CPI International Holding 10-Q 2013 Q3 Quarterly report

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 June 28, 2013

or

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

For the transition period from ________ to ________

Commission file number: 333-173372-07

CPI INTERNATIONAL HOLDING CORP.

(Exact Name of Registrant as Specified in Its Charter) 

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

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

Yes ¨ No ý

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

Yes ý No ¨

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding for each of the registrant’s classes of Common Stock, as of the latest practicable date: As of August 7, 2013, 1,000 shares of Common Stock, $0.01 par value, all of which are owned by CPI International Holding LLC, the registrant’s parent holding company, and are not publicly traded.

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

10-Q REPORT

INDEX

			Page
Part I:	FINANCIAL INFORMATION		4
	Item 1.	Unaudited Condensed Consolidated Financial Statements	4
		Condensed Consolidated Balance Sheets as of June 28, 2013 and September 28, 2012	4
		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 28, 2013 and June 29, 2012	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 28, 2013 and June 29, 2012	6
		Notes to Unaudited Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4.	Controls and Procedures	40
Part II:	OTHER INFORMATION		41
	Item 1.	Legal Proceedings	41
	Item 1A.	Risk Factors	41
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 3.	Defaults Upon Senior Securities	41
	Item 4.	Mine Safety Disclosures	41
	Item 5.	Other Information	41
	Item 6.	Exhibits	41

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

Cautionary Statements Regarding Forward-Looking Statements

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that relate to future events or our future financial performance. In some cases, readers can identify forward-looking statements by terminology, such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

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

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

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

Part I:  FINANCIAL INFORMATION

Item 1.    Unaudited Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data – unaudited) 

	June 28, 2013			September 28, 2012
Assets
Current Assets:
Cash and cash equivalents	$	61,272		$	43,006
Restricted cash	2,451			1,926
Accounts receivable, net	55,001			51,076
Inventories	92,212			83,937
Deferred tax assets	14,292			14,186
Prepaid and other current assets	4,308			10,400
Total current assets	229,536			204,531
Property, plant, and equipment, net	77,068			81,601
Deferred debt issue costs, net	10,282			11,954
Intangible assets, net	242,569			248,877
Goodwill	179,594			178,934
Other long-term assets	1,034			1,105
Total assets	$	740,083		$	727,002
Liabilities and stockholders’ equity
Current Liabilities:
Current portion of long-term debt	$	—		$	3,200
Accounts payable	25,337			26,331
Accrued expenses	31,922			26,707
Product warranty	4,105			4,066
Income taxes payable	6,158			2,852
Advance payments from customers	16,201			14,434
Total current liabilities	83,723			77,590
Deferred income taxes	87,103			88,879
Long-term debt, less current portion	358,703			358,613
Other long-term liabilities	6,206			5,704
Total liabilities	535,735			530,786
Commitments and contingencies
Stockholders’ equity
Common stock ($0.01 par value, 2 shares authorized: 1 share issued and outstanding)	—			—
Additional paid-in capital	199,319			198,565
Accumulated other comprehensive (loss) income	(1,075		)	449
Retained earnings (accumulated deficit)	6,104			(2,798		)
Total stockholders’ equity	204,348			196,216
Total liabilities and stockholders’ equity	$	740,083		$	727,002

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

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

CONDENSED CONSOLIDATED

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands – unaudited)

	Three Months Ended						Nine Months Ended
	6/28/2013			6/29/2012			6/28/2013			6/29/2012
Sales	$	109,616		$	97,193		$	309,396		$	286,631
Cost of sales, including $0, $13, $261 and $20 of utilization of net increase in cost basis of inventory due to purchase accounting, respectively	75,704			67,676			220,810			206,635
Gross profit	33,912			29,517			88,586			79,996
Operating costs and expenses:
Research and development	3,850			3,370			11,081			10,397
Selling and marketing	5,618			5,209			16,455			16,345
General and administrative	7,227			6,310			20,805			18,483
Amortization of acquisition-related intangible assets	1,947			2,664			7,019			11,252
Total operating costs and expenses	18,642			17,553			55,360			56,477
Operating income	15,270			11,964			33,226			23,519
Interest expense, net	6,753			6,784			20,467			20,437
Income before income taxes	8,517			5,180			12,759			3,082
Income tax expense	2,366			2,235			3,857			2,093
Net income	6,151			2,945			8,902			989
Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on cash flow hedges, net of tax	(490		)	(356		)	(1,524		)	688
Total other comprehensive (loss) income, net of tax	(490		)	(356		)	(1,524		)	688
Comprehensive income	$	5,661		$	2,589		$	7,378		$	1,677

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

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands – unaudited)

	Nine Months Ended
	June 28, 2013			June 29, 2012
Cash flows from operating activities
Net cash provided by operating activities	$	30,627		$	14,485
Cash flows from investing activities
Capital expenditures	(3,790		)	(6,441		)
Acquisitions	(5,371		)	(400		)
Net cash used in investing activities	(9,161		)	(6,841		)
Cash flows from financing activities
Repayment of borrowings under CPII’s term loan facility	(3,200		)	(1,125		)
Net cash used in financing activities	(3,200		)	(1,125		)
Net increase in cash and cash equivalents	18,266			6,519
Cash and cash equivalents at beginning of period	43,006			34,955
Cash and cash equivalents at end of period	$	61,272		$	41,474
Supplemental cash flow disclosures
Cash paid for interest	$	14,426		$	14,754
Cash (received) paid for income taxes, net	$	(3,006	)	$	376

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

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All tabular dollar amounts in thousands)

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

The Company

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

The accompanying condensed consolidated financial statements represent the consolidated results and financial position of the Company. The Company develops, manufactures and distributes microwave and power grid electron devices, microwave amplifiers, modulators, antenna systems and various other power supply equipment and devices. The Company has two reportable segments: electron devices (formerly vacuum electron devices or “VEDs”) and satcom equipment.

Basis of Presentation and Consolidation

The Company’s fiscal year is the 52- or 53-week period that ends on the Friday nearest September 30. Fiscal years 2013 and 2012 comprise the 52-week periods ending September 27, 2013 and September 28, 2012, respectively. The third quarters of both fiscal years 2013 and 2012 include 13 weeks. The first three quarters of both fiscal years 2013 and 2012 include 39 weeks. All other period references are to the Company’s fiscal periods unless otherwise indicated.

The accompanying unaudited condensed consolidated financial statements of the Company as of June 28, 2013 and for the three and nine months endedJune 28, 2013 and June 29, 2012 are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2012 filed with the Securities and Exchange Commission. The condensed consolidated balance sheet as of September 28, 2012 has been derived from the audited financial statements at that date. The results of operations and cash flows for the interim period ended June 28, 2013 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.

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Use of Estimates and Assumptions

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

2. Recently Issued Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” intended to simplify how an entity tests goodwill for impairment. ASU 2011-08 allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of this qualitative assessment will determine whether a quantitative impairment test must be performed. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption was permitted. The Company will adopt ASU 2011-08 in connection with its annual goodwill impairment test in the fourth quarter of fiscal year 2013. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In November 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Offsetting, otherwise known as netting, is the presentation of assets and liabilities as a single net amount in the statement of financial position (balance sheet). In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” which clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, “Derivatives and Hedging,” including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, and should provide the required disclosures retrospectively for all comparative periods presented. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2014. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

In July 2012, the FASB issued ASU 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 amends the guidance in Accounting Standards Codification (“ASC”) 350-302 on testing indefinite-lived intangible assets, other than goodwill, for impairment by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50% impaired, the entity would not need to calculate the fair value of the asset. In addition, ASU 2012-02 does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption being permitted. The Company will adopt ASU 2012-02 in connection with its annual indefinite-lived intangible assets impairment test in the fourth quarter of fiscal year 2013. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In February 2013, the FASB issued ASU 2013-02, “Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which amends ASC 220, “Comprehensive Income.” The amended guidance requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendment is effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2012. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2014. As this ASU addresses disclosure requirements only, its adoption is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2015. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

3. Business Combination

On June 25, 2013, the Company completed its acquisition of certain assets of M C L, Inc., (“MCL”) a manufacturer of power amplifier products and systems for the satellite communications market and a wholly owned subsidiary of MITEQ, Inc., for a payment of approximately $5.4 million in cash, subject to customary working capital adjustments. The acquisition was funded entirely from the Company’s cash on hand and was made to support the strategic growth of the Company. MCL, which operates a manufacturing facility in Bolingbrook, Illinois, has been integrated into the Company’s Satcom Division as a part of the Company’s satcom equipment operating segment. The results of MCL’s operations were included in the Company’s consolidated results of operations beginning on the date of the acquisition.

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Under the acquisition method of accounting, the total purchase price was allocated to MCL’s net tangible and intangible assets based upon their estimated fair values as of the date of acquisition. Of the approximately $5.4 million preliminary purchase price for MCL, approximately $0.7 million was allocated to goodwill, $3.3 million to net assets and $1.4 million to identifiable intangible assets. Goodwill associated with this transaction is deductible for income tax purposes. The impact of this acquisition was not material to the Company’s condensed consolidated financial statements.

