The following is a comparison of fiscal year 2012 and fiscal year 2011 results of operations for the Sensors segment, separately identifying the estimated impact of currency translation:
The following is a comparison of fiscal year 2012 and fiscal year 2011 revenue for the Sensors segment by geography:
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U.S. Government Settlement Expense
U.S. Government settlement expense in fiscal year 2012 includes $1.7 million of the $7.8 million costs related to the previously mentioned U.S. Government matter that was settled during fiscal year 2012. U.S. Government settlement expense as a percentage of revenue was 1.7% for fiscal year 2012.
Income from Operations
Income from operations was $22.2 million, a decrease of $4.8 million, or 17.8%, compared to income from operations of $27.0 million for fiscal year 2011, primarily due to lower gross profit and increased operating expenses. Operating income as a percentage of revenue was 22.1%, compared to 26.1% for fiscal year 2011.
Cash Flow Comparison - Fiscal Years 2013, 2012 and 2011
Total cash and cash equivalents decreased $31.5 million during fiscal year 2013. This decrease was driven by $77.9 million increased working capital requirements, investment in property and equipment of $29.7 million, purchases of our common stock of $24.8 million, and dividend payments of $19.1 million. These decreases were partially offset by earnings of $76.4 million, $35.0 million in proceeds received from borrowings on the credit facility and $8.6 million of proceeds from the exercise of stock options.
Total cash and cash equivalents decreased $24.2 million during fiscal year 2012. This decrease was driven by the repayment of interest-bearing debt of $40.0 million, purchases of our common stock of $35.3 million, dividend payments of $15.9 million, and investment in property and equipment of $15.6 million. These decreases were partially offset by earnings of $69.1 million and $17.9 million of proceeds from the exercise of stock options.
Total cash and cash equivalents increased $27.5 million during fiscal year 2011. This increase was driven by earnings of $72.9 million and $12.9 million of proceeds from the exercise of stock options, partially offset by $33.7 million increased working capital requirements, a $9.6 million payment to settle an accelerated share repurchase agreement, investment in property and equipment of $10.1 million, and dividend payments of $9.3 million.
Cash flow from operating activities used cash totaling $2.1 million during fiscal year 2013, compared to cash provided of $65.0 million and $43.0 million in fiscal year 2012 and 2011, respectively. Fiscal year 2013 cash flow from operating activities was primarily driven by $43.2 million increased accounts and unbilled receivables resulting from higher volume as well as the general timing of billing and collections, $21.1 million decreased advance payments received from customers driven by timing of customer orders and relatively unfavorable customer payment terms, $9.6 million increased inventories to support future revenue, and $4.0 million decreased accounts payable resulting from general timing of purchases and payments. These decreases were partially offset by earnings of $76.4 million.
Fiscal year 2012 cash flow from operating activities was primarily driven by earnings.
Fiscal year 2011 cash flow from operating activities was primarily due to earnings of $72.9 million, $19.1 million increased advance payments received from customers driven by higher custom orders, and $5.5 million increased accounts payable resulting from general timing of purchases and payments, partially offset by $44.7 million increased accounts and unbilled receivables resulting from higher volume as well as the general timing of billing and collections, and $13.6 million increased inventories to support future revenue.
Cash flow from investing activities required the use of cash totaling $29.7 million during fiscal year 2013, compared to the use of cash totaling $15.6 million and $10.1 million during fiscal year 2012 and 2011, respectively. The cash usage for fiscal years 2013, 2012 and 2011 represents investment in property and equipment.
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Cash flow from financing activities provided cash totaling $1.3 million during fiscal year 2013, compared to the use of cash totaling $72.5 million and $5.8 million in fiscal year 2012 and 2011, respectively. The cash provided for fiscal year 2013 was primarily due to $35.0 million of borrowings on our credit facility and $8.6 million received from stock option exercises and stock purchases under our employee stock purchase plan, partially offset by purchases of our common stock of $24.8 million, including purchases of stock related to stock-based compensation arrangements of $0.5 million, and payment of cash dividends of $19.1 million.
During fiscal year 2012, our cash usage primarily resulted from $40.0 million repayment of all outstanding borrowings on our credit facility, purchases of our common stock of $35.3 million, including purchases of stock related to stock-based compensation arrangements of $0.3 million, and payment of cash dividends of $15.9 million. These cash usages were partially offset by $17.9 million received from stock option exercises and stock purchases under our employee stock purchase plan.
During fiscal year 2011, our cash usage primarily resulted from the use of $9.6 million to settle an accelerated share purchase agreement that was initially entered into during the fourth quarter of fiscal year 2010, purchases of our common stock related to stock-based compensation arrangements of $0.3 million, and payment of cash dividends of $9.3 million. These cash usages were partially offset by $13.0 million received from stock option exercises and stock purchases under our employee stock purchase plan.
