Backlog of undelivered orders at September 27, 2008 was $11.9 million, relatively flat compared to backlog of $12.0 million at September 29, 2007.
The following is a comparison of fiscal year 2008 and fiscal year 2007 results of operations for the Sensors segment, separately identifying the impact of currency translation (in millions):
The following is a comparison of fiscal year 2008 and fiscal year 2007 revenue for the Sensors segment by geography:
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Research and Development Expense
Research and development expense was $5.1 million, an increase of $0.9 million, or 21.4%, compared to $4.2 million for fiscal year 2007, due to a planned increase in spending. Research and development expense as a percentage of revenue was 5.3%, compared to 5.5% for fiscal year 2007.
Income from Operations
Income from operations was $20.7 million, an increase of $5.9 million, or 39.9%, compared to income from operations of $14.8 million for fiscal year 2007, primarily due to increased gross profit, partially offset by planned increases in operating expenses to support strategic initiatives. Operating income as a percentage of revenue was 21.5%, compared to 19.2% for fiscal year 2007.
Cash Flow
Total cash and cash equivalents increased $4.8 million during fiscal year 2009, primarily due to earnings and decreased working capital requirements, partially offset by employee incentive and related benefit payments, purchases of company stock, dividend payments, investment in property and equipment, and the acquisition of SANS.
Total cash and cash equivalents increased $9.8 million during fiscal year 2008, primarily due to earnings, proceeds received from borrowings on the credit facility, net proceeds from the conversion of short-term investments to cash and cash equivalents, net proceeds from the sale of the Nano Instruments product line, and proceeds from the exercise of stock options. These factors were partially offset by purchases of the Company’s common stock, an initial investment towards the purchase of SANS, funding contributions to a defined benefit pension plan, increased working capital requirements, and dividend payments.
Total cash and cash equivalents increased $6.4 million during fiscal year 2007, primarily due to earnings, net proceeds from the conversion of short-term investments to cash and cash equivalents, proceeds from the exercise of stock options, and a favorable impact of currency translation, partially offset by purchases of the Company’s common stock, increased working capital requirements, and dividend payments.
Cash flow from operating activities provided cash of $43.8 million during fiscal year 2009, compared to cash provided of $30.2 million and $44.9 million in fiscal year 2008 and 2007, respectively. Fiscal year 2009 cash flow from operating activities was primarily due to earnings and $52.1 million decreased accounts and unbilled receivables driven by lower revenue volume. This cash provided was partially offset by $14.6 million decreased accounts payable primarily resulting from overall reduced spending levels, $20.7 million decrease in advance payables received from customers driven by decreased orders and negotiated payment terms, and $8.6 million incentive and benefit payments.
Fiscal year 2008 cash flow from operating activities was primarily due to earnings, partially offset by $13.2 million contributions to a defined benefit pension plan, $11.1 million increased working capital requirements, and $4.6 million net cash usage for the discontinued Nano Instruments product line.
Fiscal year 2007 cash flow from operating activities was primarily due to earnings and a $7.6 million increase in income taxes payable, partially offset by $9.2 million increased working capital requirements and a $4.6 net increase in deferred tax assets.
Cash flow from investing activitiesrequired the use of cash totaling $33.6 million during fiscal year 2009, compared to cash provided of $3.6 million during fiscal year 2008, and $5.2 million used during fiscal year 2007. The cash usage for fiscal year 2009 was due to $25.1 million payments associated with the acquisition of SANS and $9.8 million invested in property and equipment, partially offset by $1.3 million proceeds from the sale of the Nano instruments product line in fiscal year 2008.
During fiscal year 2008, the Company received net proceeds of $17.1 million and $10.3 million for the maturity of short term investments and the sale of the Nano Instruments product line, respectively, and invested $13.7 million and $9.8 million in SANS and property and equipment, respectively.
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During fiscal year 2007, the Company invested $12.0 million in property and equipment, and received net proceeds of $6.5 million and $1.0 million from the maturity of short-term investments and the sale of assets associated with the Company’s linear friction welding technology, respectively.
Cash flow from financing activities required a use of cash of $7.8 million during fiscal year 2009, compared to $26.5 million and $41.5 million used in fiscal year 2008 and 2007, respectively. The cash usage for fiscal year 2009 was primarily due to $12.8 million to purchase shares of the Company’s common stock, payment of cash dividends of $10.1 million, and repayment of interest-bearing debt of $2.3 million, partially offset by $16.0 million borrowings on the Company’s credit facility, and $1.6 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan.
During fiscal year 2008, the Company’s cash usage primarily resulted from purchases of the Company’s common stock of $42.0 million, including purchases of stock related to stock option exercises of $3.2 million, payment of cash dividends of $10.5 million, and net repayment of interest-bearing debt of $6.7 million, partially offset by $24.0 million borrowings on the Company’s credit facility, and $7.9 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan.
During fiscal year 2007, the Company’s cash usage primarily resulted from purchases of the Company’s common stock of $38.2 million, including purchases of stock related to stock option exercises of $0.3 million, payment of cash dividends of $8.0 million, and net repayment of interest-bearing debt of $6.7 million, partially offset by $9.3 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan.
During fiscal years 2009, 2008 and 2007, the Company purchased approximately 0.5 million, 1.0 million, and 1.0 million shares of its common stock for $12.8 million, $38.8 million, and $37.9 million, respectively.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $118.9 million at October 3, 2009. Of this amount, approximately $14.9 million was located in North America, $84.1 million in Europe, and $19.9 million in Asia. The North American balance was primarily invested in tax-free money market funds and in bank deposits. In Europe, the balances were primarily invested in Euro money market funds and bank deposits. In Asia, the balances were primarily invested in bank deposits.
At October 3, 2009, the Company’s capital structure was comprised of $40.2 million in short-term debt and $204.0 million in Shareholders’ Investment. Total interest-bearing debt at October 3, 2009 was $40.0 million, an increase of $13.7 million from $26.3 million at September 27, 2008, due to $16.0 million of additional borrowings on the credit facility, partially offset by scheduled long term debt payments. Notes payable outstanding on September 27, 2008 consisted of $24.0 million in interest-bearing short-term notes payable placed with the Company’s credit facility. The borrowings on the credit facility include, at the Company’s discretion, optional month-to-month term renewals and loan repricing until December 2012. Under the terms of the credit facility, the Company has agreed to certain financial covenants, including, among other covenants, the ratio of consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”), as well as the ratio of consolidated EBITDA to consolidated interest expense. These covenants may restrict the Company’s ability to pay dividends and purchase outstanding shares of common stock. At October 3, 2009, the Company was in compliance with these financial covenants.
Shareholders’ Investment decreased by $1.0 million during fiscal year 2009, primarily due to $12.8 million in purchases of the Company’s common stock, $10.1 million in dividends declared, partially offset by operating results, $3.3 million in stock-based compensation, $2.5 million of foreign currency translation gains, and $1.6 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan.
The Company believes its liquidity, represented by funds available from cash, cash equivalents, credit facility, anticipated cash from operations, and capital structure are adequate to fund ongoing operations, internal growth opportunities, capital expenditures and Company dividends and share purchases, as well as to fund strategic acquisitions.
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At October 3, 2009, the Company’s contractual obligations were as follows:
| | | | | | | | | | | | | | | | |
| | | | Payments Due by Period
(expressed in thousands) | |
Contractual Obligations(1) | | Total | | Less than 1
year | | 1 - 3 years | | 3 - 5 years | | More than 5
years | |
Operating Lease Obligations | | $ | 17,088 | | $ | 5,095 | | $ | 6,972 | | $ | 2,437 | | $ | 2,584 | |
Other Long-Term Obligations(2) | | | 7,444 | | | 693 | | | 1,356 | | | 1,086 | | | 4,309 | |
Total | | $ | 24,532 | | $ | 5,788 | | $ | 8,328 | | $ | 3,523 | | $ | 6,893 | |
| | |
| (1) | Long-term income tax liabilities for uncertain tax positions have been excluded from the contractual obligations table as the Company is not able to make a reasonably reliable estimate of the amount and period of related future payments. At October 3, 2009, the Company’s long-term liability for uncertain tax positions was $3.6 million. |
| | |
| (2) | Other long-term obligations include liabilities under pension and other retirement plans. |
At October 3, 2009 the Company had letters of credit and guarantees outstanding totaling $23.1 million and $2.7 million, respectively, primarily to bond advance payments and performance related to customer contracts in the Test segment. The Company’s operating leases are primarily for office space and automobiles.
Off-Balance Sheet Arrangements
At the end of fiscal year 2009, the Company did not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies
The Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the Company to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company’s results of operations and financial position, may require the application of a higher level of judgment by the Company’s management, and as a result, are subject to an inherent degree of uncertainty. For further information see “Summary of Significant Accounting Policies” and “Stock-Based Compensation” under Notes 1 and 2, respectively, to the Consolidated Financial Statements, included in Item 8 of this Annual Report on Form 10-K.
Revenue Recognition: The Company is required to comply with a variety of technical accounting requirements in order to achieve consistent and accurate revenue recognition. The most significant area of judgment and estimation is percentage of completion contract accounting. The Company develops cost estimates that include materials, component parts, labor and overhead costs. Detailed costs plans are developed for all aspects of the contracts during the bidding phase of the contract. Cost estimates are largely based on actual historical performance of similar projects combined with current knowledge of the projects in progress. Significant factors that impact the cost estimates include technical risk, inflationary cost of materials and labor, changes in scope and schedule, and internal and subcontractor performance. Actual costs incurred during the project phase are monitored and compared to the estimates on a monthly basis. Cost estimates are revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident.
Inventories: The Company maintains a material amount of inventory to support its engineering and manufacturing operations. The Company establishes valuation reserves for excess, slow moving, and obsolete inventory based on inventory levels, expected product life, and forecasted sales demand. It is possible that an increase in the Company’s inventory reserves may be required in the future if there is a significant decline in demand for the Company’s products and the Company does not adjust its manufacturing production accordingly.
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Impairment of Long-Lived Assets. The Company reviews 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 market value, 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, the Company recognizes an asset impairment charge against 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.
Goodwill: The Company tests goodwill at least annually for impairment. Goodwill is also tested for impairment as changes in circumstances occur indicating that the carrying value may not be recoverable. Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. The fair value of a reporting unit is estimated using a discounted cash flow model that requires input of certain estimates and assumptions requiring management judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, and new product introductions. The Company believes the estimates and assumptions used in determining the projected cash flows of its reporting units are reasonable however, 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.
Software Development Costs: The Company incurs costs associated with the development of software to be sold, leased, or otherwise marketed. 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. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized software costs, the Company compares expected product performance, utilizing forecasted revenue amounts, to the total costs incurred to date and estimates of additional costs to be incurred. If revised forecasted product revenue is less than, and/or revised forecasted costs are greater than, the previously forecasted amounts, the net realizable value may be lower than previously estimated, which could result in the recognition of an impairment charge in the period in which such a determination is made.
Warranty Obligations: The Company is subject to warranty guarantees on sales of its products. A certain amount of judgment is required in determining appropriate reserve levels for anticipated warranty claims. While these reserve levels are based on historical warranty experience, they may not reflect the actual claims that will occur over the upcoming warranty period, and additional warranty reserves may be required.
Income Taxes: The Company records 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. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company believes 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 its 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 management’s expectations could have a material impact on the Company’s financial condition and operating results.
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Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles” as codified by Accounting Standards Codification (“ASC”) 105. This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) is the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. ASC 105 is effective for interim or annual reporting periods ending after September 15, 2009. The Company adopted the provisions of ASC 105 in the fourth quarter of fiscal year 2009 and included references to the ASC in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The Company’s adoption of the provisions of ASC 105 did not have an impact on the consolidated financial statements, as the Codification did not change or alter existing GAAP.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), an update to ASC 820, “Fair Value Measurements and Disclosures”. This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this ASU 2009-05 provides clarification that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in this update. ASU 2009-05 is effective for interim or annual financial periods beginning after August 27, 2009. The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” as codified by ASC 855-10. This standard establishes general standards or accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009. The Company’s adoption of the provisions of ASC 855 during the third quarter of fiscal year 2009 did not have an impact on the consolidated financial statements.
In December 2008, the FASB issued FSP FAS 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” as codified by ASC 715-20-65-2. This standard amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” as codified by ASC 715-20 and requires additional disclosures regarding defined benefit plan assets, including investment policies and strategies, major categories of plan assets, valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. ASC 715-20-65-2 is effective for fiscal years ending after December 15, 2009. The Company does not expect the adoption of ASC 715-20-65-2 to have a material impact on its consolidated financial statements.
In June 2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” as codified by ASC 815-40-15. This standard provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815-40-15 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of ASC 815-40-15 to have a material impact on its consolidated financial statements.
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In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) No. 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” as codified by ASC 260-10-45. This standard clarifies that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. ASC 260-10-45 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of ASC 260-10-45 to have a material impact on its consolidated financial statements.
In April 2008, the FASB issued Staff Position (“FSP”) FAS 142-3 “Determination of the Useful Life of Intangible Assets” as codified by ASC 350-30-65-1. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets” as codified under ASC 350-30. ASC 350-30-65-1 is intended to improve the consistency between the useful life of a recognized intangible asset under ASC 350-30 and the period of the expected cash flows used to measure the fair value of the asset under ASC 805 and other GAAP. ASC 350-30-65-1 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company does not expect the adoption of ASC 350-30-65-1 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” As codified by ASC 805. ASC 805 expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. ASC 805 also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, ASC 805 requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. ASC 805 is effective for the Company’s fiscal years beginning on or after December 15, 2008, with early adoption prohibited. The Company does not expect the adoption of ASC 805 to have a material impact on its consolidated financial statements.
Quarterly Financial Information
Revenue and operating results reported on a quarterly basis do not necessarily reflect trends in demand for the Company’s products or its operating efficiency. Revenue and operating results in any quarter may be significantly affected by customer shipments, installation timing, or the timing of the completion of one or more contracts where revenue is recognized upon shipment or customer acceptance rather than on the percentage-of-completion method of revenue recognition. The Company’s use of the percentage-of-completion revenue recognition method for large, long-term projects generally has the effect of smoothing significant fluctuations from quarter to quarter. See Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the Company’s revenue recognition policy. Quarterly earnings also vary as a result of the use of estimates including, but not limited to, the rates used in recording federal, state, and foreign income tax expense. See Notes 1 and 8 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the Company’s use of estimates and income tax related matters, respectively.
