Table of Contents





UNITED
STATES


SECURITIES
AND EXCHANGE


COMMISSION


Washington,
DC 20549




FORM
10-Q






(Mark
One)




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




For
the quarterly period ended April 3, 2009




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: 000-51928






CPI
INTERNATIONAL, INC.


(Exact
Name of Registrant as Specified in Its Charter)







Delaware
              (State
      or Other Jurisdiction of Incorporation or Organization)
            75-3142681
              (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     xNo      ̈




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    
 ̈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                              
x


Non-accelerated
filer                  ̈ (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 ̈ Nox






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: 16,517,206 shares of Common Stock,
$0.01 par value, at May 5, 2009.







CPI INTERNATIONAL, INC.
 and
Subsidiaries


10-Q
REPORT


INDEX






Part I:
              FINANCIAL INFORMATION
              4Item 1.
              Unaudited Condensed Consolidated Financial
      Statements
              4Condensed Consolidated Balance
    Sheets
              4Condensed Consolidated Statements of Operations and
      Comprehensive Income
              5Condensed Consolidated Statements of Cash
      Flows
              6Notes to Unaudited Condensed Consolidated Financial
      Statements
              7Item 2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              42Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              65Item 4.
              Controls and Procedures
              66Part II:
              OTHER INFORMATION
              67Item 1.
              Legal Proceedings
              67Item 1A.
              Risk Factors
              67Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              67Item 3.
              Defaults Upon Senior
Securities
              67Item 4.
              Submission of Matters to a Vote of Security
      Holders
              67Item 5.
              Other Information
              68Item 6.
              Exhibits
              69




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 CPI
INTERNATIONAL, INC.
 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;
the impact of a general slowdown in the global economy; 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 laws and regulations; changes in
technology; the impact of unexpected costs; 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 report 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 other 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 report to conform such statements to actual
results or to changes in our expectations.




The
information in this report is not a complete description of our business or the
risks and uncertainties associated with an investment in our securities. You
should carefully consider the various risks and uncertainties that impact our
business and the other information in this report and in our other 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, INC.
 and
Subsidiaries




Part I:  FINANCIAL INFORMATION






Item
1.       Unaudited Condensed Consolidated
Financial Statements






CONDENSED CONSOLIDATED BALANCE
SHEETS


(In
thousands, except per share data – unaudited)





April
      3,
                        
                        
                        October
      3,2009
                        
                        
                        2008AssetsCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        27,863
                        
                        
                        $
                        28,670Restricted
      cash
                        
                        
                        1,101
                        
                        
                        
                        776Accounts
      receivable, net
                        
                        
                        41,882
                        
                        
                        
                        47,348Inventories
                        
                        
                        68,321
                        
                        
                        
                        65,488Deferred
      tax assets
                        
                        
                        13,146
                        
                        
                        
                        11,411Prepaid
      and other current assets
                        
                        
                        3,808
                        
                        
                        
                        3,823Total
      current assets
                        
                        
                        156,121
                        
                        
                        
                        157,516Property,
      plant, and equipment, net
                        
                        
                        60,346
                        
                        
                        
                        62,487Deferred
      debt issue costs, net
                        
                        
                        4,321
                        
                        
                        
                        4,994Intangible
      assets, net
                        
                        
                        77,024
                        
                        
                        
                        78,534Goodwill
                        
                        
                        162,293
                        
                        
                        
                        162,611Other
      long-term assets
                        
                        
                        3,651
                        
                        
                        
                        806Total
      assets
                        
                        $
                        463,756
                        
                        
                        $
                        466,948Liabilities
      and stockholders’ equityCurrent
      liabilities:Current
      portion of long-term debt
                        
                        $
                        -
                        
                        
                        $
                        1,000Accounts
      payable
                        
                        
                        21,065
                        
                        
                        
                        21,109Accrued
      expenses
                        
                        
                        21,924
                        
                        
                        
                        23,044Product
      warranty
                        
                        
                        3,981
                        
                        
                        
                        4,159Income
      taxes payable
                        
                        
                        3,612
                        
                        
                        
                        7,766Advance
      payments from customers
                        
                        
                        12,898
                        
                        
                        
                        12,335Total
      current liabilities
                        
                        
                        63,480
                        
                        
                        
                        69,413Deferred
      income taxes
                        
                        
                        26,508
                        
                        
                        
                        27,321Long-term
      debt, less current portion
                        
                        
                        217,916
                        
                        
                        
                        224,660Other
      long-term liabilities
                        
                        
                        1,897
                        
                        
                        
                        1,689Total
      liabilities
                        
                        
                        309,801
                        
                        
                        
                        323,083Commitments
      and contingenciesStockholders’
      equityCommonstock ($0.01 par value, 90,000 shares authorized; 16,723 and 16,538
      shares issued; 16,517
      and 16,332 shares outstanding)
                        
                        
                        167
                        
                        
                        
                        165Additional
      paid-in capital
                        
                        
                        73,824
                        
                        
                        
                        71,818Accumulated
      other comprehensive loss
                        
                        
                        (5,071
                        )
                        
                        
                        (1,809
                        )Retained
      earnings
                        
                        
                        87,835
                        
                        
                        
                        76,491Treasury
      stock, at cost (206 shares)
                        
                        
                        (2,800
                        )
                        
                        
                        (2,800
                        )Total
      stockholders’ equity
                        
                        
                        153,955
                        
                        
                        
                        143,865Total
      liabilities and stockholders' equity
                        
                        $
                        463,756
                        
                        
                        $
                        466,948






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




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 CPI
INTERNATIONAL, INC.
 and
Subsidiaries




CONDENSED CONSOLIDATED


STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


(In
thousands, except per share data – unaudited)




Three Months Ended
                                
                                
                                Six Months EndedApril 3,
                                  2009
                                
                                
                                March 28,
                                  2008
                                
                                
                                April 3,
                                  2009
                                
                                
                                March 28,
                                  2008Sales
                                
                                $
                                81,903
                                
                                
                                $
                                94,804
                                
                                
                                $
                                159,049
                                
                                
                                $
                                180,714Cost
      of sales
                                
                                
                                60,137
                                
                                
                                
                                66,738
                                
                                
                                
                                117,367
                                
                                
                                
                                128,512Gross
      profit
                                
                                
                                21,766
                                
                                
                                
                                28,066
                                
                                
                                
                                41,682
                                
                                
                                
                                52,202Operating
      costs and expenses:Research
      and development
                                
                                
                                3,157
                                
                                
                                
                                2,930
                                
                                
                                
                                5,340
                                
                                
                                
                                5,654Selling
      and marketing
                                
                                
                                4,801
                                
                                
                                
                                5,328
                                
                                
                                
                                9,790
                                
                                
                                
                                10,500General
      and administrative
                                
                                
                                5,196
                                
                                
                                
                                5,492
                                
                                
                                
                                10,400
                                
                                
                                
                                11,645Amortization
      of acquisition-related intangible assets
                                
                                
                                691
                                
                                
                                
                                781
                                
                                
                                
                                1,385
                                
                                
                                
                                1,562Net
      loss on disposition of fixed assets
                                
                                
                                44
                                
                                
                                
                                41
                                
                                
                                
                                64
                                
                                
                                
                                75Total
      operating costs and expenses
                                
                                
                                13,889
                                
                                
                                
                                14,572
                                
                                
                                
                                26,979
                                
                                
                                
                                29,436Operating
      income
                                
                                
                                7,877
                                
                                
                                
                                13,494
                                
                                
                                
                                14,703
                                
                                
                                
                                22,766Interest
      expense, net
                                
                                
                                4,306
                                
                                
                                
                                4,805
                                
                                
                                
                                8,761
                                
                                
                                
                                9,617(Gain)
      loss on debt extinguishment
                                
                                
                                (197
                                )
                                
                                
                                393
                                
                                
                                
                                (197
                                )
                                
                                
                                393Income
      before income taxes
                                
                                
                                3,768
                                
                                
                                
                                8,296
                                
                                
                                
                                6,139
                                
                                
                                
                                12,756Income
      tax expense (benefit)
                                
                                
                                79
                                
                                
                                
                                2,142
                                
                                
                                
                                (5,205
                                )
                                
                                
                                4,092Net
      income
                                
                                $
                                3,689
                                
                                
                                $
                                6,154
                                
                                
                                $
                                11,344
                                
                                
                                $
                                8,664Other
      comprehensive income, net of taxNet
      unrealized gain (loss) on cash flow hedges and othercomprehensive
      income
                                
                                
                                617
                                
                                
                                
                                (2,001
                                )
                                
                                
                                (3,262
                                )
                                
                                
                                (3,202
                                )Comprehensive
      income
                                
                                $
                                4,306
                                
                                
                                $
                                4,153
                                
                                
                                $
                                8,082
                                
                                
                                $
                                5,462Earnings
      per share - Basic
                                
                                $
                                0.23
                                
                                
                                $
                                0.38
                                
                                
                                $
                                0.70
                                
                                
                                $
                                0.53Earnings
      per share - Diluted
                                
                                $
                                0.21
                                
                                
                                $
                                0.35
                                
                                
                                $
                                0.65
                                
                                
                                $
                                0.49Shares
      used to compute earnings per share - Basic
                                
                                
                                16,317
                                
                                
                                
                                16,387
                                
                                
                                
                                16,293
                                
                                
                                
                                16,379Shares
      used to compute earnings per share - Diluted
                                
                                
                                17,319
                                
                                
                                
                                17,656
                                
                                
                                
                                17,353
                                
                                
                                
                                17,744






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




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 CPI
INTERNATIONAL, INC.
 and
Subsidiaries




CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In
thousands – unaudited)





Six Months EndedApril
      3,
                            
                            
                            March
      28,2009
                            
                            
                            2008Cash
      flows from operating activitiesNet
      cash provided by operating activities
                            
                            $
                            7,865
                            
                            
                            $
                            10,439Cash
      flows from investing activitiesCapital
      expenditures
                            
                            
                            (1,818
                            )
                            
                            
                            (2,558
                            )Proceeds
      from adjustment to acquisition purchase price
                            
                            
                            -
                            
                            
                            
                            1,615Payment
      of patent application fees
                            
                            
                            -
                            
                            
                            
                            (147
                            )Net
      cash used in investing activities
                            
                            
                            (1,818
                            )
                            
                            
                            (1,090
                            )Cash
      flows from financing activitiesRepayments
      of debt
                            
                            
                            (7,495
                            )
                            
                            
                            (10,000
                            )Proceeds
      from issuance of common stock to employees
                            
                            
                            605
                            
                            
                            
                            418Proceeds
      from exercise of stock options
                            
                            
                            36
                            
                            
                            
                            -Net
      cash used in financing activities
                            
                            
                            (6,854
                            )
                            
                            
                            (9,582
                            )Net
      decrease in cash and cash equivalents
                            
                            
                            (807
                            )
                            
                            
                            (233
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            28,670
                            
                            
                            
                            20,474Cash
      and cash equivalents at end of period
                            
                            $
                            27,863
                            
                            
                            $
                            20,241Supplemental
      cash flow disclosuresCash
      paid for interest
                            
                            $
                            8,323
                            
                            
                            $
                            8,293Cash
      paid for income taxes, net of refunds
                            
                            $
                            2,270
                            
                            
                            $
                            8,722




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




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CPI
INTERNATIONAL, INC.


and
Subsidiaries




NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(All
tabular dollar amounts in thousands except share and per share
amounts)






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




The
Company




Unless
the context otherwise requires, “CPI International” means CPI International,
Inc., and “CPI” means Communications & Power Industries, Inc. CPI is a
direct subsidiary of CPI International. CPI International is a holding company
with no operations of its own. The term “the Company” refers to CPI
International and its direct and indirect subsidiaries on a consolidated
basis.




The
accompanying consolidated financial statements represent the consolidated
results and financial position of CPI International, which is controlled by
affiliates of The Cypress Group L.L.C. (“Cypress”). CPI International, through
its wholly owned subsidiary, CPI, 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 year 2009 comprises the 52-week period ending
October 2, 2009 and fiscal year 2008 comprised the 53-week period ending October
3, 2008. The second quarters of fiscal years 2009 and 2008 both include 13
weeks. The first two quarters of fiscal years 2009 and 2008 both include 26
weeks. All period references are to the Company’s fiscal periods unless
otherwise indicated.





The
accompanying unaudited condensed consolidated financial statements of the
Company as of April 3, 2009 and for the three and six months ended April 3, 2009
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 October 3, 2008. The condensed
consolidated balance sheet as of October 3, 2008 has been derived from the
audited financial statements at that date. The results of operations for
the interim period ended April 3, 2009 are not necessarily indicative of results
to be expected for the full year.




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





Foreign
Currency Translation




The functional currency of the
Company’s foreign subsidiaries is the U.S. dollar. Gains or losses resulting
from the translation into U.S. dollars of amounts denominated in foreign
currencies are included in the determination of net income or loss. Foreign
currency translation gains and losses are generally reported on a net basis in
the caption “general and administrative” in the condensed consolidated
statements of operations and comprehensive income, except for translation gains
or losses on income tax-related assets and liabilities, which are reported in
“income tax expense (benefit)” in the condensed consolidated statements of
operations and comprehensive income.




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




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 provision for revenue
recognition; inventory and inventory reserves; product warranty; business
combinations; recoverability and valuation of recorded amounts of long-lived
assets and identifiable intangible assets, including goodwill; recognition of
share-based compensation; 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.





Revenue
Recognition




Sales are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable, and collectibility is reasonably
assured. The Company’s products are generally subject to warranties, and the
Company provides for the estimated future costs of repair, replacement or
customer accommodation in cost of sales.




The
Company has commercial and U.S. Government fixed-price contracts that are
accounted for under American Institute of Certified Public Accountants Statement
of Position No. 81-1, “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.” These contracts are generally greater than
one year in duration and include a significant amount of product development.
The Company uses the percentage-of-completion method when reasonably dependable
estimates of the extent of progress toward completion, contract revenues and
contract costs can be made. The portion of revenue earned or the amount of gross
profit earned for a period is determined by measuring the extent of progress
toward completion using total cost incurred to date and estimated costs at
contract completion.





Sales
under cost-reimbursement contracts, which are primarily for research and
development, are recorded as costs are incurred and include estimated earned
fees in the proportion that costs incurred to date bear to total estimated
costs. The fees under certain commercial and U.S. Government contracts may be
increased or decreased in accordance with cost or performance incentive
provisions that measure actual performance against established targets or other
criteria. Such incentive fee awards or penalties are included in revenue at the
time the amounts can be reasonably determined.




Revenue
is recorded net of taxes collected from customers that are remitted to
governmental authorities, with the collected taxes recorded as current
liabilities until remitted to the relevant government authority.




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




2.
            Recently
      Issued Accounting Standards




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements,” which defines fair value, establishes a framework for measuring
fair value under other accounting pronouncements that permit or require fair
value measurements, changes the methods used to measure fair value and expands
disclosures about fair value measurements. In particular, disclosures are
required to provide information on: the extent to which fair value is used to
measure assets and liabilities; the inputs used to develop measurements; and the
effect of certain of the measurements on earnings (or changes in net assets).
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. In February 2008, the FASB
issued FASB Staff Position (“FSP”) SFAS No. 157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13,” which removes certain leasing
transactions from the scope of SFAS No. 157 and FSP SFAS No. 157-2,
“Effective Date of FASB Statement No. 157,” which defers the effective date
of SFAS No. 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis. Effective October 4,
2008, the Company adopted SFAS No. 157 for financial assets and liabilities
recognized at fair value on a recurring basis. The adoption of SFAS No. 157
did not have a significant impact on the Company’s consolidated financial
statements, and the resulting fair values calculated under SFAS No. 157
after adoption were not significantly different than the fair values that would
have been calculated under previous guidance. See Note 4 for further details on
the Company’s fair value measurements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS No. 159
is to provide opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. The Company adopted SFAS No. 159 effective October 4, 2008. The
Company currently does not have any instruments for which it has elected the
fair value option under SFAS No. 159. Therefore, the adoption of SFAS No.
159 has not impacted the Company’s consolidated financial position, results of
operations or cash flows.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), or 141(R),
“Business Combinations,” which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008. The Company will be required to adopt SFAS No. 141(R) in its
fiscal year 2010 commencing October 3, 2009.




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




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s
derivative instruments and hedging activities including: (1) how and why an
entity uses derivative instruments; (2) how derivative instruments and
related hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and its related interpretations;
and (3) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance and cash flows. SFAS No. 161
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with earlier application
encouraged. The Company adopted SFAS No. 161 in the second quarter of
fiscal year 2009. Since SFAS No. 161 only required additional disclosure, the
adoption did not have an impact on the Company’s consolidated financial
position, results of operations or cash flows. See Note 6 for further details on
the Company’s derivative instruments and hedging activities.





In
October 2008, FASB issued FSP No.132 (R)-1, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to require that an employer
disclose the following information about the fair value of plan assets: 1) the
level within the fair value hierarchy in which fair value measurements of plan
assets fall; 2) information about the inputs and valuation techniques used to
measure the fair value of plan assets; and 3) a reconciliation of beginning and
ending balances for fair value measurements of plan assets using significant
unobservable inputs. The final FSP will be effective for fiscal years
ending after December 15, 2009, with early application permitted. The Company
will be required to adopt FSP No.132 (R)-1 in its fiscal year 2010 commencing
October 3, 2009. At initial adoption, application of the FSP would not be
required for earlier periods that are presented for comparative purposes. The
Company is currently evaluating the potential impact of adopting this FSP on the
disclosures in its consolidated financial statements.





In April
2009, the FASB issued FSP SFAS No. 141R-1, “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies.” FSP SFAS No. 141R-1 amends the provisions in SFAS No. 141R,
“Business Combinations,” and requires an acquirer to recognize at fair value, at
the acquisition date, an asset acquired or a liability assumed that arises from
a contingency if the acquisition date fair value of that asset or liability can
be determined during the measurement period. If the acquisition date fair value
cannot be determined during the measurement period, an asset or liability shall
be recognized at the acquisition date if (i) information available before the
end of the measurement period indicates that it is probable that an asset
existed or that a liability had been incurred at the acquisition date, and (ii)
the amount of the asset or liability can be reasonably estimated. FSP SFAS No.
141R-1 is effective for contingent assets and contingent liabilities acquired in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company will apply the provisions of FSP SFAS No.
141R-1 if and when a future acquisition occurs.





In April
2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” which provides
additional guidance in evaluating certain factors that are indicative of a
significant decrease in the volume and level of activity for an asset or
liability when compared to normal market activity. Additionally, this statement
clarifies the circumstances to consider when evaluating whether a transaction is
not orderly, in which quoted prices may not be determinative of fair value. FSP
SFAS No. 157-4 is applied prospectively to all fair value measurements where
appropriate and will be effective for interim and annual periods ending after
June 15, 2009. The Company will adopt the provisions of FSP SFAS No. 157-4
effective April 4, 2009. The Company is currently assessing the impact of FSP
SFAS No. 157-4 on its results of operations and financial position.




- 10
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




In April
2009, the FASB issued FSP SFAS No. 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments.” FSP SFAS No. 107-1 and APB No. 28-1
amend FASB Statement No. 107, “Disclosures about Fair Value of Financial
Instruments,” to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. FSP FAS No. 107-1 and APB No. 28-1 is effective for
interim reporting periods ending after June 15, 2009. The Company’s
disclosures about fair value of financial instruments will reflect the adoption
of this FSP in the third quarter of fiscal year 2009.






3.           Supplemental
Balance Sheet Information




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




April
      3,
                          
                          
                          October
      3,2009
                          
                          
                          2008Accounts
      receivable
                          
                          $
                          41,994
                          
                          
                          $
                          47,437Less:
      Allowance for doubtful accounts
                          
                          
                          (112
                          )
                          
                          
                          (89
                          )Accounts
      receivable, net
                          
                          $
                          41,882
                          
                          
                          $
                          47,348


Inventories:    The
following table provides details of inventories, net of reserves:




April
      3,
                      
                      
                      October
      3,2009
                      
                      
                      2008Raw
      material and parts
                      
                      $
                      39,401
                      
                      
                      $
                      40,187Work
      in process
                      
                      
                      19,323
                      
                      
                      
                      17,622Finished
      goods
                      
                      
                      9,597
                      
                      
                      
                      7,679$
                      68,321
                      
                      
                      $
                      65,488


Reserve for excess, slow-moving and
obsolete inventory:    The following table summarizes
the activity related to reserves for excess, slow-moving and obsolete
inventory:




Six Months EndedApril
      3,
                    
                    
                    March
      28,2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    9,860
                    
                    
                    $
                    9,784Inventory
      provision, charged to cost of sales
                    
                    
                    335
                    
                    
                    
                    550Inventory
      write-offs
                    
                    
                    (451
                    )
                    
                    
                    (397
                    )Balance
      at end of period
                    
                    $
                    9,744
                    
                    
                    $
                    9,937


-
11 -
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




Reserve for loss
contracts:




Six Months EndedApril
      3,
                            
                            
                            March
      28,2009
                            
                            
                            2008Balance
      at beginning of period
                            
                            $
                            1,928
                            
                            
                            $
                            2,700Provision
      for loss contracts, charged tocost of sales
                            
                            
                            1,454
                            
                            
                            
                            1,431Credit
      to cost of sales upon revenuerecognition
                            
                            
                            (1,101
                            )
                            
                            
                            (2,096
                            )Balance
      at end of period
                            
                            $
                            2,281
                            
                            
                            $
                            2,035


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




April
      3,
                    
                    
                    March
      28,2009
                    
                    
                    2008Inventories
                    
                    $
                    2,273
                    
                    
                    $
                    953Accrued
      expenses
                    
                    
                    8
                    
                    
                    
                    1,082$
                    2,281
                    
                    
                    $
                    2,035


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




Weighted Average
                                    
                                    
                                    April 3, 2009
                                    
                                    
                                    October 3, 2008Useful Life

                                      (in years)
                                    
                                    
                                    Cost
                                    
                                    
                                    Accumulated Amortization
                                    
                                    
                                    Net
                                    
                                    
                                    Cost
                                    
                                    
                                    Accumulated Amortization
                                    
                                    
                                    NetVED
      Core Technology
                                    
                                    
                                    50
                                    
                                    
                                    $
                                    30,700
                                    
                                    
                                    $
                                    (3,194
                                    )
                                    
                                    $
                                    27,506
                                    
                                    
                                    $
                                    30,700
                                    
                                    
                                    $
                                    (2,887
                                    )
                                    
                                    $
                                    27,813VED
      Application Technology
                                    
                                    
                                    25
                                    
                                    
                                    
                                    19,800
                                    
                                    
                                    
                                    (4,109
                                    )
                                    
                                    
                                    15,691
                                    
                                    
                                    
                                    19,800
                                    
                                    
                                    
                                    (3,713
                                    )
                                    
                                    
                                    16,087X-ray
      Generator and SatcomApplication
      Technology
                                    
                                    
                                    15
                                    
                                    
                                    
                                    8,000
                                    
                                    
                                    
                                    (2,775
                                    )
                                    
                                    
                                    5,225
                                    
                                    
                                    
                                    8,000
                                    
                                    
                                    
                                    (2,508
                                    )
                                    
                                    
                                    5,492Antenna
      and TelemetryTechnology
                                    
                                    
                                    25
                                    
                                    
                                    
                                    5,300
                                    
                                    
                                    
                                    (347
                                    )
                                    
                                    
                                    4,953
                                    
                                    
                                    
                                    5,300
                                    
                                    
                                    
                                    (241
                                    )
                                    
                                    
                                    5,059Customer
      backlog
                                    
                                    
                                    1
                                    
                                    
                                    
                                    580
                                    
                                    
                                    
                                    (580
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    580
                                    
                                    
                                    
                                    (580
                                    )
                                    
                                    
                                    -Land
      lease
                                    
                                    
                                    46
                                    
                                    
                                    
                                    11,810
                                    
                                    
                                    
                                    (1,308
                                    )
                                    
                                    
                                    10,502
                                    
                                    
                                    
                                    11,810
                                    
                                    
                                    
                                    (1,181
                                    )
                                    
                                    
                                    10,629Tradename
                                    
                                    20
      - Indefinite
                                    
                                    
                                    
                                    7,600
                                    
                                    
                                    
                                    (165
                                    )
                                    
                                    
                                    7,435
                                    
                                    
                                    
                                    7,600
                                    
                                    
                                    
                                    (55
                                    )
                                    
                                    
                                    7,545Customer
      list and programs
                                    
                                    
                                    25
                                    
                                    
                                    
                                    6,280
                                    
                                    
                                    
                                    (1,083
                                    )
                                    
                                    
                                    5,197
                                    
                                    
                                    
                                    6,280
                                    
                                    
                                    
                                    (950
                                    )
                                    
                                    
                                    5,330Noncompete
      agreement
                                    
                                    
                                    5
                                    
                                    
                                    
                                    640
                                    
                                    
                                    
                                    (272
                                    )
                                    
                                    
                                    368
                                    
                                    
                                    
                                    640
                                    
                                    
                                    
                                    (208
                                    )
                                    
                                    
                                    432Patent
      application fees
                                    
                                    
                                    -
                                    
                                    
                                    
                                    147
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    147
                                    
                                    
                                    
                                    147
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    147$
                                    90,857
                                    
                                    
                                    $
                                    (13,833
                                    )
                                    
                                    $
                                    77,024
                                    
                                    
                                    $
                                    90,857
                                    
                                    
                                    $
                                    (12,323
                                    )
                                    
                                    $
                                    78,534


- 12
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




Intangible
assets, net as of April 3, 2009 include a total of approximately $0.1 million of
application costs and associated legal costs incurred to obtain certain patents.
Once obtained, these patents will be amortized on a straight-line basis and
charged to operations over their estimated useful lives, not to exceed 17
years.




