PART I
ITEM 1. BUSINESS
Business Overview
MTS Systems Corporation is a leading global supplier of high-performance test systems and sensors that was incorporated under Minnesota law in 1966. Our operations are organized and managed in two reportable segments, Test and Sensors, based on global similarities within their markets, products, operations and distribution. The Test and Sensors segments represented
64%
and
36%
of our revenue, respectively, for the fiscal year ended
September 30, 2017
.
Terms
The terms "MTS," "we," "us," the "Company" or "our" in this Annual Report on Form 10-K, unless the context otherwise requires, refer to MTS Systems Corporation and its wholly owned subsidiaries.
Fiscal year
2017
refers to the fiscal year ended
September 30, 2017
; fiscal year
2016
refers to the fiscal year ended
October 1, 2016
; and fiscal year
2015
refers to the fiscal year ended
October 3, 2015
. Fiscal years
2017
,
2016
and
2015
include 52, 52 and 53 weeks, respectively. All dollar amounts and shares are in thousands unless otherwise noted.
Products and Markets
Test
Our Test segment (Test) provides testing solutions including hardware, software and services which are used by customers in product development to characterize the product's mechanical properties. Our solutions simulate forces and motions that customers expect their products to encounter in use. Mechanical simulation testing in a lab setting is an accepted method to accelerate product development compared to reliance on full physical prototypes in real-world settings, proving ground testing, and virtual testing because it provides more controlled simulation and accurate measurement. The need for mechanical simulation increases in proportion to the cost of a product, the range and complexity of the physical environment in which the product will be used, expected warranty or recall risk and expense, governmental regulation and potential legal liability. A significant portion of Test products are considered by our customers to be capital expenditures. We believe the timing of purchases of our products may be impacted by interest rates, general economic conditions, product development cycles and new product initiatives.
A typical Test system includes a reaction frame to hold the prototype specimen, a hydraulic pump or electro-mechanical power source, piston actuators to create the force or motion and a computer controller with specialized software to coordinate the actuator movement, record and manipulate results. Lower force and less dynamic testing can usually be accomplished with electro-mechanical power sources, which are generally less expensive than hydraulic systems. In addition to these basic components, we sell a variety of accessories and spare parts.
We provide Test customers across all sectors with a spectrum of services to maximize product performance. Our service offerings include installation, product life cycle management, professional training, calibration and metrology, technical consulting and onsite and factory repair and maintenance.
Test has a diverse customer base by industry and geography. Regionally, the Americas, Europe and Asia represented approximately
29%
,
19%
and
52%
of revenue for fiscal year
2017
, respectively, based on customer location.
Products, service and customers are grouped into the following three global sectors:
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Ground Vehicles (approximately
60%
of Test revenue for fiscal year
2017
)
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This sector consists of automobile, truck, motorcycle, motorsports vehicles, construction equipment, agricultural equipment, rail and off-road vehicle manufacturers and their suppliers. Customers include original equipment manufacturers (OEMs), universities, government research and development institutes, motorsports teams and contract test facilities. Our products are used to measure and simulate solutions to assess durability, vehicle dynamics and aerodynamics of vehicles, sub-systems and components. Our products include:
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Road simulators and component test systems for durability testing;
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Vehicle performance test systems that evaluate ride handling, ride comfort and noise;
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Vehicle dynamics simulators to test conceptual vehicle designs in advance of physical prototypes;
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High-performance electrical motors and energy recovery systems for high-end automotive and aerospace applications;
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Tire performance and rolling resistance measurement systems; and
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Moving ground-plane systems and balances for vehicle aerodynamic measurements in wind tunnels.
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Materials (approximately
25%
of Test revenue for fiscal year
2017
)
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This sector covers diverse industries such as power generation, aerospace, vehicles and bio-medical. Our products and services support customers in the research and development of products through the physical characterization of material properties, such as ceramics, composites and steel. Bio-medical applications include systems to test durability and performance of implants, prostheses and other medical and dental materials and devices.
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Structures (approximately
15%
of Test revenue for fiscal year
2017
)
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This sector serves the structural testing needs and services in the fields of aerospace, structural engineering, oil and gas, and wind energy, among others. The aerospace structural testing market consists of manufacturers of commercial, military and private aircraft and their suppliers that use our products, systems and software to perform static and fatigue testing of aircraft and space vehicles. Systems for structural engineering include high force static and dynamic testing, as well as seismic simulation tables used around the world to test the design of structures, such as bridges and buildings, and to help governments establish building codes. Structural engineering customers include construction companies, government agencies, universities and building materials manufacturers. The wind energy market consists of wind turbine manufacturers and their component suppliers that use our products to reduce cost and improve reliability of blades, bearings and entire wind turbines.
Sensors
Our Sensors segment (Sensors) is a global leader in sensing technologies and solutions used worldwide by design engineers and predictive maintenance professionals, serving customers with a focus on total customer satisfaction, and offering regional support to provide innovative and reliable sensing solutions. Sensors provides high-performance sensors used for acceleration, position, vibration, motion, pressure, force and sound measurement. Our products and solutions are used to enable automation, enhance precision and safety, and lower our customers' production costs by improving performance and reducing downtime. Revenue is partially fueled by our customers' spending on research and development activities and industrial capacity utilization. Sensors products and solutions serve the automotive, aerospace, industrial, defense, and research and development markets, as well as many other markets. Sensors manufactures products utilizing piezoelectric and magnetostriction technology, both of which provide an accurate and reliable sensor ideal for use in harsh operating environments.
During fiscal year 2016, we completed the acquisition of 100% of PCB Group, Inc. (PCB), a manufacturer of piezoelectric sensors and components used for vibration, pressure and force measurement. The acquisition of PCB expanded our market position in Sensors and our ability to deliver a wide variety of applications including acceleration, pressure, noise, force, load and torque to both enhance the performance of our customers' products and enable those products to enter the market more rapidly and reliably. Largely as a result of the acquisition of PCB, the percentage of total Sensors revenue attributable to test sensors, industrial sensors and systems sensors increased and the percentage of total Sensors revenue attributable to positional sensors decreased during fiscal year 2017.
For additional information related to the acquisition of PCB, see Note 13 to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Sensors serves a diverse spectrum of customers by industry and geography. Regionally, the Americas, Europe and Asia represented approximately
47%
,
35%
and
18%
of revenue for fiscal year
2017
, respectively, based on customer location.
Products and customers are grouped into the following four global sectors:
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Positional Sensors (approximately
35%
of Sensors revenue for fiscal year
2017
)
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This sector consists of a wide range of industrial machinery OEMs and their end use customers with applications in all areas of manufacturing including plastics, steel, construction, agriculture, wood, mining and other factory automation applications. These sensors provide positional feedback for motion control systems, improve productivity by enabling high levels of automation and reduce maintenance costs, as well as enhance safety of machine operations.
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Test Sensors (approximately
35%
of Sensors revenue for fiscal year
2017
)
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This sector covers diverse industries, including test and measurement, automotive, rail, aerospace and defense. This sector includes a variety of applications including research and development; structural monitoring; ground testing of aircraft and vehicles; harsh environmental testing; impact sensors for shock and vibration testing; component and system performance; ride and handling; durability testing; and noise, vibration, and harshness testing. These sensors provide engineers and scientists with precise and accurate measurements to accelerate technology advancement and reduce new product development cycle time.
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Industrial Sensors (approximately
20%
of Sensors revenue for fiscal year
2017
)
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This sector consists of sensors used in heavy industrial markets and energy and power generation. Sensors used in heavy industrial markets are primarily used to monitor the vibration and pressure in a wide spectrum of applications including motors, pumps, paper machines and steel rollers. These sensors provide valuable feedback on equipment
performance, reducing downtime and maximizing safety and productivity. Sensors used in the energy and power generation markets are equipped to address hazardous and inaccessible locations, and serve gas and wind turbines, oil and gas refineries, nuclear power instrumentation as well as other critical energy infrastructure providers.
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Systems Sensors (approximately
10%
of Sensors revenue for fiscal year
2017
)
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This sector consists of dynamic test, measurement and sensing systems primarily used to test, model and monitor the behavior of structures and processes, and ensure safety and compliance from exposure to noise and vibration. This sector also includes the calibration systems used with a variety of sensors, a comprehensive rental offering of both transactional sensor products, and consultative systems that serve a broad range of testing and industrial customers.
Financial and geographical information about our segments is included in Item 7 and in Item 8 of Part II of this Annual Report on Form 10-K.
Sales and Service
Test
Test products are sold worldwide through a direct field sales and service organization, independent representatives and distributors and, to a much lesser extent, through other means (e.g. catalogs, internet, etc.) for standard products and accessories. Direct field sales and service personnel are compensated through salary and order incentive programs. Independent representatives and distributors are either compensated through commissions based upon orders or discounts off list prices.
In addition to direct field sales and service personnel throughout the U.S., we have sales and service subsidiaries in Toronto, Canada; Berlin, Germany; Paris, France; Guildford, United Kingdom; Turin, Italy; Gothenburg and Gislaved, Sweden; Chinchon, Spain; Tokyo and Nagoya, Japan; Seoul, South Korea; Moscow, Russia; Chennai and Bangalore, India; and Beijing, Shanghai and Shenzhen, China.
The timing and volume of large orders (valued at $5,000 or greater on a U.S. dollar-equivalent basis) may produce volatility in backlog and quarterly operating results. Most customer orders are based on fixed-price quotations and typically have an average sales cycle of three to nine months due to the technical nature of the test systems and customer capital expenditure approval processes. The sales cycle for larger, more complex test systems may be two years or longer.
Sensors
Sensors products are sold worldwide through a direct sales and service organization as well as through independent distributors. The direct sales and service organization is compensated through salary and commissions based upon revenue. The independent distributors purchase MTS products at wholesale pricing and resell the product to their customers.
In addition to direct field sales and service personnel throughout the U.S., we have sales subsidiaries in Treviolo, Italy; Hitchin, United Kingdom; Aubervilliers, France; Huckelhoven and Dresden, Germany; Beijing and Shanghai, China; Machida, Japan; Vandreuil, Canada; and Zaventem, Belgium. The Machida, Japan sales operation will be closed in the second quarter of fiscal year 2018.
The average sales cycle for Sensors ranges from approximately one week to one month for existing customers purchasing standard products. The average sales cycle for a new account can range from approximately two weeks to two years depending on customer testing and specification requirements.
Manufacturing and Engineering
Test
Test systems are largely built to order and primarily engineered and assembled at our headquarters in Eden Prairie, Minnesota. We also operate manufacturing facilities in Shenzhen and Shanghai, China, which manufacture materials test systems, and in Lexington, North Carolina and Guilford, United Kingdom which manufacture ground vehicles test systems. We perform certain smaller system assembly at our locations in Berlin, Germany and Seoul, South Korea. Installation of systems, training, service and consulting services are primarily delivered at customer sites. The engineering and assembly cycle for a typical Test system ranges from one to 12 months, depending on the complexity of the system and the availability of components. The engineering and assembly cycle for larger, more complex systems may be up to three years. We continue to look for ways to optimize manufacturing efficiencies, including facility closures.
Sensors
Sensors are engineered and assembled regionally at facilities located in Depew, New York; Halifax and Cary, North Carolina; Farmington Hills, Michigan; Provo, Utah; Cincinnati, Ohio; and Lüdenscheid, Germany. The Machida, Japan engineering and assembly operation was closed during the third quarter of fiscal year 2017. Assembly cycles generally vary from several days to several weeks, depending on the degree of product customization, the size of the order and manufacturing capacity.
Sources and Availability of Raw Materials and Components
Test
A significant portion of test systems consist of materials and component parts purchased from independent vendors. We are dependent, in certain situations, on a limited number of vendors to provide raw materials and components, such as mechanical and electronic components. However, we have not experienced any recent issues in procuring materials, parts or components needed in our engineering or production processes.
As Test generally sells products and services based on fixed-price contracts, fluctuations in the cost of materials and components between the date of the order and the delivery date may impact the expected profitability. The material and component cost variability is considered in the estimation and customer negotiation process. We believe fluctuations in the cost of raw materials and components did not have a significant impact on our operating results for fiscal years
2017
,
2016
and
2015
.
Sensors
A significant portion of Sensors products consists of materials and component parts purchased from independent vendors. We are dependent, in certain situations, on a limited number of vendors to provide raw materials and components, such as mechanical and electronic components. However, we have not experienced any recent issues in procuring materials, parts or components needed in our engineering or production processes.
As Sensors generally sells products and services based on fixed-price contracts and the products are manufactured and delivered days to months from the time of order to shipment, fluctuations in the cost of materials and components between the date of the order and the delivery date are not likely to materially impact the expected profitability. We believe fluctuations in the cost of raw materials and components did not have a significant impact on our operating results for fiscal years
2017
,
2016
and
2015
.
Patents and Trademarks
We rely on a combination of patents, copyrights, trademarks and proprietary trade secrets to protect our proprietary technology, some of which are material to our segments. We have obtained numerous patents and trademarks worldwide and actively file and renew patents and trademarks on a global basis to establish and protect our proprietary technology. We are also party to exclusive and non-exclusive license and confidentiality agreements relating to our own and third-party technologies. We aggressively protect certain of our processes, products and strategies as proprietary trade secrets. Our efforts to protect intellectual property and avoid disputes over proprietary rights include ongoing review of third-party patents and patent applications.
Seasonality
There is no significant seasonality in Test or Sensors.
Working Capital
Test
Test does not have significant finished product inventory, but maintains inventories of materials and components to facilitate on-time product delivery. Test may have varying levels of work-in-process projects that are classified as inventories, net or unbilled accounts receivable in our Consolidated Balance Sheets, depending upon the manufacturing cycle, timing of orders, project revenue recognition and shipments to customers.
Payments are often received from Test customers upon order or at milestones during the fulfillment of the order depending on the size and customization of the system. These payments are recorded as advance payments from customers in our Consolidated Balance Sheets and reduced as revenue is recognized. Conversely, if revenue is recognized on a project prior to customer billing, an unbilled accounts receivable is recorded in our Consolidated Balance Sheets until the customer has been billed. Upon billing, it is recorded as accounts receivable, net in our Consolidated Balance Sheets. Changes in the average size, payment terms and revenue recognition for orders in Test may have a significant impact on accounts receivable, net; unbilled accounts receivable; advance payments from customers; and inventories, net. It has not been our practice to provide rights of return for our products. Payment terms vary and are subject to negotiation.
Sensors
Sensors has finished product inventory, as well as inventories of materials and components to facilitate rapid delivery of product to exceed customer expectations on delivery time. The type and amount of finished goods on hand are targeted based on historical and anticipated customer demands for high-volume products.
Payments are often received from Sensors customers based on negotiated payment terms. Revenue is primarily recognized when products are shipped.
Customers
We do not have a significant concentration of sales with any individual customer within Test or Sensors. Therefore, the loss of any one customer would not have a material impact on our results.
Backlog
Most of our products are built to order. Our backlog of orders, defined as firm orders from customers that remain unfulfilled, totaled approximately
$360,016
,
$370,523
and
$353,013
at
September 30, 2017
,
October 1, 2016
and
October 3, 2015
, respectively. Test backlog was
$311,551
,
$331,044
and
$339,967
at
September 30, 2017
,
October 1, 2016
and
October 3, 2015
, respectively. Sensors backlog was
$48,465
,
$39,479
and
$13,046
at
September 30, 2017
,
October 1, 2016
and
October 3, 2015
, respectively. Based on anticipated manufacturing schedules, we expect approximately
85%
of the backlog as of
September 30, 2017
will be converted to revenue in fiscal year
2018
. Delays may occur in the conversion of backlog into revenue as a result of export licensing compliance, technical difficulties, specification changes, manufacturing capacity, supplier issues or access to the customer site for installation. While the backlog is subject to order cancellations, we have not historically experienced a significant number of order cancellations. Refer to Item 7 of Part II of this Annual Report on Form 10-K for further discussion of order cancellations.
Government Contracts
Revenue from U.S. Government contracts varies by year. A portion of our government business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. Government. In addition to contract terms, we must comply with procurement laws and regulations relating to the formation, administration and performance of U.S. Government contracts. Failure to comply with these laws and regulations could lead to the termination of contracts at the election of the U.S. Government or the suspension or debarment from U.S. Government contracting or subcontracting. U.S. Government revenue as a percentage of our total revenue was
4%
,
3%
and
3%
for fiscal years
2017
,
2016
and
2015
, respectively.
Competition
Test
For relatively simple and inexpensive mechanical testing applications, customers may satisfy their needs internally by building their own test systems or using competitors who compete on price, performance, quality and service. For larger and more complex mechanical test systems, we compete directly with several companies worlwide based upon customer value including application knowledge, engineering capabilities, technical features, price, quality and service.
Sensors
We primarily compete on factors that include technical performance, price and customer service in new applications or in situations in which other sensing technologies have been used. Sensors competitors are typically larger companies that carry multiple sensors product lines, larger diverse companies with only a small portion of business in the sensors market, or smaller, privately held companies throughout the world.
Research and Development
We invest in significant product, system and software application development. Costs associated with most research and development (R&D) are expensed as incurred, totaling
$34,999
,
$25,336
and
$23,705
for fiscal years
2017
,
2016
and
2015
, respectively. Total internal software development costs capitalized during fiscal years
2017
and
2016
were
$2,046
and
$2,761
, respectively. We also strategically engage in customer funded development by contracting with customers for first-of-a-kind products and product enhancements, with costs expensed as incurred.
Environmental Compliance
We believe our operations are in compliance with all applicable material environmental regulations within the jurisdictions in which we operate. Capital expenditures for environmental compliance were not material in fiscal year
2017
,
2016
and
2015
, and we do not expect such expenditures will be material in fiscal year
2018
.
Employees
We had approximately
3,500
employees as of
September 30, 2017
, including approximately
1,340
employees located outside the United States.
Available Information
The U.S. Securities and Exchange Commission (SEC) maintains a website that contains reports, proxy and information statements and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov. We file annual reports, quarterly reports, current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended (the Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We also make available free of charge on or through the "Investor Relations" pages of our corporate website (www.mts.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Code of Conduct (the Code), any waivers from and amendments to the Code and our Corporate Governance Guidelines, Articles of Incorporation and Bylaws, as well as the Charters for the Audit, Compensation and Leadership Development and Governance and Nominating Committees of our Board of Directors are also available free of charge on the "Investor Relations" pages of our corporate website (www.mts.com).
ITEM 1A. RISK FACTORS
Our business involves risks. The following summarizes what we believe to be the most important risks facing us that could adversely impact our business, financial condition or operating results. The information about these risks should be considered carefully together with the other information contained in this Annual Report on Form 10-K. Additional risks not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition or results of operations in future periods.
Market Risks
Our business is significantly international in scope.
We have manufacturing facilities in North America, Europe and Asia. Sales outside of the United States (U.S.), including export sales from U.S. business locations, accounted for approximately
70%
of our revenue in fiscal year
2017
. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in foreign countries. These risks include, but are not limited to:
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exposure to the risk of currency value fluctuations, where payment for products is denominated in a currency other than U.S. dollars;
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variability in the U.S. dollar value of foreign currency-denominated assets, earnings and cash flows;
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difficulty enforcing agreements, including patent and trademarks, and collecting receivables through foreign legal systems;
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trade protection measures and import or export licensing requirements;
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tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign earnings;
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higher danger of terrorist activity, war or civil unrest compared to domestic operations;
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imposition of tariffs, exchange controls or other restrictions;
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difficulty in staffing and managing global operations;
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required compliance with a variety of foreign laws and regulations and U.S. laws and regulations, such as the Foreign Corrupt Practices Act applicable to our international operations, and significant compliance costs and penalties for failure to comply with any of these laws and regulations; and
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changes in general economic and political conditions in countries where we operate, particularly in emerging markets.
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Volatility in the global economy could adversely affect results.
Long-term disruptions in the capital and credit markets would likely adversely affect our customers' operations and financing of both our international and U.S. customers and could therefore result in a decrease in orders and revenue. In addition, during periods of economic uncertainty, our customers' spending patterns and financing availability could be negatively impacted, reducing demand for our products and services.
Fluctuations in foreign currency exchange rates could affect our financial results.
Although our financial results are reported in U.S. dollars, a large portion of our sales and operating costs are realized in Euros, Japanese yen, Chinese yuan and other foreign currencies. Our profitability is affected by movements of the U.S. dollar against these currencies in which we generate revenues and incur expenses. To the extent that we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our international operations will be lower because the applicable local currency will translate into fewer U.S. dollars. Significant long-term fluctuations in relative currency values, in particular, a significant change in the relative values of the U.S. dollar, Euro, Japanese yen or Chinese yuan, could have an adverse effect on our results of operations and financial condition given that approximately
70%
of our revenue has historically been derived from customers outside of the U.S. Additionally, there has been and may continue to be volatility in currency exchange rates as a result of the United Kingdom's referendum held on June 23, 2016 in which British voters approved the United Kingdom's withdrawal from the European Union, commonly referred to as Brexit. As further described in Item 7 of Part II of this Annual Report on Form 10-K, revenue for fiscal year
2017
was negatively impacted by currency translation.
