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UNITED STATES


SECURITIES AND EXCHANGE


COMMISSION


Washington, DC 20549


FORM 10-Q


(Mark One)


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


For the quarterly period ended June 29, 2012


or


 ̈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 filerx(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 8, 2012 , 1,000 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.





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CPI INTERNATIONAL HOLDING CORP.


and Subsidiaries





10-Q REPORT





INDEX








PagePart I:FINANCIAL INFORMATION4Item 1.Unaudited Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June 29, 2012 and September 30, 20114Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended June 29, 2012 and July 1, 20115Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Nine Months Ended June 29, 2012 and Periods February 11, 2011 to July 11, 2011 and October 2, 2010 to February 10, 20116Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 29, 2012 and Periods February 11 to July 1, 2011 and October 2, 2010 to February 10, 20117Notes to Unaudited Condensed Consolidated Financial Statements8Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations36Item 3.Quantitative and Qualitative Disclosures About Market Risk49Item 4.Controls and Procedures50Part II:OTHER INFORMATION51Item 1.Legal Proceedings51Item 1A.Risk Factors51Item 2.Unregistered Sales of Equity Securities and Use of Proceeds51Item 3.Defaults Upon Senior Securities51Item 4.Mine Safety Disclosures51Item 5.Other Information51Item 6.Exhibits51

















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 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 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 document is not a complete description of our business or the risks and uncertainties associated with an investment in our securities. You 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 you decide to invest in our securities or to maintain or increase your investment.








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 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries


Part I:  FINANCIAL INFORMATION





Item 1.              Unaudited Condensed Consolidated Financial Statements





CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands – unaudited, except per share data)


June 29, 2012September 30, 2011AssetsCurrent Assets:Cash and cash equivalents$41,474$34,955Restricted cash2,1852,370Accounts receivable, net47,51345,610Inventories83,02078,296Deferred tax assets12,98614,414Prepaid and other current assets6,0926,486Total current assets193,270182,131Property, plant, and equipment, net80,50081,675Deferred debt issue costs, net12,49414,073Intangible assets, net250,483262,232Goodwill178,730178,983Other long-term assets5,5605,205Total assets$721,037$724,299Liabilities and stockholders’ equityCurrent Liabilities:Current portion of long-term debt$3,100$1,500Accounts payable24,02327,188Accrued expenses28,68627,301Product warranty4,4475,607Income taxes payable4,8082,912Advance payments from customers13,08014,661Total current liabilities78,14479,169Deferred income taxes86,18287,268Long-term debt, less current portion359,058361,697Other long-term liabilities5,3346,269Total liabilities528,718534,403Commitments and contingenciesStockholders’ equityCommon stock ($0.01 par value, 2 shares authorized: 1 share issued and outstanding)——Additional paid-in capital198,310197,564Accumulated other comprehensive loss(497)(1,185)Accumulated deficit(5,494)(6,483)Total stockholders’ equity192,319189,896Total liabilities and stockholders' equity$721,037$724,299





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


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 CPI INTERNATIONAL HOLDING CORP.
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CONDENSED CONSOLIDATED


STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


(In thousands – unaudited)











Three Months EndedJune 29, 2012July 1, 2011Sales$97,193$104,206Cost of sales, including $3,907 of utilization of net increase in cost basis of inventory due to purchase accounting for the three months ended July 1, 201167,67677,077Gross profit29,51727,129Operating costs and expenses:Research and development3,3703,269Selling and marketing5,2095,300General and administrative6,3106,427Amortization of acquisition-related intangible assets2,6644,853Strategic alternative transaction expenses—344Total operating costs and expenses17,55320,193Operating income11,9646,936Interest expense, net6,7846,811Income before income taxes5,180125Income tax expense2,2351,957Net income (loss)2,945(1,832)Other comprehensive loss, net of taxUnrealized loss on cash flow hedges, net of tax of $122 and $0(356)—Total other comprehensive loss, net of tax(356)—Comprehensive income (loss)$2,589$(1,832)





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


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 CPI INTERNATIONAL HOLDING CORP.
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CONDENSED CONSOLIDATED


STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


(In thousands – unaudited)








Fiscal Year20122011Nine MonthsFebruary 11October 2, 2010EndedtotoJune 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorPredecessorSales$286,631$164,010$124,223Cost of sales, including $7,474 of utilization of net increase in cost basis of inventory due to purchase accounting for the period February 11 to July 1, 2011206,635121,07391,404Gross profit79,99642,93732,819Operating costs and expenses:Research and development10,3975,4324,994Selling and marketing16,3458,0028,264General and administrative18,4839,55211,853Amortization of acquisition-related intangible assets11,2527,282999Strategic alternative transaction expenses—9,1294,668Total operating costs and expenses56,47739,39730,778Operating income23,5193,5402,041Interest expense, net20,43710,9495,788Loss on debt extinguishment, net—134—Income (loss) before income taxes3,082(7,543)(3,747)Income tax expense2,0931,462983Net income (loss)989(9,005)(4,730)Other comprehensive income, net of taxUnrealized gain on cash flow hedges, net of tax of $234, $123 and $237688225284Unrealized actuarial gain and amortization of prior service cost for pension liability, net of tax of $0, $0 and $51——175Total other comprehensive income, net of tax688225459Comprehensive income (loss)$1,677$(8,780)$(4,271)





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


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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands – unaudited)








Fiscal Year20122011Nine MonthsFebruary 11October 2, 2010EndedtotoJune 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorPredecessorCash flows from operating activitiesNet cash provided by operating activities$14,485$7,340$4,277Cash flows from investing activitiesCapital expenditures(6,441)(2,483)(2,434)Acquisitions(400)(370,490)—Payment of patent application fees——(6)Net cash used in investing activities(6,841)(372,973)(2,440)Cash flows from financing activitiesEquity investment, net—197,144—Proceeds from issuance of CPII's senior notes—208,550—Borrowings under CPII's term loan facility—143,815—Debt issue costs—(3,071)—Redemption and repurchase of Predecessor's senior subordinated notes and floating rate notes—(129,000)—Repayment of borrowings under Predecessor's term loan facility—(66,000)—Repayment of borrowings under CPII's term loan facility(1,125)(750)—Payment for Predecessor's senior credit facilities agreement amendment——(379)Proceeds from issuance of common stock to employees——217Proceeds from exercise of stock options——174Excess tax benefit on stock option exercises——2,191Net cash (used in) provided by financing activities(1,125)350,6882,203Net increase (decrease) in cash and cash equivalents6,519(14,945)4,040Cash and cash equivalents at beginning of period34,95546,86942,829Cash and cash equivalents at end of period$41,474$31,924$46,869Supplemental cash flow disclosuresCash paid for interest$14,754$3,361$6,451Cash paid for income taxes, net of refunds$376$56$6,284





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





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 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(All tabular dollar amounts in thousands except share amounts)








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




The Company





On February 11, 2011, CPI International LLC (formerly, CPI International, Inc., “Predecessor”), then a Delaware corporation and publicly traded company, completed its merger with Catalyst Acquisition, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of CPI International, Inc. (formerly, CPI International Acquisition, Inc.; “CPII”), a Delaware corporation, whereby Merger Sub merged with and into Predecessor (the “Merger”), with Predecessor continuing as the surviving corporation and a wholly owned subsidiary of CPII. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of November 24, 2010, among Predecessor , CPII and Merger Sub (the “Merger Agreement”). Immediately following the consummation of the Merger and related transactions, Predecessor was converted into a limited liability company and liquidated, and CPI International Acquisition, Inc. changed its name to CPI International, Inc. See Note 3, Business Combinations, for more information about the Merger.





As used herein, unless the context indicates or otherwise requires, (i) for periods prior to the Merger, the term “Company” refers to Predecessor and its consolidated subsidiaries, and for periods after the Merger, the term refers to Successor (defined below), its consolidated subsidiaries and, where the context so requires, its direct and indirect parent companies, (ii) the term “Veritas Fund” refers to The Veritas Capital Fund IV, L.P. and (iii) the terms “Veritas Capital” and “Sponsor” refer collectively to The Veritas Capital Fund IV, L.P., The Veritas Capital Fund III, L.P. and their affiliates, including CICPI Holdings LLC.





The Company’s parent, CPI International Holding LLC (“Holding LLC”), owns all of the outstanding common stock of CPI International Holding Corp. (“Successor” or “Parent” or “the Company”), 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 (formerly, Communications & Power Industries, Inc.; “CPI”) and Communications & Power Industries Canada Inc. (“CPI Canada”), the Company’s main operating subsidiaries. The Veritas Fund and its affiliates and certain members of CPII’s management beneficially own shares of Successor’s common stock indirectly through their holdings in Holding LLC. Holding LLC, Parent 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 condensed consolidated financial statements represent the consolidated results and financial position of the Company. The Company develops, manufactures and distributes microwave and power grid vacuum electron devices (“VEDs”), microwave amplifiers, modulators, antenna systems and various other power supply equipment and devices. The Company has two reportable segments: VED and satcom equipment.





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 2012 and 2011 comprise the 52 -week periods ending September 28, 2012 and September 30, 2011 , respectively. Predecessor and Successor relate to the period preceding the Merger and the period succeeding the Merger, respectively. All other period references are to the Company’s fiscal periods unless otherwise indicated.





The accompanying unaudited condensed consolidated financial statements of Successor as of June 29, 2012 and for the three and nine months ended June 29, 2012 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 30, 2011 filed with the Securities and Exchange Commission. The condensed consolidated balance sheet as of September 30, 2011 has been derived from the audited financial statements at that date. The results of operations and cash flows for the interim period ended June 29, 2012 are not necessarily indicative of results to be expected for the full year.





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 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)


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.





Use of Estimates and Assumptions





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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; 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.








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|2. | Recently Issued Accounting Standards




In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 is intended to result in convergence between U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying U.S. GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU 2011-04 was effective for interim and annual periods beginning after December 15, 2011. The Company adopted these standards in the beginning of its second quarter of fiscal year 2012. The adoption of these standards did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.





In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” intended to simplify how an entity tests goodwill for impairment. The guidance allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of this qualitative assessment will determine whether a quantitative impairment test must be performed. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. This ASU will be effective for the Company beginning on September 29, 2012. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.





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 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)


In November 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. This ASU will be effective for the Company beginning on September 27, 2013. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.








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|3. | Business Combinations




The Merger mentioned in Note 1 and the Company's other business combination constitute transactions or events in which an acquirer obtains control of one or more “businesses” or a “business combination” and, accordingly, are accounted for under the acquisition method of accounting in accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations,” in which Parent or the Company 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 date of the completion of each transaction. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, intangibles and other asset lives, among other items.





For purposes of measuring the estimated fair value of the assets acquired and liabilities assumed, the Company used the guidance in ASC 820, “Fair Value Measurement and Disclosure,” which established a framework for measuring fair values. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, under ASC 820, fair value measurements for an asset assume the highest and best use of that asset by market participants. As a result, the Company may have been required to value the acquired assets at fair value measures that do not reflect its intended use of those assets. Use of different estimates and judgments could yield different results.





As mentioned in Note 1, on November 24, 2010 , CPII , Predecessor and Merger Sub entered into the Merger Agreement pursuant to which CPII acquired Predecessor through the merger of Merger Sub with and into Predecessor. On February 11, 2011 , contemporaneously with the consummation of the Merger, the separate corporate existence of Merger Sub ceased, and Predecessor became the surviving corporation. Predecessor’s common stock is no longer publicly traded as a result of the Merger. Immediately following the consummation of the Merger and related transactions, Predecessor was converted into a limited liability company and liquidated, and CPII changed its name from CPI International Acquisition, Inc. to CPI International, Inc.





In connection with the Merger, Veritas Capital invested $186.0 million , and certain officers of CPII invested an aggregate amount of $11.1 million solely for the purpose of purchasing equity securities of Holding LLC in order to provide a portion of the financing required for the Merger and the transactions contemplated by the Merger Agreement. The $197.1 million total equity investment is net of $14.0 million merger and acquisition fees, including merger-related expenses that were paid upon or shortly after the Merger closing. Veritas Capital is a private equity firm that specializes in making investments in companies that provide products and services to government-related end markets and customers around the world, including those in healthcare, education, energy, defense, infrastructure, national security and aerospace.