Selected quarterly financial information for the fiscal years ended October 3, 2009 and September 27, 2008 was as follows:
| | | | | | | | | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Total
Year | |
| | | | (expressed in thousands, except per share data) | | | |
| | | | | | | |
2009 | | | | | | | | | | | | | | | | |
Revenue | | $ | 116,609 | | $ | 107,652 | | $ | 90,779 | | $ | 93,841 | | $ | 408,881 | |
Gross profit | | | 44,221 | | | 41,513 | | | 34,604 | | | 31,278 | | | 151,616 | |
Income (loss) before income taxes | | | 12,842 | | | 10,359 | | | 4,495 | | | (3,793 | ) | | 23,903 | |
Net income (loss) | | $ | 9,751 | | $ | 7,473 | | $ | 3,149 | | $ | (2,979 | ) | $ | 17,394 | |
Earnings (loss) per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.58 | | $ | 0.45 | | $ | 0.19 | | $ | (0.18 | ) | $ | 1.04 | |
Diluted | | $ | 0.57 | | $ | 0.45 | | $ | 0.19 | | $ | (0.18 | ) | $ | 1.03 | |
| | | | | | | | | | | | | | | | |
2008 | | | | | | | | | | | | | | | | |
Revenue | | $ | 107,392 | | $ | 112,168 | | $ | 116,886 | | $ | 124,069 | | $ | 460,515 | |
Gross profit | | | 43,222 | | | 46,074 | | | 47,246 | | | 53,711 | | | 190,253 | |
Income before income taxes and discontinued operations | | | 12,604 | | | 15,381 | | | 15,327 | | | 22,148 | | | 65,460 | |
Income before discontinued operations | | | 8,181 | | | 13,445 | | | 10,985 | | | 14,499 | | | 47,110 | |
Discontinued operations, net of tax | | | 175 | | | 94 | | | 1,765 | | | 47 | | | 2,081 | |
Net income | | $ | 8,356 | | $ | 13,539 | | $ | 12,750 | | $ | 14,546 | | $ | 49,191 | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | |
Income before discontinued operations | | $ | 0.46 | | $ | 0.76 | | $ | 0.64 | | $ | 0.86 | | $ | 2.72 | |
Discontinued operations, net of tax | | | 0.01 | | | 0.01 | | | 0.10 | | | — | | | 0.12 | |
Earnings per share | | $ | 0.47 | | $ | 0.77 | | $ | 0.74 | | $ | 0.86 | | $ | 2.84 | |
Diluted | | | | | | | | | | | | | | | | |
Income before discontinued operations | | $ | 0.45 | | $ | 0.75 | | $ | 0.63 | | $ | 0.85 | | $ | 2.68 | |
Discontinued operations, net of tax | | | 0.01 | | | 0.01 | | | 0.10 | | | — | | | 0.12 | |
Earnings per share | | $ | 0.46 | | $ | 0.76 | | $ | 0.73 | | $ | 0.85 | | $ | 2.80 | |
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Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Foreign Currency Exchange Risk
Approximately 65-70% of the Company’s revenue has historically been derived from shipments to customers outside of the United States and about 59% of this revenue (approximately 40% of the Company’s total revenue) is denominated in currencies other than the U.S. dollar. The Company’s international subsidiaries have functional currencies other than the Company’s U.S. dollar reporting currency and, occasionally, transact business in currencies other than their functional currencies. These non-functional currency transactions expose the Company to market risk on assets, liabilities and cash flows recognized on these transactions.
The strengthening of the U.S. dollar relative to foreign currencies decreases the value of foreign currency-denominated revenue and earnings when translated into U.S. dollars. Conversely, a weakening of the U.S. dollar increases the value of foreign currency-denominated revenue and earnings. The following table illustrates financial results utilizing currency exchange rates from the prior year to estimate the impact of currency on the following financial items:
Foreign Currency Exchange Rates
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands) | |
(Decrease) increase from currency translation on: | | | | | | | | | | |
Orders | | $ | (8,077 | ) | $ | 21,090 | | $ | 9,107 | |
Revenue | | | (9,921 | ) | | 22,128 | | | 11,593 | |
Net Income | | $ | (581 | ) | $ | 2,243 | | $ | 868 | |
The estimated net effect of currency translation on orders, revenue, and net income was unfavorable in fiscal year 2009 in comparison to fiscal year 2008, primarily driven by the unfavorable translation impact associated with the strengthening in the value of the U.S. dollar against the Euro during the first half of fiscal year 2009. This was partially offset by a favorable translation impact associated with the weakening in the value of the U.S. dollar against the Japanese Yen throughout fiscal year 2009.
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A hypothetical 10% appreciation or depreciation in foreign currencies against the U.S. dollar, assuming all other variables are held constant, would result in an increase or decrease in fiscal year 2009 revenue of approximately $18.3 million.
The Company has operational procedures to mitigate these non-functional currency exposures. The Company also utilizes foreign currency exchange contracts to exchange currencies at set exchange rates on future dates to offset expected gains or losses on specifically identified exposures. See Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Gains and losses on foreign currency transactions are included in both Revenue and Other Income (Expense), net in the accompanying Consolidated Statements of Income, was a net loss of $1.6 million in fiscal year 2009, a net gain of $0.6 million in fiscal year 2008, and a net loss of $0.6 million in fiscal year 2007. Mark-to-market gains and losses on derivatives designated as cash flow hedges in the Company’s currency hedging program, as well as on the translation of non-current assets and liabilities, are recorded within Accumulated Other Comprehensive Income in the Consolidated Balance Sheet. The Company recognizes gains and losses on fair value and cash flow hedges at the time a gain or loss is recognized on the hedged exposure in the Consolidated Statement of Income, or at the time the cash flow hedge is determined to be ineffective. The associated mark-to-market gains and losses are reclassified from Accumulated Other Comprehensive Income to the same line item in the Consolidated Statements of Income that the underlying hedged transaction is reported.
Interest Rates
The Company is also directly exposed to changes in market interest rates on cash, cash equivalents, short-term investments, and debt and is indirectly exposed to the impact of market interest rates on overall business activity.
On floating-rate investments, increases and decreases in market interest rates will increase or decrease future interest income, respectively. On floating-rate debt, increases or decreases in market interest rates will increase or decrease future interest expense, respectively. On fixed-rate investments, increases or decreases in market interest rates do not impact future interest income but may decrease or increase the fair market value of the investments, respectively.
At October 3, 2009, the Company had cash and cash equivalents of $118.9 million. Most of this balance was invested in interest-bearing bank deposits or money market funds, with interest rates re-set every 1-89 days. A hypothetical increase or decrease of 1% in market interest rates, assuming all other variables were held constant, would increase or decrease interest income by approximately $1.1 million on an annualized basis.
The Company’s short-term borrowings outstanding at the end of fiscal year 2009 consisted of $40.0 million utilization of the revolving credit facility and $0.2 million in non-interest bearing notes payable to vendors. This utilization of the credit facility involves interest payments calculated at a floating rate. In order to mitigate the Company’s exposure to interest rate increases, the Company has entered into floating to fixed rate interest swap agreements. The notes payable to vendors are non-interest bearing and, therefore, are not impacted by the effect of increases or decreases in market interest rates.
A discount rate of 5.5% and an expected rate increase in future compensation levels of 3.0% was used in the calculation of the pension liability related to the non-contributory, defined benefit pension plan of one of the Company’s international subsidiaries. In addition, a 5.9% expected rate of return was used in the calculation of the plan assets associated with this defined benefit pension plan.
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Item 8. | Financial Statements and Supplementary Data |
The Company’s audited financial statements and notes thereto described in Item 15(1) of this Annual Report on Form 10-K, and appearing on pages F-1 through F-40 of this report, are incorporated by reference herein. See also “Quarterly Financial Data” in Management’s Discussion and Analysis under Item 7 of this Annual Report on Form 10-K, which is incorporated herein by reference.
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Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
| |
Item 9A. | Controls and Procedures |
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “1934 Act”)) as of October 3, 2009. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in internal control over financial reporting during the fiscal quarter ended October 3, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal controls over financial reporting as of October 3, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control – Integrated Framework. Based on management’s assessment using this framework, management concluded that the Company’s internal control over financial reporting is effective as of October 3, 2009.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of this audit, has issued their report, included in Item 8, on the effectiveness of the Company’s internal control over financial reporting.
| |
Item 9B. | Other Information |
None.
PART III
| |
Item 10. | Directors and Executive Officers of Registrant |
The required information with respect to the directors of the Company, the Company’s Code of Business Conduct, compliance with Section 16(a) of the Securities Exchange Act of 1934, and the Company’s Audit Committee, including the Audit Committee financial experts, is incorporated herein by reference to the information set forth under the headings “Election of Directors” and “Other Information” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 10, 2010. Information regarding the Company’s executive officers is contained under Item 1 of Part I of this Annual Report on Form 10-K.
| |
Item 11. | Executive Compensation |
The information required by this Item is incorporated herein by reference to the information set forth under headings “Executive Compensation” and “Election of Directors – Independent Directors Compensation” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 10, 2010.
40
Table of Contents
| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Equity Compensation Plan Information:
The following table sets forth the aggregate information regarding grants under all equity compensation plans as of October 3, 2009:
| | | | | | | | | | |
Plan Category | | Number of Securities to
be Issued Upon Exercise of
Outstanding Options, Warrants
and Rights
(in thousands)
(a) | | Weighted-
Average
Exercise
Price of
Outstanding
Warrants and
Rights
(b) | | Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities Reflected
in Column (a))(1)
(in thousands)
(c) | |
| | | | | | | | |
Equity compensation plans approved by security holders | | 1,566 | | | $ | 33.88 | | 1,437 | | |
| | | | | | | | | | |
Equity compensation plans not approved by security holders | | — | | | | — | | — | | |
| | | | | | | | | | | |
Total | | 1,566 | | | $ | 33.88 | | 1,437 | | |
| | | | | | | | | | | |
(1) Includes 478 shares available for issuance under the 2002 Employee Stock Purchase Plan as of October 3, 2009.
Certain other information required by this Item is incorporated herein by reference to the information set forth under the heading “Other Information - Security Ownership of Principal Shareholders and Management” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 10, 2010.
| |
Item 13. | Certain Relationships and Related Transactions, and Directors Independence |
The information required by this Item is incorporated herein by reference to the information set forth under headings “Election of Directors” and “Other Information – Related Party Transactions” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held February 10, 2010.
| |
Item 14. | Principal Accountant Fees and Services |
The information required by this Item is incorporated by reference to the information set forth under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 10, 2010.
41
Table of Contents
PART IV
| | | |
Item 15. | Exhibits and Financial Statement Schedules |
| | | |
| The following documents are filed as part of this report: |
| | | |
| | (1) Consolidated Financial Statements: |
| | | |
| | | Report of Independent Registered Public Accounting Firm |
| | | |
| | | Consolidated Balance Sheets – October 3, 2009 and September 27, 2008 |
| | | |
| | | Consolidated Statements of Income for the Years Ended October 3, 2009, September 27, 2008 and September 29, 2007 |
| | | |
| | | Consolidated Statements of Shareholders’ Investment for the Years Ended October 3, 2009, September 27, 2008 and September 29, 2007 |
| | | |
| | | Consolidated Statements of Cash Flows for the Years Ended October 3, 2009, September 27, 2008 and September 29, 2007 |
| | | |
| | | Notes to Consolidated Financial Statements |
| | | |
| | (2) Financial Statement Schedules: |
| | | |
| | | See accompanying Index to Financial Statements on page F-1. |
| | | |
| | (3) Exhibits: |
| | | |
| Exhibit
Number | | Description |
| | | |
| | | |
| 3.a | | Restated and Amended Articles of Incorporation, incorporated herein by reference from Exhibit 3.a of the Company’s Form 10-K for the fiscal year ended September 30, 1996. |
| | | |
| 3.b | | Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.1 of the Company’s Form 8-K Current Report filed on December 1, 2009. |
| | | |
| 10.a | | Executive Variable Compensation Plan, incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K Current Report filed on November 30, 2004. |
| | | |
| 10.b | | 1994 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.e of the Company’s Form 10-K filed for the fiscal year ended September 30, 1996. |
| | | |
| 10.c | | 1997 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 10.p of the Company’s Form 10-K filed for the fiscal year ended September 30, 1996 and Exhibit 10.p of the Company’s Form 10-K filed for the fiscal year ended September 30, 1999. |
| | | |
| 10.d | | 2002 Employee Stock Purchase Plan, as amended, incorporated herein by reference to Exhibit 10.d of the Company’s Form 10-K filed for the fiscal year ended October 1, 2005. |
| | | |
| 10.e | | 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K Current Report filed on February 7, 2006. |
| | | |
| 10.f | | Form of Notice of Grant of Restricted Stock (Director) under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.2 of the Company’s Form 8-K Current Report filed on February 7, 2006. |
| | | |
| 10.g | | Uniform Terms and Conditions to Restricted Stock Awards (Director) under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.3 of Company’s Form 8-K Current Report filed on February 7, 2006. |
42
Table of Contents
| | | |
| 10.h | | Description of the terms of employment of Susan E. Knight, pursuant to an offer letter, incorporated by reference to Exhibit 10.r of the Company’s Form 10-Q/A for the fiscal quarter ended December 31, 2001. |
| | | |
| 10.i | | Letter dated February 6, 1987 from MTS Sensor Technologie GmbH and Co. KG (formerly, Hellwig GmbH) regarding its pension commitment to Joachim Hellwig, incorporated by reference to Exhibit 10.p of the Company’s Form 10-K filed for fiscal year ended October 2, 2004. |
| | | |
| 10.j | | Employment Contract dated January 1, 1991 between MTS Sensor Technologie GmbH and Co. KG and Joachim Hellwig, incorporated by reference to Exhibit 10.q of the Company’s Form 10-K filed for fiscal year ended October 2, 2004. |
| | | |
| 10.k | | Change in Control Agreement, dated December 31, 2008, between the Company and Laura B. Hamilton (Filed herewith). |
| | | |
| 10.l | | Form of Indemnification Agreement between the Company and each of its directors and executive officers, incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K Current Report filed on September 1, 2006. |
| | | |
| 10.m | | First Amendment to the Company’s 2006 Stock Incentive Plan, First Amendment to the Company’s Executive Variable Compensation Plan, amendments to the Company’s Executive Deferred Compensation Plan (2005), and amendments to the Company’s form of change in control agreements, incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 and 10.4 of the Company’s Form 8-K Current Report filed on October 27, 2008. |
| | | |
| 10.n | | Master Asset Purchase Agreement dated April 28, 2008, between the Company and the SANS Group, incorporated herein by reference to Exhibit 2.1 of the Company’s Form 8-K Current Report filed October 2, 2008. |
| | | |
| 10.o | | Credit Agreement dated December 18, 2007, among the Company, Wells Fargo Bank, National Association, Fifth Third Bank, The Bank of Tokyo Mitsubishi UFJ, Ltd., U.S. Bank National Association, JPMorgan Chase Bank, N.A. and J.P. Morgan Securities Inc., incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K Current Report filed December 21, 2007. |
| | | |
| 10.p | | Change in Control Agreement, dated December 31, 2008, between the Company and Susan E. Knight (Filed herewith). |
| | | |
| 10.q | | Change in Control Agreement, dated December 31, 2008, between the Company and Kathleen M. Staby (Filed herewith). |
| | | |
| 10.r | | Severance Agreement, dated March 30, 2009, between the Company and Alfred Richter (Filed herewith). |
| | | |
| 10.s | | Change in Control Agreement, dated March 30, 2009, between the Company and Alfred Richter (Filed herewith). |
| | | |
| 10.t | | Form of Notice of Grant of Restricted Stock Units under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K Current Report filed on June 29, 2009. |
43
Table of Contents
| | | |
| 10.u | | Uniform Terms and Conditions to Restricted Stock Units under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of Company’s Form 8-K Current Report filed on June 29, 2009. |
| | | |
| 10.v | | Form of Notice of Grant of Restricted Stock (Employee) under 2006 Stock Incentive Plan (Filed herewith). |
| | | |
| 10.w | | Uniform Terms and Conditions to Restricted Stock Awards (Employee) under 2006 Stock Incentive Plan (Filed herewith). |
| | | |
| 21. | | Subsidiaries of the Company (Filed herewith). |
| | | |
| 23. | | Consent of Independent Registered Public Accounting Firm (Filed herewith). |
| | | |
| 31.1 | | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
| | | |
| 31.2 | | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
| | | |
| 32.1 | | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
| | | |
| 32.2 | | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
44
Table of Contents
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| MTS SYSTEMS CORPORATION |
| | |
| By: | /s/ LAURA B. HAMILTON |
| | Laura B. Hamilton |
| | Chair and Chief Executive Officer |
Date: December 1, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
| | | | | | | | | | |
| Signatures | | | Title | | | | | Date | |
| | | | |
/s/ LAURA B. HAMILTON | | Chair and Chief | | December 1, 2009 |
Laura B. Hamilton | | Executive Officer | | |
| | | | |
/s/ SUSAN E. KNIGHT | | Chief Financial Officer | | December 1, 2009 |
Susan E. Knight | | and Vice President | | |
| | | | |
/s/ DAVID J. ANDERSON | | Director | | December 1, 2009 |
David J. Anderson | | | | |
| | | | |
/s/ JEAN-LOU CHAMEAU | | Director | | December 1, 2009 |
Jean-Lou Chameau | | | | |
| | | | |
/s/ MERLIN E. DEWING | | Director | | December 1, 2009 |
Merlin E. Dewing | | | | |
| | | | |
/s/ BRENDAN C. HEGARTY | | Director | | December 1, 2009 |
Brendan C. Hegarty | | | | |
| | | | |
/s/ LOIS M. MARTIN | | Director | | December 1, 2009 |
Lois M. Martin | | | | |
| | | | |
/s/ BARB J. SAMARDZICH | | Director | | December 1, 2009 |
Barb J. Samardzich | | | | |
| | | | |
/s/ GAIL P. STEINEL | | Director | | December 1, 2009 |
Gail P. Steinel | | | | |
45
Table of Contents
MTS Systems Corporation and Subsidiaries
Index to Financial Statements
| | | |
CONSOLIDATED FINANCIAL STATEMENTS | Page | | |
| |
Report of Independent Registered Public Accounting Firm | F-2 through F-3 |
| |
Consolidated Balance Sheets – October 3, 2009 and September 27, 2008 | F-4 |
| |
Consolidated Statements of Income for the Years Ended
October 3, 2009, September 27, 2008, and September 29, 2007 | F-5 |
| |
Consolidated Statements of Shareholders’ Investment
and Comprehensive Income (Loss) for the Years Ended
October 3, 2009, September 27, 2008 and September 29, 2007 | F-6 |
| |
Consolidated Statements of Cash Flows for the Years Ended
October 3, 2009, September 27, 2008 and September 29, 2007 | F-7 |
| |
Notes to Consolidated Financial Statements | F-8 through F-35 |
| |
Financial Statement Schedule | |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
MTS Systems Corporation:
We have audited the accompanying consolidated balance sheets of MTS Systems Corporation and subsidiaries as of October 3, 2009 and September 27, 2008, and the related consolidated statements of income, shareholders’ investment and comprehensive income, and cash flows for each of the years in the three-year period ended October 3, 2009. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. We also have audited MTS Systems Corporation’s internal control over financial reporting as of October 3, 2009, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). MTS Systems Corporation and subsidiaries’ management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A of this Form 10-K. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTS Systems Corporation and subsidiaries as of October 3, 2009 and September 27, 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended October 3, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, MTS Systems Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 3, 2009, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
F-2
Table of Contents
As disclosed in Note 8 to the consolidated financial statements, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” as of September 30, 2007.