Our business is subject to strong competition.
Our products are sold in competitive markets throughout the world. Competition is based on application knowledge, product features and design, brand recognition, reliability, technology, breadth of product offerings, price, delivery, customer relationships and after-market support. If we are not perceived as competitive in overall value as measured by these criteria, our customers would likely choose solutions offered by our competitors or developed internally.
Our business is subject to customer demand cycles.
For many of our products, orders are subject to customers' procurement cycles and their willingness and ability to invest in capital, especially in the cyclical automotive, aircraft and machine tool industries. Any event that adversely impacts those customers' new product development activities may reduce their demand for our products.
We may experience difficulty obtaining materials or components for our products, or the cost of materials or components may increase.
We purchase materials and components from third-party suppliers, some of whom may be competitors. Other materials and components may be provided by a limited number of suppliers or by sole sources and could only be replaced with difficulty or at significant added cost. Additionally, some materials or components may become scarce or difficult to obtain in the market or they may increase in price. This could adversely affect the lead time within which we receive the materials or components, and in turn affect our commitments to our customers, or could adversely affect the cost or quality of materials.
Our level of indebtedness and interest rate fluctuations on that indebtedness could adversely affect our business and results of operations and may require the use of our available cash resources to meet repayment obligations, which could reduce the cash available for other purposes.
We have a senior secured credit facility that provides for a $120,000 revolving credit facility and a
$455,400
tranche B term loan facility, both of which require that we pay a variable interest rate on outstanding borrowings. The debt under the tranche B term loan facility amortizes in equal quarterly installments in an aggregate annual amount equal to 1.00% of the original principal amount and matures on July 5, 2023. As of September 30, 2017, we did not have any borrowings under the revolving credit facility; however, we may, at times, use debt under the revolving credit facility to purchase shares of our common stock, finance working capital needs or continue to finance the growth of the business through acquisitions.
Our level of indebtedness may place us at a competitive disadvantage to our competitors that are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. We hedge against a portion of the risk on the term facility by swapping the variable rate for a fixed rate. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, developments in tax policy, such as the disallowance of tax deductions for interest paid on outstanding indebtedness, could have a material adverse effect on our results of operations and liquidity. Further, our senior secured credit facility and the indenture governing our tangible equity units contain customary affirmative and negative covenants and certain restrictions on operations that could impose operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. The loans under our term facility are also subject to mandatory prepayments in certain circumstances and require a prepayment of a certain percentage of our excess cash flow beginning in fiscal year 2018. We anticipate a significant payment will be due in the first quarter of fiscal year 2018 based on fiscal year 2017 results. This excess cash flow payment, and future required prepayments, will reduce our cash available for other purposes and could impact our ability to reinvest in other areas of our business.
Our outstanding 8.75% tangible equity units (TEUs) may adversely affect the market price of our common stock.
The market price of our common stock may be influenced by the outstanding TEUs sold in our June 2016 public offering. For example, additional shares of our common stock are currently and will continue to be issuable upon settlement of the purchase contract component of the tangible equity units through expiration on July 1, 2019. The settlement rates for such purchase contracts are subject to certain anti-dilution and make-whole adjustments that could increase, potentially significantly, the number of shares of our common stock issuable upon such settlement. As a result, the market price of our common stock could become more volatile and could be depressed by the following factors:
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investors' anticipation of the sale into the market of a substantial number of additional shares of common stock received upon settlement of the purchase contract component of the tangible equity units;
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possible sales of our common stock by investors who view the tangible equity units as a more attractive means of equity participation in the Company than owning shares of our common stock; and
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hedging or arbitrage trading activities that may develop involving the tangible equity units, the purchase contracts and our common stock.
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In addition, our debt obligations under the senior amortizing note component of the tangible equity units may further influence the market price of our common stock, including but not limited to our ability to make timely payments to holders of the notes.
As a result of the delayed filing of our Annual Report on Form 10-K for the period ended October 1, 2016 and our Quarterly Report on Form 10-Q for the period ended December 31, 2016 with the SEC, we are not currently eligible to use a registration statement on Form S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital in a timely manner or complete acquisitions.
We are not currently eligible to register the offer and sale of our securities using a registration statement on Form S-3 and we will not become eligible until we have timely filed certain periodic reports required under the Exchange Act for 12 consecutive calendar months, which will not be met until February 9, 2018 at the earliest. There can be no assurance when we will meet this requirement, which depends in part upon our ability to file our periodic reports on a timely basis in the future. Should we wish to register the offer and sale of our securities to the public before we are eligible to do so using Form S-3, our transaction costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially having an adverse effect on our financial condition.
Operational Risks
We identified material weaknesses in our internal control over financial reporting in fiscal years 2016 and 2015 which were subsequently remediated. If additional material weaknesses or significant deficiencies in our internal control over financial reporting are identified in the future, or if we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, which could adversely affect our stock price and negatively impact our results of operations.
We previously identified material weaknesses in our internal control over financial reporting in fiscal years 2016 and 2015, as discussed in Controls and Procedures included Item 9A of Part II of this Annual Report on Form 10-K and our Annual Report on Form 10-K for fiscal year 2016, respectively. These material weaknesses were remediated, and management concluded that its internal control over financial reporting was effective as of September 30, 2017.
Future testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, may identify deficiencies in our internal controls over financial reporting. Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. The existence of a material weakness could cause our consolidated financial results to contain material misstatements, require prospective or retrospective changes to our consolidated financial statements, lead to a loss of investor confidence and have a negative impact on the trading price of our common stock, cause us to incur unforeseen costs, subject us to investigations by the SEC or other regulatory authorities, damage our reputation or have other potentially material adverse consequences.
We plan to reorganize the Test business structure, processes and operating systems, which may not deliver the results we require for growth of the business.
We continue to invest in our Test operating model and modify our business processes and systems. Given the growth in demand and sophistication of testing needs across the primary markets served, on January 5, 2017, we announced that we plan to divide Test into two separate business units, "Materials Test Systems" and "Vehicles and Structure Test Systems." We anticipate that the division of our Test segment will result in us having three operating segments once discrete financial information is made available to our Chief Operating Decision Maker. We will continue to report only the Test and Sensors segments until such time. We continue to evaluate the timing of such implementation.
When the planned Test business structure reorganization is complete, the focus of the "Materials Test Systems" business unit will be on providing test solutions to global customers involved in developing and manufacturing advanced materials that are essential to biomedical, energy, automotive and aerospace applications. The "Vehicles and Structures Test Systems" business unit will focus on providing test solutions to automotive, aerospace, infrastructure and energy markets worldwide. We plan to restructure the Test business to make it a more scalable business model in the markets that we currently serve. Successful implementation of these initiatives is critical to the growth of our business. The execution of the reorganization of the Test business structure may have limited success or no success at all and may be negatively impacted if we are unable to hire leadership and key personnel for each of the Test business units.
We may not realize the growth opportunities and cost synergies that are anticipated from our acquisition of PCB.
The benefits that are expected to result from our July 5, 2016 acquisition of PCB, the largest acquisition in our history, will depend, in part, on our ability to realize the anticipated growth opportunities and cost synergies that result from the acquisition. Our success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of PCB. There is a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition as sizable as PCB. The process of integrating operations could cause an interruption of, or loss of momentum in, our and PCB's activities. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage other aspects of the Company, service existing customers, attract new customers and develop new products or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. There can be no assurance that we will successfully or cost-effectively integrate PCB. The failure to do so could have a material adverse effect on our business, financial condition or results of operations.
Even if we are able to integrate PCB successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that we currently expect from this integration, and we cannot guarantee that these benefits will be achieved within anticipated timeframes or at all. For example, we may not be able to eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with the integration of PCB, and such expenses may have a material adverse effect on our business, financial condition or results of operations. While it is anticipated that certain expenses will be incurred to achieve cost synergies, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the acquisition may be offset by costs incurred related to, or delays in, integrating the businesses.
PCB may have liabilities that are not known, probable or estimable at this time and we may become subject to additional risks and uncertainties relating to PCB and its business.
Upon completion of the acquisition of PCB, PCB became our wholly owned subsidiary and, as a result, we became subject to all of its liabilities. There could be unasserted claims or assessments that we failed or were unable to discover or identify in the course of performing our due diligence investigation of PCB. In addition, there may be liabilities that are neither probable nor estimable at this time that may become probable or estimable in the future. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial results and our ability to make an indemnity claim against the sellers of PCB will be limited after the release of the escrow, which is anticipated in early calendar 2018. We may learn additional information about PCB that adversely affects us, such as unknown, unasserted or contingent liabilities and issues relating to compliance with applicable laws.
In addition, we may become subject to additional risks associated with PCB and its business, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. The integration process may be complex, costly and time-consuming, as PCB was not previously operating as a public company. The difficulties of integrating the businesses include, among others:
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•
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failure to implement our business plan for the combined business;
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•
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unanticipated issues in integrating equipment, logistics, information, communications and other systems;
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•
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possible inconsistencies in standards, controls, contracts, procedures and policies;
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•
|
impacts of change in control provisions in contracts and agreements;
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•
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failure to retain key customers and suppliers;
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•
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unanticipated changes in applicable laws and regulations;
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•
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failure to recruit and retain key employees to operate the combined business;
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•
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increased competition within the industries in which PCB operates;
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•
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inherent operating risks in the business;
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•
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unanticipated issues, expenses and liabilities;
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•
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additional reporting requirements pursuant to applicable rules and regulations; and
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•
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additional requirements relating to internal control over financial reporting.
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Our business operations may be affected by government contracting risks.
Government business is important to us and is expected to increase in the future. Revenue from U.S. Government contracts varies by year. Such revenue as a percent of our total revenue was
4%
,
3%
and
3%
for fiscal years
2017
,
2016
and
2015
, respectively.
We must comply with procurement laws and regulations relating to the formation, administration and performance of U.S. Government contracts. Failure to comply with these laws and regulations could lead to suspension or debarment from U.S. Government contracting or subcontracting and result in administrative, civil or criminal penalties. Failure to comply could also have a material adverse effect on our reputation, our ability to secure future U.S. Government contracts and export control licenses, and our results of operations or financial condition. These laws and regulations also create compliance risks and affect how we do business with federal agency clients. U.S. Government contracts, as well as contracts with certain foreign governments with which we do business, are also subject to modification or termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. Further, any investigation relating to, or suspension or debarment from, U.S. Government contracting could have a material impact on our results of operations as, during the duration of any suspension or debarment, we would be prohibited or otherwise limited in our ability to enter into prime contracts or subcontracts with U.S. Government agencies, certain entities that receive U.S. Government funds or that are otherwise subject to the Federal Acquisition Regulations, and certain state government or commercial customers who decline to contract with suspended or debarred entities. A federal suspension could also impact our ability to obtain export control licenses which are materially important to our business.
We are subject to risks because we design and manufacture first-of-a-kind products.
We design and build systems that are unique and innovative and, in some cases, the first created to address complex and unresolved issues. The design, manufacture and support of these systems may involve higher than planned costs. If we are unable to meet our customers' expectations, our reputation and ability to further utilize our expertise will likely be damaged.
The backlog, sales, delivery and acceptance cycle for many of our products is irregular and may not develop as anticipated.
Many of our products have long sales, delivery and acceptance cycles. In addition, our backlog is subject to order cancellations and our sales arrangements typically do not include specific cancellation provisions. If an order is canceled, we typically would only be entitled to receive reimbursement from the customer for actual costs incurred under the arrangement plus a reasonable margin. Events may cause recognition of orders, backlog and results of operations to be irregular over shorter periods of time. These factors include the timing of individual large orders which may be impacted by interest rates, customer capital spending and product development cycles, design and manufacturing problems, capacity constraints, delays in product readiness, damage or delays in transit, problems in achieving technical performance requirements, and various customer-initiated delays. Any such delay or any cancellations may cause fluctuations in our reported periodic financial results and may cause our stated conversion to revenue to be inaccurate.
The business could be adversely affected by product liability and commercial litigation.
Our products or services may be claimed to cause or contribute to personal injury or property damage to our customers' facilities. Additionally, we are, at times, involved in commercial disputes with third parties, such as customers, vendors and others. The ensuing claims may arise singularly, in groups of related claims or in class actions involving multiple claimants. Such claims and litigation are frequently expensive and time consuming to resolve and may result in substantial liability to us, and any liability and related costs and expenses may not be recoverable through insurance or other forms of reimbursement.
We may experience difficulties obtaining and retaining the services of skilled employees.
We rely on knowledgeable, experienced and skilled technical personnel, particularly engineers, sales management and service personnel, to design, assemble, sell and service our products. We may be unable to attract, retain and motivate a sufficient number of such people which could adversely affect our business. The inability to transfer knowledge and transition between roles within these teams could also adversely affect our business.
We may fail to protect our intellectual property effectively or may infringe upon the intellectual property of others.
We have developed significant proprietary technology and other rights that are used in our businesses. We rely on trade secret, copyright, trademark and patent laws and contractual provisions to protect our intellectual property. While we take enforcement of these rights seriously, other companies such as competitors or others in markets in which we do not participate may attempt to copy or use our intellectual property for their own benefit.
In addition, the intellectual property of others also has an impact on our ability to offer some of our products and services for specific uses or at competitive prices. Competitors' patents or other intellectual property may limit our ability to offer products and services to our customers. Any infringement on the intellectual property rights of others could result in litigation and adversely affect our ability to continue to provide, or could increase the cost of providing, our products and services.
Intellectual property litigation can be very costly and could result in substantial expense and diversion of our resources, both of which could adversely affect our businesses, financial condition and results. In addition, there may be no effective legal recourse against infringement of our intellectual property by third parties, whether due to limitations on enforcement of rights in foreign jurisdictions or as a result of other factors.
If we are unable to protect our information systems against misappropriation of data or breaches of security, our business operations and financial results could be adversely impacted. Evolving regulations and legal obligations related to data privacy, data protection and information security and our actual or perceived failure to comply with such obligations could have an adverse effect on our business.
Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of cyber attacks. Although we strive to have appropriate security controls in place, prevention of security breaches cannot be assured, particularly as cyber threats continue to evolve. We may be required to expend additional resources to continue to enhance our security measures or to investigate and remediate any security vulnerabilities. The consequences of these risks could adversely impact our business operations and financial results.
In addition, our handling of certain data is subject to a variety of laws and regulations, which have been adopted by various federal, state and foreign governments to regulate the collection, distribution, use and storage of personal information of individuals. Several foreign countries in which we conduct business, including the European Economic Area (EEA), currently have in place, or have recently proposed, laws or regulations concerning privacy, data protection and information security, which are more restrictive than those imposed in the United States. Some of these laws are in their early stages and we cannot yet determine the impact these revised laws and regulations, if implemented, may have on our business. However, any failure or perceived failure by us to comply with these privacy laws, regulations, policies or obligations or any security incident that results in the unauthorized release or transfer of personally identifiable information or other customer data in our possession, could result in government enforcement actions, litigation, fines and penalties and/or adverse publicity, all of which could have an adverse effect on our reputation and business. For example, the new EEA-wide General Data Protection Regulation will become effective in our fiscal year 2018 and will replace the data protection laws of each EEA member state. If our privacy or data security measures fail to comply with applicable current or future laws and regulations, we may be subject to litigation, regulatory investigations and enforcement notices requiring us to change the way we use personal data.
Government regulation imposes costs and other constraints.
Our manufacturing operations and past and present ownership and operations of real property are subject to extensive and changing federal, state, local and foreign laws and regulations, including laws and regulations pertaining to health and safety matters, as well as the handling or discharge of hazardous materials into the environment. We expect to continue to incur costs to comply with these laws and may incur penalties for any failure to do so. We may also be identified as a responsible party and be subject to liability relating to any investigation and cleanup of properties used for industrial purposes or the generation or disposal of hazardous substances. In addition, some of our products contain hazardous substances and are subject to requirements that regulate their content, such as the European Union’s Restriction of Hazardous Substances Directive and analogous regulations elsewhere.
Some of our export sales require approval from the U.S. government. Changes in political relations between the U.S. and foreign countries and/or specific potential customers for which export licenses may be required, may cause a license application to be delayed or denied, or a previously issued license withdrawn, rendering us unable to complete a sale or vulnerable to competitors who do not operate under such restrictions. Capital expenditures for environmental compliance were immaterial in fiscal year 2017, and we do not expect such expenditures will be material in fiscal year 2018; however, the factors described above may cause our estimates to differ from our expectations.
We have been required to conduct a good faith reasonable country of origin analysis on our use of conflict minerals, which has imposed and may impose additional costs on us and could raise reputational and other risks.
The SEC has promulgated final rules in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding disclosure of the use of certain minerals, known as conflict minerals, mined from the Democratic Republic of the Congo and adjoining countries. While there is pending litigation challenging these rules, we have incurred and will continue to incur costs associated with complying with these disclosure requirements, including costs to determine the source of any conflict minerals used in our products. We have adopted a policy relating to conflict minerals, incorporating the standards set forth in the Organisation for Economic Co-operation and Development Due Diligence Guidance, which affects the sourcing, supply, and pricing of materials used in our products. As we continue our due diligence, we may face reputational challenges if we are unable to verify the origins for all metals used in our products through the procedures we have and may continue to implement. We may also encounter challenges in our efforts to satisfy customers that may require all of the components of products purchased to be certified as conflict-free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.
We may not achieve our growth plans for the expansion of the business.
In addition to market penetration, our long-term success depends on our ability to expand our business through (a) new product development and service offerings; (b) mergers and acquisitions; and/or (c) geographic expansion.
New product development and service offerings
require that we maintain our ability to improve existing products, continue to bring innovative products and services to market in a timely fashion and adapt products and services to the needs and standards of current and potential customers. Our products and services may become less competitive or eclipsed by technologies to which we do not have access or which render our solutions obsolete.
Mergers and acquisitions
will be accompanied by risks that may include:
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•
|
suitable candidates may not exist or may not be available at acceptable costs;
|
|
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•
|
failure to achieve the financial and strategic goals for the acquired and combined businesses;
|
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•
|
difficulty integrating the operations and personnel of the acquired businesses;
|
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•
|
disruption of ongoing business and distraction of management from the ongoing business;
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•
|
dilution of existing shareholders and earnings per share;
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•
|
unanticipated, undisclosed or inaccurately assessed liabilities, legal risks and costs; and
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•
|
difficulties retaining the key vendors, customers or employees of the acquired business.
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Acquisitions of businesses having a significant presence outside the U.S. will increase our exposure to the risks of international operations discussed in the operational risk factors.
Geographic expansion
may be outside of the U.S., and hence will be disproportionately subject to the risks of international operations discussed in the operational risk factors.
We may be required to recognize impairment charges for goodwill and long-lived assets.
As of
September 30, 2017
, the net carrying value of goodwill and long-lived assets (property and equipment, net and intangible assets, net) totaled
$724,771
. We periodically assess the value of these assets for impairment in accordance with U.S. generally accepted accounting principles (GAAP). Significant negative industry or economic trends, disruptions to our businesses, significant unexpected or planned changes in use of the assets, divestitures and market capitalization declines may result in impairments to goodwill and other long-lived assets. Future impairment charges could significantly affect reported financial results.
We cannot guarantee that we will not record a material goodwill impairment charge in the future for the PCB reporting unit. Changes in our assumptions or estimates could materially affect the estimation of fair value of the PCB reporting unit and, therefore, could reduce the excess of fair value over the carrying value of the PCB reporting unit entirely resulting in goodwill impairment. Events and conditions that could negatively impact the estimated fair value include a sustained decline in our stock price, inability to realize the anticipated sales growth opportunities as a result of the PCB acquisition, unsuccessful integration of PCB, lack of development of new products and a decrease in projected profitability.
Our investigation during fiscal year 2017 relating to our China operations and our failure to maintain effective processes and controls relative to adherence to our Code of Conduct by employees involved with our business in China during fiscal year 2016 may have an adverse effect on our business, financial condition or results of operations.