The fair values of certain assets acquired and liabilities assumed in the MCL business combination are preliminary, and are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, inventory, fixed assets and loss reserves. A change to the acquisition date fair value of the identifiable net assets during the measurement period (up to one year from the acquisition date) affects the amount of the purchase price allocated to goodwill. Changes to the purchase price allocation are adjusted retrospectively in the consolidated financial statements.

In connection with the acquisition of certain assets of MCL, the Company incurred various costs totaling $0.4 million and $0.9 million included in general and administrative in the condensed consolidated statements of comprehensive income for the three and nine months ended June 28, 2013, respectively. These costs, which the Company expensed as incurred, consist primarily of professional fees payable to financial and legal advisors.

4. Supplemental Financial Information

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

	June 28, 2013			September 28, 2012
Accounts receivable	$	55,005		$	51,079
Less: Allowance for doubtful accounts	(4		)	(3		)
Accounts receivable, net	$	55,001		$	51,076

Of the $3.9 million increase in net accounts receivable, $2.3 million resulted from the MCL acquisition (Note 3).

Inventories: The following table provides details of inventories: 

	June 28, 2013		September 28, 2012
Raw material and parts	$	53,720	$	49,250
Work in process	27,874		26,425
Finished goods	10,618		8,262
	$	92,212	$	83,937

Of the $8.3 million increase in inventory, $2.5 million resulted from the MCL acquisition (Note 3).

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

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

	Three Months Ended						Nine Months Ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Balance at beginning of period	$	7,907		$	7,074		$	6,951		$	5,667
Provision for loss contracts, charged to cost of sales	560			(346		)	2,420			2,455
Credit to cost of sales upon revenue recognition	(3,586		)	(162		)	(4,490		)	(1,556		)
Balance at end of period	$	4,881		$	6,566		$	4,881		$	6,566

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

	June 28, 2013		June 29, 2012
Inventories	$	4,527	$	5,313
Accrued expenses	354		1,253
	$	4,881	$	6,566

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

	Three Months Ended						Nine Months Ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Beginning accrued warranty	$	3,758		$	4,979		$	4,066		$	5,607
Actual costs of warranty claims	(1,092		)	(918		)	(3,507		)	(3,356		)
Assumed from acquisitions	200			—			200			20
Estimates for product warranty, charged to cost of sales	1,239			386			3,346			2,176
Ending accrued warranty	$	4,105		$	4,447		$	4,105		$	4,447

Other Comprehensive (Loss) Income: The following table summarizes the activity related to other comprehensive (loss) income during the periods presented: 

	Three Months Ended						Nine Months Ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Cash flow hedges:
Unrealized (loss) gain arising during period	$	(757	)	$	(430	)	$	(1,941	)	$	760
Reclassification adjustment for losses (gains) realized in net income	103			(48		)	(97		)	163
Income tax benefit (expense)	164			122			514			(235		)
Net unrealized (loss) gain on cash flow hedges	(490		)	(356		)	(1,524		)	688
Other comprehensive (loss) income	$	(490	)	$	(356	)	$	(1,524	)	$	688

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

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

	June 28, 2013			September 28, 2012
Unrealized (loss) gain on cash flow hedges, net of tax of $246 and $(268), respectively	$	(737	)	$	787
Unrealized actuarial loss and prior service credit for pension liability, net of tax of $114 and $114, respectively	(338		)	(338		)
Accumulated other comprehensive (loss) income	$	(1,075	)	$	449

5. Financial Instruments

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

			Fair Value Measurements at June 28, 2013 Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market and overnight U.S. Government securities1	$	52,119	$	52,119	$	—	$	—
Mutual funds2	233		233		—		—
Foreign exchange forward derivatives3	1		—		1		—
Total assets at fair value	$	52,353	$	52,352	$	1	—
Liabilities:
Foreign exchange forward derivatives4	$	755	$	—	$	755	$	—
Total liabilities at fair value	$	755	$	—	$	755	$	—
1 The money market and overnight U.S. Government securities are classified as part of cash and cash equivalents in the condensed consolidated balance sheet.
2 The mutual funds are classified as part of other long-term assets in the condensed consolidated balance sheet.
3 The asset position of foreign currency derivatives is classified as part of prepaid and other current assets in the condensed consolidated balance sheet.
4 The liability position of foreign currency derivatives is classified as part of accrued expenses in the condensed consolidated balance sheet.

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

			Fair Value Measurements at September 28, 2012 Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market and overnight U.S. Government securities1	$	33,064	$	33,064	$	—	$	—
Mutual funds2	211		211		—		—
Foreign exchange forward derivatives3	1,067		—		1,067		—
Total assets at fair value	$	34,342	$	33,275	$	1,067	—
Liabilities:
Foreign exchange forward derivatives4	$	36	$	—	$	36	$	—
Contingent consideration liability5	56		—		—		56
Total liabilities at fair value	$	92	$	—	$	36	$	56
1 The money market and overnight U.S. Government securities are classified as part of cash and cash equivalents in the condensed consolidated balance sheet.
2 The mutual funds are classified as part of other long-term assets in the condensed consolidated balance sheet.
3 The asset position of foreign currency derivatives is classified as part of prepaid and other current assets in the condensed consolidated balance sheet.
4 The liability position of foreign currency derivatives is classified as part of accrued expenses in the condensed consolidated balance sheet.
5 The contingent consideration liability is classified as part of other long-term liabilities in the condensed consolidated balance sheet.

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

Contingent Consideration

In connection with, and as part of the consideration for, the acquisition in June 2012 of the Codan Satcom business from Codan Limited, an Australian-based public company, the Company was obligated to make a maximum of $4.5 million in potential additional payments if certain revenue targets were achieved over the two years following the acquisition. These potential earn-out payments were considered contingent consideration. This contingent consideration was measured at fair value at the acquisition date and has been remeasured to fair value at each reporting date until the contingency is resolved. The fair value of the contingent consideration is based on a probabilistic calculation whereby the Company assigned estimated probabilities to achieving the earn-out targets and then discounted the total contingent consideration to net present value using Level 3 inputs. The Company believed the discount rate used to discount the earn-out payments reflect market participant assumptions. As of September 28, 2012, the estimated fair value of the contingent consideration was $0.1 million. During the third quarter of fiscal year 2013, the Company has determined that the earn-out revenue targets would not be met. The Company, therefore, recorded a gain of $0.1 million in general and administrative in the condensed consolidated statements of comprehensive income for the three and nine months ended June 28, 2013 from the reversal of the contingent consideration liability.

Other Financial Instruments

The Company’s other financial instruments include cash, restricted cash, accounts receivable, accounts payable, accrued expenses and long-term debt. Except for long-term debt, the carrying value of these financial instruments approximates fair values because of their relatively short maturity.

- 13 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The fair value of the Company’s long-term debt is estimated based on quoted market prices from the trading desk of a nationally recognized investment bank. In previous periods, the Company presented the long-term debt under Level 1 of the fair value hierarchy. Upon further analysis of market activity, given that the Company’s senior notes are only available to investors through certain brokerage firms and, as a result, are not considered actively traded, the Company has classified this debt under Level 2 of the fair value hierarchy as of June 28, 2013 and September 28, 2012. The estimated fair value of the Company’s long-term debt as of June 28, 2013 and September 28, 2012 using Level 2 fair value inputs was $365.2 million and $352.3 million, respectively, compared to the carrying value of $358.7 million and $361.8 million, respectively.

6. Long-term Debt

Long-term debt comprises the following:

	June 28, 2013		September 28, 2012
Term loan, net of issue discount of $472 and $562	$	143,703	$	146,813
8% Senior notes due 2018	215,000		215,000
	358,703		361,813
Less:  Current portion	—		3,200
Long-term portion	$	358,703	$	358,613
Standby letters of credit	$	4,037	$	4,753

Senior Secured Credit Facilities. In February 2011, CPII entered into the Senior Secured Credit Facilities consisting of (i) a $150.0 million, six-year term loan facility; and (ii) a $30.0 million, five-year revolving credit facility. CPII immediately borrowed the full amount of the term loan facility thereunder, and the revolving credit facility was undrawn at June 28, 2013 (other than for approximately $4.0 million of outstanding letters of credit). CPII has the option to increase the amount available under the Senior Secured Credit Facilities by up to an aggregate of $50.0 million on an uncommitted basis.

Borrowings under the term loan facility and the revolving credit facility bear interest, at CPII’s option, at a rate equal to a margin over either (a) a base rate or (b) a LIBOR rate. As of June 28, 2013, the variable interest rate on the term loan was 5.0%. The Senior Secured Credit Facilities are subject to amortization and prepayment requirements and contain customary representations and warranties, covenants, events of default and other provisions.