| |
| /s/ KPMG LLP |
| |
Minneapolis, Minnesota | |
December 1, 2009 | |
F-3
Table of Contents
Consolidated Balance Sheets
(October 3 and September 27, respectively)
| | | | | | | |
Assets | | 2009 | | 2008 | |
| | (expressed in thousands) | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | 118,885 | | $ | 114,099 | |
Accounts receivable, net of allowance for doubtful accounts of $1,410 and $1,008 respectively | | | 72,553 | | | 101,331 | |
Unbilled accounts receivable | | | 27,246 | | | 43,022 | |
Inventories | | | 47,969 | | | 46,135 | |
Prepaid expenses and other current assets | | | 6,583 | | | 6,585 | |
Deferred tax assets | | | 12,322 | | | 11,825 | |
Total current assets | | | 285,558 | | | 322,997 | |
Property and equipment, net | | | 56,118 | | | 50,534 | |
Goodwill | | | 15,206 | | | 1,668 | |
Other intangibles, net | | | 23,826 | | | 4,363 | |
Other assets | | | 4,181 | | | 17,283 | |
Deferred tax assets | | | 2,025 | | | 2,312 | |
Total assets | | $ | 386,914 | | $ | 399,157 | |
| | | | | | | |
Liabilities and Shareholders’ Investment | | | | | | | |
| | | | | | | |
Current Liabilities: | | | | | | | |
Short-term borrowings | | $ | 40,182 | | $ | 24,338 | |
Current maturities of long-term debt | | | — | | | 2,308 | |
Accounts payable | | | 18,630 | | | 28,567 | |
Accrued payroll and related costs | | | 25,376 | | | 33,819 | |
Advance payments from customers | | | 46,739 | | | 64,979 | |
Accrued warranty costs | | | 9,774 | | | 6,107 | |
Accrued income taxes | | | 1,182 | | | 4,510 | |
Deferred tax liabilities | | | 960 | | | 3,723 | |
Other accrued liabilities | | | 25,149 | | | 17,219 | |
Total current liabilities | | | 167,992 | | | 185,570 | |
Deferred tax liabilities | | | 3,843 | | | 1,354 | |
Non-current accrued income taxes | | | 3,591 | | | 4,009 | |
Pension benefit plan | | | 1,917 | | | 245 | |
Other long-term liabilities | | | 5,606 | | | 3,037 | |
Total liabilities | | | 182,949 | | | 194,215 | |
| | | | | | | |
Shareholders’ Investment: | | | | | | | |
Common stock, 25¢ par value; 64,000 shares authorized:
16,564 and 16,976 shares issued and outstanding | | | 4,141 | | | 4,244 | |
Retained earnings | | | 174,301 | | | 175,216 | |
Accumulated other comprehensive income | | | 25,523 | | | 25,482 | |
Total shareholders’ investment | | | 203,965 | | | 204,942 | |
Total liabilities and shareholders’ investment | | $ | 386,914 | | $ | 399,157 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-4
Table of Contents
Consolidated Statements of Income
(For the Fiscal Years Ended October 3, September 27, and September 29, respectively)
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Revenue: | | | | | | | | | | |
Product | | $ | 349,502 | | $ | 395,173 | | $ | 350,156 | |
Service | | | 59,379 | | | 65,342 | | | 59,935 | |
Total Revenue | | | 408,881 | | | 460,515 | | | 410,091 | |
Cost of Sales: | | | | | | | | | | |
Product | | | 224,279 | | | 235,861 | | | 206,067 | |
Service | | | 32,986 | | | 34,401 | | | 30,386 | |
Total Cost of Sales | | | 257,265 | | | 270,262 | | | 236,453 | |
Gross Profit | | | 151,616 | | | 190,253 | | | 173,638 | |
Operating Expenses: | | | | | | | | | | |
Selling and marketing | | | 71,571 | | | 76,867 | | | 68,907 | |
General and administrative | | | 39,129 | | | 35,393 | | | 32,216 | |
Research and development | | | 16,322 | | | 16,232 | | | 19,285 | |
Total Operating Expenses | | | 127,022 | | | 128,492 | | | 120,408 | |
Gain on sale of assets | | | — | | | — | | | 742 | |
Income From Operations | | | 24,594 | | | 61,761 | | | 53,972 | |
Interest expense | | | (2,024 | ) | | (1,083 | ) | | (1,309 | ) |
Interest income | | | 1,108 | | | 4,033 | | | 3,899 | |
Other income, net | | | 225 | | | 749 | | | 28 | |
Income Before Income Taxes and Discontinued Operations | | | 23,903 | | | 65,460 | | | 56,590 | |
Provision for Income Taxes | | | 6,509 | | | 18,350 | | | 15,549 | |
Income Before Discontinued Operations | | | 17,394 | | | 47,110 | | | 41,041 | |
Discontinued Operations: | | | | | | | | | | |
(Loss) income from discontinued operations, net of tax | | | — | | | (368 | ) | | 955 | |
Net gain on disposal of discontinued businesses, net of tax | | | — | | | 2,449 | | | — | |
Income from Discontinued Operations, net of tax | | | — | | | 2,081 | | | 955 | |
Net Income | | $ | 17,394 | | $ | 49,191 | | $ | 41,996 | |
Earnings Per Share | | | | | | | | | | |
Basic: | | | | | | | | | | |
Income Before Discontinued Operations | | $ | 1.04 | | $ | 2.72 | | $ | 2.29 | |
Discontinued Operations: | | | | | | | | | | |
(Loss) income from discontinued operations, net of tax | | | — | | | (0.02 | ) | | 0.05 | |
Net gain on disposal of discontinued businesses, net of tax | | | — | | | 0.14 | | | — | |
Income from Discontinued Operations, net of tax | | | — | | | 0.12 | | | 0.05 | |
Earnings Per Share - Basic | | $ | 1.04 | | $ | 2.84 | | $ | 2.34 | |
Diluted: | | | | | | | | | | |
Income Before Discontinued Operations | | $ | 1.03 | | $ | 2.68 | | $ | 2.24 | |
Discontinued Operations: | | | | | | | | | | |
(Loss) income from discontinued operations, net of tax | | | — | | | (0.02 | ) | | 0.05 | |
Net gain on disposal of discontinued businesses, net of tax | | | — | | | 0.14 | | | — | |
Income from Discontinued Operations, net of tax | | | — | | | 0.12 | | | 0.05 | |
Earnings Per Share - Diluted | | $ | 1.03 | | $ | 2.80 | | $ | 2.29 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-5
Table of Contents
|
Consolidated Statements of Shareholders’ Investment and Comprehensive Income (Loss) |
(For the Fiscal Years Ended October 3, September 27, and September 29, respectively, expressed in thousands) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated
Other
Comprehensive
Income (Loss) | | | |
| | Common Stock | | Additional
Paid-In
Capital | | | | | Total
Shareholders’
Investment | |
| | Shares
Issued | | | | | Retained
Earnings | | | |
| | | Amount | | | | | |
Balance, September 30, 2006 | | | 18,216 | | $ | 4,554 | | $ | — | | $ | 152,657 | | $ | 12,110 | | $ | 169,321 | |
Net income | | | — | | | — | | | — | | | 41,996 | | | — | | | 41,996 | |
Foreign currency translation | | | — | | | — | | | — | | | — | | | 9,298 | | | 9,298 | |
Minimum pension liability adjustment | | | — | | | — | | | — | | | — | | | 738 | | | 738 | |
Derivative instruments | | | — | | | — | | | — | | | — | | | (735 | ) | | (735 | ) |
Total comprehensive income | | | — | | | — | | | — | | | 41,996 | | | 9,301 | | | 51,297 | |
Adjustment to initially apply FASB ASC 715-20 | | | — | | | — | | | — | | | — | | | (998 | ) | | (998 | ) |
Exercise of stock options | | | 426 | | | 107 | | | 8,448 | | | — | | | — | | | 8,555 | |
Stock-based compensation | | | 12 | | | 3 | | | 5,052 | | | — | | | — | | | 5,055 | |
Tax benefit from equity compensation | | | — | | | — | | | 2,675 | | | — | | | — | | | 2,675 | |
Issuance for employee stock purchase plan | | | 21 | | | 5 | | | 696 | | | — | | | — | | | 701 | |
Common stock purchased and retired | | | (971 | ) | | (243 | ) | | (16,871 | ) | | (21,122 | ) | | — | | | (38,236 | ) |
Dividends, $0.48 per share | | | — | | | — | | | — | | | (8,669 | ) | | — | | | (8,669 | ) |
Balance, September 29, 2007 | | | 17,704 | | $ | 4,426 | | $ | — | | $ | 164,862 | | $ | 20,413 | | $ | 189,701 | |
Net income | | | — | | | — | | | — | | | 49,191 | | | — | | | 49,191 | |
Foreign currency translation | | | — | | | — | | | — | | | — | | | 3,859 | | | 3,859 | |
Pension benefit plan adjustments | | | — | | | — | | | — | | | — | | | 890 | | | 890 | |
Derivative instruments | | | — | | | — | | | — | | | — | | | 320 | | | 320 | |
Total comprehensive income | | | — | | | — | | | — | | | 49,191 | | | 5,069 | | | 54,260 | |
Exercise of stock options | | | 332 | | | 83 | | | 7,096 | | | — | | | — | | | 7,179 | |
Stock-based compensation | | | 11 | | | 3 | | | 4,190 | | | — | | | — | | | 4,193 | |
Tax benefit from equity compensation | | | — | | | — | | | 1,302 | | | — | | | — | | | 1,302 | |
Issuance for employee stock purchase plan | | | 21 | | | 5 | | | 682 | | | — | | | — | | | 687 | |
Common stock purchased and retired | | | (1,092 | ) | | (273 | ) | | (13,270 | ) | | (28,499 | ) | | — | | | (42,042 | ) |
Dividends, $0.60 per share | | | — | | | — | | | — | | | (10,338 | ) | | — | | | (10,338 | ) |
Balance, September 27, 2008 | | | 16,976 | | $ | 4,244 | | $ | — | | $ | 175,216 | | $ | 25,482 | | $ | 204,942 | |
Net income | | | — | | | — | | | — | | | 17,394 | | | — | | | 17,394 | |
Foreign currency translation | | | — | | | — | | | — | | | — | | | 2,459 | | | 2,459 | |
Pension benefit plan adjustments | | | — | | | — | | | — | | | — | | | (982 | ) | | (982 | ) |
Derivative instruments | | | — | | | — | | | — | | | — | | | (1,436 | ) | | (1,436 | ) |
Total comprehensive income | | | — | | | — | | | — | | | 17,394 | | | 41 | | | 17,435 | |
Exercise of stock options | | | 40 | | | 10 | | | 899 | | | — | | | — | | | 909 | |
Stock-based compensation | | | 17 | | | 4 | | | 3,327 | | | — | | | — | | | 3,331 | |
Tax shortfall from equity compensation | | | — | | | — | | | (491 | ) | | — | | | — | | | (491 | ) |
Issuance for employee stock purchase plan | | | 36 | | | 9 | | | 709 | | | — | | | — | | | 718 | |
Common stock purchased and retired | | | (505 | ) | | (126 | ) | | (4,444 | ) | | (8,253 | ) | | — | | | (12,823 | ) |
Dividends, $0.60 per share | | | — | | | — | | | — | | | (10,056 | ) | | — | | | (10,056 | ) |
Balance, October 3, 2009 | | | 16,564 | | $ | 4,141 | | $ | — | | $ | 174,301 | | $ | 25,523 | | $ | 203,965 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Table of Contents
|
Consolidated Statements of Cash Flows |
(For the Fiscal Years Ended October 3, September 27 and September 29, respectively) |
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands) | |
Cash Flows from Operating Activities: | | | | | | | | | | |
Net income | | $ | 17,394 | | $ | 49,191 | | $ | 41,996 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Loss (income) from discontinued operations | | | — | | | 368 | | | (955 | ) |
Net gain on disposal of discontinued operations | | | — | | | (2,449 | ) | | — | |
Gain on sale of assets | | | — | | | — | | | (742 | ) |
Stock-based compensation | | | 3,384 | | | 4,199 | | | 5,023 | |
Excess tax benefits from stock-based compensation | | | (4 | ) | | (925 | ) | | (2,123 | ) |
Charge for fair value mark-up of acquired inventory | | | 1,859 | | | — | | | — | |
Net periodic pension benefit cost | | | 738 | | | 1,282 | | | 1,208 | |
Depreciation and amortization | | | 12,132 | | | 9,207 | | | 7,985 | |
Deferred income taxes | | | (364 | ) | | (5,726 | ) | | (4,599 | ) |
Bad debt provision | | | 755 | | | (111 | ) | | 320 | |
Changes in operating assets and liabilities, excluding the effect of the acquisition: | | | | | | | | | | |
Accounts and unbilled contracts receivable | | | 52,129 | | | (27,462 | ) | | (11,414 | ) |
Inventories | | | 5,980 | | | (3,191 | ) | | (1,733 | ) |
Prepaid expenses and other assets | | | (6,657 | ) | | (5,911 | ) | | (3,489 | ) |
Accounts payable | | | (14,582 | ) | | 6,138 | | | 4,994 | |
Accrued payroll and related costs | | | (8,571 | ) | | 4,441 | | | (654 | ) |
Advance payments from customers | | | (20,654 | ) | | 13,398 | | | (1,054 | ) |
Accrued warranty costs | | | 3,614 | | | (138 | ) | | 138 | |
Other liabilities | | | (3,031 | ) | | 5,613 | | | 8,581 | |
Contributions to pension benefit plan | | | (488 | ) | | (13,198 | ) | | (257 | ) |
Operating activities of discontinued operations | | | 204 | | | (4,552 | ) | | 1,690 | |
Net Cash Provided by Operating Activities | | | 43,838 | | | 30,174 | | | 44,915 | |
Cash Flows from Investing Activities: | | | | | | | | | | |
Additions to property and equipment | | | (9,757 | ) | | (9,752 | ) | | (12,040 | ) |
Purchase of business | | | (25,143 | ) | | (13,737 | ) | | — | |
Net proceeds from sale of businesses | | | 1,330 | | | 10,293 | | | 1,000 | |
Proceeds from maturity of short-term investments | | | — | | | 19,050 | | | 71,260 | |
Purchases of short-term investments | | | — | | | (2,000 | ) | | (64,735 | ) |
Investing activities of discontinued operations | | | — | | | (287 | ) | | (695 | ) |
Net Cash (Used in) Provided by Investing Activities | | | (33,570 | ) | | 3,567 | | | (5,210 | ) |
Cash Flows from Financing Activities: | | | | | | | | | | |
Net receipts under short-term borrowings | | | 15,796 | | | 23,866 | | | 36 | |
Repayments of long-term debt | | | (2,308 | ) | | (6,683 | ) | | (6,683 | ) |
Excess tax benefits from stock-based compensation | | | 4 | | | 925 | | | 2,123 | |
Cash dividends | | | (10,112 | ) | | (10,478 | ) | | (7,988 | ) |
Proceeds from exercise of stock options and employee stock purchase plan | | | 1,627 | | | 7,866 | | | 9,256 | |
Payments to purchase and retire common stock | | | (12,823 | ) | | (42,042 | ) | | (38,236 | ) |
Net Cash Used in Financing Activities | | | (7,816 | ) | | (26,546 | ) | | (41,492 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | | | 2,334 | | | 2,559 | | | 8,170 | |
Cash and Cash Equivalents: | | | | | | | | | | |
Increase during the year | | | 4,786 | | | 9,754 | | | 6,383 | |
Balance, beginning of year | | | 114,099 | | | 104,345 | | | 97,962 | |
Balance, end of year | | $ | 118,885 | | $ | 114,099 | | $ | 104,345 | |
Supplemental Disclosures of Cash Flows: | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | |
Interest | | $ | 1,596 | | $ | 726 | | $ | 1,052 | |
Income taxes | | | 13,250 | | | 22,157 | | | 11,172 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Table of Contents
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Operations
MTS Systems Corporation is a leading global supplier of test systems and industrial position sensors. The Company’s hardware and software solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS’ high-performance position sensors provide controls for a variety of industrial and vehicular applications.