Pursuant to the terms of the Merger Agreement, each outstanding share of common stock of Predecessor was converted into the right to receive $19.50 in cash in the Merger. Subject to certain exceptions, each option to purchase shares of Predecessor’s common stock that was granted under its equity compensation plans and outstanding immediately prior to the closing became vested and was canceled at (or shortly following) the closing in exchange for cash equal to the excess, if any, of (i) $19.50 reduced by (ii) the per-share exercise price of such option. Subject to certain exceptions, each restricted stock award and restricted stock unit granted under Predecessor’s equity compensation plans outstanding immediately prior to the closing was canceled at the closing in exchange for a payment, in cash, equal to $19.50 .


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 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)


The following table presents the total purchase price based on the number of outstanding shares of common stock, restricted stock awards and units, and stock options of Predecessor as of February 10, 2011 :


CPII sharesPurchase    priceCommon stock16,742,279$326,474Restricted stock awards112,316930Restricted stock units208,9251,194Stock options3,354,22241,892Total$370,490





The purchase price for restricted stock awards and units and stock options is net of $5.2 million cash paid for the unvested portion of the stock awards for which vesting was accelerated as of the closing date in accordance with the terms of the Merger Agreement. Cash payments made by the acquirer in a business combination to settle unvested stock awards were immediately expensed after the acquisition date in the post-combination financial statements in accordance with ASC 805.





In connection with the Merger and previous activities which ultimately resulted in consummation of the Merger, the Company incurred various expenses, recorded as “strategic alternative transaction expenses” in the condensed consolidated statements of operations and comprehensive income (loss) , consisting primarily of professional fees payable to financial and legal advisors that the Company expensed as incurred.





The following table reflects the final allocation of the total purchase price to the fair values of assets acquired and the liabilities assumed and the resulting goodwill:


Purchase price$370,490Less: Estimated fair value of assets acquired:Net current assets(111,501)Property, plant and equipment(82,879)Identifiable intangible assets(274,980)Other long-term assets(7,417)(476,777)Add: Estimated fair value of liabilities assumed:Deferred tax liabilities85,563Long-term debt195,487Other long-term liabilities3,967285,017Goodwill$178,730





Measurement period adjustments to fair values identified during the first two quarters of fiscal year 2012 included an increase in long-term income tax receivable of approximately $2.0 million , an increase in net deferred tax liabilities of approximately $1.8 million and a decrease in short-term income tax payable of approximately $30,000 . As a result of these adjustments, there was a net decrease in goodwill of approximately $0.3 million . 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 to one year from the Merger date.





Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company anticipates that none of the goodwill recorded in connection with the Merger will be deductible for income tax purposes.





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 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)


The fair value assigned to identifiable intangible assets acquired was 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 core technology and trade names were based on the relief-from-royalty method; developed technology, backlog and in-process research and development (“IPR&D”) are valued using the excess earnings method; and leasehold interests are valued using discounted cash flows method. The royalty rates used in the relief-from-royalty method were based on both a return-on-asset method and market comparable rates. The Company believes that these identified intangible assets will have no residual value after their estimated economic useful lives. The fair value of the identifiable intangible assets and their weighted-average useful lives are as follows:


EstimatedFair ValueEstimatedUseful Life(years)Definite-lived assets:Division tradenames$2,90015Core technology94,40040Completed technology88,10015 - 25Backlog15,3001 - 2Leasehold interest35,6804 - 40In-process research and development3,50010Total definite-lived assets239,880Indefinite-lived assets:CPI tradenames35,100IndefiniteTotal indefinite-lived assets35,100Total identifiable intangible assets$274,980





Definite-lived intangible assets are amortized over their estimated useful lives. Intangible assets with indefinite useful lives and goodwill are not amortized but are tested for impairment annually.





IPR&D consists of the in-process project to complete development of the next generation of the Company’s medical x-ray generators. The value assigned to IPR&D was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. This methodology is referred to as the income approach, which discounts expected future cash flows to present value. The discount rate used in the present value calculations was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the product’s development and success as well as the product’s stage of completion. An acquired IPR&D asset is initially recognized at fair value and, during the development period after the acquisition date, is not amortized as a charge to earnings; instead this asset is subject to periodic impairment testing. The development process for the acquired IPR&D project was successfully completed during the third quarter of fiscal year 2012 and, therefore, amortization of the acquired IPR&D commenced accordingly.





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 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)


The following unaudited pro forma results of operations are presented as though the Merger had occurred as of the beginning of the fiscal year 2010, after giving effect to purchase accounting adjustments relating to depreciation and amortization of the revalued assets, interest expense associated with the new credit facilities and other acquisition-related adjustments in connection with the Merger. The pro forma results of operations do not reflect the impact of the non-recurring charges that have resulted from or in connection with the Merger, including, (i) the utilization of the net increase in the cost basis of inventory, (ii) settlement of unvested stock awards, and (iii) expenses in connection with the Merger. The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the Merger been consummated as of the earliest period presented, nor are they necessarily indicative of future operating results.


Three Months EndedNine Months EndedJune 29, 2012July 1, 2011June 29, 2012July 1, 2011Sales$97,193$104,206$286,631$288,233Net income (loss)$3,457$931$4,718$(661)





In connection with the Merger, the Company issued $215 million aggregate principal amount of 8.00% senior notes due 2018 and entered into senior secured credit facilities, comprised of a $150.0 million  six -year term loan facility and a $30.0 million  five -year revolving credit facility. In addition, shortly after the date of the Merger, Predecessor purchased or redeemed all of its then existing outstanding senior subordinated notes and floating rate senior notes and repaid its outstanding indebtedness under the then-existing senior credit facilities. See Note 6, Long-term Debt, for details.





On February 13, 2012 , the Company completed a business combination in which the Company acquired selected assets of a small company that repairs and rebuilds vacuum electron devices for the communications, industrial, scientific and medical markets for cash consideration of $0.4 million . The Company has recorded $0.2 million of identifiable intangible assets and $0.2 million of net tangible assets, which comprised primarily inventory. The Company has included the financial results of this business combination in its consolidated results of operations beginning on the acquisition date; however, the impact of this acquisition was not material to the Company’s consolidated results of operations, financial position or cash flows.








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|4. | Supplemental Financial Information




Inventories: The following table provides details of inventories:


June 29, 2012September 30, 2011Raw material and parts$47,740$46,480Work in process26,53724,632Finished goods8,7437,184$83,020$78,296





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


Fiscal Year20122011Nine MonthsFebruary 11October 2, 2010EndedtotoJune 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorPredecessorBalance at beginning of period$5,667$—$3,737Provision for loss contracts, charged to cost of sales2,4554,2082,154Credit to cost of sales upon revenue recognition(1,556)(21)(2,982)Balance at end of period$6,566$4,187$2,909


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 (All tabular dollar amounts in thousands except share amounts)





Reserve for loss contracts are reported in the condensed consolidated balance sheet in the following accounts:


June 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorPredecessorInventories$5,313$2,911$1,994Accrued expenses1,2531,276915$6,566$4,187$2,909





Property, Plant and Equipment, Net: The following table provides details of property, plant and equipment, net:


June 29, 2012September 30, 2011Land$7,580$7,580Land improvements2,2552,243Buildings39,23438,910Machinery and equipment41,97537,246Construction in progress2,8351,57293,87987,551Less: accumulated depreciation and amortization(13,379)(5,876)Property, plant and equipment, net$80,500$81,675





Intangible Assets: The following tables present the details of the Company’s total intangible assets:


Weighted AverageJune 29, 2012September 30, 2011Useful Life(in years)CostAccumulatedAmortizationNetCostAccumulatedAmortizationNetDefinite-lived assets:Division tradenames15$2,900(267)$2,633$2,900(122)$2,778Core technology4094,400(3,246)91,15494,400(1,477)92,923Completed technology15 - 2588,100(6,485)81,61588,100(2,948)85,152Backlog1 - 215,300(13,331)1,96915,300(7,594)7,706Leasehold interest4 - 4035,680(1,344)34,33635,680(611)35,069In-process research and development103,500(58)3,4423,500—3,500Non-compete agreement52—2———Customer relationship10238(6)232———Patent application fees———4—4Total definite-lived assets240,120(24,737)215,383239,884(12,752)227,132Indefinite-lived assets:CPI tradenames35,100—35,10035,100—35,100Total indefinite-lived assets35,100—35,10035,100—35,100Total intangible assets$275,220$(24,737)$250,483$274,984$(12,752)$262,232





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The amortization of intangible assets is recorded as “amortization of acquisition-related intangible assets,” except for leasehold interest, which is included in “cost of sales” in the condensed consolidated statements of operations and comprehensive income (loss) . The amortization of intangible assets amounted to $2.9 million and $12.0 million for the three and nine months ended June 29, 2012 , respectively. The amortization of intangible assets amounted to $5.1 million , $7.6 million , and $1.1 million for the three months ended July 1, 2011 and the periods February 11, 2011 to July 1, 2011 and October 2, 2010 to February 10, 2011 , respectively.





As discussed in Note 3, acquired in-process research and development from the Merger was completed in the third quarter of fiscal year 2012 , during which amortization began over its expected useful life of 10 years.





The estimated future amortization expense of intangible assets, excluding the Company’s unamortized tradenames, is as follows:


Fiscal YearAmount2012 (remaining three months)$2,94320139,79720148,61620158,59820168,530Thereafter176,899$215,383





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


June 29, 2012September 30, 2011VED$128,347$128,957Satcom equipment38,92238,964Other11,46111,062$178,730$178,983





The $0.3 million reduction in goodwill represents measurement period adjustments related to the Merger as discussed in Note 3.





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


Fiscal Year20122011Nine MonthsFebruary 11October 2, 2010EndedtotoJune 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorPredecessorBeginning accrued warranty$5,607$5,490$5,101Actual costs of warranty claims(3,356)(1,934)(2,020)Assumed from acquisition20——Estimates for product warranty, charged to cost of sales2,1761,9082,409Ending accrued warranty$4,447$5,464$5,490





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 (All tabular dollar amounts in thousands except share amounts)


Accumulated Other Comprehensive Loss: The following table provides the components of accumulated other comprehensive loss in the condensed consolidated balance sheets:


June 29, 2012September 30, 2011Unrealized loss on cash flow hedges, net of tax$(202)$(890)Unrealized actuarial loss and prior service credit for pension liability, net of tax(295)(295)Accumulated other comprehensive loss$(497)$(1,185)








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|5. | Financial Instruments




The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, restricted cash, available-for-sale securities and derivative instruments. The following tables set forth financial instruments carried at fair value within the ASC 825 hierarchy:


Fair Value Measurements at                                June 29, 2012 UsingTotalQuoted Prices in Active Markets for Identical Assets(Level 1)Significant OtherObservable Inputs(Level 2)SignificantUnobservable Inputs(Level 3)Assets:Money market and overnight U.S. Government securities1$27,642$27,642$—$—Mutual funds2198198——Foreign exchange forward derivatives3346—346—Total assets at fair value$28,186$27,840$346—Liabilities:Foreign exchange forward derivatives4$292$—$292$—Total liabilities at fair value$292$—$292$—


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


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Fair Value Measurements at                    September 30, 2011 UsingTotalQuoted Prices in Active Markets for Identical Assets(Level 1)Significant OtherObservable Inputs(Level 2)SignificantUnobservable Inputs(Level 3)Assets:Money market and overnight U.S. Government securities1$30,428$30,428$—$—Mutual funds2169169——Total assets at fair value$30,597$30,597$——Liabilities:Foreign exchange forward derivatives3$1,166$—$1,166$—Total liabilities at fair value$1,166$—$1,166$—


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





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





Other Financial Instruments





The Company’s other financial instruments include cash, restricted cash and long-term debt that are classified as Level 1 in the fair value hierarchy. Except for long-term debt, the carrying value of these financial instruments approximates fair values because of their relatively short maturity.





The fair values of the Company’s long-term debt were estimated based on Level 1 inputs using quoted market prices. The estimated fair value of the Company’s long-term debt as of June 29, 2012 and September 30, 2011 was $340.2 million and $335.8 million , respectively, compared to the carrying value of $362.2 million and $363.2 million , respectively.