In the first quarter of fiscal year 2017, we announced the initiation of an internal investigation into apparent violations of our Code of Conduct involving certain employees in our China operations, including association by those employees with an independent business that may compete with us in certain markets. As the apparent violations implicated members of leadership in our China operations, the Audit Committee engaged independent external counsel to conduct an investigation of
our China operations in order to assess the impact of these apparent violations on the Company's financial input from China and to review for potential violations the Company's Code of Conduct, anticorruption compliance policies and procedures and related U.S. law. Independent forensic accountants, acting at the direction of external counsel, performed testing of certain transactions related to our China operations as part of this investigation. As of September 30, 2017, investigative work was completed and confirmed that the former China Test leader and several other former senior managers associated with our China Test operations violated the conflict of interest provisions of our Code of Conduct in connection with their involvement with an independent business that competed with the Company's low-end products in the China market. This inconsistent adherence to our Code of Conduct could have resulted in management override of internal control over financial reporting.
Our Code of Conduct and other internal policies prohibit us and our employees from engaging in unethical business practices. However, there can be no assurance that all of our employees or agents will refrain from acting in violation of such policies and procedures or that our processes and controls will be sufficient to detect any such violations. The investigation into potential violations of these policies, or even allegations of such violations, and evaluation of our internal controls, could disrupt our operations, involve significant management distraction, and lead to significant costs and expenses, including legal and accounting fees and such expenses may have a material adverse effect on our financial results. Further, if our employees or agents violate such policies and procedures, such actions could result in management override of internal controls over financial reporting. If we, or our employees or agents acting on our behalf, are found to have engaged in practices that violate these policies and/or applicable law, we could suffer severe fines and penalties, repayment of ill-gotten gains, injunctions on future conduct, securities litigation, material weaknesses in our financial reporting and other consequences that may have a material adverse effect on our business, financial condition or results of operations, including but not limited to our operations in China. In addition, our reputation, sales activities or stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of applicable laws and regulations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Shown below is a breakdown of the approximate square footage of our primary owned and leased facilities as of
September 30, 2017
. We consider our current facilities adequate to support our operations during fiscal year
2018
.
Owned Property
|
|
|
|
|
Location
|
Use of Facility
|
Approximate
Square Footage
|
|
Eden Prairie, Minnesota (U.S.)
|
Corporate headquarters and primary Test manufacturing and research
|
420,000
|
|
Depew, New York (U.S.)
|
Sensors manufacturing
|
47,000
|
|
|
Sensors manufacturing, sales and service administration
|
91,000
|
|
|
Sensors manufacturing
|
6,000
|
|
Cary, North Carolina (U.S.)
|
Sensors manufacturing, research and sales and service administration
|
65,000
|
|
Provo, Utah (U.S.)
|
Sensors sales and service administration
|
13,000
|
|
|
Sensors manufacturing
|
12,000
|
|
Farmington Hills, Michigan (U.S.)
|
Sensors manufacturing, sales and service administration
|
16,000
|
|
Lancaster, New York (U.S.)
|
Sensors sales and service administration
|
1,000
|
|
Berlin, Germany
|
Test manufacturing and sales and service administration
|
72,000
|
|
Shanghai, China
|
Test manufacturing, sales and service administration
|
129,000
|
|
Shenzhen, China
|
Test manufacturing, research, sales and service administration
|
75,000
|
|
Total
|
|
947,000
|
|
Leased Property
|
|
|
|
|
|
|
|
|
Location
|
|
Use of Facility
|
|
Lease
Expires
|
|
Approximate
Square Footage
|
Swartz Creek, Michigan (U.S.)
|
|
Test manufacturing and research
|
|
2022
|
|
8,000
|
|
Latham, New York (U.S.)
|
|
Sensors manufacturing, sales and service administration
|
|
2020
|
|
5,000
|
|
Cary, North Carolina (U.S.)
|
|
Sensors manufacturing
|
|
2020
|
|
8,000
|
|
Halifax, North Carolina (U.S.)
|
|
Sensors manufacturing, sales and service administration
|
|
2018
|
|
51,000
|
|
Lexington, North Carolina (U.S.)
|
|
Test manufacturing
|
|
2019
|
|
12,000
|
|
Cincinnati, Ohio (U.S.)
|
|
Sensors manufacturing, warehouse, sales and service administration
|
|
2018
|
|
16,000
|
|
|
|
Sensors warehouse, sales and service administration
|
|
2018
|
|
9,000
|
|
San Clemente, California (U.S.)
|
|
Sensors warehouse, sales and service administration
|
|
2018
|
|
7,000
|
|
Beijing, China
|
|
Test sales and service administration
|
|
2018
|
|
6,000
|
|
|
|
Sensors sales and service administration
|
|
2018
|
|
5,000
|
|
Shanghai, China
|
|
Test sales, service administration and assembly
|
|
2018
|
|
13,000
|
|
|
|
Test sales and service administration
|
|
2018
|
|
7,000
|
|
|
|
Test land under Shanghai facility
|
|
2056
|
|
161,000
|
|
Shenzhen, China
|
|
Test manufacturing and warehouse
|
|
2019
|
|
13,000
|
|
|
|
Test manufacturing and warehouse
|
|
2019
|
|
16,000
|
|
|
|
Test land under Shenzhen facility
|
|
2047
|
|
31,000
|
|
Creteil, France
|
|
Test sales and service administration
|
|
2018
|
|
16,000
|
|
Huckelhoven, Germany
|
|
Sensors sales and service administration
|
|
2021
|
|
12,000
|
|
Ludenscheid, Germany
|
|
Sensors manufacturing, research and sales and service administration
|
|
2018
|
|
48,000
|
|
|
|
Sensors sales and service administration
|
|
2018
|
|
10,000
|
|
|
|
Sensors manufacturing
|
|
2018
|
|
10,000
|
|
Tokyo, Japan
|
|
Test sales and service administration
|
|
2018
|
|
7,000
|
|
|
|
Sensors sales and service administration
|
|
2020
|
|
5,000
|
|
Sungnam, South Korea
|
|
Test sales, service administration and assembly
|
|
2019
|
|
17,000
|
|
Guildford, U.K.
|
|
Test sales, service and manufacturing
|
|
2025
|
|
8,000
|
|
Berlin, Germany
|
|
Test land under Berlin facility
|
|
2052
|
|
97,000
|
|
Other Locations
1
|
|
Test and Sensors other sales and service administration
|
|
|
|
85,000
|
|
Total
|
|
|
|
|
|
683,000
|
|
|
|
1
|
We also lease space in the U.S., Europe and Asia for Test and Sensors sales and service administration, including locations in China, France, Germany, India, Italy, Japan, Russia, Spain, Sweden, Canada and the United Kingdom. Neither the amount of leased space nor the rental obligations in these locations is significant individually or in aggregate.
|
Additional information relative to lease obligations is included in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of Part II of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
Discussion of legal matters is incorporated by reference from Note 14, "Commitments and Contingencies," included in Item 8 of Part II of this Annual Report on Form 10-K and should be considered an integral part of Item 3 of Part I of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Notes to Consolidated Financial Statements
(Dollars and shares in thousands, unless otherwise noted)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
MTS Systems Corporation is a leading global supplier of high-performance test systems and sensors. Our testing hardware and software solutions help customers accelerate and improve design, development and manufacturing processes and are used for determining the mechanical behavior of materials, products and structures. Our high-performance sensors are used for measuring acceleration, position, vibration, motion, pressure, force and sound.
Fiscal Year
We have a 5-4-4 week, quarterly accounting cycle with our fiscal year ending on the Saturday closest to September 30. Fiscal years
2017
,
2016
and
2015
ended
September 30, 2017
,
October 1, 2016
and
October 3, 2015
, respectively. Fiscal years
2017
,
2016
and
2015
include 52, 52 and 53 weeks, respectively.
Consolidation
The Consolidated Financial Statements include the accounts of MTS Systems Corporation and its wholly owned subsidiaries. Significant intercompany account balances and transactions have been eliminated.
Revenue Recognition
We recognize revenue on a sales arrangement when it is realized or realizable and earned, which occurs when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery and title transfer has occurred or services have been rendered; (3) the sales price is fixed and determinable; (4) collectability is reasonably assured; and (5) all significant obligations to the customer have been fulfilled.
Orders that are manufactured and delivered in less than
six
months with routine installations and no special acceptance protocols may contain multiple elements for revenue recognition purposes. We consider each deliverable that provides value to the customer on a standalone basis a separable element. Separable elements in these arrangements may include the design and manufacture of hardware and essential software, installation services, training and/or post contract maintenance and support. We initially allocate consideration to each separable element using the relative selling price method. Selling prices are determined based on either vendor-specific objective evidence (VSOE) (the actual selling prices of similar products and services sold on a standalone basis) or, in the absence of VSOE, our best estimate of the selling price. Factors considered in determining estimated selling prices for applicable elements generally include overall economic conditions, customer demand and costs incurred to provide the deliverable, as well as our historical pricing practices. Under these arrangements, revenue associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement. Under arrangements where special acceptance protocols exist, installation services and training are not considered separable. Accordingly, revenue for the entire arrangement is recognized upon the completion of installation, training and fulfillment of any other significant obligations specific to the terms of the arrangement. Arrangements that do not contain any separable elements are typically recognized when the products are shipped and title has transferred to the customer.
Certain contractual arrangements require longer production periods, generally longer than
six
months (long-term contracts), and may contain non-routine installations and special acceptance protocols. These arrangements often include hardware and essential software, installation services, training and support. Long-term contractual arrangements involving essential software typically include significant production, modification and customization. For long-term arrangements with essential software and all other long-term arrangements with complex installations and/or unusual acceptance protocols, revenue is recognized using the percentage-of-completion method, based on the cost incurred to date relative to estimated total cost of the contract. Elements of an arrangement that do not separately fall within the scope of the percentage-of-completion method (e.g. training and post contract software maintenance and support) are recognized as the service is provided in amounts determined based on VSOE, or in the absence of VSOE, our best estimate of the selling price.
Under the terms of our long-term contracts, revenue recognized using the percentage-of-completion method may not, in certain circumstances, be invoiced until completion of contractual milestones, upon shipment of the equipment or upon installation and acceptance by the customer. Unbilled amounts for these contracts are included in unbilled accounts receivable in the Consolidated Balance Sheets.
Revenue from the rental of equipment is recognized in the period that the rental is provided. Revenue from the profit on the sale of used rental equipment is recognized when the products are shipped and title has transferred. Rental revenue is included in product revenue in the Consolidated Statements of Income.
Revenue from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. Revenue from post contract software maintenance and support services is recognized ratably over the defined contractual period of the maintenance agreement.
Our sales arrangements typically do not include specific performance, cancellation, termination or refund-type provisions. In the event a customer cancels a contractual arrangement, we would typically be entitled to receive reimbursement from the customer for actual costs incurred under the arrangement plus a reasonable margin.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Shipping and Handling
Freight revenue billed to customers is reported within revenue in the Consolidated Statements of Income. Expenses incurred for shipping products to customers are reported within cost of sales in the Consolidated Statements of Income.
Research and Development
Research and development (R&D) costs associated with new products are charged to operations as incurred. We have also allocated certain resources to capitalized software development activities. Total internal software development costs capitalized during fiscal years
2017
and
2016
were
$2,046
and
$2,761
, respectively.
Foreign Currency
The financial position and results of operations of our foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities are translated using fiscal period-end exchange rates and monthly statements of income are translated using average exchange rates applicable to each month, with the resulting translation adjustments recorded as a separate component of shareholders' equity. Net gains and losses from foreign currency transactions are recognized in the Consolidated Statements of Income. We recorded net foreign currency transaction losses of
$2,499
,
$1,567
and
$2,510
during fiscal years
2017
,
2016
and
2015
, respectively.
Cash and Cash Equivalents
Cash and cash equivalents represent cash, demand deposits and highly liquid investments with original maturities of three months or less. Cash equivalents are recorded at cost, which approximates fair value. Cash equivalents, both inside and outside the U.S., are invested in bank deposits or money market funds and are held in local currency denominations.
Accounts Receivable and Long-term Contracts
We grant credit to customers, but it generally does not require collateral or other security from domestic customers. When deemed appropriate, receivables from customers located outside the U.S. are supported by letters of credit from financial institutions. The allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of those specific customers. We record an allowance to reduce receivables to the amount reasonably believed to be collectible and consider factors such as the financial condition of the customer and the aging of the receivables. If there is a deterioration of a customer's financial condition, if we become aware of additional information related to the credit worthiness of a customer or if future actual default rates on trade receivables differ from those currently anticipated, we may adjust the allowance for doubtful accounts, which would affect earnings in the period the adjustments were made.
We enter into long-term contracts for customized equipment sold to our customers. Under the terms of such contracts, revenue recognized using the percentage-of-completion method may be invoiced upon completion of contractual milestones, shipment to the customer, or installation and customer acceptance. Unbilled amounts relating to these contracts are included in unbilled accounts receivable in the Consolidated Balance Sheets. Amounts unbilled as of
September 30, 2017
are expected to be invoiced during fiscal year
2018
.
Inventories
Inventories consist of material, labor and overhead costs and are stated at the lower of cost or market value determined under the first-in, first-out accounting method. Certain inventories are measured using the weighted average cost method. Inventories, net were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Components, assemblies and parts
|
|
$
|
86,991
|
|
|
$
|
87,119
|
|
Customer projects in various stages of completion
|
|
30,225
|
|
|
32,575
|
|
Finished goods
|
|
10,512
|
|
|
12,872
|
|
Total inventories, net
|
|
$
|
127,728
|
|
|
$
|
132,566
|
|
Software Development Costs
We capitalize certain software development costs related to software to be sold, leased or otherwise marketed. Capitalized software development costs include purchased materials and services, salary and benefits of our development and technical support staff and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on our product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and we have the capability to manufacture the end product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales in the Consolidated Statements of Income over the product's estimated economic life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.
Our capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value will be expensed in the period such a determination is made. We capitalized
$2,900
,
$3,637
and
$2,834
of software development costs during fiscal years
2017
,
2016
and
2015
, respectively. Amortization expense for software development costs was
$892
,
$892
and
$2,403
for fiscal years
2017
,
2016
and
2015
, respectively. See Note 2 for additional information on capitalized software development costs.
Impairment of Long-lived Assets
We review the carrying value of long-lived assets or asset groups, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, we recognize an asset impairment charge against income from operations. The amount of the impairment loss recorded is the amount by which the carrying value of the impaired asset or asset group exceeds its fair value.
Property and Equipment
Property and equipment, are capitalized at cost, including additions, replacements and improvements, while repairs and maintenance are expensed as incurred. Depreciation is recorded over the following estimated useful lives of the asset:
|
|
|
Asset Type
|
Useful Life
|
Buildings and improvements
|
10 to 40 years
|
Machinery and equipment
|
3 to 10 years
|
Building and equipment additions are generally depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax purposes. Property and equipment includes assets held under capital leases, consisting of machinery and equipment, and are recorded at the present value of minimum lease payments and are amortized on a straight-line basis over the estimated life of the asset or the lease term. Amortization of assets held as capital leases is included in depreciation expense in the Consolidated Statements of Income. See Note 2 for additional information on property and equipment.
Goodwill and Indefinite-lived Intangible Assets
Goodwill represents the excess of cost over the fair value of the identifiable net assets of businesses acquired and allocated to our reporting units at the time of acquisition. We test goodwill for impairment annually in the fourth quarter and when an event occurs or circumstances change that indicate the carrying value of the reporting unit may not be recoverable. As of both
September 30, 2017
and
October 1, 2016
, we determined there was
no
impairment of our goodwill or indefinite-lived intangible assets.
Evaluating goodwill for impairment involves the determination of the fair value of each reporting unit in which goodwill is recorded using a qualitative or quantitative analysis. A reporting unit is an operating segment or a component of an operating segment for which discrete financial information is available and reviewed by management on a regular basis. For fiscal year
2017
, we identified three reporting units: Test, Temposonics and PCB Group, Inc. (PCB).
Prior to completing the quantitative analysis described below, we have the option to perform a qualitative assessment of goodwill for impairment to determine whether it is more likely than not (a likelihood of more than
50%
) that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If we conclude the fair value is more likely than not less than the carrying value, we perform the quantitative analysis. Otherwise, no further testing is needed.
If the quantitative analysis is required, the impairment test is used to compare the calculated fair value of each reporting unit to its carrying value, including goodwill. We estimate the fair value of a reporting unit using both the income approach and the market approach. The income approach uses a discounted cash flow model that requires input of certain estimates and assumptions requiring judgment, including projections of revenue, profit margins, operating costs, capital expenditures, changes in working capital, discount rates and perpetual growth rates based on economic conditions, customer demand, changes in competition and new product introductions. The market approach uses a multiple of earnings and revenue based on guidelines for publicly traded companies. Fair value calculations contain significant judgments and estimates. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
In fiscal year
2017
, we elected to perform the quantitative analysis of goodwill for our
three
reporting units as described above as this is the first goodwill assessment following a full fiscal year of operations for PCB. Based on the analysis, we determined that goodwill was not impaired for any of our reporting units. The fiscal year 2017 impairment test indicated the fair value of the Test and Temposonics reporting units significantly exceeded their carrying values. The PCB reporting unit exceeded its carrying value by approximately
11 percent
. As of
September 30, 2017
, our Test, Temposonics and PCB reporting units had goodwill balances of
$25,109
,
$1,475
and
$343,178
, respectively.
While we believe the estimates and assumptions used in determining the fair value of our reporting units are reasonable, significant changes in estimates of future cash flows, such as those caused by unforeseen events or changes in market conditions, could materially impact the fair value of a reporting unit which could result in the recognition of a goodwill impairment charge and adversely affect financial results.
We performed our annual test of goodwill during the fourth quarter of fiscal year 2017, utilizing discount rates of approximately
10 percent
based on market, company specific and reporting unit specific data to discount projected future cash flows for each reporting unit and perpetual growth rates of
3 percent
based on historical and forecasted reporting unit and industry growth rates.
For the PCB reporting unit, we performed the quantitative analysis on the fair values resulting from the discounted cash flow analysis utilizing alternate assumptions that reflect reasonably possible changes to future assumptions. Based on the analysis, a
50
basis point increase in the discount rate utilized in the discounted cash flow analysis would not have resulted in the PCB reporting unit failing the quantitative analysis of the impairment test. Additionally, a
50
basis point decrease in the estimated perpetual sales growth rates utilized in the discounted cash flow analysis would not have resulted in the PCB reporting unit failing the quantitative analysis of the impairment test.
Changes in our assumptions or estimates could materially affect the estimation of fair value of the PCB reporting unit and, therefore, could reduce the excess of fair value over the carrying value of the PCB reporting unit entirely resulting in goodwill impairment. Events and conditions that could negatively impact the estimated fair value include a sustained decline in our stock price, inability to realize the anticipated sales growth opportunities as a result of the PCB acquisition, unsuccessful integration of PCB, lack of development of new products and a decrease in projected profitability.
In fiscal year
2016
, we performed a qualitative assessment of goodwill for our Test and Temposonics reporting units as described above. Based on the assessment, we determined it was not necessary to perform the goodwill impairment test for any of our reporting units.
Intangible assets with indefinite lives are not amortized. These assets are tested annually for impairment and when an event occurs or circumstances change that indicate the carrying value of the asset may not be recoverable. Fair value of indefinite-lived intangible assets is primarily determined using a relief from royalty method if a quantitative analysis is deemed necessary.
See Note 2 for additional information on goodwill and intangible assets.
Other Long-term Assets
Other assets at
September 30, 2017
and
October 1, 2016
primarily consisted of cash value of life insurance policies, security deposits paid on leased property and debt issuance costs.
Warranty Obligations
Sales of our products and systems are subject to limited warranty obligations that are included in customer contracts. For sales that include installation services, warranty obligations generally extend for a period of
12
to
24
months from the date of either shipment or acceptance based on the contract terms. Product obligations generally extend for a period of
12
to
24
months from the date of purchase. Certain products offered in our Sensors segment include a lifetime warranty.
Under the terms of these warranties, we are obligated to repair or replace any components or assemblies deemed defective due to workmanship or materials. We reserve the right to reject warranty claims where it is determined that failure is due to normal wear, customer modifications, improper maintenance or misuse. We record general warranty provisions based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects our historical warranty claims experience over the preceding
12
-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. Warranty provisions are also recognized for certain unanticipated product claims that are individually significant.