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to September 30. The Company’s fiscal year ended October 3, 2009 consisted of 53 weeks. The Company’s fiscal years ended September 27, 2008 and September 29, 2007 each consisted of 52 weeks.
Consolidation
The Consolidated Financial Statements include the accounts of MTS Systems Corporation and its wholly owned subsidiaries (the “Company”). Significant intercompany balances and transactions have been eliminated.
Revenue Recognition
Orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol may involve separable elements for revenue recognition purposes. Sufficient evidence of fair value of these elements exists to allow revenue recognition for these systems upon shipment, less the greater of the fair value associated with installation and training (if applicable) or the amount of revenue for which payment is deemed contingent upon delivery of these elements, which is deferred until customer acceptance. Fair value is determined based upon the sale price of similar products sold individually. In cases where special acceptance protocols exist, installation and training are not considered to be separable from the other elements of the arrangement. Accordingly, revenue for these systems is recognized upon the completion of installation and fulfillment of obligations specific to the terms of the arrangement.
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, software, installation services, training and support. In certain arrangements software may be essential to the functionality of the system deliverable. For these arrangements the Company identifies components of the arrangement which are considered software-related. Contractual arrangements in which software is essential to system functionality typically include significant production, modification, and customization. For 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. software maintenance and training) are accounted for as the service is provided based on fair value as determined by stand-alone sales.
The Company enters into long-term contracts for customized equipment sold to its customers. Under the terms of such 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 appear in the Consolidated Balance Sheets as Unbilled Accounts Receivable.
Revenue for services is recognized as the service is performed or ratably over a defined contractual period for service maintenance contracts.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
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Table of Contents
Shipping and Handling
Freight revenue billed to customers is reported within Revenue on the Consolidated Statements of Income, and expenses incurred for shipping products to customers are reported within Cost of Sales on the Consolidated Statements of Income.
Research and Development
Research and development costs associated with new products are charged to operations as incurred.
Foreign Currency
The financial position and results of operations of the Company’s 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’ Investment. The Company recorded gains on foreign currency translation in Comprehensive Income of $2.5 million, $3.9 million, and $9.3 million for fiscal years 2009, 2008, and 2007 respectively. Gains and losses from foreign currency transactions are recognized in the Consolidated Statements of Income. The Company recorded net foreign currency transaction (losses)/gains of ($1.6) million, $0.6 million, and ($0.6) million in fiscal years 2009, 2008, and 2007, 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 United States, are invested in money market funds and bank deposits in local currency denominations.
Short-Term Investments
The Company held no short-term investments as of October 3, 2009 or September 27, 2008. As of September 29, 2007, the Company’s short-term investments consisted of U.S. municipal bonds. The Company classified these investments as available-for-sale, and liquidated them in fiscal year 2008 to fund current operations, as well as to return capital to shareholders. All investments in available-for-sale securities at September 29, 2007 were carried at fair value, and unrealized gains and losses were reported as a component of Accumulated Other Comprehensive Income within Shareholders’ Investment on the Consolidated Balance Sheets. At September 29, 2007, there were no material unrealized gains or losses associated with any of the Company’s short-term investments, as the fair value of each investment approximated amortized cost.
Accounts Receivable and Long-Term Contracts
The Company grants 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 United States are supported by letters of credit from financial institutions. The allowance for doubtful accounts is based on management’s assessment of the collectibility of specific customer accounts and includes consideration of the credit worthiness and financial condition of those specific customers. The Company records an allowance to reduce receivables to the amount that is reasonably believed to be collectible and considers 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 the Company becomes aware of additional information related to the credit worthiness of a customer, or if future actual default rates on trade receivables in general differ from those currently anticipated, the Company may have to adjust its allowance for doubtful accounts, which would affect earnings in the period the adjustments were made.
The Company enters into long-term contracts for customized equipment sold to its 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 reflected as Unbilled Accounts Receivable in the accompanying Consolidated Balance Sheets. Amounts unbilled at October 3, 2009 are expected to be invoiced during fiscal year 2010.
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Table of Contents
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. Inventories at October 3, 2009 and September 27, 2008 were as follows:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Customer projects in various stages of completion | | $ | 15,075 | | $ | 14,257 | |
Components, assemblies and parts | | | 32,894 | | | 31,878 | |
Total | | $ | 47,969 | | $ | 46,135 | |
Software Development Costs
The Company capitalizes 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 the Company’s 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 the Company’s 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 the Company has established that the necessary skills, hardware, and software technology are available for production of the 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 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.
The Company’s 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. The 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. The Company reached technological feasibility for certain software products and began capitalizing software development costs during the fiscal years ended October 3, 2009 and September 27, 2008. Amortization expense for software development costs was $0.7 million for the fiscal year ended October 3, 2009. No amortization expense was recognized during the year ended September 27, 2008. See Note 4 to the Consolidated Financial Statements for additional information on capitalized software development costs.
Impairment of Long-lived Assets
The Company reviews the carrying value of long-lived assets or asset groups, 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. 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 sale of the asset or asset group, the Company recognizes an asset impairment charge against 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.
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Property and Equipment
Property and equipment is stated at cost. Additions, replacements, and improvements are capitalized at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is recorded over the following estimated useful lives of the property:
| |
| 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. See Note 4 to the Consolidated Financial Statements for additional information on property and equipment.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of the net assets of businesses acquired. Goodwill is not amortized to income, but instead tested at least annually for impairment. Goodwill is also tested for impairment as changes in circumstances occur indicating that the carrying value may not be recoverable.
Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. Impairment testing for indefinite-lived intangible assets requires a comparison between the fair value and the carrying value of the asset. If the carrying value of the asset exceeds its fair value, the asset is reduced to fair value.
Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows, and reviewed for impairment. Fair values of goodwill and intangible assets are primarily determined using discounted cash flow analyses. At both October 3, 2009 and September 27, 2008, the Company determined there was no impairment of its goodwill or intangible assets. See Note 4 to the Consolidated Financial Statements for additional information on goodwill and intangible assets.
Other Assets
Other assets at October 3, 2009 and September 27, 2008 include security deposits paid on leased property and cash redemption values on group insurance policies. Other assets at September 27, 2008 also include a $13.7 million investment in SANS Group (“SANS”). See Note 3 to the Consolidated Financial Statements for additional information regarding the acquisition of the SANS business.
Warranty Obligations
Sales of the Company’s products and systems are subject to limited warranty guarantees that are included in customer contracts. For sales that include installation services, warranty guarantees typically extend for a period of twelve to twenty-four months from the date of either shipment or acceptance. Product guarantees typically extend for a period of twelve to twenty-four months from the date of purchase. Under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies it deems defective due to workmanship or materials. The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance, or misuse. The Company records general warranty provisions based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty claims experience over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. In addition, warranty provisions are also recognized for certain nonrecurring product claims that are individually significant.
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Warranty provisions and claims for the years ended October 3, 2009 and September 27, 2008, were as follows:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Beginning balance | | $ | 6,107 | | $ | 6,205 | |
Warranty claims | | | (9,122 | ) | | (7,643 | ) |
Warranty provisions | | | 12,736 | | | 7,585 | |
Acquisition of SANS | | | 73 | | | — | |
Translation adjustment | | | (20 | ) | | (40 | ) |
Ending balance | | $ | 9,774 | | $ | 6,107 | |
Derivative Financial Instruments
Effective December 28, 2008, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment to SFAS No. 133” as codified by FASB Accounting Standards Codification (“ASC”) 815. ASC 815 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.
The Company’s results of operations could be materially impacted by changes in foreign currency exchange rates, as well as interest rates on its floating rate indebtedness. In an effort to manage exposure to these risks, the Company periodically enters into forward and option currency exchange contracts and interest rate swaps. Because the market value of these hedging contracts is derived from current market rates, they are classified as derivative financial instruments. The Company does not use derivatives for speculative or trading purposes. The derivative contracts contain credit risk to the extent that the Company’s 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, the Company has the contractual right to offset fair value amounts recognized for the right to reclaim cash collateral with obligations to return cash collateral. The Company does not offset fair value amounts recognized on these derivative instruments. As of October 3, 2009, the Company does not have any foreign exchange contracts with credit-risk related contingent features.
The Company’s foreign exchange cash flow hedges and interest rate swaps are designated and qualify as hedging instruments pursuant to ASC 815. The Company’s balance sheet hedges are accounted for and reported under the guidance of ASC 830-20-10. The fair value of the Company’s designated and undesignated outstanding hedge derivative assets and liabilities were reported in the October 3, 2009 Consolidated Balance Sheet as follows:
| | | | | | | |
| | October 3, 2009 | |
| | Prepaid Expenses
and Other
Current Assets | | Other Accrued
Liabilities | |
| | (expressed in thousands) | |
Designated hedge derivatives: | | | | | | | |
Foreign exchange cash flow hedges | | $ | 234 | | $ | 470 | |
Interest rate swaps | | | — | | | 1,894 | |
Total designated hedge derivatives | | | 234 | | | 2,364 | |
| | | | | | | |
Hedge derivatives not designated: | | | | | | | |
Foreign exchange balance sheet hedges | | | — | | | 729 | |
Total hedge derivatives | | $ | 234 | | $ | 3,093 | |
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Table of Contents
Foreign Currency Cash Flow Hedging
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 in Accumulated Other Comprehensive Income (“AOCI”) within Shareholders’ Investment on 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. The Company periodically assesses whether its currency exchange contracts are effective and, when a contract is determined to be no longer effective as a hedge, the Company discontinues hedge accounting prospectively. Subsequent changes in the market value of ineffective currency exchange contracts are recognized as an increase or decrease in Revenue on the Consolidated Statement of Income.
