Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 30, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
Commission file number: 333-173372-07
CPI INTERNATIONAL HOLDING CORP.
(Exact Name of Registrant as Specified in Its Charter) 
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
 
90-0649687
(I.R.S. Employer Identification No.)
 811 Hansen Way, Palo Alto, California 94303
(Address of Principal Executive Offices and Zip Code) 
(650) 846-2900
(Registrant’s telephone number, including area code) 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. 
Yes ¨ No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ No ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding for each of the registrant’s classes of Common Stock, as of the latest practicable date: As of February 7, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




 



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Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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

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

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





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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) 
 
December 30,
2016
 
September 30,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
44,342

 
$
50,152

Restricted cash
1,270

 
1,559

Accounts receivable, net
56,333

 
63,059

Inventories
103,257

 
105,457

Prepaid and other current assets
10,678

 
5,877

Total current assets
215,880

 
226,104

Property, plant, and equipment, net
72,287

 
72,942

Intangible assets, net
244,366

 
247,289

Goodwill
216,549

 
216,549

Other long-term assets
1,295

 
1,997

Total assets
$
750,377

 
$
764,881

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$

 
$
10,051

Accounts payable
24,884

 
32,450

Accrued expenses
33,213

 
28,212

Product warranty
5,720

 
5,992

Income taxes payable
941

 
3,055

Advance payments from customers
12,176

 
11,232

Total current liabilities
76,934

 
90,992

Deferred tax liabilities
88,106

 
89,059

Long-term debt:
 
 
 
Principal, less current portion
535,309

 
535,199

Less unamortized original issue discount
(2,086
)
 
(2,585
)
Less unamortized debt issuance costs
(7,284
)
 
(8,214
)
Long term debt, net of discount and debt issuance costs
525,939

 
524,400

Other long-term liabilities
4,208

 
4,755

Total liabilities
695,187

 
709,206

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Common stock ($0.01 par value, 2 shares authorized: 1 share issued and outstanding)

 

Additional paid-in capital
27,173

 
27,156

Accumulated other comprehensive income (loss)
(95
)
 
626

Retained earnings
28,112

 
27,893

Total stockholders’ equity
55,190

 
55,675

Total liabilities and stockholders’ equity
$
750,377

 
$
764,881


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 LOSS
(In thousands – unaudited)


 
 
Three Months Ended
 
December 30,
2016
 
January 1,
2016
Sales
$
114,623

 
$
110,682

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
32,090

 
28,898

Operating costs and expenses:
 

 
 

Research and development
3,922

 
3,893

Selling and marketing
5,984

 
6,529

General and administrative
8,165

 
8,118

Amortization of acquisition-related intangible assets
2,699

 
3,558

Total operating costs and expenses
20,770

 
22,098

Operating income
11,320

 
6,800

Interest expense, net
10,786

 
9,723

Income (loss) before income taxes
534

 
(2,923
)
Income tax expense (benefit)
315

 
(1,713
)
Net income (loss)
219

 
(1,210
)
 
 
 
 
Other comprehensive loss, net of tax
 

 
 

Unrealized loss on cash flow hedges, net of tax
(721
)
 
(379
)
Total other comprehensive loss, net of tax
(721
)
 
(379
)
Comprehensive loss
$
(502
)
 
$
(1,589
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



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Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands – unaudited)
 
 
 
Three Months Ended
 
December 30,
2016
 
January 1,
2016
Cash flows from operating activities
 
 
 
Net cash provided by operating activities
$
8,899

 
$
4,146

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(2,248
)
 
(1,925
)
Acquisition

 
(363
)
Net cash used in investing activities
(2,248
)
 
(2,288
)
 
 
 
 
Cash flows from financing activities
 

 
 

Payment of contingent consideration

 
(4,300
)
Payment of Bridge Facility commitment fee and debt issuance costs
(2,520
)
 
(63
)
Repayment of borrowings under First Lien Term Loan
(9,941
)
 
(775
)
Net cash used in financing activities
(12,461
)
 
(5,138
)
 
 
 
 
Net decrease in cash and cash equivalents
(5,810
)
 