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|6. | Long-term Debt




Long-term debt comprises the following:


June 29, 2012September 30, 2011Term loan, net of issue discount of $592 and $678$147,158$148,1978% Senior notes due 2018215,000215,000362,158363,197Less:  Current portion3,1001,500Long-term portion$359,058$361,697Standby letters of credit$4,774$4,114





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 (All tabular dollar amounts in thousands except share amounts)


Senior Secured Credit Facilities. In connection with the Merger, on February 11, 2011, CPII entered into the Senior Secured Credit Facilities consisting of (i) a $150.0 million  six -year term loan facility; and (ii) a $30.0 million , five -year revolving credit facility. CPII borrowed the full amount of the term loan facility thereunder in connection with the Merger, and the revolving credit facility was undrawn at June 29, 2012 (other than for approximately $4.8 million of outstanding letters of credit). CPII has the option to increase the amount available under the Senior Secured Credit Facilities by up to an aggregate of $50.0 million on an uncommitted basis.





Borrowings under the term loan facility and the revolving credit facility bear interest, at CPII’s option, at a rate equal to a margin over either (a) a base rate or (b) a LIBOR rate. As of June 29, 2012 , the variable interest rate on the term loan was 5.0% . The Senior Secured Credit Facilities are subject to amortization and prepayment requirements and contain customary representations and warranties, covenants, events of default and other provisions.





The prepayment requirement under the Senior Secured Credit Facilities commences with the fiscal year 2012, and is calculated based on a percentage of “excess cash flow” as defined in the credit agreement governing the Senior Secured Credit Facilities. The excess cash flow mandatory prepayment is required to be made within five business days of issuing the year-end consolidated financial statements. Based on current projections for fiscal year 2012, CPII estimates that a prepayment of $1.6 million will be required to be made during the first quarter of fiscal year 2013. This amount, together with $1.5 million of scheduled mandatory repayment, has been classified as current in the condensed consolidated balance sheet, while the remaining balance is classified as noncurrent. As the excess cash flow mandatory prepayment estimate is based on CPII’s current financial projections for fiscal year 2012, the ultimate payment may differ from CPII’s current estimate.





8.00% Senior Notes due 2018. On February 11, 2011, CPII issued an aggregate of $215 million of 8.00% Senior Notes due 2018 (the “8% Notes”). The outstanding notes are CPII’s senior unsecured obligations. The Parent and each of CPII’s existing and future restricted subsidiaries (as defined in the indenture governing the 8% Notes) guarantee the 8% Notes on a senior unsecured basis. The 8% Notes bear interest at the rate of 8.00% per year. Interest is payable in cash. The indenture governing the 8% 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.





At any time or from time to time on or after February 15, 2015, CPII, at its option, may redeem the 8% Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning February 15 of the years indicated:


YearOptional Redemption Price2015104%2016102%2017 and thereafter100%





In addition, at any time prior to February 15, 2015, CPII may redeem all or a part of the 8% Notes at a redemption price equal to 100% of the principal amount of the 8% Notes to be redeemed plus an applicable premium (as defined in the indenture governing the 8% Notes) plus accrued and unpaid interest, if any, to, the redemption date.





At any time before February 15, 2014, CPII may redeem up to 35% of the aggregate principal amount of the 8% Notes issued under the indenture with the net cash proceeds of one or more qualified equity offerings at a redemption price equal to 108% of the principal amount of the 8% Notes to be redeemed, plus accrued and unpaid interest.





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 (All tabular dollar amounts in thousands except share amounts)


Upon a change of control, CPII may be required to purchase all or any part of the 8% Notes for a cash price equal to 101% of the principal amount, plus accrued and unpaid interest thereon, if any, to the date of purchase.





Debt Maturities: As of June 29, 2012 , maturities on long-term debt were as follows:


Fiscal YearTermLoan8% SeniorNotesTotal2012 (remaining three months)$375$—$37520133,100—3,10020141,500—1,50020151,500—1,50020161,500—1,500Thereafter139,775215,000354,775$147,750$215,000$362,750





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, and (3) the prepayment of $1.6 million payable in fiscal year 2013 based on a percentage of “excess cash flow” as defined in the credit agreement governing the Senior Secured Credit Facilities. No other excess cash flow and any optional prepayments are assumed in the above table.





As of June 29, 2012 , the Company was in compliance with the covenants under the agreements governing the Senior Secured Credit Facilities and the indentures governing the 8% Notes.





Deferred Debt Issuance Costs





CPII incurred a total of $15.3 million of debt issuance costs and issue discount, including those netted against the debt proceeds, associated with the Senior Credit Facilities and 8% Notes. As of June 29, 2012 , the unamortized deferred debt issuance costs related to the Company’s new debt were $12.5 million , net of $2.8 million accumulated amortization. As of September 30, 2011 , the unamortized deferred debt issuance costs related to the Company’s new debt were $14.1 million , net of $1.3 million accumulated amortization.








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|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 June 29, 2012 have durations of two to 16 months . These contracts are designated as a cash flow hedge and are considered highly effective, as defined by FASB ASC 815, “Derivatives and Hedging.” Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets. At June 29, 2012 , the unrealized loss, net of tax of $0.1 million , was $0.2 million . 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 consolidated statements of operations and comprehensive income (loss). 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 consolidated statements of operations and comprehensive income (loss). No ineffective amounts were recognized due to


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hedge ineffectiveness in the three and nine months ended June 29, 2012 , as well as in the three months ended July 1, 2011 and in the periods February 11 to July 1, 2011 and October 2, 2010 to February 10, 2011 .





As of June 29, 2012 , the Company had entered into Canadian dollar forward contracts for approximately $40.0 million (Canadian dollars), or approximately 63% of estimated Canadian dollar denominated expenses for July 2012 through September 2013 , at an average rate of approximately 0.98 U.S. dollar to one Canadian dollar.





The following table summarizes the fair value of derivative instruments designated as cash flow hedges at June 29, 2012 and September 30, 2011 :


Asset DerivativesLiability DerivativesFair ValueFair ValueBalance SheetLocationJune 29, 2012September 30, 2011Balance SheetLocationJune 29, 2012September 30, 2011Derivatives designated as hedging instrumentsForward contractsPrepaid and other current assets$174$—Accrued expenses2921,166Other long-term assets$172Total derivatives designated as hedging instruments$346$—$292$1,166





As of June 29, 2012 and September 30, 2011 , all of the Company’s derivative instruments were classified as hedging instruments under ASC 815.





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 (All tabular dollar amounts in thousands except share amounts)


The following table summarizes the effect of derivative instruments on the condensed consolidated statements of operations and comprehensive income (loss) for the periods of fiscal years 2012 and 2011 presented:


Derivatives in Cash Flow Hedging RelationshipsAmount of(Loss) Gain Recognizedin OCI on Derivative(Effective Portion)Location ofGain (Loss) Reclassified from AccumulatedOCI into Income(Effective Portion)Amount ofGain (Loss) Reclassifiedfrom Accumulated OCI into Income(Effective Portion)Location ofGain Recognizedin Income on Derivative (Ineffective andExcluded Portion)Amount of GainRecognized in Income on Derivative(Ineffective and Excluded Portion )Three Months EndedThree Months EndedThree Months EndedJune 29, 2012July 1, 2011June 29, 2012July 1, 2011June 29, 2012July 1, 2011Forward contracts$(430)129Cost of sales$9167General and administrative(a)$27364Research and development(22)35Selling and marketing(9)16General and administrative(12)20Total$(430)$129$48$138$273$64(a)The amount of gain recognized in income during the three months ended June 29, 2012 and July 1, 2011 represents $273 and $64 gain, respectively, related to the amount excluded from the assessment of hedge effectiveness.





Derivatives in Cash Flow Hedging RelationshipsAmount ofGain Recognizedin OCI on Derivative(Effective Portion)Location of(Loss) Gain Reclassified from AccumulatedOCI into Income(Effective Portion)Amount of(Loss) Gain Reclassifiedfrom Accumulated OCI into Income(Effective Portion)Location ofGain (Loss) Recognizedin Income on Derivative (Ineffective andExcluded Portion)Amount of Gain (Loss)Recognized in Income on Derivative(Ineffective and Excluded Portion )Fiscal YearFiscal YearFiscal Year201220112012201120122011Nine MonthsFebruary 11, 2011October 2, 2010Nine MonthsFebruary 11, 2011October 2, 2010Nine MonthsFebruary 11, 2011October 2, 2010EndedtotoEndedtotoEndedtotoJune 29, 2012July 1, 2011February 10, 2011June 29, 2012July 1, 2011February 10, 2011June 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorPredecessorSuccessorSuccessorPredecessorSuccessorSuccessorPredecessorInterest rate contracts(1)$—$360Interest expense, net$—$(456)Interest expense, net(2)$—$(424)Forward contracts$760497463Cost of sales$(28)67614General and administrative(3)$28310650Research and development(68)4171Selling and marketing(30)1831General and administrative(37)2342Total$760$497$823$(163)$149$302$283$106$(374)(1)Terminated in February 2011 in anticipation of the repayment of Predecessor's term loan.(2)The amount of loss recognized in income during the period October 2, 2010 to February 10, 2011 includes a $415 loss related to the ineffective portion of the hedging relationships as a result of early termination of the derivative.(3)The amount of gain recognized in income during the nine months ended June 29, 2012 and the periods of fiscal year 2011 presented represents $283, $106 and $50 gain, respectively, related to the amount excluded from the assessment of hedge effectiveness.





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 (All tabular dollar amounts in thousands except share amounts)


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|8. | Contingencies




From time to time, the Company may be subject to claims that arise in the ordinary course of business. Except as noted below, 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.





During the fourth quarter of fiscal year 2011, the Company received a notice from a customer terminating a portion of a sales contract due to alleged nonperformance. In addition, the Company has received a letter from its partner on this contract claiming indemnification costs from the Company. The Company has reached agreement with its customer. In April 2012, the Company’s partner initiated a legal proceeding against the Company in the Commercial Court of Aix-en-Provence, France, claiming damages of approximately $3.5 million (based on an exchange rate of 1.25 U.S. dollars to one Euro as of June 29, 2012 ). The Company intends to vigorously contest the claims made in this proceeding. The Company recorded certain costs in the fourth quarter of fiscal year 2011 as a result of the termination; however, at this time, the Company cannot estimate the range of any further possible loss or gain with respect to this matter.





In fiscal year 2011, the Company submitted a voluntary self-disclosure to the U.S. Office of Foreign Assets Control (“OFAC”) regarding assistance provided by the Swiss branch office of one of its U.S. subsidiaries with respect to sales of medical x-ray equipment by its Canadian subsidiary to distributors for resale to end-users in Iran, which is subject to U.S. trade sanctions. Since the initial voluntary self-disclosure there have been requests by OFAC for additional information, which the Company has provided. In the second quarter of fiscal year 2012, the Company was notified by OFAC that it had determined a penalty was appropriate and asked the Company if it was interested in settling the matter rather than going through a more formal adjudicative process. The Company notified OFAC it would like to go through the settlement process. In response to a request from OFAC, the Company has entered into a tolling agreement extending the statute of limitations for this matter. However, at this time, the Company cannot predict when the settlement process will be resolved. The Company is not able to assess the range of any potential loss with respect to this matter; however, it does not believe the potential loss will have a material adverse effect on the Company’s results of operations and cash flows.








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|9. | Related-Party Transactions




In connection with the Merger, on February 11, 2011 the Company entered into an advisory agreement with Veritas Capital Fund Management, L.L.C. (“Veritas Management”), a Delaware limited liability company and an affiliate of Sponsor, pursuant to which Veritas Management will provide the Company with certain management, advisory and consulting services including, without limitation, business and organizational strategy, financial and advisory services. The initial term of the advisory agreement will end December 31, 2023 , and the agreement will renew automatically for additional one -year terms thereafter unless Veritas Management or the Company terminates the advisory agreement. Pursuant to such agreement, the Company pays Veritas Management an annual fee equal to the greater of $1 million or 3% of the Company’s Adjusted EBITDA (earnings before net interest expense, provision for income taxes, depreciation and amortization, certain unusual or non-recurring items and certain non-cash items), a portion of which is payable in advance annually beginning on the date of the Merger, and the Company reimburses certain out-of-pocket expenses of Veritas Management. The Veritas Management advisory fee is recorded in “general and administrative” expenses in the condensed consolidated statements of operations and comprehensive income (loss) . For the three and nine months ended June 29, 2012 , the Company incurred Veritas Management advisory fee of $0.6 million and $1.4 million , respectively. For the three months ended July 1, 2011 and the period February 11 to July 1, 2011, the Company incurred Veritas Management advisory fee of $0.6 million and $0.9 million , respectively.