At October 3, 2009 and September 27, 2008, the Company had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $16.6 million and $59.1 million, 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 were $11.0 million and $39.8 million at October 3, 2009 and September 27, 2008, respectively. At October 3, 2009 the net market value of the foreign currency exchange contracts was a net liability of $0.3 million, consisting of $0.5 million in liabilities and $0.2 million in offsetting assets. At September 27, 2008, the net market value of foreign currency exchange contracts was a net asset of $0.6 million, consisting of $1.1 million in assets and $0.5 million in offsetting liabilities.
The pretax amounts recognized in AOCI on currency exchange contracts for the fiscal year ended October 3, 2009, including gains (losses) reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (“OCI”), are as follows:
| | | | |
| | 2009 | |
| | (expressed in thousands) | |
Beginning unrealized net gain in AOCI | | $ | 108 | |
Net loss reclassified into Revenue (effective portion) | | | 1,969 | |
Net loss reclassified into Revenue upon the removal of hedge designations on underlying foreign currency transactions that were cancelled | | | 46 | |
Net loss recognized in OCI (effective portion) | | | (2,642 | ) |
Ending unrealized net loss in AOCI | | $ | (519 | ) |
The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was less than $0.1 million in each of the fiscal years ended October 3, 2009 and September 27, 2008. At October 3, 2009 and September 27, 2008, the amount projected to be reclassified from AOCI into earnings in the next 12 months was a net loss of $0.5 million and a net gain of $0.4 million, respectively. The maximum remaining maturity of any forward or optional contract at October 3, 2009 and September 27, 2008 was 0.7 years and 1.3 years, respectively.
Interest Rate Swaps
The Company also uses floating to fixed interest rate swaps to mitigate its exposure to changes in interest rates related to a portion of its floating rate indebtedness. The Company has designated these interest rate swaps as cash flow hedges. As a result, changes in the fair value of the interest rate swap are recorded in AOCI within Shareholders’ Investment on the Consolidated Balance Sheets.
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At October 3, 2009, the Company had outstanding interest rate swaps with total notional amounts of $40.0 million, which equals the amount of outstanding credit facility borrowings as of that date. At September 27, 2008, the Company had an outstanding interest rate swap with a total notional amount of $13.0 million. Every month, the Company pays fixed interest on these interest rate swaps in exchange for interest received at monthly U.S. LIBOR. At October 3, 2009 and September 27, 2008, the weighted-average fixed interest rate payable by the Company under the terms of the interest rate swap arrangements was 3.31% and 4.24%, respectively. Because there is a 45 basis-point differential between the variable-rate interest paid by the Company on its outstanding credit facility borrowings and the variable-rate interest received on the interest rate swaps, the overall effective interest rate applicable to outstanding credit facility borrowings at October 3, 2009 and September 27, 2008, under the terms of the credit facility borrowings and interest rate swap agreements, was 3.76% and 4.69%, respectively. The total market value of the interest rate swaps at October 3, 2009 and September 27, 2008 was a liability of $1.9 million and $0.2 million, respectively.
The pretax amounts recognized in AOCI on interest rate swaps for the fiscal year ended October 3, 2009 are as follows:
| | | | |
| | 2009 | |
| | (expressed in thousands) | |
Beginning unrealized net loss in AOCI | | $ | (199 | ) |
Net loss reclassified into interest expense (effective portion) | | | 970 | |
Net loss recognized in OCI (effective portion) | | | (2,665 | ) |
Ending unrealized net loss in AOCI | | $ | (1,894 | ) |
Foreign Currency Balance Sheet Hedging
The Company also uses currency exchange contracts to hedge 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 contracts are included in Other Income, net on the Consolidated Statement of Income in the current period.
At October 3, 2009 and September 27, 2008, the Company had outstanding balance sheet hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $54.5 million and $17.3 million, 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 October 3, 2009 and September 27, 2008 was $12.7 million and $0.5 million, respectively. At October 3, 2009, the net market value of the balance sheet foreign currency exchange contracts was a net liability of $0.7 million. On September 27, 2008, the net market value of the balance sheet forward exchange contracts was less than $0.1 million.
The net loss recognized in the Consolidated Statements of Income on balance sheet hedge currency exchange contracts during the fiscal year ended October 3, 2009 is as follows:
| | | | |
| | 2009 | |
| | (expressed in thousands) | |
Net loss recognized in Other income, net | | $ | (1,863 | ) |
Income Taxes
The Company records 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. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company believes 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 its 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 management’s expectations could have a material impact on the Company’s financial condition and operating results. See Note 8 to the Consolidated Financial Statements for additional information on income taxes.
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Earnings Per Common Share
Basic earnings per share are computed by dividing net earnings by the daily weighted average number of common shares outstanding during the applicable periods. Diluted earnings per share include the potentially dilutive effect of common shares issued in connection with outstanding stock-based compensation options and grants, using the treasury stock method. 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. As a result, stock options to acquire 1.3 million, 0.9 million, and 0.5 million weighted common shares have been excluded from the diluted weighted shares outstanding calculation for the fiscal year ended October 3, 2009, September 27, 2008, and September 29, 2007, respectively. The potentially dilutive effect of common shares issued in connection with outstanding stock options is determined based on income before discontinued operations. A reconciliation of these amounts is as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands, except per share data) | |
| | | | | | | | | | |
Income before discontinued operations | | $ | 17,394 | | $ | 47,110 | | $ | 41,041 | |
Income from discontinued operations, net of tax | | | — | | | 2,081 | | | 955 | |
Net income | | $ | 17,394 | | $ | 49,191 | | $ | 41,996 | |
Weighted average common shares outstanding | | | 16,793 | | | 17,351 | | | 17,980 | |
Dilutive potential common shares | | | 38 | | | 193 | | | 350 | |
Total dilutive common shares | | | 16,831 | | | 17,544 | | | 18,330 | |
Earnings per share: | | | | | | | | | | |
Basic: | | | | | | | | | | |
Income before discontinued operations | | $ | 1.04 | | $ | 2.72 | | $ | 2.29 | |
Income from discontinued operations, net of tax | | | — | | | 0.12 | | | 0.05 | |
Earnings per share | | $ | 1.04 | | $ | 2.84 | | $ | 2.34 | |
Diluted: | | | | | | | | | | |
Income before discontinued operations | | $ | 1.03 | | $ | 2.68 | | $ | 2.24 | |
Income from discontinued operations, net of tax | | | — | | | 0.12 | | | 0.05 | |
Earnings per share | | $ | 1.03 | | $ | 2.80 | | $ | 2.29 | |
Stock-Based Compensation
The Company measures 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, and recognizes 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, the Company utilizes a Black-Scholes option pricing model, which requires the input of certain assumptions requiring management judgment. Because the Company’s 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. Management 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 the Company employs 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 2 to the Consolidated Financial Statements for additional information on stock-based compensation.
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Comprehensive Income (Loss)
Comprehensive Income (Loss), a component of Shareholders’ Investment, for the fiscal years ended October 3, 2009, September 27, 2008 and September 29, 2007 consists of net income, pension benefit plan adjustments, derivative instrument gains or losses and foreign currency translation adjustments.
Effective September 29, 2007, the Company adopted the recognition and disclosure provisions of ASC 715-20, which resulted in the recognition of the funded status of a defined benefit retirement plan located at one of its German subsidiaries. Upon adoption of ASC 715-20, the unrealized portion of the incremental increase in the retirement plan liability was recognized as a component of Accumulated Other Comprehensive Income (Loss). See Note 9 to the Consolidated Financial Statements for additional information on the Company’s defined benefit retirement plan.
The accumulated balances for each component of Accumulated Other Comprehensive Income (Loss) were as follows:
| | | | | | | | | | | | | |
| | Derivative
Financial
Instrument
Unrealized
Gain (Loss) | | Minimum
Pension
Liability
and other
Pension
Benefit Plan
Adjustments | | Foreign
Currency
Translation
Adjustment | | Total
Accumulated
Other
Comprehensive
Income (Loss) | |
| | (expressed in thousands) | |
Balances at September 30, 2006 | | $ | 343 | | $ | (750 | ) | $ | 12,517 | | $ | 12,110 | |
Foreign exchange translation adjustments | | | — | | | (91 | ) | | 9,389 | | | 9,298 | |
Minimum pension liability adjustment, net of tax of $490 | | | — | | | 738 | | | — | | | 738 | |
Change in unrealized loss, net of tax of ($366) | | | (612 | ) | | — | | | — | | | (612 | ) |
Realized gain, net of tax of ($74) | | | (123 | ) | | — | | | — | | | (123 | ) |
Adjustment to initially apply FASB | | | | | | | | | | | | | |
ASC 715-20, net of tax of ($431) | | | — | | | (998 | ) | | — | | | (998 | ) |
Balances at September 29, 2007 | | $ | (392 | ) | $ | (1,101 | ) | $ | 21,906 | | $ | 20,413 | |
Foreign exchange translation adjustments | | | — | | | (29 | ) | | 3,888 | | | 3,859 | |
Minimum pension liability adjustment, net of tax of $374 | | | — | | | 866 | | | — | | | 866 | |
Change in unrealized loss, net of tax of ($523) | | | (973 | ) | | — | | | — | | | (973 | ) |
Realized gain, net of tax of $892 | | | 1,293 | | | 24 | | | — | | | 1,317 | |
Balances at September 27, 2008 | | $ | (72 | ) | $ | (240 | ) | $ | 25,794 | | $ | 25,482 | |
Foreign exchange translation adjustments | | | — | | | — | | | 2,459 | | | 2,459 | |
Pension benefit plan adjustments, net of tax of ($429) | | | — | | | (992 | ) | | — | | | (992 | ) |
Change in unrealized loss, net of tax of ($1,910) | | | (3,397 | ) | | — | | | — | | | (3,397 | ) |
Realized loss, net of tax of $1,028 | | | 1,961 | | | 10 | | | — | | | 1,971 | |
Balances at October 3, 2009 | | $ | (1,508 | ) | $ | (1,222 | ) | $ | 28,253 | | $ | 25,523 | |
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Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management 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. Ultimate results could differ from those estimates. Additionally, the Company frequently undertakes significant technological innovation on certain of its 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.
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles” as codified by Accounting Standards Codification (“ASC”) 105. This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) is the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. ASC 105 is effective for interim or annual reporting periods ending after September 15, 2009. The Company adopted the provisions of ASC 105 in the fourth quarter of fiscal year 2009 and included references to the ASC in the Notes to the Consolidated Financial Statements, as appropriate. The Company’s adoption of the provisions of ASC 105 did not have an impact on the consolidated financial statements, as the Codification did not change or alter existing GAAP.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), an update to ASC 820, “Fair Value Measurements and Disclosures”. This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this ASU 2009-05 provides clarification that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in this update. ASU 2009-05 is effective for interim or annual financial periods beginning after August 27, 2009. The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” as codified by ASC 855-10. This standard establishes general standards or accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009. The Company’s adoption of the provisions of ASC 855 during the third quarter of fiscal year 2009 did not have an impact on the consolidated financial statements.
In December 2008, the FASB issued FSP FAS 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” as codified by ASC 715-20-65-2. This standard amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” as codified by ASC 715-20 and requires additional disclosures regarding defined benefit plan assets, including investment policies and strategies, major categories of plan assets, valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. ASC 715-20-65-2 is effective for fiscal years ending after December 15, 2009. The Company does not expect the adoption of ASC 715-20-65-2 to have a material impact on its consolidated financial statements.
In June 2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” as codified by ASC 815-40-15. This standard provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. ASC 815-40-15 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of ASC 815-40-15 to have a material impact on its consolidated financial statements.
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In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) No. 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” as codified by ASC 260-10-45. This standard clarifies that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. ASC 260-10-45 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of ASC 260-10-45 to have a material impact on its consolidated financial statements.
In April 2008, the FASB issued Staff Position (“FSP”) FAS 142-3 “Determination of the Useful Life of Intangible Assets” as codified by ASC 350-30-65-1. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets” as codified under ASC 350-30. ASC 350-30-65-1 is intended to improve the consistency between the useful life of a recognized intangible asset under ASC 350-30 and the period of the expected cash flows used to measure the fair value of the asset under ASC 805 and other GAAP. ASC 350-30-65-1 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company does not expect the adoption of ASC 350-30-65-1 to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” As codified by ASC 805. ASC 805 expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. ASC 805 also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, ASC 805 requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. ASC 805 is effective for the Company’s fiscal years beginning on or after December 15, 2008, with early adoption prohibited. The Company does not expect the adoption of ASC 805 to have a material impact on its consolidated financial statements.
2. Stock-Based Compensation:
The Company compensates officers, directors, and employees with stock-based compensation under four stock plans approved by the Company’s shareholders in 1994, 1997, 2002 and 2006, and administered under the supervision of the Company’s Board of Directors. During the years ended October 3, 2009, September 27, 2008, and September 29, 2007, the Company awarded stock options, employee stock purchase plan shares, and restricted stock grants. During the year ended October 3, 2009, the Company also awarded restricted stock units under the 2006 stock plan. At October 3, 2009, a total of 1,437,231 shares were available for future grant under these plans.
Stock-Based Compensation Expense
The effect of recording stock-based compensation expense for the years ended October 3, 2009, September 27, 2008, and September 29, 2007 was as follows (in thousands, except per share data):
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
Stock-based compensation expense by type of award: | | | | | | | | | | |
Employee stock options | | $ | 2,478 | | $ | 3,591 | | $ | 4,388 | |
Employee stock purchase plan (ESPP) | | | 242 | | | 191 | | | 189 | |
Restricted stock grants and units | | | 612 | | | 441 | | | 441 | |
Amounts capitalized as inventory | | | (775 | ) | | (938 | ) | | (1,080 | ) |
Amounts recognized in income for amounts previously capitalized as inventory | | | 827 | | �� | 914 | | | 1,085 | |
| | | | | | | | | | |
Total stock-based compensation included in income from operations | | | 3,384 | | | 4,199 | | | 5,023 | |
Income tax benefit on stock-based compensation | | | (1,091 | ) | | (1,421 | ) | | (1,669 | ) |
Net compensation expense included in net income | | $ | 2,293 | | $ | 2,778 | | $ | 3,354 | |
| | | | | | | | | | |
Earnings per share: | | | | | | | | | | |
Basic | | $ | 0.14 | | $ | 0.16 | | $ | 0.19 | |
Diluted | | $ | 0.14 | | $ | 0.16 | | $ | 0.18 | |
| | | | | | | | | | |
Tax effect on: | | | | | | | | | | |
Cash flows from operating activities | | $ | (4 | ) | $ | (925 | ) | $ | (2,123 | ) |
Cash flows from financing activities | | $ | 4 | | $ | 925 | | $ | 2,123 | |
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At October 3, 2009, there was $2.5 million of total stock option expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of approximately 1.4 years. At October 3, 2009, there was $0.4 million and $0.7 million of total restricted stock expense related to non-vested awards of restricted stock grants and restricted stock units, respectively, not yet recognized, which is expected to be recognized over a weighted average period of approximately 2.0 years and 2.8 years, respectively.