(3,280
)
Cash and cash equivalents at beginning of period
50,152

 
37,514

Cash and cash equivalents at end of period
$
44,342

 
$
34,234

 
 
 
 
Supplemental cash flow disclosures
 

 
 

Cash paid for interest
$
3,886

 
$
3,991

Cash paid for income taxes, net of refunds
$
4,463

 
$
1,061

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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Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All tabular dollar amounts in thousands)
 
 
1.
The Company and a Summary of its Significant Accounting Policies
 
The Company

Unless the context requires otherwise, (i) “Holding LLC” refers to CPI International Holding LLC, (ii) “CPI International” or “Parent” refers to the issuer, CPI International Holding Corp., and (iii) “CPII” means CPI International, Inc. Holding LLC owns all of the outstanding common stock of CPI International, which in turn owns all of the outstanding common stock of CPII, which in turn owns all of the outstanding equity interests of Communications & Power Industries LLC (“CPI”) and Communications & Power Industries Canada Inc. (“CPI Canada”), CPI International’s main operating subsidiaries. The term “the Company” refers to CPI International and its direct and indirect subsidiaries on a consolidated basis. The Veritas Capital Fund IV, L.P. 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 2017 and 2016 comprise the 52-week periods ending September 29, 2017 and September 30, 2016, respectively. Each of the three months ended December 30, 2016 and January 1, 2016 included 13 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 December 30, 2016 and for the three months ended December 30, 2016 and January 1, 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 September 30, 2016 filed with the Securities and Exchange Commission on December 14, 2016. The condensed consolidated balance sheet as of September 30, 2016 has been derived from the audited financial statements at that date. The results of operations and cash flows for the interim period ended December 30, 2016 are not necessarily indicative of results to be expected for the full year.
 
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated in consolidation.

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.
    



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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 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.

In 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. 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.

In October 2016, the FASB issued an accounting standard update that requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset is sold. This accounting standard update requires adoption on a modified retrospective basis through a cumulative-effect adjustment to retained earnings. This accounting standard update is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Company early adopted this accounting standard update beginning in the first quarter of fiscal year 2017. The new accounting standard update had no impact on the Company's consolidated results of operations, financial position or cash flows because the Company did not have any deferred income tax accounts for intra-entity asset transfers as of October 1, 2016, the Company's date of adoption.

In November 2016, the FASB issued an accounting standard update which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period 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 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 Company beginning in the first quarter of fiscal year 2019. The Company does not expect the 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 provides details of inventories: 
 
December 30,
2016
 
September 30,
2016
Raw materials and parts
$
56,255

 
$
57,508

Work in process
30,953

 
32,258

Finished goods
16,049

 
15,691

Total inventories
$
103,257

 
$
105,457

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

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



    
Product Warranty: The following table summarizes the activity related to product warranty: 
 
Three Months Ended
 
December 30,
2016
 
January 1,
2016
Beginning accrued warranty
$
5,992

 
$
5,304

Actual costs of warranty claims
(1,846
)
 
(1,350
)
Estimates for product warranty, charged to cost of sales
1,574

 
1,506

Ending accrued warranty
$
5,720

 
$
5,460

    

4.
Financial Instruments
 
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and derivative instruments. The following tables set forth financial instruments carried at fair value by level of fair value hierarchy: 
 
 
 
 
 
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.



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CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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




 
 
 
 
 
Fair Value Measurements at September 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.

See Note 6, “Derivative Instruments and Hedging Activities,” for information regarding the Company’s derivative instruments.

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:
 
 
 
 
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.



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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 fair value of 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 identical 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.


5.
Long-term Debt
 
Anticipated Refinancing
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.
Pursuant to the Commitment Letter, the Company 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 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)




The Company’s long-term debt comprises the following as of the dates presented:
 
 
 
December 30,
2016
 
September 30,
2016
Senior Secured Credit Facilities:
 
 
 
First Lien Credit Agreement:
 
 
 
Revolver
$

 
$

First Lien Term Loan
292,309

 
302,250

Less unamortized original issue discount
(478
)
 
(521
)
Less unamortized debt issuance costsa
(5,241
)
 
(5,717
)
 
 
286,590

 
296,012

Second Lien Credit Agreement:
 
