UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~July~~December 130, 2016



¨	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~~February 97, ~~2016~~2017, 1,110 shares of Common Stock, $0.01 par value, all of which are owned by CPI International Holding LLC, the registrant’s parent holding company, are outstanding 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 July 1, 2016 and October 2, 2015	4
		Condensed Consolidated Balance Sheets as of December 30, 2016 and September 30, 2016	4
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended July 1, 2016 and July 3, 2015	5
		Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended December 30, 2016 and January 1, 2016	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 1, 2016 and July 3, 2015	6
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 30, 2016 and January 1, 2016	6
		Notes to Unaudited Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3529
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4737
	Item 4.	Controls and Procedures	4838
Part II:	OTHER INFORMATION		4939
	Item 1.	Legal Proceedings	4939
	Item 1A.	Risk Factors	4939
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4939
	Item 3.	Defaults Upon Senior Securities	4939
	Item 4.	Mine Safety Disclosures	4939
	Item 5.	Other Information	4939
	Item 6.	Exhibits	5040

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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 and zoning laws and regulations; and inability to obtain raw materials and components. All written and oral forward-looking statements made in connection with this document that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing risk factors and other cautionary statements included herein and in our filings with the Securities and Exchange Commission (“SEC”). We are under no duty to update any of the forward-looking statements after the date of this document to conform such statements to actual results or to changes in our expectations.

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

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Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

Part I: FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data – unaudited)

	July 1, 2016			October 2, 2015
	December 30, 2016			September 30, 2016
Assets
Current assets:
Cash and cash equivalents	$	3944,~~168~~342		$	3750,~~514~~152
Restricted cash	1,~~811~~270			1,~~681~~559
Accounts receivable, net	5856,~~830~~333			6163,~~750~~059
Inventories	~~115~~103,~~926~~257			~~103~~105,~~276~~457
Prepaid and other current assets	610,~~677~~678			65,~~200~~877
Total current assets	~~222~~215,~~412~~880			~~210~~226,~~421~~104
Property, plant, and equipment, net	7472,~~439~~287			7872,~~592~~942
Intangible assets, net	~~250~~244,~~891~~366			~~263~~247,~~273~~289
Goodwill	216,~~505~~549			~~215~~216,~~434~~549
Other long-term assets	31,~~906~~295			31,~~424~~997
Total assets	$	~~768~~750,~~153~~377		$	~~771~~764,~~144~~881
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	~~3,100~~—		$	310,~~100~~051
Accounts payable	3024,~~971~~884			3032,~~349~~450
Accrued expenses	2933,~~973~~213			4428,~~106~~212
Product warranty	65,~~082~~720			5,~~304~~992
Income taxes payable	~~2,563~~941			13,~~154~~055
Advance payments from customers	1512,~~390~~176			1311,~~037~~232
Total current liabilities	8876,~~079~~934			9790,~~050~~992
Deferred tax liabilities	88,~~863~~106			9189,~~227~~059
Long-term debt:
Principal, less current portion	~~542~~535,~~925~~309			~~545~~535,~~250~~199
Less unamortized original issue discount	(32,~~056~~086		)	(42,~~400~~585		)
Less unamortized debt issuance costs	(87,~~969~~284		)	(118,~~084~~214		)
Long term debt, net of discount and debt issuance costs	~~530~~525,~~900~~939			~~529~~524,~~766~~400
Other long-term liabilities	64,~~168~~208			64,~~384~~755
Total liabilities	~~714~~695,~~010~~187			~~724~~709,~~427~~206
Commitments and contingencies
Stockholders’ equity:
Common stock ($0.01 par value, 2 shares authorized: 1 share issued and outstanding)	—			—
Additional paid-in capital	27,~~137~~173			2627,~~565~~156
Accumulated other comprehensive income (loss)	~~1,082~~(95		)	~~(1,995~~626		)
Retained earnings	2528,~~924~~112			2227,~~147~~893
Total stockholders’ equity	5455,~~143~~190			4655,~~717~~675
Total liabilities and stockholders’ equity	$	~~768~~750,~~153~~377		$	~~771~~764,~~144~~881

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~~LOSS

(In thousands – unaudited)

	Three Months Ended						~~Nine Months Ended~~
	July 1, 2016			July 3, 2015			July 1, 2016		July 3, 2015
	December 30, 2016			January 1, 2016
Sales	$	~~129~~114,~~612~~623		$	~~109~~110,~~645~~682		$	~~360,579~~	$	~~328,283~~
Cost of sales, including $0, $0, $906 and $0 of utilization of net increase in cost basis of inventory due to purchase accounting, respectively	89,820			79,831			259,411		236,978
Cost of sales, including $0 and $906 of utilization of net increase in cost basis of inventory due to purchase accounting, respectively	82,533			81,784
Gross profit	3932,~~792~~090			2928,~~814~~898			~~101,168~~		~~91,305~~
Operating costs and expenses:
Research and development	43,~~001~~922			3,~~813~~893			~~12,236~~		~~11,370~~
Selling and marketing	65,~~368~~984			56,~~518~~529			~~19,426~~		~~17,018~~
General and administrative	78,~~650~~165			78,~~572~~118			~~23,132~~		~~23,234~~
Amortization of acquisition-related intangible assets	32,~~299~~699			23,~~546~~558			~~10,414~~		~~7,637~~
Total operating costs and expenses	2120,~~318~~770			1922,~~449~~098			~~65,208~~		~~59,259~~
Operating income	1811,~~474~~320			106,~~365~~800			~~35,960~~		~~32,046~~
Interest expense, net	910,~~800~~786			9,~~119~~723			~~29,308~~		~~27,312~~
Income before income taxes	8,674			1,246			6,652		4,734
Income (loss) before income taxes	534			(2,923		)
Income tax expense	4,161			27			2,875		1,402
Income tax expense (benefit)	315			(1,713		)
Net income	4,513			1,219			3,777		3,332
Net income (loss)	219			(1,210		)
Other comprehensive income (loss), net of tax
Other comprehensive loss, net of tax
Unrealized income (loss) on cash flow hedges, net of tax	818			876			3,077		(688		)
Unrealized loss on cash flow hedges, net of tax	(721		)	(379		)
Total other comprehensive income (loss), net of tax	818			876			3,077		(688		)
Total other comprehensive loss, net of tax	(721		)	(379		)
Comprehensive income	$	5,331		$	2,095		$	6,854	$	2,644
Comprehensive loss	$	(502	)	$	(1,589	)

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
	Three Months Ended
	July 1, 2016			July 3, 2015
	December 30, 2016			January 1, 2016
Cash flows from operating activities
Net cash provided by operating activities	$	138,~~579~~899		$	174,~~687~~146
Cash flows from investing activities
Capital expenditures	(42,~~873~~248		)	(41,~~695~~925		)
Acquisition, net of cash acquired	(363		)	—
Acquisition	—			(363		)
Net cash used in investing activities	(52,~~236~~248		)	(42,~~695~~288		)
Cash flows from financing activities
Payment of contingent consideration	~~(4,300~~—		)	—(4,300		)
Payment of debt issue costs	(64		)	—
Payment of Bridge Facility commitment fee and debt issuance costs	(2,520		)	(63		)
Repayment of borrowings under First Lien Term Loan	(29,~~325~~941		)	(~~2,325~~775		)
Net cash used in financing activities	(612,~~689~~461		)	(25,~~325~~138		)
Net increase in cash and cash equivalents	1,654			10,667
Net decrease in cash and cash equivalents	(5,810		)	(3,280		)
Cash and cash equivalents at beginning of period	3750,~~514~~152			5037,~~617~~514
Cash and cash equivalents at end of period	$	3944,~~168~~342		$	6134,~~284~~234
Supplemental cash flow disclosures
Cash paid for interest	$	213,~~249~~886		$	193,~~531~~991
Cash paid for income taxes, net of refunds	$	34,~~071~~463		$	41,~~311~~061
Decrease in accrued capital expenditures	$	464		$	9
Accrued Bridge Facility commitment fee	$	2,450		$	—
Decrease in accrued capital expenditures	$	134		$	400

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

The accompanying unaudited condensed consolidated financial statements represent the consolidated results and financial position of the Company. The Company develops, manufactures and globally distributes components and subsystems used in the generation, amplification, transmission and reception of microwave signals for a wide variety of systems including radar, electronic warfare and communications (satellite and point-to-point) systems for military and commercial applications, specialty products for medical diagnostic imaging and the treatment of cancer, as well as microwave and radio frequency (“RF”) energy generating products for various industrial and scientific pursuits. The Company has two reportable segments: RF products 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 ~~2016~~2017 and ~~2015~~2016 comprise the 52-week periods ending September 3029, ~~2016~~2017 and ~~October~~September 230, ~~2015~~2016, respectively. Each of the three months ended ~~July~~December 130, 2016 and ~~July~~January ~~3, 2015 included 13 weeks, and each of the nine months ended July~~ 1, 2016 ~~and July 3, 2015~~ included 3913 weeks. All other period references are to the Company’s fiscal periods unless otherwise indicated.

The accompanying condensed consolidated financial statements of the Company as of ~~July~~December 130, 2016 and for the three ~~and nine~~ months ended ~~July~~December 130, 2016 and ~~July~~January 31, ~~2015~~2016 are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended ~~October~~September 230, ~~2015~~2016 filed with the Securities and Exchange Commission on December 1014, ~~2015~~2016. The condensed consolidated balance sheet as of ~~October~~September 230, ~~2015~~2016 has been derived from the audited financial statements at that date. The results of operations and cash flows for the interim period ended ~~July~~December 130, 2016 are not necessarily indicative of results to be expected for the full year.

Certain prior year amounts within the condensed consolidated balance sheets have been reclassified to conform to the current year presentation. Specifically, debt issuance costs and current deferred tax assets and current deferred tax liabilities have been reclassified due to recent accounting standard updates. See Note 2, “Recently Issued Accounting Standards” for additional information on these updates.

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.

Risks and Uncertainties

The Company operates in a dynamic industry and, accordingly, its liquidity can be affected by a variety of factors, some of which are based on normal ongoing operations of its business and others that are related to uncertainties in the markets in which the Company competes and other global economic factors. The Company has historically financed, and intends to continue to finance, its capital and working capital requirements, including debt service and internal growth, through a combination of cash flows from its operations and borrowings under its senior secured credit facilities. The Company's primary uses of cash are cost of sales, operating expenses, debt service, income taxes and capital expenditures.

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The term loans under the Company's first and second lien credit facilities will mature and become payable in November 2017 unless the Company refinances at least 65% of its outstanding senior notes and satisfies certain other conditions prior to that time. However, if the Company refinances at least 65% of its outstanding senior notes and satisfies certain other conditions prior to the requisite deadline, the maturity of the term loans under the first and second lien credit facilities will be extended by approximately three and a half years. The Company intends to refinance at least 65% of its outstanding senior notes and satisfy the conditions necessary for the extension of the maturity dates of the term loans under its first and second lien credit facilities. On December 12, 2016, the Company entered into a commitment letter (the “Commitment Letter”) with UBS, AG, Stamford Branch and UBS Securities LLC (collectively, “UBS”), pursuant to which UBS has committed (subject to certain customary conditions) to provide and arrange a bridge loan facility to refinance 100% of the Company's existing senior notes (if the Company is otherwise unable to refinance its senior notes with certain other financing) and 100% of the Company's second lien credit facility. Assuming the Company is successful in refinancing its senior notes prior to November 2017, the Company believes that cash flows from operations and availability under its revolving credit facility, included in its senior secured credit facilities, will be sufficient to fund the Company's working capital needs, capital expenditures and other business requirements for at least the next 12 months. See Note 5, “Long-term Debt,” for additional information.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and costs and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; inventory valuation; recoverability and valuation of recorded amounts of long-lived assets and identifiable intangible assets, including goodwill; recognition and measurement of current and deferred income tax assets and liabilities; and business combinations. 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that provides a single model for revenue arising from contracts with customers. This accounting standard update, which will supersede current revenue recognition guidance, requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of goods or services. In July 2015, the FASB approved a one-year deferral of the effective date of this accounting standard update. This accounting standard update is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2019. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is currently evaluating the impact the adoption will have on its consolidated results of operations, financial position or cash flows and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.

In April 2015, the FASB issued an accounting standard update that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This accounting standard update requires retrospective adoption and is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company early adopted this accounting standard update beginning in the first quarter of fiscal year 2016. The new accounting standard update reduced other long-term assets and long-term debt on the Company’s consolidated balance sheet as of October 2, 2015 by $11.1 million, representing the unamortized balance of deferred debt issuance costs at that date. The new accounting standard update had no impact on the Company’s consolidated results of operations or cash flows.

In September 2015, the FASB issued an accounting standard update that replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize such adjustments in the reporting period in which the adjustment amounts are determined. This accounting standard update requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public business entities, this accounting standard update is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance, with earlier application permitted for financial statements that have not been issued. The Company early adopted this accounting standard update in the first quarter of fiscal year 2016. See Note 3, Business Combination, for details on the measurement period adjustments made during the nine months ended July 1, 2016 related to the Company's acquisition of ASC Signal Holdings Corporation and their corresponding impact on the Company’s financial statements.

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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 November 2015, the FASB issued an accounting standard update that requires deferred tax liabilities and assets be classified as noncurrent in the balance sheet. The existing requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this accounting standard update. The Company early adopted this accounting standard update retrospectively in the first quarter of fiscal year 2016. The new accounting standard update reduced current assets by $8.5 million, increased other long-term assets and reduced current liabilities by $0.1 million each, and reduced noncurrent deferred tax liabilities by $8.3 million on the Company’s consolidated balance sheet as of October 2, 2015. The new accounting standard update had no impact on the Company’s consolidated results of operations or cash flows.

In February 2016, the FASB issued an accounting standard update which requires lessees to record most leases on their balance sheets. Lessees initially recognize a lease liability (measured at the present value of the lease payments over the lease term) and a right-of-use (“ROU”) asset (measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs). Lessees can make an accounting policy election to not recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the underlying assets that the lessee is reasonably certain to exercise. This accounting standard update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted with the recognition and measurement of leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the impact the adoption may have on its consolidated results of operations, financial position or cash flows and related disclosures.

3In August 2016, the FASB issued an accounting standard update that provides new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. ~~Business~~ ~~Combination~~The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. This accounting standard update is effective for annual and interim periods beginning after December 15, 2017. This accounting standard update will be effective for the Company beginning in the second quarter of fiscal year 2018. The Company does not expect that the adoption of this accounting standard update will have a material effect on its consolidated statements of cash flows.

OnIn ~~September 17,~~October ~~2015~~2016, the ~~Company~~FASB ~~acquired~~issued ~~all~~an ofaccounting ~~the~~standard ~~issued~~update ~~and~~that ~~outstanding~~requires ~~equity~~entities ~~securities~~to ofrecognize ~~ASC~~the ~~Signal~~income ~~Holdings~~tax ~~Corporation~~consequences ~~(“ASC~~of ~~Signal”),~~an aintra-entity ~~Delaware~~transfer ~~corporation,~~of ~~for~~an aasset ~~payment~~other ofthan ~~approximately~~inventory ~~$50.7~~when ~~million~~the intransfer ~~cash~~occurs ~~consideration,~~instead ~~net~~ of ~~$2.2~~when ~~million~~the ~~cash~~asset ~~acquired,~~is ~~including~~sold. This aaccounting ~~post-closing~~standard ~~adjustment~~update ~~based~~requires adoption on a ~~determination~~modified ofretrospective ~~ASC~~basis ~~Signal’s~~through ~~closing~~a ~~net~~cumulative-effect ~~working~~adjustment ~~capital~~to ofretained $0earnings.4 ~~million~~This ~~paid~~accounting instandard ~~the~~update ~~three~~is ~~months~~effective ~~ended~~for ~~January~~annual 1periods, ~~2016.~~including ~~ASC~~interim ~~Signal~~periods ~~designs~~within ~~and~~those ~~builds~~annual ~~advanced~~periods, ~~satellite~~beginning ~~communications,~~after ~~radar~~December ~~and~~15, ~~high-frequency~~2017, ~~antennas~~with ~~and~~early ~~controllers~~application ~~used~~permitted. inThe ~~commercial~~Company ~~and~~early ~~government~~adopted ~~satellite~~this ~~communications,~~accounting ~~terrestrial~~standard ~~communications,~~update ~~imagery~~beginning ~~and~~in ~~data~~the ~~transmission,~~first ~~and~~quarter ~~radar~~of ~~and~~fiscal ~~intelligence~~year ~~applications~~2017. The ~~results~~new ofaccounting ~~ASC~~standard ~~Signal’s~~update ~~operations~~had ~~were~~no ~~included~~impact inon the Company’'s ~~satcom~~consolidated ~~equipment~~results ~~segment~~of ~~and~~operations, financial position or cash flows because the Company’s ~~consolidated~~did ~~results~~not have any deferred income tax accounts for intra-entity asset transfers as of ~~operations~~October ~~beginning~~1, on2016, the Company's date of ~~the acquisition~~adoption.

~~The~~In ~~purchase~~November of2016, the ~~outstanding~~FASB ~~equity~~issued ~~securities~~an accounting standard update which requires that a statement of ~~ASC~~cash ~~Signal~~flows ~~was~~explain ~~accounted~~the ~~for~~change ~~under~~during the ~~acquisition~~period ~~method~~in the total of ~~accounting~~cash, incash ~~which~~equivalents, ~~CPI~~and isamounts ~~deemed~~generally todescribed beas ~~the~~restricted ~~accounting~~cash ~~acquirer~~or restricted cash equivalents. ~~All~~Therefore, ~~assets~~amounts ~~acquired~~generally described as restricted cash and ~~liabilities~~restricted ~~assumed~~cash ~~were~~equivalents ~~recorded~~should atbe ~~their~~included ~~respective~~with ~~fair~~cash ~~values~~and atcash equivalents when reconciling the ~~acquisition~~beginning-of-period ~~date~~and end-of-period total amounts shown on the statement of cash flows. This accounting standard update is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period as of the ~~excess~~beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. This accounting standard update will be effective for the ~~purchase~~Company ~~price~~beginning ~~over~~in the ~~fair~~first ~~value~~quarter of ~~all~~fiscal ~~assets~~year ~~acquired~~2019. ~~and~~The ~~liabilities~~Company ~~assumed~~does ~~was~~not ~~recognized~~expect asthe ~~goodwill~~adoption of this ASU to have a material impact on its consolidated statements of cash flows.