If Parent or any of its subsidiaries (including the Company) is involved in any transaction (including, without limitation, any acquisition, merger, disposition, debt or equity financing, recapitalization, structural reorganization or similar transaction), the Company will pay a transaction fee to Veritas Management equal to the greater of $0.5 million or 2% of transaction value. The Company may terminate the advisory agreement immediately prior to a change of control or an initial public offering, upon payment of an amount equal to all accrued fees and expenses plus the present value of all annual fees that would have been payable under the advisory agreement through December 31, 2023.





No other related person has any interest in the advisory agreement .


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 (All tabular dollar amounts in thousands except share amounts)





Certain members of management of the Company have been granted Class B membership interests in Holding LLC. See Note 10 for more details.








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|10. | Equity-based Compensation




On April 27, 2011 and December 12, 2011, certain members of management and independent directors of the Company were granted Class B membership interests in Holding LLC. At June 29, 2012 , the aggregate individual grants of Class B membership interests represented approximately 5.5% of the profit interests in Holding LLC. Pursuant to the terms of the limited liability company operating agreement governing Holding LLC, holders of Class B membership interests are entitled to receive a percentage of all distributions, if any, made by Holding LLC after the holders of the Class A membership interests, including Sponsor, have received a return of their invested capital plus an 8% per annum internal rate of return (compounded quarterly and accruing daily) on their unreturned invested capital. Holders of Class B membership interests are not entitled to any voting rights. The Class B membership interests are subject to a five -year vesting schedule, except vesting will be accelerated in the event of a change of control. The unvested portion of Class B membership interests resulting from forfeitures reverts to the holders of Class A membership interests in Holding LLC. Class B membership interests are granted with no exercise price and no expiration date. Grants of Class B membership interests are limited in the aggregate to 7.5% of the net profits interests in Holding LLC.





A summary of activity for grants and the outstanding balance of Class B membership interests in Holding LLC follow:


Class B Membership InterestsAvailable for GrantOutstandingFair Value atDate of GrantBalance, September 30, 20112.2%5.3%$4,874Granted(0.2)0.2183Balance, June 29, 20122.0%5.5%$5,057





The fair value of grants of Class B membership interests is determined by management using an income approach based on a cash flow methodology, the ownership percentage in Holding LLC, the preference of the Class A membership interests, and a 25% marketability discount. The discount is estimated based on an option pricing model for an Asian put option known as Finnerty model, and the weighted average assumptions are risk free rate of 0.65% , expected volatility of 75% , restricted period of 2.0 years, and no dividend yield.





In accordance with FASB ASC 718, “Compensation—Stock Compensation,” the Company records equity-based compensation expense based on the grant-date fair value on a straight-line basis over the vesting period of the awards. The following table summarizes equity-based compensation expense for the periods presented, which was allocated as follows:





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Fiscal Year2012201120122011Nine MonthsFebruary 11, 2011Three Months EndedEndedtoJune 29, 2012July 1, 2011June 29, 2012July 1, 2011Equity-based compensation cost recognized in the statement of operations by caption:Cost of sales$72$—$209$—Research and development128368Selling and marketing32239623General and administrative1359940599$251$130$746$130Equity-based compensation cost capitalized in inventory$72$46$209$46Equity-based compensation cost remaining in inventory at end of period$46$46$46$46





The unamortized amount of equity-based compensation was $3.9 million at June 29, 2012 , and is scheduled to be charged to expense as follows:


Fiscal YearAmount2012 (remaining three months)$25420131,00820141,02520151,0062016636Thereafter8$3,937








|    |             
|--- | ------------
|11. | Income Taxes




The condensed consolidated statements of operations and comprehensive income (loss) reflect the following income tax expense (benefit):


Fiscal Year2012201120122011Nine MonthsFebruary 11October 2, 2010Three Months EndedEndedtotoJune 29, 2012July 1, 2011June 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorSuccessorSuccessorPredecessorIncome (loss) before income taxes$5,180$125$3,082$(7,543)$(3,747)Income tax expense$2,235$1,957$2,093$1,462$983Effective income tax rate43.1%1,565.6%67.9%(19.4)%(26.2)%





The Company's 43.1% effective tax rate for the three months ended June 29, 2012 differs from the federal statutory rate of 35% primarily due to discrete tax charges related to filing prior year U.S. income tax returns. The Company's 1,566% effective tax rate for the three months ended July 1, 2011 differs from income tax expense computed using the federal statutory rate of 35% primarily due to non-deductible Merger expenses and U.S. inclusion of foreign income and foreign tax rate differences.


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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)


The Company's 67.9% effective tax rate for the nine months ended June 29, 2012 differs from the federal statutory rate of 35% primarily due to discrete tax charges related to filing prior year U.S. income tax returns and an adjustment to deferred taxes on undistributed earnings for the Company's Canadian subsidiary. The Company's negative 19.4% effective tax rate for period from February 11, 2011 to July 1, 2011 differs from the federal statutory rate of 35% primarily due to non-deductible Merger expenses, partially offset by a reduction to tax contingency reserves. The Company's negative 26.2% effective tax rate for the period October 2, 2010 to February 10, 2011 differs from the federal statutory rate primarily due to non-deductible Merger expenses, and U.S. inclusion of foreign income and foreign tax rate differences.


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, the Company is no longer subject to examination by the various taxing authorities for fiscal years prior to 2007. 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 IRS audit for fiscal years 2008 and 2009. During the second quarter of fiscal year 2012, the Company settled an audit with Canada Revenue Agency (“CRA”) for fiscal years 2001 and 2002. The result of the Canada tax settlement was a refund of $2.4 million that was recorded as a $1.8 million reduction to long-term assets, a $0.5 million increase in the balance of uncertain tax benefits and a tax benefit of $0.1 million .


Of the total unrecognized tax benefit balance of $6.8 million at June 29, 2012 , $5.7 million would reduce the effective tax rate if recognized as of June 29, 2012 . 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 $3.2 million as audits close, statutes expire and tax payments are made. As of June 29, 2012 , the Company had accrued income tax related interest and penalties, net of accrued interest benefits on income tax receivables, of approximately $0.6 million . Estimated interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the condensed consolidated statements of operations and comprehensive income (loss) and totaled approximately $0.2 million for the nine months ended June 29, 2012 . The Company has minimal penalties accrued in income tax expense. Any prospective adjustments to the Company's unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to the Company's effective tax rate. Accordingly, the Company's effective tax rate could fluctuate materially from period to period.


The Company made an assertion under ASC 740-30, “Income Taxes - Other Considerations or Special Areas,” that all earnings of its foreign subsidiaries will be remitted and taxed in the U.S. Since a portion of the earnings of the Company's Canadian subsidiary was used for a portion of the Codan Satcom acquisition price mentioned in Note 13, Subsequent Event, the acquisition price paid by the Company's Canadian subsidiary will no longer be remitted and taxed in the U.S. In connection with recording the acquisition in the fourth quarter of fiscal year 2012, the Company will reduce the deferred tax liability for unremitted earnings from its Canadian subsidiary and report an income tax benefit of approximately $1.2 million.








|    |                                              
|--- | ---------------------------------------------
|12. | Segments, Geographic and Customer Information




The Company’s reportable segments are VED and satcom equipment. The VED segment develops, manufactures and distributes high-power/high-frequency microwave and radio frequency signal components. The satcom equipment segment manufactures and supplies high-power amplifiers and networks for satellite communication uplink, electronic warfare and industrial applications. 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.





Amounts not reported as VED or satcom equipment are reported as Other in accordance with quantitative and qualitative guidelines established by FASB ASC 280, “Segment Reporting.” Other includes the activities of the Company’s Malibu division and unallocated corporate expenses, such as strategic alternative transaction expenses, share-based compensation expense and certain non-recurring or unusual expenses. 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.


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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





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


Fiscal Year2012201120122011Nine MonthsFebruary 11October 2, 2010Three Months EndedEndedtotoJune 29, 2012July 1, 2011June 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorSuccessorSuccessorPredecessorSales from external customersVED$69,531$64,109$210,650$105,362$89,174Satcom equipment22,81635,20460,28649,90127,469Other4,8464,89315,6958,7477,580$97,193$104,206$286,631$164,010$124,223Intersegment product transfersVED$5,674$9,513$14,724$14,873$8,045Satcom equipment64—7045229$5,738$9,513$14,794$14,918$8,274Capital expendituresVED$1,800$1,164$4,956$1,824$1,484Satcom equipment122277663555694Other15685822104256$2,078$1,526$6,441$2,483$2,434EBITDAVED$16,774$17,228$45,975$29,806$18,713Satcom equipment2,8516,4044,2428,3511,491Other(2,188)(9,258)(7,181)(23,642)(14,046)$17,437$14,374$43,036$14,515$6,158





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 a covenant that requires the Company to maintain a total leverage ratio that contains EBITDA as a component, and the Company’s management team uses EBITDA to monitor compliance with this covenant;

|  |                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------
|• | 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.

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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





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 net income (loss), 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 unusual or non-recurring items. Operating income by the Company’s reportable segments was as follows:


Fiscal Year2012201120122011Nine MonthsFebruary 11October 2, 2010Three Months EndedEndedtotoJune 29, 2012July 1, 2011June 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorSuccessorSuccessorPredecessorOperating incomeVED$14,923$15,517$40,518$27,266$16,463Satcom equipment2,5926,1953,4998,0531,210Other(5,551)(14,776)(20,498)(31,779)(15,632)$11,964$6,936$23,519$3,540$2,041





The following table reconciles net income to EBITDA:


Fiscal Year2012201120122011Nine MonthsFebruary 11October 2, 2010Three Months EndedEndedtotoJune 29, 2012July 1, 2011June 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorSuccessorSuccessorPredecessorNet income (loss)$2,945$(1,832)$989$(9,005)$(4,730)Depreciation and amortization5,4737,43819,51711,1094,117Interest expense, net6,7846,81120,43710,9495,788Income tax expense2,2351,9572,0931,462983EBITDA$17,437$14,374$43,036$14,515$6,158








|    |                 
|--- | ----------------
|13. | Subsequent Event




On June 30, 2012 , the Company completed its acquisition of the Codan Satcom business from Codan Limited, an Australian-based public company, for a payment of approximately $9.0 million in cash, subject to customary working capital adjustments, and a maximum of $4.5 million in potential additional payments if certain earn-out objectives and financial targets are achieved over the following two years. The acquisition was funded entirely from the Company's cash on hand. Codan Satcom designs and manufactures solid-state radio frequency subsystems for satellite communications services to commercial and government customers. The acquisition of Codan Satcom expands the Company's portfolio of solid-state and satellite communications products and enables the Company to offer customers the most complete line of satellite communications amplifiers, operating at all satellite uplink frequencies and power levels, in the industry.





The Company will record the purchase of Codan Satcom using the acquisition method of accounting and will recognize the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of Codan Satcom's operations will be included in the Company's consolidated results of operations beginning on the date of the acquisition.





The Company is currently evaluating the fair values of the assets acquired and liabilities assumed and expects to complete its purchase price allocation in the fourth quarter of fiscal year 2012.


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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





During the three months ended June 29, 2012, the Company incurred $0.7 million of costs related to the acquisition of Codan Satcom. These costs are included in general and administrative expense in the Company's condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended June 29, 2012.








14. Supplemental Guarantors Condensed Consolidating Financial Information





The tables that follow reflect the supplemental guarantor financial information associated with CPII’s 8% Notes issued on February 11, 2011. The 8% 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 8% 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 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.