The
amortization of intangible assets amounted to $0.8 million and $1.5 million for
the three and six months ended April 3, 2009, respectively, and $0.8 million and
$1.7 million for the corresponding periods of fiscal year 2008.




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




Fiscal Year
                      
                      Amount2009
      (remaining six months)
                      
                      $
                      1,5132010
                      
                      
                      3,0062011
                      
                      
                      3,0062012
                      
                      
                      2,9922013
                      
                      
                      2,900Thereafter
                      
                      
                      60,407$
                      73,824


Goodwill:    The
following table sets forth the changes in goodwill by reportable
segment:




Reportable SegmentsVED
                            
                            
                            Satcom
                            
                            
                            Other
                            
                            
                            TotalBalance
      at October 3, 2008
                            
                            $
                            132,897
                            
                            
                            $
                            13,830
                            
                            
                            $
                            15,884
                            
                            
                            $
                            162,611Purchase
      accounting adjustment
                            
                            
                            (215
                            )
                            
                            
                            (103
                            )
                            
                            
                            -
                            
                            
                            
                            (318
                            )Balance
      at April 3, 2009
                            
                            $
                            132,682
                            
                            
                            $
                            13,727
                            
                            
                            $
                            15,884
                            
                            
                            $
                            162,293


The
purchase accounting adjustment represents the correction of income tax rates
that were used to establish Canadian deferred tax accounts related to the
Company’s merger in fiscal year 2004.





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




Six Months EndedApril
      3,
                      
                      
                      March
      28,2009
                      
                      
                      2008Beginning
      accrued warranty
                      
                      $
                      4,159
                      
                      
                      $
                      5,578Estimates
      for product warranty, charged to cost of sales
                      
                      
                      2,014
                      
                      
                      
                      1,406Actual
      costs of warranty claims
                      
                      
                      (2,192
                      )
                      
                      
                      (2,032
                      )Ending
      accrued warranty
                      
                      $
                      3,981
                      
                      
                      $
                      4,952


- 13
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




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




April
      3,
                        
                        
                        October
      3,2009
                        
                        
                        2008Unrealized
      loss on cash flow hedges, net of tax
                        
                        $
                        4,800
                        
                        
                        $
                        1,587Unrealized
      actuarial loss and prior service creditfor
      pension liability, net of tax
                        
                        
                        271
                        
                        
                        
                        222$
                        5,071
                        
                        
                        $
                        1,809




4.             Financial
Instruments




Effective
October 4, 2008, the Company adopted SFAS No. 157 for financial assets and
liabilities. SFAS No. 157 establishes a framework for measuring fair value
and expands disclosures about fair value measurements by establishing a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and lowest priority to unobservable inputs
(Level 3 measurements). The three levels of the fair value hierarchy under
SFAS No. 157 are described below:





Level
      1
                    Observable
      inputs that reflect quoted prices (unadjusted) for identical assets or
      liabilities in active markets.Level
      2
                    Inputs
      reflect quoted prices for identical assets or liabilities in markets that
      are not active; quoted prices for similar assets or liabilities in active
      markets; inputs other than quoted prices that are observable for the asset
      or the liability; or inputs that are derived principally from or
      corroborated by observable market data by correlation or other
      means.Level
      3
                    Unobservable
      inputs reflecting the Company’s own assumptions incorporated in valuation
      techniques used to determine fair value. These assumptions are required to
      be consistent with market participant assumptions that are reasonably
      available.






Under
SFAS No. 157, the fair value is the price that would be received to sell an
asset or paid to transfer a liability that assumes an orderly transaction in the
most advantageous market at the measurement date.




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. As of April 3, 2009, financial assets
utilizing Level 1 inputs included cash equivalents, such as money market and
overnight U.S. Government securities and available-for-sale securities, such as
mutual funds. Financial assets and liabilities utilizing Level 2 inputs included
restricted cash in the form of certificates of deposit, foreign currency
derivatives and interest rate swap derivatives. The Company does not have any
financial assets or liabilities requiring the use of Level 3
inputs.


- 14
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)
  The
following table sets forth financial instruments carried at fair value within
the SFAS No. 157 hierarchy as of April 3, 2009:





Fair
      Value Measurements at Reporting Date UsingQuoted
      Prices in Active Markets for Identical Assets
                  
                  
                  Significant
      Other Observable Inputs
                  
                  
                  Significant
      Unobservable InputsTotal
                  
                  
                  (Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)Assets:Money
      market and overnight U.S. Government securities1
                  
                  $
                  24,766
                  
                  
                  $
                  24,766
                  
                  
                  $
                  -
                  
                  
                  $
                  -Certificates
      of deposit2
                  
                  
                  872
                  
                  
                  
                  -
                  
                  
                  
                  872
                  
                  
                  
                  -Mutual
      funds3
                  
                  
                  124
                  
                  
                  
                  124
                  
                  
                  
                  -
                  
                  
                  
                  -Foreign
      exchange forward derivatives4
                  
                  
                  182
                  
                  
                  
                  -
                  
                  
                  
                  182
                  
                  
                  
                  -Total
      assets at fair value
                  
                  $
                  25,944
                  
                  
                  $
                  24,890
                  
                  
                  $
                  1,054
                  
                  
                  
                  -Liabilities:Interest
      rate swap derivative5
                  
                  $
                  2,832
                  
                  
                  $
                  -
                  
                  
                  $
                  2,832
                  
                  
                  $
                  -Foreign
      exchange forward derivatives4
                  
                  
                  3,924
                  
                  
                  
                  -
                  
                  
                  
                  3,924
                  
                  
                  
                  -Total
      liabilities at fair value
                  
                  $
                  6,756
                  
                  
                  $
                  -
                  
                  
                  $
                  6,756
                  
                  
                  $
                  - 1The money market and overnight U.S. Government securities are
      classified as part of cash and cash equivalents in the condensed
      consolidated balance
      sheet.2The certificates of deposit are classified as part of restricted
      cash in the condensed consolidated balance
      sheet.3The
      mutual funds are classified as part of other long-term assets in the
      condensed consolidated balance
      sheet.4The
      foreign currency derivatives are classified as part of prepaid and other
      current assets, other long-term assets and accrued expenses in the
      condensed consolidated balance
      sheet.5The
      interest rate swap derivatives are classified as part of accrued expenses
      and other long-term liabilities in the condensed consolidated balance
      sheet.







Investments
Other Than Derivatives




In
general and where applicable, the Company uses quoted prices in active markets
for identical assets or liabilities to determine fair value. This pricing
methodology applies to the Company’s Level 1 investments, such as money market,
U.S. Government securities and mutual funds.





If quoted
prices in active markets for identical assets or liabilities are not available
to determine fair value, then the Company would use quoted prices for similar
assets and liabilities or inputs other than the quoted prices that are
observable either directly or indirectly. These investments, such as
certificates of deposit, would be included in Level 2.





- 15
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)


Derivatives




The
Company executes foreign exchange forward contracts to purchase Canadian dollars
and holds a pay-fixed receive-variable interest rate swap contract, all executed
in the retail market with its relationship banks. For recognizing the most
appropriate value, the Company uses an in-exchange valuation premise which
considers the assumptions that market participants would use in pricing the
derivatives. The Company has elected to use the income approach and uses
observable (Level 2) market expectations at the measurement date and standard
valuation techniques to convert future amounts to a single present amount. Level
2 inputs for derivative valuations are midmarket quoted prices for similar
assets or liabilities in active markets and inputs other than quoted prices that
are observable for the asset or liability.





Key
inputs for currency derivatives are spot rates, forward rates, interest rates
and credit derivative rates. The spot rate for the Canadian dollar is the same
spot rate used for all balance sheet translations at the measurement date.
Forward premiums/discounts and interest rates are interpolated from commonly
quoted intervals. Once valued, each forward is identified as either an asset or
liability. Assets are further discounted using counterparty annual credit
default rates, and liabilities are valued using the Company’s credit as
reflected in the spread paid over LIBOR on the term loan under the Company’s
senior credit facilities.





Key
inputs for valuing the interest rate swap are the cash rates used for the short
term (under three months), futures rates for up to three years and LIBOR
swap rates for periods beyond. These inputs are used to derive variable resets
for the swap as well as to discount future fixed and variable cash flows to
present value at measurement date. A credit spread is used to further discount
each net cash flow using, for assets, counterparty credit default rates
and, for liabilities, the Company’s credit spread over LIBOR on the term
loan under the Company’s senior credit facilities.





See
Note 6 for further information regarding the Company’s derivative
instruments.






5.            
Long-term Debt




Long-term
debt comprises the following:




April
      3,
                          
                          
                          October
      3,2009
                          
                          
                          2008Term
      loan, expiring 2014
                          
                          $
                          84,000
                          
                          
                          $
                          88,7508%
      Senior subordinated notes due 2012
                          
                          
                          122,000
                          
                          
                          
                          125,000Floating
      rate seniornotes due
      2015, netof issue discount of
      $84 and $90
                          
                          
                          11,916
                          
                          
                          
                          11,910217,916
                          
                          
                          
                          225,660Less:  Current
      portion
                          
                          
                          -
                          
                          
                          
                          1,000Long-term
      portion
                          
                          $
                          217,916
                          
                          
                          $
                          224,660Standby
      letters of credit
                          
                          $
                          5,724
                          
                          
                          $
                          4,609


- 16
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)


Senior Credit
Facilities:On August 1, 2007, CPI
amended and restated its then existing senior credit facilities. The amended and
restated senior credit facilities (“Senior Credit Facilities”) provide for
borrowings of up to an aggregate principal amount of $160 million, consisting of
a $100 million term loan facility (“Term Loan”) and a $60 million revolving
credit facility (“Revolver”), with a sub-facility of $15 million for letters of
credit and $5 million for swing line loans. Upon certain specified conditions,
including maintaining a senior secured leverage ratio of 3.75:1 or less on a pro
forma basis, CPI may seek commitments for a new class of term loans, not to
exceed $125 million in the aggregate. The Senior Credit Facilities are
guaranteed by CPI International and all of CPI’s domestic subsidiaries and are
secured by substantially all of the assets of CPI International, CPI and CPI’s
domestic subsidiaries.




Except as
provided in the following sentence, the Term Loan will mature on August 1, 2014
and the Revolver will mature on August 1, 2013. However, if, prior to August 1,
2011, CPI has not repaid or refinanced its 8% Senior Subordinated Notes due
2012, both the Term Loan and the Revolver will mature on August 1,
2011.




The
Senior Credit Facilities replaced CPI’s previous senior credit facilities of
$130 million. On the closing date of the Senior Credit Facilities, CPI borrowed
$100 million under the Term Loan. Borrowings under the Senior Credit Facilities
bear interest at a rate equal to, at CPI’s option, LIBOR or the ABR plus the
applicable margin. The ABR is the greater of the (a) the prime rate and (b) the
federal funds rate plus 0.50%. For Term Loans, the applicable margin will be
2.00% for LIBOR borrowings and 1.00% for ABR borrowings. The applicable margins
under the Revolver vary depending on CPI’s leverage ratio, as defined in the
Senior Credit Facilities, and range from 1.25% to 2.00% for LIBOR borrowings and
from 0.25% to 1.00% for ABR borrowings.




In
addition to customary fronting and administrative fees under the Senior Credit
Facilities, CPI will pay letter of credit participation fees equal to the
applicable LIBOR margin per annum on the average daily amount of the letter of
credit exposure and a commitment fee on the average daily unused commitments
under the Revolver. The commitment fee will vary depending on CPI’s leverage
ratio, as defined in the Senior Credit Facilities, and will range from 0.25% to
0.50%.




The
Senior Credit Facilities require that CPI repay $250,000 of the Term Loan at the
end of each fiscal quarter prior to the maturity date of the Term Loan, with the
remainder due on the maturity date. CPI is required to prepay its outstanding
loans under the Senior Credit Facilities, subject to certain exceptions and
limitations, with net cash proceeds received from certain events, including,
without limitation, (1) all such proceeds received from certain asset sales by
CPI International, CPI or any of CPI’s subsidiaries, (2) all such proceeds
received from issuances of debt (other than certain specified permitted debt) or
preferred stock by CPI International, CPI or any of CPI’s subsidiaries, and (3)
all such proceeds paid to CPI International, CPI or any of CPI’s subsidiaries
from casualty and condemnation events in excess of amounts applied to replace,
restore or reinvest in any properties for which proceeds were paid within a
specified period.




If CPI’s
leverage ratio, as defined in the Senior Credit Facilities, exceeds 3.5:1 at the
end of any fiscal year, CPI will also be required to make an annual prepayment
within 90 days after the end of such fiscal year equal to 50% of excess cash
flow, as defined in the Senior Credit Facilities, less optional prepayments made
during the fiscal year. CPI can make optional prepayments on the outstanding
loans at any time without premium or penalty, except for customary “breakage”
costs with respect to LIBOR loans.




- 17
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




The
Senior Credit Facilities contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of CPI International, CPI
or any of CPI’s subsidiaries to: sell assets; engage in mergers and
acquisitions; pay dividends and distributions or repurchase their capital stock;
incur additional indebtedness or issue equity interests; make investments and
loans; create liens or further negative pledges on assets; engage in certain
transactions with affiliates; enter into sale and leaseback transactions; amend
agreements or make prepayments relating to subordinated indebtedness; and amend
or waive provisions of charter documents in a manner materially adverse to the
lenders. CPI and its subsidiaries must comply with a maximum capital expenditure
limitation and a maximum total secured leverage ratio, each calculated on a
consolidated basis for CPI.




CPI made
repayments on the Term Loan of $4.75 million during the first quarter of fiscal
year 2009, $11.0 million during fiscal year 2008 and $250,000 during fiscal year
2007, leaving a principal balance of $84.0 million as of April 3,
2009.




At April
3, 2009, the amount available for borrowing under the Revolver, after taking
into account the Company‘s outstanding letters of credit of $5.7 million, was
approximately $54.3 million.




8%
Senior Subordinated Notes due 2012 of CPI:As of April 3,
2009, CPI had $122.0 million in aggregate principal amount of its 8% Senior
Subordinated Notes due 2012 (the “8% Notes”) after giving effect to the
repurchase of $3.0 million in January 2009. The Company repurchased $3.0 million
aggregate principal amount of the 8% Notes at a discount of 8.5% to par value.
The Company paid approximately $2.9 million, including accrued interest of $0.1
million, for the repurchase and realized a net gain of approximately $0.2
million. The 8% Notes have no sinking fund requirements.





The 8%
Notes bear interest at the rate of 8.0% per year, payable on February 1 and
August 1 of each year. The 8% Notes will mature on February 1, 2012.
The 8% Notes are unsecured obligations, jointly and severally guaranteed by CPI
International and each of CPI’s domestic subsidiaries. The payment of all
obligations relating to the 8% Notes are subordinated in right of payment to the
prior payment in full in cash or cash equivalents of all senior debt (as defined
in the indenture governing the 8% Notes) of CPI, including debt under the Senior
Credit Facilities. Each guarantee of the 8% Notes is and will be subordinated to
guarantor senior debt (as defined in the indenture governing the 8% Notes) on
the same basis as the 8% Notes are subordinated to CPI’s senior
debt.




At any
time or from time to time on or after February 1, 2008, CPI, 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 on February 1 of the years indicated
below:




Year
                  
                  Optional
      Redemption
                      Price2009
                  
                  
                  102
                  %2010
      and thereafter
                  
                  
                  100
                  %





Upon a
change of control, CPI 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.





- 18
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)


The
indenture governing the 8% Notes contains a number of covenants that, among
other things, restrict, subject to certain exceptions, the ability of CPI and
its restricted subsidiaries (as defined in the indenture governing the 8% Notes)
to incur additional indebtedness, sell assets, consolidate or merge with or into
other companies, pay dividends or repurchase or redeem capital stock or
subordinated indebtedness, make certain investments, issue capital stock of
their subsidiaries, incur liens and enter into certain types of transactions
with their affiliates.




Events of
default under the indenture governing the 8% Notes include: failure to make
payments on the 8% Notes when due; failure to comply with covenants in the
indenture governing the 8% Notes; a default under certain other indebtedness of
CPI or any of its restricted subsidiaries that is caused by a failure to make
payments on such indebtedness or that results in the acceleration of the
maturity of such indebtedness; the existence of certain final judgments or
orders against CPI or any of the restricted subsidiaries; and the occurrence of
certain insolvency or bankruptcy events.




Floating Rate
Senior Notes due 2015 of CPI International:As of April 3, 2009, $12.0
million of aggregate principal amount remained outstanding under CPI
International’s Floating Rate Senior Notes due 2015 (the “FR Notes”) after
giving effect to the redemption of $10.0 million aggregate principal amount and
$58.0 million aggregate principal amount in fiscal years 2008 and 2007,
respectively. The FR Notes were originally issued at a 1% discount and have no
sinking fund requirements.




The FR
Notes require interest payments at an annual interest rate, reset at the
beginning of each semi-annual period, equal to the then six-month LIBOR plus
5.75%, payable semiannually on February 1 and August 1 of each year. The
interest rate on the semi-annual interest payment due August 1, 2009 is 7.38%
per annum. CPI International may, at its option, elect to pay interest through
the issuance of additional FR Notes for any interest payment date on or after
August 1, 2006 and on or before February 1, 2010. If CPI International
elects to pay interest through the issuance of additional FR Notes, the annual
interest rate on the FR Notes will increase by an additional 1% step-up, with
the step-up increasing by an additional 1% for each interest payment made
through the issuance of additional FR Notes (up to a maximum of 4%). The FR
Notes will mature on February 1, 2015.




The FR
Notes are general unsecured obligations of CPI International. The FR Notes are
not guaranteed by any of CPI International’s subsidiaries but are structurally
subordinated to all existing and future indebtedness and other liabilities of
CPI International’s subsidiaries. The FR Notes are senior in right of payment to
CPI International’s existing and future indebtedness that is expressly
subordinated to the FR Notes.




Because
CPI International is a holding company with no operations of its own, CPI
International relies on distributions from Communications & Power Industries
to satisfy its obligations under the FR Notes. The Senior Credit Facilities and
the indenture governing the 8% Notes restrict CPI’s ability to make
distributions to CPI International. The Senior Credit Facilities prohibit CPI
from making distributions to CPI International unless there is no default under
the Senior Credit Facilities and CPI satisfies a senior secured leverage ratio
of 3.75:1 and, in the case of distributions to pay amounts other than interest
on the FR Notes, the amount of the distribution and all prior such distributions
do not exceed a specified amount. The indenture governing the 8% Notes prohibits
CPI from making distributions to CPI International unless, among other things,
there is no default under the indenture and the amount of the proposed dividend
plus all previous Restricted Payments (as defined in the indenture governing the
8% Notes) does not exceed a specified amount.




- 19
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




At any
time or from time to time on or after February 1, 2008, CPI International, at
its option, may redeem the FR 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 on February 1 of the years indicated
below:




Year
                
                Optional
      Redemption
                    Price2009
                
                
                101
                %2010
      and thereafter
                
                
                100
                %





Upon a
change of control, as defined in the indenture governing the FR Notes, CPI
International may be required to purchase all or any part of the outstanding FR
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.




The
indenture governing the FR Notes contains certain covenants that, among other
things, limit the ability of CPI International and its restricted subsidiaries
(as defined in the indenture governing the FR Notes) to incur additional
indebtedness, sell assets, consolidate or merge with or into other companies,
pay dividends or repurchase or redeem capital stock or subordinated
indebtedness, make certain investments, issue capital stock of their
subsidiaries, incur liens and enter into certain types of transactions with
their affiliates.




Events of
default under the indenture governing the FR Notes include: failure to make
payments on the FR Notes when due; failure to comply with covenants in the
indenture governing the FR Notes; a default under certain other indebtedness of
CPI International or any of its restricted subsidiaries that is caused by a
failure to make payments on such indebtedness or that results in the
acceleration of the maturity of such indebtedness; the existence of certain
final judgments or orders against CPI International or any of the restricted
subsidiaries; and the occurrence of certain insolvency or bankruptcy
events.




Debt
Maturities:    As of April 3, 2009, maturities on
long-term debt were as follows:







Fiscal Year
                    
                    Term
                      Loan
                    
                    
                    8% Senior
                      Subordinated Notes
                    
                    
                    Floating Rate
                      Senior Notes
                    
                    
                    Total2009
      (remaining six months)
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -2011
                    
                    
                    84,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    84,0002012
                    
                    
                    -
                    
                    
                    
                    122,000
                    
                    
                    
                    -
                    
                    
                    
                    122,0002013
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Thereafter
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,000
                    
                    
                    
                    12,000$
                    84,000
                    
                    
                    $
                    122,000
                    
                    
                    $
                    12,000
                    
                    
                    $
                    218,000






- 20
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




The above
table assumes (1) that the respective debt instruments will be outstanding until
their scheduled maturity dates, except for the Term Loan under the Senior Credit
Facilities, which is assumed to mature on the earlier date of August 1, 2011 as
described above under “Senior Credit Facilities,” and (2) a debt level based on
mandatory repayments according to the contractual amortization schedule. The
above table also excludes any optional prepayments.




As of
April 3, 2009, the Company was in compliance with the covenants under the
indentures governing the 8% Notes and FR Notes and the agreements governing the
Senior Credit Facilities, and the Company expects to remain in compliance with
those covenants throughout the remainder of fiscal year 2009.




Interest rate
swap agreements: See Note 6 for information on the interest rate swap
agreements entered into by the Company to hedge the interest rate exposure
associated with the Term Loan.