3.	Supplemental Financial Information

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



	December 30, 2016			September 30, 2016
Accounts receivable	$	56,956		$	63,682
Less: Allowance for doubtful accounts	(623		)	(623		)
Accounts receivable, net	$	56,333		$	63,059

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Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Inventories: The following table ~~sets~~provides ~~forth~~details ~~a preliminary allocation~~ of ~~the total purchase price, including the measurement period adjustments, as of July~~inventories: ~~1, 2016 to the assets acquired and the liabilities assumed and the resulting goodwill based on the preliminary estimates of fair value.~~

	Preliminary			Measurement Period Adjustments			As Adjusted
	December 30, 2016			September 30, 2016
Purchase price	$	52,918		$	—		$	52,918
Raw materials and parts	$	56,255		$	57,508
Less: Fair value of assets acquired:
Work in process	30,953			32,258
Net current assets	(12,558		)	1,816			(10,742		)
Finished goods	16,049			15,691
Property, plant and equipment	(7,465		)	(347		)	(7,812		)
Total inventories	$	103,257		$	105,457
Identifiable intangible assets	(25,750		)	1,300			(24,450		)
Other long-term asset	(2,817		)	—			(2,817		)
	(48,590		)	2,769			(45,821		)
Add: Fair value of liabilities assumed:
Long-term deferred tax liabilities	9,408			(1,698		)	7,710
Other long-term liabilities	2,817			—			2,817
	12,225			(1,698		)	10,527
Goodwill	$	16,553		$	1,071		$	17,624

~~The~~Reserve ~~other~~for ~~long-term~~loss ~~asset~~contracts: ~~and~~The ~~other~~following ~~long-term~~table ~~liability~~summarizes ~~represent~~the anactivity ~~environmental~~related ~~indemnification~~to ~~receivable~~reserves ~~and~~for ~~an environmental~~ loss ~~reserve,~~contracts ~~respectively,~~during ~~for~~the ~~environmental~~periods ~~remediation efforts at ASC Signal’s Whitby, Ontario, Canada manufacturing facility. See Note 8, Contingencies, for more information.~~presented:

The measurement period adjustments shown in the table above reflect (i) an increase of $0.5 million to the fair value of assumed product warranty, (ii) a reduction of $0.1 million in sales tax benefit, (iii) an increase of $0.3 million to the fair value of property, plant and equipment, (iv) a decrease of $1.1 million to the fair value of customer relationship, (v) a decrease of $0.2 million to the fair value of backlog, and (vi) a decrease of $0.5 million to long-term deferred tax liabilities, along with their effect on goodwill. In addition, deferred tax assets of $1.2 million were netted against deferred tax liabilities. These measurement period adjustments were among those expected to be made to the preliminary purchase price allocation based on awaited information obtained in the measurement period and are properly reflected in the Company’s condensed consolidated balance sheet as of July 1, 2016.



	Three Months Ended
	December 30, 2016			January 1, 2016
Balance at beginning of period	$	1,180		$	1,638
Provision for loss contracts, charged to cost of sales	77			571
Credit to cost of sales upon revenue recognition	(393		)	(304		)
Balance at end of period	$	864		$	1,905

AsAt ~~mentioned in Note 2, Recently Issued Accounting Standards,~~ the ~~Company~~end ~~has recently adopted an accounting standard update that requires the acquirer in a business combination to record the effect on earnings~~ of ~~measurement~~each period ~~adjustments~~presented ~~in the same period the adjustments are identified. As a result~~above, ~~the~~reserve ~~Company~~for ~~recorded~~loss ~~cumulative~~contracts ~~catch-up~~was ~~pre-tax~~reported ~~adjustments of an additional $0.1 million to the depreciation of property, plant and equipment and a reduction of $0.2 million~~ in the ~~amortization of acquisition-related intangible assets in the Company’s~~ condensed consolidated ~~statements~~balance ofsheet ~~comprehensive~~in ~~income for~~ the ~~three~~following ~~months ended July~~accounts: ~~1, 2016.~~

The Company is in the process of finalizing the purchase price allocation and may make additional adjustments to the allocation during the remaining measurement period. The areas of the purchase price allocation that are not yet finalized and are subject to change relate to the contingent environmental indemnification receivable and loss reserve, certain accrued liabilities, income and non-income tax-related items and the resulting goodwill adjustment. The Company expects to continue to obtain information to finalize these preliminary valuations during the measurement period, which ends during the Company’s fiscal quarter ending September 30, 2016.



	December 30, 2016		January 1, 2016
Inventories	$	841	$	1,905
Accrued expenses	23		—
Total reserves for loss contracts	$	864	$	1,905

Accrued Expenses: The following table provides details of accrued expenses:



	December 30, 2016		September 30, 2016
Payroll and employee benefits	$	14,162	$	16,276
Accrued interest	7,161		2,472
Foreign exchange forward derivatives	575		217
Deferred income	994		984
Bridge Facility commitment fee (Note 5)	2,450		—
Other accruals	7,871		8,263
	$	33,213	$	28,212

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Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

~~The~~Product ~~fair~~Warranty: value assigned to identifiable intangible assets acquired is determined using variations of the income approach. Under these methods, fair value is estimated based upon the present value of cash flows that the applicable asset is expected to generate. The ~~valuation~~following oftable ~~tradenames~~summarizes ~~and completed technology is based on~~ the ~~relief-from-royalty~~activity ~~method,~~related and backlog and customer relationship is valued using the excess earnings method. The royalty rates used in the relief-from-royalty method are based on both a return-on-asset method and market comparable rates. The excess earnings method requires for the Company to ~~forecast~~product future expected earnings of ASC Signal based on management’s best estimates derived from historical results and future projected demand of their offerings. The Company believes that these identifiable intangible assets will have no residual value after their estimated economic useful lives. The fair value of the identifiable intangible assets and their weighted-average useful lives are as followswarranty:

	Estimated Fair Value			Estimated Useful Life(years)
	Three Months Ended
Tradenames	$	3,050		15
	December 30, 2016			January 1, 2016
Completed technology	11,150			15
Beginning accrued warranty	$	5,992		$	5,304
Backlog	2,200			1
Actual costs of warranty claims	(1,846		)	(1,350		)
Customer relationship	8,050			14
Estimates for product warranty, charged to cost of sales	1,574			1,506
Total identifiable intangible assets	$	24,450
Ending accrued warranty	$	5,720		$	5,460

~~All of the above identifiable intangible assets are definite-lived and are amortized over their estimated useful lives~~4. Financial Instruments

~~Goodwill~~The ~~resulting~~Company ~~from~~measures ~~the~~certain ~~ASC~~financial ~~Signal~~assets ~~acquisition~~and isliabilities ~~largely~~at ~~attributable~~fair tovalue ~~future~~on ~~growth~~a ~~opportunities~~recurring ~~within~~basis, ~~the~~including ~~Company’s~~cash ~~communications~~equivalents and ~~radar~~derivative ~~markets~~instruments. ~~and~~The isfollowing ~~not~~tables ~~deductible~~set ~~for~~forth ~~income~~financial ~~tax~~instruments ~~purposes.~~carried at fair value by level of fair value hierarchy:

In connection with the ASC Signal acquisition, the Company incurred various direct costs totaling $0.2 million and $1.0 million for the three and nine months ended July 1, 2016, respectively, and $0.3 million for each of the three and nine months ended July 3, 2015 included in general and administrative in the condensed consolidated statements of comprehensive income. These costs, which the Company expensed as incurred, consist primarily of professional fees payable to financial and legal advisors and an accrual for retention bonuses for ASC Signal's senior management.



				Fair Value Measurements at December 30, 2016
		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Institutional Government money market and overnight U.S. Government securities¹		$	28,983	$	28,983	$	—	$	—
Foreign exchange forward derivatives²		460		—		460		—
Total assets at fair value		$	29,443	$	28,983	$	460	$	—

Liabilities:
Foreign exchange forward derivatives³		$	575	$	—	$	575	$	—
Total liabilities at fair value		$	575	$	—	$	575	$	—


¹	The institutional Government 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 asset position of foreign currency derivatives is classified as part of prepaid and other current assets in the condensed consolidated balance sheet.
³	The liability position of foreign currency derivatives is classified as part of accrued expenses in the condensed consolidated balance sheet.

The following unaudited pro forma results of operations are presented as though the ASC Signal acquisition had occurred as of the beginning of the fiscal year 2014 or September 28, 2013, after giving effect to purchase accounting adjustments relating to depreciation and amortization of the revalued assets and debt incurred by the Company to partially fund the acquisition. The pro forma results of operations exclude the impact of certain charges that have resulted from or were in connection with the acquisition, including (i) the utilization of the net increase in the cost basis of inventory of $0.9 million for the nine months ended July 1, 2016, and (ii) amortization of backlog of $0.4 million and $1.6 million for the three and nine months ended July 1, 2016, respectively. All other pro forma adjustments reflected in the supplemental pro forma results of operations are individually immaterial to each period presented. The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the acquisition been consummated as of the earliest period presented, nor are they necessarily indicative of future operating results.

	Three Months Ended				Nine Months Ended
	July 1, 2016		July 3, 2015		July 1, 2016		July 3, 2015
Sales	$	129,711	$	123,662	$	360,876	$	360,535
Net income	$	5,049	$	2,158	$	6,179	$	3,819

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Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

4. Supplemental Financial Information



				Fair Value Measurements at September 30, 2016
		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Institutional Government money market and overnight U.S. Government securities¹		$	34,215	$	34,215	$	—	$	—
Foreign exchange forward derivatives²		1,159		—		1,159		—
Total assets at fair value		$	35,374	$	34,215	$	1,159	$	—

Liabilities:
Foreign exchange forward derivatives³		$	217	$	—	$	217	$	—
Total liabilities at fair value		$	217	$	—	$	217	$	—


¹	The institutional Government 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 asset position of foreign currency derivatives is classified as part of prepaid and other current assets in the condensed consolidated balance sheet.
³	The liability position of foreign currency derivatives is classified as part of accrued expenses in the condensed consolidated balance sheet.

~~Accounts~~See ~~Receivable:~~Note ~~Accounts~~6, ~~receivable~~“Derivative ~~are~~Instruments ~~stated~~and ~~net~~Hedging ofActivities,” ~~allowances~~ for ~~doubtful~~information ~~accounts~~regarding asthe ~~follows:~~ Company’s derivative instruments.

	July 1, 2016			October 2, 2015
Accounts receivable	$	59,480		$	62,379
Less: Allowance for doubtful accounts	(650		)	(629		)
Accounts receivable, net	$	58,830		$	61,750

Other Financial Instruments

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

	July 1, 2016		October 2, 2015
Raw materials and parts	$	59,765	$	54,499
Work in process	35,880		33,991
Finished goods	20,281		14,786
Total inventories	$	115,926	$	103,276

The estimated carrying and fair values of the Company’s long-term debt are as follows:

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



		December 30, 2016				September 30, 2016
	Fair Value Measurement	Carrying Value		Fair Value		Carrying Value		Fair Value
First Lien Term Loan	Level 2	$	287,018	$	286,287	$	296,488	$	294,599
Second Lien Term Loan	Level 3	26,582		26,582		26,515		26,515
Senior Notes due 2018	Level 2	212,767		215,992		211,924		214,074
		$	526,367	$	528,861	$	534,927	$	535,188

Note: Amounts are net of associated issue discounts and debt issuance costs. Not reflected in the above table are debt issuance costs related to the Company's revolving credit facility of $428 and $476 as of December 30, 2016 and September 30, 2016, respectively.

	Three Months Ended						Nine Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Balance at beginning of period	$	2,095		$	5,347		$	1,638		$	5,008
Provision for loss contracts, charged to cost of sales	216			336			1,251			908
Credit to cost of sales upon revenue recognition	(1,297		)	(4,400		)	(1,875		)	(4,633		)
Balance at end of period	$	1,014		$	1,283		$	1,014		$	1,283

The reduction in reserve for loss contracts was primarily due to completion of certain contractual obligations.

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

	July 1, 2016		July 3, 2015
Inventories	$	941	$	1,283
Accrued expenses	73		—
Total reserves for loss contracts	$	1,014	$	1,283

- 12 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

~~Accrued Expenses:~~ The ~~following~~fair ~~table~~value ~~provides~~of ~~details~~the Second Lien Term Loan (as defined in Note 5, “Long-term Debt”), into which the Company entered in September 2015, was estimated using inputs that are not observable (Level 3) as there are no quoted prices in active or inactive markets for this term loan nor are there any other observable inputs for pricing of ~~accrued~~identical ~~expenses:~~or similar debt instruments. The fair value of the Second Lien Term Loan approximates its carrying value at December 30, 2016 as interest payments on this term loan are based on LIBOR rates that are reset monthly, and the Company believes that its credit risk has not changed materially since the date the term loan was executed.

	July 1, 2016		October 2, 2015
Payroll and employee benefits	$	14,621	$	14,980
Accrued interest	7,288		2,721
Foreign exchange forward derivatives	308		1,821
Deferred income	948		3,329
Contingent consideration liability	—		9,700
Other accruals	6,808		11,555
Total accrued expenses	$	29,973	$	44,106


5.	Long-term Debt

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

	Three Months Ended						Nine Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Beginning accrued warranty	$	6,232		$	4,553		$	5,304		$	4,863
Actual costs of warranty claims	(1,129		)	(1,342		)	(3,965		)	(3,751		)
Assumed from acquisition	—			—			555			—
Estimates for product warranty, charged to cost of sales	979			1,658			4,188			3,757
Ending accrued warranty	$	6,082		$	4,869		$	6,082		$	4,869

On December 12, 2016, CPII entered into the Commitment Letter with UBS with respect to its existing Senior Notes due 2018 (“Senior Notes”). Pursuant to the Commitment Letter, which expires on April 12, 2017, UBS has committed to provide and arrange a bridge loan financing of $245 million (the “Bridge Facility”) providing the funding necessary for the anticipated refinancing of the Senior Notes (if the Company is otherwise unable to refinance its Senior Notes with certain other financing) and the Second Lien Credit Agreement. The financing commitment is subject to certain customary conditions set forth in the Commitment Letter, including the execution and delivery of documentation, the accuracy of representations, the absence of events of default, the absence of material adverse changes and other customary closing conditions. Successful refinancing of the Senior Notes through the Bridge Facility, or otherwise, will extend the maturity date for the First Lien Term Loan (as defined below) and, if not refinanced, the Second Lien Term Loan (as defined below) by approximately three and half years.

~~Assumed~~Pursuant ~~from~~to ~~acquisition~~the ~~represents~~Commitment ~~measurement~~Letter, ~~period~~the ~~adjustment~~Company ~~related~~agreed to ~~ASC~~pay ~~Signal~~UBS ~~acquisition~~a commitment fee in an aggregate amount of $4.9 million. The first $2.45 million of the commitment fee was paid upon execution of the Commitment Letter and the second $2.45 million of the commitment fee is due on the earlier of the execution of the Bridge Facility or the expiration of the Commitment Letter. In connection with the execution of the Commitment Letter, the Company incurred various direct costs, primarily professional legal fees, totaling $0.3 million for the three months ended December 30, 2016. The commitment fee and other costs incurred are capitalized as prepaid and other current assets in the condensed consolidated balance sheet and are being amortized to interest expense, net, in the condensed consolidated statements of comprehensive loss over the commitment period on a straight-line basis. Of the $5.2 million capitalized commitment fee and other costs during the three months ended December 30, 2016, $0.8 million was amortized in the same period. The unpaid commitment fee and other costs of $2.7 million are included in accrued expenses in the condensed consolidated balance sheet as of December 30, 2016.

- 13 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

5. Financial Instruments

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

				Fair Value Measurements at July 1, 2016 Using
		Total		Quoted Prices in Active Markets for Identical Assets(Level 1)		Significant OtherObservable Inputs(Level 2)		SignificantUnobservable Inputs(Level 3)
Assets:
Money market and overnight U.S. Government securities1		$	19,692	$	19,692	$	—	$	—
Mutual funds2		298		298		—		—
Foreign exchange forward derivatives3		1,670		—		1,670		—
Total assets at fair value		$	21,660	$	19,990	$	1,670	$	—
Liabilities:
Foreign exchange forward derivatives4		$	322	$	—	$	322	$	—
Total liabilities at fair value		$	322	$	—	$	322	$	—
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 and other long-term assets in the condensed consolidated balance sheet.
4	The liability position of foreign currency derivatives is classified as part of accrued expenses and other long-term liabilities in the condensed consolidated balance sheet.

- 14 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

				Fair Value Measurements at October 2, 2015 Using
		Total		Quoted Prices in Active Markets for Identical Assets(Level 1)		Significant OtherObservable Inputs(Level 2)		SignificantUnobservable Inputs(Level 3)
Assets:
Money market, fixed deposit and overnight U.S. Government securities1		$	22,390	$	22,390	$	—	$	—
Mutual funds2		282		282		—		—
Total assets at fair value		$	22,672	$	22,672	$	—	$	—
Liabilities:
Foreign exchange forward derivatives3		$	1,821	$	—	$	1,821	$	—
Contingent consideration liability4		9,700		—		—		9,700
Total liabilities at fair value		$	11,521	$	—	$	1,821	$	9,700
1	The money market, fixed deposit 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 liability position of foreign currency derivatives is classified as part of accrued expenses in the condensed consolidated balance sheet.
4	The contingent consideration liability is classified as part of accrued expenses in the condensed consolidated balance sheet.

See Note 7, Derivative Instruments and Hedging Activities, for information regarding the Company’s derivative instruments.

Contingent Consideration

In connection with, and as part of the Company’s acquisition of Radant Technologies, Inc. (“Radant”), the Company was obligated to pay a maximum of $10.0 million in contingent consideration if certain financial targets were achieved by Radant over the two years following the acquisition. The fair value of the contingent consideration was based on a probability-weighted calculation whereby the Company assigned estimated probabilities to achieving the earn-out targets and then discounted the total contingent consideration to net present value using Level 3 inputs. Key assumptions included a discount rate of 14%, which the Company believed to reflect market participant assumptions, and a probability-adjusted level of Radant’s earnings before net interest expense, provision for income taxes and depreciation and amortization (“EBITDA”) in aggregate for the two years following the acquisition. Radant achieved the set financial targets, which gave rise to the earn-out payment of $10.0 million in December 2015.

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

	Three Months Ended				Nine Months Ended
	July 1, 2016		July 3, 2015		July 1, 2016			July 3, 2015
Balance at beginning of period	$	—	$	8,700	$	9,700		$	7,600
Change in fair value included in earnings	—		700		300			1,800
Payment of contingent consideration	—		—		(10,000		)	—
Balance at end of period	$	—	$	9,400	$	—		$	9,400

- 15 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

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

Other Financial Instruments

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

The estimated carrying and fair values of the Company’s long-term debt are as follows:

		July 1, 2016				October 2, 2015
	Fair Value Measurement	Carrying Value		Fair Value		Carrying Value		Fair Value
First Lien Term Loan	Level 2	$	296,970	$	289,394	$	298,432	$	293,088
Second Lien Term Loan	Level 3	26,449		26,449		26,333		26,333
8.75% Senior Notes due 2018	Level 2	211,105		211,105		208,768		209,843
		$	534,524	$	526,948	$	533,533	$	529,264
Note: Amounts are net of associated issue discounts and debt issuance costs. Not reflected in the above table are debt issuance costs related to the Company's revolving credit facility of $524 and $667 as of July 1, 2016 and October 2, 2015, respectively. Prior year amounts have been adjusted to conform to the current year presentation.

The fair value of the Second Lien Term Loan, into which the Company entered in September 2015, was estimated using inputs that are not observable (Level 3) as there are no quoted prices in active markets for this term loan. The fair value of the Second Lien Term Loan approximates its carrying value at July 1, 2016 as interest payments on this term loan are based on LIBOR rates that are reset monthly, and the Company believes that its credit risk has not changed materially since the date the term loan was executed.

