complement and extend the Company’s broad portfolio of microwave, RF, power and control solutions for these and other critical applications. The results of Radant’s operations were included in the Company’s RF products segment and the Company’s consolidated results of operations beginning on the date of the acquisition.

The purchase of the outstanding stock of Radant (the “Radant acquisition”) constitutes a transaction in which an acquirer obtains control of one or more businesses and, accordingly, the purchase is accounted for under the acquisition method of accounting, in which CPI is deemed to be the accounting acquirer. Under this method of accounting, all assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. Any excess of the purchase price over the fair value of all assets acquired and liabilities assumed is recognized as goodwill.

- 9 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The following table sets forth a preliminary allocation of the total purchase price as of July 4, 2014 to the assets acquired and the liabilities assumed and the resulting goodwill based on the preliminary estimates of fair value. This is a preliminary purchase price allocation, which was based upon valuation information and estimates and assumptions available at July 4, 2014, and, therefore, subject to adjustment on completion of the valuation process.



Purchase price	$	37,367
Less: Fair value of assets acquired:
Net current assets	(9,426		)
Property, plant and equipment	(5,415		)
Identifiable intangible assets	(20,600		)
Other long-term assets	(67		)
	(35,508		)
Add: Fair value of liabilities assumed:
Deferred revenue, non-current	5,497
Contingent consideration liability	4,300
Long-term deferred tax liabilities	6,077
	15,874

Goodwill	$	17,733

Measurement period adjustments represent updates made to the preliminary purchase price allocation based on revisions to valuation estimates in the interim period subsequent to the acquisition and initial accounting date up until the purchase price allocation is finalized which cannot be any later than one year from the acquisition date. The following table summarizes the measurement period adjustments to fair values of certain acquired assets and assumed liabilities, along with an adjustment to the cash consideration, and their effect on goodwill during the periods presented:



	Three Months Ended			Nine Months Ended
	July 4, 2014			July 4, 2014
Decrease in inventories	$	65		65
Increase in property, plant and equipment	(490		)	(490		)
Decrease in identifiable intangible assets	1,100			1,100
Decrease in deferred revenue	(923		)	(1,752		)
Increase in deferred tax liabilities, net	1,454			1,454
Adjustment to the cash consideration	(132		)	(219		)
Net increase in goodwill	$	1,074		$	158

These measurement period adjustments are properly reflected in the Company’s condensed consolidated balance sheet as of July 4, 2014. However, as these measurement period adjustments did not have a significant impact on the Company’s condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows in any period, the adjustments have therefore been recorded on a prospective basis.

The Company is in the process of finalizing the purchase price allocation and may make additional adjustments to the allocation during the measurement period. The areas of the purchase price allocation that are not yet finalized and are subject to change relate to identifiable intangible assets, tax-related items and the resulting goodwill adjustment. The Company expects to continue to obtain information to finalize these preliminary valuations during the measurement period, which ends during the Company’s fiscal quarter ending October 3, 2014.

- 10 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The preliminary fair value assigned to identifiable intangible assets acquired is determined using variations of the income approach. Under these methods, fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. The valuation of tradenames and completed technology is based on the relief-from-royalty method, and backlog and customer relationship is valued using the excess earnings method. The royalty rates used in the relief-from-royalty method are based on both a return-on-asset method and market comparable rates. The Company believes that these identifiable intangible assets will have no residual value after their estimated economic useful lives. The preliminary fair value of the identifiable intangible assets and their weighted-average useful lives are as follows:



	Fair Value		Useful Life (years)
Tradenames	$	2,300	15
Completed technology	7,300		15
Backlog	2,600		3
Customer relationship	8,400		10
Total identifiable intangible assets	$	20,600

All of the above identifiable intangible assets are definite-lived and are amortized over their estimated useful lives.

The valuation of the contingent consideration liability was based on a probability-weighted discounted cash flow analysis. See Note 5, Financial Instruments, for additional information on the fair value of the contingent consideration.

Goodwill resulting from the Radant acquisition is largely attributable to future growth opportunities within the Company’s radar and electronic warfare and communications markets and is not deductible for income tax purposes.

In connection with the Radant acquisition, the Company incurred various costs totaling $0.1 million and $0.4 million that are included in general and administrative expenses in the condensed consolidated statements of comprehensive income for the three and nine months ended July 4, 2014, respectively. These costs, which the Company expensed as incurred, consist of professional fees payable to financial and legal advisors.

The following unaudited supplemental pro forma results of operations are presented as though the Radant acquisition had occurred as of the beginning of the earliest period presented, after giving effect to purchase accounting adjustments relating to depreciation and amortization of the revalued assets. The supplemental pro forma results of operations exclude the impact of certain charges that have resulted from or were in connection with the acquisition, including, (i) the utilization of the net increase in the cost basis of inventory, (ii) amortization of backlog, (iii) certain discrete tax expenses, and (iv) expenses in connection with the acquisition. Each of the pro forma adjustments reflected in the supplemental pro forma results of operations are individually immaterial to each period presented, other than the $1.5 million added back to pro forma net income for the nine months ended July 4, 2014, representing the utilization of the net increase in the cost basis of inventory. The supplemental pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the acquisition been consummated as of the earliest period presented, nor are they necessarily indicative of future operating results.



	Three Months Ended				Nine Months Ended
	July 4, 2014		June 28, 2013		July 4, 2014		June 28, 2013
Sales	$	119,413	$	116,836	$	364,451	$	331,110
Net income	$	3,620	$	6,073	$	15,008	$	9,392

- 11 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)


4.	Supplemental Financial Information

Accounts Receivable: Accounts receivable are stated net of allowances for doubtful accounts as follows:



	July 4, 2014			September 27, 2013
Accounts receivable	$	47,960		$	52,239
Less: Allowance for doubtful accounts	(17		)	(79		)
Accounts receivable, net	$	47,943		$	52,160

Inventories: The following table provides details of inventories:



	July 4, 2014		September 27, 2013
Raw materials and parts	$	49,715	$	50,901
Work in process	35,643		28,590
Finished goods	13,007		10,341
	$	98,365	$	89,832

Reserve for loss contracts: The following table summarizes the activity related to reserves for loss contracts during the periods presented:



	Three Months Ended						Nine Months Ended
	July 4, 2014			June 28, 2013			July 4, 2014			June 28, 2013
Balance at beginning of period	$	5,329		$	7,907		$	4,992		$	6,951
Provision for loss contracts, charged to cost of sales	329			560			1,206			2,420
Credit to cost of sales upon revenue recognition	(41		)	(3,586		)	(581		)	(4,490		)
Balance at end of period	$	5,617		$	4,881		$	5,617		$	4,881

At the end of each period presented above, reserve for loss contracts was reported in the condensed consolidated balance sheet in the following accounts:



	July 4, 2014		June 28, 2013
Inventories	$	5,535	$	4,527
Accrued expenses	82		354
	$	5,617	$	4,881

Goodwill: The following table sets forth goodwill by reportable segment:



	July 4, 2014		September 27, 2013
RF products	$	146,284	$	128,551
Satcom equipment	39,715		39,715
Other	11,461		11,461
	$	197,460	$	179,727

The increase in goodwill resulted from the Radant acquisition in October 2013 (Note 3).

- 12 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Product Warranty: The following table summarizes the activity related to product warranty:



	Three Months Ended						Nine Months Ended
	July 4, 2014			June 28, 2013			July 4, 2014			June 28, 2013
Beginning accrued warranty	$	4,790		$	3,758		$	4,706		$	4,066
Actual costs of warranty claims	(1,193		)	(1,092		)	(3,516		)	(3,507		)
Assumed from acquisition	—			200			—			200
Estimates for product warranty, charged to cost of sales	1,198			1,239			3,605			3,346
Ending accrued warranty	$	4,795		$	4,105		$	4,795		$	4,105


5.	Financial Instruments

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, available-for-sale securities, derivative instruments and contingent consideration. The following tables set forth financial instruments carried at fair value by level of fair value hierarchy:



			Fair Value Measurements at July 4, 2014 Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market and overnight U.S. Government securities¹	$	32,250	$	32,250	$	—	$	—
Mutual funds²	284		284		—		—
Foreign exchange forward derivatives³	493		—		493		—
Total assets at fair value	$	33,027	$	32,534	$	493	—

Liabilities:
Foreign exchange forward derivatives⁴	$	308	$	—	$	308	$	—
Contingent consideration liability⁵	4,900						4,900
Total liabilities at fair value	$	5,208	$	—	$	308	$	4,900


¹ The money market and overnight U.S. Government securities are classified as part of cash and cash equivalents in the condensed consolidated balance sheet.
² The mutual funds are classified as part of other long-term assets in the condensed consolidated balance sheet.
³ The asset position of foreign currency derivatives is classified as prepaid and other current assets ($376) and other long-term assets ($117) in the condensed consolidated balance sheet.
⁴ The liability position of foreign currency derivatives is classified as part of accrued expenses in the condensed consolidated balance sheet.
⁵ The contingent consideration liability is classified as part of other long-term liabilities in the condensed consolidated balance sheet.

- 13 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)



			Fair Value Measurements at September 27, 2013 Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market and overnight U.S. Government securities¹	$	58,844	$	58,844	$	—	$	—
Mutual funds²	249		249		—		—
Foreign exchange forward derivatives³	444		—		444		—
Total assets at fair value	$	59,537	$	59,093	$	444	—

Liabilities:
Foreign exchange forward derivatives⁴	$	236	$	—	$	236	$	—
Total liabilities at fair value	$	236	$	—	$	236	$	—


¹ The money market and overnight U.S. Government securities are classified as part of cash and cash equivalents in the condensed consolidated balance sheet.
² The mutual funds are classified as part of other long-term assets in the condensed consolidated balance sheet.
³ The asset position of foreign currency derivatives is classified as part of prepaid and other current assets in the condensed consolidated balance sheet.
⁴ The liability position of foreign currency derivatives is classified as part of accrued expenses in the condensed consolidated balance sheet.

See Note 7 for information regarding the Company’s derivative instruments.

Contingent Consideration

In connection with, and as part of the consideration for, the Radant acquisition in October 2013, the Company will be obligated to make a maximum of $10.0 million in potential additional payments if certain financial targets are achieved by Radant over the two years following the acquisition. These potential earn-out payments are considered contingent consideration. This contingent consideration was measured at fair value at the acquisition date and is remeasured to fair value at each reporting date until the contingency is resolved. Subsequent changes in the fair value of contingent consideration are recognized within general and administrative expenses in the Company’s condensed consolidated statement of comprehensive income. The fair value of the contingent consideration is based on a probability-weighted calculation whereby the Company assigned estimated probabilities to achieving the earn-out targets and then discounted the total contingent consideration to net present value using Level 3 inputs. Key assumptions include a discount rate of 14% and a probability-adjusted level of Radant’s earnings before net interest expense, provision for income taxes and depreciation and amortization (“EBITDA”) in aggregate for the two years following the acquisition. The Company believes the discount rate used to discount the earn-out payments reflects market participant assumptions.

The following table summarizes the activity related to contingent consideration during the period presented:



	Nine Months Ended July 4, 2014
Balance at beginning of period	$	—
Contingent consideration from Radant acquisition	4,300
Change in fair value included in earnings	600
Balance at end of period	$	4,900

- 14 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The change in fair value of the contingent consideration was due to the passage of time and subsequent adjustments in the probability assumptions regarding Radant’s future EBITDA. Other assumptions used for determining the estimated fair value of the contingent consideration have not changed significantly from those used at the acquisition date.

Other Financial Instruments

The Company’s other financial instruments include cash, restricted cash, accounts receivable, accounts payable, accrued expenses and long-term debt. Except for long-term debt, the carrying value of these financial instruments approximates fair values because of their relatively short maturity. The estimated fair value of the Company’s long-term debt as of July 4, 2014 and September 27, 2013 using Level 2 fair value inputs was $527.8 million and $365.7 million, respectively, compared to the carrying value of $518.4 million and $358.7 million, respectively.


6.	Long-term Debt

During the three months ended July 4, 2014, the Company refinanced its long-term debt as follows:

•

Amended the terms of the Company’s Senior Notes due 2018 upon completing a consent solicitation of the Note holders in order to increase the aggregate amount of indebtedness permitted under CPII’s senior secured credit facilities from $230.0 million to $365.0 million, to increase the interest rate on the Notes from 8.00% to 8.75% per annum and to modify the restricted payments covenant of said credit facilities in order to allow CPII to pay a one-time dividend of up to $175.0 million to Holding LLC and,


•	Entered into new senior secured credit facilities composed of (a) Term B Loans in an aggregate principal amount of $310.0 million, and (b) a $30.0 million revolving credit facility, and repaid the outstanding balance of the prior senior secured credit facilities.

The Company's long-term debt comprises the following as of the dates presented:



	July 4, 2014		September 27, 2013
Term loan, net of issue discount of $751 and $442	$	308,474	$	143,733
Senior notes due 2018, net of issue discount of $5,030 and $0	209,970		215,000
	518,444		358,733
Less: Current portion	3,100		5,500
Long-term portion	$	515,344	$	353,233

Standby letters of credit secured by Revolver	$	2,992	$	3,848

Senior Secured Credit Facilities

On April 7, 2014 (the “Closing Date”), CPII entered into new senior secured credit facilities (“Senior Credit Facilities”), which provide for (a) Term B Loans in an aggregate principal amount of $310.0 million (“Term Loan”), and (b) a $30.0 million revolving credit facility (“Revolver”), with sub-limits for letters of credit and swingline loans. The Senior Credit Facilities replaced CPII’s prior senior secured credit facilities.