The prepayment requirement under the Senior Secured Credit Facilities is calculated based on a percentage of “excess cash flow” (“ECF”) as defined in the credit agreement governing the Senior Secured Credit Facilities. The ECF mandatory prepayment is required to be made within five business days of issuing the year-end consolidated financial statements. Based on the results for fiscal year 2012, CPII made a prepayment of $3.2 million during the first quarter of fiscal year 2013. 

8.00% Senior Notes due 2018. In February 2011, CPII issued an aggregate of $215 million of 8.00% Senior Notes due 2018 (the “8% Notes”). The outstanding notes are CPII’s senior unsecured obligations. The Parent and each of CPII’s existing and future restricted subsidiaries (as defined in the indenture governing the 8% Notes) guarantee the 8% Notes on a senior unsecured basis. The 8% Notes bear interest at the rate of 8.0% per year. Interest is payable in cash. The indenture governing the 8% Notes limits, subject to certain exceptions, CPII and its restricted subsidiaries’ ability to incur additional indebtedness or issue certain preferred stock; pay dividends and make other restricted payments; make certain investments; sell assets; create

- 14 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

liens; consolidate, merge or sell all or substantially all of CPII’s assets; enter into transactions with affiliates and designate subsidiaries as unrestricted subsidiaries.

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

Year	Optional Redemption Price
2015	104%
2016	102%
2017 and thereafter	100%

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

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

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

Debt Maturities:    As of June 28, 2013, maturities on long-term debt were as follows: 

Fiscal Year	Term Loan		8% Senior Notes		Total
2013 (remaining three months)	$	—	$	—	$	—
2014	—		—		—
2015	1,420		—		1,420
2016	1,420		—		1,420
2017	141,335		—		141,335
Thereafter	—		215,000		215,000
	$	144,175	$	215,000	$	359,175

The above table assumes that the respective debt instruments will be outstanding until their scheduled maturity dates. The table also reflects the remaining mandatory quarterly repayments, as adjusted as a result of the ECF prepayment made under the Senior Credit Facilities in the first quarter of fiscal year 2013. Due to the ECF prepayment made, no mandatory quarterly repayment is to be made until the first quarter of fiscal year 2015. The above table does not reflect future ECF or other optional prepayments, if any, that may be required under the Senior Credit Facilities.

As of June 28, 2013, the Company was in compliance with the covenants under the agreements governing the Senior Secured Credit Facilities and the indentures governing the 8% Notes.

Deferred Debt Issuance Costs

CPII incurred a total of $15.3 million of debt issuance costs and issue discount, including those netted against the debt proceeds, associated with the Senior Credit Facilities and 8% Notes. As of June 28, 2013, the unamortized deferred debt

- 15 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

issuance costs related to the Company’s new debt were $10.3 million, net of $5.0 million accumulated amortization. As of September 28, 2012, the unamortized deferred debt issuance costs related to the Company’s new debt were $12.0 million, net of $3.4 million accumulated amortization.

7. Derivative Instruments and Hedging Activities

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

The Company’s Canadian dollar forward contracts in effect as of June 28, 2013 have durations of six to 16 months. These contracts are designated as a cash flow hedge and are considered highly effective. Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive (loss) income in the condensed consolidated balance sheets. At June 28, 2013, the unrealized loss, net of tax of $0.2 million, was $0.7 million. The Company anticipates recognizing the entire unrealized gain or loss in operating earnings within the next four fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the condensed consolidated statements of comprehensive income. The time value was not material for all periods presented. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then the Company immediately recognizes the gain or loss on the associated financial instrument in general and administrative expenses in the condensed consolidated statements of comprehensive income. No ineffective amounts were recognized due to hedge ineffectiveness in the three and nine months endedJune 28, 2013 and June 29, 2012.

As of June 28, 2013, the Company had entered into Canadian dollar forward contracts for approximately $27.5 million (Canadian dollars), or approximately 67% of estimated Canadian dollar denominated expenses for July 2013 through March 2014, at an average rate of approximately 0.98 U.S. dollars to one Canadian dollar.

The following table summarizes the fair value of derivative instruments designated as cash flow hedges at June 28, 2013 and September 28, 2012: 

	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	June 28, 2013		September 28, 2012		Balance Sheet Location	June 28, 2013		September 28, 2012
Derivatives designated as hedging instruments
Forward contracts	Prepaid and other current assets	$	1	$	1,067	Accrued expenses	$	755	$	36
Total derivatives designated as hedging instruments		$	1	$	1,067		$	755	$	36

As of June 28, 2013 and September 28, 2012, all of the Company’s derivative instruments were classified as hedging instruments.

- 16 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The following table summarizes the effect of derivative instruments on the condensed consolidated statements of comprehensive income for the periods of fiscal years 2013 and 2012 presented:

Derivatives in Cash Flow Hedging Relationships	Amount of (Loss) Gain Recognized in OCI on Derivative (Effective Portion)
	Three Months Ended						Nine Months Ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Forward contracts	$	(757	)	$	(430	)	$	(1,941	)	$	760
Total	$	(757	)	$	(430	)	$	(1,941	)	$	760

Derivatives in Cash Flow Hedging Relationships	Location of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)
		Three Months Ended						Nine Months Ended
		June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Forward contracts	Cost of sales	$	(106	)	$	91		$	98		$	(28	)
	Research and development	1			(22		)	(1		)	(68		)
	Selling and marketing	1			(9		)	—			(30		)
	General and administrative	1			(12		)	—			(37		)
Total		$	(103	)	$	48		$	97		$	(163	)

Derivatives in Cash Flow Hedging Relationships	Location of Gain Recognized in Income on Derivative (Ineffective and Excluded Portion)	Amount of Gain Recognized in Income on Derivative (Ineffective and Excluded Portion)
		Three Months Ended				Nine Months Ended
		June 28, 2013		June 29, 2012		June 28, 2013		June 29, 2012
Forward contracts	General and administrative(a)	$	46	$	273	$	196	$	283
Total		$	46	$	273	$	196	$	283
(a) The amount recognized in income for each period presented represents a gain related to the amount excluded from the assessment of hedge effectiveness.

- 17 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

8. Contingencies

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

During the fourth quarter of fiscal year 2011, the Company received a notice from a customer terminating a portion of a sales contract due to alleged nonperformance. The Company has reached a settlement agreement with its customer resolving this matter. In April 2012, the Company’s partner initiated a legal proceeding against the Company in the Commercial Court of Aix-en-Provence, France, claiming damages of approximately $3.6 million (based on an exchange rate of 1.30 U.S. dollars to one Euro as of June 28, 2013). The Company recorded certain costs in the fourth quarter of fiscal year 2011 as a result of the termination. In June 2013, the parties have agreed to settle the case with the Company agreeing to pay its partner a lump sum to settle all disputes between the parties in connection with the partial termination of the sales contract. As a result of the settlement, the Company recorded a gain of $0.7 million in cost of sales in the condensed consolidated statements of comprehensive income for the three and nine months ended June 28, 2013 from the reversal of a portion of the liability.

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

9. Income Taxes

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

	Three Months Ended						Nine Months Ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Income before income taxes	$	8,517		$	5,180		$	12,759		$	3,082
Income tax expense	$	2,366		$	2,235		$	3,857		$	2,093
Effective income tax rate	27.8		%	43.1		%	30.2		%	67.9		%

The Company’s 27.8% effective tax rate for the three months ended June 28, 2013 differs from the federal statutory rate of 35.0% primarily due to discrete tax benefits related to filing prior year U.S. income tax returns, a current period adjustment to deferred taxes on the Company’s Canadian subsidiary, CPI Canada, due to a change in its income tax reporting currency from Canadian dollar to U.S. dollar, the domestic manufacturing deduction, and the U.S. research credit, partially offset by foreign earnings that are subject to U.S. federal income tax and non-deductible stock compensation. The Company’s 43.1% effective tax rate for the three months ended June 29, 2012 differs from the federal statutory rate of 35.0% primarily due to discrete tax charges related to filing prior year U.S. income tax returns.

- 18 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The Company’s 30.2% effective tax rate for the nine months ended June 28, 2013 differs from the federal statutory rate of 35.0% primarily due to discrete tax benefits related to filing prior year U.S. income tax returns, a current period adjustment to deferred taxes on CPI Canada due to a change in its income tax reporting currency from Canadian dollar to U.S. dollar, the domestic manufacturing deduction, and the U.S. research credit, partially offset by foreign earnings that are subject to U.S. federal income tax and non-deductible stock compensation. The Company’s 67.9% effective tax rate for the nine months ended June 29, 2012 differs from the federal statutory rate of 35.0% primarily due to discrete tax charges related to filing prior year U.S. income tax returns and an adjustment to deferred taxes on undistributed earnings for the Company’s Canadian subsidiary.

The Company files a U.S. federal income tax return and state income tax returns in California, Massachusetts and several other U.S. states. The Company also files income tax returns in Canada and other foreign jurisdictions. With the exception of Canada and California, the Company is no longer subject to examination by the various taxing authorities for fiscal years prior to 2009. The Company’s Canadian subsidiary is no longer subject to examination by the taxing authorities for fiscal years prior to 2003. The Company has income tax audits in progress in several jurisdictions in which it operates, including an audit by the Canada Revenue Agency (“CRA”) for fiscal years 2010 and 2011.