Changes to accrued warranty costs were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Beginning accrued warranty costs
|
|
$
|
5,718
|
|
|
$
|
4,695
|
|
Warranty claims
|
|
(4,383
|
)
|
|
(5,592
|
)
|
Warranty provisions
|
|
4,310
|
|
|
5,273
|
|
Adjustments to preexisting warranties
|
|
352
|
|
|
731
|
|
Acquired warranty obligations
|
|
—
|
|
|
608
|
|
Currency translation
|
|
21
|
|
|
3
|
|
Ending accrued warranty costs
|
|
$
|
6,018
|
|
|
$
|
5,718
|
|
Derivative Financial Instruments
Our results of operations could be materially impacted by changes in foreign currency exchange rates, as well as interest rates on our floating-rate indebtedness. In an effort to manage exposure to these risks, we periodically enter into forward and option currency exchange contracts, interest rate swaps and forward interest rate swaps. Since the market value of these hedging contracts is derived from current market rates, they are classified as derivative financial instruments. We do not use derivatives for speculative or trading purposes. The derivative contracts contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality. For derivative instruments executed under master netting arrangements, we have the contractual right to offset fair value amounts recognized for the right to reclaim cash collateral with obligations to return cash collateral. We do not offset fair value amounts recognized on these derivative instruments. As of both
September 30, 2017
and
October 1, 2016
, we did not have any foreign exchange contracts with credit-risk related contingent features. See Note 4 for additional information on derivatives and hedging activities.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and operating results. See Note 8 for additional information on income taxes.
Earnings Per Common Share
Basic earnings per share is computed by dividing net income by the daily weighted average number of common shares outstanding during the applicable period. The
8.75%
tangible equity units (TEUs) are assumed to be settled at the minimum settlement amount of
1.9841
shares per TEU when calculating weighted average common shares outstanding for purposes of basic earnings per share.
Using the treasury stock method, diluted earnings per share includes the potentially dilutive effect of common shares issued in connection with outstanding stock-based compensation options and grants. The potentially dilutive effect of common shares issued in connection with outstanding stock options is determined based on the average market price for the period. For diluted earnings per share, the TEUs are assumed to be settled at a conversion factor based on our daily volume-weighted average price per share of our common stock for the
20
consecutive trading days preceding the end of the current fiscal year quarter not to exceed
2.3810
shares of common stock per TEU.
Under the treasury stock method, shares associated with certain stock options have been excluded from the diluted weighted average shares outstanding calculation because the exercise of those options would lead to a net reduction in common shares outstanding or anti-dilution. As a result, stock options to acquire
726
,
673
and
179
weighted common shares have been excluded from the diluted weighted shares outstanding calculation for fiscal years
2017
,
2016
and
2015
, respectively.
In connection with the pricing of the TEUs, we purchased capped calls. The capped calls will not be reflected in the calculation of diluted earnings per share until settled as they are anti-dilutive. See Note 9 for additional information on our equity instruments.
Basic and diluted earnings per share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
|
$
|
25,084
|
|
|
$
|
27,494
|
|
|
$
|
45,462
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
19,040
|
|
|
16,027
|
|
|
14,984
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
Stock-based compensation
|
|
97
|
|
|
105
|
|
|
158
|
|
Tangible equity units
|
|
—
|
|
|
47
|
|
|
—
|
|
Weighted average dilutive common shares outstanding
|
|
19,137
|
|
|
16,179
|
|
|
15,142
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.32
|
|
|
$
|
1.72
|
|
|
$
|
3.03
|
|
Diluted
|
|
$
|
1.31
|
|
|
$
|
1.70
|
|
|
$
|
3.00
|
|
Stock-based Compensation
We measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. We recognize the cost over the period during which an employee is required to provide services in exchange for the award.
For purposes of determining estimated fair value of stock-based payment awards, we utilize the Black-Scholes option pricing model, which requires the input of certain assumptions requiring management judgment. Because our employee stock option awards have characteristics significantly different from those of traded options and because changes in the input assumptions
can materially affect fair value estimates, existing models may not provide a reliable single measure of the fair value of employee stock options. We will continue to assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time that could result in changes to these assumptions and methodologies and thereby materially impact the fair value determination of future grants of stock-based payment awards. If factors change and we employ different assumptions in future periods, the compensation expense recorded may differ significantly from the stock-based compensation expense recorded in the current period. See Note 6 for additional information on stock-based compensation.
Loss Contingencies
We establish an accrual for loss contingencies when it is both probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. When both of these criteria are not met, we do not establish an accrual. However, when there is at least a reasonable possibility that a loss has been incurred, but it is not probable or reasonably estimable, we disclose the nature of the loss contingency and an estimate of the possible loss or range of loss, as applicable. Any adjustment made to a loss contingency accrual during an accounting period affects the earnings of the period.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenue and expense during the reporting period. Additionally, we frequently undertake significant technological innovation on certain of our long-term contracts, involving performance risk that may result in delayed delivery of product and/or revenue and gross profit variation due to changes in the ultimate costs of these contracts versus estimates. On an ongoing basis, we evaluate our estimates including those related to receivables, inventory, property and equipment, intangible assets, warranties, accrued expenses, stock-based compensation, income taxes and capitalized software, among others. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, and in August 2015, issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date
, which amended ASU No. 2014-09 as to the effective date of the standard. The guidance, as amended, clarifies the principles for revenue recognition in transactions involving contracts with customers. Determination of when and how revenue is recognized will be based on a five-step analysis. The new guidance will require revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The mandatory effective date of the new revenue recognition standard was deferred by one year under ASU No. 2015-14.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which amends ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to clarify principal versus agent guidance in situations in which a revenue transaction involves a third party in providing goods or services to a customer. In such circumstances, an entity must determine whether the nature of its promise to the customer is to provide the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for the third party to provide the underlying goods or services (i.e., the entity is the agent in the transaction). To determine the nature of its promise to the customer, the entity must first identify each specified good or service to be provided to the customer and then (before transferring it) assess whether it controls each specified good or service. The new guidance clarifies how an entity should identify the unit of accounting (the specified good or service) for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, to amend ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable from other promises in the a contract and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost or an expense. The updated guidance also clarifies how an entity would evaluate the nature of its promise in granting a license of intellectual property, which determines whether the entity recognizes revenue over time or at a point in time, and other aspects relative to licensing.
In May 2016, the FASB issued ASU No. 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements
at the March 3, 2016 EITF Meeting (SEC Update)
, which rescinds previous guidance on revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer.
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which amends ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. The amendment also added an expedient to ease transition for contracts that were modified prior to adoption of the new revenue standard, clarifies how an entity should evaluate the collectibility threshold and when an entity can recognize non-refundable considerations received as revenue if the arrangement does not meet the standard's contract criteria. The amendment clarifies that fair value of non-cash considerations should be measured at contract inception when determining the transaction price and allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses the policy.
In December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which amends ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, providing thirteen corrections and improvements to the new revenue standard.
The aforementioned revenue standards and amendments are required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The new standards and amendments may be adopted retrospectively for all periods presented, or adopted using a modified retrospective approach. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, and interim periods within that annual period, which is our fiscal year 2018. We intend to adopt the aforementioned revenue standards and amendments for our fiscal year 2019. We currently anticipate utilizing the modified retrospective approach as our method of adoption. We have substantially completed our review and analysis of our sales channels, selected contracts, policies and practices as compared to the new guidance and continue to work through implementation steps. We continue to evaluate our procedural and related system requirements related to the provisions of this standard. We are updating and rewriting our revenue recognition accounting policy as needed to reflect the requirements of this standard. In fiscal year 2018, we expect to draft our new revenue disclosures. We anticipate the revenue recognition methodology for the majority of our products and contracts will remain substantially unchanged; however, the methodology and timing of revenue recognition for a portion of our contracts will likely change. Certain contracts may have a delay in revenue recognition until the customer takes control of the product, while certain products and contracts may accelerate revenue recognition to recognize revenue over the life of the contract. We are currently evaluating the impact that these changes in methodology will have on our consolidated financial statements.
Other
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under current inventory standards, the market value requires consideration of replacement cost, net realizable value and net realizable value less an approximately normal profit margin. The new guidance replaces market with net realizable value defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period, which is our fiscal year 2018. The amendment is to be applied prospectively with early adoption permitted. The adoption of this guidance will have no impact on our financial condition, results of operations or disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 824)
, which requires lessees to recognize a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability on the balance sheet for all leases with terms greater than 12 months. Lessees can forgo recognizing a right-of-use asset and lease liability with lease terms of 12 months or less on the balance sheet through accounting policy elections as long as the lease does not include options to purchase the underlying assets that are reasonably certain to be exercised. The new guidance also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements. The standard is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is our fiscal year 2020. The amendment is to be applied using a modified retrospective approach, which includes a number of optional practical expedients, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures.
In March 2016, the FASB issued ASU No. 2016-04,
Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products
, which amends existing guidance on extinguishing financial liabilities
for certain prepaid stored-value products. The new standard requires recognition of the expected breakage amount or the value that is ultimately not redeemed either proportionally in earnings as redemption occurs or when redemption is remote, if issuers are not entitled to breakage. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied either using a modified retrospective approach by recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the year or retrospectively to each period presented. Early adoption is permitted. We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial condition, results of operations or disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which is intended to simplify certain aspects of accounting for share-based compensation arrangements, including modifications to the accounting for income taxes upon vesting or settlement of awards, employer tax withholding on share-based compensation, classification on the statement of cash flows and forfeitures. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period, which is our fiscal year 2018. Certain aspects of the amendment are to be applied using a retrospective transition method, while others are to be applied either prospectively or retrospectively. Early adoption is permitted, but all amendments must be adopted in the same period and must be reflected as of the beginning of the fiscal year that includes the interim period. We are finalizing the impact of adoption; however, we do not expect the adoption of any of the provisions within this standard to have a significant impact on our financial condition, results of operations or disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which changes the accounting for credit losses on instruments measured at amortized cost by adding an impairment model that is based on expected losses rather than incurred losses. An entity will recognize as an allowance its estimate of expected credit losses, which is believed to result in more timely recognition of such losses as the standard eliminates the probable initial recognition threshold. The standard is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within that annual period, which is our fiscal year 2021. The amendment is to be applied using a modified-retrospective approach as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which adopted. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is our fiscal year 2020. We have not yet evaluated the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on the classification of certain cash receipts and cash payments with the objective of reducing diversity in practice. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied retrospectively, but if impracticable to do so, the amendments related to that issue would be applied prospectively. Early adoption is permitted. We have not yet evaluated the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory
, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory when the transfer occurs. Current guidance requires companies to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied using a modified retrospective approach. Early adoption is permitted as of the beginning of an annual period. We have not yet evaluated the impact of adoption of this guidance will have on our financial condition, results of operations or disclosures.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The new guidance clarifies that a business must also include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in Accounting Standards Codification (ASC) 606,
Revenue from Contracts with Customers
. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied prospectively with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial condition, results of operations or disclosures as the standard only applies to businesses acquired after the adoption date.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income
statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period with only the service cost component eligible for capitalization in assets. Other components of the net periodic benefit cost are to be stated separately from the line items that include the service cost and outside of operating income. These components are not eligible for capitalization in assets. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied retrospectively. Early adoption is permitted as of the beginning of an annual period. We have not yet evaluated the impact of adoption of this guidance will have on our financial condition, results of operations or disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Modification guidance must be applied if the fair value, vesting conditions or classification of the awards changes. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied prospectively to an award modified on or after the adoption date, with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial condition, results of operations or disclosures.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The standard is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is our fiscal year 2020. The amendment is to be applied using a modified retrospective approach, with early adoption permitted. We have not yet evaluated the impact of adoption of this guidance will have on our financial condition, results of operations or disclosures.
Adopted
In July 2015, the FASB issued ASU No. 2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force)
. The standard allows for a plan with a fiscal year end that does not coincide with the end of the calendar month to measure its investments and investment-related accounts using the month end closest to its fiscal year end. In previous guidance, the measurement date was required to coincide with the fiscal year end. We adopted ASU No. 2015-12 on a prospective basis for the annual period ended September 30, 2017. The adoption of the standard had no effect on our fiscal year 2017 financial condition, results of operations or disclosures as the measurement date and fiscal year end coincide.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under the existing business combination standard, an acquirer reports provisional amounts with respect to acquired assets and liabilities when their measurements are incomplete as of the end of the reporting period. The provisional amounts and the related impact on earnings are adjusted by restating prior period financial statements during the measurement period which cannot exceed one year from the date of acquisition. The new guidance requires that the cumulative impact of a measurement-period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified, eliminating the requirement to restate prior period financial statements. The new guidance also requires disclosure of the nature and amount of measurement-period adjustments as well as information with respect to the portion of the adjustments recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustments to provisional amounts had been recognized as of the acquisition date. We adopted ASU No. 2015-16 on a prospective basis for the annual period ended September 30, 2017, including interim periods within that annual period. The adoption of the standard had no material effect on our financial condition, results of operations or disclosures for fiscal year 2017.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge or Step 2 of the goodwill impairment analysis. Instead, an impairment charge will be recorded based on the excess of a reporting unit's carrying amount over its fair value using Step 1 of the goodwill impairment analysis. We early adopted ASU No. 2017-04 on a prospective basis for our annual and interim goodwill impairment testing performed in the fourth quarter of fiscal year 2017. The adoption of this standard had no effect on our financial condition, results of operations or disclosures as no impairment of goodwill was identified in fiscal year 2017.
NOTE 2 CAPITAL ASSETS
Property and Equipment
Property and equipment, net are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Land and improvements
|
|
$
|
2,867
|
|
|
$
|
2,865
|
|
Buildings and improvements
|
|
60,340
|
|
|
59,350
|
|
Machinery and equipment
|
|
196,621
|
|
|
189,406
|
|
Assets held under capital leases
|
|
2,747
|
|
|
—
|
|
Total property and equipment
|
|
262,575
|
|
|
251,621
|
|
Less: Accumulated depreciation
|
|
(162,645
|
)
|
|
(150,832
|
)
|
Total property and equipment, net
|
|
$
|
99,930
|
|
|
$
|
100,789
|
|
Goodwill
Changes to the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Test
|
|
Sensors
|
|
Total
|
Balance, October 3, 2015
|
|
$
|
26,243
|
|
|
$
|
1,434
|
|
|
$
|
27,677
|
|
Acquisitions
1
|
|
—
|
|
|
343,242
|
|
|
343,242
|
|
Adjustment related to finalization of purchase accounting
1
|
|
(530
|
)
|
|
—
|
|
|
(530
|
)
|
Currency translation gain (loss)
|
|
(691
|
)
|
|
2
|
|
|
(689
|
)
|
Balance, October 1, 2016
|
|
$
|
25,022
|
|
|
$
|
344,678
|
|
|
$
|
369,700
|
|
Adjustment related to finalization of purchase accounting
1
|
|
—
|
|
|
(64
|
)
|
|
(64
|
)
|
Currency translation gain (loss)
|
|
87
|
|
|
39
|
|
|
126
|
|
Balance, September 30, 2017
|
|
$
|
25,109
|
|
|
$
|
344,653
|
|
|
$
|
369,762
|
|
|
|
1
|
See Note 13 for additional information regarding acquisitions.
|
See Note 1 for additional information on our goodwill impairment analysis.
Intangible Assets
Intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(in thousands)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Weighted
Average
Useful Life
(in Years)
|
Software development costs
|
|
$
|
26,083
|
|
|
$
|
(15,830
|
)
|
|
$
|
10,253
|
|
|
5.9
|
Technology and patents
|
|
46,731
|
|
|
(9,399
|
)
|
|
37,332
|
|
|
14.9
|
Trademarks and trade names
|
|
6,936
|
|
|
(2,484
|
)
|
|
4,452
|
|
|
25.6
|
Customer lists
|
|
157,016
|
|
|
(13,359
|
)
|
|
143,657
|
|
|
15.8
|
Land-use rights
|
|
2,377
|
|
|
(492
|
)
|
|
1,885
|
|
|
26.4
|
Trade names
|
|
57,500
|
|
|
—
|
|
|
57,500
|
|
|
Indefinite
|
Total intangible assets
|
|
$
|
296,643
|
|
|
$
|
(41,564
|
)
|
|
$
|
255,079
|
|
|
15.0
|
|
|
October 1, 2016
|
(in thousands)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Weighted
Average
Useful Life
(in Years)
|
Software development costs
|
|
$
|
23,184
|
|
|
$
|
(14,938
|
)
|
|
$
|
8,246
|
|
|
6.0
|
Technology and patents
|
|
46,672
|
|
|
(6,360
|
)
|
|
40,312
|
|
|
14.9
|
Trademarks and trade names
|
|
6,903
|
|
|
(1,911
|
)
|
|
4,992
|
|
|
25.5
|
Customer lists
|
|
156,987
|
|
|
(3,372
|
)
|
|
153,615
|
|
|
15.8
|
Land-use rights
|
|
2,369
|
|
|
(245
|
)
|
|
2,124
|
|
|
26.3
|
Trade names
|
|
57,500
|
|
|
—
|
|
|
57,500
|
|
|
Indefinite
|
Total intangible assets
|
|
$
|
293,615
|
|
|
$
|
(26,826
|
)
|
|
$
|
266,789
|
|
|
15.1
|
Amortization expense recognized during fiscal years
2017
,
2016
and
2015
was
$14,665
,
$5,517
and
$4,058
, respectively.
See Note 1 for additional information on our intangible asset impairment analysis.
Estimated future amortization expense related to finite-lived intangible assets is as follows:
|
|
|
|
|
Fiscal Year
|
Amortization Expense
(in thousands)
|
|
2018
|
$
|
15,422
|
|
2019
|
15,638
|
|
2020
|
15,357
|
|
2021
|
15,357
|
|
2022
|
15,174
|
|
Thereafter
|
120,631
|
|
Future amortization amounts presented above are estimates. Actual future amortization expense may be different due to fluctuations in foreign currency exchange rates, future acquisitions, impairments, changes in amortization periods or other factors.
NOTE 3
FAIR VALUE MEASUREMENTS
In determining the fair value of financial assets and liabilities, we currently utilize market data or other assumptions that we believe market participants would use in pricing the asset or liability in the principal or most advantageous market and adjust for non-performance and/or other risk associated with the company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
|
|
•
|
Level 1:
Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to us at the measurement date.
|
|
|
•
|
Level 2:
Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
•
|
Level 3:
Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
|
The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities subject to fair value measurements on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts
1
|
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
150
|
|
Interest rate swaps
2
|
|
—
|
|
|
3,499
|
|
|
—
|
|
|
3,499
|
|
Total assets
|
|
—
|
|
|
3,649
|
|
|
—
|
|
|
3,649
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts
1
|
|
—
|
|
|
551
|
|
|
—
|
|
|
551
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
551
|
|
|
$
|
—
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts
1
|
|
$
|
—
|
|
|
$
|
149
|
|
|
$
|
—
|
|
|
$
|
149
|
|
Total assets
|
|
—
|
|
|
149
|
|
|
—
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts
1
|
|
—
|
|
|
711
|
|
|
—
|
|
|
711
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
711
|
|
|
|
1
|
Based on observable market transactions of spot currency rates and forward currency rates on equivalently-termed instruments. Carrying amounts of the financial assets and liabilities are equal to the fair value. See Note 4 for additional information on derivative financial instruments.
|
|
|
2
|
Based on London Interbank Offered Rate (LIBOR) and spot rates. Carrying amount of the financial asset is equal to the fair value. See Note 4 for additional information on derivative financial instruments.
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain financial instruments at fair value on a nonrecurring basis. These assets primarily include goodwill, intangible assets and other long-lived assets acquired either as part of a business acquisition, individually or with a group of other assets, as well as property and equipment. These assets were initially measured and recognized at amounts equal to the fair value determined as of the date of acquisition or purchase subject to changes in value only for foreign currency translation. Periodically, these assets are tested for impairment, by comparing their respective carrying values to the estimated fair value of the reporting unit or asset group in which they reside. In the event any of these assets were to become impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. Fair value measurements of reporting units are estimated using an income approach involving discounted or undiscounted cash flow models that contain certain Level 3 inputs requiring management judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, working capital requirements and new product introductions. Fair value measurements of the reporting units associated with our goodwill balances are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment
testing if a quantitative analysis is performed. Fair value measurements associated with our indefinite-lived intangible assets are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment testing if a quantitative analysis is required. Fair value measurements associated with our intangible assets, other long-lived assets and property and equipment are estimated when events or changes in circumstances such as market value, asset utilization, physical change, legal factors or other matters indicate that the carrying value may not be recoverable. See Note 1 and Note 2 for additional information on goodwill, indefinite-lived intangible assets, other long-lived assets, property and equipment and impairment testing.
Assets and Liabilities Not Measured at Fair Value
Certain financial instruments are not measured at fair value but are recorded at carrying amounts approximating fair value based on their short-term nature or variable interest rate. These financial instruments include cash and cash equivalents, accounts receivable and accounts payable.