- 15 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Upon satisfaction of certain specified conditions, including pro forma compliance with a total leverage ratio, CPII may seek commitments for new term loans and revolving loans, not to exceed the sum of (a) $75.0 million, plus (b) the aggregate amount of all prepayments of Term Loans and permanent commitment reductions of the Revolver made prior to or simultaneously with the incurrence of new incremental commitments, plus (c) such additional amounts to the extent CPII maintains a first lien leverage ratio of 3.50:1 or less on a pro forma basis after giving effect to such incremental commitments (“Incremental Cap”). In addition, instead of incremental commitments of term loans or revolving loans under the Senior Credit Facilities, CPII may utilize the Incremental Cap at any time by issuing or incurring incremental equivalent debt, outside of the Senior Credit Facilities, which may be in the form of secured or unsecured debt securities or loans, in each case upon satisfaction of certain specified conditions, including maintaining certain leverage ratios.

The Senior Credit Facilities are guaranteed by Parent and CPII’s domestic subsidiaries and are secured by substantially all of the assets of CPII and such guarantors.

Except as noted below, the Term Loan will mature on November 17, 2017 and the Revolver will mature on August 19, 2017. However, if (a) in the case of the Term Loan, on or before November 17, 2017, and, in the case of the Revolver, on or before August 19, 2017, CPII has repaid or refinanced 65% of its Senior Notes due 2018, or (b) the first lien leverage ratio as of August 19, 2017 is 2.50:1 or less on a pro forma basis, then the Term Loan will mature on April 7, 2021 and the Revolver will mature on April 7, 2019.

On the Closing Date, CPII borrowed the entire $310.0 million available under the Term Loan. The proceeds of $309.2 million, net of $0.8 million issue discount, were principally used to:


•	pay the full balance of $138.7 million which represented the total amounts due or outstanding under or in respect of CPII’s existing senior secured credit facilities (either in cash or an agreement by certain existing lenders to receive loans under the new Term Loan in exchange for their existing debt),


•	pay a dividend in an aggregate principal amount of $175.0 million to CPII’s direct and/or indirect shareholders, and


•	pay fees, costs and expenses in connection with the foregoing, including the $5.4 million consent payment in connection with the consent solicitation for CPII’s Senior Notes due 2018.

No borrowings were made under the Revolver on the Closing Date (other than for approximately $3.0 million of outstanding letters of credit from the existing senior secured credit facilities which were deemed to be issued under the new Senior Credit Facilities), but the Revolver may be used for general corporate purposes at any time after the Closing Date and prior to the maturity date of the Revolver.

Borrowings under the Senior Credit Facilities will bear interest at a rate equal to, at CPII’s option, the LIBOR or the Alternate Base Rate (ABR) plus the applicable margin. LIBOR and ABR borrowings under the Term Loan are subject to a 1.00% and 2.00% “floor,” respectively. The ABR is the greatest of (a) the base rate established by the administrative agent, (b) the federal funds rate plus 0.50% and (c) adjusted LIBOR for a one-month interest period plus 1.00%. For Term Loans, the applicable margin will be 3.25% per annum for LIBOR borrowings and 2.25% per annum for ABR borrowings. The applicable margins under the Revolver, until delivery of financial statements for the first full fiscal quarter ending after the Closing Date, is 3.25% per annum for LIBOR borrowings and 2.25% for ABR Borrowings and thereafter, with respect to the Revolver only, will vary depending on CPII’s total leverage ratio, as defined in the Senior Credit Facilities, and range from 3.25% to 3.00% for LIBOR borrowings and from 2.25% to 2.00% for ABR borrowings.

In addition to customary fronting and administrative fees under the Senior Credit Facilities, CPII will pay letter of credit participation fees equal to the LIBOR margin per annum applicable to the Revolver on the average daily amount of the letter of credit exposure, and a commitment fee on the average daily unused commitments under the Revolver. The commitment fee with respect to the unused portion of the Revolver, until delivery of financial statements for the first full fiscal quarter ending after the Closing Date, is 0.500% per annum and thereafter, will vary depending on CPII’s leverage ratio, as defined in the Senior Credit Facilities, and will range from 0.375% to 0.500% per annum.

- 16 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The Term Loan is payable in equal quarterly installments in annual amounts equal to 1.00% of the original principal amount of the Term Loan, with the remainder due on the Term Loan maturity date.

CPII is required to prepay its outstanding loans under the Senior Credit Facilities, subject to certain exceptions and limitations, with net cash proceeds received from certain events, including, without limitation:


•	proceeds received from certain asset sales by Parent or any of its restricted subsidiaries subject to reinvestment rights,


•	proceeds received from certain issuances of debt or certain disqualified capital stock by Parent or any of its restricted subsidiaries, and


•	proceeds paid to Parent or any of its restricted subsidiaries from casualty and condemnation events in excess of amounts applied to replace, restore or reinvest in any properties for which proceeds were paid within a specified period.

Annually except for the fiscal year 2014, CPII will also be required to make prepayments within five business days after the date on which the financial statements with respect to each fiscal year are delivered, based on a calculation of excess cash flow, as defined in the Senior Credit Facilities, less optional prepayments and, in the case of the Revolver, corresponding reductions in commitment, made during such fiscal year. A prepayment premium of 1.00% of the aggregate principal amount of Term B Loans which are prepaid pursuant to a repricing transaction, as defined in the Senior Credit Facilities, on or prior to the date that is six months following the Closing Date applies to any such prepayment of the Term Loans. CPII can otherwise make optional prepayments on the outstanding loans at any time without premium or penalty, except for customary “breakage” costs with respect to LIBOR loans.

The Senior Credit Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of Parent and its restricted subsidiaries, including CPII, to:


•	sell assets;


•	engage in mergers and acquisitions;


•	pay dividends and distributions or repurchase their capital stock;


•	incur additional indebtedness or issue equity interests;


•	make investments and loans;


•	create liens or further negative pledges on assets;


•	engage in certain transactions with affiliates;


•	enter into sale and leaseback transactions;


•	amend documents relating to its Senior Notes due 2018 to accelerate the dates principal payments are due thereon or make prepayments relating to subordinated indebtedness, the Senior Notes or permitted incremental debt outside of the Senior Credit Facilities; and


•	amend or waive provisions of charter documents in a manner materially adverse to the lenders.

If on the last day of any period of four consecutive fiscal quarters, the aggregate principal amount of revolving loans, swingline loans and/or letters of credit (excluding letters of credit which have been cash collateralized) that are issued and/or outstanding is greater than 30% of the commitments under the Revolver, Parent and its restricted subsidiaries must comply with a maximum total leverage ratio, calculated on a consolidated basis for Parent and its restricted subsidiaries.

- 17 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Subject in certain cases to applicable notice provisions and grace periods, events of default under the Senior Credit Facilities include, among other things: failure to make payments when due; breaches of representations and warranties in the documents governing the Senior Credit Facilities; non-compliance by Parent, and/or the restricted subsidiaries with certain covenants; failure by Parent and/or the restricted subsidiaries to pay certain other indebtedness or to observe any other covenants or agreements that would allow acceleration of such indebtedness; events of bankruptcy or insolvency of CPII, Parent and/or CPII’s material subsidiaries; certain uninsured and unstayed judgments against CPII, Parent and/or CPII’s material subsidiaries; impairment of the security interests in the collateral or the guarantees under the Senior Credit Facilities; and a change in control, as defined in the Senior Credit Facilities. If an event of default occurs and is continuing under the Senior Credit Facilities, the entire outstanding balance may become immediately due and payable.

The refinancing of CPII’s old debt with the Senior Credit Facilities was accounted for as a debt extinguishment in

connection with which the Company recorded an expense of $3.8 million included in “loss on debt restructuring” in the condensed consolidated statements of comprehensive income for the three and nine months ended July 4, 2014. This expense primarily represents the write offs of deferred debt issuance costs and unamortized debt discount associated with the previously existing credit facilities. The Company also incurred fees and costs associated with the new Senior Credit Facilities of approximately $8.7 million and $0.8 million that were capitalized and will be amortized as interest expense under the effective interest method over the expected term of the related debt.

The description of the Senior Credit Facilities above does not purport to be complete and is qualified in its entirety by reference to the Senior Credit Facilities.

8.75% Senior Notes due 2018

In February 2011, CPII issued an aggregate of $215 million of Senior Notes due 2018 (the “Notes”) originally bearing interest at the rate of 8.0% per year. The outstanding notes are CPII’s senior unsecured obligations. Parent and each of CPII’s existing and future restricted subsidiaries (as defined in the indenture governing the Notes) guarantee the Notes on a senior unsecured basis. Interest is payable in cash. The indenture governing the Notes limits, subject to certain exceptions, CPII and its restricted subsidiaries’ ability to incur additional indebtedness or issue certain preferred stock; pay dividends and make other restricted payments; make certain investments; sell assets; create liens; consolidate, merge or sell all or substantially all of CPII’s assets; enter into transactions with affiliates and designate subsidiaries as unrestricted subsidiaries.

Second Supplemental Indenture. CPII entered into a second supplemental indenture dated as of March 12, 2014, which amended the indenture governing the Notes to:


•	increase the interest rate on the Notes from 8.00% to 8.75% per annum;


•	increase the premium for any optional redemption of the Notes to (i) for redemptions prior to February 15, 2016, the make-whole premium, (ii) for redemptions from February 15, 2016 to February 14, 2017, 4% and (iii) for redemptions thereafter, 1%;


•	increase the aggregate amount of indebtedness under CPII’s senior secured credit facilities that constitutes "Permitted Indebtedness" for purposes of the Limitations on Additional Indebtedness covenant from $230.0 million to $365.0 million; and


•	modify the Restricted Payments covenant in order to allow CPII to pay a one-time dividend of up to $175.0 million to the Company.

- 18 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

In consideration for these amendments, on April 7, 2014, CPII made an aggregate cash payment of $5.4 million (the “Consent Payment”) to those holders of such Notes who had validly delivered a duly executed consent prior to the applicable expiration date of CPII’s consent solicitation and who had not revoked the consent in accordance with the procedure described in the consent solicitation statement. Upon payment of the Consent Payment, the amendments in the second supplemental indenture for the Notes became operative.

The amendment of the indenture governing the Notes as provided for in the second supplemental indenture was accounted for as debt modification, which resulted in the Company’s recording the Consent Payment mentioned above of $5.4 million as a debt discount netted against the balance of the Notes on the condensed consolidated balance sheet. Debt discount is amortized and recognized as interest expense under the effective interest method over the remaining term of the Notes. Also, the Company recorded an expense of $3.4 million included in “loss on debt restructuring” in the condensed consolidated statements of comprehensive income for the three and nine months ended July 4, 2014 for incurred fees and costs associated with this debt modification.

Debt Maturities: As of July 4, 2014, maturities on long-term debt were as follows:



Fiscal Year	Term Loan		8.75% Senior Notes		Total
2014 (remaining three months)	$	775	$	—	$	775
2015	3,100		—		3,100
2016	3,100		—		3,100
2017	3,100		—		3,100
2018	299,150		215,000		514,150
Thereafter	—		—		—
	$	309,225	$	215,000	$	524,225

The above table assumes (1) that the respective debt instruments will be outstanding until their scheduled maturity dates, and (2) a debt level based on mandatory repayments according to the contractual amortization schedule of the Senior Credit Facilities. The above table excludes any optional and excess cash flow prepayments on the Term Loan. The table also excludes the effect of the Company’s contractual right to repay or refinance the Notes by November 17, 2017, which would extend the maturity date for the Term Loan from November 2017 to April 2021.

Covenants

As of July 4, 2014, the Company was in compliance with the covenants under the agreements governing CPII’s new Senior Credit Facilities and the indentures governing the Notes.

Deferred Debt Issuance Costs

CPII incurred deferred debt issuance costs, excluding issue discount, of $8.7 million associated with its new Senior Credit Facilities and cumulative deferred debt issuance costs, excluding issue discount, of $8.0 million associated with the Notes. As of July 4, 2014, the unamortized deferred debt issuance costs related to CPII’s debt were $13.2 million, net of $3.5 million accumulated amortization. As of September 27, 2013, the unamortized deferred debt issuance costs related to CPII’s prior senior credit facilities and the Notes were $9.7 million, net of $5.6 million accumulated amortization.

- 19 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)


7.	Derivative Instruments and Hedging Activities

Foreign Exchange Forward Contracts: Although the majority of the Company’s revenue and expense activities are transacted in U.S. dollars, the Company does transact business in foreign countries. The Company’s primary foreign currency cash flows are in Canada and several European countries. In an effort to reduce its foreign currency exposure to Canadian dollar-denominated expenses, the Company enters into Canadian dollar forward contracts to hedge the Canadian dollar-denominated costs for its manufacturing operation in Canada. The Company does not engage in currency speculation.

The Company’s Canadian dollar forward contracts in effect as of July 4, 2014 have durations of four to 18 months. These contracts are designated as a cash flow hedge and are considered highly effective. Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income in the condensed consolidated balance sheets. At July 4, 2014, the unrealized loss, net of tax of $17,000, was $50,000. At September 27, 2013, the unrealized loss, net of tax, was not material. The Company anticipates recognizing the entire unrealized gain or loss in operating earnings within the next six fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the condensed consolidated statements of comprehensive income. The time value was not material for all periods presented. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then the Company immediately recognizes the gain or loss on the associated financial instrument in general and administrative expenses in the condensed consolidated statements of comprehensive income. No ineffective amounts were recognized due to hedge ineffectiveness in the three and nine months ended July 4, 2014 and June 28, 2013.

As of July 4, 2014, the Company had entered into Canadian dollar forward contracts for approximately $41.1 million (Canadian dollars), or approximately 60% of estimated Canadian dollar denominated expenses for July 2014 through September 2015, at an average rate of approximately 0.91 U.S. dollars to one Canadian dollar.