During the third quarter of 2013, the Company received a $4.0 million refund from the Internal Revenue Service (“IRS”) in settlement of a transfer pricing audit on the sale of the Satcom Division to our Canadian subsidiary in fiscal years 2001 and 2002. The IRS refund was recorded as a reduction to income tax receivable (prepaid and other current assets). Also as a result of this transfer pricing audit, the Company’s Canadian subsidiary now has a $3.3 million income tax payable as of June 28, 2013 that the Company expects to pay within the next 12 months.

The total liability for gross unrecognized tax benefits of $7.2 million at June 28, 2013 comprised unrecognized tax benefits of $5.8 million and interest and penalties of $1.4 million. The total liability for gross unrecognized tax benefits, if recognized, would reduce the effective tax rate on income from continuing operations. The $1.4 million balance of interest and penalties was increased by $0.1 million during the nine months ended June 28, 2013. The Company’s policy is to classify interest, foreign exchange rate changes and penalties, if any, on unrecognized tax benefits as components of income tax expense.

10. Segments, Geographic and Customer Information

The Company’s reportable segments are electron devices and satcom equipment. The electron devices segment develops, manufactures and distributes high-power/high-frequency microwave and radio frequency (“RF”) signal components. The satcom equipment segment manufactures and supplies high-power amplifiers and networks for satellite communication uplink, electronic warfare and industrial applications. Segment information reported below is consistent with the manner in which it is reviewed and evaluated by the Company’s chief operating decision maker (“CODM”), its chief executive officer, and is based on the nature of the Company’s operations and products offered to customers.

Amounts not reported as electron devices or satcom equipment are reported as “other.” Other includes the activities of the Company’s Malibu Division and unallocated corporate expenses, such as business combination-related expenses, share-based compensation expense and certain 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.

- 19 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

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

	Three Months Ended						Nine Months Ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Sales from external customers
Electron devices	$	81,478		$	69,531		$	231,589		$	210,650
Satcom equipment	21,883			22,816			63,806			60,286
Other	6,255			4,846			14,001			15,695
	$	109,616		$	97,193		$	309,396		$	286,631
Intersegment product transfers
Electron devices	$	3,592		$	5,674		$	14,135		$	14,724
Satcom equipment	21			64			59			70
	$	3,613		$	5,738		$	14,194		$	14,794
Capital expenditures
Electron devices	$	626		$	1,800		$	2,762		$	4,956
Satcom equipment	31			122			137			663
Other	442			156			891			822
	$	1,099		$	2,078		$	3,790		$	6,441
EBITDA
Electron devices	$	19,285		$	16,774		$	51,126		$	45,975
Satcom equipment	2,564			2,851			7,795			4,242
Other	(1,521		)	(2,188		)	(9,257		)	(7,181		)
	$	20,328		$	17,437		$	49,664		$	43,036

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

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

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

• the Company’s Senior Credit Facilities contain covenants that require the Company to maintain a total leverage ratio and an interest coverage ratio that contain EBITDA as a component, and the Company’s management team uses EBITDA to monitor compliance with these covenants;

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

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

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

- 20 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

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

	Three Months Ended						Nine Months Ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Operating income
Electron devices	$	17,158		$	14,923		$	44,728		$	40,518
Satcom equipment	2,316			2,592			7,019			3,499
Other	(4,204		)	(5,551		)	(18,521		)	(20,498		)
	$	15,270		$	11,964		$	33,226		$	23,519

The following table reconciles net income to EBITDA:

	Three Months Ended				Nine Months Ended
	June 28, 2013		June 29, 2012		June 28, 2013		June 29, 2012
Net income	$	6,151	$	2,945	$	8,902	$	989
Depreciation and amortization	5,058		5,473		16,438		19,517
Interest expense, net	6,753		6,784		20,467		20,437
Income tax expense	2,366		2,235		3,857		2,093
EBITDA	$	20,328	$	17,437	$	49,664	$	43,036

11.Supplemental Guarantors Condensed Consolidating Financial Information

The tables that follow reflect the supplemental guarantor financial information associated with CPII’s 8% Notes issued on February 11, 2011. The 8% Notes are guaranteed by Parent and, subject to certain exceptions, each of Parent’s existing and future domestic restricted subsidiaries (other than CPII) on a senior unsecured basis. Separate financial statements of the guarantors are not presented because (i) the guarantors are wholly owned and have fully and unconditionally guaranteed the 8% Notes on a joint and several basis and (ii) CPII’s management has determined that such separate financial statements are not material to investors. Instead, presented below are the consolidating financial statements of: (a) the guarantor subsidiaries (all of the domestic subsidiaries), (b) the non-guarantor subsidiaries, (c) the consolidating elimination entries, and (d) the consolidated totals. The accompanying consolidating financial information should be read in connection with the consolidated financial statements of the Company.

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

- 21 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING BALANCE SHEET

As of June 28, 2013

	Parent			Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Assets
Cash and cash equivalents	$	—		$	—		$	54,873	$	6,399		$	—		$	61,272
Restricted cash	—			—			2,352		99			—			2,451
Accounts receivable, net	—			—			35,435		19,566			—			55,001
Inventories	—			—			68,709		24,601			(1,098		)	92,212
Deferred tax assets	—			—			13,523		769			—			14,292
Intercompany receivable	—			—			51,708		11,881			(63,589		)	—
Prepaid and other current assets	2			67			2,531		1,291			417			4,308
Total current assets	2			67			229,131		64,606			(64,270		)	229,536
Property, plant and equipment, net	—			—			60,505		16,563			—			77,068
Deferred debt issue costs, net	—			10,282			—		—			—			10,282
Intangible assets, net	—			—			157,169		85,400			—			242,569
Goodwill	—			—			91,976		87,618			—			179,594
Other long-term assets	—			—			920		114			—			1,034
Investment in subsidiaries	204,996			581,809			17,847		—			(804,652		)	—
Total assets	$	204,998		$	592,158		$	557,548	$	254,301		$	(868,922	)	$	740,083
Liabilities and stockholders’ equity
Accounts payable	$	—		$	—		$	14,788	$	10,549		$	—		$	25,337
Accrued expenses	650			7,013			18,574		5,646			39			31,922
Product warranty	—			—			2,346		1,759			—			4,105
Income taxes payable	—			—			1,843		4,315			—			6,158
Advance payments from customers	—			—			11,684		4,517			—			16,201
Intercompany payable	—			1,401			7,847		—			(9,248		)	—
Total current liabilities	650			8,414			57,082		26,786			(9,209		)	83,723
Deferred income taxes	—			—			64,538		22,565			—			87,103
Long-term debt, less current portion	—			358,703			—		—			—			358,703
Other long-term liabilities	—			—			5,283		923			—			6,206
Total liabilities	650			367,117			126,903		50,274			(9,209		)	535,735
Common stock	—			—			—		—			—			—
Parent investment	—			211,100			375,433		191,702			(778,235		)	—
Equity investment in subsidiary	(1,075		)	(1,075		)	9,377		—			(7,227		)	—
Additional paid-in capital	199,319			—			—		—			—			199,319
Accumulated other comprehensive loss	—			—			—		(1,075		)	—			(1,075		)
Retained earnings	6,104			15,016			45,835		13,400			(74,251		)	6,104
Total stockholders’ equity	204,348			225,041			430,645		204,027			(859,713		)	204,348
Total liabilities and stockholders’ equity	$	204,998		$	592,158		$	557,548	$	254,301		$	(868,922	)	$	740,083