6.            
Derivative Instruments and Hedging Activities




In March
2008, the FASB issued SFAS No. 161, which amends and expands the disclosure
requirements of SFAS No. 133 to provide an enhanced understanding of the
use of derivative instruments, how they are accounted for under SFAS 133 and
their effect on financial position, financial performance and cash flows. The
Company adopted the disclosure provisions of SFAS No. 161 in the second quarter
of fiscal year 2009.





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 April 3, 2009 have
durations of three to nine months. These contracts are designated
as a cash flow hedge and are considered highly effective, as defined by SFAS
No. 133. Unrealized gains and losses from foreign exchange forward
contracts are included in accumulated other comprehensive income (loss) in the
consolidated balance sheets, and the Company anticipates recognizing the entire
unrealized gain or loss in operating earnings within the next five fiscal
quarters. Changes in the fair value of foreign currency forward contracts due to
changes in time value are excluded from the assessment of effectiveness and are
immediately recognized in general and administrative expenses in the condensed
consolidated statements of operations and comprehensive income. The time value
was not material for the first two quarters of fiscal years 2009 and 2008. If
the transaction being hedged fails to occur, or if a portion of any derivative
is ineffective, then the Company promptly recognizes the gain or loss on the
associated financial instrument in general and administrative expenses in the
condensed consolidated statements of operations and comprehensive income. No
ineffective amounts were recognized due to anticipated transactions failing to
occur in the first two quarters of fiscal years 2009 and
2008.


- 21
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)


As of
April 3, 2009, the Company had entered into Canadian dollar forward contracts
for approximately $50.6 million (Canadian dollars), or approximately 87% of
estimated Canadian dollar denominated expenses for April 2009 through
June 2010, at an average rate of approximately $0.87 U.S. dollar to
Canadian dollar.





Interest Rate
Contracts: The Company also uses derivative instruments in order to
manage interest costs and risk associated with its long-term debt. During fiscal
year 2007, the Company entered into an interest rate swap contract (the “2007
Swap”) to receive three-month USD-LIBOR-BBA (British Bankers’ Association)
interest and pay 4.77% fixed rate interest. Net interest positions are settled
quarterly. The Company has structured the 2007 Swap with decreasing notional
amounts such that it is less than the balance of its Term Loan under the Senior
Credit Facilities discussed in Note 5. The notional value of the 2007 Swap was
$60.0 million at April 3, 2009 and represented approximately 71% of the
aggregate Term Loan balance. The Swap agreement is effective through June 30,
2011. Under the provisions of SFAS No. 133, this arrangement was initially
designated and qualified as an effective cash flow hedge of interest rate risk
related to the Term Loan, which permitted recording the fair value of the 2007
Swap and corresponding unrealized gain or loss to accumulated other
comprehensive income (loss) in the consolidated balance sheets. The interest
rate swap gain or loss is included in the assessment of hedge effectiveness.
Gains and losses representing hedge ineffectiveness are immediately recognized
in interest expense, net in the condensed consolidated statements of operations
and comprehensive income.





See
Note 4, Financial Instruments, for further information regarding the
Company’s derivative instruments.





The
following table summarizes the fair value of derivative instruments designated
as cash flow hedges at April 3, 2009:





Asset
      Derivatives
                                                  
                                                  Liability
      DerivativesBalance
      SheetLocation
                                                  
                                                  Fair
      Value
                                                  
                                                  Balance
      SheetLocation
                                                  
                                                  Fair
      ValueDerivatives
      designated as hedging instruments
                                                    under SFAS No. 133Interest
      rate contracts
                                                  Prepaid
      and other current assets
                                                  
                                                  $
                                                  -
                                                  
                                                  Accrued
      expenses
                                                  
                                                  $
                                                  (1,819
                                                  )Interest
      rate contracts
                                                  Other
      long-term assets
                                                  
                                                  
                                                  -
                                                  
                                                  Other
      long-term liabilities
                                                  
                                                  
                                                  (1,013
                                                  )Forward
      contracts
                                                  Prepaid
      and other current assets
                                                  
                                                  
                                                  56
                                                  
                                                  Accrued
      expenses
                                                  
                                                  
                                                  (3,924
                                                  )Forward
      contracts
                                                  Other
      long-term assets
                                                  
                                                  
                                                  126
                                                  
                                                  Other
      long-term liabilities
                                                  
                                                  
                                                  -Total
      derivatives designated as hedging instruments
                                                    under SFAS No. 133
                                                  
                                                  $
                                                  182
                                                  
                                                  
                                                  
                                                  $
                                                  (6,756
                                                  )




As of
April 3, 2009, all of the Company’s derivative instruments were classified as
hedging instruments under SFAS No. 133.




- 22
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




The
following table summarizes the effect of derivative instruments on the condensed
consolidated statement of operations and comprehensive income for the six months
ended April 3, 2009:




Derivatives
      in Statement 133
                                          Cash
      Flow Hedging Relationships
                                        
                                        Amount
      of
                                          Gain
      (Loss) Recognizedin
                                          OCI
      on Derivative
                                          (Effective
      Portion)
                                        
                                        Location
      of
                                          Gain
      (Loss) Reclassified from AccumulatedOCI
      into Income
                                          (Effective
      Portion)
                                        
                                        Amount
      of
                                          Gain
      (Loss) Reclassified from Accumulated
                                          OCI
      into Income
                                          (Effective
      Portion)
                                        
                                        Location
      of
                                          Gain
      (Loss) Recognized in
                                          Income
      on Derivative
                                          (Ineffective
      and
                                          Excluded
      Portion)
                                        
                                        Amount
      of
                                          Gain
      (Loss)Recognized
      in
                                          Income
      on Derivative
                                          (Ineffective
      and
                                          Excluded
      Portion )Interest
      rate contracts
                                        
                                        $
                                        (1,587
                                        )
                                        Interest
      expense, net
                                        
                                        $
                                        (700
                                        )
                                        Interest
      expense, net
                                        
                                        $
                                        (28
                                        )Forward
      contracts
                                        
                                        
                                        (6,382
                                        )
                                        Cost
      of sales
                                        
                                        
                                        (1,846
                                        )
                                        General
      and administrative
                                        
                                        
                                        (225
                                        )
                                        (a)Forward
      contracts
                                        
                                        
                                        
                                        
                                        Research
      and development
                                        
                                        
                                        (114
                                        )Forward
      contracts
                                        
                                        
                                        
                                        
                                        Selling
      and marketing
                                        
                                        
                                        (63
                                        )Forward
      contracts
                                        
                                        
                                        
                                        
                                        General
      and administrative
                                        
                                        
                                        (188
                                        )Total
                                        
                                        $
                                        (7,969
                                        )
                                        
                                        
                                        $
                                        (2,911
                                        )
                                        
                                        
                                        $
                                        (253
                                        )





(a)The amount of loss recognized in income represents $3,000 related
to the ineffective portion of the hedging relationships and $222,000 related to
the amount excluded from the assessment of hedge
effectiveness.


As a
result of the use of derivative instruments, the Company is exposed to the risk
that counterparties to derivative contracts will fail to meet their contractual
obligations. The Company does not hold collateral or other security from its
counterparties supporting its derivative instruments. To mitigate the
counterparty credit risk, the Company has a policy of only entering into
contracts with carefully selected major financial institutions based upon their
credit ratings and other factors. The Company regularly reviews its credit
exposure balances as well as the creditworthiness of the
counterparties.





In
addition, the Company’s interest rate swap contract is subject to an
International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA
Master Agreement”). The ISDA Master Agreement allows for the aggregation of the
market exposures and termination of all transactions between the Company and its
counterparty in the event a default (as defined in the ISDA Master Agreement)
occurs in respect of either party.




If the
counterparty fails to perform, credit risk with such counterparty is equal to
the extent of the fair value gain in the derivative. At April 3, 2009, the
Company’s derivatives were in a net liability position, and the Company,
therefore, was not exposed to any counterparty credit risk.






7.            
Commitments and Contingencies




Leases:The Company is
committed to minimum rentals under non-cancelable operating lease agreements,
primarily for land and facility space, that expire on various dates through
2050. Certain of the leases provide for escalating lease payments. Future
minimum lease payments for all non-cancelable operating lease agreements at
April 3, 2009 were as follows:




Fiscal
      Year
                  
                  Operating
      Leases2009
      (remaining six months)
                  
                  $
                  1,0652010
                  
                  
                  1,7562011
                  
                  
                  6762012
                  
                  
                  4882013
                  
                  
                  419Thereafter
                  
                  
                  2,896Total
      future minimum lease payments
                  
                  $
                  7,300




Real
estate taxes, insurance and maintenance are also obligations of the Company.
Rental expense under non-cancelable operating leases amounted to $0.6 million
and $1.3 million for the three and six months ended April 3, 2009, respectively,
and to $0.6 million and $1.2 million for the corresponding periods of fiscal
year 2008. Assets subject to capital leases at April 3, 2009 and October 3, 2008
were not material.




- 23
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




Restricted cash:The Company
has restricted cash of $1.1 million and $0.8 million as of April 3, 2009 and
October 3, 2008, respectively, consisting primarily of bank guarantees from
customer advance payments to the Company’s international subsidiaries. The bank
guarantees become unrestricted cash when performance under the sales contract is
complete.





Purchase commitments:As of
April 3, 2009, the Company had the following known purchase commitments,
which include primarily future purchases for inventory-related items under
various purchase arrangements as well as other obligations in the ordinary
course of business that the Company cannot cancel or where it would be required
to pay a termination fee in the event of cancellation:





Fiscal
      Year
                
                Purchase
      Contracts2009
      (remaining six months)
                
                $
                23,7852010
                
                
                5,1072011
                
                
                2332012
                
                
                202013
                
                
                -Total
      purchase commitments
                
                $
                29,145





Contingent Earnout Consideration:Under the terms of the purchase agreement for the acquisition of Malibu
Research, Inc. (Malibu) in August 2007, in addition to the $20.5 million of net
cash consideration paid for the acquisition, the Company may be required to pay
a potential earnout to the former stockholders of Malibu of up to $14.0 million,
which is primarily contingent upon the achievement of certain financial
objectives over the three years following the acquisition (“Financial Earnout”)
and a discretionary earnout of up to $1.0 million contingent upon achievement of
certain succession planning goals by June 30, 2010. As of April 3, 2009, the
Company has not accrued any of these contingent earnout amounts as achievement
of the objectives and goals has not occurred. Any earnout consideration paid
based on financial performance will be recorded as additional goodwill. Any
discretionary succession earnout consideration paid will be recorded as general
and administrative expense. No earnout was earned for the first
earnout period, and the maximum potential Financial Earnout that could be
earned over the three years following the acquisition has been reduced from
$14.0 million to $12.3 million based on the performance in the first earnout
period.





Indemnification:As permitted
under Delaware law, the Company has agreements whereby the Company indemnifies
its officers, directors and certain employees for certain events or occurrences
while the employee, officer or director is, or was serving, at the Company’s
request in such capacity. The term of the indemnification period is for the
officer’s or director’s lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has Director and Officer insurance
policies that limit its exposure and may enable it to recover a portion of any
future amounts paid.




- 24
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




The
Company has entered into other standard indemnification agreements in its
ordinary course of business. Pursuant to these agreements, the Company agrees to
indemnify, defend, hold harmless and to reimburse the indemnified party for
losses suffered or incurred by the indemnified party, generally the Company’s
business partners or customers, in connection with any patent, copyright or
other intellectual property infringement claim by any third-party with respect
to the Company's products. The term of these indemnification agreements is
generally perpetual after execution of the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. Management believes that the likelihood
of loss under these agreements is remote.





Employment Agreements: The
Company has entered into employment agreements with certain members of the
executive management, which include provisions for the continued payment of
salary, benefits and a pro-rata portion of an annual bonus for periods ranging
from 12 months to 30 months upon employment termination.




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 financial position if unfavorably resolved.




During
the first quarter of fiscal year 2009, the Company received a notice from a
customer purporting to terminate a sales contract due to alleged nonperformance.
The Company plans to contest this matter vigorously. The Company recorded
certain costs in the fourth quarter of fiscal year 2008 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 or whether an
unfavorable resolution of this matter would have a material adverse effect on
the Company's results of operations and cash flows.






8.
            Stock-based
      Compensation Plans




As of
April 3, 2009, the Company had an aggregate of 1.7 million shares of its common
stock available for future grant and approximately 3.4 million options
outstanding under its various equity plans. Awards are subject to terms and
conditions as determined by the Company’s board of directors.





Stock Options:The following
table summarizes stock option activity as of April 3, 2009 and changes during
the six months ended April 3, 2009 under the Company’s stock option
plans:




Outstanding Options
                        
                        
                        Exercisable OptionsNumber of Shares
                        
                        
                        Weighted-Average Exercise
    Price
                        
                        
                        Weighted-Average Remaining Contractual Term
      (Years)
                        
                        
                        Aggregate Intrinsic Value
                        
                        
                        Number of Shares
                        
                        
                        Weighted-Average Exercise
    Price
                        
                        
                        Weighted-Average Remaining Contractual Term
      (Years)
                        
                        
                        Aggregate Intrinsic ValueBalance
      at October 3, 2008
                        
                        
                        3,349,294
                        
                        
                        $
                        6.23
                        
                        
                        
                        5.77
                        
                        
                        $
                        24,363
                        
                        
                        
                        2,556,762
                        
                        
                        $
                        3.83
                        
                        
                        
                        5.16
                        
                        
                        $
                        23,052Granted
                        
                        
                        108,000
                        
                        
                        
                        10.00Exercised
                        
                        
                        (8,334
                        )
                        
                        
                        4.32Forfeited
      or cancelled
                        
                        
                        (6,399
                        )
                        
                        
                        16.13Balance
      at April 3, 2009
                        
                        
                        3,442,561
                        
                        
                        $
                        6.33
                        
                        
                        
                        5.40
                        
                        
                        $
                        16,253
                        
                        
                        
                        2,819,582
                        
                        
                        $
                        4.34
                        
                        
                        
                        4.82
                        
                        
                        $
                        16,223
   - 25
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




During
the first quarter of fiscal year 2009, the Company granted its officers 108,000
shares of stock options that are subject to time vesting and market performance
vesting conditions. All of such shares are broken up into two tranches
(each a "Tranche"), each consisting of one-half of the nonvested shares. The
nonvested shares in each Tranche become fully vested only if both the time
vesting conditions and the performance conditions are satisfied with respect to
such nonvested shares. The time vesting conditions with respect to 25% of
the nonvested shares in each Tranche generally will be satisfied on each of the
first four anniversaries of the grant date. The market performance
conditions of each Tranche are based on specified price thresholds reached by
the Company's common stock. The nonvested shares in Tranche One are subject
to a $13.50 stock price threshold, and the nonvested shares in Tranche Two are
subject to a $16.00 stock price threshold. In order for the market performance
conditions to be satisfied with respect to a Tranche, the average closing share
price of the Company's common stock must be at or above the applicable stock
price threshold amount for 20 consecutive trading days. The stock options have a
term of 10 years at the grant date.





The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $9.50 as of April 3, 2009,
which would have been received by the option holders had all option holders
exercised their options and sold the shares received upon such exercises as of
that date. As of April 3, 2009, approximately 2.6 million exercisable options
were in-the-money.





During
the three and six months ended April 3, 2009, cash received from option
exercises was approximately $29,411 and $36,003, respectively, and the total
intrinsic value of options exercised was $20,896 and $27,900, respectively.
There were no options exercised during the three and six months ended March 28,
2008. As of April 3, 2009, there was approximately $3.7 million of total
unrecognized compensation costs related to nonvested stock options, which is
expected to be recognized over a weighted-average vesting period of 1.6
years.





Stock Purchase
Plan:Employees purchased 22,481 shares for $0.2 million and
70,851 shares for $0.6 million in the three and six months ended April 3, 2009,
respectively, under the 2006 Employee Stock Purchase Plan (the “2006 ESPP”). As
of April 3, 2009, there were no unrecognized compensation costs related to
rights to acquire stock under the 2006 ESPP.





Restricted Stock and Restricted Stock
Units:There were 223,498 and 117,154 shares outstanding of nonvested
restricted stock and restricted stock units granted to directors and employees
as of April 3, 2009 and October 3, 2008, respectively. The restricted stock and
restricted stock units generally vest over periods of one to four years. Upon
vesting, each restricted stock unit will automatically convert into one share of
common stock of CPI International.




- 26
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




A summary
of the status of the Company’s nonvested restricted stock and restricted stock
unit awards as of April 3, 2009 and October 3, 2008 and of changes during the
six months then ended is presented below:




Number of Shares
                    
                    
                    Weighted-Average Grant-Date Fair Value Per
      ShareNonvested
      at October 3, 2008
                    
                    
                    117,154
                    
                    
                    $
                    15.28Granted
                    
                    
                    142,721
                    
                    
                    
                    8.87Vested
                    
                    
                    (36,377
                    )
                    
                    
                    14.81Forfeited
                    
                    
                    -
                    
                    
                    
                    -Nonvested
      at April 3, 2009
                    
                    
                    223,498
                    
                    
                    $
                    11.26


During
the first quarter of fiscal year 2009, the Company granted its officers and
certain other employees, respectively, 36,000 and 102,900 shares of restricted
stock or restricted stock units. The restricted stock and restricted stock units
granted to the Company’s officers are subject to time vesting and market
performance vesting conditions similar to those applicable to the stock option
grants described above, except the time vesting conditions with respect to 25%
of the nonvested shares will be satisfied on the third trading day
following the Company's issuance of its press release reporting first quarter
financial results in each of 2010, 2011, 2012 and 2013, but no later than the
end of February in each year. The restricted stock and restricted stock
units granted to certain other employees of the Company are only subject to time
vesting similar to that applicable to restricted stock and restricted stock
units granted to the Company’s officers.





During
the second quarter of fiscal year 2009, the Company granted a member of its
board of directors 3,821 shares of restricted stock which will vest after one
year.





Aggregate
intrinsic value of the nonvested restricted stock and restricted stock unit
awards at April 3, 2009 was $2.1 million. As of April 3, 2009, there was $2.3
million of unrecognized compensation costs related to restricted stock and
restricted stock unit awards. The unrecognized compensation cost is expected to
be recognized over a weighted average period
of 2.0 years.





The
Company settles stock option exercises, restricted stock awards and restricted
stock units with newly issued common shares.







Valuation
and Expense Information




The fair
value of the Company’s time-based option awards is estimated on the date of
grant using the Black-Scholes model. The fair value of each market
performance-based (or combination of market performance- and time-based) option,
restricted stock and restricted stock unit award is estimated on the date of
grant using the Monte Carlo simulation technique in a risk-neutral
framework.




- 27
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




The
Black-Scholes and the Monte Carlo simulation valuation models were developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable and requires the input of subjective
assumptions, including the expected stock price volatility and estimated option
life. The Company currently does not intend to pay dividends and, accordingly,
no dividends have been assumed in its Black-Scholes calculation and Monte Carlo
simulation. Since the Company’s common stock has not been publicly traded for a
sufficient time period, the expected volatility used in prior periods was based
on expected volatilities of similar companies that have a longer history of
being publicly traded. Beginning with fiscal year 2009, the expected volatility
is based on a blend of expected volatilities of similar companies and that of
the Company based on its available historical data. The risk-free rates are
based on the U.S. Treasury yield in effect at the time of the grant. Since the
Company’s historical data is limited, the expected term of time-based options
granted is based on the simplified method for plain vanilla options in
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 107. In December 2007, the SEC issued SAB No. 110, an
amendment of SAB No. 107. SAB No. 110 states that the Staff will continue to
accept, under certain circumstances, the continued use of the simplified method
beyond December 31, 2007. Accordingly, the Company will continue to use the
simplified method until it has enough historical experience to provide a
reasonable estimate of expected term.





Assumptions
used in the Black-Scholes model to estimate the fair value of time-based option
grants during the six months ended March 28, 2008 (specifically, in the first
quarter of fiscal year 2008) are presented below.


Expected
      term (in years)
                        
                        
                        6.25Expected
      volatility
                        
                        
                        41.20
                        %Risk-free
      rate
                        
                        
                        3.82
                        %Dividend
      yield
                        
                        
                        0
                        %


There
were no time-based options granted during the three and six months ended April
3, 2009, nor during the three months ended March 28, 2008.





Assumptions
used in the Monte Carlo simulation model to estimate the fair value of time- and
market performance-based options first granted during the six months ended April
3, 2009 (specifically, in the first quarter of fiscal year 2009) are presented
below.





Contractual
      term (in years)
                    
                    
                    10.00Expected
      volatility
                    
                    
                    51.50
                    %Risk-free
      rate
                    
                    
                    3.53
                    %Dividend
      yield
                    
                    
                    0
                    %


There
were no time- and market performance-based options granted during the three
months ended April 3, 2009.





The
weighted-average grant-date fair value of all the options granted during the six
months ended April 3, 2009 and March 28, 2008 was $5.61 and $7.83 per share,
respectively.




- 28
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




Based on
the 15% discount received by the employees, the weighted-average fair value of
shares issued under the 2006 ESPP was $1.43 and $1.50 per share during the three
and six months ended April 3, 2009, respectively, and $2.67 and $2.76 per share
during the three and six months ended March 28, 2008, respectively.





Assumptions
used in the Monte Carlo simulation model to estimate the fair value of time- and
market performance-based restricted stock and restricted stock units first
granted during the six months ended April 3, 2009 (specifically, in the first
quarter of fiscal year 2009) are presented below.





Expected
      volatility
                      
                      
                      51.50
                      %Risk-free
      rate
                      
                      
                      3.54
                      %Dividend
      yield
                      
                      
                      0
                      %






There
were no time- and market performance-based restricted stock and restricted stock
units granted during the three months ended April 3, 2009.





The fair
value of each time-based restricted stock and restricted stock unit award is
calculated using the market price of the Company’s common stock on the date of
grant.





The
weighted-average estimated fair value of all restricted stock and restricted
stock units granted was $7.85 and $8.87 per share during the three and six
months ended April 3, 2009, respectively, and $10.98 and $15.22 per share during
the three and six months ended March 28, 2008, respectively.





As
stock-based compensation expense recognized in the condensed consolidated
statements of operations and comprehensive income for the three and six months
ended April 3, 2009 and for the corresponding periods of fiscal year 2008 is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.




- 29
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




The
following table summarizes stock-based compensation expense for the three and
six months ended April 3, 2009 and March 28, 2008, which was allocated as
follows:





Three Months Ended
                                    
                                    
                                    Six Months EndedApril 3,
                                      2009
                                    
                                    
                                    March 28,
                                      2008
                                    
                                    
                                    April 3,
                                      2009
                                    
                                    
                                    March 28,
                                      2008Share-based
      compensation cost recognized in the income
      statement by caption:Cost
      of sales
                                    
                                    $
                                    127
                                    
                                    
                                    $
                                    111
                                    
                                    
                                    $
                                    244
                                    
                                    
                                    $
                                    191Research
      and development
                                    
                                    
                                    45
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    87
                                    
                                    
                                    
                                    69Selling
      and marketing
                                    
                                    
                                    73
                                    
                                    
                                    
                                    59
                                    
                                    
                                    
                                    141
                                    
                                    
                                    
                                    104General
      and administrative
                                    
                                    
                                    456
                                    
                                    
                                    
                                    342
                                    
                                    
                                    
                                    850
                                    
                                    
                                    
                                    610$
                                    701
                                    
                                    
                                    $
                                    550
                                    
                                    
                                    $
                                    1,322
                                    
                                    
                                    $
                                    974Share-based
      compensation cost capitalized in inventory
                                    
                                    $
                                    129
                                    
                                    
                                    $
                                    119
                                    
                                    
                                    $
                                    253
                                    
                                    
                                    $
                                    215Share-based
      compensation cost remaining in
      inventoryat end of
      period
                                    
                                    $
                                    85
                                    
                                    
                                    $
                                    72
                                    
                                    
                                    $
                                    85
                                    
                                    
                                    $
                                    72Share-based
      compensation expense by type of award:Stock
      options
                                    
                                    $
                                    454
                                    
                                    
                                    $
                                    395
                                    
                                    
                                    $
                                    872
                                    
                                    
                                    $
                                    732Stock
      purchase plan
                                    
                                    
                                    31
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    66
                                    
                                    
                                    
                                    75Restricted
      stock and units
                                    
                                    
                                    216
                                    
                                    
                                    
                                    117
                                    
                                    
                                    
                                    384
                                    
                                    
                                    
                                    167$
                                    701
                                    
                                    
                                    $
                                    550
                                    
                                    
                                    $
                                    1,322
                                    
                                    
                                    $
                                    974


The tax
benefit realized from option exercises and restricted stock vesting totaled
approximately $29,000 and $88,000 during the three and six months ended April 3,
2009, respectively. The tax benefit realized from option exercises and
restricted stock vesting totaled approximately $19,000 during the three and six
months ended March 28, 2008.