The following table summarizes the fair value of derivative instruments designated as cash flow hedges at July 4, 2014 and September 27, 2013:



	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	July 4, 2014		September 27, 2013		Balance Sheet Location	July 4, 2014		September 27, 2013
Derivatives designated as hedging instruments
Forward contracts	Prepaid and other current assets	$	376	$	444	Accrued expenses	$	308	$	236
Forward contracts	Other long-term assets	117		—			—		—
Total derivatives designated as hedging instruments		$	493	$	444		$	308	$	236

As of July 4, 2014 and September 27, 2013, the Company had no derivative instruments that were classified as non-hedging instruments. The Company’s derivative assets and liabilities are reported on a gross basis. None of these derivative instruments are subject to master netting arrangements with the Company’s derivative counterparties that would allow for net settlement.

- 20 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The following table summarizes the effect of derivative instruments on the condensed consolidated statements of comprehensive income for the periods of fiscal years 2014 and 2013 presented:



Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
	Three Months Ended					Nine Months Ended
	July 4, 2014		June 28, 2013			July 4, 2014			June 28, 2013
Forward contracts	$	898	$	(757	)	$	(1,234	)	$	(1,941	)
Total	$	898	$	(757	)	$	(1,234	)	$	(1,941	)



Derivatives in Cash Flow Hedging Relationships	Location of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)
		Three Months Ended						Nine Months Ended
		July 4, 2014			June 28, 2013			July 4, 2014			June 28, 2013
Forward contracts	Cost of sales	$	(443	)	$	(106	)	$	(963	)	$	98
	Research and development	(27		)	1			(109		)	(1		)
	Selling and marketing	(12		)	1			(48		)	—
	General and administrative	(14		)	1			(57		)	—
Total		$	(496	)	$	(103	)	$	(1,177	)	$	97



Derivatives in Cash Flow Hedging Relationships	Location of Gain Recognized in Income on Derivative (Ineffective and Excluded Portion)	Amount of Gain Recognized in Income on Derivative (Ineffective and Excluded Portion)
		Three Months Ended				Nine Months Ended
		July 4, 2014		June 28, 2013		July 4, 2014		June 28, 2013
Forward contracts	General and administrative^(a)	$	61	$	46	$	180	$	196
Total		$	61	$	46	$	180	$	196

^(a) The amount recognized in income for each period presented represents a gain related to the amount excluded from the assessment of hedge effectiveness.

- 21 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)


8.	Commitments and Contingencies

Leases: The Company is committed to minimum rentals under non-cancelable operating lease agreements, primarily for land and facility space, that expire on various dates through 2050. Certain of the leases provide for escalating lease payments. At July 4, 2014, future minimum lease payments for all non-cancelable operating lease agreements, including those assumed from Radant, were as follows:



Fiscal Year	Operating Leases
2014 (remaining three months)	721
2015	2,381
2016	1,950
2017	1,660
2018	1,237
Thereafter	2,717
	$	10,666

Real estate taxes, insurance and maintenance are also obligations of the Company. Rental expense under non-cancelable operating leases amounted to $1.0 million and $0.8 million for the three months ended July 4, 2014 and June 28, 2013, respectively, and $3.1 million and $2.3 million for the nine months ended July 4, 2014 and June 28, 2013, respectively. Assets subject to capital leases at July 4, 2014 and September 27, 2013 were not material.

Contingencies: From time to time, the Company may be subject to claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts that would not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows if unfavorably resolved.


9.	Related-party Transactions

A former major stockholder of the newly acquired Radant was retained by the Company to serve as president of the division (the “Radant president”). In connection with, and as part of the consideration for, the Radant acquisition, the Company will be obligated to make a maximum of $10.0 million to the former stockholders of Radant including the Radant president and certain of his relatives in potential additional payments if certain financial targets are achieved by Radant over the two years following the acquisition (see Notes 3 and 5). Also in connection with the acquisition, the Company has entered into a lease agreement for a property in Stow, Massachusetts, that contains a manufacturing plant and office facilities owned by a company controlled by the Radant president. The Company records rent expense for the Stow lease on an arm’s length basis. The Company recorded a rent expense for such lease of $0.1 million and $0.3 million for the three and nine months ended July 4, 2014, respectively.

In connection with the debt refinancing described in Note 6, the Company paid $4.0 million to Veritas Capital Fund Management, L.L.C ("Veritas") during the three months ended July 4, 2014 for a transaction fee in accordance with its advisory agreement with Veritas. The total transaction fee paid comprised (1) $2.5 million attributed to the new Senior Credit Facilities as part of their capitalized debt issuance costs and (2) $1.5 million attributed to the Notes as part of their expensed debt modification costs included in “loss on debt restructuring” on the accompanying condensed consolidated statements of comprehensive income for the three and nine months ended July 4, 2014.

On April 7, 2014, the Company paid a special cash dividend in an aggregate amount of $175.0 million to Holding LLC, the Company’s sole stockholder. Pursuant to the terms of the limited liability company operating agreement governing Holding LLC, holders of Class A membership interests in Holding LLC, including Veritas Capital and certain members of the Company’s management, received a portion of the dividend received by Holding LLC.

- 22 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)


10.	Income Taxes

The condensed consolidated statements of comprehensive income reflect the following income tax expense:



	Three Months Ended						Nine Months Ended
	July 4, 2014			June 28, 2013			July 4, 2014		June 28, 2013
(Loss) income before income taxes	$	(496	)	$	8,517		15,035		12,759
Income tax (benefit) expense	$	(3,966	)	$	2,366		2,524		3,857
Effective income tax rate	799.6		%	27.8		%	16.8	%	30.2	%

The Company’s 799.6% effective tax rate for the three months ended July 4, 2014 differs from the federal statutory rate of 35.0% primarily due to discrete income tax benefits from the expiration of the statute of limitations for an unrecognized tax benefit and the provision to tax return true-up resulting from filing the U.S. fiscal year 2013 income tax return. The Company’s 27.8% effective tax rate for the three months ended June 28, 2013 differs from the federal statutory rate of 35.0% primarily due to discrete income tax benefits from filing the U.S. fiscal year 2012 income tax return, an adjustment to deferred taxes for the Company's Canadian subsidiary, CPI Canada, due to a change in the income tax reporting currency from the Canadian dollar to U.S. dollar, the domestic manufacturing deduction, and the U.S. research credit, partially offset by foreign earnings that are subject to U.S. federal income tax and non-deductible stock compensation.

The Company’s 16.8% effective tax rate for the nine months ended July 4, 2014 differs from the federal statutory rate of 35.0% primarily due to discrete income tax benefits from the expiration of the statute of limitations for an unrecognized tax benefit and the provision to tax return true-up resulting from filing the U.S. fiscal year 2013 income tax return. The Company’s 30.2% effective tax rate for the nine months ended June 28, 2013 differs from the federal statutory rate of 35.0% primarily due to discrete tax benefits for a provision to tax return true-up from filing the U.S. fiscal year 2012 income tax return, an adjustment to deferred taxes for the Company's Canadian subsidiary, CPI Canada, due to a change in the income tax reporting currency from the Canadian dollar to U.S. dollar, the domestic manufacturing deduction, and the U.S. research credit, partially offset by foreign earnings that are subject to U.S. federal income tax and non-deductible stock compensation.

The Company files a U.S. federal income tax return and state income tax returns in California, Massachusetts and several other U.S. states. The Company also files income tax returns in Canada and other foreign jurisdictions. With the exception of Canada and California, the Company is no longer subject to examination by the various taxing authorities for fiscal years prior to 2010. The Company’s Canadian subsidiary is no longer subject to examination by the taxing authorities for fiscal years prior to 2003. The Company has income tax audits in progress in several jurisdictions in which it operates, including an audit by the Canada Revenue Agency (“CRA”) for fiscal years 2010 and 2011 and by California for years 2004 through 2007.

The total liability for gross unrecognized tax benefits of $4.3 million at July 4, 2014 comprised unrecognized tax benefits of $3.1 million and interest and penalties of $1.2 million. For the three and nine months ended July 4, 2014, the total liability for gross unrecognized tax benefits decreased by $3.3 million and $3.0 million, respectively, primarily due to the expiration of the statute of limitations for an unrecognized tax benefit. The total liability for gross unrecognized tax benefits, if recognized, would reduce the effective tax rate on income from continuing operations. The Company believes that it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by $2.5 million as audits close, statutes expire and tax payments are made. The Company’s policy is to classify interest, foreign exchange rate changes and penalties, if any, on unrecognized tax benefits as components of income tax expense.

- 23 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)


11.	Stockholders’ Equity

Special Dividend

On April 7, 2014, the Company’s board of directors officially declared, and the Company paid a special cash dividend in an aggregate amount of $175.0 million to Holding LLC, the Company’s sole stockholder of record as of the close of business April 2, 2014. The special dividend was recorded as a reduction to additional paid-in capital on the accompanying condensed consolidated balance sheet as of July 4, 2014.

Accumulated Other Comprehensive Income

The following table provides the components of accumulated other comprehensive income in the condensed consolidated balance sheets:



	July 4, 2014			September 27, 2013
Unrealized loss on cash flow hedges, net of tax of $17 and $2, respectively	$	(50	)	$	(8	)
Unrealized actuarial gain and prior service credit for pension liability, net of tax of $47 and $47, respectively	94			94
Accumulated other comprehensive income	$	44		$	86

The following table provides changes in accumulated other comprehensive income, net of tax, reported in the Company’s condensed consolidated balance sheets for the three and nine months ended July 4, 2014 and June 28, 2013 (amounts in parentheses indicate debits):



	Three Months Ended
	July 4, 2014								June 28, 2013
	Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items		Total			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items			Total
Balance at beginning of period	$	(1,096	)	$	94	$	(1,002	)	$	(247	)	$	(338	)	$	(585	)
Other comprehensive gain (loss) before reclassifications	674			—		674			(567		)	—			(567		)
Amounts reclassified from accumulated other comprehensive loss	372			—		372			77			—			77
Net current-period other comprehensive income (loss)	1,046			—		1,046			(490		)	—			(490		)
Balance at end of period	$	(50	)	$	94	$	44		$	(737	)	$	(338	)	$	(1,075	)

- 24 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)



	Nine Months Ended
	July 4, 2014								June 28, 2013
	Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items		Total			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items			Total
Balance at beginning of period	$	(8	)	$	94	$	86		$	787		$	(338	)	$	449
Other comprehensive loss before reclassifications	(925		)	—		(925		)	(1,451		)	—			(1,451		)
Amounts reclassified from accumulated other comprehensive loss or income	883			—		883			(73		)	—			(73		)
Net current-period other comprehensive loss	(42		)	—		(42		)	(1,524		)	—			(1,524		)
Balance at end of period	$	(50	)	$	94	$	44		$	(737	)	$	(338	)	$	(1,075	)

The following table provides the gross amount reclassified from accumulated other comprehensive income and the corresponding amount of tax relating to gains and losses on cash flow hedges for the three and nine months ended July 4, 2014, and for the three and nine months ended June 28, 2013 (amounts in parentheses indicate debits):



	Three Months Ended						Nine Months Ended
	July 4, 2014			June 28, 2013			July 4, 2014			June 28, 2013
Amounts reclassified from accumulated other comprehensive loss or income	$	496		$	103		$	1,177		$	(97	)
Less: Tax	(124		)	(26		)	(294		)	24
Amounts reclassified from accumulated other comprehensive loss or income, net	$	372		$	77		$	883		$	(73	)

See Note 7, Derivatives Instruments and Hedging Activities, for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the condensed consolidated statements of comprehensive income.


12.	Segments, Geographic and Customer Information

The Company’s reportable segments are RF (“radio frequency”) products (formerly “electron devices”) and satcom equipment. With the Company’s recent acquisitions and broadening of its product offerings through internal development, the Company concluded that it is more inclusive, suitable and accurate to refer to the segment previously described as “electron devices” as “RF products.” RF products is a broader term that encompasses all classes of electron devices and more appropriately describes the broader nature of the Company’s current complementary product offerings in the radio frequency field.

The Company’s reportable segments are differentiated based on their underlying profitability and economic performance. The RF products segment is made up of five divisions, including the Company’s newly acquired operations of Radant, that have been aggregated based on the similarity of their economic characteristics as measured by EBITDA, and the similarity of their products and services, production processes, types of customers and distribution methods, and the nature of their regulatory environments. The satcom equipment segment consists of one division. The Company’s analysis of the similarity of economic characteristics was based on both a historical and anticipated future analysis of performance. Segment information reported below is consistent with the manner in which it is reviewed and evaluated by the Company’s chief operating decision maker (“CODM”), its chief executive officer, and is based on the nature of the Company’s operations and products offered to customers.

- 25 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The RF products segment develops, manufactures and distributes high-power/high-frequency microwave and RF signal components and structures. These products are used in the communications, radar, electronic warfare, industrial, medical and scientific markets depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the RF products will be located. These products are distributed through the Company’s direct sales force, independent sales representatives and distributors.

The satcom equipment segment manufactures and supplies high-power amplifiers and networks for satellite communication uplink, electronic warfare and industrial applications. This segment also provides spares, service and other post-sales support. Its products are distributed through the Company’s direct sales force and independent sales representatives.