- 22 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING BALANCE SHEET

As of September 28, 2012

	Parent			Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Assets
Cash and cash equivalents	$	—		$	—	$	34,042	$	8,964		$	—		$	43,006
Restricted cash	—			—		1,836		90			—			1,926
Accounts receivable, net	—			—		36,707		14,369			—			51,076
Inventories	—			—		58,135		26,552			(750		)	83,937
Deferred tax assets	—			—		13,968		218			—			14,186
Intercompany receivable	—			—		61,497		26,599			(88,096		)	—
Prepaid and other current assets	1			43		7,569		2,502			285			10,400
Total current assets	1			43		213,754		79,294			(88,561		)	204,531
Property, plant and equipment, net	—			—		64,378		17,223			—			81,601
Deferred debt issue costs, net	—			11,954		—		—			—			11,954
Intangible assets, net	—			—		161,628		87,249			—			248,877
Goodwill	—			—		91,123		87,811			—			178,934
Other long-term assets	—			—		991		114			—			1,105
Investment in subsidiaries	197,158			570,037		13,554		—			(780,749		)	—
Total assets	$	197,159		$	582,034	$	545,428	$	271,691		$	(869,310	)	$	727,002
Liabilities and stockholders’ equity
Current portion of long-term debt	$	—		$	3,200	$	—	$	—		$	—		$	3,200
Accounts payable	—			—		13,984		12,347			—			26,331
Accrued expenses	943			2,237		14,960		8,580			(13		)	26,707
Product warranty	—			—		2,411		1,655			—			4,066
Income taxes payable	—			—		273		2,579			—			2,852
Advance payments from customers	—			—		9,403		5,031			—			14,434
Intercompany payable	—			1,401		19,315		—			(20,716		)	—
Total current liabilities	943			6,838		60,346		30,192			(20,729		)	77,590
Deferred income taxes	—			—		65,322		23,557			—			88,879
Long-term debt, less current portion	—			358,613		—		—			—			358,613
Other long-term liabilities	—			—		4,725		979			—			5,704
Total liabilities	943			365,451		130,393		54,728			(20,729		)	530,786
Common stock	—			—		—		—			—			—
Parent investment	—			211,100		376,989		210,638			(798,727		)	—
Equity investment in subsidiary	449			449		9,359		—			(10,257		)	—
Additional paid-in capital	198,565			—		—		(529		)	529			198,565
Accumulated other comprehensive income	—			—		—		449			—			449
(Accumulated deficit) retained earnings	(2,798		)	5,034		28,687		6,405			(40,126		)	(2,798		)
Total stockholders’ equity	196,216			216,583		415,035		216,963			(848,581		)	196,216
Total liabilities and stockholders’ equity	$	197,159		$	582,034	$	545,428	$	271,691		$	(869,310	)	$	727,002

- 23 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATINGSTATEMENT OF COMPREHENSIVE INCOME

For the Three Months Ended June 28, 2013

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

- 24 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATINGSTATEMENT OF COMPREHENSIVE INCOME

For the Three Months Ended June 29, 2012

	Parent			Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Sales	$	—		$	—		$	73,736	$	37,251		$	(13,794	)	$	97,193
Cost of sales	—			—			53,540		27,998			(13,862		)	67,676
Gross profit	—			—			20,196		9,253			68			29,517
Operating costs and expenses:
Research and development	—			—			1,088		2,282			—			3,370
Selling and marketing	—			—			2,891		2,318			—			5,209
General and administrative	559			748			3,950		1,053			—			6,310
Amortization of acquisition-related intangible assets	—			—			1,723		941			—			2,664
Total operating costs and expenses	559			748			9,652		6,594			—			17,553
Operating (loss) income	(559		)	(748		)	10,544		2,659			68			11,964
Interest expense (income), net	—			6,787			1		(4		)	—			6,784
(Loss) income before income tax expense and equity in income of subsidiaries	(559		)	(7,535		)	10,543		2,663			68			5,180
Income tax (benefit) expense	(212		)	(2,891		)	5,146		166			26			2,235
Equity in income of subsidiaries	3,292			7,936			201		—			(11,429		)	—
Net income	2,945			3,292			5,598		2,497			(11,387		)	2,945
Equity in other comprehensive income of subsidiaries, net of tax	(356		)	(356		)	—		—			712			—
Other comprehensive loss, net of tax
Unrealized loss on cash flow hedges, net of tax	—			—			—		(356		)	—			(356		)
Total other comprehensive loss, net of tax	—			—			—		(356		)	—			(356		)
Comprehensive income	$	2,589		$	2,936		$	5,598	$	2,141		$	(10,675	)	$	2,589

- 25 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATINGSTATEMENT OF COMPREHENSIVE INCOME

For the Nine Months EndedJune 28, 2013

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

- 26 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATINGSTATEMENT OF COMPREHENSIVE INCOME

For the Nine Months EndedJune 29, 2012

	Parent			Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Eliminations			Consolidated Total
Sales	$	—		$	—		$	216,889	$	114,534		$	(44,792	)	$	286,631
Cost of sales	—			—			162,690		88,822			(44,877		)	206,635
Gross profit	—			—			54,199		25,712			85			79,996
Operating costs and expenses:
Research and development	—			—			3,380		7,017			—			10,397
Selling and marketing	—			—			9,295		7,050			—			16,345
General and administrative	1,413			814			11,973		4,283			—			18,483
Amortization of acquisition-related intangible assets	—			—			6,514		4,738			—			11,252
Total operating costs and expenses	1,413			814			31,162		23,088			—			56,477
Operating (loss) income	(1,413		)	(814		)	23,037		2,624			85			23,519
Interest expense (income), net	—			20,446			3		(12		)	—			20,437
(Loss) income before income tax expense and equity in income of subsidiaries	(1,413		)	(21,260		)	23,034		2,636			85			3,082
Income tax (benefit) expense	(537		)	(8,078		)	10,255		421			32			2,093
Equity in income of subsidiaries	1,865			15,047			657		—			(17,569		)	—
Net income	989			1,865			13,436		2,215			(17,516		)	989
Equity in other comprehensive income of subsidiaries, net of tax	688			688			—		—			(1,376		)	—
Other comprehensive income, net of tax
Unrealized gain on cash flow hedges, net of tax	—			—			—		688			—			688
Total other comprehensive income, net of tax	—			—			—		688			—			688
Comprehensive income	$	1,677		$	2,553		$	13,436	$	2,903		$	(18,892	)	$	1,677

- 27 -

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months EndedJune 28, 2013

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months EndedJune 29, 2012

	Parent		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
Cash flows from operating activities
Net cash provided by operating activities	$	—	$	—		$	13,554		$	931		$	14,485
Cash flows from investing activities
Capital expenditures	—		—			(5,618		)	(823		)	(6,441		)
Acquisition	—		—			(400		)	—			(400		)
Net cash used in investing activities	—		—			(6,018		)	(823		)	(6,841		)
Cash flows from financing activities
Intercompany funding	—		1,125			(596		)	(529		)	—
Repayment of borrowings under CPII’s term loan facility	—		(1,125		)	—			—			(1,125		)
Net cash used in financing activities	—		—			(596		)	(529		)	(1,125		)
Net increase (decrease) in cash and cash equivalents	—		—			6,940			(421		)	6,519
Cash and cash equivalents at beginning of period	—		—			20,465			14,490			34,955
Cash and cash equivalents at end of period	$	—	$	—		$	27,405		$	14,069		$	41,474

- 28 -

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

Our fiscal years are the 52- or 53-week periods that end on the Friday nearest September 30. Fiscal years 2013 and 2012 comprise the 52-week periods ending September 27, 2013 and September 28, 2012, respectively. The third quarters of both fiscal years 2013 and 2012 include 13 weeks. The first three quarters of both fiscal years 2013 and 2012 include 39 weeks. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, and the notes thereto, of CPI International Holding Corp.

Overview

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

On June 25, 2013, we completed our acquisition of certain assets of M C L, Inc., (“MCL”) a manufacturer of power amplifier products and systems for the satellite communications market and a wholly owned subsidiary of MITEQ, Inc., for a payment of approximately $5.4 million in cash, subject to customary working capital adjustments. The acquisition was funded entirely from our cash on hand. MCL, which operates a manufacturing facility in Bolingbrook, Illinois, has been integrated into our Satcom Division as a part of our satcom equipment operating segment.

On June 30, 2012, we completed our acquisition of the Codan Satcom (“Codan”) business from Codan Limited, an Australian-based public company, for a payment of approximately $7.5 million in cash. The acquisition was funded entirely from our cash on hand. Codan designs and manufactures solid-state RF subsystems for satellite communications services to commercial and government customers. The acquisition of Codan expanded our portfolio of solid-state and satellite communications products and enabled us to offer customers the most complete line of satellite communications amplifiers, operating at all satellite uplink frequencies and power levels, in the industry. The Codan business, which consisted of an operation based in Newton, South Australia and the Locus Microwave operation based in Boalsburg, Pennsylvania, was integrated into our Communications & Medical Products Division in Ontario, Canada, as part of our electron devices operating segment. In the three months ended June 28, 2013, we completed the relocation of the Australian-based operation, which designs and manufactures C-band and Ku-band subsystems and block-up converters (“BUCs”), to our existing Canadian facilities. We also have established an engineering center in South Australia for a number of key research and development personnel from this operation. The Pennsylvania-based Locus Microwave operation, which designs and manufactures X-band and Ku-band BUCs, primarily for military communications applications, has remained in its current location and is now operating under the name “CPI Locus Microwave, Inc.”

Orders

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

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

- 29 -

Our orders by market for the nine months endedJune 28, 2013 and June 29, 2012 are summarized as follows (dollars in millions):

	Nine Months Ended
	June 28, 2013				June 29, 2012				Increase (Decrease)
	Amount		% of Orders		Amount		% of Orders		Amount			Percent
Radar and Electronic Warfare	$	153.4	40	%	$	119.5	43	%	$	33.9		28	%
Medical	55.9		15		49.0		17		6.9			14
Communications	150.8		39		87.9		31		62.9			72
Industrial	16.6		4		14.5		5		2.1			14
Scientific	9.0		2		10.7		4		(1.7		)	(16	)
Total	$	385.7	100	%	$	281.6	100	%	$	104.1		37	%

Orders of $385.7 million for the nine months endedJune 28, 2013 were $104.1 million, or approximately 37%, higher than orders of $281.6 million for the nine months endedJune 29, 2012. Explanations for the order increase or decrease by market for the nine months endedJune 28, 2013 compared to the nine months endedJune 29, 2012 are as follows:

• Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. Orders in these markets primarily comprised many smaller orders of less than $3.0 million by product or program, and the timing of these orders may vary from year to year. Orders for the radar and electronic warfare markets increased 28%, primarily as a result of increased demand for products to support various U.S. and foreign military radar systems, particularly the Aegis radar system. Demand for products to support U.S. military electronic warfare systems increased as well.