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, with this value being recognized evenly over the vesting period. The weighted average per share fair value of stock options granted during the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 was $4.71, $7.53, and $10.51, respectively. The weighted average assumptions used to determine fair value of stock options granted during those fiscal years were as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
Expected life (in years) | | | 2.7 | | | 2.6 | | | 2.6 | |
Risk-free interest rate | | | 1.4 | % | | 2.8 | % | | 4.9 | % |
Expected volatility | | | 41.4 | % | | 33.3 | % | | 31.1 | % |
Dividend yield | | | 2.9 | % | | 1.7 | % | | 1.0 | % |
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. The Company estimates stock price volatility 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.
Awards of restricted stock grants and restricted stock units both are valued based on the market value of the Company’s shares at the date of grant. The value of restricted stock grants and restricted stock units is allocated to expense evenly over the restricted period. 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.
Stock Options
Stock options are granted at exercise prices equal to the closing market price of the Company’s stock on the date of grant. Generally, options vest proportionally on the first three anniversaries of the grant date and expire five years from the grant date.
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Stock option activity for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | Shares | | WAEP* | | Shares | | WAEP* | | Shares | | WAEP* | |
Options outstanding at beginning of year | | | 1,572 | | $ | 37.59 | | | 1,588 | | $ | 34.60 | | | 1,667 | | $ | 28.06 | |
Granted | | | 273 | | $ | 20.60 | | | 377 | | $ | 35.87 | | | 416 | | $ | 45.49 | |
Exercised | | | (40 | ) | $ | 22.44 | | | (332 | ) | $ | 21.62 | | | (426 | ) | $ | 20.08 | |
Forfeited or expired | | | (313 | ) | $ | 34.36 | | | (61 | ) | $ | 35.87 | | | (69 | ) | $ | 31.92 | |
Options outstanding at end of year | | | 1,492 | | $ | 35.56 | | | 1,572 | | $ | 37.59 | | | 1,588 | | $ | 34.60 | |
Options eligible for exercise at year-end | | | 892 | | $ | 38.90 | | | 821 | | $ | 35.68 | | | 763 | | $ | 27.05 | |
*Weighted Average Exercise Price |
Options outstanding at October 3, 2009 had a weighted average remaining contractual term of 2.7 years, and an aggregate intrinsic value of $2.0 million. Options eligible for exercise at October 3, 2009 had a weighted average remaining contractual term of 1.9 years, and no aggregate intrinsic value.
The total intrinsic value of stock options exercised during the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 were less than $0.1 million, $5.8 million and $9.6 million, respectively.
Restricted Stock
The Company awards directors and key employees restricted stock grants and restricted stock units that vest over three years. For restricted stock grants 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. For restricted stock grants awarded to employees, participants were not entitled to cash dividends and voting rights on unvested shares.
Restricted stock grant activity for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | Shares | | WAGDFV* | | Shares | | WAGDFV* | | Shares | | WAGDFV* | |
Unvested shares at beginning of year | | | 20 | | $ | 39.29 | | | 22 | | $ | 38.64 | | | 22 | | $ | 34.06 | |
Granted | | | 29 | | $ | 24.76 | | | 12 | | $ | 38.30 | | | 11 | | $ | 42.49 | |
Vested | | | (10 | ) | $ | 38.99 | | | (11 | ) | $ | 36.62 | | | (11 | ) | $ | 33.57 | |
Forfeited | | | (3 | ) | $ | 26.91 | | | (3 | ) | $ | 39.87 | | | — | | $ | — | |
Unvested shares at end of year | | | 36 | | $ | 28.72 | | | 20 | | $ | 39.29 | | | 22 | | $ | 38.64 | |
*Weighted Average Grant Date Fair Value |
Restricted stock unit activity for the fiscal years ended October 3, 2009, was as follows (in thousands, except per share amounts):
| | | | | | | |
| | 2009 | |
| | Shares | | WAGDFV* | |
Outstanding at beginning of year | | | — | | $ | — | |
Granted | | | 39 | | $ | 20.55 | |
Vested | | | — | | $ | — | |
Forfeited | | | (1 | ) | $ | 20.55 | |
Outstanding at end of year | | | 38 | | $ | 20.55 | |
*Weighted Average Grant Date Fair Value | | | | | | | |
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Employee Stock Purchase Plan
The Company’s U.S. employees are eligible to participate in the Company’s Employee Stock Purchase Plan (“ESPP”). Employee purchases of Company stock are funded by payroll deductions over calendar six-month periods. The purchase price is 85% of the lower of the market price at either 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. Two purchase periods closed in fiscal year 2009 with the combined issuance of 36,333 shares at a weighted average price of $19.75. In fiscal years 2008 and 2007, purchases were 20,733 and 21,351 shares, respectively, with weighted average share prices of $33.15 and $32.83, respectively. At October 3, 2009, the number of shares remaining for issuance under the ESPP was 478,136.
3. Acquisitions & Divestitures:
Business Acquisition
On September 28, 2008, the Company acquired substantially all of the assets of SANS. SANS has manufacturing facilities in both Shenzhen and Shanghai, China, and is headquartered in Shenzhen. SANS manufactures material testing solutions and offers a variety of products, including electro-mechanical and static-hydraulic testing machines. The acquisition accelerates the Company’s China growth strategy while also broadening its product offering worldwide.
The total purchase price for SANS was $49.4 million, including direct acquisition costs of $2.9 million. As of October 3, 2009, approximately $41.7 million of the total purchase price was paid, including the $2.9 million of direct acquisition costs. The remaining liability of approximately $7.7 million is included in Other Accrued Liabilities on the October 3, 2009 Consolidated Balance Sheet, and is expected to be paid during the next twelve months. The results of operations for SANS have been included in the Company’s Consolidated Statements of Income since the date of acquisition, and are reported in the Company’s Test segment. Pro forma results have not been included as the impact of the acquisition is not material.
The purchase price for SANS was allocated based on the fair values of assets acquired and liabilities assumed. The following table summarizes the allocation of the SANS purchase price, including acquisition costs, to the fair values of the assets acquired and liabilities assumed at the date of acquisition:
| | | | |
| | September 28, 2008 | |
| | (expressed in thousands) | |
Accounts receivable, inventories and other current assets | | $ | 18,548 | |
Property and equipment | | | 6,631 | |
Other intangible assets(1) | | | 17,887 | |
Goodwill | | | 13,604 | |
Total assets acquired | | | 56,670 | |
Current liabilities assumed | | | 7,318 | |
Net assets acquired | | $ | 49,352 | |
| | |
| (1) | Intangible assets include patents, trade names, non-compete agreements and land use rights in the amounts of $9.2 million, $5.1 million $2.4 million and $1.2 million, respectively. See Note 4 in the Notes to Consolidated Financial Statements for additional information on intangible assets. |
Discontinued Operations
On June 27, 2008, the Company sold substantially all of the net assets of its Nano Instruments product line, which was based in Oak Ridge, Tennessee. As a result of this sale, the Company recorded a gain of $2.4 million, net of tax of $3.6 million, in fiscal year 2008. The Nano Instruments product line was historically included in the Company’s Test segment for financial reporting. The results of operations of the Nano Instruments product line, including the gain on the sale, have been excluded from the results of operations of the Test segment and are reported as discontinued operations.
The Company does not allocate interest income or interest expense to discontinued operations. There were no significant operating results of discontinued operations during the fiscal year ended October 3, 2009. Operating results of the discontinued operations included in the Company’s results for the fiscal years ended September 27, 2008, and September 29, 2007 were as follows:
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| | | | | | | |
| | 2008 | | 2007 | |
| | (expressed in thousands) | |
Revenue | | $ | 6,106 | | $ | 10,413 | |
(Loss) income from discontinued operations before taxes and gain on sale | | | (628 | ) | | 1,576 | |
(Benefit) provision for income taxes | | | (260 | ) | | 621 | |
(Loss) income from discontinued operations, net of tax | | $ | (368 | ) | $ | 955 | |
There were no significant assets or liabilities of discontinued operations at October 3, 2009. The assets and liabilities of discontinued operations at September 27, 2008 were as follows:
| | | | |
| | 2008 | |
| | (expressed in thousands) | |
Accounts receivable, net of allowances for doubtful accounts | | $ | 149 | |
Unbilled accounts receivable | | | 88 | |
Current deferred tax assets | | | 143 | |
Total assets of discontinued operations(1) | | $ | 380 | |
| | | | |
Accrued income taxes | | $ | 177 | |
Total liabilities of discontinued operations(2) | | $ | 177 | |
| | |
| (1) | Total assets of discontinued operations balance is reported in Prepaid Expenses and Other Current Assets in the accompanying Consolidated Balance Sheet. |
| | |
| (2) | Total liabilities of discontinued operations balance is reported in Other Accrued Liabilities in the accompanying Consolidated Balance Sheet. |
4. Capital Assets:
Property and Equipment
Property and equipment at October 3, 2009 and September 27, 2008 consist of the following:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Land and improvements | | $ | 1,716 | | $ | 1,668 | |
Buildings and improvements | | | 52,921 | | | 45,700 | |
Machinery and equipment | | | 96,156 | | | 91,851 | |
Total | | | 150,793 | | | 139,219 | |
Less accumulated depreciation | | | (94,675 | ) | | (88,685 | ) |
Property and equipment, net | | $ | 56,118 | | $ | 50,534 | |
Goodwill
The changes to the carrying amount of goodwill for fiscal years ended October 3, 2009 and September 27, 2008 were as follows:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Beginning balance | | $ | 1,668 | | $ | 1,642 | |
Acquisition of SANS | | | 13,604 | | | — | |
Currency translation | | | (66 | ) | | 26 | |
Ending balance | | $ | 15,206 | | $ | 1,668 | |
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At October 3, 2009 and September 27, 2009, $13.5 million and $1.7 million of goodwill was associated with the Test and Sensors segments, respectively. At September 27, 2008, goodwill of $1.7 million was associated entirely with the Sensors segment.
Other Intangible Assets
Other intangible assets at October 3, 2009 and September 27, 2008 consist of the following:
| | | | | | | | | | | | | |
| | October 3, 2009 | |
| | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Value | | Weighted
Average
Useful Life
(in Years) | |
| | (expressed in thousands) | |
Software development costs | | $ | 8,062 | | $ | (729 | ) | $ | 7,333 | | | 5.0 | |
Patents | | | 9,225 | | | (652 | ) | | 8,573 | | | 15.4 | |
Trademarks and trade names | | | 5,583 | | | (412 | ) | | 5,171 | | | 30.2 | |
Non-compete agreements | | | 2,435 | | | (812 | ) | | 1,623 | | | 3.0 | |
Land-use rights | | | 1,144 | | | (18 | ) | | 1,126 | | | 47.8 | |
| | $ | 26,449 | | $ | (2,623 | ) | $ | 23,826 | | | 15.6 | |
| | | | | | | | | | | | | |
| | September 27, 2008 | |
| | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Value | | Weighted
Average
Useful Life
(in Years) | |
| | (expressed in thousands) | |
Software development costs | | $ | 4,155 | | $ | — | | $ | 4,155 | | | 5.0 | |
Trademarks and trade names | | | 435 | | | (227 | ) | | 208 | | | 33.0 | |
| | $ | 4,590 | | $ | (227 | ) | $ | 4,363 | | | 7.7 | |
Amortization expense recognized during the fiscal years ended October 3, 2009 and September 27, 2008 was $2.4 million and less than $0.1 million, respectively. The estimated future amortization expense related to other intangible assets for the next five fiscal years is as follows:
| | | | |
Fiscal Year | | Amortization
Expense | |
| | (expressed in
thousands) | |
2010 | | $ | 3,286 | |
2011 | | $ | 3,285 | |
2012 | | $ | 2,473 | |
2013 | | $ | 2,473 | |
2014 | | $ | 1,744 | |
Future amortization amounts presented above are estimates. Actual future amortization expense may be different, due to future acquisitions, impairments, changes in amortization periods, or other factors.
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5. Business Segment Information:
The Company’s Chief Executive Officer and management regularly review financial information for the Company’s three discrete operating units. Based on similarities in the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments, the operating units have been aggregated for financial statement purposes and categorized into two reportable segments, “Test” and “Sensors.” The Test segment provides testing equipment, systems, and services to the ground vehicles, aerospace, and infrastructure markets. The Sensors segment provides high-performance position sensors for a variety of industrial and vehicular applications.
In evaluating each segment’s performance, management 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 primarily on the basis of revenue.
Financial information by reportable segment for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007, were as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands) | |
Revenue | | | | | | | | | | |
Test | | $ | 342,595 | | $ | 364,068 | | $ | 333,185 | |
Sensors | | | 66,286 | | | 96,447 | | | 76,906 | |
Total Revenue | | $ | 408,881 | | $ | 460,515 | | $ | 410,091 | |
|
Income from Operations | | | | | | | | | | |
Test | | $ | 17,494 | | $ | 41,108 | | $ | 39,215 | |
Sensors | | | 7,100 | | | 20,653 | | | 14,757 | |
Total Income from Operations | | $ | 24,594 | | $ | 61,761 | | $ | 53,972 | |
|
Identifiable Assets | | | | | | | | | | |
Test | | $ | 289,700 | | $ | 301,346 | | $ | 261,040 | |
Sensors | | | 97,214 | | | 97,431 | | | 83,864 | |
Discontinued Operations | | | — | | | 380 | | | 8,077 | |
Total Assets | | $ | 386,914 | | $ | 399,157 | | $ | 352,981 | |
|
Other Segment Data | | | | | | | | | | |
Test: | | | | | | | | | | |
Goodwill | | $ | 13,538 | | $ | — | | $ | — | |
Capital expenditures | | | 8,134 | | | 7,643 | | | 8,908 | |
Depreciation and amortization | | $ | 10,090 | | $ | 7,317 | | $ | 6,290 | |
Sensors: | | | | | | | | | | |
Goodwill | | $ | 1,668 | | $ | 1,668 | | $ | 1,642 | |
Capital expenditures | | | 1,623 | | | 2,109 | | | 3,132 | |
Depreciation and amortization | | $ | 2,042 | | $ | 1,890 | | $ | 1,695 | |
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Geographic information was as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | (expressed in thousands) | |
Revenue | | | | | | | | | | |
United States | | $ | 123,336 | | $ | 147,766 | | $ | 134,889 | |
Europe, excluding Germany | | | 95,368 | | | 92,995 | | | 97,867 | |
China | | | 61,209 | | | 35,325 | | | 30,571 | |
Japan | | | 47,500 | | | 48,802 | | | 42,600 | |
Germany | | | 33,341 | | | 58,962 | | | 49,597 | |
Asia, excluding Japan & China | | | 29,439 | | | 55,396 | | | 40,180 | |
Other | | | 18,688 | | | 21,269 | | | 14,387 | |
Total Revenue | | $ | 408,881 | | $ | 460,515 | | $ | 410,091 | |
| | | | | | | | | | |
Property and Equipment, Net | | | | | | | | | | |
United States | | $ | 34,613 | | $ | 38,915 | | $ | 35,312 | |
Europe | | | 12,668 | | | 10,085 | | | 12,403 | |
Asia | | | 8,837 | | | 1,534 | | | 2,032 | |
Total Property and Equipment, Net | | $ | 56,118 | | $ | 50,534 | | $ | 49,747 | |
Revenue by geographic area is presented based on customer location. No countries other than the United States, Germany, China and Japan had revenue in excess of 10% of the Company’s total revenue during any of the periods presented. No single customer accounted for 10% or more of the Company’s consolidated revenue for any of the periods presented.