Amounts not reported as RF products or satcom equipment are reported as “other.” Other includes the activities of the Company’s Malibu Division and unallocated corporate expenses, such as business combination-related expenses, share-based compensation expense and certain other charges and credits that the Company’s management has determined are non-operational, non-cash items or not directly attributable to the Company’s operating divisions. The Malibu Division is a designer, manufacturer and integrator of advanced antenna systems for radar, radar simulators and telemetry systems, as well as for data links used in ground, airborne, unmanned aerial vehicles (“UAVs”) and shipboard systems.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables:



	Three Months Ended						Nine Months Ended
	July 4, 2014			June 28, 2013			July 4, 2014			June 28, 2013
Sales from external customers
RF products	$	90,995		$	81,478		$	269,459		$	231,589
Satcom equipment	21,254			21,883			69,997			63,806
Other	7,164			6,255			24,995			14,001
	$	119,413		$	109,616		$	364,451		$	309,396
Intersegment product transfers
RF products	$	5,098		$	3,592		$	17,309		$	14,135
Satcom equipment	20			21			30			59
	$	5,118		$	3,613		$	17,339		$	14,194
Capital expenditures^a
RF products	$	938		$	626		$	3,354		$	2,762
Satcom equipment	25			31			211			137
Other	387			442			671			891
	$	1,350		$	1,099		$	4,236		$	3,790
EBITDA
RF products	$	22,475		$	19,285		$	63,604		$	51,126
Satcom equipment	1,934			2,564			6,797			7,795
Other	(10,066		)	(1,521		)	(14,170		)	(9,257		)
	$	14,343		$	20,328		$	56,231		$	49,664

^aCapital expenditures incurred on an accrual basis.

- 26 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)



	July 4, 2014		September 27, 2013
Total assets
RF products	$	523,864	$	473,032
Satcom equipment	110,405		116,835
Other	113,566		148,504
	$	747,835	$	738,371

The increase in RF products total assets primarily reflects assets derived from Radant, which was acquired by the Company in October 2013 (Note 3). The decrease in Other total assets primarily reflects a net decrease in cash resulting from the Company's recent debt restructuring (Note 6) and dividend payment (Note 11).

EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. The Company believes that EBITDA is useful to assess its ability to generate cash from operations sufficient to pay taxes, to service debt and to undertake capital expenditures.

For the reasons listed below, the Company believes that U.S. GAAP-based financial information for leveraged businesses like its own should be supplemented by EBITDA so that investors better understand its financial performance in connection with their analysis of the Company’s business:


•	EBITDA is a component of the measures used by the Company’s board of directors and management team to evaluate the Company’s operating performance;


•	the Company’s senior credit facilities contain covenants that require the Company to maintain a total leverage ratio in certain circumstances that contains EBITDA as a component, and the Company’s management team uses EBITDA to monitor compliance with these covenants;


•	EBITDA is a component of the measures used by the Company’s management team to make day-to-day operating decisions;


•	EBITDA facilitates comparisons between the Company’s operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the management to facilitate internal comparisons to competitors’ results and the Company’s industry in general; and


•	the payment of management bonuses is contingent upon, among other things, the satisfaction by the Company of certain targets that contain EBITDA as a component.

EBITDA is not a presentation made in accordance with U.S. GAAP and has important limitations as an analytical tool. EBITDA should not be considered as an alternative to comprehensive income, net income, operating income or any other performance measures derived in accordance with U.S. GAAP as a measure of operating performance or operating cash flows as a measure of liquidity. The Company’s use of the term EBITDA varies from others in the Company’s industry. The Company’s presentation of EBITDA should not be construed to imply that the Company’s future results will be unaffected by non-operational or non-cash items. Operating income by the Company’s reportable segments was as follows:

- 27 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)



	Three Months Ended						Nine Months Ended
	July 4, 2014			June 28, 2013			July 4, 2014			June 28, 2013
Operating income
RF products	$	20,094		$	17,158		$	56,809		$	44,728
Satcom equipment	1,666			2,316			5,930			7,019
Other	(6,003		)	(4,204		)	(17,329		)	(18,521		)
	$	15,757		$	15,270		$	45,410		$	33,226

The following table reconciles net income to EBITDA:



	Three Months Ended					Nine Months Ended
	July 4, 2014			June 28, 2013		July 4, 2014		June 28, 2013
Net income	$	3,470		$	6,151	$	12,511	$	8,902
Depreciation and amortization	5,821			5,058		18,056		16,438
Interest expense, net	9,018			6,753		23,140		20,467
Income tax (benefit) expense	(3,966		)	2,366		2,524		3,857
EBITDA	$	14,343		$	20,328	$	56,231	$	49,664

13. Supplemental Guarantors Condensed Consolidating Financial Information

The tables that follow reflect the supplemental guarantor financial information associated with CPII’s Notes issued on February 11, 2011. The Notes are guaranteed by Parent and, subject to certain exceptions, each of Parent’s existing and future domestic restricted subsidiaries (other than CPII) on a senior unsecured basis. Separate financial statements of the guarantors are not presented because (i) the guarantors are wholly owned and have fully and unconditionally guaranteed the Notes on a joint and several basis and (ii) CPII’s management has determined that such separate financial statements are not material to investors. Instead, presented below are the consolidating financial statements of: (a) the guarantor subsidiaries (all of the domestic subsidiaries), (b) the non-guarantor subsidiaries, (c) the consolidating elimination entries, and (d) the consolidated totals. The accompanying consolidating financial information should be read in connection with the condensed consolidated financial statements of the Company.

Investments in subsidiaries are accounted for based on the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.

- 28 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING BALANCE SHEET

As of July 4, 2014



	Parent		Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations			Consolidated Total
Assets
Cash and cash equivalents	$	—	$	—	$	32,216	$	8,280	$	—		$	40,496
Restricted cash	—		—		2,698		96		—			2,794
Accounts receivable, net	—		—		36,097		11,846		—			47,943
Inventories	—		—		73,183		25,992		(810		)	98,365
Deferred tax assets	—		—		7,668		357		—			8,025
Intercompany receivable	—		—		85,575		14,534		(100,109		)	—
Prepaid and other current assets	1		80		8,376		1,762		308			10,527
Total current assets	1		80		245,813		62,867		(100,611		)	208,150
Property, plant and equipment, net	—		—		61,213		15,209		—			76,422
Deferred debt issue costs, net	—		13,153		—		—		—			13,153
Intangible assets, net	—		—		170,834		80,630		—			251,464
Goodwill	—		—		109,307		88,153		—			197,460
Other long-term assets	—		—		1,051		135		—			1,186
Investment in subsidiaries	47,062		760,314		14,810		—		(822,186		)	—
Total assets	$	47,063	$	773,547	$	603,028	$	246,994	$	(922,797	)	$	747,835
Liabilities and stockholders’ equity
Current portion of long-term debt	$	—	$	3,100	$	—	$	—	$	—		$	3,100
Accounts payable	—		—		15,942		9,201		—			25,143
Accrued expenses	1,095		7,394		17,161		6,375		2			32,027
Product warranty	—		—		2,722		2,073		—			4,795
Income taxes payable	—		—		10		191		—			201
Advance payments from customers	—		—		12,913		3,069		—			15,982
Intercompany payable	—		5,353		6,428		—		(11,781		)	—
Total current liabilities	1,095		15,847		55,176		20,909		(11,779		)	81,248
Deferred income taxes, non-current	—		—		71,559		22,032		—			93,591
Long-term debt, less current portion	—		515,344		—		—		—			515,344
Other long-term liabilities	—		—		10,909		775		—			11,684
Total liabilities	1,095		531,191		137,644		43,716		(11,779		)	701,867
Common stock	—		—		—		—		—			—
Parent investment	—		211,100		376,245		182,893		(770,238		)	—
Equity investment in subsidiary	44		44		9,377		—		(9,465		)	—
Additional paid-in capital	25,322		—		—		—		—			25,322
Accumulated other comprehensive income	—		—		—		44		—			44
Retained earnings	20,602		31,212		79,762		20,341		(131,315		)	20,602
Total stockholders’ equity	45,968		242,356		465,384		203,278		(911,018		)	45,968
Total liabilities and stockholders’ equity	$	47,063	$	773,547	$	603,028	$	246,994	$	(922,797	)	$	747,835

- 29 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING BALANCE SHEET

As of September 27, 2013



	Parent		Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations			Consolidated Total
Assets
Cash and cash equivalents	$	—	$	—	$	61,387	$	5,664	$	—		$	67,051
Restricted cash	—		—		2,468		103		—			2,571
Accounts receivable, net	—		—		33,456		18,704		—			52,160
Inventories	—		—		67,352		23,095		(615		)	89,832
Deferred tax assets	—		—		13,172		314		—			13,486
Intercompany receivable	—		—		59,763		13,316		(73,079		)	—
Prepaid and other current assets	2		41		4,290		2,501		234			7,068
Total current assets	2		41		241,888		63,697		(73,460		)	232,168
Property, plant and equipment, net	—		—		60,191		16,142		—			76,333
Deferred debt issue costs, net	—		9,713		—		—		—			9,713
Intangible assets, net	—		—		155,874		83,621		—			239,495
Goodwill	—		—		91,574		88,153		—			179,727
Other long-term assets	—		—		935		—		—			935
Investment in subsidiaries	208,929		581,545		17,163		—		(807,637		)	—
Total assets	$	208,931	$	591,299	$	567,625	$	251,613	$	(881,097	)	$	738,371
Liabilities and stockholders’ equity
Current portion of long-term debt	$	—	$	5,500	$	—	$	—	$	—		$	5,500
Accounts payable	—		—		15,601		11,141		—			26,742
Accrued expenses	1,179		2,724		17,144		6,303		(2		)	27,348
Product warranty	—		—		2,646		2,060		—			4,706
Income taxes payable	—		—		49		49		—			98
Advance payments from customers	—		—		14,308		3,688		—			17,996
Intercompany payable	—		1,401		8,387		—		(9,788		)	—
Total current liabilities	1,179		9,625		58,135		23,241		(9,790		)	82,390
Deferred income taxes, non-current	—		—		66,420		22,758		—			89,178
Long-term debt, less current portion	—		353,233		—		—		—			353,233
Other long-term liabilities	—		—		5,394		424		—			5,818
Total liabilities	1,179		362,858		129,949		46,423		(9,790		)	530,619
Common stock	—		—		—		—		—			—
Parent investment	—		211,100		375,639		191,752		(778,491		)	—
Equity investment in subsidiary	86		86		9,377		—		(9,549		)	—
Additional paid-in capital	199,575		—		—		—		—			199,575
Accumulated other comprehensive income	—		—		—		86		—			86
Retained earnings	8,091		17,255		52,660		13,352		(83,267		)	8,091
Total stockholders’ equity	207,752		228,441		437,676		205,190		(871,307		)	207,752
Total liabilities and stockholders’ equity	$	208,931	$	591,299	$	567,625	$	251,613	$	(881,097	)	$	738,371

- 30 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

For the Three Months Ended July 4, 2014



	Parent			Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Sales	$	—		$	—		$	95,912	$	40,823		$	(17,322	)	$	119,413
Cost of sales	—			—			68,643		31,557			(16,698		)	83,502
Gross profit	—			—			27,269		9,266			(624		)	35,911
Operating costs and expenses:
Research and development	—			—			1,960		2,109			—			4,069
Selling and marketing	—			—			3,624		2,803			(516		)	5,911
General and administrative	711			150			5,126		1,585			182			7,754
Amortization of acquisition-related intangible assets	—			—			1,401		1,019			—			2,420
Total operating costs and expenses	711			150			12,111		7,516			(334		)	20,154
Operating (loss) income	(711		)	(150		)	15,158		1,750			(290		)	15,757
Interest expense (income), net	—			9,018			2		(2		)	—			9,018
Loss on debt restructuring	—			7,235			—		—			—			7,235
(Loss) income before income tax expense and equity in income of subsidiaries	(711		)	(16,403		)	15,156		1,752			(290		)	(496		)
Income tax (benefit) expense	(249		)	(6,231		)	1,784		840			(110		)	(3,966		)
Equity in income of subsidiaries	3,932			14,104			451		—			(18,487		)	—
Net income	3,470			3,932			13,823		912			(18,667		)	3,470
Equity in other comprehensive income of subsidiaries, net of tax	1,046			1,046			—		—			(2,092		)	—
Other comprehensive income, net of tax
Unrealized income on cash flow hedges, net of tax	—			—			—		1,046			—			1,046
Total other comprehensive income, net of tax	—			—			—		1,046			—			1,046
Comprehensive income	$	4,516		$	4,978		$	13,823	$	1,958		$	(20,759	)	$	4,516

- 31 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

For the Three Months Ended June 28, 2013



	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Sales	$	—		$	—		$	78,929		$	46,829		$	(16,142	)	$	109,616
Cost of sales	—			—			56,081			35,397			(15,774		)	75,704
Gross profit	—			—			22,848			11,432			(368		)	33,912
Operating costs and expenses:
Research and development	—			—			1,404			2,446			—			3,850
Selling and marketing	—			—			3,725			2,786			(893		)	5,618
General and administrative	658			620			3,882			2,028			39			7,227
Amortization of acquisition-related intangible assets	—			—			944			1,003			—			1,947
Total operating costs and expenses	658			620			9,955			8,263			(854		)	18,642
Operating (loss) income	(658		)	(620		)	12,893			3,169			486			15,270
Interest expense (income), net	—			6,770			(15		)	(2		)	—			6,753
(Loss) income before income tax expense and equity in income of subsidiaries	(658		)	(7,390		)	12,908			3,171			486			8,517
Income tax (benefit) expense	(221		)	(2,815		)	5,127			74			201			2,366
Equity in income of subsidiaries	6,588			11,163			369			—			(18,120		)	—
Net income	6,151			6,588			8,150			3,097			(17,835		)	6,151
Equity in other comprehensive loss of subsidiaries, net of tax	(490		)	(490		)	—			—			980			—
Other comprehensive loss, net of tax
Unrealized loss on cash flow hedges, net of tax	—			—			—			(490		)	—			(490		)
Total other comprehensive loss, net of tax	—			—			—			(490		)	—			(490		)
Comprehensive income	$	5,661		$	6,098		$	8,150		$	2,607		$	(16,855	)	$	5,661