 
 
Second Lien Term Loan
28,000

 
28,000

Less unamortized original issue discount
(455
)
 
(476
)
Less unamortized debt issuance costs
(963
)
 
(1,009
)
 
26,582

 
26,515

 
 
 
 
Senior Notes
215,000

 
215,000

Less unamortized original issue discount
(1,153
)
 
(1,588
)
Less unamortized debt issuance costs
(1,080
)
 
(1,488
)
 
212,767

 
211,924

 
 
 
 
Long term debt, net of discount and debt issuance costs
525,939

 
534,451

Less current portion

 
(10,051
)
Long-term portion
$
525,939

 
$
524,400

 
 
 
 
Standby letters of credit secured by Revolver
$
4,073

 
$
4,542

 
 
 
 
 
 
a 
Amounts comprised debt issuance costs associated with both Revolver and First Lien Term Loan.

Senior Secured Credit Facilities

In April 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 $4.1 million of outstanding letters of credit as of December 30, 2016).
    
In September 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.




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Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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



Except 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 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 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.




- 15 -

Table of Contents

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 December 30, 2016, maturities on long-term debt were as follows: 
Fiscal Year
 
First Lien
Term Loan
 
Second Lien
Term Loan
 
Senior
Notes
 
Total
2017 (remaining nine months)
 
$

 
$

 
$

 
$

2018
 
292,309

 
28,000

 
215,000

 
535,309

2019
 

 

 

 

2020
 

 

 

 

2021
 

 

 

 

Thereafter
 

 

 

 

 
 
$
292,309

 
$
28,000

 
$
215,000

 
$
535,309

 
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 the Term Loans, (ii) 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 Loans from November 2017 to April 2021, and (iii) the $2.45 million remaining unpaid Bridge Facility commitment fee.
Covenants

As of December 30, 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.


6.
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.




- 16 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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



The Company’s Canadian dollar forward contracts in effect as of December 30, 2016 have durations of eight 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 December 30, 2016, the unrealized loss, net of tax of $30,000, was $0.1 million. At 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 loss in operating earnings within the next four fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the condensed consolidated statements of comprehensive loss. The time value was not material for all periods presented. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then the Company immediately recognizes the gain or loss on the associated financial instrument in general and administrative expenses in the condensed consolidated statements of comprehensive loss. No ineffective amounts were recognized due to hedge ineffectiveness in each of the three months ended December 30, 2016 and January 1, 2016.

As of December 30, 2016, the Company had entered into Canadian dollar forward contracts for nominal values of approximately $45.4 million (Canadian dollars), or approximately 75% of estimated Canadian dollar denominated expenses for January 2017 through September 2017, at an average rate of approximately 0.75 U.S. dollars to one Canadian dollar.

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
 
 
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 of 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)
 
 
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.




- 17 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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




7.
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 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 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 is addressing these conditions through the implementation of a remediation plan. ASC Signal holds a pair of pollution insurance policies and the insurer is indemnifying 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 assets 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.
 




- 18 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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



8.
Related-party Transactions

The 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. The 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.

One of the vendors of the Company's ASC Signal division is owned by the father of ASC Signal's Vice President of Products. The vendor is also a customer of ASC Signal. Purchases from this vendor were $0.1 million and $0.5 million for the three months ended December 30, 2016 and January 1, 2016, respectively. Sales to this vendor were not material and zero for the same periods, respectively. The Company's outstanding payables to this vendor were not material as of each December 30, 2016 and September 30, 2016, and the Company's outstanding receivables from this vendor were zero and $0.1 million as of the same dates, respectively.
    
    
9.
Income Taxes
 
The condensed consolidated statements of comprehensive loss reflect the following income tax expense (benefit):
 
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
%

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 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 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.





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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)



10.
Accumulated Other Comprehensive Income (Loss)

The following table provides the components of accumulated other comprehensive income (loss) in the condensed consolidated balance sheets: 
 
December 30,
2016
 
September 30,
2016
Unrealized income (loss) on cash flow hedges, net of tax of $(30) and $212, respectively
$
(87
)
 
$
634

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)
$
(95
)
 
$
626

The following 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.