Other Financial Instruments
Other financial instruments subject to fair value measurements include debt, which is recorded at carrying value in the Consolidated Balance Sheets. The carrying amount and estimated fair values of our debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Debt component of tangible equity units
3
|
|
$
|
16,443
|
|
|
$
|
19,844
|
|
|
$
|
—
|
|
|
$
|
19,844
|
|
|
$
|
—
|
|
Tranche B term loan
4
|
|
455,400
|
|
|
457,085
|
|
|
—
|
|
|
457,085
|
|
|
—
|
|
Total debt
|
|
$
|
471,843
|
|
|
$
|
476,929
|
|
|
$
|
—
|
|
|
$
|
476,929
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
(in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Debt component of tangible equity units
3
|
|
$
|
24,985
|
|
|
$
|
28,080
|
|
|
$
|
—
|
|
|
$
|
28,080
|
|
|
$
|
—
|
|
Tranche B term loan
4
|
|
460,000
|
|
|
465,465
|
|
|
—
|
|
|
465,465
|
|
|
—
|
|
Total debt
|
|
$
|
484,985
|
|
|
$
|
493,545
|
|
|
$
|
—
|
|
|
$
|
493,545
|
|
|
$
|
—
|
|
|
|
3
|
The fair value of the TEUs is based on the most recently quoted price for the outstanding securities, adjusted for any known significant deviations in value. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange. See Note 9 for additional information on the TEUs.
|
|
|
4
|
The fair value of the tranche B term loan is based on the most recently quoted market price for the outstanding debt instrument, adjusted for any known significant deviations in value. The estimated fair value of the debt obligation is not necessarily indicative of the amount that would be realized in a current market exchange. See Note 5 for additional information on debt instruments.
|
NOTE 4
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Our currency exchange and interest rate swaps are designated as cash flow hedges and qualify as hedging instruments. We also have derivatives which are not designated as cash flow hedges and, therefore, are accounted for and reported under foreign currency guidance. Regardless of designation for accounting purposes, we believe all of our derivative instruments are hedges of transactional risk exposures. The fair value of our outstanding designated and undesignated derivative assets and liabilities are reported in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(in thousands)
|
|
Prepaid Expenses
and Other
Current Assets
|
|
Other Accrued
Liabilities
|
Designated hedge derivatives
|
|
|
|
|
|
|
Cash flow derivatives
|
|
$
|
73
|
|
|
$
|
551
|
|
Interest rate swaps
|
|
3,499
|
|
|
—
|
|
Total designated hedge derivatives
|
|
3,572
|
|
|
551
|
|
Undesignated hedge derivatives
|
|
|
|
|
|
|
Balance sheet derivatives
|
|
77
|
|
|
—
|
|
Total hedge derivatives
|
|
$
|
3,649
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
(in thousands)
|
|
Prepaid Expenses
and Other
Current Assets
|
|
Other Accrued
Liabilities
|
Designated hedge derivatives
|
|
|
|
|
|
|
Cash flow derivatives
|
|
$
|
149
|
|
|
$
|
633
|
|
Undesignated hedge derivatives
|
|
|
|
|
|
|
Balance sheet derivatives
|
|
—
|
|
|
78
|
|
Total hedge derivatives
|
|
$
|
149
|
|
|
$
|
711
|
|
A reconciliation of the net fair value of foreign exchange cash flow hedge assets and liabilities subject to master netting arrangements that are recorded in the Consolidated Balance Sheets to the net fair value that could have been reported in the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gross
Recognized
Amount
|
|
Gross
Offset
Amount
|
|
Net
Amount
Presented
|
|
Derivatives
Subject to
Offset
|
|
Cash
Collateral
Received
|
|
Net
Amount
1
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
3,572
|
|
|
$
|
—
|
|
|
$
|
3,572
|
|
|
$
|
(210
|
)
|
|
$
|
—
|
|
|
$
|
3,362
|
|
Liabilities
|
|
551
|
|
|
—
|
|
|
551
|
|
|
(210
|
)
|
|
—
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
149
|
|
|
$
|
—
|
|
|
$
|
149
|
|
|
$
|
(147
|
)
|
|
$
|
—
|
|
|
$
|
2
|
|
Liabilities
|
|
633
|
|
|
—
|
|
|
633
|
|
|
(147
|
)
|
|
—
|
|
|
486
|
|
|
|
1
|
Net fair value of foreign exchange cash flow hedge assets / liabilities that could have been reported in the Consolidated Balance Sheets.
|
Cash Flow Hedging – Currency Risks
Currency exchange contracts utilized to maintain the functional currency value of expected financial transactions denominated in foreign currencies are designated as cash flow hedges. Qualifying gains and losses related to changes in the market value of these contracts are reported as a component of accumulated other comprehensive income (loss) (AOCI) within shareholders' equity in the Consolidated Balance Sheets and reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The effective portion of the cash flow hedges represents the change in fair value of the hedge that offsets the change in the functional currency value of the hedged item. We periodically assess whether our currency exchange contracts are effective and, when a contract is determined to be no longer effective as a hedge, we discontinue hedge accounting prospectively. Subsequent changes in the market value of ineffective currency exchange contracts are recognized as an increase or decrease in revenue in the Consolidated Statements of Income as that is the same line item in which the underlying hedged transaction is reported.
As of
September 30, 2017
and
October 1, 2016
, we had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of
$29,136
and
$29,092
, respectively. Upon netting offsetting contracts to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding was
$24,093
and
$24,884
at
September 30, 2017
and
October 1, 2016
, respectively. As of
September 30, 2017
, the net market value of the foreign currency exchange contracts was a net liability of
$478
, consisting of
$73
in assets and
$551
in liabilities. As of
October 1, 2016
, the net market value of the foreign currency exchange contracts was a net liability of
$484
, consisting of
$149
in assets and
$633
in liabilities.
The pretax amounts recognized in AOCI on currency exchange contracts, including (gains) losses reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (loss) (OCI), are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Beginning unrealized net gain (loss) in AOCI
|
|
$
|
(400
|
)
|
|
$
|
608
|
|
Net (gain) loss reclassified into revenue (effective portion)
|
|
(459
|
)
|
|
334
|
|
Net gain (loss) recognized in OCI (effective portion)
|
|
416
|
|
|
(1,342
|
)
|
Ending unrealized net gain (loss) in AOCI
|
|
$
|
(443
|
)
|
|
$
|
(400
|
)
|
The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was
$8
in the fiscal year ended
September 30, 2017
and less than
$1
in each of the fiscal years ended
October 1, 2016
and
October 3, 2015
. As of
September 30, 2017
, the amount projected to be reclassified from AOCI into earnings in the next
12 months
was a net loss of
$444
. The maximum remaining maturity of any forward or optional contracts at
September 30, 2017
was
1.3 years
.
Interest Rate Swaps
On October 20, 2016, we entered into a floating to fixed interest rate swap agreement to mitigate our exposure to interest rate increases related to a portion of our tranche B term loan facility. The total notional amount of the interest rate swap is
$275,000
as of
September 30, 2017
. The swap agreement expires April 3, 2021. As a result of this agreement, every month we pay fixed interest at
1.256%
in exchange for interest received at one month U.S. LIBOR. The market value of the interest rate swap as of
September 30, 2017
was an asset of
$3,499
. The interest rate swap has been designated as a cash flow hedge. As a result, changes in the fair value of the interest rate swap are recorded in AOCI within shareholders' equity in the Consolidated Balance Sheets.
The pre-tax amounts recognized in AOCI on interest rate swaps, including (gains) losses reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in OCI, are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Beginning unrealized net gain (loss) in AOCI
|
|
$
|
—
|
|
|
$
|
—
|
|
Net (gain) loss reclassified into interest expense (effective portion)
|
|
614
|
|
|
—
|
|
Net gain (loss) recognized in OCI (effective portion)
|
|
2,885
|
|
|
—
|
|
Ending unrealized net gain (loss) in AOCI
|
|
$
|
3,499
|
|
|
$
|
—
|
|
As of
September 30, 2017
, the amount projected to be reclassified from AOCI into earnings in the next
12 months
was a net gain of
$853
.
Foreign Currency Balance Sheet Derivatives
We also use foreign currency derivative contracts to maintain the functional currency value of monetary assets and liabilities denominated in non-functional foreign currencies. The gains and losses related to the changes in the market value of these derivative contracts are included in other income (expense), net in the Consolidated Statements of Income.
As of
September 30, 2017
and
October 1, 2016
, we had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of
$52,208
and
$13,187
, respectively. Upon netting offsetting contracts by counterparty banks to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding at
September 30, 2017
and
October 1, 2016
was
$14,762
and
$1,347
, respectively. As of
September 30, 2017
and
October 1, 2016
, the net market value of the foreign exchange balance sheet derivative contracts was a net asset of
$77
and a net liability of
$78
, respectively.
The net gain (loss) recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Net gain (loss) recognized in other income (expense), net
|
|
$
|
(876
|
)
|
|
$
|
(950
|
)
|
|
$
|
582
|
|
NOTE 5 FINANCING
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Long-term debt
|
|
|
|
|
Tranche B term loan, 1.00% amortizing per year, maturing July 5, 2023
|
|
$
|
455,400
|
|
|
$
|
460,000
|
|
Tangible equity units, 8.75% coupon, maturing July 1, 2019
1
|
|
16,443
|
|
|
24,985
|
|
Capital lease obligations
|
|
2,466
|
|
|
—
|
|
Total long-term debt
|
|
$
|
474,309
|
|
|
$
|
484,985
|
|
Less: Unamortized underwriting discounts, commissions and other expenses
|
|
(12,491
|
)
|
|
(16,843
|
)
|
Less: Current maturities of tranche B term loan debt
2, 3
|
|
(33,600
|
)
|
|
(4,600
|
)
|
Less: Current maturities of TEU debt
2
|
|
(9,152
|
)
|
|
(8,541
|
)
|
Less: Current maturities of capital lease obligations
2
|
|
(522
|
)
|
|
—
|
|
Total long-term debt, less current maturities, net
|
|
$
|
418,544
|
|
|
$
|
455,001
|
|
|
|
1
|
See Note 9 for more information on our TEUs issued in the third quarter of fiscal year 2016.
|
|
|
2
|
In addition to the current maturities above, current maturities of long-term debt, net on the Consolidated Balance Sheets includes the current portion of unamortized underwriting discounts, commissions and other expenses of
$4,179
and
$3,291
as of
September 30, 2017
and
October 1, 2016
, respectively.
|
|
|
3
|
As of
September 30, 2017
, current maturities of tranche B term loan consists of the
1%
annual payment and calculated required annual Excess Cash Flow payment as defined below, as well as planned prepayments. As of
October 1, 2016
, current maturities of tranche B term loan consists of the
1%
annual payment.
|
Tranche B Term Loan and Revolving Credit Facility
In the fourth quarter of fiscal year 2016, we entered into a credit agreement with U.S. Bank National Association and HSBC Bank USA, National Association as Co-documentation Agents, Wells Fargo Bank, National Association as Syndication Agent, JPMorgan Chase Bank, N.A. as Administrative Agent and JP Morgan Chase Bank, N.A. and Wells Fargo Securities, LLC as Joint Bookrunners and Joint Lead Arrangers (the Credit Agreement). The Credit Agreement provides for senior secured credit facilities consisting of a
$120,000
revolving credit facility (the Revolving Credit Facility) which expires on July 5, 2021, and a
$460,000
tranche B term loan facility (the Term Facility) which expires on July 5, 2023. The proceeds of the Revolving Credit Facility can be drawn upon to refinance existing indebtedness and for working capital and other general corporate purposes up to a maximum of
$120,000
. The proceeds of the Term Facility were used for financing the acquisition of PCB. The Term Facility amortizes in equal quarterly installments equal to 1% of the original principal amount.
In the fourth quarter of fiscal year 2017, we completed a repricing of the tranche B term loan through an amendment to the Credit Agreement (Second Credit Agreement Amendment) to reduce the Applicable Rate (as defined in the Credit Agreement) by 100 basis points for both the Term Facility and Revolving Credit Facility and to make certain reductions to the Revolving Credit Facility commitment fee rates. During the fourth quarter of 2017, in connection with the execution of the Second Credit Agreement Amendment, we paid debt financing costs of
$1,770
, of which
$1,147
was expensed in interest expense, net in the Consolidated Income Statements and
$623
was capitalized in current maturities of long-term debt, net; long-term debt, less current maturities, net; and prepaid expenses and other current assets in the Consolidated Balance Sheets. We also recognized non-cash charges of
$503
in interest expense, net in the Consolidated Income Statements for the loss on debt extinguishment resulting from the write-off of existing unamortized debt financing costs.
The primary categories of borrowing include Alternate Base Rate (ABR) Borrowings (ABR Term Loans and ABR Revolving Loans), Swingline Loans and Eurocurrency Borrowing (each as defined in the Credit Agreement). ABR Borrowings and Swingline Loans made in U.S. dollars under the Credit Agreement bear interest at a rate per annum equal to the ABR plus the Applicable Rate. The ABR is defined as the greater of (a) the Prime Rate (as defined in the Credit Agreement) in effect on such day, (b) the New York Federal Reserve Bank Rate (NYFRB Rate) (as defined in the Credit Agreement) in effect on such day plus ½ of
1.00%
, or (c) the Adjusted LIBOR (as defined in the Credit Agreement) for a one-month interest period in dollars on such day plus
1.00%
. The ABR for ABR Term Loans shall not be less than
1.75%
per annum. The Applicable Rate for any ABR Revolving Loans is based upon the leverage ratio applicable on such date. As of
September 30, 2017
, the Applicable Rate was
2.25%
per annum for ABR Term Loans.
Eurocurrency Borrowings made under the Credit Agreement bear interest at a rate per annum equal to the Adjusted LIBOR Rate plus the Applicable Rate. The Adjusted LIBOR Rate is defined as an interest rate per annum equal to (a) the LIBOR Rate for such interest period multiplied by (b) the Statutory Reserve Rate (as defined in the Credit Agreement). The Applicable Rate for any Eurocurrency Revolving Loans is based upon the leverage ratio applicable on such date. The Adjusted LIBOR Rate for Eurocurrency Term Loans shall not be less than
0.75%
per annum. Based on our leverage ratio as of
September 30, 2017
, the Applicable Rate for Eurocurrency Revolving Loans was
4.00%
. As of
September 30, 2017
, the Applicable Rate for Eurocurrency Term Loans was
3.25%
per annum, plus the applicable Adjusted LIBOR rate of
1.24%
. The weighted average interest rate on the Term Facility during fiscal year
2017
was
4.96%
.
As of
September 30, 2017
, there were
no
borrowings against the Revolving Credit Facility, and we had outstanding letters of credit drawn from the credit facility totaling
$37,811
, leaving approximately
$82,189
of unused borrowing capacity. Commitment fees are payable on the unused portion of the Revolving Credit Facility at rates between
0.25%
and
0.40%
based on our leverage ratio. For the fiscal years ended
September 30, 2017
and
October 1, 2016
, commitment fees incurred totaled
$405
and
$271
, respectively.
The Credit Agreement governing the Term Facility requires us to prepay outstanding term loans, subject to certain exceptions, depending on the leverage ratio with (a) up to
50%
of the Company's annual Excess Cash Flow (as defined in the Credit Agreement) and (b)
100%
of the net cash proceeds of (i) certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and (ii) any incurrence or issuance of certain debt, other than debt permitted under the Credit Agreement. We may voluntarily prepay outstanding loans under the Term Facility at any time without premium or penalty. All obligations under the Term Facility are unconditionally guaranteed by certain of the Company's existing wholly owned domestic subsidiaries, and are secured, subject to certain exceptions, by substantially all of the Company's assets and the assets of the Company's subsidiary guarantors.
Under the Credit Agreement, we are subject to customary affirmative and negative covenants, including, among others, restrictions on our ability to incur debt, create liens, dispose of assets, make investments, loans, advances, guarantees and acquisitions, enter into transactions with affiliates, and enter into any restrictive agreements and customary events of default (including payment defaults, covenant defaults, change of control defaults and bankruptcy defaults). The Credit Agreement also contains financial covenants, including the ratio of consolidated total indebtedness to adjusted consolidated earnings before income, taxes, depreciation and amortization (Adjusted EBITDA), as defined in the Credit Agreement, as well as the ratio of Adjusted EBITDA to consolidated interest expense. These covenants restrict our ability to purchase outstanding shares of common stock. As of
September 30, 2017
and
October 1, 2016
, we were in compliance with these financial covenants.
See Note 3 for additional information on the fair value of the tranche B term loan and the TEU debt.
Interest Rate Swaps
On October 20, 2016, in order to mitigate our exposure to interest rate increases on our variable rate debt, we entered into a variable to fixed amortizing interest rate swap. See Note 4 for additional information on derivative financial instruments.
The interest rate swap will be reduced to the following notional amounts over the next five years:
|
|
|
|
|
(in thousands)
|
Notional Amount
|
|
October 3, 2017
|
$
|
255,000
|
|
October 3, 2018
|
225,000
|
|
October 3, 2019
|
180,000
|
|
October 3, 2020
|
125,000
|
|
April 3, 2021
|
—
|
|
Future Maturities of Long-term Debt
Future maturities of long-term debt, excluding unamortized original issue discounts and deferred financing costs, for the next five fiscal years and thereafter are as follows:
|
|
|
|
|
Fiscal Year
|
Future Maturities
4
(in thousands)
|
2018
|
$
|
32,658
|
|
2019
|
12,432
|
|
2020
|
5,161
|
|
2021
|
5,179
|
|
2022
|
4,863
|
|
Thereafter
|
414,016
|
|
|
|
4
|
Includes the
1%
annual payment on the tranche B term loan, calculated required annual Excess Cash Flow prepayment on the tranche B term loan for fiscal year 2017 results due in the first quarter of fiscal year 2018, current maturities of TEU debt and current maturities of capital lease obligations. For fiscal year 2019 and thereafter, excludes any Excess Cash Flow prepayments which may be required under the provisions of the Credit Agreement for the tranche B term loan based on fiscal year 2018 and subsequent fiscal year results because the amount of future prepayments, if any, is not reasonably estimable as of
September 30, 2017
. Capital lease obligations expire on various dates through fiscal year 2022.
|
Letters of Credit and Guarantees
As of
September 30, 2017
, we had outstanding letters of credit and guarantees totaling
$47,086
and
$22,800
, respectively, primarily to bond advance payments and performance guarantees related to customer contracts in Test.
NOTE 6 STOCK-BASED COMPENSATION
We compensate our officers, directors and employees with stock-based compensation under the 2011 Stock Incentive Plan (the 2011 Plan) and the 2017 Stock Incentive Plan (the 2017 Plan) approved by our shareholders and administered under the supervision of our Board of Directors.
During fiscal year 2016, our shareholders approved a
1,500
share increase in the number of shares that could be issued under the 2011 Plan, bringing the aggregate total to
3,800
shares. In the third quarter of fiscal year 2017, the 2017 Plan was approved by our shareholders. The 2017 Plan provides stock incentive awards in the form of stock options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock, performance stock units and other stock awards. Awards under the 2017 Plan may be granted to officers, directors, employees and key service providers. Effective upon approval of the 2017 Plan,
no
new awards may be granted under the 2011 Plan, and carryover activity for forfeitures and cancellations of unvested grants under the 2011 Plan will become available for issuance under the 2017 Plan. In addition to the carryover activity from the 2011 Plan,
1,500
shares are authorized for issuance under the 2017 Plan. As of
September 30, 2017
, a total of
1,566
shares were available for issuance under the 2017 Plan. Shares will be available for issuance under the 2017 Plan until
June 6, 2027
.
In fiscal year 2011, our shareholders approved a 2012 Employee Stock Purchase Plan (the 2012 ESPP) that was effective beginning January 1, 2012. During fiscal years
2017
,
2016
and
2015
, we issued shares of our common stock to participants under the 2012 ESPP. As of
September 30, 2017
, a total of
639
shares were available for issuance under the 2012 ESPP. Shares will be available for issuance under the 2012 ESPP until
December 31, 2021
.
Stock-based Compensation Expense
Stock-based compensation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Stock-based compensation expense by type of award
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
$
|
1,588
|
|
|
$
|
2,436
|
|
|
$
|
2,683
|
|
Employee stock purchase plan
|
|
298
|
|
|
519
|
|
|
239
|
|
Restricted stock and restricted stock units
|
|
3,737
|
|
|
4,203
|
|
|
4,536
|
|
Amounts capitalized as inventory
|
|
(1,444
|
)
|
|
(2,354
|
)
|
|
(1,985
|
)
|
Amounts recognized in income for amounts previously capitalized as inventory
|
|
1,421
|
|
|
2,420
|
|
|
1,878
|
|
Total stock-based compensation included in income from operations
|
|
5,600
|
|
|
7,224
|
|
|
7,351
|
|
Income tax benefit on stock-based compensation
|
|
(1,893
|
)
|
|
(2,421
|
)
|
|
(2,564
|
)
|
Net compensation expense included in net income
|
|
$
|
3,707
|
|
|
$
|
4,803
|
|
|
$
|
4,787
|
|
As of
September 30, 2017
, there was
$2,457
of total unrecognized stock option expense related to non-vested awards, which is expected to be recognized over a weighted average period of approximately
1.2 years
. As of
September 30, 2017
, there was
$6,190
of total unrecognized restricted stock expense related to non-vested awards of restricted stock units, which is expected to be recognized over a weighted average period of approximately
1.2 years
.