- 32 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

For the Nine Months Ended July 4, 2014



	Parent			Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Sales	$	—		$	—		$	281,196	$	135,149		$	(51,894	)	$	364,451
Cost of sales	—			—			205,711		103,775			(50,611		)	258,875
Gross profit	—			—			75,485		31,374			(1,283		)	105,576
Operating costs and expenses:
Research and development	—			—			4,808		6,878			—			11,686
Selling and marketing	—			—			10,398		8,531			(1,274		)	17,655
General and administrative	2,299			567			15,927		3,948			186			22,927
Amortization of acquisition-related intangible assets	—			—			4,842		3,056			—			7,898
Total operating costs and expenses	2,299			567			35,975		22,413			(1,088		)	60,166
Operating (loss) income	(2,299		)	(567		)	39,510		8,961			(195		)	45,410
Interest expense (income), net	—			23,139			6		(5		)	—			23,140
Loss on debt restructuring	—			7,235			—		—			—			7,235
(Loss) income before income tax expense and equity in income of subsidiaries	(2,299		)	(30,941		)	39,504		8,966			(195		)	15,035
Income tax (benefit) expense	(853		)	(11,757		)	13,231		1,977			(74		)	2,524
Equity in income of subsidiaries	13,957			33,141			829		—			(47,927		)	—
Net income	12,511			13,957			27,102		6,989			(48,048		)	12,511
Equity in other comprehensive loss of subsidiaries, net of tax	(42		)	(42		)	—		—			84			—
Other comprehensive loss, net of tax
Unrealized loss on cash flow hedges, net of tax	—			—			—		(42		)	—			(42		)
Total other comprehensive loss, net of tax	—			—			—		(42		)	—			(42		)
Comprehensive income	$	12,469		$	13,915		$	27,102	$	6,947		$	(47,964	)	$	12,469

- 33 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

For the Nine Months Ended June 28, 2013



	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Sales	$	—		$	—		$	229,507		$	129,676		$	(49,787	)	$	309,396
Cost of sales	—			—			170,293			99,151			(48,634		)	220,810
Gross profit	—			—			59,214			30,525			(1,153		)	88,586
Operating costs and expenses:
Research and development	—			—			3,924			7,157			—			11,081
Selling and marketing	—			—			9,455			8,107			(1,107		)	16,455
General and administrative	1,671			1,273			12,897			4,621			343			20,805
Amortization of acquisition-related intangible assets	—			—			4,004			3,015			—			7,019
Total operating costs and expenses	1,671			1,273			30,280			22,900			(764		)	55,360
Operating (loss) income	(1,671		)	(1,273		)	28,934			7,625			(389		)	33,226
Interest expense (income), net	—			20,478			(16		)	5			—			20,467
(Loss) income before income tax expense and equity in income of subsidiaries	(1,671		)	(21,751		)	28,950			7,620			(389		)	12,759
Income tax (benefit) expense	(591		)	(8,269		)	12,224			625			(132		)	3,857
Equity in income of subsidiaries	9,982			23,464			422			—			(33,868		)	—
Net income	8,902			9,982			17,148			6,995			(34,125		)	8,902
Equity in other comprehensive loss of subsidiaries, net of tax	(1,524		)	(1,524		)	—			—			3,048			—
Other comprehensive loss, net of tax
Unrealized loss on cash flow hedges, net of tax	—			—			—			(1,524		)	—			(1,524		)
Total other comprehensive loss, net of tax	—			—			—			(1,524		)	—			(1,524		)
Comprehensive income	$	7,378		$	8,458		$	17,148		$	5,471		$	(31,077	)	$	7,378

- 34 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended July 4, 2014



	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
Cash flows from operating activities
Net cash provided by operating activities	$	—		$	—		$	36,600		$	3,041		$	39,641
Cash flows from investing activities
Capital expenditures	—			—			(4,171		)	(425		)	(4,596		)
Acquisition, net of cash acquired	—			—			(36,776		)	—			(36,776		)
Net cash used in investing activities	—			—			(40,947		)	(425		)	(41,372		)
Cash flows from financing activities
Return of intercompany capital	—			9,000			—			(9,000		)	—
Intercompany funding	—			15,824			(24,824		)	9,000			—
Intercompany dividend	175,000			(175,000		)	—			—			—
Borrowings under new term loan facility	—			309,225			—			—			309,225
Payment of debt issue costs	—			(8,734		)	—			—			(8,734		)
Payment of debt modification costs	—			(5,365		)	—			—			(5,365		)
Repayment of borrowings under previous term loan facility	—			(144,175		)	—			—			(144,175		)
Repayment of borrowings under new term loan facility	—			(775		)	—			—			(775		)
Dividends paid	(175,000		)	—			—			—			(175,000		)
Net cash used in financing activities	—			—			(24,824		)	—			(24,824		)
Net (decrease) increase in cash and cash equivalents	—			—			(29,171		)	2,616			(26,555		)
Cash and cash equivalents at beginning of period	—			—			61,387			5,664			67,051
Cash and cash equivalents at end of period	$	—		$	—		$	32,216		$	8,280		$	40,496

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended June 28, 2013



	Parent		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
Cash flows from operating activities
Net cash provided by (used in) operating activities	$	—	$	—		$	30,737		$	(110	)	$	30,627
Cash flows from investing activities
Capital expenditures	—		—			(2,835		)	(955		)	(3,790		)
Acquisition	—		—			(3,871		)	(1,500		)	(5,371		)
Net cash used in investing activities	—		—			(6,706		)	(2,455		)	(9,161		)
Cash flows from financing activities
Return of intercompany capital	—		19,181			—			(19,181		)	$	—
Intercompany funding	—		(15,981		)	(3,200		)	19,181			—
Repayment of borrowings under CPII’s term loan facility	—		(3,200		)	—			—			(3,200		)
Net cash used in financing activities	—		—			(3,200		)	—			(3,200		)
Net increase (decrease) in cash and cash equivalents	—		—			20,831			(2,565		)	18,266
Cash and cash equivalents at beginning of period	—		—			34,042			8,964			43,006
Cash and cash equivalents at end of period	$	—	$	—		$	54,873		$	6,399		$	61,272

- 35 -

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our fiscal years are the 52- or 53-week periods that end on the Friday nearest September 30. Fiscal years 2014 and 2013 comprise the 53- and 52-week periods ending October 3, 2014 and September 27, 2013, respectively. Each of the three months ended July 4, 2014 and June 28, 2013 includes 13 weeks. The nine months ended July 4, 2014 and June 28, 2013 include 40 and 39 weeks, respectively. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, and the notes thereto, of CPI International Holding Corp.

Overview

CPI International Holding Corp. (“Parent”), headquartered in Palo Alto, California, is the parent company of CPI International, Inc. (“CPII”), which in turn is a parent company of Communications & Power Industries LLC (“CPI”) and Communications & Power Industries Canada Inc. (“CPI Canada”). CPI and CPI Canada together are a provider of microwave, radio frequency (“RF”), power and control solutions for critical defense, communications, medical, scientific and other applications. CPI develops, manufactures and distributes products used to generate, amplify, transmit and receive high-power/high-frequency microwave and RF 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.

Debt Restructuring

On April 7, 2014, we completed a consent solicitation of the holders of our Senior Notes due 2018 (the “Notes”) pursuant to which we entered into a supplemental indenture governing the Notes. The supplemental indenture amended the indenture by, among other things, increasing the aggregate amount of indebtedness permitted under our senior secured credit facilities from $230.0 million to $365.0 million and increasing the interest rate on the Notes from 8.00% to 8.75% per annum. At the same time, we entered into new senior secured credit facilities which replaced our previous credit facilities in their entirety. The new senior secured credit facilities consist of (i) a $310.0 million term loan facility and (ii) a $30.0 million revolving credit facility. We have borrowed the full amount of the term loan facility thereunder. The proceeds of $309.2 million, net of $0.8 million issue discount, were principally used to: (1) pay all amounts outstanding under our previous credit facilities totaling $138.7 million, (2) pay a dividend totaling $175.0 million to our shareholders, and (3) pay fees, costs and expenses totaling $17.5 million in connection with the foregoing debt restructuring. See “Liquidity and Capital Resources” section below for more information.

Business Combinations

On October 1, 2013, we completed our purchase of the outstanding stock of Radant Technologies, Inc. (“Radant”), a Massachusetts corporation, for a payment of approximately $36.8 million in cash consideration, net of $0.6 million cash acquired. A maximum of $10.0 million in potential additional payments may be payable if certain financial targets are achieved by Radant over the two years following the date of acquisition. Radant designs, manufactures and tests advanced composite radomes, reflector antennas and structures for defense aerospace and naval applications as well as commercial aerospace applications. The acquisition of Radant provides us with advanced technology and specialized products for radar, electronic warfare and communications applications that complement and extend our broad portfolio of microwave, RF, power and control solutions for these and other critical applications. See Note 3, Business Combinations, to the accompanying condensed consolidated financial statements for more information about the Radant acquisition.

On June 25, 2013, we completed our acquisition of certain assets of M C L, Inc. (“MCL”), an Illinois corporation that manufactures power amplifier products and systems for the satellite communications market and a wholly owned subsidiary of MITEQ, Inc., for a payment of $6.0 million in cash. The acquisition was made to support our strategic growth. MCL has been integrated into our Satcom Division as a part of the satcom equipment operating segment.

- 36 -

Table of Contents

Orders

We sell our products into five end markets: defense (radar and electronic warfare), medical, communications, industrial and scientific.

Our customer sales contracts are recorded as orders when we accept written customer purchase orders or contracts. Customer purchase orders with an undefined delivery schedule, or blanket purchase orders, are not reported as orders until the delivery date is determined. Our government sales contracts are not reported as orders until we have been notified that the contract has been funded. Total orders for a fiscal period represent the total dollar amount of customer orders recorded by us during the fiscal period, reduced by the dollar amount of any order cancellations or terminations during the fiscal period.

Our orders by market for the nine months ended July 4, 2014, which included 40 weeks, and June 28, 2013, which included 39 weeks, are summarized as follows (dollars in millions):



	Nine Months Ended
	July 4, 2014				June 28, 2013				(Decrease) Increase
	Amount		% of Orders		Amount		% of Orders		Amount			Percent
Radar and Electronic Warfare	$	136.9	41	%	$	153.4	40	%	$	(16.5	)	(11	)
Medical	56.9		17		55.9		15		1.0			2
Communications	104.5		31		150.8		39		(46.3		)	(31	)
Industrial	21.9		7		16.6		4		5.3			32
Scientific	13.3		4		9.0		2		4.3			48
Total	$	333.5	100	%	$	385.7	100	%	$	(52.2	)	(14	)%

Orders of $333.5 million for the nine months ended July 4, 2014 were $52.2 million, or approximately 14%, lower than orders of $385.7 million for the nine months ended June 28, 2013. Our Radant Division, which resulted from our acquisition of Radant in October 2013, contributed approximately $27 million in orders for the nine months ended July 4, 2014. Explanations for the order increase or decrease by market for the nine months ended July 4, 2014 compared to the nine months ended June 28, 2013 are as follows:

•

Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. Orders in these markets are characterized by many smaller orders of less than $3.0 million, and the timing of these orders may vary from year to year. Orders for the radar and electronic warfare markets decreased 11%. Lower demand for products to support certain domestic radar and electronic warfare systems, including Aegis radar systems, missile radar systems and an electronic countermeasures system, was primarily due to the timing of those programs. Partially offsetting this decrease, our radar and electronic warfare orders in the nine months ended July 4, 2014 included orders for products from our Radant Division.

•

Medical: Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, MRI and other applications, and for radiation therapy applications for the treatment of cancer. The 2% increase in medical orders resulted principally from an increase in demand for products to support x-ray imaging applications, particularly in Asia. Demand for products to support radiation therapy applications also increased. Partially offsetting these increases, demand for products to support MRI applications decreased.

•

Communications: Orders for our communications products consist of orders for commercial communications applications and military communications applications. The 31% decrease in communications orders was due, in large part, to a multi-year order totaling more than $25 million for military communications applications that our Malibu Division received in the nine months ended June 28, 2013; this order for advanced tactical common data link (“TCDL”) antenna products was not expected to, and did not, repeat in the nine months ended July 4, 2014. Demand for products to support certain other military communications programs and commercial communications applications, particularly fixed satellite service applications such as satellite broadcast and broadband data communications, also decreased due to the timing of large Ka-band programs. Partially offsetting these decreases,

- 37 -

Table of Contents

our communications orders in the nine months ended July 4, 2014 included orders for products from our Radant Division and from the former MCL business that we acquired at the end of the third quarter of fiscal year 2013.


•	Industrial: Orders in the industrial market are cyclical and are generally tied to the state of the economy. The $5.3 million increase in industrial orders was due to an increase in demand for products to support electromagnetic vulnerability testing, chemical analysis applications and industrial heating applications.

•

Scientific: Orders in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $4.3 million increase in scientific orders was due to an increase in orders to support accelerator programs, including the European XFEL superconducting linear accelerator, and a domestic scientific laboratory, and was partially offset by decreased orders to support certain foreign customers.

Incoming order levels can fluctuate significantly on a quarterly or annual basis, and a particular quarter’s or year’s order rate may not be indicative of future order levels. In addition, our sales are highly dependent upon manufacturing scheduling and performance and, accordingly, it is not possible to accurately predict when orders will be recognized as sales.