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 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





CONDENSED CONSOLIDATING BALANCE SHEET


As of June 29, 2012





ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatingEliminationsConsolidatedTotalAssetsCash and cash equivalents$—$—$27,405$14,069$—$41,474Restricted cash——2,09887—2,185Accounts receivable, net——32,62414,889—47,513Inventories——61,71821,865(563)83,020Deferred tax assets——12,603383—12,986Intercompany receivable——39,26520,716(59,981)—Prepaid and other current assets1704,4761,3312146,092Total current assets170180,18973,340(60,330)193,270Property, plant and equipment, net——64,81115,689—80,500Deferred debt issue costs, net—12,494———12,494Intangible assets, net——163,51486,969—250,483Goodwill——92,12686,604—178,730Other long-term assets——5,295265—5,560Investment in subsidiaries192,661570,35413,698—(776,713)—Total assets$192,662$582,918$519,633$262,867$(837,043)$721,037Liabilities and stockholders' equityCurrent portion of long-term debt$—$3,100$—$—$—$3,100Accounts payable——15,1788,845—24,023Accrued expenses3436,80616,2715,267(1)28,686Product warranty——3,0501,397—4,447Income taxes payable——1,4643,344—4,808Advance payments from customers——9,1773,903—13,080Intercompany payable—1,401——(1,401)—Total current liabilities34311,30745,14022,756(1,402)78,144Deferred income taxes——62,44823,734—86,182Long-term debt, less current portion—359,058———359,058Other long-term liabilities——4,496838—5,334Total liabilities343370,365112,08447,328(1,402)528,718Common stock——————Parent investment—211,100376,783210,231(798,114)—Equity investment in subsidiary(497)(497)9,356—(8,362)—Additional paid-in capital198,310——(529)529198,310Accumulated other comprehensive loss———(497)—(497)(Accumulated deficit) retained earnings(5,494)1,95021,4106,334(29,694)(5,494)Total stockholders’ equity192,319212,553407,549215,539(835,641)192,319Total liabilities and stockholders' equity$192,662$582,918$519,633$262,867$(837,043)$721,037





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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





CONDENSED CONSOLIDATING BALANCE SHEET


As of September 30, 2011





ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatingEliminationsConsolidatedTotalAssetsCash and cash equivalents$—$—$20,465$14,490$—$34,955Restricted cash——2,27793—2,370Accounts receivable, net——30,71314,897—45,610Inventories——58,53420,410(648)78,296Deferred tax assets——13,848566—14,414Intercompany receivable——28,45521,125(49,580)—Prepaid and other current assets440454,6771,0782466,486Total current assets44045158,96972,659(49,982)182,131Property, plant and equipment, net——65,61816,057—81,675Deferred debt issue costs, net—14,073———14,073Intangible assets, net——170,52591,707—262,232Goodwill——92,32986,654—178,983Other long-term assets——5,11293—5,205Investment in subsidiaries190,491563,00514,463—(767,959)—Total assets$190,931$577,123$507,016$267,170$(817,941)$724,299Liabilities and stockholders' equityCurrent portion of long-term debt$—$1,500$—$—$—$1,500Accounts payable32(5)15,07312,088—27,188Accrued expenses1,0032,53017,3696,404(5)27,301Product warranty——3,7871,820—5,607Income taxes payable——342,878—2,912Advance payments from customers——9,4895,172—14,661Intercompany payable—1,401——(1,401)—Total current liabilities1,0355,42645,75228,362(1,406)79,169Deferred income taxes——62,34724,921—87,268Long-term debt, less current portion—361,697———361,697Other long-term liabilities——5,429840—6,269Total liabilities1,035367,123113,52854,123(1,406)534,403Common stock——————Parent investment—211,100376,158210,113(797,371)—Equity investment in subsidiary(1,185)(1,185)9,356—(6,986)—Additional paid-in capital197,564————197,564Accumulated other comprehensive loss———(1,185)—(1,185)(Accumulated deficit) retained earnings(6,483)857,9744,119(12,178)(6,483)Total stockholders’ equity189,896210,000393,488213,047(816,535)189,896Total liabilities and stockholders' equity$190,931$577,123$507,016$267,170$(817,941)$724,299





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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





CONDENSED CONSOLIDATING  STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME


For the Three Months Ended June 29, 2012  ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatingEliminationsConsolidatedTotalSales$—$—$73,736$37,251$(13,794)$97,193Cost of sales——53,54027,998(13,862)67,676Gross profit——20,1969,2536829,517Operating costs and expenses:Research and development——1,0882,282—3,370Selling and marketing——2,8912,318—5,209General and administrative5597483,9501,053—6,310Amortization of acquisition-related intangible assets——1,723941—2,664Total operating costs and expenses5597489,6526,594—17,553Operating (loss) income(559)(748)10,5442,6596811,964Interest expense (income), net—6,7871(4)—6,784(Loss) income before income tax expense and equity in income of subsidiaries(559)(7,535)10,5432,663685,180Income tax (benefit) expense(212)(2,891)5,146166262,235Equity in income of subsidiaries3,2927,936201—(11,429)—Net income2,9453,2925,5982,497(11,387)2,945Equity in other comprehensive income of subsidiaries, net of tax(356)(356)——712—Other comprehensive loss, net of tax———(356)—(356)Comprehensive income$2,589$2,936$5,598$2,141$(10,675)$2,589





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 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





CONDENSED CONSOLIDATING  STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


For the Three Months Ended July 1, 2011


ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatingEliminationsConsolidatedTotalSales$—$—$73,133$50,735$(19,662)$104,206Cost of sales——57,22939,914(20,066)77,077Gross profit——15,90410,82140427,129Operating costs and expenses:Research and development——1,0152,254—3,269Selling and marketing——2,9002,400—5,300General and administrative600(12)4,886953—6,427Amortization of acquisition-related intangible assets——2,6182,235—4,853Strategic alternative transaction expenses334——10—344Total operating costs and expenses934(12)11,4197,852—20,193Operating (loss) income(934)124,4852,9694046,936Interest expense (income), net—6,8123(4)—6,811(Loss) income before income tax expense and equity in income of subsidiaries(934)(6,800)4,4822,973404125Income tax expense (benefit)1,164(2,787)3,463(37)1541,957Equity in income of subsidiaries2664,279300—(4,845)—Net (loss) income(1,832)2661,3193,010(4,595)(1,832)Equity in other comprehensive income of subsidiaries, net of tax——————Other comprehensive income, net of tax——————Comprehensive (loss) income$(1,832)$266$1,319$3,010$(4,595)$(1,832)


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 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





CONDENSED CONSOLIDATING  STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME


For the Nine Months Ended  June 29, 2012


ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatingEliminationsConsolidatedTotalSales$—$—$216,889$114,534$(44,792)$286,631Cost of sales——162,69088,822(44,877)206,635Gross profit——54,19925,7128579,996Operating costs and expenses:Research and development——3,3807,017—10,397Selling and marketing——9,2957,050—16,345General and administrative1,41381411,9734,283—18,483Amortization of acquisition-related intangible assets——6,5144,738—11,252Total operating costs and expenses1,41381431,16223,088—56,477Operating (loss) income(1,413)(814)23,0372,6248523,519Interest expense (income), net—20,4463(12)—20,437(Loss) income before income tax expense and equity in income of subsidiaries(1,413)(21,260)23,0342,636853,082Income tax (benefit) expense(537)(8,078)10,255421322,093Equity in income of subsidiaries1,86515,047657—(17,569)—Net income9891,86513,4362,215(17,516)989Equity in other comprehensive income of subsidiaries, net of tax688688——(1,376)—Other comprehensive income, net of tax———688—688Comprehensive income$1,677$2,553$13,436$2,903$(18,892)$1,677





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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





CONDENSED CONSOLIDATING  STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


For the period from February 11, 2011 to July 1, 2011


ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatingEliminationsConsolidatedTotalSales$—$—$118,502$77,177$(31,669)$164,010Cost of sales——91,39560,857(31,179)121,073Gross profit——27,10716,320(490)42,937Operating costs and expenses:Research and development——1,6303,802—5,432Selling and marketing——4,3753,627—8,002General and administrative903(25)6,8171,857—9,552Amortization of acquisition-related intangible assets——3,9283,354—7,282Strategic alternative transaction expenses9,119——10—9,129Total operating costs and expenses10,022(25)16,75012,650—39,397Operating (loss) income(10,022)2510,3573,670(490)3,540Interest expense (income), net—10,626325(2)—10,949Loss (gain) on debt extinguishment, net—253(119)——134(Loss) income before income tax expense and equity in income of subsidiaries(10,022)(10,854)10,1513,672(490)(7,543)Income tax (benefit) expense(3,809)(4,125)9,636(54)(186)1,462Equity in income of subsidiaries(2,792)3,937531—(1,676)—Net (loss) income(9,005)(2,792)1,0463,726(1,980)(9,005)Equity in other comprehensive income of subsidiaries, net of tax225225——(450)—Other comprehensive income, net of tax———225—225Comprehensive (loss) income$(8,780)$(2,567)$1,046$3,951$(2,430)$(8,780)


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Table of Contents
 
 CPI INTERNATIONAL HOLDING CORP.
 and Subsidiaries
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (All tabular dollar amounts in thousands except share amounts)





CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


For the Nine Months Ended  June 29, 2012


ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatedTotalCash flows from operating activitiesNet cash provided by operating activities$—$1,125$12,429$931$14,485Cash flows from investing activitiesCapital expenditures——(5,618)(823)(6,441)Acquisition——(400)—(400)Net cash used in investing activities——(6,018)(823)(6,841)Cash flows from financing activitiesRepayment of borrowings under Successor's term loan facility—(1,125)——(1,125)Intercompany dividends529(529)—Net cash (used in) provided by financing activities—(1,125)529(529)(1,125)Net increase (decrease) in cash and cash equivalents——6,940(421)6,519Cash and cash equivalents at beginning of period——20,46514,49034,955Cash and cash equivalents at end of period$—$—$27,405$14,069$41,474








CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


For the period from February 11, 2011 to July 1, 2011


ParentIssuerGuarantorSubsidiariesNon-GuarantorSubsidiariesConsolidatedTotalCash flows from operating activitiesNet cash provided by operating activities$—$—$7,340$—$7,340Cash flows from investing activitiesCapital expenditures——(1,834)(649)(2,483)Acquisition—(370,490)——(370,490)Net cash used in investing activities—(370,490)(1,834)(649)(372,973)Cash flows from financing activitiesEquity investment, net197,144———197,144Proceeds from issuance of Successor's senior subordinated notes—208,550——208,550Borrowings under Successor's term loan facility—143,815——143,815Debt issue costs—(3,071)——(3,071)Redemption and repurchase of Predecessor's senior subordinated notes and floating rate notes—(12,000)(117,000)—(129,000)Repayment of borrowings under Predecessor's term loan facility——(66,000)—(66,000)Repayment of borrowings under Successor's term loan facility—(750)——(750)Intercompany financing activity(197,144)33,892163,252——Net cash provided by (used in) financing activities—370,436(19,748)—350,688Net decrease in cash and cash equivalents—(54)(14,242)(649)(14,945)Cash and cash equivalents at beginning of period—5444,7902,02546,869Cash and cash equivalents at end of period$—$—$30,548$1,376$31,924


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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 2012 and 2011 comprise the 52-week periods ending September 28, 2012 and September 30, 2011, respectively. The three month periods ended June 29, 2012 and July 1, 2011 each include 13 weeks. The nine month periods ended June 29, 2012 and July 1, 2011 each include 39 weeks. The discussion and analysis of results of operations and financial condition for the nine-month period ended July 1, 2011 included herein is based on combined results of Parent (defined below) for the period February 11, 2011 through July 1, 2011 and Predecessor (defined below) for the period October 2, 2010 through February 10, 2011. This presentation of the combined results of operations for the nine-month period ended July 1, 2011 does not comply with generally accepted accounting principles (“GAAP”) in the United States or with the rules for pro forma presentation but is presented because we believe it facilitates the ability of investors to more meaningfully compare our operating results. 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., headquartered in Palo Alto, California (“Successor” or “Parent”),  is the parent company of CPI International, Inc. (“CPII”), which in turn is a parent company of Communications & Power Industries LLC (“CPI”), a provider of microwave, radio frequency, 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 radio frequency signals and/or provide power and control for various applications. End-use applications of these systems include the transmission of radar signals for navigation and location; transmission of deception signals for electronic countermeasures; transmission and amplification of voice, data and video signals for broadcasting, Internet and other types of commercial and military communications; providing power and control for medical diagnostic imaging; and generating microwave energy for radiation therapy in the treatment of cancer and for various industrial and scientific applications.





The Merger





On February 11, 2011, CPI International LLC (formerly, CPI International, Inc., “Predecessor”), then a Delaware corporation and publicly traded company, completed its merger with Catalyst Acquisition, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of CPII (formerly, CPI International Acquisition, Inc.), a Delaware corporation, whereby Merger Sub merged with and into Predecessor (the “Merger”), with Predecessor continuing as the surviving corporation and a wholly owned subsidiary of CPII. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of November 24, 2010, among Predecessor, CPII and Merger Sub (the “Merger Agreement”). Immediately following the consummation of the Merger and related transactions, Predecessor was converted into a limited liability company and liquidated, and CPI International Acquisition, Inc. changed its name to CPI International, Inc.