9.            
Income Taxes




The
income tax benefit of $5.2 million for the six months ended April 3, 2009 and
income tax expense of $4.1 million for the six months ended March 28, 2008
reflect estimated federal, foreign and state taxes. The effective tax rate for
the six months ended April 3, 2009 was a negative 85% and diverged from the
federal and state statutory rate primarily due to several significant discrete
tax benefits: (1) $5.1 million relating to adjustments to the FASB
Interpretation (“FIN”) No. 48 position for the outstanding audit by the Canada
Revenue Agency (“CRA”), (2) $0.7 million related to certain provisions of the
California Budget Act of 2008 signed on February 20, 2009, which will allow a
taxpayer to elect an alternative method to attribute taxable income to
California for tax years beginning on or after January 1, 2011, which resulted
in a reduction to the Company’s deferred tax liability accounts and (3) $0.9
million for adjustments to Canadian deferred tax accounts.




The
effective tax rate for the six months ended March 28, 2008 was 32%. Income tax
expense for the six months ended March 28, 2008 included a discrete tax benefit
of approximately $0.4 million that was attributable to the fourth quarter of
fiscal year 2007 relating to the correction of an immaterial error in the
computation of the warranty expense tax deduction.




- 30
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




On
December 15, 2008, the Treasury Department announced that the Fifth Protocol
("Protocol") to the U.S.-Canada Income Tax Treaty ("Treaty") entered into force.
The new treaty mandates arbitration for the resolution of double taxation
disputes that are not settled through the competent authority process. As a
result, the Company’s US tax position related to the issues raised in the
outstanding tax audit by the CRA has become more favorable, and the Company
recorded income tax benefits of $5.1 million in the first quarter of fiscal year
2009. This tax benefit was recorded through a $3.0 million reduction of Canadian
tax contingency reserves, inclusive of interest, and the recognition of a $2.8
million income tax receivable in the U.S., partially offset by a $0.7 million
increase in related deferred tax liabilities.




The $0.9
million adjustment to Canadian deferred tax accounts includes a $0.6 million tax
benefit to reflect the reduction to Canadian corporate income tax rates and a
$0.3 million tax benefit to correct the computation of certain deferred tax
accounts. The $0.6 million adjustment should have been recorded in the first
quarter of fiscal year 2008 rather than in the first quarter of fiscal year 2009
and the $0.3 million adjustment should have been recorded in several prior
year’s financial results. These adjustments are deemed immaterial to the
Company’s results of operations and financial condition in current periods as
well as prior affected periods.




The
Company is subject to U.S. federal, state and foreign income and franchise tax
in various jurisdictions. Generally, fiscal years 2004 to 2007 remain open to
examination by the various taxing jurisdictions and the Company has not been
audited for U.S. federal income tax matters. The Company has income tax audits
in progress in Canada and in several states, local and international
jurisdictions in which it operates. The years under examination by the Canadian
taxing authorities are 2001 to 2002. The years under examination by other taxing
authorities vary, with the earliest year being 2004.




The
Company accounts for uncertainty in income taxes in accordance with FIN No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109.” As a result, the Company applies a more-likely-than-not
recognition threshold for all income tax uncertainties. FIN No. 48 only allows
the recognition of those tax benefits that have a greater than 50% likelihood of
being sustained upon examination by the taxing authorities. The total
unrecognized tax benefit, which excludes any related interest accruals, was $3.2
million as of April 3, 2009. Of the total unrecognized tax benefit balance, $2.1
million of unrecognized tax benefits would reduce the effective tax rate if
recognized as of April 3, 2009. Estimated interest and penalties related to the
underpayment of income taxes are classified as a component of tax expense in the
condensed consolidated statement of operations and comprehensive income and
totaled to a benefit of approximately $1.2 million for the six months ended
April 3, 2009, primarily as a result of the favorable impact of the new
U.S.-Canada income tax treaty on the Company’s tax contingency reserves. Accrued
interest and penalties, net of interest benefits accrued on receivables
anticipated as a result of the change in the U.S.-Canada treaty, were
approximately $0.4 million as of April 3, 2009. The Company had minimal
penalties accrued in income tax expense.




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 and statutes expire.






- 31
-
 Table of Contents
 
  CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




10.          Earnings
Per Share




Basic
earnings per share are computed using the weighted-average number of common
shares outstanding during the period excluding outstanding nonvested restricted
shares subject to forfeiture. Diluted earnings per share are computed using the
weighted-average number of common and dilutive potential common equivalent
shares outstanding during the period. Potential common equivalent shares consist
of common stock issuable upon exercise of stock options and nonvested restricted
shares using the treasury stock method.




The
following table is a reconciliation of the shares used to calculate basic and
diluted earnings per share (in thousands):




Three Months Ended
                            
                            
                            Six Months EndedApril 3,
                              2009
                            
                            
                            March 28,
                              2008
                            
                            
                            April 3,
                              2009
                            
                            
                            March 28,
                              2008Weighted
      average common shares outstanding -- Basic
                            
                            
                            16,317
                            
                            
                            
                            16,387
                            
                            
                            
                            16,293
                            
                            
                            
                            16,379Effect
      of dilutive stock options and nonvested restricted stock awards and
      units
                            
                            
                            1,002
                            
                            
                            
                            1,269
                            
                            
                            
                            1,060
                            
                            
                            
                            1,365Weighted
      average common shares outstanding -- Diluted
                            
                            
                            17,319
                            
                            
                            
                            17,656
                            
                            
                            
                            17,353
                            
                            
                            
                            17,744


The
calculation of diluted net income per share excludes all anti-dilutive shares.
For the three and six months ended April 3, 2009, the number of anti-dilutive
shares, as calculated based on the weighted average price of the Company’s
common stock for the periods, was approximately 1.1 million and 1.0 million
shares, respectively. For the three and six months ended March 28, 2008,
the number of anti-dilutive shares, as calculated based on the weighted average
price of the Company’s common stock for the periods, was approximately
0.9 million and 0.7 million shares, respectively.






11.           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
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 SFAS No. 131, Other
includes the activities of the Company’s Malibu division and unallocated
corporate expenses, such as business combination-related expenses, share-based
compensation expense and certain 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.




- 32
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




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





April
      3,
                                        
                                        
                                        March
      28,
                                        
                                        
                                        April
      3,
                                        
                                        
                                        March
      28,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Sales
      to external customersVED
                                        
                                        $
                                        62,069
                                        
                                        
                                        $
                                        73,744
                                        
                                        
                                        $
                                        117,697
                                        
                                        
                                        $
                                        137,734Satcom
      equipment
                                        
                                        
                                        16,174
                                        
                                        
                                        
                                        17,134
                                        
                                        
                                        
                                        33,625
                                        
                                        
                                        
                                        34,709Other
                                        
                                        
                                        3,660
                                        
                                        
                                        
                                        3,926
                                        
                                        
                                        
                                        7,727
                                        
                                        
                                        
                                        8,271$
                                        81,903
                                        
                                        
                                        $
                                        94,804
                                        
                                        
                                        $
                                        159,049
                                        
                                        
                                        $
                                        180,714Intersegment
      product transfersVED
                                        
                                        $
                                        4,422
                                        
                                        
                                        $
                                        7,287
                                        
                                        
                                        $
                                        9,787
                                        
                                        
                                        $
                                        13,148Satcom
      equipment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14
                                        
                                        
                                        
                                        9
                                        
                                        
                                        
                                        63$
                                        4,422
                                        
                                        
                                        $
                                        7,301
                                        
                                        
                                        $
                                        9,796
                                        
                                        
                                        $
                                        13,211Capital
      expendituresVED
                                        
                                        $
                                        629
                                        
                                        
                                        $
                                        502
                                        
                                        
                                        $
                                        1,494
                                        
                                        
                                        $
                                        1,344Satcom
      equipment
                                        
                                        
                                        4
                                        
                                        
                                        
                                        210
                                        
                                        
                                        
                                        15
                                        
                                        
                                        
                                        654Other
                                        
                                        
                                        281
                                        
                                        
                                        
                                        159
                                        
                                        
                                        
                                        309
                                        
                                        
                                        
                                        560$
                                        914
                                        
                                        
                                        $
                                        871
                                        
                                        
                                        $
                                        1,818
                                        
                                        
                                        $
                                        2,558EBITDAVED
                                        
                                        $
                                        11,850
                                        
                                        
                                        $
                                        18,647
                                        
                                        
                                        $
                                        22,201
                                        
                                        
                                        $
                                        32,287Satcom
      equipment
                                        
                                        
                                        682
                                        
                                        
                                        
                                        656
                                        
                                        
                                        
                                        2,045
                                        
                                        
                                        
                                        2,377Other
                                        
                                        
                                        (1,779
                                        )
                                        
                                        
                                        (3,460
                                        )
                                        
                                        
                                        (3,969
                                        )
                                        
                                        
                                        (6,899
                                        )$
                                        10,753
                                        
                                        
                                        $
                                        15,843
                                        
                                        
                                        $
                                        20,277
                                        
                                        
                                        $
                                        27,765


April
      3,
                    
                    
                    October
      3,2009
                    
                    
                    2008Total
      assetsVED
                    
                    $
                    327,541
                    
                    
                    $
                    324,483Satcom
      equipment
                    
                    
                    46,615
                    
                    
                    
                    48,219Other
                    
                    
                    89,600
                    
                    
                    
                    94,246$
                    463,756
                    
                    
                    $
                    466,948


EBITDA is
the measure used by the CODM to evaluate segment profit or loss. EBITDA
represents earnings before net interest expense, provision for income taxes and
depreciation and amortization. The Company believes that EBITDA is a more
meaningful representation of operating performance for leveraged businesses like
its own and therefore uses this metric as its primary measure of profitability.
For the reasons listed below, the Company believes EBITDA provides investors
better understanding of the Company’s 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;




- 33
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




•
            the
      Senior Credit Facilities contain a covenant that requires the Company to
      maintain a senior secured 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 Company’s 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.




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





The
following table reconciles net income to EBITDA:





Three Months Ended
                      
                      
                      Six Months EndedApril 3,
                        2009
                      
                      
                      March 28,
                        2008
                      
                      
                      April 3,
                        2009
                      
                      
                      March 28,
                        2008Net
      income
                      
                      $
                      3,689
                      
                      
                      $
                      6,154
                      
                      
                      $
                      11,344
                      
                      
                      $
                      8,664Depreciation
      and amortization
                      
                      
                      2,679
                      
                      
                      
                      2,742
                      
                      
                      
                      5,377
                      
                      
                      
                      5,392Interest
      expense, net
                      
                      
                      4,306
                      
                      
                      
                      4,805
                      
                      
                      
                      8,761
                      
                      
                      
                      9,617Income
      tax expense (benefit)
                      
                      
                      79
                      
                      
                      
                      2,142
                      
                      
                      
                      (5,205
                      )
                      
                      
                      4,092EBITDA
                      
                      $
                      10,753
                      
                      
                      $
                      15,843
                      
                      
                      $
                      20,277
                      
                      
                      $
                      27,765


Net
property, plant and equipment by geographic area were as follows:




April
      3,
                    
                    
                    October
      3,2009
                    
                    
                    2008United
      States
                    
                    $
                    46,984
                    
                    
                    $
                    48,593Canada
                    
                    
                    13,311
                    
                    
                    
                    13,843Other
                    
                    
                    51
                    
                    
                    
                    51$
                    60,346
                    
                    
                    $
                    62,487


With the
exception of goodwill, the Company does not identify or allocate assets by
operating segment, nor does its CODM evaluate operating segments using discrete
asset information.




- 34
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




Goodwill
by geographic area was as follows:




April
      3,
                    
                    
                    October
      3,2009
                    
                    
                    2008United
      States
                    
                    $
                    114,297
                    
                    
                    $
                    114,297Canada
                    
                    
                    47,996
                    
                    
                    
                    48,314$
                    162,293
                    
                    
                    $
                    162,611


Geographic
sales by customer location were as follows for external customers:




Three Months Ended
                    
                    
                    Six Months EndedApril 3,
                      2009
                    
                    
                    March 28,
                      2008
                    
                    
                    April 3,
                      2009
                    
                    
                    March 28,
                      2008United
      States
                    
                    $
                    54,495
                    
                    
                    $
                    62,206
                    
                    
                    $
                    103,591
                    
                    
                    $
                    116,729All
      foreign countries
                    
                    
                    27,408
                    
                    
                    
                    32,598
                    
                    
                    
                    55,458
                    
                    
                    
                    63,985Total
      sales
                    
                    $
                    81,903
                    
                    
                    $
                    94,804
                    
                    
                    $
                    159,049
                    
                    
                    $
                    180,714


There
were no individual foreign countries with sales greater than 10% of total sales
for the periods presented.





The U.S. Government is the only
customer that accounted for 10% or more of the Company’s consolidated sales in
the three and six months ended April 3, 2009 and in the corresponding periods of
fiscal year 2008. Direct sales to the U.S. Government were $14.6 million and
$25.8 million for the three and six months ended April 3, 2009, respectively,
and $16.1 million and $30.9 million for the three and six months ended March 28,
2008, respectively. Accounts receivable from this customer represented 14% and
17% of consolidated accounts receivable as of April 3, 2009 and October 3, 2008,
respectively.






- 35
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




12.           Supplemental
Guarantors Condensed Consolidating Financial Information
(Unaudited)




Issued on
January 23, 2004, CPI’s 8% Notes, the current balance of which is $122.0
million, are guaranteed by CPI International and all of CPI’s domestic
subsidiaries. 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) the Company’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 parent, CPI International, (b) the issuer, CPI, (c) the
guarantor subsidiaries (all of the domestic subsidiaries), (d) the non-guarantor
subsidiaries, (e) the consolidating elimination entries, and (f) the
consolidated totals. The accompanying consolidating financial information should
be read in connection with the condensed consolidated financial statements of
CPI International.




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.




- 36
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)


CONDENSED
CONSOLIDATING BALANCE SHEET


As
of April 3, 2009






Parent
                                
                                
                                Issuer
                                
                                
                                Guarantor
                                
                                
                                Non-Guarantor
                                
                                
                                Consolidating
                                
                                
                                Consolidated(CPI
      Int'l)
                                
                                
                                (CPI)
                                
                                
                                Subsidiaries
                                
                                
                                Subsidiaries
                                
                                
                                Eliminations
                                
                                
                                TotalAssetsCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                29
                                
                                
                                $
                                17,131
                                
                                
                                $
                                608
                                
                                
                                $
                                10,095
                                
                                
                                $
                                -
                                
                                
                                $
                                27,863Restricted
      cash
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                971
                                
                                
                                
                                130
                                
                                
                                
                                -
                                
                                
                                
                                1,101Accounts
      receivable, net
                                
                                
                                -
                                
                                
                                
                                19,145
                                
                                
                                
                                12,054
                                
                                
                                
                                10,683
                                
                                
                                
                                -
                                
                                
                                
                                41,882Inventories
                                
                                
                                -
                                
                                
                                
                                44,876
                                
                                
                                
                                7,458
                                
                                
                                
                                17,055
                                
                                
                                
                                (1,068
                                )
                                
                                
                                68,321Deferred
      tax assets
                                
                                
                                -
                                
                                
                                
                                12,326
                                
                                
                                
                                2
                                
                                
                                
                                818
                                
                                
                                
                                -
                                
                                
                                
                                13,146Intercompany
      receivable
                                
                                
                                -
                                
                                
                                
                                13,768
                                
                                
                                
                                4,514
                                
                                
                                
                                8,437
                                
                                
                                
                                (26,719
                                )
                                
                                
                                -Prepaid
      and other current assets
                                
                                
                                -
                                
                                
                                
                                2,680
                                
                                
                                
                                514
                                
                                
                                
                                614
                                
                                
                                
                                -
                                
                                
                                
                                3,808Total
      current assets
                                
                                
                                29
                                
                                
                                
                                109,926
                                
                                
                                
                                26,121
                                
                                
                                
                                47,832
                                
                                
                                
                                (27,787
                                )
                                
                                
                                156,121Property,
      plant and equipment, net
                                
                                
                                -
                                
                                
                                
                                44,028
                                
                                
                                
                                2,971
                                
                                
                                
                                13,347
                                
                                
                                
                                -
                                
                                
                                
                                60,346Deferred
      debt issue costs, net
                                
                                
                                368
                                
                                
                                
                                3,953
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                4,321Intangible
      assets, net
                                
                                
                                -
                                
                                
                                
                                55,795
                                
                                
                                
                                13,864
                                
                                
                                
                                7,365
                                
                                
                                
                                -
                                
                                
                                
                                77,024Goodwill
                                
                                
                                -
                                
                                
                                
                                93,375
                                
                                
                                
                                20,973
                                
                                
                                
                                47,945
                                
                                
                                
                                -
                                
                                
                                
                                162,293Other
      long-term assets
                                
                                
                                -
                                
                                
                                
                                3,271
                                
                                
                                
                                293
                                
                                
                                
                                87
                                
                                
                                
                                -
                                
                                
                                
                                3,651Intercompany
      notes receivable
                                
                                
                                -
                                
                                
                                
                                1,035
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (1,035
                                )
                                
                                
                                -Investment
      in subsidiaries
                                
                                
                                192,348
                                
                                
                                
                                107,451
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (299,799
                                )
                                
                                
                                -Total
      assets
                                
                                $
                                192,745
                                
                                
                                $
                                418,834
                                
                                
                                $
                                64,222
                                
                                
                                $
                                116,576
                                
                                
                                $
                                (328,621
                                )
                                
                                $
                                463,756Liabilities
      and stockholders' equityCurrent
      liabilities:Current
      portion of long-term debt
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Accounts
      payable
                                
                                
                                -
                                
                                
                                
                                11,944
                                
                                
                                
                                2,442
                                
                                
                                
                                6,679
                                
                                
                                
                                -
                                
                                
                                
                                21,065Accrued
      expenses
                                
                                
                                155
                                
                                
                                
                                17,277
                                
                                
                                
                                1,497
                                
                                
                                
                                2,995
                                
                                
                                
                                -
                                
                                
                                
                                21,924Product
      warranty
                                
                                
                                -
                                
                                
                                
                                1,913
                                
                                
                                
                                527
                                
                                
                                
                                1,541
                                
                                
                                
                                -
                                
                                
                                
                                3,981Income
      taxes payable
                                
                                
                                -
                                
                                
                                
                                1
                                
                                
                                
                                101
                                
                                
                                
                                3,510
                                
                                
                                
                                -
                                
                                
                                
                                3,612Advance
      payments from customers
                                
                                
                                -
                                
                                
                                
                                7,318
                                
                                
                                
                                3,346
                                
                                
                                
                                2,234
                                
                                
                                
                                -
                                
                                
                                
                                12,898Intercompany
      payable
                                
                                
                                26,719
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (26,719
                                )
                                
                                
                                -Total
      current liabilities
                                
                                
                                26,874
                                
                                
                                
                                38,453
                                
                                
                                
                                7,913
                                
                                
                                
                                16,959
                                
                                
                                
                                (26,719
                                )
                                
                                
                                63,480Deferred
      income taxes
                                
                                
                                -
                                
                                
                                
                                21,661
                                
                                
                                
                                -
                                
                                
                                
                                4,847
                                
                                
                                
                                -
                                
                                
                                
                                26,508Intercompany
      notes payable
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,035
                                
                                
                                
                                (1,035
                                )
                                
                                
                                -Long-term
      debt, less current portion
                                
                                
                                11,916
                                
                                
                                
                                206,000
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                217,916Other
      long-term liabilities
                                
                                
                                -
                                
                                
                                
                                1,449
                                
                                
                                
                                -
                                
                                
                                
                                448
                                
                                
                                
                                -
                                
                                
                                
                                1,897Total
      liabilities
                                
                                
                                38,790
                                
                                
                                
                                267,563
                                
                                
                                
                                7,913
                                
                                
                                
                                23,289
                                
                                
                                
                                (27,754
                                )
                                
                                
                                309,801Common
      stock
                                
                                
                                167
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                167Parent
      investment
                                
                                
                                -
                                
                                
                                
                                51,089
                                
                                
                                
                                43,167
                                
                                
                                
                                58,351
                                
                                
                                
                                (152,607
                                )
                                
                                
                                -Additional
      paid-in capital
                                
                                
                                73,824
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                73,824Accumulated
      other comprehensive loss
                                
                                
                                (5,071
                                )
                                
                                
                                (5,071
                                )
                                
                                
                                -
                                
                                
                                
                                (1,110
                                )
                                
                                
                                6,181
                                
                                
                                
                                (5,071
                                )Retained
      earnings
                                
                                
                                87,835
                                
                                
                                
                                105,253
                                
                                
                                
                                13,142
                                
                                
                                
                                36,046
                                
                                
                                
                                (154,441
                                )
                                
                                
                                87,835Treasury
      stock, at cost
                                
                                
                                (2,800
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2,800
                                )Total
      stockholders’ equity
                                
                                
                                153,955
                                
                                
                                
                                151,271
                                
                                
                                
                                56,309
                                
                                
                                
                                93,287
                                
                                
                                
                                (300,867
                                )
                                
                                
                                153,955Total
      liabilities and stockholders' equity
                                
                                $
                                192,745
                                
                                
                                $
                                418,834
                                
                                
                                $
                                64,222
                                
                                
                                $
                                116,576
                                
                                
                                $
                                (328,621
                                )
                                
                                $
                                463,756
   - 37
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)






CONDENSED
CONSOLIDATING BALANCE SHEET


As
of October 3, 2008






Parent
                          
                          
                          Issuer
                          
                          
                          Guarantor
                          
                          
                          Non-Guarantor
                          
                          
                          Consolidating
                          
                          
                          Consolidated(CPI
      Int'l)
                          
                          
                          (CPI)
                          
                          
                          Subsidiaries
                          
                          
                          Subsidiaries
                          
                          
                          Eliminations
                          
                          
                          TotalAssetsCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          84
                          
                          
                          $
                          26,272
                          
                          
                          $
                          493
                          
                          
                          $
                          1,821
                          
                          
                          $
                          -
                          
                          
                          $
                          28,670Restricted
      cash
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          629
                          
                          
                          
                          147
                          
                          
                          
                          -
                          
                          
                          
                          776Accounts
      receivable, net
                          
                          
                          -
                          
                          
                          
                          22,453
                          
                          
                          
                          12,353
                          
                          
                          
                          12,542
                          
                          
                          
                          -
                          
                          
                          
                          47,348Inventories
                          
                          
                          -
                          
                          
                          
                          42,066
                          
                          
                          
                          6,759
                          
                          
                          
                          17,653
                          
                          
                          
                          (990
                          )
                          