• Medical: Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, magnetic resonance imaging (“MRI”) and other applications, and for radiation therapy applications for the treatment of cancer. The 14% increase in medical orders resulted principally from increases in demand for products to support radiation therapy and x-ray imaging applications. Demand for products to support MRI applications also increased.

• Communications: Orders for our communications products consist of orders for commercial communications applications and military communications applications. The 72% increase in communications orders was largely the result of one large order for military communications applications, specifically for advanced tactical common data link (“TCDL”) antenna products to support intelligence, surveillance and reconnaissance (“ISR”) applications, for which we expect to make shipments in the last three months of fiscal year 2013 through fiscal year 2015. Orders to support other military communications and commercial broadcast applications increased, as well, including orders to support broadband data communications applications. Our communications orders in the nine months ended June 28, 2013 also included orders for products from the Codan business that we acquired in the fourth quarter of fiscal year 2012. The acquisition of the former MCL business in June 2013 did not have a material impact on our communications orders in the most recent period.

• Industrial: Orders in the industrial market are cyclical and are generally tied to the state of the economy. The $2.1 million increase in industrial orders was due primarily to an increase in demand for products to support electromagnetic vulnerability testing and chemical analysis applications, partially offset by a decrease in demand for products used in cargo screening applications.

• Scientific: Orders in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $1.7 million decrease in scientific orders was primarily due to a decrease in orders to support certain foreign and domestic accelerator programs due to the timing of those programs.

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

- 30 -

Backlog

As of June 28, 2013, we had an order backlog of $324.5 million, compared to an order backlog of $243.5 million as of June 29, 2012. Because our orders for government end-use products generally have much longer delivery terms than our orders for commercial business (which require quicker turn-around), our backlog is primarily composed of government orders. Backlog represents the cumulative balance, at a given point in time, of recorded customer sales orders that have not yet been shipped or recognized as sales. Backlog is increased when an order is received, and backlog is decreased when we recognize sales. We believe that backlog and orders information is helpful to investors because this information may be indicative of future sales results. Although backlog consists of firm orders for which goods and services are yet to be provided, customers can, and sometimes do, terminate or modify these orders. However, historically the amount of modifications and terminations has not been material compared to total contract volume.

Results of Operations

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

Cost of goods sold generally includes costs for raw materials, manufacturing costs, including allocation of overhead and other indirect costs, charges for reserves for excess and obsolete inventory, warranty claims and losses on fixed price contracts. Operating expenses generally consist of research and development, selling and marketing and general and administrative expenses.

Three Months Ended June 28, 2013 Compared to Three Months Ended June 29, 2012

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

	Three Months Ended								Increase(Decrease)
	June 28, 2013				June 29, 2012
	Amount		% of Sales		Amount		% of Sales		Amount
Sales	$	109.6	100.0	%	$	97.2	100.0	%	$	12.4
Cost of sales	75.7		69.1		67.7		69.7		8.0
Gross profit	33.9		30.9		29.5		30.3		4.4
Research and development	3.9		3.6		3.4		3.5		0.5
Selling and marketing	5.6		5.1		5.2		5.3		0.4
General and administrative	7.2		6.6		6.3		6.5		0.9
Amortization of acquisition-related intangibles	1.9		1.7		2.7		2.8		(0.8		)
Operating income	15.3		14.0		12.0		12.3		3.3
Interest expense, net	6.8		6.2		6.8		7.0		—
Income before taxes	8.5		7.8		5.2		5.3		3.3
Income tax expense	2.4		2.2		2.2		2.3		0.2
Net income	$	6.2	5.7	%	$	2.9	3.0	%	$	3.3
Other Data:
EBITDA (a)	$	20.3	18.5	%	$	17.4	17.9	%	$	2.9

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

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

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

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

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

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

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

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

 For a reconciliation of Net Income to EBITDA, see Note 10 of the accompanying unaudited condensed consolidated financial statements.

Sales: Our sales by market for the three months endedJune 28, 2013 and June 29, 2012 are summarized as follows (dollars in millions):

	Three Months Ended
	June 28, 2013				June 29, 2012				Increase
	Amount		% of Sales		Amount		% of Sales		Amount		Percent
Radar and Electronic Warfare	$	41.5	38	%	$	36.5	37	%	$	5.0	14	%
Medical	18.4		17		18.3		19		0.1		1
Communications	38.4		35		33.0		34		5.4		16
Industrial	6.6		6		6.4		7		0.2		3
Scientific	4.7		4		3.0		3		1.7		57
Total	$	109.6	100	%	$	97.2	100	%	$	12.4	13	%

Sales of $109.6 million for the three months endedJune 28, 2013 were $12.4 million, or approximately 13%, higher than sales of $97.2 million for the three months endedJune 29, 2012. Explanations for the sales increase by market for the three months endedJune 28, 2013 as compared to the three months endedJune 29, 2012 are as follows:

• Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of orders receipts and subsequent shipments in these markets may vary from year to year. Sales for these two markets increased 14% primarily due to higher sales of products to support various U.S. and foreign radar systems, particularly the Aegis radar system.

• Medical: Sales of our medical products consist of sales for medical imaging applications, such as x-ray imaging, MRI and other applications, and for radiation therapy applications for the treatment of cancer. The 1% increase in sales of our medical products in the three months ended June 28, 2013 was primarily due to higher sales of products to support x-ray imaging applications.

• Communications: Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 16% increase in sales in the communications market was largely due to the inclusion of sales from the Codan business we acquired in the fourth quarter of fiscal year 2012. Sales of products to support military communications applications, including advanced TCDL antenna products, and sales of products to support certain commercial communications applications, including direct-to-home broadcast applications, increased, as well. The acquisition of the former MCL business in June 2013 did not have a material impact on our communications sales in the most recent period.

• Industrial: Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $0.2 million increase in sales of industrial products in the three months ended June 28, 2013 was primarily due to higher sales to support chemical analysis applications.

• Scientific: Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $1.7 million increase in scientific sales was due to higher sales to support certain foreign fusion and accelerator programs.

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Gross Profit. Gross profit was $33.9 million, or 30.9% of sales, for the three months ended June 28, 2013 as compared to $29.5 million, or 30.3% of sales, for the three months ended June 29, 2012. The $4.4 million increase in gross profit for the three months ended June 28, 2013 as compared to the three months ended June 29, 2012 was primarily due to higher sales volume and a favorable mix of product shipments in the three months ended June 28, 2013.

Research and Development. Research and development expenses were $3.9 million, or 3.6% of sales, for the three months ended June 28, 2013 and $3.4 million, or 3.5% of sales, for the three months ended June 29, 2012. The $0.5 million increase in research and development expenses for the three months ended June 28, 2013 compared to the three months ended June 29, 2012 was primarily due to the addition of development activity associated with the solid-state products that were acquired from Codan on June 30, 2012.

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

	Three Months Ended
	June 28, 2013		June 29, 2012
Company sponsored	$	3.9	$	3.4
Customer sponsored, charged to cost of sales	3.8		3.4
	$	7.7	$	6.8

Customer-sponsored research and development represents non-recurring development costs incurred on customer sales contracts to develop new or improved products.

Selling and Marketing. Selling and marketing expenses were $5.6 million, or 5.1% of sales, for the three months ended June 28, 2013, and $5.2 million, or 5.3% of sales, for the three months ended June 29, 2012. The $0.4 million increase in selling and marketing expenses for the three months ended June 28, 2013, compared to the three months ended June 29, 2012, was primarily due to expenses for solid-state product lines that were acquired from Codan on June 30, 2012.

General and Administrative. General and administrative expenses were $7.2 million, or 6.6% of sales, for the three months ended June 28, 2013, and $6.3 million, or 6.5% of sales, for the three months ended June 29, 2012. The $0.9 million increase in general and administrative expenses for the three months ended June 28, 2013, compared to the three months ended June 29, 2012, was primarily due to higher management incentive accruals due to improved financial performance, and expenses related to the negotiation, closing and integration of acquisitions, including for the MCL acquisition and integration of the Codan acquisition into CPI.

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 $1.9 million for the three months ended June 28, 2013 and $2.7 million for the three months ended June 29, 2012. The $0.8 million decrease in amortization of acquisition-related intangibles for the three months ended June 28, 2013, compared to the three months ended June 29, 2012, was primarily due to completing backlog amortization in prior periods.