As used herein, unless the context indicates or otherwise requires, (i) for periods prior to the Merger, the terms “we,” “us,” “our” and the “Company” refer to Predecessor and its consolidated subsidiaries, and for periods after the Merger, the terms refer to Successor, its consolidated subsidiaries and, where the context so requires, its direct and indirect parent companies, (ii) the term “Veritas Fund” refers to The Veritas Capital Fund IV, L.P. and (iii) the terms “Veritas Capital” and “Sponsor” refer collectively to The Veritas Capital Fund IV, L.P., The Veritas Capital Fund III, L.P. and their affiliates, including CICPI Holdings LLC. CPII’s parent, CPI International Holding LLC (“Holding LLC”), owns all of the outstanding common stock of Parent, which in turn owns all of the outstanding common stock of CPII, which in turn owns all of the outstanding equity interests of CPI (formerly, Communications & Power Industries, Inc.) and Communications & Power Industries Canada Inc. (“CPI Canada”), CPII’s main operating subsidiaries. Holding LLC, Parent 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.





See Note 3, Business Combinations, to the accompanying condensed consolidated financial statements for more information about the Merger.





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Recent Event





On June 30, 2012, we completed our acquisition of the Codan Satcom business from Codan Limited, an Australian-based public company, for a payment of approximately $9.0 million in cash, subject to customary working capital adjustments, and a maximum of $4.5 million in potential additional payments if certain earn-out objectives and financial targets are achieved over the next two years. The acquisition was funded entirely from our cash on hand. Codan Satcom designs and manufactures solid-state radio frequency subsystems for satellite communications services to commercial and government customers. The acquisition of Codan Satcom expands our portfolio of solid-state and satellite communications products and enables us to offer customers the most complete line of satellite communications amplifiers, operating at all satellite uplink frequencies and power levels, in the industry.





The Codan Satcom business, which consists of operations based in Newton, South Australia and the Locus Microwave operations based in Boalsburg, Pennsylvania, will be integrated into our Communications & Medical Products Division in Ontario, Canada. Over an approximately nine-month period, we will relocate the Australian-based operations, which design and manufacture C-band and Ku-band subsystems and block-up converters (“BUCs”), to our existing Canadian facilities. We are also establishing an engineering center in South Australia for a number of key research and development personnel from these operations. The Pennsylvania-based Locus Microwave operations, which design and manufacture X-band and Ku-band BUCs, primarily for military communications applications, will remain in their current location and will be operated under the name “CPI Locus Microwave.”





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 June 29, 2012 and July 1, 2011 are summarized as follows (dollars in millions):


Nine Months EndedJune 29, 2012July 1, 2011(Decrease) IncreaseAmount% ofOrdersAmount% ofOrdersAmountPercentRadar and Electronic Warfare$119.543%$128.042%$(8.5)(7)%Medical49.01749.616(0.6)(1)Communications87.93197.232(9.3)(10)Industrial14.5519.57(5.0)(26)Scientific10.747.733.039Total$281.6100%$302.0100%$(20.4)(7)%





Orders of $281.6 million for the nine months ended June 29, 2012 were $20.4 million, or approximately 7%, lower than orders of $302.0 million for the nine months ended July 1, 2011. Explanations for the order increase or decrease by market for the first nine months of fiscal year 2012 compared to the first nine months of fiscal year 2011 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 primarily comprised of many smaller orders of less than $3.0 million by product or program, and the timing of these orders may vary from year to year. On a combined basis, orders for the radar and electronic warfare markets decreased 7% from an aggregate of $128.0 million in the first nine months of fiscal year 2011 to an aggregate of $119.5 million in the first nine months of fiscal year 2012. The decrease in orders for these combined markets resulted primarily from the expected absence of a large, non-recurring program for counter-improvised explosive devices

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(“counter-IEDs”) that was completed in fiscal year 2011. We recorded approximately $18 million in orders for this program in the first nine months of fiscal year 2011, as compared to no orders for this program in the current fiscal year. Partially offsetting this decrease, demand for products to support the Aegis weapons systems, various foreign radar systems and the radars for certain missile systems increased during the first nine months of fiscal year 2012.





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|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Medical:Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, magnetic resonance imaging (“MRI”) and other applications, and for radiation therapy applications for the treatment of cancer. The 1% decrease in medical orders resulted primarily from a decrease in demand for products to support MRI applications that was largely due to the typically irregular timing and size of orders to support those applications. This decrease was offset, in part, by an increase in demand for products to support x-ray imaging applications, particularly from customers participating in x-ray imaging programs in Russia.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Communications:Orders for our communications products consist of orders for commercial communications applications and military communications applications. The 10% decrease in communications orders was primarily due to decreases in orders to support military communications applications, including telemetry antenna applications and, as expected, the Warfighter Information Network - Tactical (“WIN-T”) program, as we have substantially completed our involvement in Increment One of the WIN-T program. Orders for certain commercial satellite applications also decreased. These decreases were partially offset by an increase in orders for certain military communications applications.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Industrial:Orders in the industrial market are cyclical and are generally tied to the state of the economy. The $5.0 million decrease in industrial orders was due to reduced demand for products to support semiconductor manufacturing, industrial testing, electromagnetic compatibility testing and nuclear magnetic resonance applications, and was partially offset by an increase in demand for products to support cargo screening applications.




|  |                                                                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Scientific:Orders in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $3.0 million increase in scientific orders was primarily the result of an increase in orders to support certain fusion research and accelerator programs.




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 June 29, 2012, we had an order backlog of $243.5 million compared to an order backlog of $256.7 million as of July 1, 2011. 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 end-use 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 radio frequency 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 and losses on fixed price contracts. Operating expenses generally consist of research and development, selling and marketing and general and administrative expenses.





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We believe that the Merger resulted, and will continue to result, in certain benefits, including certain cost savings and operational efficiencies through elimination of redundant public company and other general and administrative expenses. However, the Merger also increased, and will continue to increase, certain of our noncash expenses (on pretax basis), such as: (1) a $7.7 million charge, distributed over the three fiscal quarters following the date of the Merger, for the utilization of the net increase in cost basis of inventory, (2) a $15.3 million charge, distributed over the eight fiscal quarters following the date of the Merger, for the amortization of backlog, (3) a $6.1 million annual increase in depreciation and amortization expense as a result of the fair market value adjustments to all other intangibles and property, plant and equipment, and (4) an estimated $0.7 million annual increase in amortization of the new debt issue costs and discount. The Merger also increased, and will continue to increase, certain of our cash expenses (on pretax basis), such as: (1) an estimated $11.4 million annual increase in interest expense, and (2) a yearly charge estimated to be at least $1.8 million for the annual Sponsor's advisory fee.





Three Months Ended June 29, 2012 Compared to Three Months Ended July 1, 2011


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


Three Months Ended(Decrease) IncreaseJune 29, 2012July 1, 2011Amount% ofSalesAmount% ofSalesAmountSales$97.2100.0%$104.2100.0%$(7.0)Cost of sales(a)67.769.777.174.0(9.4)Gross profit29.530.327.126.02.4Research and development3.43.53.33.20.1Selling and marketing5.25.35.35.1(0.1)General and administrative6.36.56.46.1(0.1)Amortization of acquisition-related intangibles2.72.84.94.7(2.2)Strategic alternative transaction expenses——0.30.3(0.3)Operating income12.012.36.96.65.1Interest expense, net6.87.06.86.5—Income before taxes5.25.30.10.15.1Income tax expense2.22.32.01.90.2Net income (loss)$2.93.0%$(1.8)(1.7)%$4.7Other Data:EBITDA(b)$17.417.9%$14.413.8%$3.0


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


|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Cost of sales for the three months ended July 1, 2011 includes $3.9 of utilization of the net increase in cost basis of inventory that resulted from purchase accounting in connection with the Merger.

|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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:




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

|  |                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | our senior secured credit facilities contain a covenant that requires us to maintain a total leverage ratio that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with this covenant;

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

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|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | 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

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




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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, net income, cash flows from operating activities or other statements of operations 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.





Sales: Our sales by market for the three months ended June 29, 2012 and July 1, 2011 are summarized as follows (dollars in millions):


Three Months EndedJune 29, 2012July 1, 2011(Decrease) IncreaseAmount% ofSalesAmount% ofSalesAmountPercentRadar and Electronic Warfare$36.537%$47.145%$(10.6)(23)%Medical18.31916.6161.710Communications33.03432.2310.82Industrial6.476.060.47Scientific3.032.320.730Total$97.2100%$104.2100%$(7.0)(7)%





Sales of $97.2 million for the three months ended June 29, 2012 were $7.0 million, or approximately 7%, lower than sales of $104.2 million for the three months ended July 1, 2011. Explanations for the sales increase or decrease by market for the third quarter of fiscal year 2012 as compared to the third quarter of fiscal year 2011 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. On a combined basis, sales for these two markets decreased 23% from an aggregate of $47.1 million in the three months ended July 1, 2011 to an aggregate of $36.5 million in the three months ended June 29, 2012. The decrease in sales for these combined markets resulted from the expected absence of a large, non-recurring program for counter-IEDs that was completed in fiscal year 2011. We recorded approximately $14 million in sales for this program in the third quarter of fiscal year 2011, as compared to no sales for this program in the most recent period. Partially offsetting this decrease, sales of products to support the radars for certain missile systems increased during the third quarter of fiscal year 2012.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | 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 10% increase in sales of our medical products was due to an increase in sales of products to support radiation therapy applications, as well as an increase in sales to support x-ray imaging applications, particularly for customers participating in x-ray imaging programs in Russia. These increases were partially offset by a decrease in sales to support MRI applications.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Communications:Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 2% increase in sales in the communications market was primarily due to an increase in sales for commercial satellite broadcasting applications. This increase was partially offset by a decrease in sales, as expected, for the WIN-T military communications program, as we have substantially completed our involvement in Increment One of the WIN-T program.




|  |                                                                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Industrial:Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $0.4 million increase in sales of industrial products in the most recent period was primarily due to increased sales to support cargo screening applications. This increase was partially offset by decreased sales of products for semiconductor manufacturing applications.







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|• | 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 primarily the result of increased sales of products for accelerator applications.




Gross Profit . Gross profit was $29.5 million, or 30.3% of sales, for the three months ended June 29, 2012 as compared to $27.1 million, or 26.0% of sales, for the three months ended July 1, 2011. The $2.4 million increase in gross profit in the three months ended June 29, 2012 as compared to the three months ended July 1, 2011 was primarily due to the $3.9 million of utilization of the net increase in cost basis of the inventory that resulted from purchase accounting in connection with the Merger in the three months ended July 1, 2011, partially offset by lower shipment volume and the related operating inefficiencies for the three months ended June 29, 2012. In addition, there was a significant improvement in operating margins for telemetry products as a development program that incurred losses in the three months ended July 1, 2011 did not repeat in the current period.


Research and Development . Company-sponsored research and development expenses were $3.4 million, or 3.5% of sales, for the three months ended June 29, 2012, and $3.3 million, or 3.2% of sales, for the three months ended July 1, 2011.


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


Three Months EndedJune 29,2012July 1,2011Company sponsored$3.4$3.3Customer sponsored, charged to cost of sales3.44.6$6.8$7.9





Customer-sponsored research and development represents development costs incurred on customer sales contracts to develop new or improved products. Prior to the first quarter of fiscal year 2012, we disclosed in the above table customer-sponsored research and development based on the amount charged to costs of sales upon revenue recognition rather than the amount of expenditures incurred for these activities as the development work was performed. For comparative purposes, prior period's amount presented above has been adjusted to reflect expenditures incurred for customer-sponsored research and development activities and to conform to current period presentation.


Selling and Marketing . Selling and marketing expenses were $5.2 million, or 5.3% of sales, for the three months ended June 29, 2012, a $0.1 million decrease from the $5.3 million, or 5.1% of sales, for the three months ended July 1, 2011.


General and Administrative . General and administrative expenses were $6.3 million, or 6.5% of sales, for the three months ended June 29, 2012 as compared to the $6.4 million, or 6.1% of sales, for the three months ended July 1, 2011. The three months ended June 29, 2012 included legal, tax and other professional service fees of approximately $0.7 million to assist with the Codan Satcom acquisition. These expenses were partially offset by lower spending on other professional services fees and gains on the excluded portion of foreign currency contracts for the three months ended June 29, 2012 compared to the three months ended July 1, 2011.


Amortization of Acquisition-related Intangibles . Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. The $2.2 million decrease in amortization of acquisition-related intangibles for the three months ended June 29, 2012 compared to the three months ended July 1, 2011 was due primarily to a portion of backlog amortization completing on February 11, 2012.