Backlog

As of July 4, 2014, we had an order backlog of $331.2 million, compared to an order backlog of $324.5 million as of June 28, 2013. Because our orders for government end-use products generally have much longer delivery terms than our orders for commercial business (which require quicker turn-around), our backlog is primarily composed of government orders. Backlog represents the cumulative balance, at a given point in time, of recorded customer sales orders that have not yet been shipped or recognized as sales. Backlog is increased when an order is received, and backlog is decreased when we recognize sales. We believe that backlog and orders information is helpful to investors because this information may be indicative of future sales results. Although backlog consists of firm orders for which goods and services are yet to be provided, customers can, and sometimes do, terminate or modify these orders. However, historically the amount of modifications and terminations has not been material compared to total contract volume.

Results of Operations

We derive our revenue primarily from the sale of microwave and RF products, including high-power microwave amplifiers, satellite communications amplifiers, medical x-ray imaging subsystems and other related products.

Cost of goods sold generally includes costs for raw materials, manufacturing costs, including allocation of overhead and other indirect costs, charges for reserves for excess and obsolete inventory, warranty claims, losses on fixed price contracts and, normally upon a business combination, utilization of the net increase in cost basis of acquired inventory. Operating expenses generally consist of research and development, selling and marketing, general and administrative expenses and amortization of acquisition-related intangibles.

The nine months ended July 4, 2014 consisted of 40 weeks, compared to 39 weeks for the nine months ended June 28, 2013. This additional week in the first nine months of fiscal year 2014 contributed to an increase in each of our sales, cost of sales and operating and other expenses for the period.

Our recent debt restructuring resulted in, and will continue to result in, a substantial increase in interest expense and in amortization of debt issue costs and issue discount. The annual increase in cash interest expense due to the change in interest rate on the Notes is approximately $1.6 million throughout their remaining terms. The annual increase in cash interest expense due to increased borrowings under our new term loan facility is approximately $6.3 million throughout its remaining term. The annual increase in amortization of debt issue costs and issue discount on the Notes and senior secured credit facilities averages $1.8 million throughout their respective remaining terms.

- 38 -

Table of Contents

We believe that our acquisitions of Radant in October 2013 and MCL in June 2013 resulted in, and will continue to result in, certain benefits, including cost savings, broader market opportunities, product innovations and operational efficiencies. However, both acquisitions also increased, and will continue to increase, certain of our noncash expenses. Based on preliminary estimates of the fair value of assets acquired, the noncash expenses (on a pretax basis) related to the acquisition of Radant include: (1) a $1.5 million charge in fiscal year 2014 for the utilization of the net increase in cost basis of inventory, and (2) a higher depreciation and amortization expense as a result of the additional intangibles and property, plant and equipment, which is expected to be approximately $3.6 million for each of the first three fiscal years following the date of the acquisition and approximately $2.0 million annually thereafter until said assets are fully amortized or depreciated at various dates through 2028.

Three Months Ended July 4, 2014 Compared to Three Months Ended June 28, 2013

The following table sets forth our historical results of operations for each of the periods indicated (dollars in millions):



	Three Months Ended									Increase (Decrease)
	July 4, 2014					June 28, 2013
	Amount			% of Sales		Amount		% of Sales
Sales	$	119.4		100.0	%	$	109.6	100.0	%	$	9.8
Cost of sales	83.5			69.9		75.7		69.1		7.8
Gross profit	35.9			30.1		33.9		30.9		2.0
Research and development	4.1			3.4		3.9		3.6		0.2
Selling and marketing	5.9			4.9		5.6		5.1		0.3
General and administrative	7.8			6.5		7.2		6.6		0.6
Amortization of acquisition-related intangibles	2.4			2.0		1.9		1.7		0.5
Operating income	15.8			13.2		15.3		14.0		0.5
Interest expense, net	9.0			7.5		6.8		6.2		2.2
Loss on debt restructuring	7.2			6.0		—		—		7.2
(Loss) income before taxes	(0.5		)	(0.4	)	8.5		7.8		(9.0		)
Income tax (benefit) expense	(4.0		)	(3.4	)	2.4		2.2		(6.4		)
Net income	$	3.5		2.9	%	$	6.2	5.7	%	$	(2.7	)
Other Data:
EBITDA ^(a)	$	14.3		12.0	%	$	20.3	18.5	%	$	(6.0	)

Note: Totals may not equal the sum of the components due to independent rounding. Percentages are calculated based on rounded dollar amounts presented.

(a)

EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. For the reasons listed below, we believe that U.S. generally accepted accounting principles (“GAAP”) based financial information for leveraged businesses such as ours should be supplemented by EBITDA so that investors better understand our financial performance in connection with their analysis of our business:


•	EBITDA is a component of the measures used by our board of directors and management team to evaluate our operating performance;


•	our senior credit facilities contain covenants that require us to maintain a total leverage ratio in certain circumstances that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with these covenants;


•	EBITDA is a component of the measures used by our management team to make day-to-day operating decisions;


•	EBITDA facilitates comparisons between our operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the management to facilitate internal comparisons to competitors’ results and our industry in general; and


•	the payment of management bonuses is contingent upon, among other things, the satisfaction by us of certain targets that contain EBITDA as a component.

Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. When analyzing our performance, EBITDA should be considered in addition to, and not as a substitute for or superior to, comprehensive income, net income, cash flows from operating activities or other statements of income or statements of cash flows data prepared in accordance with GAAP.

For a reconciliation of Net Income to EBITDA, see Note 12 of the accompanying unaudited condensed consolidated financial statements.

- 39 -

Table of Contents

Sales: Our sales by market for the three months ended July 4, 2014 and June 28, 2013 are summarized as follows (dollars in millions):



	Three Months Ended
	July 4, 2014				June 28, 2013				Increase (Decrease)
	Amount		% of Sales		Amount		% of Sales		Amount			Percent
Radar and Electronic Warfare	$	46.2	39	%	$	41.5	38	%	$	4.7		11	%
Medical	18.0		15		18.4		17		(0.4		)	(2	)
Communications	44.2		37		38.4		35		5.8			15
Industrial	5.6		5		6.6		6		(1.0		)	(15	)
Scientific	5.4		4		4.7		4		0.7			15
Total	$	119.4	100	%	$	109.6	100	%	$	9.8		9	%

Sales of $119.4 million for the three months ended July 4, 2014 were $9.8 million, or approximately 9%, higher than sales of $109.6 million for the three months ended June 28, 2013. Our Radant operations contributed approximately $12 million in sales for the three months ended July 4, 2014. Explanations for the sales increase or decrease by market for the three months ended July 4, 2014 compared to the three months ended June 28, 2013 are as follows:

•

Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of order receipts and subsequent shipments in these markets may vary from year to year. Sales for these two markets increased 11% due to the inclusion of sales of products from our Radant Division and higher sales of products to support various U.S. radar systems, including Aegis radar systems and the AN/APN-245 Automatic Carrier Landing System (ACLS) Radar Beacon. This increase was partially offset by lower sales to support certain other radar systems.

•

Medical: Sales of our medical products consist of sales for medical imaging applications, such as x-ray imaging, MRI and other applications, and for radiation therapy applications for the treatment of cancer. The 2% decrease in sales of our medical products in the three months ended July 4, 2014 was primarily due to lower sales of products to support MRI and radiation therapy applications. Sales of products to support x-ray imaging applications increased, particularly in Asia.

•

Communications: Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 15% increase in sales in the communications market was primarily due to higher sales of products to support military communications applications, including sales of advanced TCDL antenna products from our Malibu Division and products from our Radant Division. This increase was partially offset by a decrease in sales to support certain other military communications and broadcast applications. Our communications sales in the three months ended July 4, 2014 also included products from the former MCL business that we acquired at the end of the third quarter of fiscal year 2013.


•	Industrial: Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $1.0 million decrease in sales of industrial products in the three months ended July 4, 2014 was primarily due to lower sales to support chemical analysis and electromagnetic vulnerability testing applications.


•	Scientific: Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $0.7 million increase in scientific sales was due to higher sales to support foreign accelerator programs.

- 40 -

Table of Contents

Gross Profit. Gross profit was $35.9 million, or 30.1% of sales, for the three months ended July 4, 2014 compared to $33.9 million, or 30.9% of sales, for the three months ended June 28, 2013. The $2.0 million increase in gross profit was primarily due to higher sales volume, partially offset by an unfavorable mix of product shipments with lower margins in the three months ended July 4, 2014. The inclusion of the recently acquired Radant Division contributed to the increase in gross profit for the three months ended July 4, 2014 compared to the three months ended June 28, 2013.

Research and Development. Research and development expenses were $4.1 million, or 3.4% of sales, for the three months ended July 4, 2014 and $3.9 million, or 3.6% of sales, for the three months ended June 28, 2013. There was no significant change in research and development expenses for the three months ended July 4, 2014 compared to the three months ended June 28, 2013.

Total spending on research and development, including customer-sponsored research and development, was as follows (in millions):



	Three Months Ended
	July 4, 2014		June 28, 2013
Company sponsored	$	4.1	$	3.9
Customer sponsored	1.7		3.8
	$	5.8	$	7.7

Customer sponsored research and development represents development costs incurred on customer sales contracts to develop new or improved products. The reduction of customer-funded research and development expenses is primarily due to the completion of customer-funded programs for vacuum electronic device products for the scientific markets.

Selling and Marketing. Selling and marketing expenses were $5.9 million, or 4.9% of sales, for the three months ended July 4, 2014, and $5.6 million, or 5.1% of sales, for the three months ended June 28, 2013. The $0.3 million increase in selling and marketing expenses was primarily due to additional resources to support company growth including the Radant Division.

General and Administrative. General and administrative expenses were $7.8 million, or 6.5% of sales, for the three months ended July 4, 2014, and $7.2 million, or 6.6% of sales, for the three months ended June 28, 2013. The $0.6 million increase in general and administrative expenses was primarily due to unfavorable currency translation, higher ongoing expenses resulting from the inclusion of the Radant Division and an increase in the fair value of the Radant contingent earnout liability, partially offset by a reduction in expenses for the negotiation, closing and integration of company acquisitions.

Amortization of Acquisition-related Intangibles. Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. Amortization of acquisition-related intangibles was $2.4 million for the three months ended July 4, 2014 and $1.9 million for the three months ended June 28, 2013. The $0.5 million increase in amortization of acquisition-related intangibles was primarily due to the acquisition of the Radant Division.

Interest Expense, Net (“Interest Expense”). Interest expense was $9.0 million, or 7.5% of sales, for the three months ended July 4, 2014 and $6.8 million, or 6.2% of sales, for the three months ended June 28, 2013. The $2.2 million increase in interest expense for the three months ended July 4, 2014 compared to the three months ended June 28, 2013 is primarily due to the approximately $170.0 million increase in borrowings under the new term loan facility in connection with the April 7, 2014 debt restructuring.

Loss on Debt Restructuring. Loss on debt restructuring of $7.2 million for the three months ended July 4, 2014 is due to expenses incurred in connection with the April 7, 2014 debt restructuring. The loss on debt extinguishment consists of non-cash write-offs of deferred debt issue costs and original issue discount of $3.8 million for the termination of the previous senior secured credit facilities and cash payments to third-party consultants of $3.4 million for services to modify the Notes.

- 41 -

Table of Contents

Income Tax (Benefit) Expense. We recorded income tax benefits of $4.0 million for the three months ended July 4, 2014 and income tax expense of $2.4 million for the three months ended June 28, 2013. The effective income tax rate for the three months ended July 4, 2014 was 800%, and the effective income tax rate for the three months ended June 28, 2013 was 28%. The 800% income tax rate for the three months ended July 4, 2014 was higher than our normalized effective income tax rate of approximately 38% primarily due to discrete income tax benefits of $3.4 million from the expiration of the statute of limitations for an unrecognized tax benefit and a $1.0 million provision to tax return true-up from filing the U.S. fiscal year 2013 income tax return. The 28% effective income tax rate for the three months ended June 28, 2013 was lower than our normalized effective income tax rate of approximately 37% for fiscal year 2013 primarily due to discrete tax benefits related to filing prior year U.S. income tax returns and an adjustment to deferred taxes for undistributed earnings of our Canadian subsidiary.

Net Income. Net income was $3.5 million, or 2.9% of sales, for the three months ended July 4, 2014 compared to net income of $6.2 million, or 5.7% of sales, for the three months ended June 28, 2013. The $2.7 million decrease in net income was primarily due to the loss on debt restructuring and higher interest expense in the three months ended July 4, 2014, partially offset by a decrease in income tax expense due to discrete income tax benefits and higher gross profit in the three months ended July 4, 2014.

EBITDA. EBITDA was $14.3 million, or 12.0% of sales, for the three months ended July 4, 2014 compared to $20.3 million, or 18.5% of sales, for the three months ended June 28, 2013. The $6.0 million decrease in EBITDA was primarily due to the loss on debt restructuring in the three months ended July 4, 2014, partially offset by higher gross profit in the three months ended July 4, 2014.

Nine Months Ended July 4, 2014 Compared to Nine Months Ended June 28, 2013

The following table sets forth our historical results of operations for each of the periods indicated (dollars in millions):



	Nine Months Ended								Increase (Decrease)
	July 4, 2014				June 28, 2013
	Amount		% of Sales		Amount		% of Sales
Sales	$	364.5	100.0	%	$	309.4	100.0	%	$	55.1
Cost of sales ^(a)	258.9		71.0		220.8		71.4		38.1
Gross profit	105.6		29.0		88.6		28.6		17.0
Research and development	11.7		3.2		11.1		3.6		0.6
Selling and marketing	17.7		4.9		16.5		5.3		1.2
General and administrative	22.9		6.3		20.8		6.7		2.1
Amortization of acquisition-related intangibles	7.9		2.2		7.0		2.3		0.9
Operating income	45.4		12.5		33.2		10.7		12.2
Interest expense, net	23.1		6.3		20.5		6.6		2.6
Loss on debt restructuring	7.2		2.0		—		—		7.2
Income before taxes	15.0		4.1		12.8		4.1		2.2
Income tax expense	2.5		0.7		3.9		1.3		(1.4		)
Net income	$	12.5	3.4	%	$	8.9	2.9	%	$	3.6
Other Data:
EBITDA ^(b)	$	56.2	15.4	%	$	49.7	16.1	%	$	6.5

Note: Totals may not equal the sum of the components due to independent rounding. Percentages are calculated based on rounded dollar amounts presented.