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Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

6. Long-term Debt

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

		July 1, 2016			October 2, 2015
		December 30, 2016			September 30, 2016
Senior Secured Credit Facilities:
First Lien Credit Agreement:
Revolver		$	—		$	—
First Lien Term Loan		~~303~~292,~~025~~309			~~305~~302,~~350~~250
Less unamortized original issue discount		(~~547~~478		)	(~~625~~521		)
Less unamortized debt issuance costsa		(65,~~032~~241		)	(65,~~960~~717		)
		296,446			297,765
		286,590			296,012
Second Lien Credit Agreement:
Second Lien Term Loan		28,000			28,000
Less unamortized original issue discount		(~~498~~455		)	(~~557~~476		)
Less unamortized debt issuance costs		(~~1,053~~963		)	(1,~~110~~009		)
		26,449			26,333
		26,582			26,515
Senior Notes		215,000			215,000
Less unamortized original issue discount		(21,~~011~~153		)	(31,~~218~~588		)
Less unamortized debt issuance costs		(1,~~884~~080		)	(31,~~014~~488		)
		211,105			208,768
		212,767			211,924
Long term debt, net of discount and debt issuance costs		~~534~~525,~~000~~939			~~532~~534,~~866~~451
Less current portion		~~(3,100~~—		)	(310,~~100~~051		)
Long-term portion		$	~~530~~525,~~900~~939		$	~~529~~524,~~766~~400
Standby letters of credit secured by Revolver		$	54,~~267~~073		$	54,~~998~~542
a	Amounts comprised debt issuance costs associated with both Revolver and First Lien Term Loan.

Senior Secured Credit Facilities

OnIn April 7, 2014, CPII entered into a First Lien Credit Agreement, which provides for (a) a term loan in an aggregate principal amount of $310.0 million (“First Lien Term Loan”) and (b) a $30.0 million revolving credit facility (“Revolver”), with sub-limits for letters of credit and swingline loans. On the closing date of the First Lien Credit Agreement, CPII borrowed the entire $310.0 million available under the First Lien Term Loan. No borrowings have been made to date under the Revolver (other than for approximately $54.31 million of outstanding letters of credit as of ~~July~~December 130, 2016).

OnIn September ~~17,~~ 2015, CPII entered into a Second Lien Credit Agreement, which provides for term loan borrowings in an aggregate principal amount of $28.0 million (“Second Lien Term Loan”). On the closing date of the Second Lien Term Loan, CPII borrowed the entire $28.0 million available under the Second Lien Term Loan. ~~Proceeds of $27.4 million, after netting $0.6 million of issue discount, were principally used to fund a portion of the Company’s acquisition of ASC Signal.~~

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

Except as noted below, the First Lien Term Loan and the Second Lien Term Loan (collectively, “Term Loans”) will mature on November 17, 2017 and the Revolver will mature on August 19, 2017. However, if (a) in the case of the Term Loans, on or before November 17, 2017, and, in the case of the Revolver, on or before August 19, 2017, CPII has repaid or refinanced no less than 65% of the Senior Notes ~~due 2018 (“Senior Notes”)~~ outstanding as of the closing date of the First Lien Term Loan, or (b) the first lien leverage ratio as of August 19, 2017 is 2.50:1 or less on a pro forma basis (“Maturity Extension Condition”), then the Term Loans will mature on April 7, 2021 and the Revolver will mature on April 7, 2019. See “Anticipated Refinancing” above.

Borrowings under the First Lien Credit Agreement bear interest at a rate equal to, at CPII’s option, the LIBOR or the base rate (“ABR”) plus the applicable margin. LIBOR and ABR borrowings under the First Lien Term Loan are subject to a 1.00% and 2.00% “floor,” respectively. The ABR under the First Lien Credit Agreement is the greatest of (a) the base rate established by the administrative agent, (b) the federal funds rate plus 0.50% and (c) adjusted LIBOR for a one-month interest period plus 1.00%. For the First Lien Term Loan, the applicable margin will be 3.25% per annum for LIBOR borrowings and 2.25% per annum for ABR borrowings. The applicable margins under the Revolver vary depending on CPII’s total leverage ratio, as defined in the First Lien Credit Agreement and range from 3.25% to 3.00% for LIBOR borrowings and from 2.25% to 2.00% for ABR borrowings.

Borrowings under the Second Lien Credit Agreement bear interest at a rate equal to, at CPII’s option, the LIBOR or the ABR plus the applicable margin. LIBOR and ABR borrowings under the Second Lien Term Loan are subject to a 1.00% and 2.00% “floor,” respectively. The ABR under the Second Lien Credit Agreement is the greatest of (a) a rate equal to the rate last quoted by The Wall Street Journal as the “Prime Rate” in the United States or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Federal Reserve Board as the “bank prime loan” rate or, if such rate is no longer quoted therein, any similar rate quoted therein (as determined by the administrative agent) or any similar release by the Federal Reserve Board (as determined by administrative agent), (b) the federal funds rate plus 0.50% and (c) adjusted LIBOR for a one-month interest period plus 1.00%. For the Second Lien Term Loan, the applicable margin will be 7.00% per annum for LIBOR borrowings and 6.00% per annum for ABR borrowings. However, upon satisfaction of the Maturity Extension Condition, the applicable margin shall be increased by an amount equal to 150% of the difference in the coupon rate of the Senior Notes after the exchange and the coupon rate of the Senior Notes prior to the exchange, to the extent such difference is positive.

Under the First Lien Credit Agreement, for each fiscal year, CPII will also be required to make prepayments within five business days after the date on which the financial statements with respect to that fiscal year are delivered, based on a calculation of excess cash flow, as defined in the First Lien Credit Agreement, less optional prepayments and, in the case of the Revolver, corresponding reductions in commitment, made during such fiscal year. Based on the results for fiscal year 2016, CPII presented to the First Lien Term Loan holders an excess cash flow mandatory prepayment of $10.1 million, which was recorded accordingly as a current liability in the consolidated balance sheet as of September 30, 2016. The First Lien Term Loan holders accepted $9.9 million of the $10.1 million total prepayment tendered and a principal payment in that amount was made during the first quarter of fiscal year 2017. The excess cash flow mandatory prepayment is applied to scheduled installments of the first lien term loan facility (and allocated to such scheduled installments in direct order to the remaining scheduled installments) until paid in full. As a result, no other contractual principal payment is due on the First Lien Term Loan until its scheduled maturity date.

Senior Notes due 2018

In February 2011, CPII issued an aggregate of $215 million of Senior Notes ~~due 2018 (“Senior Notes”)~~ originally bearing interest at the rate of 8.0% per year. The outstanding notes are CPII’s senior unsecured obligations. Parent and each of CPII’s existing and future restricted subsidiaries (as defined in the indenture governing the Senior Notes) guarantee the Senior Notes on a senior unsecured basis. The interest rate on the Senior Notes increased from 8.00% to 8.75% per annum in April 2014. Interest is payable in cash on a bi-annual basis. The indenture governing the Senior Notes limits, subject to certain exceptions, CPII and its restricted subsidiaries’ ability to incur additional indebtedness or issue certain preferred stock; pay dividends and make other restricted payments; make certain investments; sell assets; create liens; consolidate, merge or sell all or substantially all of CPII’s assets; enter into transactions with affiliates and designate subsidiaries as unrestricted subsidiaries.

At any time, or from time to time, on or after February 15, 2016, CPII, at its option, may redeem the Senior 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
2016		104%
2017 and thereafter		101%

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

At any time, or from time to time, on or after February 15, 2016, CPII, at its option, may redeem the Senior 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
2016		104%
2017 and thereafter		101%

Upon a change of control, CPII may be required to purchase all or any part of the Senior 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 ~~July~~December 130, 2016, maturities on long-term debt were as follows:

Fiscal Year	First Lien Term Loan		Second Lien Term Loan		~~8.75%~~ Senior Notes		Total
2016 (remaining three months)	$	775	$	—	$	—	$	775
2017 (remaining nine months)	$	—	$	—	$	—	$	—
2017	3,100		—		—		3,100
2018	292,309		28,000		215,000		535,309
2018	299,150		28,000		215,000		542,150
2019	—		—		—		—
2020	—		—		—		—
2021	—		—		—		—
Thereafter	—		—		—		—
	$	~~303~~292,~~025~~309	$	28,000	$	215,000	$	~~546~~535,~~025~~309

The above table assumes ~~(i)~~ that the respective debt instruments will be outstanding until their scheduled maturity dates, and ~~(ii)~~that ainterest ~~debt~~rates ~~level~~in ~~based~~effect on ~~mandatory~~December 30, ~~repayments~~2016 ~~according~~remain toconstant ~~the~~for ~~contractual~~future ~~amortization schedule of the Company’s senior credit facilities~~periods. The above table also excludes (i) any optional ~~and excess cash flow~~ prepayments on the Term Loans., ~~The~~(ii) ~~table also excludes~~ the effect of the Company’s contractual right to repay or refinance the Senior Notes by November 17, 2017, which would extend the maturity date for the Term ~~Loan~~Loans from November 2017 to April 2021, and (iii) the $2.45 million remaining unpaid Bridge Facility commitment fee.

Covenants

As of ~~July~~December 130, 2016, the Company was in compliance with the covenants under the agreements governing CPII’s First Lien Credit Agreement, Second Lien Credit Agreement and the indentures governing the Senior Notes.

76. 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 operations in Canada. The Company does not engage in currency speculation.

~~The~~- ~~Company’s~~16 Canadian dollar forward contracts in effect as of July 1, 2016 have durations of five to 20 months. These contracts are designated as a cash flow hedge and are considered highly effective. Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets. At July 1, 2016, the unrealized gain, net of tax of $0.4 million, was $1.1 million. At October 2, 2015, the unrealized loss, net of tax of $0.7 million, was $2.0 million. The Company anticipates recognizing the entire unrealized gain or loss in operating earnings within the next six fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the 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 each of the three and nine months ended July 1, 2016 and July 3, 2015. -

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

AsThe Company’s Canadian dollar forward contracts in effect as of ~~July~~December 130, 2016, ~~the~~have ~~Company~~durations ~~had~~of ~~entered~~eight ~~into~~to ~~Canadian~~20 ~~dollar~~months. These contracts are designated as a cash flow hedge and are considered highly effective. Unrealized gains and losses from foreign exchange forward contracts ~~for~~are ~~nominal~~included ~~values~~in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets. At December 30, 2016, the unrealized loss, net of ~~approximately~~tax of $~~75.~~30,000, was $0.1 million. ~~(Canadian~~At ~~dollars)~~September 30, 2016, the unrealized gain, net of tax of $0.2 million, was $0.6 million. The Company anticipates recognizing the entire unrealized gain or ~~approximately~~loss ~~76%~~in operating earnings within the next four fiscal quarters. Changes in the fair value of ~~estimated~~foreign ~~Canadian~~currency ~~dollar~~forward ~~denominated~~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 loss. The time value was not material for ~~July~~all ~~2016~~periods ~~through~~presented. ~~September~~If ~~2017~~the transaction being hedged fails to occur, ator anif ~~average~~a ~~rate~~portion of ~~approximately~~any ~~0.75~~derivative Uis 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 loss.S. ~~dollars~~No ineffective amounts were recognized due to ~~one~~hedge ~~Canadian~~ineffectiveness ~~dollar~~in each of the three months ended December 30, 2016 and January 1, 2016.

~~The~~As ~~following~~of ~~table~~December 30, ~~summarizes~~2016, the ~~aggregate~~Company ~~fair~~had ~~value~~entered ~~of all~~into ~~derivative~~Canadian ~~instruments~~dollar ~~designated~~forward ascontracts ~~cash~~for ~~flow~~nominal ~~hedges~~values atof ~~July 1~~approximately $45.4 million (Canadian dollars), ~~2016~~or ~~and~~approximately ~~October 2~~75% of estimated Canadian dollar denominated expenses for January 2017 through September 2017, ~~2015:~~ at an average rate of approximately 0.75 U.S. dollars to one Canadian dollar.

	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	July 1, 2016		October 2, 2015		Balance Sheet Location	July 1, 2016		October 2, 2015
Derivative designated as hedging instruments:
Forward contracts	Prepaid and other current assets	$	1,266	$	—	Accrued expenses	$	308	$	1,821
Forward contracts	Other long-term assets	404		—		Other long-term liabilities	14		—
		$	1,670	$	—		$	322	$	1,821

The following table summarizes the aggregate fair value of all derivative instruments designated as cash flow hedges at December 30, 2016 and September 30, 2016:

As of July 1, 2016 and October 2, 2015, the Company had no derivative instruments that were classified as non-hedging instruments. The Company’s derivatives are reported on a gross basis. The Company has no master netting arrangements with its derivative counterparties that would allow for net settlement.



	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	December 30, 2016		September 30, 2016		Balance Sheet Location	December 30, 2016		September 30, 2016
Derivative designated as hedging instruments:
Forward contracts	Prepaid and other current assets	$	460	$	1,159	Accrued expenses	$	575	$	217
		$	460	$	1,159		$	575	$	217

-As 20of December 30, 2016 and September 30, 2016, the Company had no derivative instruments that were classified as non-hedging instruments. The Company’s derivatives are reported on a gross basis. The Company has no master netting arrangements with its derivative counterparties that would allow for net settlement.

The following table summarizes the effect of derivative instruments on the condensed consolidated statements of comprehensive loss for the periods of fiscal years 2017 and 2016 presented:



Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in OCI on Derivative (Effective Portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)							Gain (Loss) Recognized in Income on Derivative (Ineffective and Excluded Portion)
Derivatives in Cash Flow Hedging Relationships							Location	Amount						Location	Amount
	Three Months Ended							Three Months Ended							Three Months Ended
	December 30, 2016			January 1, 2016				December 30, 2016			January 1, 2016				December 30, 2016			January 1, 2016
Forward contracts	$	(981	)	$	(1,643	)	Cost of sales	$	(122	)	$	(1,038	)	General and administrative^(a)	$	(6	)	$	45
							Research and development	52			(48		)
							Selling and marketing	23			(21		)
							General and administrative	29			(29		)
Total	$	(981	)	$	(1,643	)		$	(18	)	$	(1,136	)		$	(6	)	$	45

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

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

~~The~~7. ~~following table summarizes the effect of derivative instruments on the condensed consolidated statements of comprehensive income for the periods of fiscal years 2016 and 2015 presented:~~Contingencies

Derivatives in Cash Flow Hedging Relationships	Amount of Gain Recognized in OCI on Derivative(Effective Portion)					Gain (Loss) Reclassified from Accumulated OCI into Income(Effective Portion)							Loss Recognized in Income on Derivative (Ineffective and Excluded Portion)
						Location	Amount						Location	Amount
	Three Months Ended						Three Months Ended							Three Months Ended
	July 1, 2016		July 3, 2015				July 1, 2016			July 3, 2015				July 1, 2016			July 3, 2015
Forward contracts	$	483	$	71		Cost of sales	$	(569	)	$	(928	)	General and administrative(a)	$	(45	)	$	(4	)
						Research and development	(33		)	(86		)
						Selling and marketing	(20		)	(37		)
						General and administrative	13			(44		)
Total	$	483	$	71			$	(609	)	$	(1,095	)		$	(45	)	$	(4	)
(a)The amount recognized in income for each period presented represents a loss related to the amount excluded from the assessment of hedge effectiveness.
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss)Recognized in OCI on Derivative(Effective Portion)					Loss Reclassified from Accumulated OCI into Income(Effective Portion)							Gain (Loss) Recognized in Income on Derivative (Ineffective and Excluded Portion)
						Location	Amount						Location	Amount
	Nine Months Ended						Nine Months Ended							Nine Months Ended
	July 1, 2016		July 3, 2015				July 1, 2016			July 3, 2015				July 1, 2016			July 3, 2015
Forward contracts	$	1,643	$	(2,752	)	Cost of sales	$	(2,099	)	$	(1,455	)	General and administrative(b)	$	(72	)	$	83
						Research and development	(177		)	(194		)
						Selling and marketing	(83		)	(85		)
						General and administrative	(101		)	(100		)
Total	$	1,643	$	(2,752	)		$	(2,460	)	$	(1,834	)		$	(72	)	$	83
(b)The amount recognized in income for each period presented represents a gain (loss) related to the amount excluded from the assessment of hedge effectiveness.

8. Contingencies

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

In 2010, the Company’s ~~new~~ subsidiary, ASC Signal Division (“ASC Signal”), became aware of volatile organic compounds (“VOC”) and other contamination in the soil and groundwater at the Whitby, Ontario, ~~Canada~~ industrial site. The Company believes that the contamination originated from the neighboring property, which reportedly is used for crystal manufacturing, and secondarily from the operational practices of the prior operators of ASC Signal. The Company ~~intends~~is toaddressing ~~address~~ these conditions through the implementation of a remediation plan. ASC Signal holds a pair of pollution insurance policies, and the insurer ~~has~~is ~~advised~~indemnifying ~~that it will indemnify~~ ASC Signal for the remediation costs. The Company expects that the total remediation costs will be less than the insurance policy limits. In addition, ASC Signal has filed a civil action against the neighbor and certain other parties to recover consequential damages resulting from the contamination. The Company has been informed that one of the defendants in this lawsuit has filed for bankruptcy.

The Company believes that the remaining cost to remediate the contamination at the Whitby site will be in the range of approximately Canadian $1.2 million to $3.3 million (or U.S. $0.9 million to $2.4 million based on an exchange rate of 0.74 U.S. dollars to one Canadian dollar) as of December 30, 2016. The Company, as a result, has a loss reserve accrual balance as of December 30, 2016 of U.S. $0.9 million, which represents the low end of the range of loss estimates because of the uncertainty of the loss estimate amounts. The minimum amount in the range is not necessarily the amount of loss that will be ultimately determined, and it is not likely that the ultimate loss will be less than the minimum amount. As mentioned above, ASC Signal has environmental liability insurance policies which are expected to provide complete indemnification from any costs incurred for the remediation efforts. The expected indemnification gave effect to an environmental indemnification asset also acquired by the Company with the September 2015 ASC Signal acquisition. The accompanying consolidated balance sheets as of December 30, 2016 and September 30, 2016 reflect balances of the environmental indemnification asset of $0.9 million and $1.6 million, respectively, in other long-term 21assets and the environmental loss reserve of $0.9 million and $1.6 million, respectively, in other long-term liabilities. The decrease in each of the environmental indemnification asset and the environmental loss reserve of $0.7 million reflects a $0.4 million adjustment to the prior estimate of total remediation costs to reflect the actual amount of costs incurred for the excavation phase of the remediation work completed in the three months ended December 30, 2016. The decrease in the environmental indemnification asset also reflects a $0.3 million reimbursement received by the Company from its insurer for actual remediation costs incurred, which decreased the amount of the environmental loss reserve, in the three months ended December 30, 2016. The calculation of environmental loss reserves is based on the evaluation of currently available information. Actual costs to be incurred in future periods may vary from the amount of reserve given the uncertainties regarding the status of laws, regulations, enforcement policies, and the impact of potentially responsible parties, technology and information related to the affected site.