Interest Expense, Net (“Interest Expense”). Interest expense was $6.8 million, or 6.2% of sales, for the three months ended June 28, 2013 and $6.8 million, or 7.0% of sales, for the three months ended June 29, 2012.

Income Tax Expense. We recorded income tax expense of $2.4 million for the three months ended June 28, 2013 and income tax expense of $2.2 million for the three months ended June 29, 2012. The effective income tax rate for the three months ended June 28, 2013 was 28%, and the effective income tax rate for the three months ended June 29, 2012 was 43%. The 28% effective income tax rate for the three months ended June 28, 2013 was lower than our estimated annual effective income tax rate of 37% for fiscal year 2013 primarily due to discrete tax benefits related to filing prior year U.S. income tax returns and an adjustment to deferred taxes for undistributed earnings of the Company’s Canadian subsidiary. The 43% effective income tax rate for the three months ended June 29, 2012 was higher than our estimated annual effective income tax rate of 35% for fiscal year 2012 primarily due to discrete tax charges related to filing prior year U.S. income tax returns.

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Net Income. Net income was $6.2 million, or 5.7% of sales, for the three months ended June 28, 2013 as compared to a net income of $2.9 million, or 3.0% of sales, for the three months ended June 29, 2012. The $3.3 million increase in net income in the three months ended June 28, 2013, compared to the three months ended June 29, 2012, was primarily due to higher gross profit due to higher sales volume and a favorable mix of product shipments and lower intangible amortization expense, partially offset by higher operating expenses due to the inclusion of the Codan business.

EBITDA. EBITDA was $20.3 million, or 18.5% of sales, for the three months ended June 28, 2013 as compared to $17.4 million, or 17.9% of sales, for the three months ended June 29, 2012. The $2.9 million increase in EBITDA in the three months ended June 28, 2013, compared to the three months ended June 29, 2012, was primarily due to higher sales volume and a favorable mix of product shipments, partially offset by higher operating expenses due to the inclusion of the Codan business.

Nine Months EndedJune 28, 2013 Compared to Nine Months EndedJune 29, 2012

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

	Nine Months Ended								Increase(Decrease)
	June 28, 2013				June 29, 2012
	Amount		% of Sales		Amount		% of Sales		Amount
Sales	$	309.4	100.0	%	$	286.6	100.0	%	$	22.8
Cost of sales	220.8		71.4		206.6		72.1		14.2
Gross profit	88.6		28.6		80.0		27.9		8.6
Research and development	11.1		3.6		10.4		3.6		0.7
Selling and marketing	16.5		5.3		16.3		5.7		0.2
General and administrative	20.8		6.7		18.5		6.5		2.3
Amortization of acquisition-related intangibles	7.0		2.3		11.3		3.9		(4.3		)
Operating income	33.2		10.7		23.5		8.2		9.7
Interest expense, net	20.5		6.6		20.4		7.1		0.1
Income before taxes	12.8		4.1		3.1		1.1		9.7
Income tax expense	3.9		1.3		2.1		0.7		1.8
Net income	$	8.9	2.9	%	$	1.0	0.3	%	$	7.9
Other Data:
EBITDA (a)	$	49.7	16.1	%	$	43.0	15.0	%	$	6.7

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

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

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

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

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

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

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

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

 For a reconciliation of Net Income to EBITDA, see Note 10 of the accompanying unaudited condensed consolidated financial statements.

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Sales: Our sales by market for the nine months endedJune 28, 2013 and June 29, 2012 are summarized as follows (dollars in millions):

	Nine Months Ended
	June 28, 2013				June 29, 2012				Increase (Decrease)
	Amount		% of Sales		Amount		% of Sales		Amount			Percent
Radar and Electronic Warfare	$	117.9	38	%	$	106.0	37	%	$	11.9		11	%
Medical	58.2		19		57.7		20		0.5			1
Communications	105.8		34		95.3		33		10.5			11
Industrial	15.9		5		17.9		6		(2.0		)	(11	)
Scientific	11.6		4		9.7		4		1.9			20
Total	$	309.4	100	%	$	286.6	100	%	$	22.8		8	%

Sales of $309.4 million for the nine months endedJune 28, 2013 were $22.8 million, or approximately 8%, higher than sales of $286.6 million for the nine months endedJune 29, 2012. Explanations for the sales increase or decrease by market for the nine months endedJune 28, 2013 as compared to the nine months endedJune 29, 2012 are as follows:

• Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of orders receipts and subsequent shipments in these markets may vary from year to year. Sales for these two markets increased 11% due to higher demand for products to support a U.S. military electronic warfare system and U.S. radar systems, including the Aegis radar system.

• Medical: Sales of our medical products consist of sales for medical imaging applications, such as x-ray imaging, MRI and other applications, and for radiation therapy applications for the treatment of cancer. The 1% increase in sales of our medical products in the nine months ended June 28, 2013 was primarily due to an increase in sales of products to support MRI and radiation therapy applications. This increase was partially offset by lower sales of x-ray imaging products, particularly for customers in Russia due to seasonal fluctuations in demand for x-ray imaging products.

• Communications: Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 11% increase in sales in the communications market was primarily due to the inclusion of sales from the Codan business we acquired in the fourth quarter of fiscal year 2012. Sales of products to support certain military and commercial communications applications, including direct-to-home and broadband data communications applications, also increased. The acquisition of the former MCL business in June 2013 did not have a material impact on our communications sales in the most recent period.

• Industrial: Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $2.0 million decrease in sales of industrial products in the nine months ended June 28, 2013 was due to lower sales to support electromagnetic vulnerability testing, cargo screening and other industrial applications.

• Scientific: Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $1.9 million increase in scientific sales was primarily the result of an increase in sales for accelerator programs.

Gross Profit. Gross profit was $88.6 million, or 28.6% of sales, for the nine months ended June 28, 2013 as compared to $80.0 million, or 27.9% of sales, for the nine months ended June 29, 2012. The $8.6 million increase in gross profit for the nine months ended June 28, 2013, compared to the nine months ended June 29, 2012, was primarily due to higher sales volume and a favorable mix of product shipments in the nine months ended June 28, 2013.

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Research and Development. Research and development expenses were $11.1 million, or 3.6% of sales, for the nine months ended June 28, 2013 and $10.4 million, or 3.6% of sales, for the nine months ended June 29, 2012. The $0.7 million increase in research and development expenses for the nine months ended June 28, 2013, compared to the nine months ended June 29, 2012, was primarily due to the addition of development activity associated with the solid-state products that were acquired from Codan on June 30, 2012.

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

	Nine Months Ended
	June 28, 2013		June 29, 2012
Company sponsored	$	11.1	$	10.4
Customer sponsored, charged to cost of sales	9.9		10.8
	$	21.0	$	21.2

Customer-sponsored research and development represents non-recurring development costs incurred on customer sales contracts to develop new or improved products. The reduction of customer-funded research and development expenses was primarily due to the completion of customer-funded programs for certain advanced antenna and solid-state products, as these products are now in production.

Selling and Marketing. Selling and marketing expenses were $16.5 million, or 5.3% of sales, for the nine months ended June 28, 2013, and $16.3 million, or 5.7% of sales, for the nine months ended June 29, 2012. There was no significant change in selling and marketing expenses for the nine months ended June 28, 2013 compared to nine months ended June 29, 2012.

General and Administrative. General and administrative expenses were $20.8 million, or 6.7% of sales, for the nine months ended June 28, 2013, and $18.5 million, or 6.5% of sales, for the nine months ended June 29, 2012. The $2.3 million increase in general and administrative expenses in the nine months ended June 28, 2013, compared to the nine months ended June 29, 2012, was primarily due to expenses related to the integration of the Codan acquisition into CPI and higher management incentive accruals due to improved financial performance, partially offset by favorable foreign currency expense.

Amortization of Acquisition-related Intangibles. Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. Amortization of acquisition-related intangibles was $7.0 million for the nine months ended June 28, 2013 and $11.3 million for the nine months ended June 29, 2012. The $4.3 million decrease in amortization of acquisition-related intangibles for the nine months ended June 28, 2013, compared to the nine months ended June 29, 2012, was primarily due to completing a portion of the backlog amortization in fiscal year 2012.

Interest Expense, Net (“Interest Expense”). Interest expense was $20.5 million, or 6.6% of sales, for the nine months ended June 28, 2013 and $20.4 million, or 7.1% of sales, for the nine months ended June 29, 2012. There was no significant change in interest expense for the nine months ended June 28, 2013 compared to the nine months ended June 29, 2012.

Income Tax Expense. We recorded income tax expense of $3.9 million for the nine months ended June 28, 2013 and income tax expense of $2.1 million for the nine months ended June 29, 2012. The 30% effective incometax rate for the nine months ended June 28, 2013 was lower than our estimated annual effective incometax rate of 37% for fiscal year 2013 primarily due to discrete tax benefits related to filing prior year U.S. income tax returns and an adjustment to deferred taxes for undistributed earnings of the Company’s Canadian subsidiary. The 68% effective incometax rate for the nine months ended June 29, 2012 was higher than our estimated annual effective incometax rate of 35% for fiscal year 2012 primarily due to discrete tax charges related to filing prior year U.S. and Canada income tax returns and an adjustment to deferred taxes on undistributed earnings for the Company’s Canadian subsidiary.