Interest Expense, Net (“Interest Expense”) . Interest expense was $6.8 million, or 7.0% of sales, for the three months ended June 29, 2012, and $6.8 million, or 6.5% of sales, for the three months ended July 1, 2011.


Income Tax Expense . We recorded income tax expense of $2.2 million for the three months ended June 29, 2012 and income tax expense of $2.0 million for the three months ended July 1, 2011. Income tax expense for the three months ending June 29, 2012 differs from income tax expense computed using the federal statutory rate of 35% primarily due to discrete tax charges related to filing prior year U.S. income tax returns. Income tax expense for the three months ending July 1, 2011 differs from income tax expense computed using the federal statutory rate of 35% primarily due to non-deductible Merger expenses and U.S. inclusion of foreign income and foreign tax rate differences.


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Net Income (Loss) . Net income was $2.9 million, or 3.0% of sales, in the three months ended June 29, 2012 as compared to a net loss of $1.8 million, or negative 1.7% of sales, in the three months ended July 1, 2011. The $4.7 million increase in net income in the three months ended June 29, 2012 as compared to the three months ended July 1, 2011 was primarily due to the $3.9 million of utilization of the net increase in cost basis of the inventory that resulted from purchase accounting in connection with the Merger for the three months ended July 1, 2011; lower intangible amortization expense and improved operating performance for telemetry products, as a development program that incurred losses for the three months ending July 1, 2011 did not repeat in the current period; partially offset by lower shipment volume and the related operating inefficiencies for the three months ended June 29, 2012.


EBITDA . EBITDA was $17.4 million, or 17.9% of sales, for the three months ended June 29, 2012 as compared to $14.4 million, or 13.8% of sales, for the three months ended July 1, 2011. The $3.0 million increase in EBITDA in the three months ended June 29, 2012 as compared to the three months ended July 1, 2011 was primarily due to the $3.9 million of utilization of the net increase in cost basis of the inventory that resulted from purchase accounting in connection with the Merger for the three months ended July 1, 2011; and improved operating performance for telemetry products, as a development program that incurred losses for the three months ending July 1, 2011 did not repeat in the current period, These items were partially offset by lower shipment volume and the related operating inefficiencies for the three months ended June 29, 2012.





Nine Months Ended June 29, 2012, Periods February 11, 2011 to July 1, 2011 and October 2, 2010 to February 10, 2011 and Nine Months Ended July 1, 2011





The results of operations for the nine months ending July 1, 2011 comprise the combined results of Successor for the period February 11, 2011 to July 1, 2011 and of the Predecessor for the period October 2, 2010 to February 10, 201l. The Successor and Predecessor periods have been prepared under two different historical-cost bases of accounting. This combination of Successor and Predecessor results of operations does not comply with generally accepted accounting principles in the United States or with the rules for pro forma presentation but is presented because we believe it facilitates the ability of investors to more meaningfully compare our operating results.





The following table sets forth our historical results of operations for each of the periods indicated (dollars in millions): Fiscal Year20122011Nine MonthsFebruary 11, 2011October 2, 2010Nine MonthsEndedJune 29, 2012SuccessortoJuly 1, 2011SuccessortoFebruary 10, 2011PredecessorEndedJuly 1, 2011Combined(Decrease) IncreaseAmount% ofSalesAmount% ofSalesAmount% ofSalesAmount% ofSalesAmountSales$286.6100.0%$164.0100.0%$124.2100.0%$288.2100.0%$(1.6)Cost of sales(a)206.672.1121.173.891.473.6212.573.7(5.9)Gross profit80.027.942.926.232.826.475.826.34.2Research and development10.43.65.43.35.04.010.43.6—Selling and marketing16.35.78.04.98.36.716.35.7—General and administrative18.56.59.65.911.99.621.47.4(2.9)Amortization of acquisition-related intangibles11.33.97.34.51.00.88.32.93.0Strategic alternative transaction expenses——9.15.54.73.813.84.8(13.8)Operating income23.58.23.52.12.01.65.61.917.9Interest expense, net20.47.110.96.65.84.716.75.83.7Loss on debt extinguishment, net——0.10.1——0.1—(0.1)Income (loss) before taxes3.11.1(7.5)(4.6)(3.7)(3.0)(11.3)(3.9)14.4Income tax expense2.10.71.50.91.00.82.40.8(0.3)Net income (loss)$1.00.3%$(9.0)(5.5)%$(4.7)(3.8)%$(13.7)(4.8)%$14.7Other Data:EBITDA(b)$43.015.0%$14.58.8%$6.25.0%$20.77.2%$22.3


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


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|    |                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Cost of sales for the period February 11, 2011 to July 1, 2011 and the nine months ended July 1, 2011 includes $7.5 of utilization of the net increase in cost basis of inventory due to purchase accounting in connection with the Merger.




|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 a covenant that requires us to maintain a total leverage ratio that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with this covenant;




|  |                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------
|• | 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, 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.





Nine Months Ended June 29, 2012 Compared to Nine Months Ended July 1, 2011


Sales. Our sales by market for the nine months ended June 29, 2012 and July 1, 2011 are summarized as follows (dollars in millions):


Nine Months EndedJune 29, 2012July 1, 2011(Decrease) IncreaseAmount% ofSalesAmount% ofSalesAmountPercentRadar and Electronic Warfare$106.037%$114.540%$(8.5)(7)%Medical57.72049.917%7.816%Communications95.33397.734%(2.4)(2)%Industrial17.9617.46%0.53%Scientific9.748.73%1.011%Total$286.6100%$288.2100%$(1.6)(1)%


Sales of $286.6 million for the nine months ended June 29, 2012 were essentially unchanged from the sales of $288.2 million for the nine months ended July 1, 2011. Explanations for the sales increase or decrease by market are as follows:


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|• | 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 the receipt of orders and subsequent shipments in these markets may vary from year to year. On a combined basis, sales for these markets decreased 7% from an aggregate of $114.5 million in the nine months ended July 1, 2011 to an aggregate of $106.0 million in the nine months ended June 29, 2012. The decrease in sales for these combined markets primarily resulted from the expected absence of a large, non-recurring program for counter-IEDs that was completed in fiscal year 2011. We recorded approximately $14 million in sales for this program in the first nine months of fiscal year 2011, as compared to no sales for this program in the most recent period. Partially offsetting this decrease, sales of products to support the radars for certain missile systems and the Aegis weapons systems increased during the nine months ended June 29, 2012.




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|• | 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 16% increase in sales of our medical products was primarily due to an increase in sales of products to support x-ray imaging applications, particularly for customers participating in x-ray imaging programs in Russia. This increase was partially offset by a decrease in sales of products to support MRI applications.




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|• | Communications:Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 2% decrease in sales in the communications market was primarily attributable to an approximately $11 million decrease in sales for the WIN-T military communications program, as expected, as we have substantially completed our involvement in Increment One of the WIN-T program. This decrease was partially offset by an increase in sales of products to support commercial communications applications, including fixed satellite services and direct-to-home broadcasting applications, as well as certain military communications applications.




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|• | Industrial:Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $0.5 million increase in sales of industrial products in the most recent period was primarily due to increased sales to support cargo screening applications. This increase was partially offset by decreased sales of products for semiconductor manufacturing applications.




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|• | Scientific:Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $1.0 million increase in scientific sales was primarily the result of increased sales for accelerator applications.




Gross Profit . Gross profit was $80.0 million, or 27.9% of sales, for the nine months ended June 29, 2012, a $4.2 million increase from $75.8 million, or 26.3% of sales, in the nine months ended July 1, 2011. The increase in gross profit in the nine months ended June 29, 2012 as compared to the nine months ended July 1, 2011 was primarily due to the $7.5 million of utilization of the net increase in cost basis of the inventory due to purchase accounting in connection with the Merger in the nine months ended July 1, 2011, partially offset by lower gross profit resulting from lower sales volume, lower gross profit on several new programs and the unfavorable impact from translation of Canadian costs in fiscal year 2012.


Research and Development . Research and development expenses were $10.4 million, or 3.6% of sales, for both the nine months ended June 29, 2012, and the nine months ended July 1, 2011. Higher spending for research and development of $0.3 million for the nine months ended June 29, 2012 was mostly offset by lower stock compensation expense from the accelerated vesting of stock options in connection with the Merger for the nine months ended July 1, 2011.


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


Nine Months EndedJune 29,2012July 1,2011Company sponsored$10.4$10.4Customer sponsored, charged to cost of sales10.814.1$21.2$24.5





Customer-sponsored research and development represents development costs incurred on customer sales contracts to develop new or improved products. Prior to the first quarter of fiscal year 2012, we disclosed in the above table customer-sponsored research and development based on the amount charged to costs of sales upon revenue recognition rather than the amount of expenditures incurred for these activities as the development work was performed. For comparative purposes, prior period's amount presented above has been adjusted to reflect expenditures incurred for customer-sponsored research and development activities and to conform to current period presentation.


Selling and Marketing . Selling and marketing expenses were $16.3 million, or 5.7% of sales, for both the nine months ended June 29, 2012, and the nine months ended July 1, 2011. Higher sales commission expense for the nine months ended June 29, 2012 was mostly offset by lower stock compensation expense of $0.4 million from the accelerated vesting of stock options in connection with the Merger for the nine months ended July 1, 2011.


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General and Administrative . General and administrative expenses were $18.5 million, or 6.5% of sales, for the nine months ended June 29, 2012, a $2.9 million decrease from the $21.4 million, or 7.4% of sales, for the nine months ended July 1, 2011. The decrease in general and administrative expenses in the nine months ended June 29, 2012 was primarily due to lower stock compensation expense of $2.8 million from the accelerated vesting of stock options in connection with the Merger for the nine months ended July 1, 2011. The nine months ended June 29, 2012 included legal, tax and other professional service fees to assist with the Codan acquisition which were partially offset by gains on the excluded portion of foreign currency contracts and lower management incentive expenses.


Amortization of Acquisition-related Intangibles . Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. The $3.0 million increase in amortization of acquisition-related intangibles for the nine months ended June 29, 2012 compared to the nine months ended July 1, 2011 was primarily due to the revaluation of intangible assets in connection with the Merger.


Strategic Alternative Transaction Expenses . Strategic alternative transaction expenses of $13.8 million for the nine months ended July 1, 2011 comprised  CPII  stock compensation expense and non-recurring transaction costs, such as fees for investment bankers, attorneys and other professional services, rendered in connection with the sale of Predecessor. CPII  stock compensation expense of $5.2 million represents the amount of cash payments for the unvested portion of the stock awards for which vesting was accelerated as of the closing date of the Merger in accordance with the terms of the Merger Agreement.


Interest Expense, Net (“Interest Expense”) . Interest expense of $20.4 million for the nine months ended June 29, 2012 was $3.7 million higher than interest expense of $16.7 million for the nine months ended July 1, 2011. The increase in interest expense for the nine months ended June 29, 2012 was primarily due to the $170 million increase in debt obligations in connection with the Merger.


Loss on Debt Extinguishment, Net (“Loss on Debt Extinguishment”) . The loss on debt extinguishment of $0.1 million in the nine months ended July 1, 2011 resulted from the retirement of debt obligations in connection with the Merger. The loss on debt extinguishment comprises bond tender fees and other related expenses, net of a $0.5 million gain from debt repayment at less than fair value.


Income Tax Expense . We recorded income tax expense of $2.1 million for the nine months ended June 29, 2012 and an income tax expense of $2.4 million for the nine months ended July 1, 2011. Income tax expense for the nine months ending June 29, 2012 differs from income tax expense computed using the federal statutory rate of 35% primarily due to discrete tax charges related to filing prior year U.S. income tax returns and an adjustment to deferred taxes on undistributed earnings for our Canadian subsidiary. Income tax expense for the nine months ending July 1, 2011 differs from income tax expense computed using the federal statutory rate of 35% primarily due to non-deductible Merger expenses and U.S. inclusion of foreign income and foreign tax rate differences. The fiscal year 2012 effective income tax rate estimate excluding non-recurring discrete tax items is approximately 39%.


Net Income (Loss) . Net income was $1.0 million, or 0.3% of sales, in the nine months ended June 29, 2012 as compared to a net loss of $13.7 million, or negative 4.8% of sales, in the nine months ended July 1, 2011. The $14.7 million decrease in net loss in the nine months ended June 29, 2012 as compared to the nine months ended July 1, 2011 was primarily due to Merger-related expenses in the nine months ended July 1, 2011, including strategic alternative transaction expenses, utilization of the net increase in cost basis of inventory, and accelerated stock compensation expense, partially offset by higher interest expense and intangible amortization in the nine months ended June 29, 2012.