(a)	Cost of sales for the nine months ended July 4, 2014 and June 28, 2013 includes $1.5 million and $0.3 million, respectively, of utilization of the net increase in cost basis of inventory that resulted from purchase accounting in connection with acquisitions.

- 42 -

Table of Contents


(b)	EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. For the reasons listed below, we believe that U.S. GAAP-based financial information for leveraged businesses such as ours should be supplemented by EBITDA so that investors better understand our financial performance in connection with their analysis of our business:


•	EBITDA is a component of the measures used by our board of directors and management team to evaluate our operating performance;


•	our senior credit facilities contain covenants that require us to maintain a total leverage ratio in certain circumstances that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with these covenants;


•	EBITDA is a component of the measures used by our management team to make day-to-day operating decisions;


•	EBITDA facilitates comparisons between our operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the management to facilitate internal comparisons to competitors’ results and our industry in general; and


•	the payment of management bonuses is contingent upon, among other things, the satisfaction by us of certain targets that contain EBITDA as a component.

For a reconciliation of Net Income to EBITDA, see Note 12 of the accompanying unaudited condensed consolidated financial statements.

Sales: Our sales by market for the nine months ended July 4, 2014, which included 40 weeks, and June 28, 2013, which included 39 weeks, are summarized as follows (dollars in millions):



	Nine Months Ended
	July 4, 2014				June 28, 2013				Increase (Decrease)
	Amount		% of Sales		Amount		% of Sales		Amount			Percent
Radar and Electronic Warfare	$	138.3	38	%	$	117.9	38	%	$	20.4		17	%
Medical	55.7		15		58.2		19		(2.5		)	(4	)
Communications	140.0		39		105.8		34		34.2			32
Industrial	18.5		5		15.9		5		2.6			16
Scientific	12.0		3		11.6		4		0.4			3
Total	$	364.5	100	%	$	309.4	100	%	$	55.1		18	%

Sales of $364.5 million for the nine months ended July 4, 2014 were $55.1 million, or approximately 18%, higher than sales of $309.4 million for the nine months ended June 28, 2013. Our Radant Division contributed approximately $32 million in sales for the nine months ended July 4, 2014. Explanations for the sales increase or decrease by market for the nine months ended July 4, 2014 compared to the nine months ended June 28, 2013 are as follows:

•

Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of orders receipts and subsequent shipments in these markets may vary from year to year. Sales for these two markets increased 17% due to the inclusion of sales of products from our Radant Division and higher sales of products to support various U.S. radar systems, including Aegis radar systems and the AN/APN-245 ACLS Radar Beacon.

•

Medical: Sales of our medical products consist of sales for medical imaging applications, such as x-ray imaging, MRI and other applications, and for radiation therapy applications for the treatment of cancer. The 4% decrease in sales of our medical products in the nine months ended July 4, 2014 was primarily due to a decrease in sales of products to support periodic x-ray imaging programs in Russia; sales of products for MRI applications and radiation therapy applications also decreased. These decreases were offset by increased sales of products for x-ray imaging programs overall, particularly in Asia.

- 43 -

Table of Contents

•

Communications: Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 32% increase in sales in the communications market was primarily due to higher sales of products to support military communications applications, including sales of advanced TCDL antenna products from our Malibu Division and products from our Radant Division. Sales of products to support certain commercial communications applications, including direct-to-home broadcast programs, increased as well. Our communications sales in the nine months ended July 4, 2014 included products from the former MCL business that we acquired at the end of the third quarter of fiscal year 2013.


•	Industrial: Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $2.6 million increase in sales of industrial products in the nine months ended July 4, 2014 was due to higher sales to support electromagnetic vulnerability testing, chemical analysis and industrial heating applications.


•	Scientific: Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $0.4 million increase in scientific sales was primarily the result of an increase in sales for certain foreign accelerator programs.

Gross Profit. Gross profit was $105.6 million, or 29.0% of sales, for the nine months ended July 4, 2014 compared to $88.6 million, or 28.6% of sales, for the nine months ended June 28, 2013. The $17.0 million increase in gross profit was primarily due to higher shipment volume, a more favorable mix of products with higher margins and favorable translation of Canadian currency denominated expenses in the nine months ended July 4, 2014, partially offset by a $1.5 million charge for utilization of the net increase in cost basis from the acquisition of the Radant Division. The inclusion of the recently acquired Radant Division and improved performance at the Malibu Division contributed to the increase in gross profit for the nine months ended July 4, 2014 compared to the nine months ended June 28, 2013.

Research and Development. Research and development expenses were $11.7 million, or 3.2% of sales, for the nine months ended July 4, 2014 and $11.1 million, or 3.6% of sales, for the nine months ended June 28, 2013. There was no significant change in research and development expenses for the nine months ended July 4, 2014 compared to the nine months ended June 28, 2013.

Total spending on research and development, including customer-sponsored research and development, was as follows (in millions):



	Nine Months Ended
	July 4, 2014		June 28, 2013
Company sponsored	11.7		11.1
Customer sponsored	6.4		9.9
	$	18.1	$	21.0

Customer-sponsored research and development represents non-recurring development costs incurred on customer sales contracts to develop new or improved products. The reduction of customer-funded research and development expenses is primarily due to the completion of customer-funded programs for vacuum electronic device products for the scientific markets.

Selling and Marketing. Selling and marketing expenses were $17.7 million, or 4.9% of sales, for the nine months ended July 4, 2014, and $16.5 million, or 5.3% of sales, for the nine months ended June 28, 2013. The $1.2 million increase in selling and marketing expenses for the nine months ended July 4, 2014 compared to the nine months ended June 28, 2013 was primarily due to additional resources to support company growth including the Radant Division.

General and Administrative. General and administrative expenses were $22.9 million, or 6.3% of sales, for the nine months ended July 4, 2014, and $20.8 million, or 6.7% of sales, for the nine months ended June 28, 2013. The $2.1 million increase in general and administrative expenses was primarily due to higher expenses for the nine months ended July 4, 2014 resulting from the inclusion of the Radant Division and the additional work week, an increase in the fair value of the Radant contingent earnout liability, higher management incentives and Veritas Capital Fund IV, L.P. management fees due to our improved performance, and unfavorable currency translation, partially offset by a reduction in expenses for the negotiation, closing and integration of company acquisitions.

- 44 -

Table of Contents

Amortization of Acquisition-related Intangibles. Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. Amortization of acquisition-related intangibles was $7.9 million for the nine months ended July 4, 2014 and $7.0 million for the nine months ended June 28, 2013. The $0.9 million increase in amortization of acquisition-related intangibles was primarily due to the acquisition of the Radant Division.

Interest Expense, Net (“Interest Expense”). Interest expense was $23.1 million, or 6.3% of sales, for the nine months ended July 4, 2014 and $20.5 million, or 6.6% of sales, for the nine months ended June 28, 2013. The $2.6 million in interest expense for the nine months ended July 4, 2014 compared to the nine months ended June 28, 2013 is primarily due to the approximately $170.0 million increase in borrowings under the new term loan facility in connection with the April 7, 2014 debt restructuring.

Loss on Debt Restructuring. Loss on debt restructuring of $7.2 million for the nine months ended July 4, 2014 is due to expenses incurred in connection with the April 7, 2014 debt restructuring. The loss on debt extinguishment consists of non-cash write-offs of deferred debt issue costs and original issue discount of $3.8 million for the termination of the previous senior secured credit facilities and cash payments to third-party consultants of $3.4 million for services to modify the Notes.

Income Tax Expense. We recorded an income tax expense of $2.5 million for the nine months ended July 4, 2014 and an income tax expense of $3.9 million for the nine months ended June 28, 2013. The effective income tax rate for the nine months ended July 4, 2014 was 17%, and the effective income tax rate for the nine months ended June 28, 2013 was 30%. The 17% tax rate for the nine months ended July 4, 2014 was lower than our estimated normalized effective income tax rate of 38% for fiscal year 2014 primarily due to discrete income tax benefits of $3.4 million from the expiration of the statute of limitations for an unrecognized tax benefit and a $1.0 million provision to tax return true-up from filing U.S. fiscal year 2013 income tax returns. The 30% income tax rate for the nine months ended June 28, 2013 was lower than our normalized effective income tax rate of 37% for fiscal year 2013 primarily due to discrete tax benefits related to filing prior year U.S. income tax returns and an adjustment to deferred taxes for undistributed earnings of our Canadian subsidiary.

Net Income. Net income was $12.5 million, or 3.4% of sales, for the nine months ended July 4, 2014 compared to $8.9 million, or 2.9% of sales, for the nine months ended June 28, 2013. The $3.6 million increase in net income was primarily due to higher gross profit from higher shipment volume including from Radant in the nine months ended July 4, 2014, partially offset by the loss on debt restructuring and higher interest expense in the nine months ended July 4, 2014.

EBITDA. EBITDA was $56.2 million, or 15.4% of sales, for the nine months ended July 4, 2014 compared to $49.7 million, or 16.1% of sales, for the nine months ended June 28, 2013. The $6.5 million increase in EBITDA was primarily due to higher gross profit from higher shipment volume including from Radant in the nine months ended July 4, 2014, partially offset by the loss on debt restructuring in the nine months ended July 4, 2014.

Liquidity and Capital Resources

Overview

Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and others that are related to uncertainties in the markets in which we compete and other global economic factors. We have historically financed, and intend to continue to finance, our capital and working capital requirements, including debt service and internal growth, through a combination of cash flows from our operations and borrowings under our senior secured credit facilities. Our primary uses of cash are cost of sales, operating expenses, debt service and capital expenditures.

On October 1, 2013, we purchased the outstanding stock of Radant for a payment of approximately $36.8 million in cash consideration, net of $0.6 million cash acquired. We may be required to pay the previous owners of Radant future consideration of up to $10.0 million contingent upon the achievement of certain financial targets over the two years following the date of acquisition.

- 45 -

Table of Contents

On April 7, 2014, we completed our long-term debt refinancing consisting of the following:

•

Amended the terms of our Senior Notes due 2018 (the “Notes”) upon completing a consent solicitation of the Note holders in order to increase the aggregate amount of indebtedness permitted under CPII’s senior secured credit facilities from $230.0 million to $365.0 million, to increase the interest rate on the Notes from 8.00% to 8.75% per annum and to modify the restricted payments covenant of said credit facilities in order to allow CPII to pay a one-time dividend of up to $175.0 million to our shareholders. In consideration of the consent solicitation, we made cash payments totaling $5.4 million to the Notes holders that had consented to the indenture amendments (“Consent Payment”).


•	Entered into new senior secured credit facilities composed of (a) Term B Loans in an aggregate principal amount of $310.0 million, and (b) a $30.0 million revolving credit facility, and repaid the outstanding balance of the prior senior secured credit facilities.

We believe that cash flows from operations and availability under our revolving credit facility included in our new senior secured credit facilities will be sufficient to fund our working capital needs, capital expenditures and other business requirements for at least the next 12 months. We may need to incur additional financings to make strategic acquisitions or investments or if our cash flows from operations are less than we expect. We cannot be certain that financing will be available to us on acceptable terms or that financing will be available at all.

Our ability to make payments to fund working capital, capital expenditures, debt service, strategic acquisitions, joint ventures and investments will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. Future indebtedness may impose various restrictions and covenants on us which could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

Cash and Working Capital

The following summarizes our cash and cash equivalents and working capital (in millions):



	July 4, 2014		September 27, 2013
Cash and cash equivalents	$	40.5	$	67.1
Working capital	$	126.9	$	149.8

We invest cash balances in excess of operating requirements in overnight U.S. Government securities and money market accounts. In addition to the above cash and cash equivalents, we have restricted cash of $2.8 million as of July 4, 2014, consisting primarily of bank guarantees from customer advance payments to our international subsidiaries and cash collateral for certain performance bonds. The bank guarantees will become unrestricted cash when performance under the sales contract is complete. The cash collateral for the performance bonds will become unrestricted cash when the performance bonds expire.

We are highly leveraged. Including the amount borrowed under our new term loan facility and excluding approximately $3.0 million of outstanding letters of credit, our total indebtedness was $524.2 million before the total unamortized debt discount of $5.8 million as of July 4, 2014. We also had an additional $27.0 million available for borrowing under our new revolving credit facility as of July 4, 2014. Our liquidity requirements are significant, primarily due to debt service requirements. For the three and nine months ended July 4, 2014, our interest expense exclusive of debt issue costs and discount amortization was $8.1 million, and $20.9 million, respectively, and our cash interest paid was $3.3 million and $15.7 million, respectively. With the increase in our indebtedness and the increase in the interest rate on the Notes, we expect interest expense to increase for the next several years.

As of July 4, 2014, we were in compliance with the covenants under the agreements governing our new senior credit facilities and the indentures governing the Notes.

- 46 -

Table of Contents

Historical Operating, Investing and Financing Activities

In summary, our cash flows were as follows (in millions):



	Nine Months Ended
	July 4, 2014			June 28, 2013
Net cash provided by operating activities	$	39.6		$	30.7
Net cash used in investing activities	(41.4		)	(9.2		)
Net cash used in financing activities	(24.8		)	(3.2		)
Net (decrease) increase in cash and cash equivalents	$	(26.6	)	$	18.3

Operating Activities

During the periods presented above, we funded our operating activities through cash generated internally. Cash provided by operating activities is net income adjusted for certain non-cash items and changes to working capital items.