Stock Options
Stock options are granted at exercise price equal to the closing market price of our stock on the date of grant. Generally, stock options vest proportionally on the first
three
anniversaries of the grant date and expire, depending on the date of grant,
five
or
seven
years from the grant date.
The fair value of stock options granted under stock-based compensation programs has been estimated as of the date of each grant using the multiple option form of the Black-Scholes valuation model based on the grant price and assumptions regarding the expected grant life, stock price volatility, dividends and risk-free interest rates. Each vesting period of an option award is valued separately, and recognized evenly over the respective vesting period. The weighted average per share fair value of stock options granted during fiscal years
2017
,
2016
and
2015
was
$8.91
,
$11.71
and
$12.16
, respectively.
The weighted average assumptions used to determine fair value of stock options granted were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Expected life (in years)
|
|
4.0
|
|
|
4.1
|
|
|
3.5
|
|
Risk-free interest rate
|
|
1.6
|
%
|
|
1.5
|
%
|
|
1.1
|
%
|
Expected volatility
|
|
29.2
|
%
|
|
26.7
|
%
|
|
27.4
|
%
|
Dividend yield
|
|
2.6
|
%
|
|
2.0
|
%
|
|
1.8
|
%
|
The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. Stock price volatility is estimated based on a historical weekly price observation. The dividend yield assumption is based on the annualized current dividend divided by the share price on the grant date.
Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
(in thousands, except per share data)
|
|
Shares
|
|
WAEP
1
|
|
Shares
|
|
WAEP
1
|
|
Shares
|
|
WAEP
1
|
Options outstanding at beginning of year
|
|
784
|
|
|
$
|
60.34
|
|
|
687
|
|
|
$
|
58.17
|
|
|
634
|
|
|
$
|
53.72
|
|
Granted
|
|
288
|
|
|
$
|
46.35
|
|
|
316
|
|
|
$
|
61.57
|
|
|
172
|
|
|
$
|
67.28
|
|
Exercised
|
|
(112
|
)
|
|
$
|
40.68
|
|
|
(68
|
)
|
|
$
|
41.10
|
|
|
(92
|
)
|
|
$
|
42.88
|
|
Forfeited or expired
|
|
(194
|
)
|
|
$
|
60.74
|
|
|
(151
|
)
|
|
$
|
61.74
|
|
|
(27
|
)
|
|
$
|
63.39
|
|
Options outstanding at end of year
|
|
766
|
|
|
$
|
57.86
|
|
|
784
|
|
|
$
|
60.34
|
|
|
687
|
|
|
$
|
58.17
|
|
Options eligible for exercise at year end
|
|
329
|
|
|
$
|
64.52
|
|
|
331
|
|
|
$
|
56.23
|
|
|
304
|
|
|
$
|
48.56
|
|
|
|
1
|
Weighted Average Exercise Price
|
Options outstanding at
September 30, 2017
had a weighted average remaining contractual term of
5.0 years
and an aggregate intrinsic value of
$1,899
. Options eligible for exercise at
September 30, 2017
had a weighted average remaining contractual term of
3.7 years
and an aggregate intrinsic value of
$18
.
The total intrinsic value of stock options exercised during the fiscal years ended
September 30, 2017
,
October 1, 2016
and
October 3, 2015
was
$1,467
,
$1,082
and
$2,484
, respectively.
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units
We award restricted stock units to directors. The restricted stock units
vest one year from the date of the grant, provided the director continues to serve on the Board of Directors
. The directors are entitled to cash dividend equivalents on restricted stock units, but they do not have voting rights on the unvested shares until they become owners of the shares, unless otherwise approved by the Compensation and Leadership Development Committee of the Board of Directors. Additionally, in fiscal year 2013, we awarded restricted stock to our directors that vest proportionately on the first
three
anniversaries of the grant date. For restricted stock awarded to directors, participants are entitled to cash dividends and voting rights on unvested shares, but the sale and transfer of these shares is restricted during the vesting period. Restricted stock and restricted stock units are valued based on the market value of the shares at the date of grant with the value allocated to expense evenly over the restricted period.
We award restricted stock units to key employees. Awards are valued based on the market value of our stock as of the date of grant with the value recognized as expense evenly over the restricted period. Restricted stock units vest proportionally on the first three anniversaries of the grant date. Participants awarded restricted stock units are not entitled to cash dividends or voting rights on unvested units.
We award performance restricted stock units to key employees. Performance restricted stock units vest
based on attainment of return on invested capital performance targets at the end of one, two and three year performance periods
. Participants awarded performance restricted stock units are not entitled to cash dividends or voting rights on unvested units. Performance restricted stock units are valued based on the market value of our shares as of the date of grant with the value recognized as an expense over the life of the performance period. Once the performance criteria has been met, the value of the performance restricted stock units is finalized.
Restricted stock activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
(in thousands, except per share data)
|
|
Shares
|
|
WAGDFV
2
|
|
Shares
|
|
WAGDFV
2
|
|
Shares
|
|
WAGDFV
2
|
Unvested shares at beginning of year
|
|
—
|
|
|
$
|
—
|
|
|
3
|
|
|
$
|
57.01
|
|
|
9
|
|
|
$
|
54.16
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Vested and released
|
|
—
|
|
|
$
|
—
|
|
|
(3
|
)
|
|
$
|
57.01
|
|
|
(6
|
)
|
|
$
|
53.03
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Unvested shares at end of year
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
3
|
|
|
$
|
57.01
|
|
|
|
2
|
Weighted Average Grant Date Fair Value per Share
|
Restricted stock unit and performance restricted stock unit activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
(in thousands, except per share data)
|
|
Shares
|
|
WAGDFV
3
|
|
Shares
|
|
WAGDFV
3
|
|
Shares
|
|
WAGDFV
3
|
Outstanding at beginning of year
|
|
165
|
|
|
$
|
58.98
|
|
|
119
|
|
|
$
|
64.77
|
|
|
98
|
|
|
$
|
60.51
|
|
Granted
|
|
157
|
|
|
$
|
45.05
|
|
|
114
|
|
|
$
|
55.84
|
|
|
74
|
|
|
$
|
65.93
|
|
Vested and released
|
|
(68
|
)
|
|
$
|
59.07
|
|
|
(47
|
)
|
|
$
|
64.69
|
|
|
(47
|
)
|
|
$
|
57.68
|
|
Forfeited
|
|
(31
|
)
|
|
$
|
53.08
|
|
|
(21
|
)
|
|
$
|
62.15
|
|
|
(6
|
)
|
|
$
|
67.96
|
|
Outstanding at end of year
|
|
223
|
|
|
$
|
49.95
|
|
|
165
|
|
|
$
|
58.98
|
|
|
119
|
|
|
$
|
64.77
|
|
|
|
3
|
Weighted Average Grant Date Fair Value per Share
|
Employee Stock Purchase Plan
Our U.S. employees are eligible to participate in the 2012 ESPP. Employee purchases of our stock are funded through payroll deductions over calendar
six
-month periods. The purchase price is
85%
of the lower of the market price at the beginning or end of the
six
-month period. The shares are required to be held by the employee for at least
eighteen
months subsequent to the purchase. Employee stock purchase plan share awards are valued based on the value of the discount feature plus the fair value of the optional features, which is determined as of the date of grant using the Black-Scholes valuation model. The value of these share awards is allocated to expense evenly over each purchase period.
Two purchase periods closed in fiscal year
2017
with the combined issuance of
25
shares at a weighted average price of
$40.49
per share. In fiscal years
2016
and
2015
, purchases were
24
shares and
16
shares, respectively, with weighted average prices per share of
$44.20
and
$58.96
, respectively.
NOTE 7 EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
We sponsor a defined contribution retirement savings plan subject to the provisions of the Employee Retirement Income Security Act. Employees may contribute a portion of their eligible compensation to the plan on a pretax or after-tax basis. We match a portion of certain employee contributions by contributing cash into the investment options selected by the employees. The total amount contributed by MTS is determined by plan provisions for matching contributions as well as at our discretion. Matching contributions were
75%
of eligible compensation for fiscal years
2017
and
2016
and
50%
of eligible compensation for fiscal year
2015
, up to a maximum of
6%
of compensation subject to Internal Revenue Service (IRS) limitations. Employer matching contributions were
$4,967
,
$4,628
and
$2,732
for fiscal years
2017
,
2016
and
2015
, respectively. We did not make any discretionary contributions under the plan in fiscal years
2017
,
2016
and
2015
.
Defined Benefit Pension Plan
We sponsor a non-contributory, defined benefit pension plan for eligible employees of one of our German subsidiaries. This plan provides benefits based on the employee's years of service and compensation during the years immediately preceding retirement, termination, disability or death, as defined in the plan. We use a September 30 measurement date for this defined benefit pension plan.
We recognize the funded status of the defined benefit pension plan in our Consolidated Balance Sheets, recognize changes in the funded status in the year in which the changes occur through comprehensive income and measure the plan's assets and obligations that determine the plan's funded status as of the end of our fiscal year.
The portion of the pretax amount in AOCI as of
October 1, 2016
that was recognized in earnings during fiscal year
2017
was
$996
. The portion of the pretax amount in AOCI as of
September 30, 2017
that is expected to be recognized as a component of net periodic retirement cost during fiscal year
2018
is
$524
. The actuarial gain in fiscal year
2017
of
$5,214
was primarily a result of the change in the discount rate from
1.28%
in fiscal year
2016
to
1.99%
in fiscal year
2017
.
Changes in benefit obligations and plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Change in benefit obligation
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year
|
|
$
|
34,434
|
|
|
$
|
27,272
|
|
Service cost
|
|
1,426
|
|
|
971
|
|
Interest cost
|
|
431
|
|
|
608
|
|
Actuarial (gain) loss
|
|
(5,214
|
)
|
|
6,123
|
|
Currency translation
|
|
1,866
|
|
|
93
|
|
Benefits paid
|
|
(663
|
)
|
|
(633
|
)
|
Projected benefit obligation, end of year
|
|
$
|
32,280
|
|
|
$
|
34,434
|
|
Change in plan assets
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
19,950
|
|
|
$
|
18,767
|
|
Actual return on plan assets
|
|
1,848
|
|
|
1,119
|
|
Employer contributions
|
|
663
|
|
|
633
|
|
Currency translation
|
|
1,088
|
|
|
64
|
|
Benefits paid
|
|
(663
|
)
|
|
(633
|
)
|
Fair value of plan assets, end of year
|
|
$
|
22,886
|
|
|
$
|
19,950
|
|
The funded status of the defined benefit pension plan and amounts included in our Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Funded status
|
|
|
|
|
|
|
Funded status, end of year
|
|
$
|
(9,394
|
)
|
|
$
|
(14,484
|
)
|
Actuarial net loss in AOCI, pretax
|
|
9,261
|
|
|
15,476
|
|
Net amount recognized
|
|
$
|
(133
|
)
|
|
$
|
992
|
|
Included in Consolidated Balance Sheets
|
|
|
|
|
|
|
Accrued payroll and related costs
|
|
$
|
(806
|
)
|
|
$
|
(740
|
)
|
Defined benefit pension plan obligation
|
|
(8,588
|
)
|
|
(13,744
|
)
|
Deferred income taxes
|
|
2,809
|
|
|
4,685
|
|
AOCI, net of tax
|
|
6,452
|
|
|
10,791
|
|
Net amount recognized
|
|
$
|
(133
|
)
|
|
$
|
992
|
|
The weighted average assumptions used to determine the defined benefit pension plan obligation as of
September 30, 2017
and
October 1, 2016
in the Consolidated Balance Sheets and the net periodic benefit cost for fiscal year
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Discount rate
|
|
1.99
|
%
|
|
1.28
|
%
|
Expected rate of return on plan assets
|
|
5.50
|
%
|
|
5.50
|
%
|
Expected rate of increase in future compensation levels
|
|
3.00
|
%
|
|
3.00
|
%
|
The discount rate is calculated based on zero-coupon bond yields published by the Deutsche Bundesbank for maturities that match the weighted average duration of the pension liability, adjusted for the average credit spread of corporate bond rates above the government bond yields.
The expected rate of return on plan assets represents the weighted average of the expected returns on individual asset categories in the portfolio. We use investment services to assist with determining the overall expected rate of return on plan assets. Factors considered in our determination include historical long-term investment performance and estimates of future long-term returns by asset class.
The overall objective of our investment policy and strategy for the defined benefit pension plan is to maintain sufficient liquidity to pay benefits and minimize the volatility of returns while earning the highest possible rate of return over time to satisfy the benefit obligations. The plan fiduciaries assist us with setting our long-term strategic investment objectives for the defined benefit pension plan assets. The objectives include preserving the funded status of the trust and balancing risk and return. Investment performance and plan asset mix are reviewed periodically.
As of both
September 30, 2017
and
October 1, 2016
, plan assets were invested in a single mutual fund, the underlying assets of which were allocated to fixed income and cash and cash equivalents categories as shown in the table below. Any decisions to change the asset allocation are made by the plan fiduciaries. The investment in equity and fixed income securities has a long-term targeted allocation of assets of
50%
equity and
50%
fixed income.
The actual defined benefit pension plan asset allocations within the balanced mutual fund are as follows:
|
|
|
|
|
|
|
|
|
|
Percentage of Plan Assets
|
|
|
2017
|
|
2016
|
Fixed income securities
1
|
|
71.4
|
%
|
|
75.5
|
%
|
Cash and cash equivalents
2
|
|
28.6
|
%
|
|
24.5
|
%
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
1
|
Fixed income securities are comprised primarily of international government agency and international corporate bonds with investment grade ratings.
|
|
|
2
|
Cash and cash equivalents include deposit accounts holding cash in Euros and other currencies and term deposits primarily held as collateral for equity futures. The market values of the equity and futures are linked to the values of equity indices of developed country markets, including the U.S., Great Britain, Europe, Canada, Switzerland and Japan.
|
The fair value of the defined benefit pension plan assets, which are subject to fair value measurement as described in Note 3, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Mutual fund
1
|
|
$
|
—
|
|
|
$
|
22,886
|
|
|
$
|
—
|
|
|
$
|
22,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Mutual fund
1
|
|
$
|
—
|
|
|
$
|
19,950
|
|
|
$
|
—
|
|
|
$
|
19,950
|
|
|
|
1
|
The fair value of the mutual fund is valued based on closing prices from national exchanges, if the underlying securities are traded on an active market, or fixed income pricing models that use observable market inputs.
|
Net periodic benefit cost for the defined benefit pension plan included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
1,426
|
|
|
$
|
971
|
|
|
$
|
860
|
|
Interest cost
|
|
431
|
|
|
608
|
|
|
634
|
|
Expected return on plan assets
|
|
(1,085
|
)
|
|
(1,027
|
)
|
|
(1,009
|
)
|
Net amortization and deferral
|
|
996
|
|
|
584
|
|
|
501
|
|
Special termination benefits
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
1,768
|
|
|
$
|
1,136
|
|
|
$
|
986
|
|
The accumulated benefit obligation of our defined benefit pension plan as of
September 30, 2017
and
October 1, 2016
was
$29,581
and
$30,716
, respectively.
Future pension benefit payments, which reflect expected future service for the next five fiscal years and the combined five fiscal years thereafter, are as follows:
|
|
|
|
|
Fiscal Year
|
Pension Benefit Payments
(in thousands)
|
2018
|
$
|
806
|
|
2019
|
876
|
|
2020
|
924
|
|
2021
|
1,038
|
|
2022
|
1,107
|
|
2023 through 2027
|
6,152
|
|
Total
|
$
|
10,903
|
|
Other Retirement Plans
Certain of our international subsidiaries have non-contributory, unfunded post-retirement benefit plans that provide retirement benefits for eligible employees and managing directors. Generally, these post-retirement plans provide benefits that accumulate based on years of service and compensation levels. As of
September 30, 2017
and
October 1, 2016
, the aggregate liabilities associated with these post-retirement benefit plans was
$4,585
and
$4,508
, respectively.
NOTE 8 INCOME TAXES
The components of income (loss) before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
(9,658
|
)
|
|
$
|
5,345
|
|
|
$
|
31,827
|
|
Foreign
|
|
32,669
|
|
|
28,167
|
|
|
27,345
|
|
Total income (loss) before income taxes
|
|
$
|
23,011
|
|
|
$
|
33,512
|
|
|
$
|
59,172
|
|
The income tax provision (benefit) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,493
|
)
|
|
$
|
3,169
|
|
|
$
|
4,588
|
|
State
|
|
156
|
|
|
138
|
|
|
527
|
|
Foreign
|
|
11,980
|
|
|
6,712
|
|
|
8,025
|
|
Deferred
|
|
(12,716
|
)
|
|
(4,001
|
)
|
|
570
|
|
Income tax provision (benefit)
|
|
$
|
(2,073
|
)
|
|
$
|
6,018
|
|
|
$
|
13,710
|
|
A reconciliation from the U.S. federal statutory income tax rate to our effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
U.S. federal statutory income tax rate
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Impact from foreign operations
|
|
(10
|
)
|
|
(5
|
)
|
|
(4
|
)
|
State income taxes, net of federal benefit
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
R&D tax credits
|
|
(22
|
)
|
|
(16
|
)
|
|
(8
|
)
|
Domestic production activities deduction
|
|
(10
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Foreign tax credits
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition costs
|
|
(3
|
)
|
|
5
|
|
|
—
|
|
Nondeductible stock option expense and other permanent items
|
|
2
|
|
|
1
|
|
|
1
|
|
Effective income tax rate
|
|
(9
|
)%
|
|
18
|
%
|
|
23
|
%
|
The effective tax rate was
lower
during fiscal year
2017
primarily due to certain discrete benefits of
$2,801
recognized during the third quarter of fiscal year 2017, which consisted of additional U.S. tax benefits for prior fiscal years associated with domestic manufacturing, deductible PCB acquisition-related expenses, and the U.S. R&D tax credit. Excluding the impact of these discrete benefits, the effective tax rate for fiscal year 2017 was
3.2%
, and declined compared to the prior year due to lower income before taxes and a more favorable geographic mix of earnings.
The effective tax rate of
18.0%
during fiscal year 2016 included a
$2,283
discrete tax benefit for retroactive reinstatement of the U.S. R&D tax credit, which was partially offset by a one-time tax cost of
$1,834
associated with nondeductible PCB acquisition-related expenses. Excluding the impact of these items, the effective tax rate for fiscal year 2016 was
19.3%
.
The effective tax rate of
23.2%
during fiscal year 2015 included a discrete tax benefit of
$1,836
due to the resolution of audit matters in connection with the IRS examination of tax years ended October 1, 2011 and September 29, 2012 and a discrete tax benefit of
$2,098
during fiscal year 2015 for retroactive reinstatement of the U.S. R&D tax credit. Excluding the impact of these discrete benefits, the effective tax rate for fiscal year 2015 was
29.8%
.
A summary of the deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
|
|
|
Accrued compensation and benefits
|
|
$
|
13,841
|
|
|
$
|
15,888
|
|
Inventory reserves
|
|
6,550
|
|
|
6,128
|
|
Other assets
|
|
4,920
|
|
|
4,685
|
|
Allowance for doubtful accounts
|
|
1,766
|
|
|
1,488
|
|
Net operating loss carryovers
|
|
227
|
|
|
140
|
|
State and foreign tax credit carryovers
|
|
3,358
|
|
|
1,249
|
|
Research and development tax credit carryovers
|
|
2,231
|
|
|
1,540
|
|
Unrealized derivative instrument gains
|
|
—
|
|
|
185
|
|
Total deferred tax asset before valuation allowance
|
|
32,893
|
|
|
31,303
|
|
Less valuation allowance
|
|
(3,487
|
)
|
|
(3,009
|
)
|
Total deferred tax assets
|
|
29,406
|
|
|
$
|
28,294
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Property and equipment
|
|
13,382
|
|
|
$
|
15,128
|
|
Foreign deferred revenue and other
|
|
3,009
|
|
|
3,320
|
|
Intangible assets
|
|
83,207
|
|
|
90,450
|
|
Unrealized derivative instrument gains
|
|
1,233
|
|
|
—
|
|
Total deferred tax liabilities
|
|
100,831
|
|
|
$
|
108,898
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(71,425
|
)
|
|
$
|
(80,604
|
)
|
As of
September 30, 2017
, we had a Minnesota R&D tax credit carryover of
$2,231
, which may be carried forward
fifteen
years. We have determined that the benefit of this tax credit is not likely to be realized before it expires and have recorded a full valuation allowance against this deferred tax asset. As of
September 30, 2017
, we had New York and North Carolina investment tax credit carryovers of
$1,224
, which we acquired as part of the PCB acquisition. We have determined that the benefit of these state tax credit carryovers is not likely to be recognized and we have recorded a full valuation allowance against this deferred tax asset.