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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)



11.
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, 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
 
 
December 30,
2016
 
January 1,
2016
Sales from external customers
 
 
 
RF products
 
$
78,787

 
$
75,287

Satcom equipment
 
30,352

 
33,453

Other
 
5,484

 
1,942

 
 
$
114,623

 
$
110,682

Intersegment product transfers
 
 
 
RF products
 
$
4,237

 
$
4,822

Satcom equipment
 
15

 
20

 
 
$
4,252

 
$
4,842

Capital expendituresa
 
 
 
 
RF products
 
$
1,351

 
$
1,118

Satcom equipment
 
606

 
211

Other
 
157

 
196

 
 
$
2,114

 
$
1,525

EBITDA
 
 
 
 
RF products
 
$
15,656

 
$
13,461

Satcom equipment
 
3,618

 
5,490

Other
 
(2,278
)
 
(5,433
)
 
 
$
16,996

 
$
13,518

 
 
 
 
 
a Capital expenditures incurred on an accrual basis.
 



- 21 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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



 
December 30,
2016
 
September 30,
2016
Total assets
 
 
 
RF products
$
509,059

 
$
513,542

Satcom equipment
177,247

 
180,164

Other
64,071

 
71,175

 
$
750,377

 
$
764,881


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
 
December 30,
2016
 
January 1,
2016
Operating income
 
 
 
RF products
$
13,863

 
$
11,426

Satcom equipment
3,114

 
5,071

Other
(5,657
)
 
(9,697
)
 
$
11,320

 
$
6,800

 



- 22 -

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
 
December 30,
2016
 
January 1,
2016
Net income (loss)
$
219

 
$
(1,210
)
Depreciation and amortization
5,676

 
6,718

Interest expense, net
10,786

 
9,723

Income tax expense (benefit)
315

 
(1,713
)
EBITDA
$
16,996

 
$
13,518



12.     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.
     



- 23 -

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 December 30, 2016
 
 
Parent
 
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
16,693

 
$
27,649

 
$

 
$
44,342

Restricted cash

 

 
1,209

 
61

 

 
1,270

Accounts receivable, net

 

 
40,879

 
15,454

 

 
56,333

Inventories

 

 
66,929

 
36,911

 
(583
)
 
103,257

Intercompany receivable

 

 
140,360

 
9,976

 
(150,336
)
 

Prepaid and other current assets

 
4,396

 
4,432

 
1,628

 
222

 
10,678

Total current assets

 
4,396

 
270,502

 
91,679

 
(150,697
)
 
215,880

Property, plant and equipment, net

 

 
52,569

 
19,718

 

 
72,287

Intangible assets, net

 

 
173,866

 
70,500

 

 
244,366

Goodwill

 

 
128,396

 
88,153

 

 
216,549

Other long-term assets

 

 
199

 
1,096

 

 
1,295

Investment in subsidiaries
57,402

 
791,220

 
34,898

 

 
(883,520
)
 

Total assets
$
57,402

 
$
795,616

 
$
660,430

 
$
271,146

 
$
(1,034,217
)
 
$
750,377

Liabilities and stockholders’ equity
 

 
 

 
 

 
 

 
 

 
 

Accounts payable
$

 
$

 
$
14,787

 
$
10,097

 
$

 
$
24,884

Accrued expenses
2,212

 
9,817

 
15,636

 
5,548

 

 
33,213

Product warranty

 

 
3,151

 
2,569

 

 
5,720

Income taxes payable

 

 
249

 
692

 

 
941

Advance payments from customers

 

 
8,807

 
3,369

 

 
12,176

Intercompany payable

 
5,354

 

 

 
(5,354
)
 

Total current liabilities
2,212

 
15,171

 
42,630

 
22,275

 
(5,354
)
 
76,934

Deferred tax liabilities

 

 
67,601

 
20,505

 

 
88,106

Long term debt, net of discount and debt issuance costs

 
525,939

 

 

 

 
525,939

Other long-term liabilities

 

 
2,992

 
1,216

 

 
4,208

Total liabilities
2,212

 
541,110

 
113,223

 
43,996

 
(5,354
)
 
695,187

Common stock

 

 

 

 

 