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

~~The Company believes that the cost of remediating the contamination at the Whitby site will be approximately Canadian $3~~8.7 million (or U.S. $2.9 million based on an exchange rate of 0.77 U.S. dollars to one Canadian dollar as of July 1, 2016), the amount of environmental loss reserve acquired by the Company through the ASC Signal acquisition. The reserve was provided for environmental liabilities that are considered probable and for which a reasonable estimate of the obligation can be made. As mentioned above, ASC Signal has environmental liability insurance policies that are expected to provide complete indemnification from any costs incurred for the remediation efforts. The expected indemnification gave effect to an environmental indemnification asset also acquired by the Company with the ASC Signal acquisition for the same amount as the estimated cost of remediation. The accompanying condensed consolidated balance sheet as of July 1, 2016 reflect the environmental loss reserve of $2.9 million and the environmental indemnification asset of $2.9 million in other longRelated-~~term~~party liabilities and other long-term assets, respectively. The calculation of environmental loss reserves is based on the evaluation of currently available information. Actual costs to be incurred in future periods may vary from the amount of reserve given the uncertainties regarding the status of laws, regulations, enforcement policies, and the impact of potentially responsible parties, technology and information related to the affected site.Transactions

9The Company leases a property in Stow, Massachusetts, that contains a manufacturing plant and office facilities owned by a company controlled by the Director of Business Development of the Company's Radant Technologies Division. ~~Related-party~~The ~~Transactions~~Company paid and recorded a rent expense for such lease of $0.1 million for each of the three months ended December 30, 2016 and January 1, 2016.

AOne ~~former major stockholder~~ of the ~~predecessor~~vendors of the ~~Radant~~Company's ~~Division~~ASC ~~now~~Signal ~~serves~~division asis ~~the~~owned ~~Director~~by ofthe ~~Business~~father ~~Development~~ of ~~that~~ASC ~~division~~Signal's ~~(the~~Vice ~~“Radant~~President ~~Director~~ of ~~Business Development”)~~Products. InThe ~~connection~~vendor ~~with,~~is ~~and~~also asa ~~part~~customer of ~~the~~ASC ~~consideration~~Signal. ~~for,~~Purchases ~~the~~from ~~Radant~~this ~~acquisition,~~vendor ~~the~~were ~~Company~~$0.1 ~~was~~million ~~obligated~~and ~~to make~~ $~~10.~~0.5 million infor ~~additional payments to~~ the ~~former~~three ~~stockholders~~months ofended ~~Radant~~December 30, ~~including~~2016 ~~the Radant Director of Business Development~~ and ~~certain~~January 1, of2016, ~~his~~respectively. ~~relatives~~Sales ~~for~~to ~~Radant’s~~this ~~having~~vendor ~~achieved~~were ~~certain~~not ~~agreed-upon~~material ~~financial~~and ~~targets~~zero ~~over~~for the ~~two~~same ~~years~~periods, ~~following the acquisition~~respectively. The Company,'s asoutstanding apayables ~~result,~~to ~~made~~this ~~the~~vendor ~~earn-out~~were not ~~payment~~material as inof ~~full~~each in December ~~2015. Also in connection with the acquisition~~ 30, ~~the~~2016 ~~Company~~and ~~entered into a lease agreement for a property in Stow~~September 30, ~~Massachusetts~~2016, ~~that contains a manufacturing plant~~ and ~~office facilities owned by a company controlled by~~ the ~~Radant Director of Business Development. The~~ Company's ~~records~~outstanding ~~rent~~receivables ~~expense~~from ~~for~~this ~~the~~vendor ~~Stow~~were ~~lease~~zero ~~on an arm’s length basis. The Company paid~~ and ~~recorded a rent expense for such lease of~~ $0.1 million ~~for~~as ~~each~~ of the ~~three~~same ~~months ended July 1~~dates, ~~2016 and July 3, 2015 and $0~~respectively.~~3 million for each of the nine months ended July 1, 2016 and July 3, 2015.~~

~~One of the vendors of the of the Company's ASC Signal Division is owned by the father of ASC Signal's Vice President of Products~~9. ~~The~~Income vendor is also a customer of ASC Signal. Purchases from this vendor were $0.6 million and $1.7 million for the three and nine months ended July 1, 2016, respectively. Sales to this vendor were not material for the same periods. The Company had $0.1 million and $0.2 million outstanding payables to this vendor as of July 1, 2016 and October 2, 2015, respectively.Taxes

~~10.~~The ~~Income~~condensed ~~Taxes~~consolidated statements of comprehensive loss reflect the following income tax expense (benefit):

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



	Three Months Ended
	December 30, 2016			January 1, 2016
Income (loss) before income taxes	$	534		$	(2,923	)
Income tax expense (benefit)	$	315		$	(1,713	)
Effective income tax rate	59.0		%	58.6		%

	Three Months Ended						Nine Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Income before income taxes	$	8,674		$	1,246		$	6,652		$	4,734
Income tax expense	$	4,161		$	27		$	2,875		$	1,402
Effective income tax rate	48.0		%	2.2		%	43.2		%	29.6		%

The Company’s 59.0% effective income tax rate for the three months ended December 30, 2016 differs from the federal statutory rate of 35.0% primarily due to foreign tax credit limitations, partially offset by the domestic manufacturing deduction. The Company’s 58.6% effective tax rate for the three months ended January 1, 2016 differs from the federal statutory rate of 35.0% primarily due to foreign tax credit limitations partially offset by tax benefits from a change in uncertain tax positions upon completion of a Canada Revenue Agency (“CRA”) tax audit and U.S. research and development tax credits from passage of the Protecting Americans from Tax Hike Act of 2015.

-The 22Company -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 2013. The Company is no longer subject to examination by Canada for fiscal years prior to 2009 and California for fiscal years prior to 2008.

The total liability for gross unrecognized tax benefits was $2.9 million and $4.0 million at December 30, 2016 and January 1, 2016, respectively. The liability for gross unrecognized tax benefits did not change significantly between December 30, 2016 and January 1, 2016, and if recognized, would reduce the effective tax rate on income from continuing operations. The Company believes that the amount of unrecognized tax benefits that is reasonably possible of changing in the next 12 months is not significant.

- 19 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

~~The Company’s 48~~10.0% ~~effective~~Accumulated ~~income~~Other ~~tax~~Comprehensive ~~rate~~Income for the three months ended July 1, 2016 differs from the federal statutory rate of 35.0% primarily due to foreign tax credit limitations, partially offset by the domestic manufacturing deduction, tax benefits from a change in state income apportionment and expiration of the statute of limitations for uncertain tax positions. The Company’s 2.2% effective tax rate for the three months ended July 3, 2015 differs from the federal statutory rate of 35.0% primarily due to tax benefits from a change in state income apportionment, the expiration of the statute of limitations for uncertain tax positions and the domestic manufacturing deduction, partially offset by foreign tax credit limitations.(Loss)

The Company’s 43.2% effective income tax rate for the nine months ended July 1, 2016 differs from the federal statutory rate of 35.0% primarily due to foreign tax credit limitations, partially offset by the domestic manufacturing deduction, tax benefits from a change in state income apportionment and favorable resolution of and the expiration of the statute of limitations for uncertain tax positions. The Company’s 29.6% effective income tax rate for the nine months ended July 3, 2015 differs from the federal statutory rate of 35.0% primarily due to tax benefits from a change in state income apportionment and a California income tax refund for prior year amended tax returns, partially offset by foreign tax credit limitations and income tax expense for an uncertain tax position as a result of an intercompany sale of assets.

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 2011. The Company is no longer subject to examination by taxing authorities in Canada and California for fiscal years prior to 2008. 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 year 2010 and for the periods from October 2, 2010 to February 10, 2011 and February 11, 2011 to September 30, 2011. 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.

The total liability for gross unrecognized tax benefits was $3.6 million and $3.0 million at July 1, 2016 and July 3, 2015, respectively. For the three and nine months ended July 1, 2016, there was no significant change in the total liability for gross unrecognized tax benefits. All of the unrecognized tax benefit balances, if recognized, would reduce the effective tax rate on income from continuing operations. The Company believes that the amount of unrecognized tax benefits that is reasonably possible of changing in the next 12 months is approximately $0.1 million.

11. Accumulated Other Comprehensive Income (Loss)

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

	July 1, 2016			October 2, 2015
	December 30, 2016			September 30, 2016
Unrealized income (loss) on cash flow hedges, net of tax of $353 and $(673), respectively	$	1,056		$	(2,021	)
Unrealized income (loss) on cash flow hedges, net of tax of $(30) and $212, respectively	$	(87	)	$	634
Unrealized actuarial gain and prior service credit for pension liability, net of tax of $8 and $8, respectively	26			26
Unrealized actuarial loss and prior service credit for pension liability, net of tax of $(3) and $(3), respectively	(8		)	(8		)
Accumulated other comprehensive income (loss)	$	~~1,082~~(95	)	$	~~(1,995~~626	)

-The 23following -tables provide changes in accumulated other comprehensive income (loss), net of tax, reported in the Company’s condensed consolidated balance sheets for the three months ended December 30, 2016 and January 1, 2016 (amounts in parentheses indicate debits):



	Three Months Ended
	December 30, 2016									January 1, 2016
	Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items			Total			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items		Total
Balance at beginning of period	$	634		$	(8	)	$	626		$	(2,021	)	$	26	$	(1,995	)
Other comprehensive loss before reclassifications	(735		)	—			(735		)	(1,231		)	—		(1,231		)
Amounts reclassified from accumulated other comprehensive loss	14			—			14			852			—		852
Net current-period other comprehensive loss	(721		)	—			(721		)	(379		)	—		(379		)
Balance at end of period	$	(87	)	$	(8	)	$	(95	)	$	(2,400	)	$	26	$	(2,374	)

The following table provides the gross amount reclassified from accumulated other comprehensive income (loss) and the corresponding amount of tax relating to losses on cash flow hedges for the three months ended December 30, 2016 and January 1, 2016 (amounts in parentheses indicate debits):



	Three Months Ended
	December 30, 2016			January 1, 2016
Amounts reclassified from accumulated other comprehensive loss	$	18		$	1,136
Less: tax	(4		)	(284		)
Amounts reclassified from accumulated other comprehensive loss, net of tax	$	14		$	852

See Note 6, Derivatives Instruments and Hedging Activities, for additional disclosures about reclassifications out of accumulated other comprehensive income (loss) and their corresponding effects on the respective line items in the condensed consolidated statements of comprehensive loss.

- 20 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

~~The~~11. ~~following tables provide changes in accumulated other comprehensive income (loss)~~Segments, ~~net~~Geographic ~~of tax, reported in the Company’s condensed consolidated balance sheets for the three~~ and ~~nine~~Customer ~~months ended July 1, 2016 and July 3, 2015 (amounts in parentheses indicate debits):~~ Information

	Three Months Ended
	July 1, 2016								July 3, 2015
	Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items		Total			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items		Total
Balance at beginning of period	$	238		$	26	$	264		$	(2,317	)	$	100	$	(2,217	)
Other comprehensive income before reclassifications	361			—		361			54			—		54
Amounts reclassified from accumulated other comprehensive loss	457			—		457			822			—		822
Net current-period other comprehensive income	818			—		818			876			—		876
Balance at end of period	$	1,056		$	26	$	1,082		$	(1,441	)	$	100	$	(1,341	)
	Nine Months Ended
	July 1, 2016								July 3, 2015
	Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items		Total			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Items		Total
Balance at beginning of period	$	(2,021	)	$	26	$	(1,995	)	$	(753	)	$	100	$	(653	)
Other comprehensive income (loss) before reclassifications	1,232			—		1,232			(2,064		)	—		(2,064		)
Amounts reclassified from accumulated other comprehensive loss	1,845			—		1,845			1,376			—		1,376
Net current-period other comprehensive income (loss)	3,077			—		3,077			(688		)	—		(688		)
Balance at end of period	$	1,056		$	26	$	1,082		$	(1,441	)	$	100	$	(1,341	)

The Company’s reportable segments are RF (“radio frequency”) products and satcom equipment. Made up of five divisions, the RF products segment develops, manufactures and distributes high-power/high-frequency microwave and RF signal components and structures. These products are used in the communications, radar, electronic warfare, industrial, medical and scientific markets depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the RF products will be located. The satcom equipment segment, which consists of two divisions, manufactures and supplies high-power amplifiers primarily for communication with satellites, and satellite communications, radar and high-frequency antennas and controllers. These products are used for satellite communication uplinks, terrestrial communications, imagery and data transmission, and radar and intelligence 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.

The following table provides the gross amount reclassified from accumulated other comprehensive income (loss) and the corresponding amount of tax relating to losses on cash flow hedges for the three and nine months ended July 1, 2016 and July 3, 2015 (amounts in parentheses indicate debits):

	Three Months Ended						Nine Months Ended
	July 1, 2016			July 3, 2015			July 1, 2016			July 3, 2015
Amounts reclassified from accumulated other comprehensive loss	$	609		$	1,095		$	2,460		$	1,834
Less: tax	(152		)	(273		)	(615		)	(458		)
Amounts reclassified from accumulated other comprehensive loss, net of tax	$	457		$	822		$	1,845		$	1,376

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

- 24 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

12. Segments, Geographic and Customer Information

The Company’s reportable segments are RF (“radio frequency”) products and satcom equipment. Made up of five divisions, the RF products segment develops, manufactures and distributes high-power/high-frequency microwave and RF signal components and structures. These products are used in the communications, radar, electronic warfare, industrial, medical and scientific markets depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the RF products will be located. The satcom equipment segment, which consists of two divisions, including the Company’s newly acquired ASC Signal Division, manufactures and supplies high-power amplifiers primarily for communication with satellites, and satellite communications, radar and high-frequency antennas and controllers. These products are used for satellite communication uplinks, terrestrial communications, imagery and data transmission, and radar and intelligence 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 RF products or satcom equipment are reported as “other.” Other includes the activities of the Company’s Malibu Division and unallocated corporate expenses, such as business combination-related expenses, share-based compensation expense and certain other charges and credits that the Company’s management has determined are non-operational, non-cash items or not directly attributable to the Company’s operating divisions. The Malibu Division is a designer, manufacturer and integrator of advanced antenna systems for radar, radar simulators and telemetry systems, as well as for data links used in ground, airborne, unmanned aerial vehicles (“UAVs”) and shipboard systems.

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

Three Months Ended

~~Nine Months Ended~~

July 1, 2016

July 3, 2015

July 1, 2016

July 3, 2015

December 30, 2016

January 1, 2016

Sales from external customers

RF products

8678,~~677~~787

8275,~~867~~287

~~247,163~~

~~251,101~~

Satcom equipment

3630,~~307~~352

2033,~~475~~453

~~101,087~~

~~59,762~~

Other

65,~~628~~484

61,~~303~~942

~~12,329~~

~~17,420~~

~~129~~114,~~612~~623

~~109~~110,~~645~~682

~~360,579~~

~~328,283~~

Intersegment product transfers

RF products

54,~~038~~237

34,~~652~~822

~~14,464~~

~~14,958~~

Satcom equipment

115

620

54,~~039~~252

34,~~658~~842

~~14,521~~

~~14,982~~

Capital expendituresa

RF products

~~553~~1,351

~~974~~1,118

~~2,728~~

~~3,703~~

Satcom equipment

~~127~~606

57211

~~673~~

~~188~~

Other

~~480~~157

~~537~~196

~~1,008~~

~~795~~

12,~~160~~114

1,~~568~~525

~~4,409~~

~~4,686~~

EBITDA

RF products

2015,~~300~~656

1713,~~351~~461

~~49,938~~

~~53,376~~

Satcom equipment

63,~~069~~618

25,~~211~~490

~~15,273~~

~~6,293~~

Other

(12,~~334~~278

)

(35,~~385~~433

)

~~(9,321~~

)

~~(10,083~~

)

2516,~~035~~996

1613,~~177~~518

~~55,890~~

~~49,586~~

a Capital expenditures incurred on an accrual basis.

- 2521 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

	July 1, 2016		October 2, 2015
	December 30, 2016		September 30, 2016
Total assets
RF products	$	~~517~~509,~~025~~059	$	~~515~~513,~~966~~542
Satcom equipment	~~183~~177,~~784~~247		~~183~~180,~~711~~164
Other	6764,~~344~~071		71,~~467~~175
	$	~~768~~750,~~153~~377	$	~~771~~764,~~144~~881

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


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


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


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

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

Three Months Ended

~~Nine Months Ended~~

July 1, 2016

July 3, 2015

July 1, 2016

July 3, 2015

December 30, 2016

January 1, 2016

Operating income

RF products

1813,~~369~~863

1511,~~064~~426

~~44,009~~

~~46,425~~

Satcom equipment

53,~~444~~114

15,~~951~~071

~~13,790~~

~~5,504~~

Other

(5,~~339~~657

)

(69,~~650~~697

)

~~(21,839~~

)

~~(19,883~~

)

1811,~~474~~320

106,~~365~~800

~~35,960~~

~~32,046~~

- 2622 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

The following table reconciles net income (loss) to EBITDA:

	Three Months Ended					~~Nine Months Ended~~
	July 1, 2016		July 3, 2015			July 1, 2016		July 3, 2015
	December 30, 2016		January 1, 2016
Net income	$	4,513	$	1,219		$	3,777	$	3,332
Net income (loss)	$	219	$	(1,210	)
Depreciation and amortization	65,~~561~~676		56,~~812~~718			~~19,930~~		~~17,540~~
Interest expense, net	910,~~800~~786		9,~~119~~723			~~29,308~~		~~27,312~~
Income tax expense	4,161		27			2,875		1,402
Income tax expense (benefit)	315		(1,713		)
EBITDA	$	2516,~~035~~996	$	1613,~~177~~518		$	~~55,890~~	$	~~49,586~~

1312. Supplemental Guarantors Condensed Consolidating Financial Information

The tables that follow reflect the supplemental guarantor financial information associated with CPII’s Senior Notes issued on February 11, 2011. The Senior 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 Senior 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: (i) the guarantor subsidiaries, (ii) the non-guarantor subsidiaries, (iii) the consolidating elimination entries, and (iv) the consolidated totals. The accompanying consolidating financial information should be read in connection with the condensed consolidated financial statements of the Company.