                          
                          65,488Deferred
      tax assets
                          
                          
                          -
                          
                          
                          
                          10,853
                          
                          
                          
                          2
                          
                          
                          
                          556
                          
                          
                          
                          -
                          
                          
                          
                          11,411Intercompany
      receivable
                          
                          
                          -
                          
                          
                          
                          8,523
                          
                          
                          
                          5,135
                          
                          
                          
                          13,454
                          
                          
                          
                          (27,112
                          )
                          
                          
                          -Prepaid
      and other current assets
                          
                          
                          -
                          
                          
                          
                          2,370
                          
                          
                          
                          632
                          
                          
                          
                          821
                          
                          
                          
                          -
                          
                          
                          
                          3,823Total
      current assets
                          
                          
                          84
                          
                          
                          
                          112,537
                          
                          
                          
                          26,003
                          
                          
                          
                          46,994
                          
                          
                          
                          (28,102
                          )
                          
                          
                          157,516Property,
      plant and equipment, net
                          
                          
                          -
                          
                          
                          
                          45,556
                          
                          
                          
                          3,047
                          
                          
                          
                          13,884
                          
                          
                          
                          -
                          
                          
                          
                          62,487Deferred
      debt issue costs, net
                          
                          
                          392
                          
                          
                          
                          4,602
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,994Intangible
      assets, net
                          
                          
                          -
                          
                          
                          
                          56,700
                          
                          
                          
                          14,168
                          
                          
                          
                          7,666
                          
                          
                          
                          -
                          
                          
                          
                          78,534Goodwill
                          
                          
                          -
                          
                          
                          
                          93,375
                          
                          
                          
                          20,973
                          
                          
                          
                          48,263
                          
                          
                          
                          -
                          
                          
                          
                          162,611Other
      long-term assets
                          
                          
                          -
                          
                          
                          
                          383
                          
                          
                          
                          287
                          
                          
                          
                          136
                          
                          
                          
                          -
                          
                          
                          
                          806Intercompany
      notes receivable
                          
                          
                          -
                          
                          
                          
                          1,035
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,035
                          )
                          
                          
                          -Investment
      in subsidiaries
                          
                          
                          182,869
                          
                          
                          
                          101,193
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (284,062
                          )
                          
                          
                          -Total
      assets
                          
                          $
                          183,345
                          
                          
                          $
                          415,381
                          
                          
                          $
                          64,478
                          
                          
                          $
                          116,943
                          
                          
                          $
                          (313,199
                          )
                          
                          $
                          466,948Liabilities
      and stockholders' equityCurrent
      liabilities:Current
      portion of long-term debt
                          
                          $
                          -
                          
                          
                          $
                          1,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          1,000Accounts
      payable
                          
                          
                          272
                          
                          
                          
                          10,893
                          
                          
                          
                          2,116
                          
                          
                          
                          7,828
                          
                          
                          
                          -
                          
                          
                          
                          21,109Accrued
      expenses
                          
                          
                          186
                          
                          
                          
                          14,905
                          
                          
                          
                          3,143
                          
                          
                          
                          4,810
                          
                          
                          
                          -
                          
                          
                          
                          23,044Product
      warranty
                          
                          
                          -
                          
                          
                          
                          2,002
                          
                          
                          
                          538
                          
                          
                          
                          1,619
                          
                          
                          
                          -
                          
                          
                          
                          4,159Income
      taxes payable
                          
                          
                          -
                          
                          
                          
                          1,280
                          
                          
                          
                          213
                          
                          
                          
                          6,273
                          
                          
                          
                          -
                          
                          
                          
                          7,766Advance
      payments from customers
                          
                          
                          -
                          
                          
                          
                          7,624
                          
                          
                          
                          3,132
                          
                          
                          
                          1,579
                          
                          
                          
                          -
                          
                          
                          
                          12,335Intercompany
      payable
                          
                          
                          27,112
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (27,112
                          )
                          
                          
                          -Total
      current liabilities
                          
                          
                          27,570
                          
                          
                          
                          37,704
                          
                          
                          
                          9,142
                          
                          
                          
                          22,109
                          
                          
                          
                          (27,112
                          )
                          
                          
                          69,413Deferred
      income taxes
                          
                          
                          -
                          
                          
                          
                          21,922
                          
                          
                          
                          -
                          
                          
                          
                          5,399
                          
                          
                          
                          -
                          
                          
                          
                          27,321Intercompany
      notes payable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,035
                          
                          
                          
                          (1,035
                          )
                          
                          
                          -Long-term
      debt, less current portion
                          
                          
                          11,910
                          
                          
                          
                          212,750
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          224,660Other
      long-term liabilities
                          
                          
                          -
                          
                          
                          
                          1,213
                          
                          
                          
                          -
                          
                          
                          
                          476
                          
                          
                          
                          -
                          
                          
                          
                          1,689Total
      liabilities
                          
                          
                          39,480
                          
                          
                          
                          273,589
                          
                          
                          
                          9,142
                          
                          
                          
                          29,019
                          
                          
                          
                          (28,147
                          )
                          
                          
                          323,083Common
      stock
                          
                          
                          165
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          165Parent
      investment
                          
                          
                          -
                          
                          
                          
                          50,020
                          
                          
                          
                          43,167
                          
                          
                          
                          58,114
                          
                          
                          
                          (151,301
                          )
                          
                          
                          -Additional
      paid-in capital
                          
                          
                          71,818
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          71,818Accumulated
      other comprehensive loss
                          
                          
                          (1,809
                          )
                          
                          
                          (1,809
                          )
                          
                          
                          -
                          
                          
                          
                          (283
                          )
                          
                          
                          2,092
                          
                          
                          
                          (1,809
                          )Retained
      earnings
                          
                          
                          76,491
                          
                          
                          
                          93,581
                          
                          
                          
                          12,169
                          
                          
                          
                          30,093
                          
                          
                          
                          (135,843
                          )
                          
                          
                          76,491Treasury
      stock, at cost
                          
                          
                          (2,800
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,800
                          )Total
      stockholders’ equity
                          
                          
                          143,865
                          
                          
                          
                          141,792
                          
                          
                          
                          55,336
                          
                          
                          
                          87,924
                          
                          
                          
                          (285,052
                          )
                          
                          
                          143,865Total
      liabilities and stockholders' equity
                          
                          $
                          183,345
                          
                          
                          $
                          415,381
                          
                          
                          $
                          64,478
                          
                          
                          $
                          116,943
                          
                          
                          $
                          (313,199
                          )
                          
                          $
                          466,948


- 38
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)


CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS


For
the Three Months Ended April 3, 2009





Parent
                              
                              
                              Issuer
                              
                              
                              Guarantor
                              
                              
                              Non-Guarantor
                              
                              
                              Consolidating
                              
                              
                              Consolidated(CPI
      Int'l)
                              
                              
                              (CPI)
                              
                              
                              Subsidiaries
                              
                              
                              Subsidiaries
                              
                              
                              Eliminations
                              
                              
                              TotalSales
                              
                              $
                              -
                              
                              
                              $
                              52,641
                              
                              
                              $
                              17,077
                              
                              
                              $
                              30,510
                              
                              
                              $
                              (18,325
                              )
                              
                              $
                              81,903Cost
      of sales
                              
                              
                              -
                              
                              
                              
                              39,798
                              
                              
                              
                              14,124
                              
                              
                              
                              24,538
                              
                              
                              
                              (18,323
                              )
                              
                              
                              60,137Gross
      profit
                              
                              
                              -
                              
                              
                              
                              12,843
                              
                              
                              
                              2,953
                              
                              
                              
                              5,972
                              
                              
                              
                              (2
                              )
                              
                              
                              21,766Operating
      costs and expenses:Research
      and development
                              
                              
                              -
                              
                              
                              
                              1,074
                              
                              
                              
                              3
                              
                              
                              
                              2,080
                              
                              
                              
                              -
                              
                              
                              
                              3,157Selling
      and marketing
                              
                              
                              -
                              
                              
                              
                              1,820
                              
                              
                              
                              988
                              
                              
                              
                              1,993
                              
                              
                              
                              -
                              
                              
                              
                              4,801General
      and administrative
                              
                              
                              -
                              
                              
                              
                              4,180
                              
                              
                              
                              1,131
                              
                              
                              
                              (115
                              )
                              
                              
                              -
                              
                              
                              
                              5,196Amortization
      of acquisition-related intangible assets
                              
                              
                              -
                              
                              
                              
                              390
                              
                              
                              
                              151
                              
                              
                              
                              150
                              
                              
                              
                              -
                              
                              
                              
                              691Net
      loss on disposition of assets
                              
                              
                              -
                              
                              
                              
                              41
                              
                              
                              
                              -
                              
                              
                              
                              3
                              
                              
                              
                              -
                              
                              
                              
                              44Total
      operating costs and expenses
                              
                              
                              -
                              
                              
                              
                              7,505
                              
                              
                              
                              2,273
                              
                              
                              
                              4,111
                              
                              
                              
                              -
                              
                              
                              
                              13,889Operating
      income
                              
                              
                              -
                              
                              
                              
                              5,338
                              
                              
                              
                              680
                              
                              
                              
                              1,861
                              
                              
                              
                              (2
                              )
                              
                              
                              7,877Interest
      expense (income), net
                              
                              
                              253
                              
                              
                              
                              4,045
                              
                              
                              
                              (3
                              )
                              
                              
                              11
                              
                              
                              
                              -
                              
                              
                              
                              4,306Gain
      on debt extinguishment
                              
                              
                              -
                              
                              
                              
                              (197
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (197
                              )(Loss)
      income before income tax expenseand
      equity in income of subsidiaries
                              
                              
                              (253
                              )
                              
                              
                              1,490
                              
                              
                              
                              683
                              
                              
                              
                              1,850
                              
                              
                              
                              (2
                              )
                              
                              
                              3,768Income
      tax (benefit) expense
                              
                              
                              (98
                              )
                              
                              
                              (251
                              )
                              
                              
                              271
                              
                              
                              
                              157
                              
                              
                              
                              -
                              
                              
                              
                              79Equity
      in income of subsidiaries
                              
                              
                              3,844
                              
                              
                              
                              2,103
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (5,947
                              )
                              
                              
                              -Net
      income
                              
                              $
                              3,689
                              
                              
                              $
                              3,844
                              
                              
                              $
                              412
                              
                              
                              $
                              1,693
                              
                              
                              $
                              (5,949
                              )
                              
                              $
                              3,689








CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS


For
the Three Months Ended March 28, 2008







Parent
                                  
                                  
                                  Issuer
                                  
                                  
                                  Guarantor
                                  
                                  
                                  Non-Guarantor
                                  
                                  
                                  Consolidating
                                  
                                  
                                  Consolidated(CPI
      Int'l)
                                  
                                  
                                  (CPI)
                                  
                                  
                                  Subsidiaries
                                  
                                  
                                  Subsidiaries
                                  
                                  
                                  Eliminations
                                  
                                  
                                  TotalSales
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  60,336
                                  
                                  
                                  $
                                  21,125
                                  
                                  
                                  $
                                  34,490
                                  
                                  
                                  $
                                  (21,147
                                  )
                                  
                                  $
                                  94,804Cost
      of sales
                                  
                                  
                                  -
                                  
                                  
                                  
                                  42,877
                                  
                                  
                                  
                                  17,891
                                  
                                  
                                  
                                  27,079
                                  
                                  
                                  
                                  (21,109
                                  )
                                  
                                  
                                  66,738Gross
      profit
                                  
                                  
                                  -
                                  
                                  
                                  
                                  17,459
                                  
                                  
                                  
                                  3,234
                                  
                                  
                                  
                                  7,411
                                  
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  28,066Operating
      costs and expenses:Research
      and development
                                  
                                  
                                  -
                                  
                                  
                                  
                                  729
                                  
                                  
                                  
                                  272
                                  
                                  
                                  
                                  1,929
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,930Selling
      and marketing
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,070
                                  
                                  
                                  
                                  1,175
                                  
                                  
                                  
                                  2,083
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,328General
      and administrative
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3,817
                                  
                                  
                                  
                                  1,018
                                  
                                  
                                  
                                  657
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,492Amortization
      of acquisition-related intangible
      assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  100
                                  
                                  
                                  
                                  531
                                  
                                  
                                  
                                  150
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  781Net
      loss on disposition of assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  22
                                  
                                  
                                  
                                  10
                                  
                                  
                                  
                                  9
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  41Total
      operating costs and expenses
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,738
                                  
                                  
                                  
                                  3,006
                                  
                                  
                                  
                                  4,828
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  14,572Operating
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  10,721
                                  
                                  
                                  
                                  228
                                  
                                  
                                  
                                  2,583
                                  
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  13,494Interest
      expense (income), net
                                  
                                  
                                  512
                                  
                                  
                                  
                                  4,314
                                  
                                  
                                  
                                  (17
                                  )
                                  
                                  
                                  (4
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,805Loss
      on debt extinguishment
                                  
                                  
                                  393
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  393(Loss)
      income before income tax expenseand
      equity in income of subsidiaries
                                  
                                  
                                  (905
                                  )
                                  
                                  
                                  6,407
                                  
                                  
                                  
                                  245
                                  
                                  
                                  
                                  2,587
                                  
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  8,296Income
      tax (benefit) expense
                                  
                                  
                                  (344
                                  )
                                  
                                  
                                  2,741
                                  
                                  
                                  
                                  (135
                                  )
                                  
                                  
                                  (120
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,142Equity
      in income of subsidiaries
                                  
                                  
                                  6,715
                                  
                                  
                                  
                                  3,049
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (9,764
                                  )
                                  
                                  
                                  -Net
      income
                                  
                                  $
                                  6,154
                                  
                                  
                                  $
                                  6,715
                                  
                                  
                                  $
                                  380
                                  
                                  
                                  $
                                  2,707
                                  
                                  
                                  $
                                  (9,802
                                  )
                                  
                                  $
                                  6,154
   - 39
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)




CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS


For
the Six Months Ended April 3, 2009







Parent
                              
                              
                              Issuer
                              
                              
                              Guarantor
                              
                              
                              Non-Guarantor
                              
                              
                              Consolidating
                              
                              
                              Consolidated(CPI
      Int'l)
                              
                              
                              (CPI)
                              
                              
                              Subsidiaries
                              
                              
                              Subsidiaries
                              
                              
                              Eliminations
                              
                              
                              TotalSales
                              
                              $
                              -
                              
                              
                              $
                              98,856
                              
                              
                              $
                              36,784
                              
                              
                              $
                              62,233
                              
                              
                              $
                              (38,824
                              )
                              
                              $
                              159,049Cost
      of sales
                              
                              
                              -
                              
                              
                              
                              76,065
                              
                              
                              
                              30,737
                              
                              
                              
                              49,311
                              
                              
                              
                              (38,746
                              )
                              
                              
                              117,367Gross
      profit
                              
                              
                              -
                              
                              
                              
                              22,791
                              
                              
                              
                              6,047
                              
                              
                              
                              12,922
                              
                              
                              
                              (78
                              )
                              
                              
                              41,682Operating
      costs and expenses:Research
      and development
                              
                              
                              -
                              
                              
                              
                              1,758
                              
                              
                              
                              3
                              
                              
                              
                              3,579
                              
                              
                              
                              -
                              
                              
                              
                              5,340Selling
      and marketing
                              
                              
                              -
                              
                              
                              
                              3,562
                              
                              
                              
                              2,235
                              
                              
                              
                              3,993
                              
                              
                              
                              -
                              
                              
                              
                              9,790General
      and administrative
                              
                              
                              -
                              
                              
                              
                              7,894
                              
                              
                              
                              2,154
                              
                              
                              
                              352
                              
                              
                              
                              -
                              
                              
                              
                              10,400Amortization
      of acquisition-related intangible assets
                              
                              
                              -
                              
                              
                              
                              780
                              
                              
                              
                              304
                              
                              
                              
                              301
                              
                              
                              
                              -
                              
                              
                              
                              1,385Net
      loss on disposition of assets
                              
                              
                              -
                              
                              
                              
                              57
                              
                              
                              
                              -
                              
                              
                              
                              7
                              
                              
                              
                              -
                              
                              
                              
                              64Total
      operating costs and expenses
                              
                              
                              -
                              
                              
                              
                              14,051
                              
                              
                              
                              4,696
                              
                              
                              
                              8,232
                              
                              
                              
                              -
                              
                              
                              
                              26,979Operating
      income
                              
                              
                              -
                              
                              
                              
                              8,740
                              
                              
                              
                              1,351
                              
                              
                              
                              4,690
                              
                              
                              
                              (78
                              )
                              
                              
                              14,703Interest
      expense (income), net
                              
                              
                              531
                              
                              
                              
                              8,198
                              
                              
                              
                              (8
                              )
                              
                              
                              40
                              
                              
                              
                              -
                              
                              
                              
                              8,761Gain
      on debt extinguishment
                              
                              
                              -
                              
                              
                              
                              (197
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (197
                              )(Loss)
      income before income tax expenseand
      equity in income of subsidiaries
                              
                              
                              (531
                              )
                              
                              
                              739
                              
                              
                              
                              1,359
                              
                              
                              
                              4,650
                              
                              
                              
                              (78
                              )
                              
                              
                              6,139Income
      tax (benefit) expense
                              
                              
                              (203
                              )
                              
                              
                              (4,085
                              )
                              
                              
                              386
                              
                              
                              
                              (1,303
                              )
                              
                              
                              -
                              
                              
                              
                              (5,205
                              )Equity
      in income of subsidiaries
                              
                              
                              11,672
                              
                              
                              
                              6,848
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (18,520
                              )
                              
                              
                              -Net
      income
                              
                              $
                              11,344
                              
                              
                              $
                              11,672
                              
                              
                              $
                              973
                              
                              
                              $
                              5,953
                              
                              
                              $
                              (18,598
                              )
                              
                              $
                              11,344








CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS


For
the Six Months Ended March 28, 2008






Parent
                                
                                
                                Issuer
                                
                                
                                Guarantor
                                
                                
                                Non-Guarantor
                                
                                
                                Consolidating
                                
                                
                                Consolidated(CPI
      Int'l)
                                
                                
                                (CPI)
                                
                                
                                Subsidiaries
                                
                                
                                Subsidiaries
                                
                                
                                Eliminations
                                
                                
                                TotalSales
                                
                                $
                                -
                                
                                
                                $
                                110,098
                                
                                
                                $
                                40,951
                                
                                
                                $
                                69,328
                                
                                
                                $
                                (39,663
                                )
                                
                                $
                                180,714Cost
      of sales
                                
                                
                                -
                                
                                
                                
                                80,308
                                
                                
                                
                                34,476
                                
                                
                                
                                53,306
                                
                                
                                
                                (39,578
                                )
                                
                                
                                128,512Gross
      profit
                                
                                
                                -
                                
                                
                                
                                29,790
                                
                                
                                
                                6,475
                                
                                
                                
                                16,022
                                
                                
                                
                                (85
                                )
                                
                                
                                52,202Operating
      costs and expenses:Research
      and development
                                
                                
                                -
                                
                                
                                
                                1,621
                                
                                
                                
                                421
                                
                                
                                
                                3,612
                                
                                
                                
                                -
                                
                                
                                
                                5,654Selling
      and marketing
                                
                                
                                -
                                
                                
                                
                                3,993
                                
                                
                                
                                2,187
                                
                                
                                
                                4,320
                                
                                
                                
                                -
                                
                                
                                
                                10,500General
      and administrative
                                
                                
                                -
                                
                                
                                
                                7,535
                                
                                
                                
                                2,088
                                
                                
                                
                                2,022
                                
                                
                                
                                -
                                
                                
                                
                                11,645Amortization
      of acquisition-related intangible assets
                                
                                
                                -
                                
                                
                                
                                668
                                
                                
                                
                                593
                                
                                
                                
                                301
                                
                                
                                
                                -
                                
                                
                                
                                1,562Net
      loss on disposition of assets
                                
                                
                                -
                                
                                
                                
                                44
                                
                                
                                
                                12
                                
                                
                                
                                19
                                
                                
                                
                                -
                                
                                
                                
                                75Total
      operating costs and expenses
                                
                                
                                -
                                
                                
                                
                                13,861
                                
                                
                                
                                5,301
                                
                                
                                
                                10,274
                                
                                
                                
                                -
                                
                                
                                
                                29,436Operating
      income
                                
                                
                                -
                                
                                
                                
                                15,929
                                
                                
                                
                                1,174
                                
                                
                                
                                5,748
                                
                                
                                
                                (85
                                )
                                
                                
                                22,766Interest
      expense (income), net
                                
                                
                                1,057
                                
                                
                                
                                8,599
                                
                                
                                
                                (37
                                )
                                
                                
                                (2
                                )
                                
                                
                                -
                                
                                
                                
                                9,617Loss
      on debt extinguishment
                                
                                
                                393
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                393(Loss)
      income before income tax expenseand
      equity in income of subsidiaries
                                
                                
                                (1,450
                                )
                                
                                
                                7,330
                                
                                
                                
                                1,211
                                
                                
                                
                                5,750
                                
                                
                                
                                (85
                                )
                                
                                
                                12,756Income
      tax (benefit) expense
                                
                                
                                (551
                                )
                                
                                
                                3,482
                                
                                
                                
                                119
                                
                                
                                
                                1,042
                                
                                
                                
                                -
                                
                                
                                
                                4,092Equity
      in income of subsidiaries
                                
                                
                                9,563
                                
                                
                                
                                5,715
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (15,278
                                )
                                
                                
                                -Net
      income
                                
                                $
                                8,664
                                
                                
                                $
                                9,563
                                
                                
                                $
                                1,092
                                
                                
                                $
                                4,708
                                
                                
                                $
                                (15,363
                                )
                                
                                $
                                8,664
   - 40
-
 Table of Contents
 CPI
INTERNATIONAL, INC.
 and
Subsidiaries
  NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 (All
tabular dollar amounts in thousands except share and per share
amounts)
  CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS


For
the Six Months Ended April 3, 2009






Parent
                        
                        
                        Issuer
                        
                        
                        Guarantor
                        
                        
                        Non-Guarantor
                        
                        
                        Consolidating
                        
                        
                        Consolidated(CPI
      Int'l)
                        
                        
                        (CPI)
                        
                        
                        Subsidiaries
                        
                        
                        Subsidiaries
                        
                        
                        Eliminations
                        
                        
                        TotalCash
      flows from operating activitiesNet
      cash (used in) provided by operating activities
                        
                        $
                        (1,092
                        )
                        
                        $
                        8,429
                        
                        
                        $
                        227
                        
                        
                        $
                        301
                        
                        
                        $
                        -
                        
                        
                        $
                        7,865Cash
      flows from investing activitiesCapital
      expenditures
                        
                        
                        -
                        
                        
                        
                        (1,679
                        )
                        
                        
                        (112
                        )
                        
                        
                        (27
                        )
                        
                        
                        -
                        
                        
                        
                        (1,818
                        )Net
      cash used in investing activities
                        
                        
                        -
                        
                        
                        
                        (1,679
                        )
                        
                        
                        (112
                        )
                        
                        
                        (27
                        )
                        
                        
                        -
                        
                        
                        
                        (1,818
                        )Cash
      flows from financing activitiesRepayments
      of debt
                        
                        
                        -
                        
                        
                        
                        (7,495
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,495
                        )Proceeds
      from issuance of common stock to employees
                        
                        
                        605
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        605Proceeds
      from exercise of stock options
                        
                        
                        36
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        36Intercompany
      dividends
                        
                        
                        396
                        
                        
                        
                        (8,396
                        )
                        
                        
                        -
                        
                        
                        
                        8,000
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      cash provided by (used in) financing activities
                        
                        
                        1,037
                        
                        
                        
                        (15,891
                        )
                        