During fiscal year 2017, we repatriated
$15,272
of current earnings from our German and Japanese subsidiaries. We recorded
$11
of tax expense during fiscal year 2017 related to these repatriations. During fiscal year 2016, we repatriated
$10,324
of earnings from our German and Japanese subsidiaries. We recorded a
$112
tax benefit during fiscal year 2016 related to these repatriations. During fiscal year 2015, we repatriated
$9,194
of current earnings from our German and Japanese subsidiaries. We recorded a
$1,057
tax benefit during fiscal year 2015 related to these repatriations.
We have not recognized a deferred tax liability for the undistributed earnings of certain foreign operations because those subsidiaries have invested or will invest the undistributed earnings indefinitely. As of
September 30, 2017
and
October 1, 2016
, undistributed earnings were
$111,717
and
$93,510
, respectively. Because of the availability of U.S. foreign tax credits, it is impracticable for us to determine the amount of U.S. federal tax liability that would be payable if these earnings were not indefinitely reinvested. Deferred taxes are recorded for earnings of foreign operations when we determine that such earnings are no longer indefinitely reinvested.
A summary of changes to our liability for unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
Beginning liability for unrecognized tax benefits
|
|
$
|
6,232
|
|
|
$
|
5,649
|
|
Increase due to tax positions related to the current year
|
|
852
|
|
|
269
|
|
Increase (decrease) due to tax positions related to prior years
|
|
189
|
|
|
500
|
|
Decrease due to settlements with tax authorities
|
|
(493
|
)
|
|
—
|
|
Decrease due to lapse of statute of limitations
|
|
(931
|
)
|
|
(186
|
)
|
Exchange rate change
|
|
—
|
|
|
—
|
|
Ending liability for unrecognized tax benefits
|
|
$
|
5,849
|
|
|
$
|
6,232
|
|
Included in the liability of unrecognized tax benefits as of
September 30, 2017
and
October 1, 2016
are potential benefits of
$3,234
and
$3,429
, respectively, that, if recognized, would affect the effective tax rate.
As of
September 30, 2017
and
October 1, 2016
, we have accrued interest related to uncertain income tax positions of approximately
$404
and
$519
, respectively. As of
September 30, 2017
and
October 1, 2016
,
no
accrual for penalties related to uncertain tax positions existed. Interest and penalties related to uncertain tax positions are included in interest expense, net and general and administrative expense, respectively, on the Consolidated Statements of Income.
We are subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. We are no longer subject to U.S. federal tax examinations for fiscal years before 2014 and with limited exceptions, state and foreign income tax examinations for fiscal years before 2011. During fiscal year 2015, the IRS completed the audit of our consolidated income tax returns for fiscal years 2011 and 2012. During fiscal year 2017, the German tax authorities concluded an audit of our German subsidiaries' fiscal years 2012, 2013 and 2014 income tax returns. As of
September 30, 2017
, we do not expect significant changes in the amount of unrecognized tax benefits for our U.S. or foreign subsidiaries during the next 12 months.
As of
September 30, 2017
and
October 1, 2016
, we were expected to receive income tax refunds within the next fiscal year. As a result, we recognized a current income tax receivable of
$5,392
and
$3,238
as of
September 30, 2017
and
October 1, 2016
, respectively, which is included in prepaid expenses and other current assets in the Consolidated Balance Sheets.
NOTE 9 SHAREHOLDERS' EQUITY
(Dollars and shares in thousands, except per share and per TEU data)
Share Issuance
During the third quarter of fiscal year 2016, we issued
1,897
shares of our common stock at
$42.00
per share in a registered public offering primarily to finance the acquisition of PCB, to repay amounts outstanding under our existing revolving credit facility and to pay related costs, fees and expenses. Total net proceeds for fiscal year 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Total
|
Public offering
|
$
|
474
|
|
|
$
|
79,221
|
|
|
$
|
79,695
|
|
Less: Underwriting discounts and commissions
|
—
|
|
|
(4,782
|
)
|
|
(4,782
|
)
|
Less: Other expenses
1
|
—
|
|
|
(612
|
)
|
|
(612
|
)
|
Issuance of common stock, net
|
$
|
474
|
|
|
$
|
73,827
|
|
|
$
|
74,301
|
|
|
|
1
|
Other expenses include direct and incremental costs related to the issuance of the common stock.
|
Tangible Equity Units
During the third quarter of fiscal year 2016, we issued
1,150
TEUs in a registered public offering primarily to finance the acquisition of PCB, to repay amounts outstanding under our existing revolving credit facility and to pay related costs, fees and expenses. Total proceeds, net of underwriting discounts, commissions and other expenses were
$110,926
. Each TEU has a stated amount of
$100
per TEU and is comprised of a prepaid stock purchase contract and a senior amortizing note having a final installment payment date of July 1, 2019. We allocated the proceeds from the issuance of the TEUs between equity and debt based on the relative fair values of the respective components of each TEU. The fair value of the prepaid stock purchase contracts, net of underwriting discounts, commissions and other expenses, was recorded in additional paid-in capital in the Consolidated Balance Sheets. The fair value of the senior amortizing notes, net of underwriting discounts, commissions and other expenses, was split between current maturities of long-term debt, net and long-term debt, less current maturities, net in the Consolidated Balance Sheets. Underwriting discounts, commissions and other costs directly associated with the TEU-related debt are amortized using the effective interest rate method over the three-year term of the instrument.
The aggregate values assigned upon issuance to each component of the TEUs, based on the relative fair value of the respective components, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except fair value price per TEU)
|
Equity Component
|
|
Debt Component
|
|
Total
|
Fair value price per TEU
2
|
$
|
76.19
|
|
|
$
|
23.81
|
|
|
$
|
100.00
|
|
Gross proceeds
|
$
|
87,614
|
|
|
$
|
27,386
|
|
|
$
|
115,000
|
|
Less: Underwriting discounts and commissions
|
(2,628
|
)
|
|
(822
|
)
|
|
(3,450
|
)
|
Less: Other expenses
3
|
(475
|
)
|
|
(149
|
)
|
|
(624
|
)
|
Issuance of TEUs, net
|
$
|
84,511
|
|
|
$
|
26,415
|
|
|
$
|
110,926
|
|
|
|
2
|
The fair value price allocation between equity and debt for each TEU was determined using a discounted cash flow model.
|
|
|
3
|
Other expenses include direct and incremental costs related to the issuance of the TEUs.
|
Equity Component
Unless converted earlier at the option of the holder, each prepaid stock purchase contract will automatically settle on July 1, 2019. If converted prior to the automatic settlement date at the option the holder, the minimum of
1.9841
shares of our common stock are delivered to the holder of each prepaid stock purchase contract. On the automatic settlement date, a minimum of
1.9841
shares and a maximum of
2.3810
shares of our common stock, subject to adjustment based upon the applicable market value discussed below, will be delivered to the holder of each prepaid stock purchase contract at the settlement date.
The number of shares of our common stock issuable upon settlement of each purchase contract on July 1, 2019 will be determined as follows:
|
|
•
|
if the applicable market value is equal to or greater than the threshold appreciation price of
$50.40
per share, holders will receive
1.9841
shares of common stock per purchase contract, or the minimum settlement rate;
|
|
|
•
|
if the applicable market value is greater than the reference price of
$42.00
per share, but less than the threshold appreciation price of
$50.40
per share, holders will receive a number of shares of common stock equal to
$100
per TEU divided by the applicable market value; or
|
|
|
•
|
if the applicable market value is less than or equal to the reference price of
$42.00
per share, holders will receive
2.3810
shares of common stock per purchase contract, or the maximum settlement rate.
|
The "applicable market value" is defined as the average of the daily volume-weighted average price of the common stock on each of the
20
consecutive trading days beginning on, and including, the
23
rd scheduled trading day immediately preceding July 1, 2019.
During fiscal year 2017, certain holders of our TEUs elected to early convert the equity component on
473
of our outstanding TEUs at the minimum conversion rate of
1.9841
which resulted in the issuance of
939
shares of our common stock. There were
677
and
1,150
units of the equity component of TEUs outstanding as of
September 30, 2017
and
October 1, 2016
, respectively.
Debt Component
The senior amortizing note was issued with an initial principal amount of
$27,386
, or
$23.8136
per TEU. Equal quarterly cash installments of
$2.1875
per amortizing note (except for the October 1, 2016 installment payment, which was
$2.5764
per amortizing note) will be paid, which in the aggregate will be equivalent to a
8.75%
cash distribution per year with respect to each
$100
stated amount per TEU. Each installment will constitute a payment of interest and partial repayment of principal.
Earnings Per Common Share
The TEUs have a dilutive effect on our earnings per share. The
1.9841
minimum shares to be issued are included in the calculation of basic weighted average shares outstanding. The
0.3969
difference between the minimum shares and the
2.3810
maximum shares is potentially dilutive, and accordingly, is included in our diluted earnings per share on a pro rata basis to the extent the applicable market value is higher than the reference price but less than the threshold appreciation price. See Note 1 for additional information regarding the calculation of earnings per share.
Capped Calls
In connection with the pricing of the TEUs sold in our public offering in fiscal year 2016, we purchased capped calls from third party banking institutions (Capped Calls) for
$7,935
. The initial Capped Calls were for
2,282
equivalent shares of our common stock with a strike price of
$50.40
, a cap price of
$58.80
and an expiration date of July 1, 2019 (Capped Call Expiration). The
value of the Capped Calls is settled with shares of our common stock, based on the approximate market value of our common stock at such time, and may be settled as the TEUs are early converted or settled upon Capped Call Expiration.
During fiscal year 2017, we settled approximately
10%
of the Capped Calls, which resulted in us receiving and retiring
12
shares of our common stock. As of September 30, 2017, the range of shares of our common stock to be received under the outstanding Capped Calls was
0
to
293
shares, which will be realized if our stock price closes at or below
$50.40
or at
$58.80
, respectively, upon Capped Call Expiration. Settlement of the Capped Calls prior to Capped Call Expiration may be for fewer shares than the maximum of
293
shares.
NOTE 10 OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss), a component of shareholders' equity, consists of foreign currency translation adjustments, gains or losses on derivative instruments and defined benefit pension plan adjustments.
Income tax expense or benefit allocated to each component of other comprehensive income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
(in thousands)
|
|
Pre-tax
|
|
Tax
|
|
Net
|
|
Pre-tax
|
|
Tax
|
|
Net
|
|
Pre-tax
|
|
Tax
|
|
Net
|
Foreign currency translation gain (loss) adjustments
|
|
$
|
3,273
|
|
|
$
|
—
|
|
|
$
|
3,273
|
|
|
$
|
(332
|
)
|
|
$
|
—
|
|
|
$
|
(332
|
)
|
|
$
|
(11,215
|
)
|
|
$
|
—
|
|
|
$
|
(11,215
|
)
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gain (loss)
|
|
3,301
|
|
|
(1,191
|
)
|
|
2,110
|
|
|
(1,342
|
)
|
|
487
|
|
|
(855
|
)
|
|
3,492
|
|
|
(1,266
|
)
|
|
2,226
|
|
Net (gain) loss reclassified to earnings
|
|
155
|
|
|
(57
|
)
|
|
98
|
|
|
334
|
|
|
(120
|
)
|
|
214
|
|
|
(4,299
|
)
|
|
1,561
|
|
|
(2,738
|
)
|
Defined benefit pension plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gain (loss)
|
|
5,918
|
|
|
(1,786
|
)
|
|
4,132
|
|
|
(6,034
|
)
|
|
1,821
|
|
|
(4,213
|
)
|
|
(1,252
|
)
|
|
378
|
|
|
(874
|
)
|
Net (gain) loss reclassified to earnings
|
|
996
|
|
|
(300
|
)
|
|
696
|
|
|
584
|
|
|
(176
|
)
|
|
408
|
|
|
501
|
|
|
(151
|
)
|
|
350
|
|
Currency exchange rate gain (loss)
|
|
(489
|
)
|
|
—
|
|
|
(489
|
)
|
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
|
850
|
|
|
—
|
|
|
850
|
|
Other comprehensive income (loss)
|
|
$
|
13,154
|
|
|
$
|
(3,334
|
)
|
|
$
|
9,820
|
|
|
$
|
(6,808
|
)
|
|
$
|
2,012
|
|
|
$
|
(4,796
|
)
|
|
$
|
(11,923
|
)
|
|
$
|
522
|
|
|
$
|
(11,401
|
)
|
The changes in the net-of-tax balances of each component of AOCI were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Unrealized
Derivative
Instrument
Adjustments
|
|
Defined
Benefit
Pension Plan
Adjustments
|
|
Total
|
Balance, September 27, 2014
|
|
$
|
12,220
|
|
|
$
|
898
|
|
|
$
|
(7,294
|
)
|
|
$
|
5,824
|
|
Other comprehensive net gain (loss) reclassifications
|
|
(11,215
|
)
|
|
2,226
|
|
|
(24
|
)
|
|
(9,013
|
)
|
Net (gain) loss reclassified to earnings
|
|
—
|
|
|
(2,738
|
)
|
|
350
|
|
|
(2,388
|
)
|
Other comprehensive income (loss)
|
|
(11,215
|
)
|
|
(512
|
)
|
|
326
|
|
|
(11,401
|
)
|
Balance, October 3, 2015
|
|
$
|
1,005
|
|
|
$
|
386
|
|
|
$
|
(6,968
|
)
|
|
$
|
(5,577
|
)
|
Other comprehensive net gain (loss) reclassifications
|
|
(332
|
)
|
|
(855
|
)
|
|
(4,231
|
)
|
|
(5,418
|
)
|
Net (gain) loss reclassified to earnings
|
|
—
|
|
|
214
|
|
|
408
|
|
|
622
|
|
Other comprehensive income (loss)
|
|
(332
|
)
|
|
(641
|
)
|
|
(3,823
|
)
|
|
(4,796
|
)
|
Balance, October 1, 2016
|
|
$
|
673
|
|
|
$
|
(255
|
)
|
|
$
|
(10,791
|
)
|
|
$
|
(10,373
|
)
|
Other comprehensive net gain (loss) reclassifications
|
|
3,273
|
|
|
2,110
|
|
|
3,643
|
|
|
9,026
|
|
Net (gain) loss reclassified to earnings
|
|
—
|
|
|
98
|
|
|
696
|
|
|
794
|
|
Other comprehensive income (loss)
|
|
3,273
|
|
|
2,208
|
|
|
4,339
|
|
|
9,820
|
|
Balance, September 30, 2017
|
|
$
|
3,946
|
|
|
$
|
1,953
|
|
|
$
|
(6,452
|
)
|
|
(553
|
)
|
The effect on certain line items in the Consolidated Statements of Income of amounts reclassified out of AOCI was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Affected Line Item in the
Consolidated Statements
of Income
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts gain (loss)
|
|
$
|
459
|
|
|
$
|
(334
|
)
|
|
$
|
4,299
|
|
|
Revenue
|
Interest rate swap contracts gain (loss)
|
|
(614
|
)
|
|
—
|
|
|
—
|
|
|
Interest expense, net
|
Income tax benefit (expense)
|
|
57
|
|
|
120
|
|
|
(1,561
|
)
|
|
Income tax provision (benefit)
|
Total net gain (loss) on derivative instruments
|
|
(98
|
)
|
|
(214
|
)
|
|
2,738
|
|
|
Net income
|
Defined benefit pension plan
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
(543
|
)
|
|
(319
|
)
|
|
(273
|
)
|
|
Cost of sales
|
Actuarial loss
|
|
(282
|
)
|
|
(165
|
)
|
|
(143
|
)
|
|
Selling and marketing
|
Actuarial loss
|
|
(171
|
)
|
|
(100
|
)
|
|
(85
|
)
|
|
General and administrative
|
Total actuarial loss
|
|
(996
|
)
|
|
(584
|
)
|
|
(501
|
)
|
|
Income before income taxes
|
Income tax benefit
|
|
300
|
|
|
176
|
|
|
151
|
|
|
Income tax provision (benefit)
|
Total net loss on pension plan
|
|
(696
|
)
|
|
(408
|
)
|
|
(350
|
)
|
|
Net income
|
Total net of tax reclassifications out of
AOCI included in net income
|
|
$
|
(794
|
)
|
|
$
|
(622
|
)
|
|
$
|
2,388
|
|
|
|
NOTE 11 BUSINESS SEGMENT INFORMATION
Our Chief Executive Officer (the Chief Operating Decision Maker) regularly reviews financial information for our
two
operating segments, Test and Sensors. Test provides testing equipment, systems and services to the ground vehicles, materials and structures sectors. Sensors provides high performance sensors for acceleration, position, vibration, motion, pressure and force measurement.
In evaluating each segment's performance, our Chief Executive Officer focuses on income from operations. This measure excludes interest income and expense, income taxes and other non-operating items. Corporate expenses, including costs associated with various support functions such as human resources, information technology, legal, finance, and accounting, and general and administrative costs are allocated to the reportable segments on the basis of revenue.
On January 5, 2017, we announced the division of our Test segment into two separate business units, "Material Test Systems" and "Vehicles and Structure Test Systems." The division of our Test segment will result in us having three operating segments once discrete financial information is made available to our Chief Operating Decision Maker. We will continue to report only the Test and Sensors segments until such time. We continue to evaluate the timing of such implementation.
Financial information by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
|
|
|
|
|
|
|
|
Test
|
|
$
|
504,087
|
|
|
$
|
512,265
|
|
|
$
|
462,880
|
|
Sensors
|
|
283,868
|
|
|
137,882
|
|
|
101,054
|
|
Total revenue
|
|
$
|
787,955
|
|
|
$
|
650,147
|
|
|
$
|
563,934
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
|
Test
|
|
$
|
28,622
|
|
|
$
|
40,660
|
|
|
$
|
42,285
|
|
Sensors
|
|
26,206
|
|
|
1,103
|
|
|
19,211
|
|
Total income from operations
|
|
$
|
54,828
|
|
|
$
|
41,763
|
|
|
$
|
61,496
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
Test
|
|
$
|
374,698
|
|
|
$
|
395,067
|
|
|
$
|
369,515
|
|
Sensors
|
|
814,994
|
|
|
792,953
|
|
|
91,316
|
|
Total identifiable assets
|
|
$
|
1,189,692
|
|
|
$
|
1,188,020
|
|
|
$
|
460,831
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
Test
|
|
$
|
25,109
|
|
|
$
|
25,022
|
|
|
$
|
26,243
|
|
Sensors
|
|
344,653
|
|
|
344,678
|
|
|
1,434
|
|
Total goodwill
|
|
$
|
369,762
|
|
|
$
|
369,700
|
|
|
$
|
27,677
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
Test
|
|
$
|
13,281
|
|
|
$
|
17,570
|
|
|
$
|
14,652
|
|
Sensors
|
|
4,517
|
|
|
3,236
|
|
|
3,793
|
|
Total capital expenditures
|
|
$
|
17,798
|
|
|
$
|
20,806
|
|
|
$
|
18,445
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
Test
|
|
$
|
17,275
|
|
|
$
|
17,279
|
|
|
$
|
18,342
|
|
Sensors
|
|
18,248
|
|
|
6,798
|
|
|
2,764
|
|
Total depreciation and amortization
|
|
$
|
35,523
|
|
|
$
|
24,077
|
|
|
$
|
21,106
|
|
Geographic information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
|
|
|
|
|
U.S.
|
|
$
|
246,679
|
|
|
$
|
154,707
|
|
|
$
|
151,288
|
|
Europe
|
|
192,491
|
|
|
163,944
|
|
|
149,308
|
|
China
|
|
174,044
|
|
|
152,264
|
|
|
131,727
|
|
Asia, excluding China
|
|
142,644
|
|
|
148,056
|
|
|
109,376
|
|
Americas, excluding U.S.
|
|
32,097
|
|
|
31,176
|
|
|
22,235
|
|
Total revenue
|
|
$
|
787,955
|
|
|
$
|
650,147
|
|
|
$
|
563,934
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
|
|
|
|
U.S.
|
|
$
|
78,080
|
|
|
$
|
79,794
|
|
|
$
|
59,312
|
|
Europe
|
|
15,296
|
|
|
13,695
|
|
|
13,071
|
|
China
|
|
5,542
|
|
|
5,630
|
|
|
6,260
|
|
Asia, excluding China
|
|
1,012
|
|
|
1,670
|
|
|
1,811
|
|
Total property and equipment, net
|
|
$
|
99,930
|
|
|
$
|
100,789
|
|
|
$
|
80,454
|
|
Revenue by geographic area is presented based on customer location. The U.S. and China were the only countries with revenue in excess of
10%
of total revenue during fiscal years
2017
,
2016
and
2015
. No single customer accounted for
10%
or more of consolidated revenue for fiscal years
2017
,
2016
and
2015
. Revenue is not reported for each of our products and services because it is impracticable to do so.