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

- 2723 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING BALANCE SHEET

As of ~~July~~December 130, 2016

	Parent			Issuer			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			ConsolidatingEliminations			ConsolidatedTotal
Assets
Cash and cash equivalents	$	—		$	—		$	1716,~~724~~693	$	2127,~~444~~649		$	—		$	3944,~~168~~342
Restricted cash	—			—			1,~~744~~209		6761			—			1,~~811~~270
Accounts receivable, net	—			—			40,~~238~~879		1815,~~592~~454			—			5856,~~830~~333
Inventories	—			—			7466,~~420~~929		4236,~~078~~911			(~~572~~583		)	~~115~~103,~~926~~257
Intercompany receivable	—			—			~~120~~140,~~030~~360		49,~~100~~976			(~~124~~150,~~130~~336		)	—
Prepaid and other current assets	1—			824,396			34,~~280~~432		31,~~097~~628			~~217~~222			610,~~677~~678
Total current assets	1—			824,396			~~257~~270,~~436~~502		8991,~~378~~679			(~~124~~150,~~485~~697		)	~~222~~215,~~412~~880
Property, plant and equipment, net	—			—			5452,~~410~~569		2019,~~029~~718			—			7472,~~439~~287
Intangible assets, net	—			—			~~178~~173,~~353~~866		7270,~~538~~500			—			~~250~~244,~~891~~366
Goodwill	—			—			128,~~352~~396		88,153			—			216,~~505~~549
Other long-term assets	—			—			~~485~~199		31,~~421~~096			—			31,~~906~~295
Investment in subsidiaries	5457,~~974~~402			~~798~~791,~~291~~220			3834,~~069~~898		—			(~~891~~883,~~334~~520		)	—
Total assets	$	5457,~~975~~402		$	~~798~~795,~~373~~616		$	~~657~~660,~~105~~430	$	~~273~~271,~~519~~146		$	(1,~~015~~034,~~819~~217	)	$	~~768~~750,~~153~~377
Liabilities and stockholders’ equity
Current portion of long-term debt	$	—		$	3,100		$	—	$	—		$	—		$	3,100
Accounts payable	$	—		$	—		$	14,787	$	10,097		$	—		$	24,884
Accounts payable	—			—			18,451		12,520			—			30,971
Accrued expenses	2,212			9,817			15,636		5,548			—			33,213
Accrued expenses	832			7,288			16,057		5,804			(8		)	29,973
Product warranty	—			—			3,151		2,569			—			5,720
Product warranty	—			—			3,762		2,320			—			6,082
Income taxes payable	—			—			249		692			—			941
Income taxes payable	—			—			1,968		595			—			2,563
Advance payments from customers	—			—			8,807		3,369			—			12,176
Advance payments from customers	—			—			11,433		3,957			—			15,390
Intercompany payable	—			5,354			—		—			(5,354		)	—
Intercompany payable	—			5,353			—		—			(5,353		)	—
Total current liabilities	2,212			15,171			42,630		22,275			(5,354		)	76,934
Total current liabilities	832			15,741			51,671		25,196			(5,361		)	88,079
Deferred tax liabilities	—			—			67,601		20,505			—			88,106
Deferred tax liabilities	—			—			67,671		21,192			—			88,863
Long term debt, net of discount and debt issuance costs	—			525,939			—		—			—			525,939
Long term debt, net of discount and debt issuance costs	—			530,900			—		—			—			530,900
Other long-term liabilities	—			—			2,992		1,216			—			4,208
Other long-term liabilities	—			—			2,773		3,395			—			6,168
Total liabilities	2,212			541,110			113,223		43,996			(5,354		)	695,187
Total liabilities	832			546,641			122,115		49,783			(5,361		)	714,010
Common stock	—			—			—		—			—			—
Parent investment	—			211,100			405,~~146~~182		184,219			(800,~~465~~501		)	—
Equity investment in subsidiary	~~1,082~~(95		)	~~1,082~~(95		)	9,378		—			(119,~~542~~188		)	—
Additional paid-in capital	27,~~137~~173			—			—		—			—			27,~~137~~173
Accumulated other comprehensive income	—			—			—		1,082			—			1,082
Accumulated other comprehensive loss	—			—			—		(95		)	—			(95		)
Retained earnings	2528,~~924~~112			3943,~~550~~501			~~120~~132,~~466~~647		3843,~~435~~026			(~~198~~219,~~451~~174		)	2528,~~924~~112
Total stockholders’ equity	5455,~~143~~190			~~251~~254,~~732~~506			~~534~~547,~~990~~207		~~223~~227,~~736~~150			(1,~~010~~028,~~458~~863		)	5455,~~143~~190
Total liabilities and stockholders’ equity	$	5457,~~975~~402		$	~~798~~795,~~373~~616		$	~~657~~660,~~105~~430	$	~~273~~271,~~519~~146		$	(1,~~015~~034,~~819~~217	)	$	~~768~~750,~~153~~377

- 2824 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING BALANCE SHEET

As of ~~October~~September 230, ~~2015~~2016

	Parent			Issuer			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			ConsolidatingEliminations			ConsolidatedTotal
Assets
Cash and cash equivalents	$	—		$	—		$	2524,~~444~~873	$	1225,~~070~~279		$	—		$	3750,~~514~~152
Restricted cash	—			—			1,~~605~~494		7665			—			1,~~681~~559
Accounts receivable, net	—			—			4045,~~738~~499		2117,~~012~~560			—			6163,~~750~~059
Inventories	—			—			6966,~~787~~798		3339,~~999~~242			(~~510~~583		)	~~103~~105,~~276~~457
Intercompany receivable	—			—			~~101~~130,~~600~~498		78,~~350~~574			(~~108~~139,~~950~~072		)	—
Prepaid and other current assets	21			5773			42,~~655~~713		12,~~315~~868			~~171~~222			65,~~200~~877
Total current assets	21			5773			~~243~~271,~~829~~875		7593,~~822~~588			(~~109~~139,~~289~~433		)	~~210~~226,~~421~~104
Property, plant and equipment, net	—			—			5853,~~101~~193		2019,~~491~~749			—			7872,~~592~~942
Intangible assets, net	—			—			~~187~~175,~~678~~769		7571,~~595~~520			—			~~263~~247,~~273~~289
Goodwill	—			—			~~127~~128,~~281~~396		88,153			—			~~215~~216,~~434~~549
Other long-term assets	—			—			~~502~~199		21,~~922~~798			—			31,~~424~~997
Investment in subsidiaries	4857,~~076~~923			~~785~~796,~~267~~297			3633,~~978~~835		—			(~~870~~888,~~321~~055		)	—
Total assets	$	4857,~~078~~924		$	~~785~~796,~~324~~370		$	~~654~~663,~~369~~267	$	~~262~~274,~~983~~808		$	(~~979~~1,~~610~~027,488	)	$	~~771~~764,~~144~~881
Liabilities and stockholders’ equity
Current portion of long-term debt	$	—		$	310,~~100~~051		$	—	$	—		$	—		$	310,~~100~~051
Accounts payable	—			—			17,~~015~~889		1314,~~334~~561			—			3032,~~349~~450
Accrued expenses	12,~~361~~249			32,~~410~~472			3318,~~239~~931		64,~~165~~557			~~(69~~3		)	4428,~~106~~212
Product warranty	—			—			23,~~840~~588		2,~~464~~404			—			5,~~304~~992
Income taxes payable	—			—			401,910		1,~~114~~145			—			13,~~154~~055
Advance payments from customers	—			—			107,~~004~~464		3,~~033~~768			—			1311,~~037~~232
Intercompany payable	—			5,353			—		—			(5,353		)	—
Total current liabilities	12,~~361~~249			1117,~~863~~876			6349,~~138~~782		26,~~110~~435			(5,~~422~~350		)	9790,~~050~~992
Deferred tax liabilities	—			—			7068,~~181~~068		2120,~~046~~991			—			9189,~~227~~059
Long term debt, net of discount and debt issuance costs	—			~~529~~524,~~766~~400			—		—			—			~~529~~524,~~766~~400
Other long-term liabilities	—			—			2,~~578~~712		32,~~806~~043			—			64,~~384~~755
Total liabilities	12,~~361~~249			~~541~~542,~~629~~276			~~135~~120,~~897~~562		5049,~~962~~469			(5,~~422~~350		)	~~724~~709,~~427~~206
Common stock	—			—			—		—			—			—
Parent investment	—			211,100			~~404~~405,~~685~~165		184,~~169~~219			(~~799~~800,~~954~~484		)	—
Equity investment in subsidiary	~~(1,995~~626		)	~~(1,995~~626		)	9,~~377~~378		—			(510,~~387~~630		)	—
Additional paid-in capital	2627,~~565~~156			—			—		—			—			2627,~~565~~156
Accumulated other comprehensive loss	—			—			—		(1,995		)	—			(1,995		)
Accumulated other comprehensive income	—			—			—		626			—			626
Retained earnings	2227,~~147~~893			3442,~~590~~368			~~104~~128,~~410~~162		2940,~~847~~494			(~~168~~211,~~847~~024		)	2227,~~147~~893
Total stockholders’ equity	4655,~~717~~675			~~243~~254,~~695~~094			~~518~~542,~~472~~705		~~212~~225,~~021~~339			(~~974~~1,~~188~~022,138		)	4655,~~717~~675
Total liabilities and stockholders’ equity	$	4857,~~078~~924		$	~~785~~796,~~324~~370		$	~~654~~663,~~369~~267	$	~~262~~274,~~983~~808		$	(~~979~~1,~~610~~027,488	)	$	~~771~~764,~~144~~881

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended ~~July~~December 130, 2016

	Parent			Issuer			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			ConsolidatingEliminations			ConsolidatedTotal
Sales	$	—		$	—		$	~~104~~88,~~449~~002		$	4846,~~216~~337		$	(2319,~~053~~716	)	$	~~129~~114,~~612~~623
Cost of sales	—			—			7366,~~910~~286			3835,~~508~~656			(2219,~~598~~409		)	8982,~~820~~533
Gross profit	—			—			3021,~~539~~716			910,~~708~~681			(~~455~~307		)	3932,~~792~~090
Operating costs and expenses:
Research and development	—			—			1,~~511~~554			2,~~490~~368			—			43,~~001~~922
Selling and marketing	—			—			4,~~523~~017			2,~~138~~274			(~~293~~307		)	65,~~368~~984
General and administrative	~~818~~1,473			2733			54,~~841~~958			~~964~~1,701			—			78,~~650~~165
Amortization of acquisition-related intangible assets	—			—			21,~~281~~680			1,~~018~~019			—			32,~~299~~699
Total operating costs and expenses	~~818~~1,473			2733			1412,~~156~~209			67,~~610~~362			(~~293~~307		)	2120,~~318~~770
Operating income (loss)	(~~818~~1,473		)	(2733		)	169,~~383~~507			3,~~098~~319			~~(162~~—		)	1811,~~474~~320
Interest expense (income), net	—			910,~~814~~824			(34		)	(1134		)	—			910,~~800~~786
Income (loss) before income tax expense (benefit) and equity in income (loss) of subsidiaries	(~~818~~1,473		)	(910,~~841~~857		)	169,~~386~~511			3,~~109~~353			~~(162~~—		)	~~8,674~~534
Income tax expense (benefit)	(~~263~~559		)	(34,~~740~~125		)	74,~~565~~178			~~660~~821			~~(61~~—		)	~~4,161~~315
Equity in income (loss) of subsidiaries	51,~~068~~133			117,~~169~~865			(~~153~~848		)	—			(168,~~084~~150		)	—
Net income	~~4,513~~219			51,~~068~~133			84,~~668~~485			2,~~449~~532			(168,~~185~~150		)	~~4,513~~219
Equity in other comprehensive income of subsidiaries, net of tax	818			818			—			—			(1,636		)	—
Equity in other comprehensive loss of subsidiaries	(721		)	(721		)	—			—			1,442			—
Other comprehensive income, net of tax
Other comprehensive loss, net of tax
Unrealized gain on cash flow hedges, net of tax	—			—			—			818			—			818
Unrealized loss on cash flow hedges, net of tax	—			—			—			(721		)	—			(721		)
Total other comprehensive income, net of tax	—			—			—			818			—			818
Total other comprehensive loss, net of tax	—			—			—			(721		)	—			(721		)
Comprehensive income	$	5,331		$	5,886		$	8,668		$	3,267		$	(17,821	)	$	5,331
Comprehensive income (loss)	$	(502	)	$	412		$	4,485		$	1,811		$	(6,708	)	$	(502	)

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended ~~July~~January 31, ~~2015~~2016

	Parent			Issuer			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			ConsolidatingEliminations			ConsolidatedTotal
Sales	$	—		$	—		$	8386,~~729~~882	$	3847,~~630~~477		$	(1223,~~714~~677	)	$	~~109~~110,~~645~~682
Cost of sales	—			—			6268,~~536~~529		2936,~~823~~678			(1223,~~528~~423		)	7981,~~831~~784
Gross profit	—			—			2118,~~193~~353		810,~~807~~799			(~~186~~254		)	2928,~~814~~898
Operating costs and expenses:
Research and development	—			—			1,~~474~~857		2,~~339~~036			—			3,~~813~~893
Selling and marketing	—			—			34,~~449~~311		2,~~327~~500			(~~258~~282		)	56,~~518~~529
General and administrative	~~586~~503			~~351~~27			56,~~465~~242		1,~~167~~347			3(1		)	78,~~572~~118
Amortization of acquisition-related intangible assets	—			—			12,~~527~~539		1,019			—			23,~~546~~558
Total operating costs and expenses	~~586~~503			~~351~~27			1114,~~915~~949		6,~~852~~902			(~~255~~283		)	1922,~~449~~098
Operating income (loss)	(~~586~~503		)	(~~351~~27		)	93,~~278~~404		13,~~955~~897			6929			106,~~365~~800
Interest expense (income), net	—			9,~~122~~728			23		(58		)	—			9,~~119~~723
Income (loss) before income tax expense (benefit) and equity in income of subsidiaries	(586		)	(9,473		)	9,276		1,960			69			1,246
Income (loss) before income tax expense (benefit) and equity in income (loss) of subsidiaries	(503		)	(9,755		)	3,401		3,905			29			(2,923		)
Income tax expense (benefit)	(~~209~~229		)	(3,~~599~~706		)	31,~~672~~903		~~137~~308			2611			27(1,713		)
Equity in income of subsidiaries	1,596			7,470			473		—			(9,539		)	—
Equity in income (loss) of subsidiaries	(936		)	5,113			737		—			(4,914		)	—
Net income	1,219			1,596			6,077		1,823			(9,496		)	1,219
Net income (loss)	(1,210		)	(936		)	2,235		3,597			(4,896		)	(1,210		)
Equity in other comprehensive income of subsidiaries, net of tax	876			876			—		—			(1,752		)	—
Equity in other comprehensive loss of subsidiaries	(379		)	(379		)	—		—			758			—
Other comprehensive income, net of tax
Other comprehensive loss, net of tax
Unrealized gain on cash flow hedges, net of tax	—			—			—		876			—			876
Unrealized loss on cash flow hedges, net of tax	—			—			—		(379		)	—			(379		)
Total other comprehensive income, net of tax	—			—			—		876			—			876
Total other comprehensive loss, net of tax	—			—			—		(379		)	—			(379		)
Comprehensive income	$	2,095		$	2,472		$	6,077	$	2,699		$	(11,248	)	$	2,095
Comprehensive income (loss)	$	(1,589	)	$	(1,315	)	$	2,235	$	3,218		$	(4,138	)	$	(1,589	)

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

For the Nine Months Ended July 1, 2016

	Parent			Issuer			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			ConsolidatingEliminations			ConsolidatedTotal
Sales	$	—		$	—		$	285,178	$	140,447		$	(65,046	)	$	360,579
Cost of sales	—			—			213,703		109,646			(63,938		)	259,411
Gross profit	—			—			71,475		30,801			(1,108		)	101,168
Operating costs and expenses:
Research and development	—			—			5,550		6,686			—			12,236
Selling and marketing	—			—			13,211		7,203			(988		)	19,426
General and administrative	1,847			81			17,095		4,107			2			23,132
Amortization of acquisition-related intangible assets	—			—			7,358		3,056			—			10,414
Total operating costs and expenses	1,847			81			43,214		21,052			(986		)	65,208
Operating income (loss)	(1,847		)	(81		)	28,261		9,749			(122		)	35,960
Interest expense (income), net	—			29,338			—		(30		)	—			29,308
Income (loss) before income tax expense (benefit) and equity in income of subsidiaries	(1,847		)	(29,419		)	28,261		9,779			(122		)	6,652
Income tax expense (benefit)	(664		)	(11,179		)	13,573		1,191			(46		)	2,875
Equity in income of subsidiaries	4,960			23,200			1,368		—			(29,528		)	—
Net income	3,777			4,960			16,056		8,588			(29,604		)	3,777
Equity in other comprehensive income of subsidiaries, net of tax	3,077			3,077			—		—			(6,154		)	—
Other comprehensive income, net of tax
Unrealized gain on cash flow hedges, net of tax	—			—			—		3,077			—			3,077
Total other comprehensive income, net of tax	—			—			—		3,077			—			3,077
Comprehensive income	$	6,854		$	8,037		$	16,056	$	11,665		$	(35,758	)	$	6,854

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CPI INTERNATIONAL HOLDING CORP.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands)

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

For the Nine Months Ended July 3, 2015

	Parent			Issuer			GuarantorSubsidiaries		Non-GuarantorSubsidiaries			ConsolidatingEliminations			ConsolidatedTotal
Sales	$	—		$	—		$	253,531	$	122,284		$	(47,532	)	$	328,283
Cost of sales	—			—			188,915		94,447			(46,384		)	236,978
Gross profit	—			—			64,616		27,837			(1,148		)	91,305
Operating costs and expenses:
Research and development	—			—			5,178		6,192			—			11,370
Selling and marketing	—			—			10,294		7,697			(973		)	17,018
General and administrative	1,748			1,657			16,712		3,114			3			23,234
Amortization of acquisition-related intangible assets	—			—			4,586		3,051			—			7,637
Total operating costs and expenses	1,748			1,657			36,770		20,054			(970		)	59,259
Operating income (loss)	(1,748		)	(1,657		)	27,846		7,783			(178		)	32,046
Interest expense (income), net	—			27,311			6		(5		)	—			27,312
Income (loss) before income tax expense (benefit) and equity in income of subsidiaries	(1,748		)	(28,968		)	27,840		7,788			(178		)	4,734
Income tax expense (benefit)	(664		)	(11,009		)	12,357		786			(68		)	1,402
Equity in income of subsidiaries	4,416			22,375			906		—			(27,697		)	—
Net income	3,332			4,416			16,389		7,002			(27,807		)	3,332
Equity in other comprehensive loss of subsidiaries	(688		)	(688		)	—		—			1,376			—
Other comprehensive loss, net of tax
Unrealized loss on cash flow hedges, net of tax	—			—			—		(688		)	—			(688		)
Total other comprehensive loss, net of tax	$	—		$	—		$	—	$	(688	)	$	—		$	(688	)
Comprehensive income	$	2,644		$	3,728		$	16,389	$	6,314		$	(26,431	)	$	2,644

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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~~Three Months Ended ~~July~~December 130, 2016

	Parent		Issuer			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			ConsolidatedTotal
Cash flows from operating activities
Net cash provided by operating activities	$	—	$	2,389		$	234		$	10,956		$	13,579
Net cash provided by (used in) operating activities	$	—	$	12,461		$	(6,523	)	$	2,961		$	8,899
Cash flows from investing activities
Capital expenditures	—		—			(41,~~071~~657		)	(~~802~~591		)	(42,~~873~~248		)
Acquisition, net of cash acquired	—		—			(363		)	—			(363		)
Net cash used in investing activities	—		—			(1,657		)	(591		)	(2,248		)
Net cash used in investing activities	—		—			(4,434		)	(802		)	(5,236		)
Cash flows from financing activities
Payment of contingent consideration	—		—			(4,300		)	—			(4,300		)
Payment of Bridge Facility commitment fee and other costs	—		(2,520		)	—			—			(2,520		)
Return of intercompany capital	—		—			614			(614		)	—
Repayment of borrowings under First Lien Term Loan	—		(9,941		)	—			—			(9,941		)
Intercompany dividend	—		—			166			(166		)	—
Net cash used in financing activities	—		(12,461		)	—			—			(12,461		)
Payment of debt issue costs	—		(64		)	—			—			(64		)
Net increase (decrease) in cash and cash equivalents	—		—			(8,180		)	2,370			(5,810		)
Repayment of borrowings under First Lien Term Loan	—		(2,325		)	—			—			(2,325		)
Cash and cash equivalents at beginning of period	—		—			24,873			25,279			50,152
Net cash used in financing activities	—		(2,389		)	(3,520		)	(780		)	(6,689		)
Cash and cash equivalents at end of period	$	—	$	—		$	16,693		$	27,649		$	44,342
Net increase (decrease) in cash and cash equivalents	—		—			(7,720		)	9,374			1,654
Cash and cash equivalents at beginning of period	—		—			25,444			12,070			37,514
Cash and cash equivalents at end of period	$	—	$	—		$	17,724		$	21,444		$	39,168