Net cash provided by operating activities of $39.6 million in the nine months ended July 4, 2014 was attributable to net income of $12.5 million and depreciation, amortization and other non-cash charges of $27.7 million, partially offset by net cash used in working capital of $0.6 million. The primary uses of cash for working capital during the nine months ended July 4, 2014 were an increase in prepaid income taxes, a decrease in uncertain tax position reserves and a decrease in accounts payable. The timing of tax payments and tax liability estimates brought about the increase in prepaid income taxes. The decrease in reserves for uncertain tax positions was primarily due to the statute of limitation expiration. Accounts payable decreased primarily as a result of a timing difference in inventory purchases and the payment of various professional service fees. The aforementioned uses of working capital were significantly offset by the improved collection of accounts receivable and an increase in accrued interest resulting from the recent debt restructuring activities.

Net cash provided by operating activities of $30.7 million in the nine months ended June 28, 2013 was attributable to net income of $8.9 million; depreciation, amortization and other non-cash charges of $17.5 million; and net cash provided by working capital of $4.3 million. The primary sources of cash for working capital during the nine months ended June 28, 2013 were increases in income taxes and accrued expenses, partially offset by an increase in inventories and a decrease in accounts payable. Income taxes increased due to higher pre-tax earnings; accrued expenses increased primarily as a result of an increase in accrued interest related to the timing of the semi-annual interest payments on our long-term debt; inventories increased to support increased orders and anticipated sales activity in future fiscal quarters; and accounts payable decreased as a result of timing of orders and payments to vendors.

Investing Activities

Investing activities for the nine months ended July 4, 2014 comprised a payment of $36.8 million made for the purchase of the outstanding stock of Radant and capital expenditures of $4.6 million. Investing activities for the nine months ended June 28, 2013 comprised a payment of $5.4 million made for the acquisition of certain assets of MCL and capital expenditures of $3.8 million.

Financing Activities

Financing activities for the nine months ended July 4, 2014 comprised a dividend payment of $175.0 million, repayments of borrowings under CPII’s prior and new term loan facilities of $144.2 million and $0.8 million, respectively, and payments of various costs totaling $14.1 million associated with the recent debt restructuring activities. These financing uses of cash were significantly offset by $309.2 million in net proceeds from borrowings under the new term loan facility. Financing activities for the nine months ended June 28, 2013 comprised a repayment of borrowings under CPII’s prior term loan facility of $3.2 million.

- 47 -

Table of Contents

Contractual Obligations

The following table summarizes our significant contractual obligations and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):



			Fiscal Year
	Total		2014 (remaining three months)		2015-2016		2017-2018		Thereafter
Operating leases	$	10,666	$	721	$	4,331	$	2,897	$	2,717
Purchase commitments	41,814		22,928		18,886		—		—
Debt obligations	524,225		775		6,200		517,250		—
Interest on debt obligations	114,695		7,913		64,379		42,403		—
Uncertain tax positions, including interest	3,164		3,164		—		—		—
Total cash obligations	$	694,564	$	35,501	$	93,796	$	562,550	$	2,717
Standby letters of credit	$	2,992	$	2,992

The above table assumes (1) that the respective debt instruments will be outstanding until their scheduled maturity dates, (2) a debt level based on mandatory repayments according to the contractual amortization schedule of our new senior credit facilities, and (3) that interest rates in effect on July 4, 2014 remain constant for future periods. The above table excludes (1) any optional and excess cash flow prepayments on our new term loan facility, (2) the effect of our contractual right to repay or refinance the Notes by November 17, 2017, which would extend the maturity date for the term loan facility from November 2017 to April 2021, and (3) the contingent additional consideration relating to the Radant acquisition.

The expected timing of payment amounts of the obligations in the above table is estimated based on current

information; the timing of payments and actual amounts paid may be different.

As of July 4, 2014, except for an increase in our contractual debt obligations as a result of our new senior credit facilities, there were no other material changes to our contractual obligations from what we disclosed in our Annual Report on Form 10-K for the fiscal year ended September 27, 2013 filed with Securities and Exchange Commission.

Debt Obligations: As of July 4, 2014, our long-term debt consisted of the following (in thousands):



8.75% Senior Notes due 2018:
Principal	$	215,000
Unamortized debt discount	(5,030		)
	209,970
Senior Secured Credit Facilities:
Revolving credit facility	—
Term loan facility, excluding discount	309,225
Term loan unamortized original issue discount	(751		)
	308,474
Total long-term debt	518,444
Less: Current portion	3,100
Long-term portion	$	515,344
Standby letters of credit	$	2,992

8.75% Senior Notes due 2018. As described above, on April 7, 2014, when the amendments in a recent supplemental indenture for the Notes became operative, the interest rate on the Notes increased from 8.00% to 8.75% per annum. Interest is payable in cash. In addition to the Consent Payment of $5.4 million mentioned above, we paid and recorded an expense of $3.4 million in the three months ended July 4, 2014 for incurred fees and costs associated with the consent solicitation for the supplemental indenture.

- 48 -

Table of Contents

Senior Secured Credit Facilities. On April 7, 2014, we entered into new senior secured credit facilities consisting of (i) a $310.0 million term loan facility; and (ii) a $30.0 million revolving credit facility, replacing our previous credit facilities in their entirety. We drew the full amount of the new term loan facility, and the new revolving credit facility was undrawn at such date (other than approximately $3.0 million of outstanding letters of credit from the existing senior secured credit facilities which were deemed to be issued under the new Senior Credit Facilities). The proceeds of $309.2 million, net of $0.8 million issue discount, were principally used to:


•	pay the full balance of $138.7 million which represented the total amounts due or outstanding under or in respect of CPII’s previous credit facilities (either in cash or an agreement by certain existing lenders to receive loans under the new Term Loan in exchange for their existing debt),


•	pay a dividend in an aggregate principal amount of $175.0 million to CPII’s direct and/or indirect shareholders, and


•	pay fees, costs and expenses in connection with the foregoing, including the $5.4 million Consent Payment mentioned above.

Except as noted below, the term loan facility will mature on November 17, 2017 and the revolving credit facility will mature on August 19, 2017. However, if, (i) in the case of the term loan, on or before November 17, 2017, and, in the case of the revolving credit facility, on or before August 19, 2017, CPII has repaid or refinanced 65% of the Notes, or (ii) the first lien leverage ratio as of August 19, 2017 is 2.50:1 or less on a pro forma basis, then the term loan will mature on April 7, 2021 and the revolving credit facility will mature on April 7, 2019.

The revolving credit facility includes borrowing capacity available for letters of credit and for short-term borrowings referred to as the swingline borrowings. Our obligations under the new senior secured credit facilities are guaranteed by Parent and CPII’s domestic subsidiaries and are secured by substantially all of the assets of CPII and such guarantors.

Borrowings under the term loan facility and the revolving credit facility bear interest, at our option, at a rate equal to a margin over either (a) a LIBOR rate or (b) a base rate. LIBOR and the base rate borrowings under the term loan facility are subject to a 1.00% and 2.00% “floor,” respectively.

The new senior secured credit facilities are subject to amortization and prepayment requirements and contain customary representations and warranties, covenants, events of default and other provisions.

We paid and capitalized as debt issuance costs $8.7 million in the three months ended July 4, 2014 for incurred fees and costs associated with the refinancing of our senior credit facilities.

See Note 6, Long-term Debt, to the accompanying consolidated financial statements for more details on the new senior secured credit facilities.

Veritas Advisory Fee

Included in amounts of incurred and paid fees and costs attributed to the consent solicitation for the supplemental indenture of the Notes and the refinancing of our senior credit facilities described above were $4.0 million in total transaction fees we paid to Veritas Capital Fund Management, L.L.C. ("Veritas") in accordance with our advisory agreement with Veritas.

Special Dividend

On April 7, 2014, immediately upon receiving the proceeds from the financing provided under our new senior secured credit facilities, we paid the special cash dividend officially declared by our board of directors on such date. The special dividend in an aggregate amount of $175.0 million was paid to CPI International Holding LLC ("Holding LLC"), our sole stockholder of record as of the close of business April 2, 2014. Pursuant to the terms of the limited liability company operating agreement governing Holding LLC, holders of Class A membership interests in Holding LLC, including Veritas Capital and certain members of our management, received a portion of the dividend received by Holding LLC.

- 49 -

Table of Contents

Capital Expenditures

Our continuing operations typically do not have large recurring capital expenditure requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. Total cash capital expenditures for the three and nine months ended July 4, 2014 were $1.5 million and $4.6 million. For fiscal year 2014, ongoing capital expenditures are expected to be approximately $7.0 to $8.0 million and to be funded by cash flows from operating activities.

Recent Accounting Pronouncements

See Note 2 to the accompanying unaudited condensed consolidated financial statements for information regarding the effect of new accounting pronouncements on our financial statements.

Critical Accounting Policies and Estimates

Our Critical Accounting Policies and Estimates have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended September 27, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not use market risk sensitive instruments for trading or speculative purposes.

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. As of July 4, 2014, we had (i) fixed-rate senior notes of $215.0 million due in 2018, bearing interest at 8.75% per year, and (ii) under our newly signed senior secured credit facilities, a variable–rate term loan of $308.5 million (net of $0.8 million unamortized original issue discount). Our variable rate debt is subject to changes in the LIBOR rate. As of July 4, 2014, the variable interest rate on the term loan under our new senior secured credit facilities was 4.25%.

We performed a sensitivity analysis to assess the potential loss in future earnings that a 10% increase in the variable portion of interest rates over a one-year period would have on our term loan under our new senior secured credit facilities. The impact was determined based on the hypothetical change from the end of period market rates over a period of one year and would result in no change in future interest expense as a 10% increase in the current variable interest rate would not increase the rate above the “LIBOR floor” in the senior secured credit facilities.

Foreign currency exchange risk

Although the majority of our revenue and expense activities are transacted in U.S. dollars, we do transact business in foreign countries. Our primary foreign currency cash flows are in Canada and several European countries. In an effort to reduce our foreign currency exposure to Canadian dollar denominated expenses, we enter into Canadian dollar forward contracts to hedge the Canadian dollar denominated costs for our manufacturing operation in Canada. Our Canadian dollar forward contracts are designated as a cash flow hedge and are considered highly effective. At July 4, 2014, the fair value of foreign currency forward contracts comprised short- and long-term assets of $0.4 million (prepaid and other current assets) and $0.1 million (other long-term assets), respectively, and a short-term liability of $0.3 million (accrued expenses). Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income in the condensed consolidated balance sheets. At July 4, 2014, the unrealized loss, net of tax of $17,000, was $50,000. We anticipate recognizing the entire unrealized gain or loss in operating earnings within the next six fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the condensed consolidated statements of comprehensive income. The time value was not material for all periods presented. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then we promptly recognize the gain or loss on the associated financial instrument in general and administrative expenses in the condensed consolidated statements of comprehensive income. No ineffective amounts were recognized due to anticipated transactions failing to occur for the three and nine months ended July 4, 2014.

- 50 -

Table of Contents

As of July 4, 2014, we had entered into Canadian dollar forward contracts for approximately $41.1 million (Canadian dollars), or approximately 60% of estimated Canadian dollar denominated expenses for July 2014 through September 2015, at an average rate of approximately 0.91 U.S. dollars to one Canadian dollar. We estimate the impact of a one cent change in the U.S. dollar to Canadian dollar exchange rate (without giving effect to our Canadian dollar forward contracts) to be approximately $0.3 million annually to our net income.

Item 4. Controls and Procedures

Our management, including our principal executive officer and principal financial officer, has evaluated, as of the end of the period covered by this report, the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this report. Based upon, and as of the date of, that evaluation, the principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC’s”) rules and forms.

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below with respect to our new operations resulting from the acquisition of Radant Technologies, Inc. (“Radant”).

In making the assessment of disclosure controls and procedures and of changes in our internal control over financial reporting as of the date of the evaluation, our management has excluded the operations of Radant. This exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from the scope of the evaluation in the year following the acquisition. We are currently assessing the control environment of this acquired business. Radant’s sales constitute approximately 9% of our sales for the nine-month period covered by this report, and Radant’s assets constitute approximately 8% of our total assets as of the end of such period.

- 51 -

Table of Contents

Part II: OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 27, 2013. There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our 2013 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

- 52 -

Table of Contents

Item 6. Exhibits



No.		Description
10.1*		Credit Agreement, dated as of April 7, 2014, among CPI International, Inc., as Borrower, CPI International Holding Corp. and the other guarantors party hereto, as Guarantors, the lenders party hereto, UBS Securities LLC and MCS Capital Markets, LLC, as Joint Arrangers and Bookrunners, UBS AG, Stamford Branch, as Swingline Lender, Administrative Agent and Collateral Agent, and UBS AG, Stamford Branch, as Issuing Bank
10.2*		Security Agreement, dated as of April 7, 2014, by CPI International, Inc., as Borrower, the guarantors party hereto and UBS AG, Stamford Branch, as Collateral Agent
10.3*		Third Supplemental Indenture, dated as of April 7, 2014, by and among CPI International, Inc., CPI Locus Microwave, Inc., and CPI Radant Technologies Division Inc., the new Guaranteeing Subsidiaries, and The Bank of New York Mellon Trust Company, N.A., as Trustee, under the Company’s 8.00% Senior Notes due 2018
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.
32.1*		Certifications of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certifications of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith

- 53 -

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		CPI INTERNATIONAL HOLDING CORP.



Dated:	August 12, 2014	/s/ JOEL A. LITTMAN
		Joel A. Littman
		Chief Financial Officer, Treasurer and Secretary
		(Duly Authorized Officer and Chief Financial Officer)

- 54 -

Attached files

CPI International Holding Corp. Reports

Also read