                        
                        -
                        
                        
                        
                        8,000
                        
                        
                        
                        -
                        
                        
                        
                        (6,854
                        )Net
      (decrease) increase in cash and cash equivalents
                        
                        
                        (55
                        )
                        
                        
                        (9,141
                        )
                        
                        
                        115
                        
                        
                        
                        8,274
                        
                        
                        
                        -
                        
                        
                        
                        (807
                        )Cash
      and cash equivalents at beginning of period
                        
                        
                        84
                        
                        
                        
                        26,272
                        
                        
                        
                        493
                        
                        
                        
                        1,821
                        
                        
                        
                        -
                        
                        
                        
                        28,670Cash
      and cash equivalents at end of period
                        
                        $
                        29
                        
                        
                        $
                        17,131
                        
                        
                        $
                        608
                        
                        
                        $
                        10,095
                        
                        
                        $
                        -
                        
                        
                        $
                        27,863







CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS


For
the Six Months Ended March 28, 2008






Parent
                          
                          
                          Issuer
                          
                          
                          Guarantor
                          
                          
                          Non-Guarantor
                          
                          
                          Consolidating
                          
                          
                          Consolidated(CPI
      Int'l)
                          
                          
                          (CPI)
                          
                          
                          Subsidiaries
                          
                          
                          Subsidiaries
                          
                          
                          Eliminations
                          
                          
                          TotalCash
      flows from operating activitiesNet
      cash (used in) provided by operating activities
                          
                          $
                          (1,812
                          )
                          
                          $
                          1,779
                          
                          
                          $
                          8,749
                          
                          
                          $
                          1,723
                          
                          
                          $
                          -
                          
                          
                          $
                          10,439Cash
      flows from investing activitiesCapital
      expenditures
                          
                          
                          -
                          
                          
                          
                          (1,941
                          )
                          
                          
                          (95
                          )
                          
                          
                          (522
                          )
                          
                          
                          -
                          
                          
                          
                          (2,558
                          )Proceeds
      from adjustment to acquisition purchase price
                          
                          
                          -
                          
                          
                          
                          1,615
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,615Payment
      of patent application fees
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (147
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (147
                          )Net
      cash used in investing activities
                          
                          
                          -
                          
                          
                          
                          (326
                          )
                          
                          
                          (242
                          )
                          
                          
                          (522
                          )
                          
                          
                          -
                          
                          
                          
                          (1,090
                          )Cash
      flows from financing activitiesRepayments
      of debt
                          
                          
                          (6,000
                          )
                          
                          
                          (4,000
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (10,000
                          )Proceeds
      from issuance of common stock to employees
                          
                          
                          418
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          418Intercompany
      dividends
                          
                          
                          6,200
                          
                          
                          
                          (6,200
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      cash provided by (used in) financing activities
                          
                          
                          618
                          
                          
                          
                          (10,200
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (9,582
                          )Net
      (decrease) increase in cash and cash equivalents
                          
                          
                          (1,194
                          )
                          
                          
                          (8,747
                          )
                          
                          
                          8,507
                          
                          
                          
                          1,201
                          
                          
                          
                          -
                          
                          
                          
                          (233
                          )Cash
      and cash equivalents at beginning of period
                          
                          
                          1,378
                          
                          
                          
                          16,518
                          
                          
                          
                          958
                          
                          
                          
                          1,620
                          
                          
                          
                          -
                          
                          
                          
                          20,474Cash
      and cash equivalents at end of period
                          
                          $
                          184
                          
                          
                          $
                          7,771
                          
                          
                          $
                          9,465
                          
                          
                          $
                          2,821
                          
                          
                          $
                          -
                          
                          
                          $
                          20,241


- 41
-
 Table of Contents




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




Our
fiscal years are the 52- or 53-week periods that end on the Friday nearest
September 30. Fiscal year 2009 comprises the 52-week period ending October 2,
2009, and fiscal year 2008 comprised the 53-week period ended October 3, 2008.
The second quarters of fiscal years 2009 and 2008 both include 13 weeks. The
first two quarters of fiscal years 2009 and 2008 both include 26 weeks. The
following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements, and the notes thereto, of
CPI International, Inc.






Overview




CPI
International, Inc., headquartered in Palo Alto, California, is the parent
company of Communications & Power Industries, a provider of microwave, radio
frequency, power and control solutions for critical defense, communications,
medical, scientific and other applications. Communications & Power
Industries develops, manufactures and distributes products used to generate,
amplify and transmit high-power/high-frequency microwave and radio frequency
signals and/or provide power and control for various applications. End-use
applications of these systems include the transmission of radar signals for
navigation and location; transmission of deception signals for electronic
countermeasures; transmission and amplification of voice, data and video signals
for broadcasting, Internet and other types of commercial and military
communications; providing power and control for medical diagnostic imaging; and
generating microwave energy for radiation therapy in the treatment of cancer and
for various industrial and scientific applications.




Unless
the context otherwise requires, “CPI International” means CPI International,
Inc., and “CPI” means Communications & Power Industries, Inc. CPI is a
direct subsidiary of CPI International. CPI International is a holding company
with no operations of its own. The terms “we,” “us,” “our” and the “Company”
refer to CPI International and its direct and indirect subsidiaries on a
consolidated basis.




Orders




We sell
our products into five end markets: 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.




- 42
-
 Table of Contents




Our
orders by market for the six months ended April 3, 2009 and March 28, 2008 are
summarized as follows (dollars in millions):





Six
      Months EndedApril
      3,2009
                              
                              
                              March
      28,2008
                              
                              
                              Increase(Decrease)%
      of
                              
                              
                              
                              
                              
                              %
      ofAmount
                              
                              
                              Orders
                              
                              
                              Amount
                              
                              
                              Orders
                              
                              
                              Amount
                              
                              
                              PercentRadar
      and Electronic Warfare
                              
                              $
                              75.6
                              
                              
                              
                              41
                              %
                              
                              $
                              66.7
                              
                              
                              
                              36
                              %
                              
                              $
                              8.9
                              
                              
                              
                              13
                              %Medical
                              
                              
                              39.7
                              
                              
                              
                              22
                              
                              
                              
                              36.7
                              
                              
                              
                              20
                              
                              
                              
                              3.0
                              
                              
                              
                              8Communications
                              
                              
                              54.8
                              
                              
                              
                              30
                              
                              
                              
                              59.9
                              
                              
                              
                              32
                              
                              
                              
                              (5.1
                              )
                              
                              
                              (9
                              )Industrial
                              
                              
                              11.1
                              
                              
                              
                              6
                              
                              
                              
                              14.3
                              
                              
                              
                              8
                              
                              
                              
                              (3.2
                              )
                              
                              
                              (22
                              )Scientific
                              
                              
                              1.3
                              
                              
                              
                              1
                              
                              
                              
                              7.6
                              
                              
                              
                              4
                              
                              
                              
                              (6.3
                              )
                              
                              
                              (83
                              )Total
                              
                              $
                              182.5
                              
                              
                              
                              100
                              %
                              
                              $
                              185.2
                              
                              
                              
                              100
                              %
                              
                              $
                              (2.7
                              )
                              
                              
                              (1
                              )%




In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the tactical common data link (“TCDL”) products at our
Malibu division, which we acquired in August 2007. TCDL products support
intelligence, surveillance and reconnaissance (“ISR”) applications. Previously,
orders and sales of our TCDL products were included in our radar and electronic
warfare market. We are now reporting these orders and sales in our
communications market, which we believe is the more appropriate category for
these products. We reclassified previously reported orders and sales information
to properly reflect TCDL products as an increase in the communications market
and a corresponding decrease in the radar and electronic warfare market. For the
six months ended March 28, 2008, the order amount reclassified was $4.0 million.
The table above reflects this change.





In recent
months, including the six months ended April 3, 2009, our defense markets, which
include our radar and electronic warfare markets, were negatively impacted by
ongoing delays in the receipt of orders. While the order levels in our defense
markets currently appear to be stabilizing, we believe that these delays have
resulted in a decrease in demand for our products to support defense programs,
and that the delays in the receipt of defense orders may continue for the
foreseeable future.




Our
commercial markets, which include our medical, commercial communications,
industrial and scientific markets, were negatively impacted in the six months
ended April 3, 2009 by the weakening of the U.S. and foreign economies. Many of
the commercial programs in which we participate depend on customers upgrading
their current equipment or expanding their infrastructures. With the recent
softening of global economies, we believe that many of our customers have
delayed, reduced or cancelled their upgrade or expansion plans. We believe that
the weakening global economies have resulted in a near-term decrease in demand
for our products to support commercial programs.




Orders
for the six months ended April 3, 2009 of $182.5 million were $2.7 million, or
approximately 1%, lower than orders of $185.2 million for the corresponding
period of fiscal year 2008. Explanations for the order increase or decrease by
market are as follows:




- 43
-
 Table of Contents




·
            Radar and Electronic
      Warfare: The majority of our orders in the radar and
      electronic warfare markets are products for domestic and international
      defense and government end uses. Orders in these markets are characterized
      by many smaller orders in the $0.5 million to $3.0 million range by
      product or program, and the timing of the receipt of these orders may vary
      from year to year. On a combined basis, orders for the radar and
      electronic warfare markets increased approximately 13% from an aggregate
      of $66.7 million in the first six months of fiscal year 2008 to an
      aggregate of $75.6 million in the first six months of fiscal year 2009.
      The increase in orders for these combined markets resulted primarily from
      the timing of the placement of orders to support various foreign and
      domestic radar programs, as well as the receipt of several large
      development orders to support various radar programs, and was partially
      offset by delays in the receipt of orders for certain other defense
      programs.




·
            Medical:Orders for
      our medical products consist of orders for medical imaging applications,
      such as x-ray imaging, magnetic resonance imaging (“MRI”), and positron
      emission tomography (“PET”) applications, and for radiation therapy
      applications for the treatment of cancer. The 8% increase in medical
      orders was due to increased demand for products to support radiation
      therapy applications. This increase was partially offset by a decrease in
      demand for products to support x-ray imaging applications due to the
      weakening of global economies.




·
            Communications:The
      9% decrease in communications orders was primarily attributable to
      decreases in orders to support commercial communications applications,
      including direct-to-home broadcast, fixed satellite broadcast and
      satellite news gathering applications, as well as commercial radio
      broadcast applications. We believe that these decreases were largely due
      to the weakening of global economies. Delays in the timing of orders
      received by our Malibu division also contributed to the decrease in
      communications orders; we expect to receive a number of the Malibu
      division’s delayed orders later in fiscal year 2009. These decreases were
      partially offset by an increase in orders for military communications
      programs, including an approximately $13 million order for the Warfighter
      Information Network – Tactical (WIN-T) program. Military communications is
      a relatively new sector of the overall communications market for us. We
      expect our participation in military communications programs to continue
      to grow.




·
            Industrial:Orders in
      the industrial market are cyclical and are generally tied to the state of
      the economy. The $3.2 million decrease in industrial orders was primarily
      attributable to decreases in orders for products used in industrial
      fabrication applications, including semiconductor wafer fabrication, and
      industrial heating applications.




·
            Scientific: Orders in
      the scientific market are historically one-time projects and can fluctuate
      significantly from period to period. The $6.3 million decrease in
      scientific orders was primarily the result of the receipt of a $5.6
      million order in the first six months of fiscal year 2008 for products to
      support a new accelerator project for fusion research at an international
      scientific institute. This order was not expected to, and did not, repeat
      in the first six months of fiscal year 2009; shipments for this order are
      scheduled to be completed in fiscal year
2011.




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.




- 44
-
 Table of Contents




Backlog




As of April 3, 2009, we had an
order backlog of $225.4 million compared to an order backlog of $201.8 million
as of March 28, 2008. Because our orders for government end-use products
generally have much longer delivery terms than our orders for commercial
business (which require quicker turn-around), our backlog is primarily composed
of government orders.





Backlog
represents the cumulative balance, at a given point in time, of recorded
customer sales orders that have not yet been shipped or recognized as sales.
Backlog is increased when an order is received, and backlog is decreased when we
recognize sales. We believe that backlog and orders information is helpful to
investors because this information may be indicative of future sales results.
Although backlog consists of firm orders for which goods and services are yet to
be provided, customers can, and sometimes do, terminate or modify these orders.
However, historically the amount of modifications and terminations has not been
material compared to total contract volume.





Results
of Operations




We derive
our revenue primarily from the sale of microwave and radio frequency products,
including high-power microwave amplifiers, satellite communications amplifiers,
medical x-ray imaging subsystems and other related products. Our products
generally have selling prices ranging from $2,000 to $100,000, with certain
limited products priced up to $1,000,000.




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.




- 45
-
 Table of Contents




Three Months Ended April 3, 2009
Compared to Three Months Ended March 28, 2008




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




Three
      Months Ended
                                                                                          
                                                                                          
                                                                                          IncreaseApril
      3,2009
                                                                                          
                                                                                          
                                                                                          March
      28,2008
                                                                                          
                                                                                          
                                                                                          (Decrease)%
      of
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          %
      ofAmount
                                                                                          
                                                                                          
                                                                                          Sales
                                                                                          
                                                                                          
                                                                                          Amount
                                                                                          
                                                                                          
                                                                                          Sales
                                                                                          
                                                                                          
                                                                                          AmountSales
                                                                                          
                                                                                          $
                                                                                          81.9
                                                                                          
                                                                                          
                                                                                          
                                                                                          100.0
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          94.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          100.0
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          (12.9
                                                                                          )Cost
      of sales
                                                                                          
                                                                                          
                                                                                          60.1
                                                                                          
                                                                                          
                                                                                          
                                                                                          73.4
                                                                                          
                                                                                          
                                                                                          
                                                                                          66.7
                                                                                          
                                                                                          
                                                                                          
                                                                                          70.4
                                                                                          
                                                                                          
                                                                                          
                                                                                          (6.6
                                                                                          )Gross
      profit
                                                                                          
                                                                                          
                                                                                          21.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          26.6
                                                                                          
                                                                                          
                                                                                          
                                                                                          28.1
                                                                                          
                                                                                          
                                                                                          
                                                                                          29.6
                                                                                          
                                                                                          
                                                                                          
                                                                                          (6.3
                                                                                          )Research
      and development
                                                                                          
                                                                                          
                                                                                          3.2
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.9
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.9
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.1
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.3Selling
      and marketing
                                                                                          
                                                                                          
                                                                                          4.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.9
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.3
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.6
                                                                                          
                                                                                          
                                                                                          
                                                                                          (0.5
                                                                                          )General
      and administrative
                                                                                          
                                                                                          
                                                                                          5.2
                                                                                          
                                                                                          
                                                                                          
                                                                                          6.3
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.5
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          (0.3
                                                                                          )Amortization
      of acquisition-related
      intangibles
                                                                                          
                                                                                          
                                                                                          0.7
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.9
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          (0.1
                                                                                          )Net
      loss on disposition of assets
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -Operating
      income
                                                                                          
                                                                                          
                                                                                          7.9
                                                                                          
                                                                                          
                                                                                          
                                                                                          9.6
                                                                                          
                                                                                          
                                                                                          
                                                                                          13.5
                                                                                          
                                                                                          
                                                                                          
                                                                                          14.2
                                                                                          
                                                                                          
                                                                                          
                                                                                          (5.6
                                                                                          )Interest
      expense, net
                                                                                          
                                                                                          
                                                                                          4.3
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.3
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.1
                                                                                          
                                                                                          
                                                                                          
                                                                                          (0.5
                                                                                          )(Gain)
      loss on debt extinguishment
                                                                                          
                                                                                          
                                                                                          (0.2
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (0.2
                                                                                          )
                                                                                          
                                                                                          
                                                                                          0.4
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.4
                                                                                          
                                                                                          
                                                                                          
                                                                                          (0.6
                                                                                          )Income
      before taxes
                                                                                          
                                                                                          
                                                                                          3.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.6
                                                                                          
                                                                                          
                                                                                          
                                                                                          8.3
                                                                                          
                                                                                          
                                                                                          
                                                                                          8.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          (4.5
                                                                                          )Income
      tax expense
                                                                                          
                                                                                          
                                                                                          0.1
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.1
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.1
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.2
                                                                                          
                                                                                          
                                                                                          
                                                                                          (2.0
                                                                                          )Net
      income
                                                                                          
                                                                                          $
                                                                                          3.7
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.5
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          6.2
                                                                                          
                                                                                          
                                                                                          
                                                                                          6.5
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          (2.5
                                                                                          )Other
      Data:EBITDA
      (a)
                                                                                          
                                                                                          $
                                                                                          10.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          13.2
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          15.8
                                                                                          
                                                                                          
                                                                                          
                                                                                          16.7
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          (5.0
                                                                                          )




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




(a)
              EBITDA
      is the measure used by the CODM to evaluate segment profit or loss. EBITDA
      represents earnings before net interest expense, provision for income
      taxes and depreciation and amortization. We believe that EBITDA is a more
      meaningful representation of operating performance for leveraged
      businesses like our own and, therefore, use this metric as our primary
      measure of profitability. For the reasons listed below, we believe EBITDA
      provides investors better understanding of 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
      senior secured 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.




- 46
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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, 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 11 of the
      accompanying unaudited condensed consolidated financial
      statements.






Sales: Our sales by market for
the three months ended April 3, 2009 and March 28, 2008 are summarized as
follows (dollars in millions):




Three
      Months EndedApril
      3,2009
                          
                          
                          March
      28,2008
                          
                          
                          Increase
      (Decrease)%
      of
                          
                          
                          
                          
                          
                          %
      ofAmount
                          
                          
                          Sales
                          
                          
                          Amount
                          
                          
                          Sales
                          
                          
                          Amount
                          
                          
                          PercentRadar
      and Electronic Warfare
                          
                          $
                          34.3
                          
                          
                          
                          42
                          %
                          
                          $
                          39.7
                          
                          
                          
                          42
                          %
                          
                          $
                          (5.4
                          )
                          
                          
                          (14
                          )
      %Medical
                          
                          
                          15.6
                          
                          
                          
                          19
                          
                          
                          
                          17.0
                          
                          
                          
                          18
                          
                          
                          
                          (1.4
                          )
                          
                          
                          (8
                          )Communications
                          
                          
                          25.3
                          
                          
                          
                          31
                          
                          
                          
                          28.5
                          
                          
                          
                          30
                          
                          
                          
                          (3.2
                          )
                          
                          
                          (11
                          )Industrial
                          
                          
                          4.4
                          
                          
                          
                          5
                          
                          
                          
                          6.6
                          
                          
                          
                          7
                          
                          
                          
                          (2.2
                          )
                          
                          
                          (33
                          )Scientific
                          
                          
                          2.3
                          
                          
                          
                          3
                          
                          
                          
                          3.0
                          
                          
                          
                          3
                          
                          
                          
                          (0.7
                          )
                          
                          
                          (23
                          )Total
                          
                          $
                          81.9
                          
                          
                          
                          100
                          %
                          
                          $
                          94.8
                          
                          
                          
                          100
                          %
                          
                          $
                          (12.9
                          )
                          
                          
                          (14
                          )
      %




In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the TCDL products at our Malibu division. Previously, orders
and sales of our TCDL products were included in our radar and electronic warfare
market. We are now reporting these orders and sales in our communications
market, which we believe is the more appropriate category for these products. We
reclassified previously reported orders and sales information to properly
reflect TCDL products as an increase in the communications market and a
corresponding decrease in the radar and electronic warfare market. For the three
months ended March 28, 2008, the sales amount reclassified was $0.9 million. The
table above reflects this change.




Sales for
the three months ended April 3, 2009 of $81.9 million were $12.9 million, or
approximately 14%, lower than sales of $94.8 million for the corresponding
period of fiscal year 2008. Explanations for the sales increase or decrease by
market are as follows:





·
            Radar and Electronic
      Warfare:The majority of our sales in the radar and electronic
      warfare markets are products 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 two markets decreased approximately 14% from $39.7
      million in the three months ended March 28, 2008 to $34.3 million in the
      three months ended April 3, 2009, primarily due to an expected $1.9
      million decrease in shipments of products to support the Aegis weapons
      system and decreases in sales for several other radar programs due to the
      timing of order receipts for those
programs.




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Demand
      for our products to support ships with the Aegis weapons system has two
      components: we support new ship builds and we provide spare and repair
      products for previously fielded ships. Over the past several years, we
      have seen high demand for products to support a significant number of
      funded new ship builds for the Aegis weapons program for U.S. and
      international military customers. We have now completed supplying our
      products required to support these funded new ship builds, and, as a
      result, we expect the near-term demand to be primarily for spare and
      repair products and the near-term sales to be roughly half of the
      approximately $20 million fiscal year 2008 sales level. We expect demand
      for our products to increase again in several years as the new ships are
      commissioned, deployed and added to the installed base, after which they
      also will require spare and repair products.  ·
            Medical: Sales of our
      medical products consist of sales for medical imaging applications, such
      as x-ray imaging, MRI and PET applications, and for radiation therapy
      applications for the treatment of cancer. The 8% decrease in medical
      product sales was due to decreased sales of x-ray imaging products to
      international customers as a result of the weakening of global
      economies.




·
            Communications:The
      11% decrease in sales in the communications market was primarily
      attributable to decreases in sales to support certain commercial
      communications applications, including satellite news gathering and
      direct-to-home broadcast applications as well as commercial radio
      broadcast applications. We believe the decreases were largely due to the
      weakening of global economies. These decreases were partially offset by an
      increase in sales of products for military communications programs, which
      is a relatively new sector of the overall communications market for us. We
      expect our participation in military communications programs to continue
      to grow.




·
            Industrial:Sales in the
      industrial market are cyclical and are generally tied to the state of the
      economy. The $2.2 million decrease in sales of industrial products was
      primarily attributable to decreases in orders for products used in
      industrial fabrication applications, including semiconductor wafer
      fabrication, and industrial heating
  applications.




·
            Scientific:Sales
      in the scientific market are historically one-time projects and can
      fluctuate significantly from period to period. The $0.7 million decrease
      in scientific sales was primarily the result of the recent completion of
      product shipments for the Spallation Neutron Source at Oakridge National
      Laboratory and the timing of certain other scientific
      programs.




Gross Profit. Gross profit was
$21.8 million, or 26.6% of sales, for the three months ended April 3, 2009 as
compared to $28.1 million, or 29.6% of sales, for the three months ended March
28, 2008. Gross profit is influenced by numerous factors including sales volume
and mix, pricing, raw material and manufacturing costs, and warranty costs. The
primary reason for the reduction in gross profit for the three months ended
April 3, 2009 as compared to the three months ended March 28, 2008 was lower
sales volume and therefore lower manufacturing cost absorption due to the
reduction in sales volume.




Research and Development.
Research and development expenses were $3.2 million, or 3.9% of sales, for the
three months ended April 3, 2009, a $0.3 million increase from $2.9 million, or
3.1% of sales, for the three months ended March 28, 2008. The increase in
research and development for the three months ended April 3, 2009 compared to
the three months ended March 28, 2008 was due primarily to additional
development efforts for our new solid state radar products.




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





Three Months EndedApril
      3,
                    
                    
                    March
      28,2009
                    
                    
                    2008Company
      sponsored
                    
                    $
                    3.2
                    
                    
                    $
                    2.9Customer
      sponsored, charged to cost of sales
                    
                    
                    4.1
                    
                    
                    
                    3.5$
                    7.3
                    
                    
                    $
                    6.4




Selling and Marketing. Selling
and marketing expenses were $4.8 million, or 5.9% of sales, for the three months
ended April 3, 2009, a $0.5 million decrease from the $5.3 million, or 5.6% of
sales, for the three months ended March 28, 2008. The reduction in selling and
marketing expenses for the three months ended April 3, 2009 compared to the
three months ended March 28, 2008 was primarily due to the implementation of
cost-reduction initiatives and approximately $0.1 million of favorable impact
from currency translation of our foreign-based expenses.