EBITDA . EBITDA was $43.0 million, or 15.0% of sales, for the nine months ended June 29, 2012 as compared to $20.7 million, or 7.2% of sales, for the nine months ended July 1, 2011. The $22.3 million increase in EBITDA in the nine months ended June 29, 2012 as compared to the nine months ended July 1, 2011 was primarily due to Merger-related expenses in the nine months ended July 1, 2011, including strategic alternative transaction expenses, utilization of the net increase in cost basis of inventory, and accelerated stock compensation expense.








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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.





In connection with the Merger, in February 2011, we received funding through an equity contribution from the Veritas Fund, certain of its affiliates and certain members of CPII’s management, as well as through  net proceeds from the offering of senior notes and borrowings under the new senior secured credit facilities into which  we entered in the second quarter of fiscal year 2011. We used a portion of the financial resources from the transactions to pay our previous long-term debt and related costs.





On June 30, 2012, we completed our acquisition of the Codan Satcom business from Codan Limited, an Australian-based public company, to whom we have paid, using cash on hand, $9.2 million (including goods and services tax), subject to customary working capital adjustments. We may be required to pay Codan Limited future consideration of up to $4.5 million, contingent upon the achievement of certain earn-out objectives and financial targets over the following two years.





We believe that cash flows from operations and availability under our new revolving credit facility included in the 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 assure you 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):


June 29,2012September 30,2011Cash and cash equivalents$41.5$35.0Working capital$115.1$103.0





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 $2.2 million as of June 29, 2012, consisting of bank guarantees from customer advance payments to our international subsidiaries and cash collateral for certain performance bonds. The bank guarantees 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. As of June 29, 2012, excluding approximately $4.8 million of outstanding letters of credit, our total indebtedness was $362.7 million before unamortized original issue discount of $0.6 million. We also had an additional $25.2 million available for borrowing under our revolving credit facility. Our liquidity requirements are significant, primarily due to debt service requirements. For the three and nine months ended June 29, 2012, our interest expense exclusive of debt issue costs and discount amortization was $6.2 million and $18.8 million, respectively, and cash interest paid was $2.1 million and $14.8 million, respectively.





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As of June 29, 2012 and September 30, 2011, we were in compliance with the covenants under the agreements governing our senior credit facilities and the indentures governing our senior notes. Currently, our most significant debt covenants require us to maintain a maximum leverage ratio of 6.75:1 and a minimum cash interest ratio of 1.75:1. Our current leverage ratio is approximately 5.7:1 and our cash interest ratio is approximately 2.4:1.





Historical Operating, Investing and Financing Activities





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


Fiscal Year20122011Nine MonthsFebruary 11October 2, 2010EndedtotoJune 29, 2012July 1, 2011February 10, 2011SuccessorSuccessorPredecessorNet cash provided by operating activities$14.4$7.3$4.3Net cash used in investing activities(6.8)(372.9)(2.5)Net cash (used in) provided by financing activities(1.1)350.72.2Net increase (decrease) in cash and cash equivalents$6.5$(14.9)$4.0





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 $14.4 million in the nine months ended June 29, 2012 was attributable to net income of $1.0 million, and depreciation, amortization and other non-cash charges of $20.1 million, partially offset by net cash used in working capital of $6.7 million. The primary uses of cash for working capital during the nine months ended June 29, 2012 were increases in inventories and accounts receivable, as well as a decrease in accounts payable. Inventories increased in anticipation of fulfilling certain customer orders and due to an increase in longer-term programs. Accounts receivable increased due to the timing factors associated with shipments and sales. Accounts payable decreased due to the timing of vendor payments. The aforementioned uses of working capital were partially offset primarily by an increase in accrued interest due to the timing of payments on our long-term debt.





Net cash provided by operating activities of $7.3 million for the period February 11, 2011 to July 1, 2011 was attributable to net loss of $9.0 million, more than offset by depreciation, amortization and other non-cash charges of $16.3 million. Changes in working capital accounts essentially offset each other for the period February 11, 2011 to July 1, 2011. Working capital uses of cash in the period February 11, 2011 to July 1, 2011 were an increase in accounts receivable due to increased sales and a decrease in advance payments from customers due to timing differences in billing and receipt of contract advances. The aforementioned uses of working capital were offset by an increase in accrued expenses as a result of higher interest accrual on a higher amount of debt, an increase in income tax payable, net, mainly due to the timing of estimated quarterly federal income tax payments, and an increase in accounts payable as a result of increased inventory purchases to support increased orders and the sales level anticipated for the following fiscal quarter.





Net cash provided by operating activities of $4.3 million for the period October 2, 2010 to February 10, 2011 was attributable to net loss of $4.7 million, more than offset by depreciation, amortization and other non-cash charges of $5.6 million and net cash provided by working capital of $3.4 million. The primary working capital sources of cash in the period October 2, 2010 to February 10, 2011 were a decrease in accounts receivable and an increase in advanced payments from customers. Accounts receivable decreased due to lower sales volume during the period preceding February 10, 2011 as compared to the sales volume during the period preceding October 1, 2010. Advance payments from customers increased due to an increase in certain sales orders, which allowed for billings at the beginning of the contract term. The aforementioned working capital sources of cash were partially offset by an increase in inventories, a decrease in income tax payable, net, and a decrease in accounts payable. The increase in inventories resulted from increased inventory purchases to support increased orders and sales levels for the last two quarters of fiscal year 2011. The decrease in income tax payable, net, primarily reflected tax payments made during the period and lower taxable income. Accounts payable decreased mainly due to timing of payments to trade vendors.


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Investing Activities





Investing activities for the nine months ended June 29, 2012 comprised $6.4 million of capital expenditures and $0.4 million payment for a business combination.





Investing activities for the period February 11, 2011 to July 1, 2011 comprised payments made for the acquisition of Predecessor of $370.5 million and capital expenditures of $2.5 million. Investing activities for the period October 2, 2010 to February 10, 2011 comprised capital expenditures of $2.4 million.





Financing Activities





Financing activities for the nine months ended June 29, 2012 comprised repayment of borrowings under Successor’s term loan facility of $1.1 million.





Net cash provided by financing activities for the period February 11, 2011 to July 1, 2011 consisted of (1) $208.6 million proceeds, net of debt issue costs, from issuance of $215.0 million aggregate principal amount of 8.00% senior notes due 2018; (2) $197.1 million net capital contributions from Holding LLC; and (3) $143.8 million proceeds, net of debt issue costs and issue discount, from borrowings under a $150.0 million six-year term loan facility. The term loan is part of our senior secured credit facilities, which also include a $30.0 million five-year revolving credit facility that includes sub-limits for letters of credit and swingline loans. Net cash provided by financing activities was partially offset by our purchase or redemption of all of Predecessor's then-existing outstanding senior subordinated notes of $117.0 million and floating rate senior notes of $12.0 million, as well as repayment of the outstanding indebtedness of $66.0 million under Predecessor's then existing senior credit facilities. Net cash provided by financing activities was further offset by $3.1 million cash paid for additional new debt issue costs and $0.7 million repayment on the new term loan.





Net cash provided by financing activities for the period October 2, 2010 to February 10, 2011 consisted of proceeds of $0.4 million and tax benefits of $2.2 million from employee stock purchases and exercise of stock options, including those for which vesting was accelerated pursuant to the Merger, under Predecessor’s then-existing stock option plans. Net cash provided by financing activities was partially offset by the payment of fees and expenses for an amendment to Predecessor’s then-existing senior credit facilities of $0.4 million.





Contractual Obligations





The following table summarizes our significant contractual obligations as of June 29, 2012 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):


Fiscal YearTotal2012(remainingthree months)2013 - 20142015 - 2016ThereafterOperating leases$5,509$400$2,083$689$2,337Purchase commitments31,52218,51313,009——Debt obligations362,7503754,6003,000354,775Interest on debt obligations138,34210,65649,88949,54428,253Uncertain tax positions, including interest8,0071,1386,869——Total cash obligations$546,130$31,082$76,450$53,233$385,365Standby letters of credit$4,774$4,774





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.





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The amounts for debt obligations and interest on debt obligations in the above table assume (1) that the respective debt instruments will be outstanding until their scheduled maturity dates, (2) that interest rates in effect on June 29, 2012 remain constant for future periods, and (3) a debt level based on mandatory repayments according to the contractual amortization schedule. The debt obligations in the above table also reflect the prepayment requirement under our senior secured credit facilities, which commences with the fiscal year 2012 and is calculated based on a percentage of “excess cash flow” as defined in the credit agreement governing our senior credit facilities. The excess cash flow mandatory prepayment is required to be made within five business days of issuing the year-end consolidated financial statements. Based on current projections for fiscal year 2012, we estimate that a prepayment of $1.6 million will be required to be made during the first quarter of fiscal year 2013. Accordingly, classified together with $1.5 million of scheduled mandatory repayment as current in the condensed consolidated balance sheet, this $1.6 million is the only excess cash flow payment reflected in the table above. The remaining balance is classified as noncurrent and shown above based on the scheduled mandatory repayments under our senior secured credit facilities. As the excess cash flow mandatory prepayment estimate is based on our current financial projections for fiscal year 2012, the ultimate payment may differ from current estimate.





As of June 29, 2012, there were no material changes to our other contractual obligations from what we disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 filed with Securities and Exchange Commission. See also Note 8 of the accompanying unaudited condensed consolidated financial statements for details on certain of our contingencies.





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 capital expenditures for the three and nine months ended June 29, 2012 were $2.1 million and $6.4 million, respectively. In fiscal year 2012, ongoing capital expenditures are expected to be approximately $7.5 to $8.5 million and to be funded by cash flows from operating activities.





Recent Accounting Pronouncements





See Note 2 to the accompanying 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 30, 2011.








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 June 29, 2012, we had fixed-rate senior notes of $215.0 million due in 2018, bearing interest at 8% per year, and a variable–rate term loan of $147.2 million (net of $0.6 million unamortized original issue discount) under our senior secured credit facilities due in 2017. Our variable rate debt is subject to changes in the LIBOR rate. As of June 29, 2012, the variable interest rate on the term loan under the senior secured credit facilities was 5.0%.





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 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.





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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, as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815. At June 29, 2012, the fair value of foreign currency forward contracts was a short-term asset of $0.2 million (prepaid and other current assets), a long-term asset of $0.2 million (other long-term assets) 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 (loss) in the condensed consolidated balance sheets. At June 29, 2012, the unrealized loss, net of tax of $0.1 million, was $0.2 million. We anticipate recognizing the entire unrealized gain or loss in operating earnings within the next four 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 consolidated statements of operations and comprehensive income (loss). 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 consolidated statements of operations and comprehensive income (loss). No ineffective amounts were recognized due to anticipated transactions failing to occur for the three and nine months ended June 29, 2012 , as well as in the three months ended July 1, 2011 and in the periods February 11 to July 1, 2011 and October 2, 2010 to February 10, 2011 .





As of June 29, 2012, we had entered into Canadian dollar forward contracts for approximately $40.0 million (Canadian dollars), or approximately 63% of estimated Canadian dollar denominated expenses for July 2012 through September 2013 , at an average rate of approximately 0.98 U.S. dollar 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





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 rules and forms.





There have been no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Part II:  OTHER INFORMATION








Item 1.    Legal Proceedings





See Note 8, Contingencies, of the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding legal proceedings.





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 30, 2011. There have been no material changes  from the risk factors disclosed in the “Risk Factors” section of our 2011 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.





Item 6.       Exhibits


No.Description31.1*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 Document101.SCH**XBRL Taxonomy Extension Schema Document101.CAL**XBRL Taxonomy Extension Calculation Linkbase Document101.LAB**XBRL Taxonomy Extension Label Linkbase Document101.PRE**XBRL Taxonomy Extension Presentation Linkbase Document101.DEF**XBRL Taxonomy Extension Definition Linkbase Document*  Filed herewith**XBRL Interactive Data files with detailed tagging will be filed by amendment to this Quarterly Report on Form 10-Q within 30 days of the filing date of this Quarterly Report on Form 10-Q, as permitted by Rule 405(a)(2)(ii) of Regulation S-T.


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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 8, 2012/s/ JOEL A. LITTMANJoel A. LittmanChief Financial Officer, Treasurer and Secretary(Duly Authorized Officer and Chief Financial Officer)





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