NOTE 12 RESTRUCTURING AND RELATED COSTS
Fiscal Year 2017 Restructuring
In fiscal year 2017, we initiated a series of Test workforce reductions and facility closures intended to increase organizational effectiveness, gain manufacturing efficiencies and provide cost savings that can be reinvested in our growth initiatives. As a result, during the fourth quarter of fiscal year 2017, we recorded
$2,899
of pre-tax severance and related expense and
$23
of pre-tax facility closure costs. In fiscal year 2018, we expect to incur
$1,000
to
$3,000
of additional pre-tax severance and related expense and facility closure costs related to these actions. No cash outlay was required in fiscal year 2017. The majority of the expenses are expected to be paid in fiscal year 2018.
In an effort to reduce costs and create economic efficiencies in Sensors, we initiated plans to close our Machida, Japan sales office in the second quarter of fiscal year 2018. We incurred severance and related pre-tax expense of
$121
in fiscal year 2017. The severance and related costs are expected to be paid during the second quarter of fiscal year 2018. We expect to incur additional severance of approximately
$104
and
$17
pre-tax expense in fiscal years 2018 and 2019, respectively, which is expected to be paid during the first quarter of fiscal year 2019.
Fiscal Year 2016 Restructuring
During the fourth quarter of fiscal year 2016, we initiated plans to reduce costs in Sensors by closing our Machida, Japan manufacturing facility in the third quarter of fiscal year 2017. We incurred severance and related pre-tax expense of
$1,036
in fiscal year 2017. As of September 30, 2017, we have incurred a total of
$1,964
of pre-tax expense, including
$1,444
and
$520
of pre-tax expense related to severance and facility closure costs, respectively. The severance and facility closing costs are expected to be paid during the first quarter of fiscal year 2018.
During the third quarter of fiscal year 2016, we initiated restructuring actions to further reduce our cost structure, primarily in our Corporate area and Test segment, through terminations, elimination of certain open positions as a result of employees leaving voluntarily throughout fiscal year 2016 and reductions in contractors. The restructuring activities resulted in severance and related pre-tax expense of
$1,237
in fiscal year 2016. All severance and related costs have been paid as of September 30, 2017.
Fiscal Year 2014 Restructuring
During fiscal year 2014, we initiated workforce and other cost reduction actions at certain of our Test locations in the U.S. and Europe. As a result of these cost reduction actions, we incurred severance and related costs of
$6,336
in fiscal year 2014.
No
restructuring expenses were recognized during fiscal years
2017
,
2016
or
2015
related to these restructuring actions.
Restructuring expense included in the Consolidated Statements of Income for all restructuring actions for fiscal years
2017
and
2016
was as follows. There was
no
restructuring expense in fiscal year 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Test
|
|
Sensors
|
|
Total
|
Fiscal year 2017
|
|
|
|
|
|
Cost of sales
|
$
|
2,439
|
|
|
$
|
701
|
|
|
$
|
3,140
|
|
Selling and marketing
|
112
|
|
|
203
|
|
|
315
|
|
General and administrative
|
371
|
|
|
253
|
|
|
624
|
|
Research and development
|
—
|
|
|
—
|
|
|
—
|
|
Total restructuring expense for fiscal year 2017
|
$
|
2,922
|
|
|
$
|
1,157
|
|
|
$
|
4,079
|
|
|
|
|
|
|
|
Fiscal year 2016
|
|
|
|
|
|
Cost of sales
|
$
|
299
|
|
|
$
|
762
|
|
|
$
|
1,061
|
|
Selling and marketing
|
129
|
|
|
155
|
|
|
284
|
|
General and administrative
|
414
|
|
|
401
|
|
|
815
|
|
Research and development
|
5
|
|
|
—
|
|
|
5
|
|
Total restructuring expense for fiscal year 2016
|
$
|
847
|
|
|
$
|
1,318
|
|
|
$
|
2,165
|
|
Restructuring expense accruals included in the Consolidated Balance Sheets for all restructuring actions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2014
|
|
|
(in thousands)
|
|
Test
|
|
Sensors
|
|
MTS
|
|
Sensors
|
|
Test
|
|
Total
|
Balance, October 3, 2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,548
|
|
|
$
|
1,548
|
|
Restructuring expense
|
|
—
|
|
|
—
|
|
|
1,237
|
|
|
928
|
|
|
—
|
|
|
2,165
|
|
Payments
|
|
—
|
|
|
—
|
|
|
(1,238
|
)
|
|
—
|
|
|
(498
|
)
|
|
(1,736
|
)
|
Other adjustments
|
|
—
|
|
|
—
|
|
|
336
|
|
|
—
|
|
|
—
|
|
|
336
|
|
Currency translation
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
|
7
|
|
|
3
|
|
|
(17
|
)
|
Balance, October 1, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
308
|
|
|
$
|
935
|
|
|
$
|
1,053
|
|
|
$
|
2,296
|
|
Restructuring expense
|
|
2,922
|
|
|
121
|
|
|
—
|
|
|
1,036
|
|
|
—
|
|
|
4,079
|
|
Payments
|
|
—
|
|
|
—
|
|
|
(303
|
)
|
|
(1,652
|
)
|
|
(352
|
)
|
|
(2,307
|
)
|
Other adjustments
|
|
(23
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23
|
)
|
Currency translation
|
|
—
|
|
|
(1
|
)
|
|
(5
|
)
|
|
(110
|
)
|
|
33
|
|
|
(83
|
)
|
Balance, September 30, 2017
|
|
$
|
2,899
|
|
|
$
|
120
|
|
|
$
|
—
|
|
|
$
|
209
|
|
|
$
|
734
|
|
|
$
|
3,962
|
|
Restructuring expense accruals included in the Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
|
2016
|
Accrued payroll and related costs
|
$
|
3,485
|
|
|
$
|
1,066
|
|
Other accrued liabilities
|
98
|
|
|
520
|
|
Other long-term liabilities
|
379
|
|
|
710
|
|
Total severance and related costs
|
$
|
3,962
|
|
|
$
|
2,296
|
|
NOTE 13 BUSINESS ACQUISITIONS
PCB Group, Inc. Acquisition
On July 5, 2016, we acquired
100%
of the outstanding capital stock of PCB for a purchase price of
$581,773
subject to certain adjustments for cash, indebtedness, transaction costs and the level of net working capital that were made at closing. The transaction was accounted for under the acquisition method of accounting. PCB is a manufacturer of piezoelectric sensors and components used for pressure, force and vibration measurement and is headquartered in Depew, New York. We funded the acquisition of PCB with existing cash on hand as well as funds raised through borrowings under the Term Facility in an aggregate principal amount of
$460,000
, proceeds from registered public offerings of our TEUs and common stock and the
$43,500
of restricted cash that was placed in escrow during the third quarter of fiscal year 2016 to secure termination fees that would have become payable to PCB had the acquisition not occurred under the definitive purchase agreement. The restricted cash was paid to the shareholders of PCB as part of the estimated purchase price. See Note 5 and Note 9 for additional financing information.
The acquired assets, liabilities and operating results have been included in our financial statements within Sensors from the date of acquisition. We included
$129,197
of revenue and operating income of
$2,773
for the first three quarters of fiscal year 2017 and
$44,503
of revenue and an operating loss of
$2,143
for the fourth quarter of fiscal year 2016 from PCB in our Consolidated Statements of Income. The operating income in fiscal year 2017 and the operating loss in fiscal year 2016 include a fair value adjustment to the acquired PCB inventory of
$7,975
and
$7,916
, respectively. Costs of
$10,170
associated with the acquisition of PCB were expensed as incurred in the Consolidated Statements of Income within the Sensors segment in fiscal year 2016.
The final purchase price of PCB consisted of the following:
|
|
|
|
|
(in thousands)
|
|
Consideration paid to PCB shareholders and employees
1
|
$
|
580,000
|
|
Consideration for PCB closing cash
|
11,612
|
|
Deferred endowment consideration
2
|
1,000
|
|
Net preacquisition earn-out
|
(141
|
)
|
Net working capital adjustment
3
|
(147
|
)
|
Cash acquired
|
(10,551
|
)
|
Total estimated purchase price, net of cash acquired
|
$
|
581,773
|
|
|
|
1
|
Of the
$580,000
consideration paid to PCB, we paid
$10,000
directly to employees of PCB on behalf of the PCB shareholders during the fourth quarter of fiscal year 2016. The payment was made pursuant to the definitive purchase agreement entered into with PCB in connection with the acquisition.
|
|
|
2
|
The deferred endowment consideration was paid during the third quarter of fiscal year 2017.
|
|
|
3
|
Payment was received for the net working capital adjustment during the fourth quarter of fiscal year 2017.
|
PCB's products include accelerometers, microphones, calibration systems, pressure sensors, load and torque sensors, force sensors, single- and multi-channel telemetry, ground fault detection and smart sensing solutions. PCB serves end markets including test and measurement, power and energy, aerospace and defense, industrial measurement and instrumentation, automotive and rail and acoustics and environmental noise monitoring. The acquisition strengthens our current Sensors business with complementary sensor products and expands channels to market, balancing the revenue mix between Test and Sensors, while enhancing our margin profile and creating significant cross-selling opportunities across the combined portfolio.
The following table summarizes the final fair value measurement of the assets acquired and liabilities assumed net of cash acquired as of the date of acquisition:
|
|
|
|
|
(in thousands)
|
|
Assets
|
|
Accounts receivable
|
$
|
21,008
|
|
Inventories
|
57,981
|
|
Prepaid expenses and other current assets
|
2,362
|
|
Property and equipment
|
19,649
|
|
Intangible assets
|
|
Customer lists
|
153,900
|
|
Trademarks and trade names
|
58,500
|
|
Technology
|
35,300
|
|
Land-use rights
|
1,200
|
|
Other long-term assets
|
1,796
|
|
Total identifiable assets acquired
|
351,696
|
|
Liabilities
|
|
Accounts payable
|
(6,786
|
)
|
Accrued payroll and related costs
|
(7,137
|
)
|
Non-current deferred tax liability
|
(94,141
|
)
|
Other accrued and long-term liabilities
|
(5,037
|
)
|
Total identifiable liabilities acquired
|
(113,101
|
)
|
|
|
Net identifiable assets acquired
|
238,595
|
|
Goodwill
|
343,178
|
|
Total estimated purchase price consideration, net of cash acquired
|
$
|
581,773
|
|
The fair value measurement was completed as of July 1, 2017. Measurement period adjustments were recorded in fiscal year 2017 and were not material. The impact to the Consolidated Statements of Income for fiscal year 2017 related to income effects that would have been recognized in the prior year if the measurement period adjustments were recorded at acquisition date was not material. The gross amount of the accounts receivable acquired was
$21,726
, of which
$718
was expected to be uncollectible as of completion of fair value measurement as of July 1, 2017.
Goodwill was calculated as the difference between the acquisition date fair value of the total purchase price consideration and the fair value of the net assets acquired and represents the future economic benefits that we expect to achieve as a result of the acquisition. This resulted in a purchase price in excess of the fair value of identifiable net assets acquired. The purchase price also included the fair value of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) of immaterial value in addition to a going concern element that represents our ability to earn a higher rate of return on the group of assets than would be expected on the separate assets as determined during the valuation process. Based on the fair value measurement of the assets acquired and liabilities assumed, we allocated
$343,178
to goodwill for the expected synergies from combining PCB with our existing business. All of the goodwill was assigned to Sensors.
None
of the goodwill is deductible for income tax purposes.
The fair value of acquired identifiable assets was determined using the income approach on an individual project basis. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by us. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the fair value hierarchy.
The fair value of the acquired intangible assets was
$248,900
. The expected lives of the acquired intangible assets are approximately
15
years for developed technology,
16
years for customer lists,
5
years for leasehold interest and
3
years for
finite-lived trademarks and trade names. The acquired intangible assets are being amortized on a straight-line basis. Trade names having a value of
$57,500
are considered to have indefinite lives.
Pro Forma Financial Information (Unaudited)
The following unaudited pro forma financial information presents the combined results of operations of MTS Systems Corporation as if the acquisition of PCB had occurred as of the beginning of the fiscal years ended October 1, 2016 and October 3, 2015. The unaudited pro forma information is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of each fiscal year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.
|
|
|
|
|
|
|
|
|
(in thousands except per share data)
|
2016
|
|
2015
|
Revenue
|
$
|
782,379
|
|
|
$
|
743,595
|
|
Net income
|
18,779
|
|
|
39,324
|
|
|
|
|
|
Earnings per share
|
|
|
|
Basic
|
$
|
0.93
|
|
|
$
|
2.05
|
|
Diluted
|
0.92
|
|
|
2.04
|
|
The unaudited pro forma financial information is based on certain assumptions which we believe are reasonable, directly attributable to the transactions, factually supportable and do not reflect the cost of any integration activities or the benefits from the acquisition of PCB and synergies that may be derived from any integration activities.
The unaudited pro forma financial information above gives effect to the following:
|
|
•
|
Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation.
|
|
|
•
|
Exclusion of the purchase accounting impact of the incremental charge reported in cost of sales for the sale of acquired inventory that was written-up to fair value of
$7,916
.
|
|
|
•
|
Includes
$22,968
of interest expense on outstanding debt entered into as part of funding the acquisition.
|
|
|
•
|
Pro forma adjustments tax affected by
20%
tax rate.
|
|
|
•
|
Weighted average shares outstanding was adjusted to increase the amount by
4,179
shares for both basic and diluted shares in the earnings per share calculation to reflect the financing of the acquisition of PCB in the form of the issuance of shares of common stock and the minimum shares to be issued for our TEUs at the minimum settlement rate.
|
Our pro forma 2016 and 2015 fiscal years ended on October 1, 2016 and October 3, 2015, respectively, while PCB's fiscal years ended on December 31, 2016 and December 31, 2015, respectively. The full-year unaudited pro forma financial information for fiscal year 2016 combines our audited financial information for the fiscal year ended October 1, 2016 and the unaudited financial information of PCB for the 12 months ended October 1, 2016. The unaudited financial information of PCB for the 12 months ended October 1, 2016 was determined by adding PCB's unaudited financial information for the three months ended December 31, 2015 (PCB's fourth quarter of 2015), the unaudited financial information for the six months ended June 30, 2016 (PCB's first six months of 2016) and the audited financial information of PCB for the period from acquisition (July 5, 2016) to October 1, 2016. The full-year unaudited pro forma financial information for fiscal year 2015 combines our audited financial information for the fiscal year ended October 3, 2015 and the audited financial information of PCB for the year ended December 31, 2015. Due to the different fiscal year ends, the pro forma statement of income for both fiscal year 2016 and 2015 included PCB's unaudited financial information for the three months ended December 31, 2015 (PCB's fourth quarter of 2015). Summarized operating information about the duplicated quarter is as follows:
|
|
|
|
|
(in thousands)
|
|
Revenue
|
$
|
45,140
|
|
Net income
|
3,582
|
|
Instrument and Calibration Sweden AB Acquisition
On June 29, 2015, we acquired Instrument and Calibration Sweden AB (ICS), a supplier of testing equipment and calibration services located in Sweden, for a purchase price of
$667
. During fiscal year 2016, goodwill of
$530
was determined to be attributable to customer lists and reclassified to intangible assets. The assets, liabilities and operating results have been included in our financial statements within Test from the date of acquisition.
NOTE 14 COMMITMENTS AND CONTINGENCIES
Internal Investigation Related to China Operations
As previously reported by us, in November 2016, after the end of fiscal year 2016, we initiated an internal investigation into apparent violations of our Code of Conduct involving certain employees in our China operations, including association by those employees with an independent business that may compete with us in certain markets. As the apparent violations implicated members of leadership in our China operations, the Audit Committee engaged independent external counsel to conduct an investigation of our China operations in order to assess the impact of these apparent violations on financial input from China and to review for potential violations to our Code of Conduct, anticorruption compliance policies and procedures and related U.S. law. Independent forensic accountants, acting at the direction of external counsel, performed testing of certain transactions related to our China operations as part of this investigation.
Substantial investigative work was completed during fiscal year 2017 and confirmed the former China Test leader and several other former senior managers associated with our China Test operations violated the conflict of interest provisions of our Code of Conduct in connection with their involvement with an independent business that competed with our low-end products in the China market. This inconsistent adherence to our Code of Conduct could have resulted in management override of internal control over financial reporting.
In light of, and to address the findings of the investigation, and to remediate the material weakness in our internal control over financial reporting resulting from the conclusion described in the prior paragraph, we are conducting more robust monitoring to ensure ongoing adherence to our Code of Conduct. We have also enhanced our third-party intermediary diligence and monitoring processes, with the support of and guidance from external resources, and have continued clear and consistent messaging on compliance expectations at all levels of the organization.
To address the challenges presented by the findings of the investigation of our China operations, we are exploring multiple business alternatives to address the low-end materials market. The consideration of these alternatives could possibly result in a future expectation of sale or disposal of certain assets that could cause an impairment charge to be recognized in a subsequent period. As of September 30, 2017, we do not anticipate any material impairment charges for the tangible and intangible assets. We are prepared to assess the mix of products, markets in which we compete and manner by which we select and utilize resellers, agents, consultants and vendors to support these commitments.
Government Investigation
As previously reported by us with disclosures starting in March 2012, we investigated certain gift, travel, entertainment and other expenses incurred in connection with some of our operations in the Asia Pacific region. This investigation focused on possible violations of Company policy, corresponding internal control issues and possible violations of applicable law, including the Foreign Corrupt Practices Act. Substantial investigative work was completed on this matter and we implemented remedial measures, including changes to internal control procedures and removing certain persons formerly employed in our Korea office. We voluntarily disclosed this matter to the Department of Justice and the SEC (the Agencies). We also investigated certain business practices in China, starting in 2014 and that investigation had a similar focus to the 2012 investigation described above. We have also updated the Agencies regarding the China investigation described in the
Internal Investigation Related to China Operations
above. We were notified by the Agencies in August 2017 that their respective investigations were closed as to MTS without further action taken by either U.S. agency. With the closure of the government investigations by the Agencies and the steps being taken by the Company voluntarily, we believe that the matter has been resolved. We are committed to continuing to monitor compliance with our Code of Conduct and applicable law.
Litigation
We are subject to various claims, legal actions and complaints arising in the ordinary course of business. We believe the final resolution of legal matters outstanding as of
September 30, 2017
will not have a material adverse effect on our consolidated financial position or results of operations. We expense legal costs as incurred.
Operating Leases
We have operating lease commitments for equipment, automobiles, land and facilities that expire on various dates through 2052. Total lease expense was
$7,506
,
$7,053
and
$5,787
for fiscal years
2017
,
2016
and
2015
, respectively.
Minimum annual rents payable under operating leases for the next five fiscal years and thereafter are as follows:
|
|
|
|
|
Fiscal Year
|
Operating Lease Payments
(in thousands)
|
2018
|
$
|
4,833
|
|
2019
|
2,320
|
|
2020
|
1,281
|
|
2021
|
591
|
|
2022
|
364
|
|
Thereafter
|
1,236
|
|
Total
|
$
|
10,625
|
|
MTS Systems Corporation
Schedule II – Summary of Consolidated Allowances for Doubtful Accounts
Changes to the allowance for doubtful accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
3,923
|
|
|
$
|
3,411
|
|
|
$
|
2,609
|
|
Provisions / (recoveries)
|
|
1,930
|
|
|
957
|
|
|
1,210
|
|
Amounts written-off / payments
|
|
(551
|
)
|
|
(330
|
)
|
|
(267
|
)
|
Currency translation (gain) loss
|
|
69
|
|
|
(115
|
)
|
|
(141
|
)
|
Ending balance
|
|
$
|
5,371
|
|
|
$
|
3,923
|
|
|
$
|
3,411
|
|