6. Fair Value Measurements
ASC 820-10 Adoption
Effective September 28, 2008, the Company adopted certain of the provisions of SFAS No. 157, “Fair Value Measurements” as codified by ASC 820-10. ASC 820-10 provides a framework for measuring fair value under GAAP, and defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (exit price). ASC 820-10 clarifies that a fair value measurement should include an adjustment for risk if market participants would include a risk adjustment in pricing the related asset or liability.
In February 2008, the FASB issued FSP 157-2 as codified by ASC 820-10-15-1A. ASC 820-10-15-1A delays the effective date of ASC 820-10 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities except those that are recognized or disclosed at fair vailue in the financial statements on a recurring basis (at least annually). The Company elected the partial deferral of ASC 820-10 under the provisions of ASC 820-10-15-1A related to its application when evaluating goodwill, other intangible assets and other long-lived assets for impairment. The Company does not expect the adoption of the deferred portions of ASC 820-10 to have a material impact on its consolidated financial statements.
In determining the fair value of financial assets and liabilities, the Company currently utilizes market data or other assumptions that it believes market participants would use in pricing the asset or liability, and adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate.
ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the fair value hierarchy are as follows:
| |
| Level 1: Inputs are unadjusted quoted prices which are available in active markets for identical assets or liabilities. |
| |
| Level 2: Inputs are other-than-quoted prices in active markets included in Level 1, which are either directly or indirectly observable, such as quoted prices for similar assets or liabilities in active markets, or for identical assets or liabilities in inactive markets. Level 2 includes those financial assets and liabilities that are valued using models or other valuation methodologies. The models used are primarily industry-standard, and consider various assumptions, including quoted forward prices, time value, volatility factors, and current contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of the assumptions used in these valuation models are observable in the marketplace. |
| |
| Level 3: Inputs are unobservable and reflect the Company’s own assumptions used to measure assets and liabilities at fair value. |
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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.
Financial Instruments Measured at Fair Value on a Recurring Basis
As of October 3, 2009, financial assets and liabilities subject to fair value measurements on a recurring basis are as follows:
| | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (expressed in thousands) | |
Assets: | | | | | | | | | | | | | |
Currency contracts(1) | | $ | — | | $ | 234 | | $ | — | | $ | 234 | |
Total assets | | $ | — | | $ | 234 | | $ | — | | $ | 234 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | |
Currency contracts(1) | | $ | — | | $ | 1,199 | | $ | — | | $ | 1,199 | |
Interest rate swaps(2) | | | | | | 1,894 | | | — | | | 1,894 | |
Total liabilities | | $ | — | | $ | 3,093 | | $ | — | | $ | 3,093 | |
| | |
| (1) | Based on observable market transactions of spot currency rates and forward currency rates on equivalently-termed instruments. |
| | |
| (2) | Based on LIBOR and swap rates. |
Financial Instruments not Measured at Fair Value
Certain of the Company’s financial instruments are not measured at fair value but nevertheless 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, accounts payable and short-term borrowings.
ASC 825 Adoption
Effective September 28, 2008, the Company adopted the provisions of SFAS No. 159, “The Fair Value Option for Financial Assts and Financial Liabilities – Including an Amendment of SFAS No. 115, ‘Accounting for Certain Investments in Debt and Equity Securities.’” as codified by ASC 825. ASC 825 provides an option to elect fair value as an alternative measurement for selected financial assets and liabilities not previously carried at fair value. Upon adoption of ASC 825, the Company evaluated its existing eligible financial assets and liabilities and determined that the risk of volatility in earnings, which could result from underlying changes in the fair values of those assets and liabilities, was not significant. As a result, the Company did not elect to apply the fair value provisions to any of them. However, because the election to apply the provisions of ASC 825 is determined on an instrument-by-instrument basis, the Company may elect the fair value measurement option on future eligible financial assets and liabilities.
7. Financing:
Short-term borrowings at October 3, 2009 and September 27, 2008 consist of the following:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Bank line of credit, monthly U.S. LIBOR plus 45 basis points (0.76% rate in effect at October 3, 2009), maturing October 2009, with optional month-to-month term renewal and loan repricing until December 2012 | | $ | 11,000 | | $ | 11,000 | |
Bank line of credit, monthly U.S. LIBOR plus 45 basis points (0.70% rate in effect at October 3, 2009), maturing October 2009, with optional month-to-month term renewal and loan repricing until December 2012 | | | 13,000 | | | 13,000 | |
Bank line of credit, monthly U.S. LIBOR plus 45 basis points (0.70% rate in effect at October 3, 2009), maturing October 2009, with optional month-to-month term renewal and loan repricing until December 2012 | | | 10,000 | | | — | |
Bank line of credit, monthly U.S. LIBOR plus 45 basis points (0.70% rate in effect at October 3, 2009), maturing October 2009, with optional month-to-month term renewal and loan repricing until December 2012 | | | 6,000 | | | — | |
Notes payable, non-interest bearing | | | 182 | | | 338 | |
Total Short-Term Borrowings | | $ | 40,182 | | $ | 24,338 | |
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On December 18, 2007, the Company entered into a five-year unsecured credit agreement (“Credit Facility”). The Credit Facility provides for up to $75.0 million for working capital financing, acquisitions, share purchases, or other general corporate purposes until December 2012. At October 3, 2009, outstanding borrowings under the Credit Facility aggregated $40.0 million.
The weighted average interest rate on outstanding borrowings under the Credit Facility during the fiscal years ended October 3, 2009 and September 27, 2008 was 1.32% and 2.95%, respectively. In order to mitigate its exposure to interest rate increases on its floating rate indeptedness, the Company has entered into floating to fixed interest rate swaps. The Company intends to renew each of the outstanding borrowings on the credit facility monthly throughout the entire term of the interest rate swap arrangement directly associated with each borrowing. See Note 1 to the Consolidated Financial Statements for additional information on the interest rate swaps.
At the Company’s election, future borrowings under the Credit Facility can be structured to bear interest at either an alternate base rate (“ABR”) or an adjusted LIBOR plus an applicable margin. The ABR is the greater of the Prime Rate or the Federal Funds Effective Rate plus 0.5%. At October 3, 2009, the prime rate of 3.25% was the applicable ABR. The adjusted LIBOR is generally determined based on the multiple of the applicable LIBOR and a statutory reserve factor, considering the projected period of use of the loan proceeds. The applicable margin applied to adjusted LIBOR on borrowings varies based on the Company’s leverage ratio. At October 3, 2009, the spread of the adjusted LIBOR plus the applicable margin ranged from 0.69% to 1.05%. Commitment fees are payable on the unused portion of the Credit Facility at rates between 0.09% and 0.18%, based on the Company’s leverage ratio. During each the fiscal years ended October 3, 2009 and September 27, 2008, commitment fees incurred on the Credit Facility were less than $0.1 million.
Notes payable at October 3, 2009 and September 27, 2008 consisted of non-interest bearing notes payable to vendors by the Company’s Japanese Sensors subsidiary.
At October 3, 2009 the Company had no outstanding long-term debt obligations. Long-term debt at September 27, 2008 was as follows:
| | | | |
| | 2008 | |
| | | | |
7.5% note, unsecured, due in semi-annual installments of $1,154, expired July 2009 | | $ | 2,308 | |
Less Current Maturities of Long-Term Debt | | | (2,308 | ) |
Total Long-Term Debt, Less Current Maturities | | $ | — | |
The Company is subject to financial covenants, among other restrictions, under the Credit Facility, including, among other covenants, the ratio of consolidated total indebtedness to consolidated EBITDA, as well as the ratio of consolidated EBITDA to consolidated interest expense. These covenants restrict the Company’s ability to pay dividends and purchase outstanding shares of common stock. At October 3, 2009 and September 27, 2008, the Company was in compliance with these financial covenants.
At October 3, 2009, the Company had outstanding letters of credit and guarantees totaling $23.1 million and $2.7 million, respectively, primarily to bond advance payments and performance related to customer contracts in the Test segment.
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8. Income Taxes:
The components of income before income taxes for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 were as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands) | |
Income before income taxes and discontinued operations: | | | | | | | | | | |
Domestic | | $ | 15,965 | | $ | 29,745 | | $ | 31,211 | |
Foreign | | | 7,938 | | | 35,715 | | | 25,379 | |
Total | | $ | 23,903 | | $ | 65,460 | | $ | 56,590 | |
| | | | | | | | | | |
The provision for income taxes from continuing operations for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 was as follows: |
|
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands) | |
Current provision (benefit): | | | | | | | | | | |
Federal | | $ | (601 | ) | $ | 9,016 | | $ | 7,791 | |
State | | | 5 | | | 1,080 | | | 1,530 | |
Foreign | | | 7,435 | | | 11,943 | | | 10,425 | |
Deferred | | | (330 | ) | | (3,689 | ) | | (4,197 | ) |
Total provision | | $ | 6,509 | | $ | 18,350 | | $ | 15,549 | |
A reconciliation from the federal statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 is as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | | | | |
United States federal statutory income tax rate | | | 35 | % | | 35 | % | | 35 | % |
Tax benefit of export sales | | | — | | | — | | | (1 | ) |
Foreign provision (less than) greater than of U.S. tax rate | | | 1 | | | (1 | ) | | (2 | ) |
Settlement of audits, favorable resolution of accrued tax matters | | | — | | | (2 | ) | | — | |
State income taxes, net of federal benefit | | | 1 | | | 1 | | | 1 | |
Research and development tax credits | | | (13 | ) | | — | | | (5 | ) |
Domestic production activities deduction | | | (1 | ) | | (1 | ) | | (1 | ) |
Foreign tax credits | | | — | | | (5 | ) | | — | |
Valuation allowances against deferred tax assets | | | 1 | | | — | | | — | |
Tax exempt income | | | — | | | — | | | (1 | ) |
Nondeductible stock option expense and other permanent items | | | 3 | | | 1 | | | 2 | |
Effective income tax rate | | | 27 | % | | 28 | % | | 28 | % |
A summary of the deferred tax assets and liabilities for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 is as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands) | |
Deferred Tax Asset: | | | | | | | | | | |
Accrued compensation and benefits | | $ | 9,212 | | $ | 7,887 | | $ | 6,907 | |
Inventory reserves | | | 3,621 | | | 1,679 | | | 2,466 | |
Intangible assets | | | 109 | | | — | | | (61 | ) |
Allowance for doubtful accounts | | | 132 | | | 163 | | | 215 | |
Other assets | | | 2,991 | | | 3,323 | | | 655 | |
Net operating loss carryovers | | | 2,093 | | | 2,555 | | | 1,483 | |
Unrealized derivative instrument losses | | | 804 | | | 82 | | | 119 | |
Capital loss carryovers | | | — | | | — | | | 34 | |
Research and development and foreign tax credits | | | 1,187 | | | 2,713 | | | 305 | |
Total deferred tax asset before valuation allowance | | | 20,149 | | | 18,402 | | | 12,123 | |
Less valuation allowance | | | (987 | ) | | (809 | ) | | (781 | ) |
Total Deferred Tax Asset | | $ | 19,162 | | $ | 17,593 | | $ | 11,342 | |
Deferred Tax Liability: | | | | | | | | | | |
Property and equipment | | $ | 7,485 | | $ | 4,193 | | $ | 3,784 | |
Intangible Assets | | | — | | | 40 | | | — | |
Foreign deferred revenue and other | | | 2,133 | | | 4,300 | | | 4,197 | |
Total Deferred Tax Liability | | $ | 9,618 | | $ | 8,533 | | $ | 7,981 | |
Net Deferred Tax Asset | | $ | 9,544 | | $ | 9,060 | | $ | 3,361 | |
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As of October 3, 2009, the Company’s French, Swedish, Chinese and one of its German subsidiaries had net operating loss carryovers of $3.3 million, $0.6 million, $0.2 million and $2.5 million, respectively. These net operating loss carryovers will not expire under local tax law, except for China which has a five year limitation. The Company determined that the benefit of the German and Swedish subsidiaries net operating loss carryover of $2.5 million and $0.6 million, respectively are not likely to be realized. Accordingly, as of October 3, 2009, the Company had a full valuation allowance against each of the German and Swedish subsidiaries’ deferred tax assets in the amount of $0.8 million, and $0.2 million, respectively.
During fiscal year 2009, U.S. research and development tax credit legislation was extended with an effective date retroactive to January 1, 2008. This legislation allowed the Company to recognize $3.0 million of tax benefits in fiscal year 2009, partly due to tax credits available on applicable research and development spending by the Company during the last three fiscal quarters of fiscal year 2008 and partly due to a full year of credit for fiscal year 2009.
During fiscal year 2008, the Company repatriated $20.2 million of historic earnings from its Japanese subsidiaries. The Company recorded $3.5 million of net tax benefit during fiscal year 2008 related to these dividends. Also during fiscal year 2008, the Company was only allowed to recognize research and development credits on applicable spending during the first quarter, as the provision in the U.S. tax law allowing for these credits expired on December 31, 2007.
The Company’s German subsidiaries benefited from tax legislation passed during fiscal year 2007. The German subsidiaries recorded $2.4 million of tax benefits during fiscal year 2007 related to this legislation. The legislation decreased the German tax rate applicable to future taxable temporary differences and entitled the primary German subsidiary to a corporate tax refund. U.S. research and development tax credit legislation was also extended during fiscal year 2007 with an effective date retroactive to January 1, 2006. This legislation allowed the Company to recognize $1.2 million of tax benefits in fiscal year 2007, due to tax credits available on applicable research and development spending by the Company during the last three fiscal quarters of fiscal year 2006.
According to ASC 740-30, income taxes are not provided on undistributed earnings of international subsidiaries that are permanently reinvested. At October 3, 2009, undistributed earnings permanently reinvested in international subsidiaries were approximately $119 million. The Company has not provided for U.S. income taxes, or any of the related foreign tax credits, on these earnings.
In the fiscal years ended October 3, 2009, September 27, 2008, September 29, 2007, the Company recognized (shortfalls)/benefits of ($0.5) million, $1.3 million, and $2.7 million, respectively, related to the Company’s equity compensation plans. These (shortfalls)/benefits were directly allocated to Shareholders’ Investment on the Consolidated Balance Sheet. Additionally, the deferred tax asset or liability related to the Company’s unrealized gain or loss associated with derivative instruments was directly allocated to Accumulated Other Comprehensive Income (Loss) within Shareholders’ Investment. The deferred tax asset associated with the defined benefit pension plan of one of the Company’s German subsidiaries was also directly allocated to Accumulated Other Comprehensive Income (Loss) within Shareholders’ Investment.