Parent investment

 
211,100

 
405,182

 
184,219

 
(800,501
)
 

Equity investment in subsidiary
(95
)
 
(95
)
 
9,378

 

 
(9,188
)
 

Additional paid-in capital
27,173

 

 

 

 

 
27,173

Accumulated other comprehensive loss

 

 

 
(95
)
 

 
(95
)
Retained earnings
28,112

 
43,501

 
132,647

 
43,026

 
(219,174
)
 
28,112

Total stockholders’ equity
55,190

 
254,506

 
547,207

 
227,150

 
(1,028,863
)
 
55,190

Total liabilities and stockholders’ equity
$
57,402

 
$
795,616

 
$
660,430

 
$
271,146

 
$
(1,034,217
)
 
$
750,377

 



- 24 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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




CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2016

 
Parent
 
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
24,873

 
$
25,279

 
$

 
$
50,152

Restricted cash

 

 
1,494

 
65

 

 
1,559

Accounts receivable, net

 

 
45,499

 
17,560

 

 
63,059

Inventories

 

 
66,798

 
39,242

 
(583
)
 
105,457

Intercompany receivable

 

 
130,498

 
8,574

 
(139,072
)
 

Prepaid and other current assets
1

 
73

 
2,713

 
2,868

 
222

 
5,877

Total current assets
1

 
73

 
271,875

 
93,588

 
(139,433
)
 
226,104

Property, plant and equipment, net

 

 
53,193

 
19,749

 

 
72,942

Intangible assets, net

 

 
175,769

 
71,520

 

 
247,289

Goodwill

 

 
128,396

 
88,153

 

 
216,549

Other long-term assets

 

 
199

 
1,798

 

 
1,997

Investment in subsidiaries
57,923

 
796,297

 
33,835

 

 
(888,055
)
 

Total assets
$
57,924

 
$
796,370

 
$
663,267

 
$
274,808

 
$
(1,027,488
)
 
$
764,881

Liabilities and stockholders’ equity
 

 
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$

 
$
10,051

 
$

 
$

 
$

 
$
10,051

Accounts payable

 

 
17,889

 
14,561

 

 
32,450

Accrued expenses
2,249

 
2,472

 
18,931

 
4,557

 
3

 
28,212

Product warranty

 

 
3,588

 
2,404

 

 
5,992

Income taxes payable

 

 
1,910

 
1,145

 

 
3,055

Advance payments from customers

 

 
7,464

 
3,768

 

 
11,232

Intercompany payable

 
5,353

 

 

 
(5,353
)
 

Total current liabilities
2,249

 
17,876

 
49,782

 
26,435

 
(5,350
)
 
90,992

Deferred tax liabilities

 

 
68,068

 
20,991

 

 
89,059

Long term debt, net of discount and debt issuance costs

 
524,400

 

 

 

 
524,400

Other long-term liabilities

 

 
2,712

 
2,043

 

 
4,755

Total liabilities
2,249

 
542,276

 
120,562

 
49,469

 
(5,350
)
 
709,206

Common stock

 

 

 

 

 

Parent investment

 
211,100

 
405,165

 
184,219

 
(800,484
)
 

Equity investment in subsidiary
626

 
626

 
9,378

 

 
(10,630
)
 

Additional paid-in capital
27,156

 

 

 

 

 
27,156

Accumulated other comprehensive income

 

 

 
626

 

 
626

Retained earnings
27,893

 
42,368

 
128,162

 
40,494

 
(211,024
)
 
27,893

Total stockholders’ equity
55,675

 
254,094

 
542,705

 
225,339

 
(1,022,138
)
 
55,675

Total liabilities and stockholders’ equity
$
57,924

 
$
796,370

 
$
663,267

 
$
274,808

 
$
(1,027,488
)
 
$
764,881

 



- 25 -

Table of Contents

CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries

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




CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended December 30, 2016

 
Parent
 
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Sales
$

 
$

 
$
88,002

 
$
46,337

 
$
(19,716
)
 
$
114,623

Cost of sales

 

 
66,286

 
35,656

 
(19,409
)
 
82,533

Gross profit

 

 
21,716

 
10,681

 
(307
)
 
32,090