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the ~~Nine~~Three Months Ended ~~July~~January 31, ~~2015~~2016

	Parent		Issuer			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			ConsolidatedTotal
Cash flows from operating activities
Net cash provided by operating activities	$	—	$	~~2,325~~838		$	131,~~979~~756		$	1,~~383~~552		$	174,~~687~~146
Cash flows from investing activities
Capital expenditures	—		—			(31,~~971~~603		)	(~~724~~322		)	(41,~~695~~925		)
Net cash used in investing activities	—		—			(3,971		)	(724		)	(4,695		)
Acquisition	—		—			(363		)	—			(363		)
Net cash used in investing activities	—		—			(1,966		)	(322		)	(2,288		)
Cash flows from financing activities
Return of intercompany capital	—		8,800			—			(8,800		)	—
Payment of contingent consideration	—		—			(4,300		)	—			(4,300		)
Intercompany funding	—		(8,800		)	—			8,800			—
Payment of debt issuance costs	—		(63		)	—			—			(63		)
Repayment of borrowings under First Lien Term Loan	—		(~~2,325~~775		)	—			—			(~~2,325~~775		)
Net cash used in financing activities	—		(~~2,325~~838		)	—(4,300		)	—			(25,~~325~~138		)
Net increase in cash and cash equivalents	—		—			10,008			659			10,667
Net increase (decrease) in cash and cash equivalents	—		—			(4,510		)	1,230			(3,280		)
Cash and cash equivalents at beginning of period	—		—			4225,~~290~~444			812,~~327~~070			5037,~~617~~514
Cash and cash equivalents at end of period	$	—	$	—		$	5220,~~298~~934		$	813,~~986~~300		$	6134,~~284~~234

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

Our fiscal years are the 52- or 53-week periods that end on the Friday nearest September 30. Fiscal years ~~2016~~2017 and ~~2015~~2016 comprise 52-week periods ending September 3029, ~~2016~~2017 and ~~October~~September 230, ~~2015~~2016, respectively. Each of the three months ended ~~July~~December 130, 2016 and ~~July~~January ~~3, 2015 included 13 weeks, and each of the nine months ended July~~ 1, 2016 ~~and July 3, 2015~~ included 3913 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 LLC (“Holding LLC”) owns all of the outstanding common stock of CPI International Holding Corp. (“Parent”), headquartered in Palo Alto, California, which is the parent company of CPI International, Inc. (“CPII”), which in turn is a parent company of Communications & Power Industries LLC (“CPI”) and Communications & Power Industries Canada Inc. (“CPI Canada”). The Veritas Capital Fund IV, L.P. and its affiliates and certain members of CPII’s management beneficially own shares of Parent’s common stock indirectly through their holdings in Holding LLC. CPI and CPI Canada, CPII’s main operating subsidiaries, together develop, manufacture and globally distribute components and subsystems used in the generation, amplification, transmission and reception of microwave signals for a wide variety of systems including radar, electronic warfare and communications (satellite and point-to-point) systems for military and commercial applications, specialty products for medical diagnostic imaging and the treatment of cancer, as well as microwave and radio frequency (“RF”) energy generating products for various industrial and scientific pursuits.

Business Combination

On September 17, 2015, we completed our purchase of the outstanding stock of ASC Signal Holdings Corporation (“ASC Signal”), a Delaware corporation, for a payment of approximately $50.7 million in cash consideration, net of $2.2 million cash acquired, including a post-closing adjustment based on a determination of ASC Signal’s closing net working capital of $0.4 million paid in the three months ended January 1, 2016. ASC Signal designs and builds advanced satellite communications, radar and high-frequency antennas and controllers used in commercial and government satellite communications, terrestrial communications, imagery and data transmission, and radar and intelligence applications. See Note 3, “Business Combination,” to the accompanying consolidated financial statements for more information about the ASC Signal acquisition.

Orders

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

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

Our orders by market for the ~~nine~~three months ended ~~July~~December 130, 2016 and ~~July~~January 31, ~~2015~~2016 are summarized as follows (dollars in millions):

	Nine Months Ended
	Three Months Ended
	July 1, 2016				July 3, 2015				Increase (Decrease)
	December 30, 2016				January 1, 2016				Increase (Decrease)
	Amount		% of Orders		Amount		% of Orders		Amount			Percent
Radar and Electronic Warfare	$	~~116~~35.26	3334	%	$	~~134~~38.56	4032	%	$	(~~18.~~3.0	)	(148	)%
Medical	5312.37		1512		5610.79		179		(31.48		)	(617	)
Communications	~~159~~47.7		46		~~123~~64.57		3754		36(17.20		)	29(26	)
Industrial	146.57		47		163.96		53		(23.41		)	~~(14~~86	)
Scientific	5.1.0		21		42.53		12		0(1.63		)	13(57	)
Total	$	~~348~~103.87	100	%	$	~~336~~120.1	100	%	$	12(16.74	)	4(14	)%

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Orders of $~~348~~103.87 million for the ~~nine~~three months ended ~~July~~December 130, 2016 were $1216.74 million, or approximately 414%, ~~higher~~lower than orders of $~~336~~120.1 million for the ~~nine~~three months ended ~~July~~January 3, 2015. Our ASC Signal operations, which resulted from our acquisition of ASC Signal in September 2015, contributed approximately $33 million in radar and communications orders to the nine months ended July 1, 2016~~, of which the significant majority were in the communications market~~. Explanations for the order increase or decrease by market for the ~~nine~~three months ended ~~July~~December 130, 2016 compared to the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016 are as follows:

• Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. Orders in these markets are typically characterized by many smaller orders of less than $3.0 million, and the timing of these orders may vary from year to year. Orders for the radar and electronic warfare markets decreased 148%, primarily due to the varying timing of large orders for ~~certain~~the ~~naval~~Aegis radar ~~programs~~systems. ~~and~~In anthe ~~airborne~~three ~~radome~~months ~~program.~~ended ~~This~~January ~~decrease~~1, ~~was~~2016, ~~partially~~our ~~offset~~Econco byDivision anreceived ~~increase~~a inmulti-year ~~orders~~order totaling more than $9.0 million to support anthe ~~airborne~~Aegis ~~electronic~~radar ~~countermeasures~~systems; ~~system~~this ~~and~~order andid ~~air~~not ~~traffic~~repeat ~~control~~in ~~radar~~the ~~system~~three months ended December 30, as2016. ~~well~~This asdecrease ~~the~~was ~~inclusion~~partially ofoffset by an increase in orders ~~from~~to ~~the~~support ~~ASC~~a ~~Signal~~variety ~~operations~~of domestic radar systems.

• Medical: Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, MRI and other applications, and for radiation therapy applications for the treatment of cancer. The 617% ~~decrease~~increase in medical orders was ~~primarily~~ due to ~~lower~~higher orders for x-ray imaging products, primarily for foreign customers~~, largely resulting from challenging global economic conditions, and lower orders to support MRI applications~~. ~~Partially offsetting these decreases, orders to support radiation therapy applications increased.~~

• Communications: Orders for our communications products consist of orders for commercial and military communications applications. The 2926% ~~increase~~decrease in communications orders was due to ~~higher~~lower orders for both ~~commercial~~military and ~~military~~commercial communications applications., ~~These~~primarily ~~increases~~resulting ~~resulted~~ from ~~the~~program ~~inclusion~~timing. ofWithin ~~orders~~military ~~from the ASC Signal operations~~communications, ~~significant strength in satellite communications~~ orders to support ~~commercial~~a ~~fixed~~shipboard ~~satellite~~communications ~~services~~system ~~applications,~~ and ~~continuing~~to ~~demand~~provide ~~for~~radomes and advanced tactical common data link (“TCDL”) antenna products for ~~unmanned~~aircraft ~~aerial vehicle (“UAV”) programs~~decreased. ~~These~~Within ~~increases~~commercial ~~were~~communications, ~~partially offset by a delay in~~ orders ofto ~~radomes~~support ~~for~~commercial afixed ~~shipboard~~satellite ~~military~~services ~~communications~~applications ~~program~~decreased.

• Industrial: Orders for our industrial market consist of products to support a wide range of systems used for applications including material processing, instrumentation and testing. Orders in this market are cyclical and generally follow the state of the economy. The $23.41 million ~~decrease~~increase in industrial orders was primarily due to ~~lower~~higher orders for ~~cargo~~industrial ~~screening~~heating and sterilization applications and electromagnetic vulnerability testing.

• Scientific: Orders in the scientific market consist of equipment used in accelerators for the study of high-energy particle physics and in reactor fusion programs. Orders in this market are historically one-time projects and can fluctuate significantly from period to period. The $01.63 million ~~increase~~decrease in scientific orders was primarily due to ~~higher~~the timing of orders for certain programs. Orders to support a ~~domestic~~foreign linear accelerator program, a foreign fusion program and ~~was~~a ~~partially~~domestic ~~offset~~laboratory, bywere ~~lower~~not ~~orders~~expected ~~for~~to, aand ~~foreign~~did ~~fusion~~not, ~~program~~recur in the three months ended December 30, 2016.

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

Backlog

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. As of ~~July~~December 130, 2016, we had an order backlog of $~~308~~315.57 million, compared to an order backlog of $~~316~~329.56 million as of ~~July~~January ~~3, 2015. The July~~ 1, 2016 ~~backlog included approximately $23 million of backlog from ASC Signal~~. 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.

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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.

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Results of Operations

We derive our revenue primarily from the sale of a wide range of power generation and conversion products, consisting of vacuum electron devices, solid-state devices, medical x-ray generators and various electronic power supply and control equipment, as well as satellite communications amplifiers, large-aperture antennas, advanced antenna technology and advanced composite radomes. We generally recognize revenue upon shipment of product, following receipt of written purchase orders, when the price is fixed or determinable, title has transferred and collectability is reasonably assured. Revenue recognized under the percentage-of-completion method of accounting is determined on the basis of costs incurred and estimates of costs at completion, which require management estimates of future costs.

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

~~The~~Three ~~second~~Months ~~lien~~Ended ~~credit agreement we entered into in September 2015 resulted in~~December 30, ~~and~~2016 ~~will~~Compared ~~continue~~ to ~~result~~Three ~~in,~~Months anEnded ~~increase~~January 1, in2016 interest expense and in amortization of debt issue costs and issue discount. The annual increase in cash interest expense due to term loan borrowings under our second lien credit agreement is approximately $2.2 million throughout its remaining term. The annual effect on amortization of debt issue costs and issue discount of the second lien credit agreement averages $0.3 million throughout its remaining terms.

We believe that our acquisitions of ASC Signal in September 2015 resulted in, and will continue to result in, certain benefits, including cost savings, broader market opportunities, product innovations and operational efficiencies. However, the acquisition of ASC Signal also increased, and will continue to increase, certain of our noncash expenses. The noncash expenses (on a pretax basis) related to the acquisition of ASC Signal include (i) a $1.1 million charge, distributed over the three months following the date of the acquisition, for the utilization of the net increase in cost basis of inventory, and (ii) also as a result of the additional intangibles and property, plant and equipment, an average of approximately $2.0 million annual increase in depreciation and amortization expense until said assets are fully amortized or depreciated at various dates through 2039.

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Three Months Ended July 1, 2016 Compared to Three Months Ended July 3, 2015

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

	Three Months Ended									Increase (Decrease)
	July 1, 2016				July 3, 2015
	December 30, 2016				January 1, 2016
	Amount		% of Sales		Amount			% of Sales
Sales	$	~~129~~114.6	100.0	%	$	~~109~~110.67		100.0	%	$	203.09
Cost of sales	89.8		69.3		79.8			72.8		10.0
Cost of sales (a)	82.5		72.0		81.8			73.9		0.7
Gross profit	3932.81		3028.70		2928.89			2726.21		103.02
Research and development	43.09		3.14		3.89			3.5		~~0.2~~—
Selling and marketing	6.40		45.92		56.5			5.09		(0.95		)
General and administrative	78.72		57.92		78.61			67.93		0.1
Amortization of acquisition-related intangibles	32.37		2.54		23.56			23.3		(0.89		)
Operating income	1811.53		149.39		106.48			96.51		84.15
Interest expense, net	910.8		79.64		9.17			8.38		01.71
Income before income taxes	8.7		6.7		1.2			1.1		7.5
Income (loss) before income taxes	0.5		0.4		(2.9		)	(2.6	)	3.4
Income tax expense	4.2		3.2		—			—		4.2
Income tax expense (benefit)	0.3		0.3		(1.7		)	(1.5	)	2.0
Net income	$	4.5	3.5	%	$	1.2		1.1	%	$	3.3
Net income (loss)	$	0.2	0.2	%	$	(1.2	)	(1.1	)%	$	1.4
Other Data:
EBITDA (a)	$	25.0	19.3	%	$	16.2		14.8	%	$	8.8
EBITDA (b)	$	17.0	14.8	%	$	13.5		12.2	%	$	3.5

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

(a) ~~EBITDA~~Cost ~~represents~~of ~~earnings~~sales ~~before net interest expense, provision~~ for ~~income~~the ~~taxes~~three ~~and~~months ~~depreciation~~ended ~~and~~January ~~amortization. For the reasons listed below~~1, we2016 ~~believe~~includes ~~that U~~$0.S.9 ~~generally~~million ~~accepted~~of ~~accounting~~utilization ~~principles~~of ~~(“GAAP”)~~the ~~based~~net ~~financial~~increase ~~information~~in ~~for~~cost ~~leveraged~~basis ~~businesses,~~of ~~such~~inventory ~~as ours, should be supplemented by EBITDA so~~ that ~~investors~~resulted ~~better~~from ~~understand~~purchase ~~our~~accounting ~~financial performance~~ in connection with ~~their~~an ~~analysis of our business:~~acquisition.

(b)

EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. For the reasons listed below, we believe that U.S. 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 first lien senior credit facility contains covenants that require us to maintain a total leverage ratio in certain circumstances that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with these covenants;


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


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


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

~~Other~~- ~~companies~~31 may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. When analyzing our performance, EBITDA should be considered in addition to, and not as a substitute for or superior to, net income, cash flows from operating activities or other statements of income or statements of cash flows data prepared in accordance with GAAP.-

For a reconciliation of net income to EBITDA, see Note 12, Segments, Geographic and Customer Information, of the accompanying unaudited condensed consolidated financial statements.

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Sales: Our sales by market for the three months ended July 1, 2016 and July 3, 2015 are summarized as follows (dollars in millions):

	Three Months Ended
	July 1, 2016				July 3, 2015				Increase (Decrease)
	Amount		% of Sales		Amount		% of Sales		Amount			Percent
Radar and Electronic Warfare	$	48.8	38	%	$	45.6	42	%	$	3.2		7	%
Medical	14.7		11		15.5		14		(0.8		)	(5	)
Communications	57.6		44		40.8		37		16.8			41
Industrial	5.3		4		5.7		5		(0.4		)	(7	)
Scientific	3.2		3		2.0		2		1.2			60
Total	$	129.6	100	%	$	109.6	100	%	$	20.0		18	%

Sales of $129.6 million for the three months ended July 1, 2016 were $20.0 million, or 18%, higher than sales of $109.6 million for the three months ended July 3, 2015. Our ASC Signal operations contributed approximately $13 million in radar and communications sales to the three months ended July 1, 2016, of which the significant majority were in the communications market. Explanations for the sales increase or decrease by market for the three months ended July 1, 2016 compared to the three months ended July 3, 2015 are as follows:

• Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of order receipts and subsequent shipments in these markets may vary from year to year. Sales for the radar and electronic warfare markets increased 7%, primarily due to higher sales for a variety of radar programs and the inclusion of sales from the ASC Signal operations in the three months ended July 1, 2016. These increases were partially offset by lower sales to support electronic warfare applications.

• 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 5% decrease in sales in the medical market was primarily due to lower sales of x-ray imaging products for foreign customers, largely resulting from challenging global economic conditions, and lower sales to support MRI applications. Sales to support radiation therapy applications increased.

• Communications: Sales of our communications products consist of sales for commercial and military communications applications. The 41% increase in sales in the communications market was primarily due to the inclusion of sales from the ASC Signal operations in the three months ended July 1, 2016 and increased sales to support military communications applications. Partially offsetting these increases, sales to support commercial direct-to-home broadcast programs, which generally have cyclical timing, decreased.

• Industrial: Sales for our industrial market consist of sales to support a wide range of systems used for applications including material processing, instrumentation and testing. Sales in this market are cyclical and generally follow the state of the economy. The $0.4 million decrease in sales of industrial products was primarily the result of lower sales to support industrial heating and material processing applications.

• Scientific: Sales in the scientific market consist of sales of equipment used in accelerators for the study of high-energy particle physics and in reactor fusion programs. Sales in this market are historically one-time projects and can fluctuate significantly from period to period. The $1.2 million increase in sales of scientific products was primarily the result of higher sales to support a foreign linear accelerator program.

Gross Profit. Gross profit was $39.8 million, or 30.7% of sales, for the three months ended July 1, 2016 compared to $29.8 million, or 27.2% of sales, for the three months ended July 3, 2015. The $10.0 million increase in gross profit was primarily due to gross profit from the recently acquired ASC Signal Division, higher shipment volume, a favorable mix of product shipments and the favorable impact of Canadian costs due to the strength of the U.S. dollar.

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Research and Development. Research and development expenses were $4.0 million, or 3.1% of sales, for the three months ended July 1, 2016 and $3.8 million, or 3.5% of sales, for the three months ended July 3, 2015. The $0.2 million increase in research and development expenses was primarily due to inclusion of ASC Signal Division expenses.

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

	Three Months Ended
	July 1, 2016		July 3, 2015
Company sponsored	$	4.0	$	3.8
Customer sponsored	3.2		2.9
	$	7.2	$	6.7

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

Selling and Marketing. Selling and marketing expenses were $6.4 million, or 4.9% of sales, for the three months ended July 1, 2016, and $5.5 million, or 5.0% of sales, for the three months ended July 3, 2015. The $0.9 million increase in selling and marketing expenses was primarily due to the inclusion of ASC Signal Division expenses.

General and Administrative. General and administrative expenses were $7.7 million, or 5.9% of sales, for the three months ended July 1, 2016, and $7.6 million, or 6.9% of sales, for the three months ended July 3, 2015. The $0.1 million increase in general and administrative expenses was primarily due to inclusion of ASC Signal Division expenses and higher accruals for management incentives for the three months ended July 1, 2016, partially offset by the $0.7 million contingent consideration expense related to our October 2013 acquisition of Radant Technologies, Inc. (“Radant”) for the three months ended July 3, 2015.

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 $3.3 million for the three months ended July 1, 2016 and $2.5 million for the three months ended July 3, 2015. The $0.8 million increase in amortization of acquisition-related intangibles was primarily due to addition of intangibles assets from the ASC Signal acquisition.

Interest Expense, Net (“Interest Expense”). Interest expense was $9.8 million, or 7.6% of sales, for the three months ended July 1, 2016 and $9.1 million, or 8.3% of sales, for the three months ended July 3, 2015. The $0.7 million increase in interest expense was primarily due to debt financing of $28 million in September 2015 used to partially fund the ASC Signal acquisition.