General and Administrative.
General and administrative expenses were $5.2 million, or 6.3% of sales, for the
three months ended April 3, 2009, a $0.3 million decrease from the $5.5 million,
or 5.8% of sales, for the three months ended March 28, 2008. The decrease in
general and administrative expenses in the three months ended April 3, 2009 was
primarily due to lower expenses from the implementation of cost-reduction
initiatives which were partially offset by foreign currency translation losses.
Foreign currency translation was a loss of $0.5 million for the three months
ended April 3, 2009, and a gain of $15,000 for the three months ended March 28,
2008.




Amortization of Acquisition-Related
Intangibles. Amortization of acquisition-related intangibles consists of
purchase accounting charges for technology and other intangible assets.
Amortization of acquisition-related intangibles was $0.7 million for the three
months ended April 3, 2009 and $0.8 million for the three months ended March 28,
2008. The $0.1 million dollar decrease in amortization of acquisition-related
intangibles for the three months ended April 3, 2009 compared to the three
months ended March 28, 2008 was primarily due to completed amortization of
customer backlog in fiscal year 2008 for our Malibu division which was acquired
in August 2007.




Interest Expense, net (“Interest
Expense”). Interest Expense was $4.3 million, or 5.3% of sales, for the
three months ended April 3, 2009, a $0.5 million decrease from the $4.8 million,
or 5.1% of sales, for the three months ended March 28, 2008. The reduction in
interest expense for the three months ended April 3, 2009 was primarily due to
repayments of debt over the past year which resulted in lower interest expense
during the three months ended April 3, 2009 compared to the three months ended
March 28, 2008.




(Gain) Loss on Debt
Extinguishment. The gain on debt extinguishment of $0.2 million in the
three months ended April 3, 2009 resulted from the repurchase of $3.0 million of
our 8% senior subordinated notes at a discount of $0.3 million, or 8.5% of par
value, partially offset by a $0.1 million non-cash write-off of deferred debt
issue costs. The loss on debt extinguishment of $0.4 million in the three months
ended March 28, 2008 resulted from the early redemption of $6.0 million of our
floating rate senior notes in March 2008, consisting of $0.3 million in non-cash
write-offs of deferred debt issue costs and issue discount costs and $0.1
million in cash payments for call premiums.




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Income Tax (Benefit) Expense.
We recorded an income tax expense of $0.1 million for the three months ended
April 3, 2009 and an income tax expense of $2.1 million for the three months
ended March 28, 2008. Our effective tax rate was approximately 2% for the three
months ended April 3, 2009 as compared to approximately 26% for the three months
ended March 28, 2008.




Income
tax expense for the three months ended April 3, 2009 includes a discrete tax
benefit of approximately $0.7 million that is related to certain provisions of
the California Budget Act of 2008 signed on February 20, 2009, which will allow
a taxpayer to elect an alternative method to attribute taxable income to
California for tax years beginning on or after January 1, 2011, which resulted
in a reduction to our deferred tax liability accounts. We also recorded a
discrete tax benefit of $0.3 million relating to the correction of an immaterial
error in the computation of certain deferred tax accounts which should have been
recorded in several prior year’s financial results.




Income
tax expense for the three months ended March 28, 2008 includes a discrete tax
benefit of approximately $0.4 million that is attributable to the fourth quarter
of fiscal year 2007 relating to the correction of an immaterial error in the
computation of the warranty expense tax deduction.




Net Income. Net income was
$3.7 million, or 4.5% of sales, for the three months ended April 3, 2009 as
compared to $6.2 million, or 6.5% of sales, in the three months ended March 28,
2008. The decrease in net income in the three months ended April 3, 2009 as
compared to the three months ended March 28, 2008 was primarily due to lower
gross profit from the reduction in sales volume, partially offset by the
reduction of expenses from the implementation of cost-reduction initiatives and
discrete tax benefits and interest expense.




EBITDA. EBITDA was $10.8
million, or 13.2% of sales, for the three months ended April 3, 2009 as compared
to $15.8 million, or 16.7% of sales, for the three months ended March 28, 2008.
The decrease in EBITDA in the three months ended April 3, 2009 as compared to
the three months ended March 28, 2008 was due primarily to lower gross profit
from the reduction in sales volume, partially offset by lower expenses from the
implementation of cost-reduction initiatives.




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Six
Months Ended April 3, 2009 Compared to Six Months Ended March 28,
2008




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




Six
      Months Ended
                                                                                                
                                                                                                
                                                                                                IncreaseApril
      3,2009
                                                                                                
                                                                                                
                                                                                                March
      28,2008
                                                                                                
                                                                                                
                                                                                                (Decrease)%
      of
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                %
      ofAmount
                                                                                                
                                                                                                
                                                                                                Sales
                                                                                                
                                                                                                
                                                                                                Amount
                                                                                                
                                                                                                
                                                                                                Sales
                                                                                                
                                                                                                
                                                                                                AmountSales
                                                                                                
                                                                                                $
                                                                                                159.0
                                                                                                
                                                                                                
                                                                                                
                                                                                                100.0
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                180.7
                                                                                                
                                                                                                
                                                                                                
                                                                                                100.0
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                (21.7
                                                                                                )Cost
      of sales
                                                                                                
                                                                                                
                                                                                                117.4
                                                                                                
                                                                                                
                                                                                                
                                                                                                73.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                128.5
                                                                                                
                                                                                                
                                                                                                
                                                                                                71.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                (11.1
                                                                                                )Gross
      profit
                                                                                                
                                                                                                
                                                                                                41.7
                                                                                                
                                                                                                
                                                                                                
                                                                                                26.2
                                                                                                
                                                                                                
                                                                                                
                                                                                                52.2
                                                                                                
                                                                                                
                                                                                                
                                                                                                28.9
                                                                                                
                                                                                                
                                                                                                
                                                                                                (10.5
                                                                                                )Research
      and development
                                                                                                
                                                                                                
                                                                                                5.3
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.3
                                                                                                
                                                                                                
                                                                                                
                                                                                                5.7
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.2
                                                                                                
                                                                                                
                                                                                                
                                                                                                (0.4
                                                                                                )Selling
      and marketing
                                                                                                
                                                                                                
                                                                                                9.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                6.2
                                                                                                
                                                                                                
                                                                                                
                                                                                                10.5
                                                                                                
                                                                                                
                                                                                                
                                                                                                5.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                (0.7
                                                                                                )General
      and administrative
                                                                                                
                                                                                                
                                                                                                10.4
                                                                                                
                                                                                                
                                                                                                
                                                                                                6.5
                                                                                                
                                                                                                
                                                                                                
                                                                                                11.6
                                                                                                
                                                                                                
                                                                                                
                                                                                                6.4
                                                                                                
                                                                                                
                                                                                                
                                                                                                (1.2
                                                                                                )Amortization
      of acquisition-related
      intangibles
                                                                                                
                                                                                                
                                                                                                1.4
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.9
                                                                                                
                                                                                                
                                                                                                
                                                                                                1.6
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.9
                                                                                                
                                                                                                
                                                                                                
                                                                                                (0.2
                                                                                                )Net
      loss on disposition of assets
                                                                                                
                                                                                                
                                                                                                0.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                -Operating
      income
                                                                                                
                                                                                                
                                                                                                14.7
                                                                                                
                                                                                                
                                                                                                
                                                                                                9.2
                                                                                                
                                                                                                
                                                                                                
                                                                                                22.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                12.6
                                                                                                
                                                                                                
                                                                                                
                                                                                                (8.1
                                                                                                )Interest
      expense, net
                                                                                                
                                                                                                
                                                                                                8.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                5.5
                                                                                                
                                                                                                
                                                                                                
                                                                                                9.6
                                                                                                
                                                                                                
                                                                                                
                                                                                                5.3
                                                                                                
                                                                                                
                                                                                                
                                                                                                (0.8
                                                                                                )(Gain)
      loss on debt extinguishment
                                                                                                
                                                                                                
                                                                                                (0.2
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (0.1
                                                                                                )
                                                                                                
                                                                                                
                                                                                                0.4
                                                                                                
                                                                                                
                                                                                                
                                                                                                0.2
                                                                                                
                                                                                                
                                                                                                
                                                                                                (0.6
                                                                                                )Income
      before taxes
                                                                                                
                                                                                                
                                                                                                6.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                3.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                12.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                7.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                (6.7
                                                                                                )Income
      tax (benefit) expense
                                                                                                
                                                                                                
                                                                                                (5.2
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (3.3
                                                                                                )
                                                                                                
                                                                                                
                                                                                                4.1
                                                                                                
                                                                                                
                                                                                                
                                                                                                2.3
                                                                                                
                                                                                                
                                                                                                
                                                                                                (9.3
                                                                                                )Net
      income
                                                                                                
                                                                                                $
                                                                                                11.3
                                                                                                
                                                                                                
                                                                                                
                                                                                                7.1
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                8.7
                                                                                                
                                                                                                
                                                                                                
                                                                                                4.8
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                2.6Other
      Data:EBITDA(a)
                                                                                                
                                                                                                $
                                                                                                20.3
                                                                                                
                                                                                                
                                                                                                
                                                                                                12.8
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                27.8
                                                                                                
                                                                                                
                                                                                                
                                                                                                15.4
                                                                                                %
                                                                                                
                                                                                                $
                                                                                                (7.5
                                                                                                )Note:  Totals
      may not equal the sum of the component line items due to independent
      rounding. Percentages are calculated based on rounded dollar amounts
      presented.







(a)
              EBITDA
      is the measure used by the CODM to evaluate segment profit or loss. EBITDA
      represents earnings before net interest expense, provision for income
      taxes and depreciation and amortization. We believe that EBITDA is a more
      meaningful representation of operating performance for leveraged
      businesses like our own and, therefore, use this metric as our primary
      measure of profitability. For the reasons listed below, we believe EBITDA
      provides investors better understanding of 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
      senior secured 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, 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 EBITDA to Net Income,
      see Note 11of
      theaccompanying
      unaudited condensed consolidated financialstatements.




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Sales. Our sales by market for
the six months ended April 3, 2009 and March 28, 2008 are summarized as follows
(dollars in millions):




Six
      Months EndedApril
      3,2009
                          
                          
                          March
      28,2008
                          
                          
                          Increase
      (Decrease)%
      of
                          
                          
                          
                          
                          
                          %
      ofAmount
                          
                          
                          Sales
                          
                          
                          Amount
                          
                          
                          Sales
                          
                          
                          Amount
                          
                          
                          PercentRadar
      and Electronic Warfare
                          
                          $
                          62.3
                          
                          
                          
                          39
                          %
                          
                          $
                          73.5
                          
                          
                          
                          41
                          %
                          
                          $
                          (11.2
                          )
                          
                          
                          (15
                          )
      %Medical
                          
                          
                          31.4
                          
                          
                          
                          20
                          
                          
                          
                          32.7
                          
                          
                          
                          18
                          
                          
                          
                          (1.3
                          )
                          
                          
                          (4
                          )Communications
                          
                          
                          51.5
                          
                          
                          
                          32
                          
                          
                          
                          56.8
                          
                          
                          
                          31
                          
                          
                          
                          (5.3
                          )
                          
                          
                          (9
                          )Industrial
                          
                          
                          9.8
                          
                          
                          
                          6
                          
                          
                          
                          12.1
                          
                          
                          
                          7
                          
                          
                          
                          (2.3
                          )
                          
                          
                          (19
                          )Scientific
                          
                          
                          4.0
                          
                          
                          
                          3
                          
                          
                          
                          5.6
                          
                          
                          
                          3
                          
                          
                          
                          (1.6
                          )
                          
                          
                          (29
                          )Total
                          
                          $
                          159.0
                          
                          
                          
                          100
                          %
                          
                          $
                          180.7
                          
                          
                          
                          100
                          %
                          
                          $
                          (21.7
                          )
                          
                          
                          (12
                          )
      %




In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the TCDL products at our Malibu division. Previously, orders
and sales of our TCDL products were included in our radar and electronic warfare
market. We are now reporting these orders and sales in our communications
market, which we believe is the more appropriate category for these products. We
reclassified previously reported orders and sales information to properly
reflect TCDL products as an increase in the communications market and a
corresponding decrease in the radar and electronic warfare market. For the six
months ended March 28, 2008, the sales amount reclassified was $2.3 million. The
table above reflects this change.




Sales for
the six months ended April 3, 2009 of $159.0 million were $21.7 million, or 12%,
lower than sales of $180.7 million for the corresponding period of fiscal year
2008. Explanations for the sales increase or decrease by market are as
follows:




·
            Radar and Electronic
      Warfare:The majority of our sales in the radar and electronic
      warfare markets are for products 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 two markets decreased approximately 15%
      from $73.5 million in the six months ended March 28, 2008 to $62.3 million
      in the six months ended April 3, 2009. The decrease in sales was due
      primarily to an expected $3.9 million decrease in shipments of products to
      support the Aegis weapons system and decreases in sales for several other
      radar and electronic warfare programs due to the timing of order receipts
      for those programs.  Demand
      for our products to support ships with the Aegis weapons system has two
      components: we support new ship builds and we provide spare and repair
      products for previously fielded ships. Over the past several years, we
      have seen high demand for products to support a significant number of
      funded new ship builds for the Aegis weapons program for U.S. and
      international military customers. We have now completed supplying our
      products required to support these funded new ship builds, and, as a
      result, we expect the near-term demand to be primarily for spare and
      repair products and the near-term sales to be roughly half of the
      approximately $20 million fiscal year 2008 sales level. We expect demand
      for our products to increase again in several years as the new ships are
      commissioned, deployed and added to the installed base, after which they
      also will require spare and repair
products.




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·
            Medical: Sales of our
      medical products consist of sales for medical imaging applications, such
      as x-ray imaging, MRI and PET applications, and for radiation therapy
      applications for the treatment of cancer. The 4% decrease in sales of our
      medical products was primarily due to decreased sales of x-ray imaging
      products to international customers as a result of the weakening of global
      economies. This decrease was partially offset by increased demand for
      products to support radiation therapy
  applications.




·
            Communications:The
      9% decrease in sales in the communications market was primarily
      attributable to decreases in sales to support certain commercial
      communications applications, including direct-to-home broadcast, fixed
      satellite broadcast and satellite news gathering applications as well as
      commercial radio broadcast applications. We believe the decreases were
      largely due to the weakening of global economies. These decreases were
      partially offset by an increase in sales of products for military
      communications programs, which is a relatively new sector of the overall
      communications market for us. We expect our participation in military
      communications programs to continue to
grow.




·
            Industrial:Sales in the
      industrial market are cyclical and are generally tied to the state of the
      economy. The $2.3 million decrease in industrial sales was due to
      decreases in demand for products used in industrial fabrication
      applications, including semiconductor wafer fabrication, and a wide
      variety of other industrial
applications.




·
            Scientific:Sales
      in the scientific market are historically one-time projects and can
      fluctuate significantly from period to period. The $1.6 million decrease
      in scientific sales was primarily the result of the recent completion of
      product shipments for the Spallation Neutron Source at Oakridge National
      Laboratory and the timing of certain other scientific
      programs.




Gross Profit. Gross profit was
$41.7 million, or 26.2% of sales, for the six months ended April 3, 2009, a
$10.5 million decrease from $52.2 million, or 28.9% of sales, in the six months
ended March 28, 2008. Gross profit is influenced by numerous factors including
sales volume and mix, pricing, raw material and manufacturing costs, and
warranty costs. The primary reason for the reduction in gross profit for the six
months ended April 3, 2009 as compared to the six months ended March 28, 2008
was lower sales volume and therefore lower manufacturing cost absorption due to
the reduction in sales volume.




Research and Development.
Research and development expenses were $5.3 million, or 3.3% of sales, for the
six months ended April 3, 2009, a $0.4 million decrease from $5.7 million, or
3.2% of sales, for the six months ended March 28, 2008. The decrease in research
and development for the six months ended April 3, 2009 compared to the six
months ended March 28, 2008 was due primarily to the completion of significant
development efforts on the Army's Warfighter Information Network-Tactical
(WIN-T) program and lower research and development spending at our Malibu
division in the second quarter of fiscal year 2009, partially offset by higher
expenditures on medical diagnostic imaging products.




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




Six Months EndedApril
      3,
                      
                      
                      March
      28,2009
                      
                      
                      2008Company
      sponsored
                      
                      $
                      5.3
                      
                      
                      $
                      5.7Customer
      sponsored, charged to cost of sales
                      
                      
                      7.3
                      
                      
                      
                      7.2$
                      12.6
                      
                      
                      $
                      12.9




Selling and Marketing. Selling
and marketing expenses were $9.8 million, or 6.2% of sales, for the six months
ended April 3, 2009, a $0.7 million decrease from the $10.5 million, or 5.8% of
sales, for the six months ended March 28, 2008. The reduction in selling and
marketing expenses for the six months ended April 3, 2009 compared to the six
months ended March 28, 2008 was primarily due to the implementation of
cost-reduction initiatives and approximately $0.2 million of favorable impact
from currency translation of our foreign-based expenses.




General and Administrative.
General and administrative expenses were $10.4 million, or 6.5% of sales, for
the six months ended April 3, 2009, a $1.2 million decrease from the $11.6
million, or 6.4% of sales, for the six months ended March 28, 2008. The decrease
in general and administrative expenses in the six months ended April 3, 2009 was
primarily due to lower expenses related to the implementation of cost-reduction
initiatives.




Amortization of Acquisition-Related
Intangibles. Amortization of acquisition-related intangibles consists of
purchase accounting charges for technology and other intangible assets.
Amortization of acquisition-related intangibles was $1.4 million for the six
months ended April 3, 2009 and $1.6 million for the six months ended March 28,
2008. The $0.2 million dollar decrease in amortization of acquisition-related
intangibles for the six months ended April 3, 2009 compared to the six months
ended March 28, 2008 was primarily due to completed amortization of customer
backlog in fiscal year 2008 for our Malibu division which was acquired in August
2007.




Interest Expense, Net (“Interest
Expense”). Interest Expense of $8.8 million for the six months ended
April 3, 2009 was $0.8 million lower than interest expense of $9.6 million for
the six months ended March 28, 2008. The reduction in interest expense for the
six months ended April 3, 2009 was primarily due to repayments of debt over the
past year which resulted in lower interest expense during the six months ended
April 3, 2009 compared to the six months ended March 28, 2008.




(Gain) Loss on Debt
Extinguishment. The gain on debt extinguishment of $0.2 million in the
six months ended April 3, 2009 resulted from the repurchase of $3.0 million of
our 8% senior subordinated notes at a discount of $0.3 million, or 8.5% of par
value, partially offset by a $0.1 million non-cash write-off of deferred debt
issue costs. The loss on debt extinguishment of $0.4 million in the six months
ended March 28, 2008 resulted from the early redemption of $6.0 million of our
floating rate senior notes in March 2008, consisting of $0.3 million in non-cash
write-offs of deferred debt issue costs and issue discount costs and $0.1
million in cash payments for call premiums.




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Income Tax (Benefit) Expense.
We recorded an income tax benefit of $5.2 million for the six months ended April
3, 2009 and an income tax expense of $4.1 million for the six months ended March
28, 2008. The six months ended April 3, 2009 included several significant
discrete tax benefits: (1) $5.1 million related to an outstanding audit by the
Canada Revenue Agency (“CRA”), (2) $0.7 million related to certain provisions of
the California Budget Act of 2008 signed on February 20, 2009, which will allow
a taxpayer to elect an alternative method to attribute taxable income to
California for tax years beginning on or after January 1, 2011, which resulted
in a reduction to our deferred tax liability accounts, and (3) $0.9 million for
adjustments to Canadian deferred tax accounts.




In
December 2008, a new tax treaty protocol between Canada and the U.S. became
effective. The new treaty requires mandatory arbitration for the resolution of
double taxation disputes not settled through the competent authority process. As
a result of this new treaty, our tax position on an outstanding audit by the CRA
has become more favorable, and we reduced our tax contingency reserve in Canada
by $3.0 million, and established an income tax receivable and recognized an
income tax benefit in the U.S for $2.8 million; this tax benefit was partially
offset by a related increase in deferred tax liabilities of $0.7
million.




The $0.9
million adjustment to Canadian deferred tax accounts includes a $0.6 million tax
benefit to reflect the reduction to Canadian corporate income tax rates, and a
$0.3 million tax benefit to correct the computation of certain deferred tax
accounts. The $0.6 million adjustment should have been recorded in the first
quarter of fiscal year 2008 rather than in the first quarter of fiscal year 2009
and the $0.3 adjustment million should have been recorded in several prior
year’s financial results. These adjustments are deemed immaterial to our results
of operations and financial condition in current periods as well as prior
affected periods.




Income
tax expense for the six months ended March 28, 2008 includes a discrete tax
benefit of approximately $0.4 million that was attributable to the fourth
quarter of fiscal year 2007 relating to the correction of an immaterial error in
the computation of the warranty expense tax deduction.




Our
estimated effective income tax rate for the remainder of fiscal year 2009 is
expected to be approximately 36% to 37%.




Net Income. Net income was
$11.3 million, or 7.1% of sales, for the six months ended April 3, 2009 as
compared to $8.7 million, or 4.8% of sales, in the six months ended March 28,
2008. The $2.6 million increase in net income in the six months ended April 3,
2009 as compared to the six months ended March 28, 2008 was primarily due to
discrete tax benefits, the reduction of expenses from the implementation of
cost-reduction initiatives, and lower interest, partially offset by lower gross
profit from the reduction in sales volume.




EBITDA. EBITDA was $20.3
million, or 12.8% of sales, for the six months ended April 3, 2009 as compared
to $27.8 million, or 15.4% of sales, for the six months ended March 28, 2008.
The $7.5 million decrease in EBITDA for the six months ended April 3, 2009 as
compared to the corresponding period of fiscal year 2008 was due primarily to
lower gross profit from the reduction in sales volume, partially offset by lower
expenses from the implementation of cost-reduction initiatives.




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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
credit facilities. Our primary uses of cash are cost of sales, operating
expenses, debt service and capital expenditures.




We believe that we have the financial
resources to meet our business requirements, including capital expenditures and
working capital requirements, for the next 12 months.






Cash
and Working Capital




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




April
      3,
                    
                    
                    October
      3,2009
                    
                    
                    2008Cash
      and cash equivalents
                    
                    $
                    27.9
                    
                    
                    $
                    28.7Working
      capital
                    
                    $
                    92.6
                    
                    
                    $
                    88.1




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 had restricted cash of $1.1 million as of April 3, 2009,
consisting primarily of bank guarantees from customer advance payments to our
international subsidiaries. The bank guarantees become unrestricted cash when
performance under the sales contract is complete.




The
significant factors underlying the net decrease in cash and cash equivalents
during the six months ended April 3, 2009 were the repayment of $7.75 million of
the outstanding balance of our senior term loan and senior subordinated notes
and capital expenditures of $1.8 million partially offset by net cash provided
by our operating activities of $7.9 million, proceeds of $0.6 million from
employee stock purchases and $0.3 million discount from the repurchase of $3.0
million of our senior subordinated notes.




As of
April 3, 2009, we had $218.0 million in total principal amount of debt
outstanding, compared to $225.75 million as of October 3, 2008. As of April
3, 2009, we had borrowing availability of $54.3 million under the revolver
under our senior credit facilities.




As more
fully described below, our most significant debt covenant compliance requirement
is maintaining a secured leverage ratio of 3.75:1. Our current secured leverage
ratio is approximately 1:1. With this low secured leverage ratio, we do not
anticipate any need to restructure our debt or reenter the capital markets until
fiscal year 2011 when our Senior Credit Facilities will mature unless we
refinance our 8% senior subordinated notes due 2012 prior to July 31,
2011.