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Effective September 30, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” as codified by ASC 740-10. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a threshold for recognizing and measuring attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, ASC 740-10 provides guidance on subsequent de-recognition of tax positions, financial statement classification, recognition of interest and penalties, accounting in interim periods and disclosure and transition requirements.
A summary of changes in the Company’s liability for unrecognized tax benefits for the fiscal years ended October 3, 2009 and September 27, 2008 is as follows:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Beginning balance | | $ | 4,009 | | $ | 5,252 | |
(Decrease) increase due to tax positions related to the current year | | | (151 | ) | | 162 | |
Decrease due to settlement of tax positions related to prior years | | | — | | | (867 | ) |
Decrease due to lapse of statute of limitations | | | (267 | ) | | (575 | ) |
Exchange rate change | | | — | | | 37 | |
Ending balance | | $ | 3,591 | | $ | 4,009 | |
Included in the balance of unrecognized tax benefits at October 3, 2009 are potential benefits of $1.7 million that, if recognized, would favorably impact the effective tax rate on continuing operations.
At October 3, 2009 and September 27, 2008, the Company had accrued interest related to uncertain income tax positions of approximately $0.7 million and $0.5 million, respectively. At October 3, 2009 and September 27, 2008, no accrual for penalties related to uncertain tax positions existed. Upon adoption of ASC 740-10, the Company elected to classify interest and penalties related to uncertain tax positions in Interest Expense and General and Administrative Expense, respectively, on the Consolidated Statements of Income. Previously, the Company recognized interest and penalties in Provision for Income Taxes on the Consolidated Statements of Income.
The Company is subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years before 2006 and with limited exceptions, state and foreign income tax examinations for fiscal years before 2005. The Company’s Japanese and French tax returns have been examined by the tax authorities through fiscal year 2006. The Company’s German tax returns have been examined by the tax authorities through fiscal year 2005. As of October 3, 2009, the Company does not expect significant changes in the amount of unrecognized tax benefits during the next twelve months.
The Company’s domestic entity and certain of its foreign subsidiaries are expected to receive income tax refunds within the next twelve months. As a result, the Company has recognized a current income tax receivable of $3.3 million at October 3, 2009, which is included in Prepaid Expenses and Other Current Assets on the Consolidated Balance Sheet.
9. Employee Benefit Plans:
The Company offers a retirement plan that has two components: (1) a 401(k) component with a Company match and (2) a fiscal year Company contribution.
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The 401(k) component of the retirement plan allows eligible employees to contribute a portion of their pre-tax income to the plan each pay period. The Company matches 50% of employees’ pre-tax contributions (excluding “catch-up” contributions that employees age 50 or older may make to the plan), up to 6% of compensation, subject to limitations imposed by federal law. The Company’s matching contributions were $2.2 million, $2.2 million, and $1.9 million in fiscal years 2009, 2008, and 2007, respectively. Employees may also contribute a percentage of their salary to the plan on an after-tax basis.
The Company also provides an annual fiscal year contribution to the retirement plan for eligible employees. Employees who are active as of the end of the fiscal year and whom have been paid for 1,000 hours or more of service during a plan year are eligible for a fiscal year contribution. After three years as a participant, employees have a vested interest equal to 100% of the total Company fiscal year contributions. The plan provides for a minimum fiscal year contribution of 3% of participant compensation below the Social Security taxable wage base and 6% of participant compensation in excess of the Social Security taxable wage base, up to the maximum contribution allowed by federal law. The Company’s Board of Directors approves any changes to the contribution levels under the plan. The Company’s fiscal year contributions under the plan totaled $2.6 million, $2.7 million, and $2.7 million in fiscal years 2009, 2008, and 2007, respectively.
One of the Company’s German subsidiaries has a non-contributory, defined benefit retirement plan for eligible employees. 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. The Company uses a September 30 measurement date for this defined benefit retirement plan.
During the fiscal year ended October 3, 2009, the Company initiated workforce reduction actions, in order to align the Company’s operating cost structure with changing market conditions. These actions resulted in both voluntary and involuntary terminations of German employees who are eligible to receive future benefits under the German defined benefit pension plan. The voluntary termination actions were executed under early retirement plan arrangements which provide, among other benefits, special termination benefits involving the Company’s funding of the defined benefit pension plan for future service periods in effect throughout the contractual term of each early retirement arrangement. During the fiscal year ended October 3, 2009, the Company recognized costs of $0.3 million associated with these special termination benefits. The special termination benefits are to be paid directly from the Company’s assets throughout the contractual terms of the arrangements, the lengths of which range from approximately 1.0 to 5.5 years. See Note 10 to the Consolidated Financial Statements for additional information regarding the Company’s cost reduction actions that were initiated during the fiscal year ended October 3, 2009.
The Company recognizes the funded status of the defined benefit pension in its statement of financial position, recognizes changes in that funded status in the year in which the changes occur through comprehensive income, and measures the plan’s assets and its obligations that determine its funded status as of the end of the Company’s fiscal year.
The pretax amounts recognized in Accumulated Other Comprehensive Income as of October 3, 2009 and September 27, 2008 consist of the following:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Actuarial net loss | | $ | 1,750 | | $ | 329 | |
Prior service cost | | | — | | | 15 | |
| | $ | 1,750 | | $ | 344 | |
The portion of the pretax amount in Accumulated Other Comprehensive Income at September 27, 2008 that was recognized during the fiscal year ended October 3, 2009 was less than $0.1 million. The portion of the pretax amount in Accumulated Other Comprehensive Income at October 3, 2009 that is expected to be recognized as a component of net periodic retirement cost during the next fiscal year is less than $0.1 million.
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The following is a summary of the changes in benefit obligations and plan assets during the fiscal years ended October 3, 2009 and September 27, 2008:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Change in benefit obligation: | | | | | | | |
Projected benefit obligation, beginning of year | | $ | 13,020 | | $ | 13,117 | |
Service cost | | | 400 | | | 551 | |
Interest cost | | | 764 | | | 740 | |
Actuarial loss (gain) | | | 1,283 | | | (1,439 | ) |
Exchange rate change | | | 167 | | | 361 | |
Benefits paid | | | (303 | ) | | (310 | ) |
Special termination benefits | | | 262 | | | — | |
Projected benefit obligation, end of year | | $ | 15,593 | | $ | 13,020 | |
| | | | | | | |
Change in plan assets: | | | | | | | |
Fair value of plan assets, beginning of year | | $ | 12,775 | | $ | — | |
Actual return on plan assets | | | 695 | | | (116 | ) |
Employer contributions | | | 488 | | | 13,198 | |
Exchange rate change | | | 21 | | | 3 | |
Benefits paid | | | (303 | ) | | (310 | ) |
Fair value of plan assets, end of year | | $ | 13,676 | | $ | 12,775 | |
The following is a summary of the funded status of the defined benefit retirement plan and amounts recognized in the Company’s Consolidated Balance Sheets at October 3, 2009 and September 27, 2008:
| | | | | | | |
| | 2009 | | 2008 | |
| | (expressed in thousands) | |
Funded status: | | | | | | | |
Funded status, end of year | | $ | (1,917 | ) | $ | (245 | ) |
Accumulated other comprehensive loss | | | 1,750 | | | 344 | |
Net amount recognized | | $ | (167 | ) | $ | 99 | |
| | | | | | | |
Amounts recognized in consolidated balance sheets: | | | | | | | |
Pension benefit plan | | $ | (1,917 | ) | $ | (245 | ) |
Deferred income taxes | | | 528 | | | 104 | |
Accumulated other comprehensive income, net of tax | | | 1,222 | | | 240 | |
Net amount recognized | | $ | (167 | ) | $ | 99 | |
The weighted average assumptions used to determine the defined benefit retirement plan obligation at October 3, 2009 and September 27, 2008, and also the net periodic benefit cost for the following fiscal year, were as follows:
| | | | | |
| | 2009 | | 2008 | |
Discount rate | | 5.5 | % | 6.4 | % |
Expected rate of return on plan assets | | 5.9 | % | 5.9 | % |
Expected rate of increase in future compensation levels | | 3.0 | % | 3.2 | % |
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.
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The objective of the Company’s investment policy for the defined benefit retirement plan is earn the highest possible total returns consistent with the preservation of capital and anticipated liquidity requirements while minimizing the volatility of returns. The plan fiduciaries set the long-term strategic investment objectives for the defined benefit retirement 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. Plan assets are currently allocated to fixed income, equity, cash and cash equivalent, and other categories (see table below). Within these categories, investments are allocated to multiple investment classes. Any decisions to change the asset allocation are made by the plan fiduciaries however, investment into equity securities is limited to a maximum of 40% of total plan assets. The expected long-term rate of return of plan assets of 5.9% for the fiscal year ended October 3, 2009 was determined by considering historical and expected returns for each asset class and the effect of periodic asset rebalancing and reallocation. While historical returns are not guarantees of future performance, current and future allocations are expected to meet the objectives of the defined benefit retirement plan.
The actual defined benefit retirement plan asset allocation at October 3, 2009 and September 27, 2008, by asset category, is as follows:
| | | | | |
| | 2009 | | 2008 | |
Fixed income securities | | 71.0 | % | 76.3 | % |
Equity securities | | 19.3 | % | 9.6 | % |
Cash and cash equivalents | | 2.3 | % | 8.6 | % |
Other | | 7.4 | % | 5.5 | % |
| | 100.0 | % | 100.0 | % |
Net periodic benefit cost for the Company’s defined retirement plan for the fiscal years ended October 3, 2009, September 27, 2008, and September 29, 2007 included the following components:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | (expressed in thousands) | |
Service cost | | $ | 400 | | $ | 551 | | $ | 513 | |
Interest cost | | | 764 | | | 740 | | | 562 | |
Expected return on plan assets | | | (702 | ) | | (44 | ) | | — | |
Net amortization and deferral | | | 14 | | | 35 | | | 133 | |
Special termination benefits | | | 262 | | | — | | | — | |
Net periodic benefit cost | | $ | 738 | | $ | 1,282 | | $ | 1,208 | |
The accumulated benefit obligation of the Company’s defined benefit retirement plan as of October 3, 2009 and September 27, 2008 was $14.4 million and $11.8 million, respectively. During fiscal year 2007, the Company was required to recognize an additional minimum pension liability due to the fact that the fair value of pension plan assets was less than the accumulated benefit obligation at the end of the plan year. As a result, the Company recorded a non-cash adjustment to Accumulated Other Comprehensive Income of $0.7 million, or $1.2 million on a pre-tax basis.
The 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:
Future Benefit payments:
| | | | |
Fiscal Year | | Pension
Benefits | |
| | (expressed in thousands) | |
2010 | | $ | 434 | |
2011 | | | 554 | |
2012 | | | 620 | |
2013 | | | 695 | |
2014 | | | 752 | |
2015 through 2019 | | | 4,676 | |
| | $ | 7,731 | |
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10. Severance Costs:
The Company initiated workforce reduction actions throughout fiscal year 2009, in order to align the Company’s operating cost structure with changing market conditions. As a result of the workforce reduction actions, the Company incurred severance and benefit costs totaling $12.1 million during the fiscal year ended October 3, 2009, of which $10.9 million and $1.2 million was reported in the Test and Sensors segments, respectively. At October 3, 2009, the remaining severance liability was $8.4 million, of which $5.6 million will be paid over the next twelve months.
The following table summarizes the severance charges included in the Company’s Consolidated Statement of Income for fiscal year ended October 3, 2009:
| | | | |
| | 2009 | |
| | (expressed in thousands) | |
Cost of sales | | $ | 6,770 | |
Research and development | | | 155 | |
Selling and marketing | | | 3,989 | |
General and administrative | | | 1,171 | |
Total severance costs | | $ | 12,085 | |
11. Commitments and Contingencies:
Litigation: The Company is subject to various claims, legal actions, and complaints arising in the ordinary course of business. The Company believes the final outcome of these matters will not have a material adverse effect on its consolidated financial position or results of operations. The Company expenses legal costs as incurred.
Leases: Total lease expense associated with continuing operations was $5.9 million, $5.4 million, and $5.4 million for fiscal years 2009, 2008, and 2007, respectively. The Company has operating lease commitments for equipment, land, and facilities that expire on various dates through 2056. Minimum annual rental commitments for the next five fiscal years and thereafter are as follows:
| | | | |
Year | | Payments | |
| | (expressed in thousands) | |
2010 | | $ | 5,095 | |
2011 | | | 4,154 | |
2012 | | | 2,818 | |
2013 | | | 1,659 | |
2014 | | | 778 | |
Thereafter | | | 2,584 | |
| | $ | 17,088 | |
12. Related Party Transactions:
During the fiscal years ended October 3, 2009, September 27, 2008 and September 29, 2007, MTS Sensors purchased mechanical components and remote-mechanic workbench services from Mark-Tronik GmbH (“Mark-Tronik”) aggregating approximately $1.1 million, $1.6 million and $1.4 million, respectively. MTS Sensors is owned by MTS Systems GmbH, a wholly-owned subsidiary of the Company. The owner and general manager of Mark-Tronik is a related party to management of the Company. At October 3, 2009 and September 27, 2008, net outstanding payments due to Mark-Tronik by MTS Sensors were less than $0.1 million.
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During the fiscal year ended October 3, 2009 the Company purchased legal services from Gray Plant Mooty Mooty and Bennett, P.A. (“GPM”) aggregating to approximately $0.2 million. A shareholder of GPM is a related party to management of the Company. At October 3, 2009 net outstanding payments due to GPM by the Company was less than $0.1 million.
13. Subsequent Events:
The Company has evaluated the period beginning October 4, 2009 through December 1, 2009, the date the Company’s annual financial statements were issued, and concluded there were no other events or transactions occurring during this period that required recognition or additional disclosure in the financial statements.
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES
FOR DOUBTFUL ACCOUNTS AND RESTRUCTURING RESERVES
FOR THE FISCAL YEARS ENDED OCTOBER 3, 2009, SEPTEMBER 27, 2008,
AND SEPTEMBER 29, 2007
(expressed in thousands)
| | | | | | | | | | | | | |
| | Balance
Beginning
of Year | | Provisions/
(Recoveries) | | Amounts
Written-Off/
Payments | | Balance
End of
Year | |
| | | | | | | | | | | | | |
Allowance for Doubtful Accounts: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2009 | | $ | 1,008 | | $ | 755 | | $ | (353 | ) | $ | 1,410 | |
| | | | | | | | | | | | | |
2008 | | | 1,518 | | | (111 | ) | | (399 | ) | | 1,008 | |
| | | | | | | | | | | | | |
2007 | | | 1,350 | | | 320 | | | (152 | ) | | 1,518 | |
| | | | | | | | | | | | | |
Restructuring Reserves: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2009 | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | |
2008 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
2007 | | | 40 | | | — | | | (40 | ) | | — | |
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