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Net Income. Net income was $8.9 million, or 2.9% of sales, for the nine months ended June 28, 2013 as compared to net income of $1.0 million, or 0.3% of sales, for the nine months ended June 29, 2012. The $7.9 million increase in net income in the nine months ended June 28, 2013, compared to the nine months ended June 29, 2012, was primarily due to higher sales volume and a favorable mix of product shipments and lower intangible amortization expense, partially offset by higher acquisition closing and integration expenses, income tax provision and operating expenses due to the inclusion of the Codan business.

EBITDA. EBITDA was $49.7 million, or 16.1% of sales, for the nine months ended June 28, 2013 as compared to $43.0 million, or 15.0% of sales, for the nine months ended June 29, 2012. The $6.7 million increase in EBITDA in the nine months ended June 28, 2013, compared to the nine months ended June 29, 2012, was primarily due to higher sales volume and a favorable mix of product shipments, partially offset by higher acquisition closing and integration expenses and operating expenses due to the inclusion of the Codan business.

Liquidity and Capital Resources

Overview

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

On June 25, 2013, we completed our acquisition of certain assets of M C L, Inc. (“MCL”), a Bolingbrook, Illinois-based manufacturing company, for a payment of approximately $5.4 million in cash, subject to customary working capital adjustments. On June 30, 2012, we completed our acquisition of the Codan Satcom business from Codan Limited, an Australian-based public company, to whom we have paid $7.5 million (including goods and services tax). Both acquisitions were funded using available cash on hand.

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

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

Cash and Working Capital

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

	June 28, 2013		September 28, 2012
Cash and cash equivalents	$	61.3	$	43.0
Working capital	$	145.8	$	126.9

We invest cash balances in excess of operating requirements in overnight U.S. Government securities and money market accounts. In addition to the above cash and cash equivalents, we have restricted cash of $2.5 million as of June 28, 2013, consisting of bank guarantees from customer advance payments to our international subsidiaries and cash collateral for certain performance bonds. The bank guarantees will become unrestricted cash when performance under the sales contract is complete. The cash collateral for the performance bonds will become unrestricted cash when the performance bonds expire.

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We are highly leveraged. As of June 28, 2013, excluding approximately $4.0 million of outstanding letters of credit, our total indebtedness was $359.2 million before unamortized original issue discount of $0.5 million. We also had an additional $26.0 million available for borrowing under our revolving credit facility. Our liquidity requirements are significant, primarily due to debt service requirements. For the three and nine months endedJune 28, 2013, our interest expense exclusive of debt issue costs and discount amortization was $6.2 million and $18.7 million, respectively, and our cash interest paid was $1.9 million and $14.4 million, respectively.

As of June 28, 2013 and September 28, 2012, we were in compliance with the covenants under the agreements governing our senior credit facilities and the indentures governing our senior notes. Currently, our most significant debt covenants require us to maintain a maximum leverage ratio of 6.25:1 and a minimum cash interest ratio of 1.85:1. Our current leverage ratio is approximately 4.6:1 and our cash interest ratio is approximately 2.95:1.

Historical Operating, Investing and Financing Activities

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

	Nine Months Ended
	June 28, 2013			June 29, 2012
Net cash provided by operating activities	$	30.7		$	14.4
Net cash used in investing activities	(9.2		)	(6.8		)
Net cash used in financing activities	(3.2		)	(1.1		)
Net increase in cash and cash equivalents	$	18.3		$	6.5

Operating Activities

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

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

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

Investing Activities

Investing activities for the nine months endedJune 28, 2013 comprised payment of $5.4 million made for the acquisition of certain assets of MCL and capital expenditures of $3.8 million. Investing activities for the nine months ended June 29, 2012 comprised $6.4 million of capital expenditures and $0.4 million payment for a business combination.

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Financing Activities

Financing activities for the nine months endedJune 28, 2013 and June 29, 2012 comprised repayment of borrowings under CPII’s term loan facility of $3.2 million and $1.1 million, respectively.

Contractual Obligations

The following table summarizes our significant contractual obligations as of June 28, 2013 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

			Fiscal Year
	Total		2013 (remaining three months)		2014-2015		2016-2017		Thereafter
Operating leases	$	5,199	$	483	$	2,071	$	406	$	2,239
Purchase commitments	42,262		22,977		19,285		—		—
Debt obligations	359,175		—		1,420		142,755		215,000
Interest on debt obligations	113,325		10,521		49,752		44,691		8,361
Uncertain tax positions, including interest	3,254		3,254		—		—		—
Total cash obligations	$	523,215	$	37,235	$	72,528	$	187,852	$	225,600
Standby letters of credit	$	4,037	$	4,037

The above table assumes that the respective debt instruments will be outstanding until their scheduled maturity dates and that interest rates in effect on June 28, 2013 remain constant for future periods. The table also reflects the remaining mandatory quarterly repayments, as adjusted as a result of the “excess cash flow” (“ECF”) prepayment made under the credit agreement governing our senior credit facilities in the first quarter of fiscal year 2013. Due to the ECF prepayment made, no mandatory quarterly repayment is to be made until the first quarter of fiscal year 2015. The above table does not reflect future ECF or other optional prepayments, if any, that may be required under the senior credit facilities.

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

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

As of June 28, 2013, there were no material changes to our other contractual obligations from what we disclosed in our Annual Report on Form 10-K for the fiscal year ended September 28, 2012 filed with Securities and Exchange Commission. See also Note 8 to the accompanying unaudited condensed consolidated financial statements for details on certain of our contingencies.

Capital Expenditures

Our continuing operations typically do not have large recurring capital expenditure requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. Total capital expenditures for the three and nine months endedJune 28, 2013 were $1.1 million and $3.8 million, respectively. For the full fiscal year 2013, ongoing capital expenditures are expected to be approximately $5.5 million to $6.5 million and to be funded by cash flows from operating activities.

Recent Accounting Pronouncements

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

Critical Accounting Policies and Estimates

Our Critical Accounting Policies and Estimates have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended September 28, 2012.

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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 June 28, 2013, we had fixed-rate senior notes of $215.0 million due in 2018, bearing interest at 8% per year, and a variable–rate term loan of $143.7 million (net of $0.5 million unamortized original issue discount) under our senior secured credit facilities due in 2017. Our variable rate debt is subject to changes in the LIBOR rate. As of June 28, 2013, the variable interest rate on the term loan under the senior secured credit facilities was 5.0%.

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

Foreign currency exchange risk

Although the majority of our revenue and expense activities are transacted in U.S. dollars, we do transact business in foreign countries. Our primary foreign currency cash flows are in Canada and several European countries. In an effort to reduce our foreign currency exposure to Canadian dollar denominated expenses, we enter into Canadian dollar forward contracts to hedge the Canadian dollar denominated costs for our manufacturing operation in Canada. Our Canadian dollar forward contracts are designated as a cash flow hedge and are considered highly effective. At June 28, 2013, the fair value of foreign currency forward contracts was a short-term liability of $0.8 million (accrued expenses). Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive (loss) income in the condensed consolidated balance sheets. At June 28, 2013, the unrealized loss, net of tax of $0.2 million, was $0.7 million. We anticipate recognizing the entire unrealized gain or loss in operating earnings within the next four fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the condensed consolidated statements of comprehensive income. The time value was not material for all periods presented. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then we promptly recognize the gain or loss on the associated financial instrument in general and administrative expenses in the condensed consolidated statements of comprehensive income. No ineffective amounts were recognized due to anticipated transactions failing to occur for the three and nine months endedJune 28, 2013 and June 29, 2012.

As of June 28, 2013, we had entered into Canadian dollar forward contracts for approximately $27.5 million (Canadian dollars), or approximately 67% of estimated Canadian dollar denominated expenses for July 2013 through March 2014, at an average rate of approximately 0.98 U.S. dollars to one Canadian dollar. We estimate the impact of a one cent change in the U.S. dollar to Canadian dollar exchange rate (without giving effect to our Canadian dollar forward contracts) to be approximately $0.3 million annually to our net income.

Item 4.    Controls and Procedures

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

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

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Part II:  OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 1A.    Risk Factors

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 28, 2012. There have been no material changesfrom the risk factors disclosed in the “Risk Factors” section of our 2012 Form 10-K.

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

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

None.

Item 6.    Exhibits

No.	Description
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934, as amended.
32.1*	Certifications of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certifications of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
* Filed herewith

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SIGNATURES

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

		CPI INTERNATIONAL HOLDING CORP.
Dated:	August 7, 2013	/s/ JOEL A. LITTMAN
		Joel A. Littman
		Chief Financial Officer, Treasurer and Secretary
		(Duly Authorized Officer and Chief Financial Officer)

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