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Historical
Operating, Investing and Financing Activities




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




Six
      Months EndedApril
      3,
                            
                            
                            March
      28,2009
                            
                            
                            2008Net
      cash provided by operating activities
                            
                            $
                            7.9
                            
                            
                            $
                            10.4Net
      cash used in investing activities
                            
                            
                            (1.8
                            )
                            
                            
                            (1.1
                            )Net
      cash used in financing activities
                            
                            
                            (6.9
                            )
                            
                            
                            (9.5
                            )Net
      decrease in cash and cash equivalents
                            
                            $
                            (0.8
                            )
                            
                            $
                            (0.2
                            )


Operating
Activities




During
the six months ended April 3, 2009 and March 28, 2008, 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 $7.9 million in the six months ended April
3, 2009 was attributable to net income of $11.3 million, depreciation,
amortization and other non-cash charges of $5.9 million, partially offset by
$9.3 million net cash used for working capital. The primary working capital uses
of cash in the six months ended April 3, 2009 were decreases in accrued expenses
and income tax payable and an increase in inventories. The decrease in accrued
expenses related primarily to the timing of payroll and employee vacations,
combined with lower incentive compensation and timing of interest payments on
debt. Income tax payable decreased primarily due to the reduction in our
contingency reserve for a Canada tax assessment. Inventories increased due to
selective increases of certain work-in-progress and finished goods to meet
anticipated customer delivery requirements. These uses of cash were partially
offset by a decrease in accounts receivable resulting primarily from decreased
sales.




Net cash
provided by operating activities of $10.4 million in the six months ended March
28, 2008 was attributable to net income of $8.7 million, depreciation,
amortization and other non-cash charges of $6.2 million, partially offset by
$4.5 million net cash used for working capital. The primary uses of cash for
working capital in the six months ended March 28, 2008 were a decrease in income
taxes payable and accrued expenses, partially offset by a decrease in accounts
receivable. The reduction in income taxes payable was due to the timing of
payments. The decrease in accrued expenses related primarily to the timing of
payroll and employee vacations, combined with timing of interest payments on
debt. The decrease in accounts receivables resulted primarily from timing
and improved collection of trade receivables.




Investing
Activities




Investing
activities for the six months ended April 3, 2009 consisted of $1.8 million
capital expenditures.




Investing
activities for the six months ended March 28, 2008 consisted of $2.6 million
capital expenditures and $0.1 million payment of patent application fees,
partially offset by cash received as a result of a $1.6 million adjustment to
the purchase price of our Malibu division based on the actual working capital of
the Malibu division as of the acquisition closing date.




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Financing
Activities




Net cash
used in financing activities for the six months ended April 3, 2009 consisted
primarily of senior term loan repayment of $4.75 million and senior
subordinated notes repurchase of $3.0 million partially offset by $0.6 million
in proceeds from employee stock purchases and $0.3 million discount from the
repurchase of our senior subordinated notes.




Net cash
used in financing activities for the six months ended March 28, 2008 consisted
primarily of a redemption of $6.0 million in principal amount of our floating
rate senior notes and a term loan repayment of $4.0 million, partially
offset by $0.4 million in proceeds from employee stock purchases.




If the
leverage ratio under our amended and restated senior credit facilities exceeds
3.5:1 at the end of any fiscal year, then we are required to make an annual
prepayment within 90 days after the end of the fiscal year based on a
calculation of excess cash flow, as defined in the senior credit facilities,
multiplied by a factor of 50%, less any optional prepayments made during the
fiscal year. There was no excess cash flow payment due for fiscal year 2008,
and, therefore, no excess cash flow payment was made in the six months ended
April 3, 2009.






Stock Repurchase
Program





On May
28, 2008, we announced that our board of directors authorized us to implement a
program to repurchase up to $12.0 million of our common stock from time to time,
funded entirely from cash on hand. Repurchases made under the program are
subject to the terms and limitations of our debt covenants, as well as market
conditions and share price, and will be made at management's discretion in open
market trades, through block trades or in privately negotiated transactions. The
program may be modified or terminated by our board of directors at any time.
During fiscal year 2008, we repurchased 206,243 shares at an average per share
price of $13.54, plus average brokerage commissions of $0.04 per share, for an
aggregate cost of $2.8 million. During the six months ended April 3, 2009, we
did not repurchase any shares of common stock under the program. Repurchased
shares have been recorded as treasury shares and will be held until our board of
directors designates that these shares be retired or used for other
purposes.






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 six months ended April 3, 2009
were $1.8 million. In the remainder of fiscal year 2009, ongoing capital
expenditures are expected to be approximately $2.0 to
$2.5 million.




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Recently
Released Accounting Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements,” which defines fair value, establishes a framework for measuring
fair value under other accounting pronouncements that permit or require fair
value measurements, changes the methods used to measure fair value and expands
disclosures about fair value measurements. In particular, disclosures are
required to provide information on: the extent to which fair value is used to
measure assets and liabilities; the inputs used to develop measurements; and the
effect of certain of the measurements on earnings (or changes in net assets).
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. In February 2008, the FASB
issued FASB Staff Position (“FSP”) SFAS No. 157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13,” which removes certain leasing
transactions from the scope of SFAS No. 157, and FSP SFAS No. 157-2,
“Effective Date of FASB Statement No. 157,” which defers the effective date
of SFAS No. 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis. Effective October
4, 2008, we adopted SFAS No. 157 for financial assets and liabilities
recognized at fair value on a recurring basis. The adoption of SFAS No. 157
did not have a significant impact on our consolidated financial statements, and
the resulting fair values calculated under SFAS No. 157 after adoption were
not significantly different than the fair values that would have been calculated
under previous guidance. See Note 4 to the condensed consolidated financial
statements included in this Form 10-Q for further details on our fair value
measurements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS No. 159
is to provide opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. We adopted SFAS No. 159 effective October 4, 2008. We currently
do not have any instruments for which we have elected the fair value option
under SFAS No. 159. Therefore, the adoption of SFAS No. 159 has not
impacted our consolidated financial position, results of operations or cash
flows.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), or 141(R),
“Business Combinations,” which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008. We will be required to adopt SFAS No. 141(R) in our fiscal
year 2010 commencing October 3, 2009.





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In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s
derivative instruments and hedging activities including: (1) how and why an
entity uses derivative instruments; (2) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (3) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with earlier
application encouraged. We adopted SFAS No. 161 in the second quarter of
fiscal year 2009. Since SFAS No. 161 only required additional disclosure, the
adoption did not have an impact on our consolidated financial position, results
of operations or cash flows. See Note 6 to the condensed consolidated financial
statements included in this Form 10-Q for further details on our derivative
instruments and hedging activities.





In
October 2008, FASB issued FSP No.132 (R)-1, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to require that an employer
disclose the following information about the fair value of plan assets: 1) the
level within the fair value hierarchy in which fair value measurements of plan
assets fall; 2) information about the inputs and valuation techniques used to
measure the fair value of plan assets; and 3) a reconciliation of beginning and
ending balances for fair value measurements of plan assets using significant
unobservable inputs. The final FSP will be effective for fiscal years
ending after December 15, 2009, with early application permitted. We will be
required to adopt FSP No.132 (R)-1 in our fiscal year 2010 commencing October 3,
2009. At initial adoption, application of the FSP would not be required for
earlier periods that are presented for comparative purposes. We are currently
evaluating the potential impact of adopting this FSP on our disclosures in our
consolidated financial statements.





In April
2009, the FASB issued FSP SFAS No. 141R-1, “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies.” FSP SFAS No. 141R-1 amends the provisions in SFAS No. 141R,
“Business Combinations,” and requires an acquirer to recognize at fair value, at
the acquisition date, an asset acquired or a liability assumed that arises from
a contingency if the acquisition date fair value of that asset or liability can
be determined during the measurement period. If the acquisition date fair value
cannot be determined during the measurement period, an asset or liability shall
be recognized at the acquisition date if (i) information available before the
end of the measurement period indicates that it is probable that an asset
existed or that a liability had been incurred at the acquisition date, and (ii)
the amount of the asset or liability can be reasonably estimated. FSP SFAS No.
141R-1 is effective for contingent assets and contingent liabilities acquired in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. We will apply the provisions of FSP SFAS No. 141R-1 if
and when a future acquisition occurs.





In April
2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” which provides
additional guidance in evaluating certain factors that are indicative of a
significant decrease in the volume and level of activity for an asset or
liability when compared to normal market activity. Additionally, this statement
clarifies the circumstances to consider when evaluating whether a transaction is
not orderly, in which quoted prices may not be determinative of fair value. FSP
SFAS No. 157-4 is applied prospectively to all fair value measurements where
appropriate and will be effective for interim and annual periods ending after
June 15, 2009. We will adopt the provisions of FSP SFAS No. 157-4 effective
April 4, 2009. We are currently assessing the impact of FSP SFAS No. 157-4 on
our results of operations and financial position.




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In April
2009, the FASB issued FSP SFAS No. 107-1 and APB No. 28-1, “Interim Disclosures
about Fair Value of Financial Instruments.” FSP SFAS No. 107-1 and APB No. 28-1
amend FASB Statement No. 107, “Disclosures about Fair Value of Financial
Instruments,” to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. FSP FAS No. 107-1 and APB No. 28-1 is effective for
interim reporting periods ending after June 15, 2009. Our disclosures about
fair value of financial instruments will reflect the adoption of this FSP in the
third quarter of our fiscal year 2009.






Critical
Accounting Policies and Estimates




Our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles, or GAAP, in the United States of America, which
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon various factors and information available to us at the time that these
estimates, judgments and assumptions are made. These factors and information 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. The estimates,
judgments and assumptions we make can affect the reported amounts
of  assets and liabilities as of the date of the financial statements,
as well as the reported amounts of revenues and expenses during the periods
presented. To the extent there are material differences between these estimates,
judgments or assumptions and actual results, our financial statements will be
affected.




We
believe the following critical accounting policies are the most significant to
the presentation of our financial statements and require the most subjective and
complex judgments. These matters, and the judgments and uncertainties affecting
them, are also essential to understanding our reported and future operating
results.




Revenue
recognition




We
generally recognize revenue upon shipment of product, following receipt of
written purchase orders, when the price is fixed or determinable, title has
transferred and collectibility is reasonably assured. Revenue recognized under
the percentage of completion method of accounting is determined on the basis of
costs incurred and estimates of costs at completion, which require management
estimates of future costs. Changes in estimated costs at completion over time
could have a material impact on our operating results.




Inventory
reserves




We assess
the valuation of inventory and periodically write down the value for estimated
excess and obsolete inventory based upon actual usage and estimates about future
demand. The excess balance determined by this analysis becomes the basis for our
excess inventory charge. Management personnel play a key role in our excess
inventory review process by providing updated sales forecasts, managing product
rollovers and working with manufacturing to maximize recovery of excess
inventory. If our estimates regarding demand are inaccurate or changes in
technology affect demand for certain products in an unforeseen manner, we may
incur losses or gains in excess of our established markdown reserve that could
be material.




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Management
also reviews the carrying value of inventory for lower of cost or market on an
individual product or contract basis. A loss reserve is charged to cost of sales
if the estimated product cost or the contract cost at completion is in excess of
net realizable value (selling price less estimated cost of disposal). If the
actual contract cost at completion is different than originally estimated, then
a loss or gain provision adjustment would be recorded that could have a material
impact on our operating results.




Product
warranty




Our
products are generally warranted for a variety of periods, typically one to
three years or a predetermined product usage life. A provision for estimated
future costs of repair, replacement or customer accommodations is reflected in
the consolidated condensed financial statements included in this report. We
assess the adequacy of our preexisting warranty liabilities and adjust the
balance based on actual experience and changes in future expectations. The
determination of product warranty reserves requires us to make estimates of
product return rates and expected cost to repair or replace the products under
warranty. If actual repair and replacement costs differ significantly from our
estimates, then adjustments to recognize additional cost of sales may be
required.




Recoverability
of long-lived assets




We
account for goodwill and other intangible assets in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires
that goodwill and identifiable intangible assets with indefinite useful lives be
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
We amortize identifiable intangible assets on a straight-line basis over their
useful lives of up to 50 years.




We assess
the recoverability of the carrying value of goodwill and other intangible assets
with indefinite useful lives at least annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be fully
recoverable. Recoverability of goodwill is measured at the reporting unit level
(our six divisions) based on a two-step approach. First, the carrying amount of
the reporting unit is compared to the fair value as estimated by the future net
discounted cash flows expected to be generated by the reporting unit. To the
extent that the carrying value of the reporting unit exceeds the fair value of
the reporting unit, a second step is performed, wherein the reporting unit's
assets and liabilities are valued. The implied fair value of goodwill is
calculated as the fair value of the reporting unit in excess of the fair value
of all non-goodwill assets and liabilities allocated to the reporting unit. To
the extent the reporting unit's carrying value of goodwill exceeds its implied
fair value, impairment exists and must be recognized. This process requires the
use of discounted cash flow models that utilize estimates of future revenue and
expenses as well as the selection of appropriate discount rates. There is
inherent uncertainty in these estimates, and changes in these factors over time
could result in an impairment charge.




At April
3, 2009 and October 3, 2008, the carrying amount of goodwill and other
intangible assets, net was $239.3 million and $241.1 million, respectively.
As of April 3, 2009, no significant changes in the underlying business
assumptions or circumstances that drive the impairment analysis led us to
believe that goodwill or other intangible assets might have been impaired. We
will continue to evaluate the need for impairment if changes in circumstances or
available information indicate that impairment may have occurred, and at least
annually in the fourth quarter.




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Our
market capitalization has historically exceeded our net asset value, although
recently it has been particularly volatile. Our market capitalization has
dropped below our net asset value in certain days of the past few months
largely, we believe, as a result of the recent global economic downturn and
volatility in the financial markets. If our stock price would again fall below
our net asset value per share, the decline in our market capitalization could
trigger the requirement of performing the impairment test on goodwill later in
fiscal year 2009, which could result in an impairment of our
goodwill.





At April
3, 2009 and October 3, 2008, the carrying amount of property, plant and
equipment was $60.3 million and $62.5 million, respectively. We assess
the recoverability of property, plant and equipment to be held and used by a
comparison of the carrying amount of an asset or group of assets to the future
net undiscounted cash flows expected to be generated by the asset or group of
assets. If such assets are considered impaired, then the impairment recognized
is measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. This process requires the use of cash flow models that
utilize estimates of future revenue and expenses. There is inherent uncertainty
in these estimates, and changes in these factors over time could result in an
impairment charge.




A
prolonged general economic downturn and, specifically, a prolonged downturn in
the defense, communications or medical markets, or technological changes, as
well as other market factors could intensify competitive pricing pressure,
create an imbalance of industry supply and demand, or otherwise diminish volumes
or profits. Such events, combined with changes in interest rates, could
adversely affect our estimates of future net cash flows to be generated by our
long-lived assets. Consequently, it is possible that our future operating
results could be materially and adversely affected by any impairment charges
related to the recoverability of our long-lived assets.




Accounting
for stock-based compensation




We
account for stock-based compensation in accordance with SFAS No. 123
(revised 2004) or 123(R), "Share-Based Payment." Under the fair value
recognition provisions of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period, which is generally the
vesting period.




The fair
value of each time-based option award is estimated on the date of grant using
the Black-Scholes model. The fair value of each market performance-based (or
combination of market performance- and time-based) option, restricted stock and
restricted stock unit award is estimated on the date of grant using the Monte
Carlo simulation technique in a risk-neutral framework. The Black-Scholes and
the Monte Carlo simulation valuation models were developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable and require the input of subjective assumptions, including the
expected stock price volatility and estimated option life. For purposes of these
valuation models, no dividends have been assumed.




In
accordance with SFAS No. 123R, prior to becoming a public entity in
April 2006, we used the minimum value method to determine a calculated
value, rather than a fair value, of share awards. Under the minimum value
method, stock price volatility was assumed to be zero. The estimated fair value
(or calculated value, as applicable) of our stock-based awards, less expected
forfeitures, is amortized over the awards' vesting period on a straight-line
basis for awards granted after the adoption of SFAS No. 123R. Since our
common stock has not been publicly traded for a sufficient time period, the
expected volatility is based on expected volatilities of similar companies that
have a longer history of being publicly traded or a blend of our expected
volatility based on available historical data and those of similar companies.
The risk-free rates are based on the U.S. Treasury yield in effect at the time
of the grant. Since our historical data is limited, the expected life of options
granted is based on the simplified method for plain vanilla options in
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 107. In December 2007, the SEC issued SAB
No. 110, an amendment of SAB No. 107. SAB No. 110 states that the staff
will continue to accept, under certain circumstances, the continued use of the
simplified method beyond December 31, 2007. Accordingly, we will continue
to use the simplified method until we have enough historical experience to
provide a reasonable estimate of expected term. For the three and six months
ended April 3, 2009, we recognized $0.7 million and $1.3 million,
respectively, in stock-based compensation expense. For the three and six months
ended March 28, 2008, we recognized $0.6 million and $1.0 million,
respectively, in stock-based compensation expense.




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Income
taxes




We must
make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of tax credits, tax benefits and deductions and in the calculation
of certain tax assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and financial statement
purposes. Significant changes to these estimates may result in an increase or
decrease to our tax provision in a subsequent period.




We must
assess the likelihood that we will be able to recover our deferred tax assets.
If recovery is not more likely than not, we must increase our provision for
taxes by recording a valuation allowance against the deferred tax assets that we
estimate will not ultimately be recoverable. We believe that all of the deferred
tax assets recorded on our consolidated balance sheets will ultimately be
recovered. However, should there be a change in our ability to recover our
deferred tax assets, our tax provision would increase in the period in which we
determined that the recovery was not more likely than not.




In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. In the first
quarter of fiscal year 2008, we adopted FASB Interpretation (“FIN”) No. 48
and related guidance. See Note 9 to consolidated
condensed financial statements of this Form 10-Q for further discussion. FIN No.
48 requires that we recognize liabilities for uncertain tax positions based on
the two-step process prescribed within the interpretation. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely of
being realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as this requires us to determine the
probability of various possible outcomes. We reevaluate these uncertain tax
positions on a quarterly basis. This evaluation is based on factors including,
but not limited to, changes in facts or circumstances, changes in tax law,
effectively settled issues under audit, and new audit activity. Such a change in
recognition or measurement would result in the recognition of a tax benefit or
an additional charge to the tax provision.




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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 April 3, 2009, we had fixed rate senior subordinated notes
of $122.0 million due in 2012, bearing interest at 8% per year and variable
rate debt consisting of $12.0 million floating rate senior notes due in
2015 and a $84.0 million term loan under our amended and restated senior
credit facilities due in 2014. Our variable rate debt is subject to changes in
the prime rate and the LIBOR rate.





We use
derivative instruments from time to time in order to manage interest costs and
risk associated with our long-term debt. On September 21, 2007, we entered
into an interest rate swap contract to receive three-month USD-LIBOR-BBA
(British Bankers’ Association)interest and pay 4.77% fixed rate interest. Net interest positions are
settled quarterly. We have structured the swap with decreasing notional amounts
such that it is less than the balance of the term loan. The notional value of
the swap was $60.0 million at April 3, 2009 and represented approximately
71% of the aggregate term loan balance. The swap agreement is effective through
June 30, 2011. Under the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, this arrangement was
initially designated and qualified as an effective cash flow hedge of interest
rate risk related to the term loan under our senior credit facilities which
permitted recording the fair value of the swap and corresponding unrealized gain
or loss to accumulated other comprehensive income in the consolidated balance
sheets. The interest rate swap gain or loss is included in the assessment of
hedge effectiveness. At April 3, 2009, the fair value of the short-term and
long-term portions of the 2007 Swap was a liability of $1.8 million (accrued
expenses) and $1.0 million (other long-term liabilities), respectively. At April
3, 2009, the unrealized loss, net of tax, on the swap was $1.8
million.




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 floating rate
senior notes and term loan under our senior 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 results in an immaterial increase in future
interest expense.




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 SFAS No. 133. The unrealized gains and losses from
foreign exchange forward contracts are included in "accumulated other
comprehensive income" in the consolidated balance sheets. 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 the consolidated statements of operations. No ineffective amounts
were recognized due to anticipated transactions failing to occur in the three
and six months ended April 3, 2009.




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As of
April 3, 2009, we had entered into Canadian dollar forward contracts for
approximately $50.6 million (Canadian dollars), or approximately 87% of our
estimated Canadian dollar denominated expenses for April 2009 through
June 2010, at an average rate of approximately $0.87 U.S. dollar to
Canadian dollar. We estimate the impact of a 1 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 or approximately 2 cents to basic and diluted earnings per
share.





Net
income for the three and six months ended April 3, 2009 includes a recognized
loss of $1.9 million and $2.2 million, respectively, from foreign currency
forward contracts. At April 3, 2009, the fair value of foreign currency forward
contracts was a short-term liability of $3.9 million (accrued expenses), a
short-term asset of $0.1 million (prepaid and other current assets), and a
long-term asset of $0.1 million, and the unrealized loss, net of tax, was $3.0
million.






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




None.






Item 1A.    Risk
Factors




For a discussion of risk factors, see "Part I. Item 1A. Risk Factors" in our
Annual Report on Form 10-K for the year ended October 3, 2008. There have been
no material changesfrom the risk factors
disclosed in the "Risk Factors" section of our 2008 Form 10-K.






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




None.






Item 3.       Defaults
Upon Senior Securities




None.






Item 4.       Submission
of Matters to a Vote of Security Holders




At an
Annual Meeting of Stockholders held on February 24, 2009, the following
proposals were presented for a vote of the stockholders of the
Company:




Proposal
No. 1: The election of the following two directors to serve for a three-year
term ending at the 2012 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified.




Nominee
                
                For Votes
                
                
                Withheld VotesO.
      Joe Caldarelli
                
                
                14,918,464
                
                
                
                869,070Michael
      F. Finley
                
                
                14,487,532
                
                
                
                1,730,934




The term
of office for the following directors continued after the Annual Meeting:
Michael Targoff, Jeffrey P. Hughes, Stephen R. Larson and William P.
Rutledge.




Proposal
No. 2: The approval of amendments to the Company’s 2006 Equity and Performance
Incentive Plan, as amended (the “2006 Plan”), to increase by 1,400,000 the
maximum number of shares of the Company's common stock that may be issued or
subject to awards under the 2006 Plan and to provide that future share-based
awards (other than option and stock appreciation right awards) made under the
2006 Plan will count as two shares for purposes of determining whether the cap
on the total number of shares issuable under the 2006 Plan has been
exceeded.





Votes
                    
                    SharesFor
                    
                    
                    11,037,657Against
                    
                    
                    4,356,422Abstain
                    
                    
                    1,945




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Proposal
No. 3: The approval of the “performance-based” compensation provisions of the
2006 Plan to comply with the requirements of Section 162(m) of the Internal
Revenue Code of 1986, as amended.





Votes
                
                SharesFor
                
                
                12,082,110Against
                
                
                3,311,347Abstain
                
                
                2,567





Proposal
No. 4: The ratification of the appointment of KPMG LLP as the Company’s
independent registered public accounting firm for fiscal year 2009.




Votes
                
                SharesFor
                
                
                15,701,112Against
                
                
                81,157Abstain
                
                
                4,665






Item 5.      Other
Information




None.




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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.







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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, INC.











Dated: 
      May 13, 2009
                /s/ JOEL A. LITTMANJoel
      A. Littman
                  Chief
      Financial Officer, Treasurer and Secretary
                  (Duly
      Authorized Officer and Chief Financial
Officer)






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