Income Tax Expense. We recorded an income tax expense of $4.2 million and $27,000 for the three months ended July 1, 2016 and July 3, 2015, respectively. The effective income tax rate for the three months ended July 1, 2016 was 48%, which was lower than our estimated normalized tax rate of approximately 52% for fiscal year 2016 primarily due to tax benefits from a change in state income apportionment and expiration of the statute of limitations for uncertain tax positions. The $27,000 income tax expense for the three months ended July 3, 2015 is lower than the estimated normalized tax expense primarily due to tax benefits from a change in state income apportionment. The 52% estimated normalized tax rate for fiscal year 2016 is higher than the federal statutory tax rate of 35% primarily due to foreign tax credit limitations.

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Net Income. Net income was $4.5 million, or 3.5% of sales, for the three months ended July 1, 2016 compared to net income of $1.2 million, or 1.1% of sales, for the three months ended July 3, 2015. The $3.3 million increase in net income was primarily due to gross profit from the recently acquired ASC Signal Division, higher shipment volume, a favorable mix of product shipments and the favorable impact of Canadian costs due to the strength of the U.S. dollar, partially offset by higher income tax expense and inclusion of ASC Signal Division operating expenses.

EBITDA. EBITDA was $25.0 million, or 19.3% of sales, for the three months ended July 1, 2016 compared to $16.2 million, or 14.8% of sales, for the three months ended July 3, 2015. The $8.8 million increase in EBITDA was primarily due to gross profit from the recently acquired ASC Signal Division, higher shipment volume, a favorable mix of product shipments and the favorable impact of Canadian costs due to the strength of the U.S. dollar, partially offset by inclusion of ASC Signal Division operating expenses.

Nine Months Ended July 1, 2016 Compared to Nine Months Ended July 3, 2015

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

	Nine Months Ended								Increase (Decrease)
	July 1, 2016				July 3, 2015
	Amount		% ofSales		Amount		% ofSales
Sales	$	360.6	100.0	%	$	328.3	100.0	%	$	32.3
Cost of sales (a)	259.4		71.9		237.0		72.2		22.4
Gross profit	101.2		28.1		91.3		27.8		9.9
Research and development	12.2		3.4		11.4		3.5		0.8
Selling and marketing	19.4		5.4		17.0		5.2		2.4
General and administrative	23.1		6.4		23.2		7.1		(0.1		)
Amortization of acquisition-related intangibles	10.4		2.9		7.6		2.3		2.8
Operating income	36.0		10.0		32.0		9.7		4.0
Interest expense, net	29.3		8.1		27.3		8.3		2.0
Income before income taxes	6.7		1.9		4.7		1.4		2.0
Income tax expense	2.9		0.8		1.4		0.4		1.5
Net income	$	3.8	1.1	%	$	3.3	1.0	%	$	0.5
Other Data:
EBITDA (b)	$	55.9	15.5	%	$	49.6	15.1	%	$	6.3

(a) Cost of sales for the nine months ended July 1, 2016 includes $0.9 million of utilization of the net increase in cost basis of inventory that resulted from purchase accounting in connection with an acquisition.

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

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

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

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

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

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

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

-For 41a -reconciliation of net income (loss) to EBITDA, see Note 11, Segments, Geographic and Customer Information, of the accompanying unaudited condensed consolidated financial statements.

Sales: Our sales by market for the three months ended December 30, 2016 and January 1, 2016 are summarized as follows (dollars in millions):



	Three Months Ended
	December 30, 2016				January 1, 2016				Increase (Decrease)
	Amount		% of Sales		Amount		% of Sales		Amount			Percent
Radar and Electronic Warfare	$	36.7	32	%	$	39.9	36	%	$	(3.2	)	(8	)%
Medical	18.4		16		16.1		15		2.3			14
Communications	51.6		45		45.8		41		5.8			13
Industrial	5.2		5		7.1		6		(1.9		)	(27	)
Scientific	2.7		2		1.8		2		0.9			50
Total	$	114.6	100	%	$	110.7	100	%	$	3.9		4	%

Sales of $114.6 million for the three months ended December 30, 2016 were $3.9 million, or 4%, higher than sales of $110.7 million for the three months ended January 1, 2016. Explanations for the sales increase or decrease by market for the three months ended December 30, 2016 compared to the three months ended January 1, 2016 are as follows:

•

Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of order receipts and subsequent shipments in these markets may vary from year to year. Sales for the radar and electronic warfare markets decreased 8% due to lower sales of aircraft radomes resulting from the completion of a large radome program.

•

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 14% increase in sales in the medical market was primarily due to higher sales of x-ray imaging products for foreign customers. Sales to support radiation therapy applications also increased.


•	Communications: Sales of our communications products consist of sales for commercial and military communications applications. The 13% increase in sales in the communications market was primarily due to increased sales to support military communications applications, including higher sales of advanced TCDL antenna products and aircraft radomes.

•

Industrial: Sales for our industrial market consist of sales to support a wide range of systems used for applications including material processing, instrumentation and testing. Sales in this market are cyclical and generally follow the state of the economy. The $1.9 million decrease in sales of industrial products was primarily the result of lower sales to support electromagnetic vulnerability testing and industrial heating applications.

•

Scientific: Sales in the scientific market consist of sales of equipment used in accelerators for the study of high-energy particle physics and in reactor fusion programs. Sales in this market are historically one-time projects and can fluctuate significantly from period to period. The $0.9 million increase in sales of scientific products was primarily the result of higher sales to support a large domestic linear accelerator program.

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~~For~~Gross aProfit. ~~reconciliation~~Gross profit was $32.1 million, or 28.0% of ~~net~~sales, ~~income~~for the three months ended December 30, 2016 compared to ~~EBITDA~~$28.9 million, ~~see~~or ~~Note~~26.1% 12of sales, ~~Segments~~for the three months ended January 1, ~~Geographic~~2016. The $3.2 million increase in gross profit was primarily due to an increase in sales volume, the favorable impact of Canadian costs due to the strength of the U.S. dollar and ~~Customer~~favorable ~~Information~~mix of product shipments in the three months ended December 30, 2016 and the absence of a $0.9 million charge for the ~~accompanying~~utilization ~~unaudited~~of ~~condensed~~the ~~consolidated~~net ~~financial~~increase ~~statements~~in the cost basis of inventory acquired in the September 2015 acquisition of ASC Signal Holdings Corporation (“ASC Signal”) that was reported for the three months ended January 1, 2016.

~~Sales:~~Research ~~Our~~and Development. Research and development expenses were $3.9 million, or 3.4% of sales, byfor ~~market~~the three months ended December 30, 2016 and $3.9 million, or 3.5% of sales, for the ~~nine~~three months ended ~~July~~January 1, 2016. There was no significant change in company-sponsored research and ~~July~~development expenses for the three months ended December 330, ~~2015~~2016 ~~are~~compared ~~summarized~~to asthe ~~follows~~three ~~(dollars~~months inended ~~millions):~~January 1, 2016.

	Nine Months Ended
	July 1, 2016				July 3, 2015				Increase (Decrease)
	Amount		% ofSales		Amount		% ofSales		Amount			Percent
Radar and Electronic Warfare	$	136.5	38	%	$	131.4	40	%	$	5.1		4	%
Medical	44.6		13		51.7		16		(7.1		)	(14	)
Communications	151.9		42		119.8		37		32.1			27
Industrial	19.1		5		17.9		5		1.2			7
Scientific	8.5		2		7.5		2		1.0			13
Total	$	360.6	100	%	$	328.3	100	%	$	32.3		10	%

Sales of $360.6 million for the nine months ended July 1, 2016 were $32.3 million, or approximately 10%, higher than sales of $328.3 million for the nine months ended July 3, 2015. Our ASC Signal operations contributed approximately $32 million in radar and communications sales for the nine months ended July 1, 2016, of which the significant majority were in the communications market. Explanations for the sales increase or decrease by market for the nine months ended July 1, 2016 compared to the nine months ended July 3, 2015 are as follows:

• Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of order receipts and subsequent shipments in these markets may vary from year to year. Sales for the radar and electronic warfare markets increased 4%, primarily due to the inclusion of sales from the ASC Signal operations in the nine months ended July 1, 2016 and higher sales to support various radar systems. These increases were partially offset by lower sales to support certain shipboard and airborne electronic warfare programs.

• 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 14% decrease in sales in the medical market was due to lower sales of x-ray imaging products, primarily for foreign customers and largely resulting from challenging global economic conditions. Sales to support radiation therapy applications increased.

• Communications: Sales of our communications products consist of sales for commercial and military communications applications. The 27% increase in sales in the communications market was primarily due to the inclusion of sales from the ASC Signal operations in the nine months ended July 1, 2016 and higher sales for a variety of military communications applications. Partially offsetting these increases, sales of TCDL antenna products for UAV programs and sales of satellite communications amplifiers to support commercial direct-to-home broadcast programs, which generally have cyclical timing, decreased.

• Industrial: Sales for our industrial market consist of sales to support a wide range of systems used for applications including material processing, instrumentation and testing. Sales in this market are cyclical and generally follow the state of the economy. The $1.2 million increase in sales of industrial products was primarily the result of higher sales to support material analysis applications.

• Scientific: Sales in the scientific market consist of sales of equipment used in accelerators for the study of high-energy particle physics and in reactor fusion programs. Sales in this market are historically one-time projects and can fluctuate significantly from period to period. The $1.0 million increase in sales of scientific products was the result of higher sales to support foreign and domestic linear accelerator programs and was partially offset by lower sales to support fusion programs.

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Gross Profit. Gross profit was $101.2 million, or 28.1% of sales, for the nine months ended July 1, 2016 compared to $91.3 million, or 27.8% of sales, for the nine months ended July 3, 2015. The $9.9 million increase in gross profit was primarily due to gross profit from ASC Signal Division and the favorable impact of Canadian costs due to the strength of the U.S. dollar, partially offset by a less favorable mix of product shipments and a $0.9 million charge for utilization of the net increase in cost basis of inventory acquired from ASC Signal.

Research and Development. Research and development expenses were $12.2 million, or 3.4% of sales, for the nine months ended July 1, 2016 and $11.4 million, or 3.5% of sales, for the nine months ended July 3, 2015. The $0.8 million increase in research and development expenses was primarily due to inclusion of ASC Signal Division expenses.

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

	Nine Months Ended
	Three Months Ended
	July 1, 2016		July 3, 2015
	December 30, 2016		January 1, 2016
Company sponsored	$	12.2	$	11.4
Company-sponsored	$	3.9	$	3.9
Customer sponsored	8.3		7.2
Customer-sponsored	4.2		2.3
	$	208.51	$	~~18.~~6.2

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

Selling and Marketing. Selling and marketing expenses were $196.40 million, or 5.42% of sales, for the ~~nine~~three months ended ~~July~~December 130, 2016, and $176.05 million, or 5.29% of sales, for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016. The $20.45 million ~~increase~~decrease in selling and marketing expenses was primarily due to ~~the~~company ~~inclusion~~cost ofreduction ~~ASC Signal Division expenses~~initiatives.

General and Administrative. General and administrative expenses were $238.12 million, or 67.42% of sales, for the ~~nine~~three months ended ~~July~~December 130, 2016, and $238.21 million, or 7.13% of sales, for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016. ~~The~~There ~~$0.1~~was ~~million~~no ~~decrease~~significant change in general and administrative expenses ~~was~~for ~~primarily due~~ the three ~~absence~~months ofended ~~Radant contingent consideration expense and a reduction in acquisition closing~~December 30, ~~integration~~2016 compared ~~and~~to ~~evaluation expenses, partially offset by~~ the three ~~inclusion of ASC Signal Division expenses for the nine~~ months ended ~~July~~January 1, 2016.

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 $102.47 million for the ~~nine~~three months ended ~~July~~December 130, 2016 and $73.6 million for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016. The $20.89 million ~~increase~~decrease in amortization of acquisition-related intangibles for the three months ended December 30, 2016 was primarily due to ~~the~~certain ~~addition~~intangible ofassets ~~intangibles~~that ~~assets~~were ~~from~~fully ~~the~~amortized ~~ASC~~in ~~Signal~~fiscal ~~acquisition~~year 2016.

Interest Expense, Net (“Interest Expense”). Interest expense was $2910.38 million, or 89.14% of sales, for the ~~nine~~three months ended ~~July~~December 130, 2016 and $279.37 million, or 8.38% of sales, for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016. The $21.01 million increase in interest expense was primarily due to ~~debt~~amortization ~~financing~~ of ~~$28~~bank ~~million~~commitment infees ~~September~~for ~~2015~~the ~~used~~commitment toletter ~~partially~~that ~~fund~~was ~~the~~entered ~~ASC~~into ~~Signal~~on ~~acquisition~~December 12, 2016.

Income Tax Expense (Benefit). We recorded an income tax expense of $20.93 million ~~and $1.4 million~~ for the ~~nine~~three months ended ~~July~~December 130, 2016 and ~~July 3,~~an ~~2015,~~income ~~respectively.~~tax ~~The~~benefit ~~effective~~of ~~income~~$1.7 ~~tax~~million ~~rate~~ for the ~~nine~~three months ended ~~July~~January 1, 2016. ~~was~~The ~~43% and the~~ effective income tax rate for each of the ~~nine~~three months ended ~~July~~December 330, ~~2015~~2016 and January 1, 2016 was 3059%. The 4359% effective income tax rate for the ~~nine~~three months ended ~~July~~December 130, 2016 ~~was~~is ~~lower~~similar ~~than~~to our estimated 56% normalized tax rate ~~of approximately 52%~~ for fiscal year ~~2016~~2017, ~~primarily~~which ~~due~~is tohigher ~~the~~than ~~favorable resolution of and~~ the ~~expiration~~federal ofstatutory ~~the~~tax ~~statute~~rate of ~~limitations~~35% ~~for~~primarily ~~uncertain~~due ~~tax~~to ~~positions~~foreign ~~and a~~ tax ~~benefit~~credit ~~from a change in state income apportionment~~limitations. The 3059% effective income tax rate benefit for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016 ~~was~~included ~~lower than the estimated normalized~~ tax ~~rate of approximately 50% for fiscal year 2015 primarily due to tax~~ benefits from a change in ~~state~~uncertain ~~income~~tax ~~apportionment~~positions ~~and~~upon ~~tax~~completion ~~benefits~~of ~~from~~ a ~~California~~Canada ~~income~~Revenue ~~tax~~Agency ~~refund for prior year amended income~~ tax ~~returns,~~audit ~~partially~~and ~~offset~~U.S. byresearch ~~tax~~and ~~expense~~development ~~for an uncertain~~ tax ~~position~~credits asfrom apassage ~~result~~ of anthe ~~intercompany~~Protecting ~~sale~~Americans offrom ~~assets.~~Tax ~~The~~Hike ~~52%~~Act ~~estimated~~of ~~normalized~~2015 ~~tax~~and ~~rate~~was ~~for fiscal year 2016 is~~ higher than the federal statutory ~~tax~~ rate of 35% primarily due to foreign tax credit limitations.

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Net Income (Loss). Net income was $30.82 million, or 10.12% of sales, for the ~~nine~~three months ended ~~July~~December 130, 2016 compared to net ~~income~~loss of $31.32 million, or 1.01% of sales, for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016. The $01.54 million increase toin net income for three months ended December 30, 2016 was primarily due to higher gross profit from ~~the~~higher ~~recently~~shipment ~~acquired ASC Signal Division and~~ volume, the favorable impact of Canadian costs due to the strength of the U.S. dollar, ~~partially~~and ~~offset~~the byabsence ~~inclusion~~ of ~~ASC~~a ~~Signal~~$0.9 ~~Division~~million ~~operating expenses, an unfavorable mix of product shipments, a~~ charge for utilization of the net increase in cost basis of inventory acquired from ~~ASC~~September ~~Signal,~~2015 ~~higher~~acquisition ~~intangible~~of ~~amortization~~ASC ~~expense~~Signal ~~due~~that towas ~~the~~reported ~~addition~~for ofthe ~~intangibles~~three ~~assets~~months ~~from~~ended ~~the~~January 1, ~~ASC~~2016, ~~Signal acquisition~~ and ~~higher~~lower ~~interest~~intangible amortization expense, ~~due~~partially tooffset ~~debt~~by ~~financing~~higher ~~used~~income totax ~~partially~~and ~~fund~~interest expense for the ~~ASC~~three ~~Signal~~months ~~acquisition~~ended December 30, 2016.

EBITDA. EBITDA was $5517.90 million, or 1514.58% of sales, for the ~~nine~~three months ended ~~July~~December 130, 2016 compared to $4913.65 million, or 1512.12% of sales, for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016. The $6.3.5 million increase in EBITDA was primarily due to higher gross profit from ~~the~~higher ~~recently~~shipment ~~acquired~~volume, ~~ASC Signal Division and~~ the favorable impact of Canadian costs due to the strength of the U.S. dollar, ~~partially~~and ~~offset~~the byabsence ~~inclusion~~ of ~~ASC~~a ~~Signal~~$0.9 ~~Division~~million ~~operating expenses, a~~ charge for utilization of the net increase in cost basis of inventory acquired from September 2015 acquisition of ASC Signal, ~~and~~that anwas ~~unfavorable~~reported ~~mix~~for ofthe ~~product~~three ~~shipments~~months ended January 1, 2016.

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.

OnOur ~~September~~senior ~~17,~~secured ~~2015,~~credit wefacilities ~~purchased~~require ~~the~~prepayment ~~outstanding stock~~ of ~~ASC~~the ~~Signal~~outstanding ~~for~~indebtedness athereunder ~~payment~~which ofis ~~approximately~~calculated ~~$50.7 million in cash consideration, net of $2.2 million cash acquired, including a post-closing adjustment~~ based on a ~~determination~~percentage of ~~ASC~~“excess ~~Signal’s~~cash ~~closing~~flow” ~~net~~as ~~working~~defined ~~capital of $0.4 million paid~~ in the ~~three~~credit ~~months~~agreement ~~ended~~governing ~~January~~our 1,senior ~~2016.~~secured Wecredit ~~funded this acquisition with cash from operations and borrowings in an aggregate principal amount of $28~~facilities.~~0 million under a new second lien term loan facility.~~

~~Our~~Based ~~Radant~~on ~~Division~~our results for fiscal year 2016, ~~formed~~we inpresented ~~October~~to ~~2013~~the ~~from~~holders of the term loan under our ~~acquisition~~first oflien ~~Radant~~credit ~~Technologies,~~facility ~~Inc.~~an ~~(“Radant”),~~excess ~~has~~cash ~~achieved~~flow ~~certain~~mandatory ~~agreed-upon~~prepayment ~~financial~~of ~~targets~~$10.1 ~~over~~million. The holders of the ~~two~~first ~~years~~lien ~~following~~term ~~the~~loan ~~date~~accepted $9.9 million of the ~~acquisition~~$10.1 Asmillion total prepayment tendered and a ~~result,~~principal onpayment ~~December~~in ~~16,~~that ~~2015,~~amount wewas ~~paid~~made during the ~~previous~~first ~~owners~~quarter of ~~Radant~~fiscal ~~$10~~year 2017.0 ~~million~~The inexcess ~~settlement~~cash flow mandatory prepayment is applied to scheduled installments of athe ~~contingent~~first ~~consideration~~lien ~~earnout~~term ~~arrangement~~loan infacility ~~connection~~(and ~~with~~allocated to such ~~acquisition~~scheduled installments in direct order to the remaining scheduled installments) until paid in full. As a result, no other contractual principal payment is due on the first lien term loan until its scheduled maturity date of November 17, 2017.

WeThe ~~believe~~term ~~that~~loans ~~cash~~under ~~flows~~our ~~from~~first ~~operations~~and second lien credit facilities will mature and ~~availability~~become ~~under~~payable in November 2017 unless we refinance at least 65% of our ~~revolving~~outstanding ~~credit~~senior ~~facility~~notes ~~included~~and insatisfy certain other conditions prior to that time. However, if we refinance at least 65% of our ~~new~~outstanding senior ~~secured~~notes and satisfy certain other conditions prior to the requisite deadline, the maturity of the term loans under our first and second lien credit facilities will be ~~sufficient~~extended by approximately three and a half years. We intend to ~~fund~~refinance ~~our~~at ~~working~~least ~~capital~~65% ~~needs,~~of ~~capital~~our ~~expenditures~~outstanding senior notes and ~~other~~satisfy ~~business~~the ~~requirements~~conditions necessary for atthe ~~least~~extension of the ~~next~~maturity 12dates ~~months~~of the term loans under our first and second lien credit facilities. WeOn ~~may~~December ~~need~~12, 2016, we entered into a commitment letter (the “Commitment Letter”) with UBS, AG, Stamford Branch and UBS Securities LLC (collectively, “UBS”), pursuant to ~~incur~~which ~~additional~~UBS ~~financings~~has committed (subject to ~~make~~certain ~~strategic~~customary ~~acquisitions~~conditions) orto ~~investments~~provide orand ifarrange a bridge loan facility of $245 million to refinance 100% of our ~~cash~~existing ~~flows~~senior ~~from~~notes ~~operations~~(if we are ~~less~~otherwise ~~than~~unable weto ~~expect.~~refinance Weour ~~cannot~~senior benotes with certain ~~that~~other financing) ~~will~~and be100% ~~available~~of our second lien credit facility. Pursuant to usthe Commitment Letter, we agreed to pay UBS a commitment fee in an aggregate amount of $4.9 million. The first $2.45 million of the commitment fee was paid upon execution of the Commitment Letter and the second $2.45 million of the commitment fee is due on ~~acceptable~~the ~~terms~~earlier orof ~~that~~the ~~financing~~execution ~~will~~of bethe ~~available~~bridge atloan ~~all~~facility or the expiration of the Commitment Letter.

Assuming we are successful in refinancing our senior notes prior to November 2017, we believe that cash flows from operations and availability under our revolving credit facility included in our first lien credit facility will be sufficient to fund our working capital needs, capital expenditures and other business requirements for at least the next 12 months. We may need to incur additional financings to make strategic acquisitions or investments or if our cash flows from operations are less than we expect. We cannot be certain that financing will be available to us on acceptable terms or that financing will be available at all.

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

Cash and Working Capital

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

	July 1, 2016		October 2, 2015
	December 30, 2016		September 30, 2016
Cash and cash equivalents	$	3944.23	$	3750.52
Working capital	$	~~134~~138.39	$	~~113~~135.41

-We 44invest -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 $1.3 million as of December 30, 2016, consisting primarily of bank guarantees from customer advance payments to our international subsidiaries and cash collateral for certain performance bonds. The bank guarantees will become unrestricted cash when performance under the sales contract is complete. The cash collateral for the performance bonds will become unrestricted cash when the performance bonds expire.

~~Table~~We are highly leveraged. As of ~~Contents~~December 30, 2016, excluding approximately $4.1 million of outstanding letters of credit, our total indebtedness was $535.3 million (before netting out the total unamortized debt discount of $2.1 million and debt issuance costs of $7.3 million). We also had an additional $25.9 million available for borrowing under our revolving credit facility as of December 30, 2016. Our liquidity requirements are significant, primarily due to debt service requirements. For the three months ended December 30, 2016, our interest expense exclusive of debt issuance costs and discount amortization was $8.6 million, and our cash interest paid was $3.9 million.

WeAs ~~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 $1.8 million as of July~~December 130, 2016, ~~consisting~~we ~~primarily~~were ofin ~~bank~~compliance ~~guarantees~~with ~~from~~the ~~customer~~covenants ~~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~~agreements ~~contract~~governing isour ~~complete.~~existing ~~The~~senior ~~cash~~secured ~~collateral~~credit ~~for~~facilities and the ~~performance~~indentures ~~bonds~~governing ~~will~~our ~~become~~senior ~~unrestricted cash when the performance bonds expire~~notes.

We are highly leveraged. As of July 1, 2016, excluding approximately $5.3 million of outstanding letters of credit, our total indebtedness was $546.0 million (before netting out the total unamortized debt discount of $3.1 million and debt issuance costs of $9.0 million). We also had an additional $24.7 million available for borrowing under our revolving credit facility as of July 1, 2016. Our liquidity requirements are significant, primarily due to debt service requirements. For the three and nine months ended July 1, 2016, our interest expense exclusive of debt issue costs and discount amortization was $8.6 million and $25.8 million, respectively, and our cash interest paid was $3.9 million and $21.2 million, respectively. With the additional borrowings under a new second term loan facility we entered into on September 17, 2015 to partially fund the ASC Signal acquisition, our interest expense in the three and nine months ended July 1, 2016 increased compared to the same periods in the prior year, and will continue to be higher at least over the next two years.

As of July 1, 2016, we were in compliance with the covenants under the agreements governing our existing senior credit facilities and the indentures governing the Senior Notes due 2018 (“Senior Notes”).

Historical Operating, Investing and Financing Activities

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

	Nine Months Ended
	Three Months Ended
	July 1, 2016			July 3, 2015
	December 30, 2016			January 1, 2016
Net cash provided by operating activities	$	138.69		$	174.71
Net cash used in investing activities	(52.2		)	(42.73		)
Net cash used in financing activities	(612.75		)	(25.31		)
Net increase in cash and cash equivalents	$	1.7		$	10.7
Net decrease in cash and cash equivalents	$	(5.8	)	$	(3.3	)

Operating Activities

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

~~Net cash provided by operating activities of $13.6 million in the nine months ended July 1, 2016 was attributable to net income of $3.8 million and depreciation, amortization and other non~~-~~cash~~ ~~charges~~35 of $23.0 million, partially offset by net cash used in working capital of $13.2 million. The primary uses of cash for working capital during the nine months ended July 1, 2016 were an increase in inventories in anticipation of fulfilling certain customer orders and a decrease in accrued expenses. The decrease in accrued expenses reflects the operating portion of the settlement of a contingent consideration earnout arrangement associated with the Radant acquisition and payments made for accrued acquisition expenses related to ASC Signal, employee incentives and advisory fees.-

Net cash provided by operating activities of $17.7 million in the nine months ended July 3, 2015 was attributable to net income of $3.3 million and depreciation, amortization and other non-cash charges of $20.7 million, partially offset by net cash used in working capital of $6.3 million. The primary uses of cash for working capital during the nine months ended July 3, 2015 were an increase in inventories and accounts receivable and a decrease in accounts payable and advance payments from customers. Inventories increased in anticipation of fulfilling certain customer orders. Accounts receivable increased due to the timing factors associated with shipments and sales. Accounts payable decreased primarily as a result of a timing difference in the payment of various professional service fees. Advance payments from customers decreased due to timing differences in billing and receipt of contract advances.

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Net cash provided by operating activities of $8.9 million in the three months ended December 30, 2016 was attributable to net income of $0.2 million, depreciation, amortization and other non-cash charges of $7.4 million, and net cash provided by working capital of $1.3 million. The primary working capital sources of cash in the three months ended December 30, 2016 were improved collections of accounts receivable; a decrease in inventories due to the completion of certain projects; and an increase in accrued expenses, which reflects the bridge loan facility commitment fee and a higher interest accrual. The aforementioned working capital sources of cash were partially offset by a decrease in accounts payable due to the timing of payments to vendors and suppliers and a decrease in income tax payable due to the timing of estimated tax payments and taxable income.

Net cash provided by operating activities of $4.1 million in the three months ended January 1, 2016 was attributable to depreciation, amortization and other non-cash charges of $8.7 million, which largely offset net loss of $1.2 million and net cash used in working capital of $3.4 million. The primary uses of cash for working capital during the three months ended January 1, 2016 were a decrease in accounts payable, a decrease in accrued expenses and an increase in inventories. The decrease in accounts payable and accrued expenses was primarily due to the timing of payments to vendors and suppliers, partially offset by accrued interest on our senior notes. The decrease in accrued expenses also reflects the operating portion of the settlement of a contingent consideration earnout arrangement associated with the October 2013 acquisition of Radant Technologies, Inc. (“Radant”) and payments made for accrued acquisition expenses related to September 2015 acquisition of ASC Signal, employee incentives and advisory fees. Inventories increased in anticipation of fulfilling certain customer orders. The aforementioned uses of cash were partially offset by a decrease in accounts receivable due to the timing of sales and cash collections and an increase in advance payments from customers due to timing of billing and receipt of contract advances.

Investing Activities

Investing activities for the ~~nine~~three months ended ~~July~~December 30, 2016 comprised capital expenditures of $2.2 million. Investing activities for the three months ended January 1, 2016 comprised capital expenditures of $41.89 million and an additional payment of $0.4 million made for the purchase of the outstanding stock of ASC Signal. The additional consideration resulted from post-closing adjustment related to ASC Signal’s working capital. ~~Investing activities for the nine months ended July 3, 2015 comprised capital expenditures of $4.7 million.~~

Financing Activities

Financing activities for the ~~nine~~three months ended ~~July~~December 130, 2016 comprised the ~~financing~~excess ~~portion~~cash offlow ~~the~~mandatory ~~settlement~~prepayment of ~~the~~$9.9 ~~contingent~~million ~~consideration~~on ~~associated~~CPII’s ~~with~~first ~~the~~lien ~~Radant~~term ~~acquisition~~loan ~~for~~facility ~~$4.3 million~~ and ~~repayment~~payment of ~~borrowings~~the ~~under~~first ~~CPII’s~~half ~~first~~of ~~lien~~the ~~term~~bridge loan facility commitment fee and other related costs of approximately $2.35 million. Financing activities for the ~~nine~~three months ended ~~July~~January 31, ~~2015~~2016 comprised ~~repayment~~the financing portion of the settlement of the contingent consideration associated with the October 2013 Radant acquisition for $24.3 million and repayment of borrowings under CPII’s first lien term loan facility of $0.8 million.

Contractual Obligations

The following table summarizes our significant contractual obligations as of ~~July~~December 130, 2016 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

			Fiscal Year
	Total		~~2016~~2017(remaining ~~three~~nine months)		~~2017~~2018		~~2018~~2019		~~2019~~2020		~~2020~~2021		Thereafter
Operating leases	$	9,~~654~~473	$	~~695~~2,339	$	2,~~484~~312	$	21,~~179~~488	$	~~1,263~~688	$	~~721~~222	$	2,~~312~~424
Purchase commitments	4740,~~040~~145		2034,~~125~~890		204,~~516~~867		~~6,229~~388		~~170~~—		—		—
Debt obligations	~~546~~535,~~025~~309		~~775~~—		3535,~~100~~309		~~542,150~~—		—		—		—
Interest on debt obligations	5841,~~940~~304		1330,~~433~~169		3411,~~284~~135		~~11,223~~—		—		—		—
Total cash obligations	$	661,659	$	35,028	$	60,384	$	561,781	$	1,433	$	721	$	2,312
Bridge loan facility commitment fee	2,450		2,450		—		—		—		—		—
Standby letters of credit	$	5,267	$	5,267
Total cash obligations	$	628,681	$	69,848	$	553,623	$	1,876	$	688	$	222	$	2,424
Standby letters of credit	$	4,073	$	4,073

~~The~~- ~~above~~36 table assumes (i) that the respective debt instruments will be outstanding until their scheduled maturity dates, (ii) a debt level based on mandatory repayments according to the contractual amortization schedule of our senior credit facilities, and (iii) that interest rates in effect on July 1, 2016 remain constant for future periods. The above table excludes (i) any optional and excess cash flow prepayments on our term loan facilities, and (ii) the effect of our contractual right to repay or refinance the Senior Notes by November 17, 2017, which would extend the maturity date for the term loan facilities from November 2017 to April 2021. Also excluded from the table above are future cash flows associated with our uncertain tax positions and our ASC Signal Division’s environmental loss contingency, amounts of which as of July 1, 2016 were not materially different from those as of October 2, 2015.-

The expected timing of payment amounts of the obligations in the above table is estimated based on current information; the actual timing and amount of payments may be different.

As of July 1, 2016, other than the settlement in December 2015 of the contingent consideration liability related to Radant acquisition, there were no material changes to the contractual obligations not mentioned in the above table from what we disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2015 filed with Securities and Exchange Commission.

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The above table assumes that the respective debt instruments will be outstanding until their scheduled maturity dates and that interest rates in effect on December 30, 2016 remain constant for future periods. The above table also excludes (i) any optional prepayments on our term loan facilities, and (ii) the effect of anticipated refinancing of our senior notes by November 17, 2017 as described above, which would, subject to the satisfaction of certain other conditions, extend the maturity date for the term loan facilities from November 2017 to April 2021. Also excluded from the table above are future cash flows associated with our uncertain tax positions totaling $2.9 million and our ASC Signal division's environmental loss contingency estimated to range from $0.9 million to $2.4 million as of December 30, 2016 (see Note 7, Contingencies, to the accompanying unaudited condensed consolidated financial statements for more information on the environmental loss contingency).

The expected timing of payment amounts of the obligations in the above table is estimated based on current information; the actual timing and amount of payments may be different.

Capital Expenditures

Our continuing operations typically do not have large recurring capital expenditure requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. Total cash capital expenditures for the three ~~and nine~~ months ended ~~July~~December 130, 2016 were $12.82 million ~~and $4~~.9 ~~million, respectively.~~ For fiscal year ~~2016~~2017, ongoing capital expenditures are expected to range between $79.0 million to $810.0 million and to be funded by cash flows from operating activities.

Recent Accounting Pronouncements

See Note 2, Recently Issued Accounting Standards, 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 ~~October~~September 230, ~~2015~~2016.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. As of ~~July~~December 130, 2016, we had (i) fixed-rate senior notes of $~~211~~212.18 million (net of $21.02 million unamortized original issue discount and $1.91 million debt issuance costs) due in 2018, bearing interest at 8.75% per year, (ii) a variable–rate first lien term loan of $~~297~~287.0 million (net of $0.5 million unamortized original issue discount and $54.58 million debt issuance costs), and (iii) a variable-rate second lien term loan of $26.46 million (net of $0.5 million unamortized original issue discount and $1.10 million debt issuance costs).

Both the variable-rate first lien term loan and the variable-rate second lien term loan are subject to changes in the LIBOR rate. As of ~~July~~December 130, 2016, the variable interest rates on the first lien term loan and the second lien term loan were 4.25% and 8.00%, respectively.

We performed a sensitivity analysis to assess the potential loss in future earnings that a 10 basis points increase in the variable portion of interest rates over a one-year period would have on our term loan 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 basis points increase in the current variable interest rate on each of our term loans would not increase the rate above the “LIBOR floor” in the respective credit facilities. Based on the current provisions of our term loans, the LIBOR rate would have to increase to 1% before impacting our future interest expense.

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Foreign currency exchange risk

Although the majority of our revenue and expense activities are transacted in U.S. dollars, we do transact business in foreign countries. Our primary foreign currency cash flows are in Canada and several European countries. In an effort to reduce our foreign currency exposure to Canadian dollar denominated expenses, we enter into Canadian dollar forward contracts to hedge the Canadian dollar denominated costs for our manufacturing operations in Canada. Our Canadian dollar forward contracts are designated as a cash flow hedge and are considered highly effective. At ~~July~~December 130, 2016, the fair value of foreign currency forward contracts comprised a short-term asset of $10.35 million (prepaid and other current assets), aand ~~long-term asset of $0.4 million (other long-term assets),~~ a short-term liability of $0.36 million (accrued expenses) ~~and a long-term liability of an immaterial amount~~. Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets. At ~~July~~December 130, 2016, the unrealized ~~gain~~loss, net of tax of $~~0.4 million~~30,000, was $10.1 million. We anticipate recognizing the entire unrealized gain or loss in operating earnings within the next ~~six~~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~~loss. The time value was not material for all periods presented. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then we promptly recognize the gain or loss on the associated financial instrument in general and administrative expenses in the condensed consolidated statements of comprehensive ~~income~~loss. No ineffective amounts were recognized due to anticipated transactions failing to occur for the three ~~and nine~~ months ended ~~July~~December 130, 2016.

As of ~~July~~December 130, 2016, we had entered into Canadian dollar forward contracts for approximately $7545.04 million (Canadian dollars), or approximately 7675% of estimated Canadian dollar denominated expenses for ~~July~~January ~~2016~~2017 through September 2017, at an average rate of approximately 0.75 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 $0.5 million annually to our net income.

Item 4. Controls and Procedures

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

InThere ~~making~~have ~~the~~been ~~assessment~~no ~~of disclosure controls and procedures and of~~ changes in our internal control over financial reporting asthat ofoccurred ~~the~~during ~~date of~~ the ~~evaluation,~~most ~~our~~recent ~~management~~fiscal ~~has~~quarter ~~excluded the operations of ASC Signal Holdings Corporation (“ASC Signal”). This exclusion is in accordance with the Securities and Exchange Commission’s general guidance~~ that anhave ~~assessment~~materially ofaffected, aor ~~recently acquired business may be omitted from the scope of the evaluation in the year of the acquisition. We~~ are ~~currently~~reasonably ~~assessing~~likely ~~the~~to ~~control~~materially ~~environment of this acquired business. ASC Signal’s sales constitute approximately 10% and 9% of our sales for the three and nine months ended July 1~~affect, ~~2016, respectively, and ASC Signal’s assets constitute approximately 10% of~~ our ~~total~~internal ~~assets~~control asover offinancial ~~July 1, 2016~~reporting.

~~Effective~~- ~~February~~38 2016, our Radant Division implemented a new enterprise resource planning (“ERP”) system, which resulted in material changes to the nature and type of Radant Division’s internal controls over financial reporting during the most recent fiscal quarter. We reviewed the implementation effort as well as its impact on our internal controls over financial reporting and, where appropriate, are making changes to these controls to address the system changes. We expect the transition period to be completed by the end of fiscal year 2016 as controls evolve under the new system. We believe that the internal control changes resulting from Radant Division’s new ERP implementation will improve our overall control environment. -

There have been no other 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, except as described above with respect to our new operations resulting from the acquisition of ASC Signal and the changes with respect to Radant Division’s ERP system.

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Part II: OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

For a discussion of risk factors, see “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended ~~October~~September 230, ~~2015~~2016. There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our ~~2015~~2016 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.

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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~~February 97, ~~2016~~2017	/s/ JOEL A. LITTMAN
		Joel A. Littman
		Chief Financial Officer, Treasurer and Secretary
		(Duly Authorized Officer and Chief Financial Officer)

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