During fiscal year 2013, we purchased 0.4 million shares of our common stock for $24.8 million. Also during fiscal year 2013, we purchased less than 0.1 million shares of our common stock related to stock-based compensation arrangements for $0.5 million. During fiscal year 2012, we made an initial payment of $35.0 million under an accelerated share purchase program and received an initial delivery of approximately 0.5 million shares of our common stock. Also during fiscal year 2012, we purchased less than 0.1 million shares of our common stock related to stock-based compensation arrangements for $0.3 million. During fiscal year 2011, we purchased less than 0.1 million shares of our common stock for $0.3 million.
Liquidity and Capital Resources
We had cash and cash equivalents of $48.3 million at September 28, 2013. Of this amount, approximately $6.1 million was located in North America, $28.1 million in Europe, and $14.1 million in Asia. Of the $42.2 million of cash located outside of North America, approximately $30.2 million is not available for use in the U.S. without the incurrence of U.S. federal and state income tax consequences.
The North American balance was primarily invested in bank deposits. In Europe and Asia, the balances were primarily invested in money market funds and bank deposits. In accordance with our investment policy, we place cash equivalent investments with issuers who have high-quality investment credit ratings. In addition, we limit the amount of investment exposure we have with any particular issuer. Our investment objectives are to preserve principal, maintain liquidity, and achieve the best available return consistent with our primary objectives of safety and liquidity. At September 28, 2013, we held no short-term investments.
At September 28, 2013, our capital structure was comprised of $35.0 million in short-term debt and $256.5 million in Shareholders’ Investment. Total interest-bearing debt at September 28, 2013 was $35.0 million. The borrowings on the credit facility include, at our discretion, optional month-to-month term renewals and loan repricing until December 2017. Under the terms of the credit facility, we have 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”), and the ratio of consolidated EBITDA to consolidated interest expense. These covenants may restrict our ability to pay dividends and purchase outstanding shares of common stock. At September 28, 2013, we were in compliance with these financial covenants.
Shareholders’ Investment increased by $29.8 million during fiscal year 2013, primarily due to higher net income of $57.8 million and $8.6 million received from stock option exercises and stock purchases under our employee stock purchase plan, partially offset by $24.8 million in purchases of our common stock and $18.8 million in dividends declared.
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We believe that our liquidity, represented by funds available from cash, cash equivalents, credit facility, and anticipated cash from operations are adequate to fund ongoing operations, internal growth opportunities, capital expenditures, dividends and share purchases, as well as to fund strategic acquisitions.
At September 28, 2013, our 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 | | | $ | 9,821 | | | $ | 4,288 | | | $ | 3,598 | | | $ | 875 | | | $ | 1,060 | |
Other Long-Term Obligations(2) | | | | 9,660 | | | | 1,611 | | | | 1,297 | | | | 1,125 | | | | 5,627 | |
Total | | | $ | 19,481 | | | $ | 5,899 | | | $ | 4,895 | | | $ | 2,000 | | | $ | 6,687 | |
| | |
| (1) | Long-term income tax liabilities for uncertain tax positions have been excluded from the contractual obligations table as we are not able to make a reasonably reliable estimate of the amount and period of related future payments. At September 28, 2013, our long-term liability for uncertain tax positions was $4.3 million. |
| | |
| (2) | Other long-term obligations include liabilities under pension and other retirement plans. |
At September 28, 2013 we had letters of credit and guarantees outstanding totaling $20.4 million and $24.7 million, respectively, primarily to bond advance payments and performance related to customer contracts in Test. Our operating leases are primarily for office space and automobiles.
Off-Balance Sheet Arrangements
At the end of fiscal year 2013, we 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 our 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 GAAP, which require us to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, we have made our best estimates and judgments of certain amounts, giving due consideration to materiality. We believe that of our 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 us, and as a result, are subject to an inherent degree of uncertainty. For further information see “Summary of Significant Accounting Policies” under Note 1 to the Consolidated Financial Statements, included in Item 8 of this Annual Report on Form 10-K.
Revenue Recognition: We are 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. We develop 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.
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Inventories: We maintain a material amount of inventory to support our engineering and manufacturing operations. This inventory is stated at the lower of cost or market. On a regular basis, we review our inventory and identify that which is excess, slow moving, and obsolete by considering factors such as inventory levels, expected product life, and forecasted sales demand. Any identified excess, slow moving, and obsolete inventory is written down to its market value through a charge to income from operations. It is possible that additional inventory write-down charges may be required in the future if there is a significant decline in demand for our products and we do not adjust our manufacturing production accordingly.
Impairment of Long-Lived Assets: We review the carrying value of long-lived assets or asset groups, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, we recognize an asset impairment charge against 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: We test 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.
We have three reporting units, two of which are assigned goodwill. At September 28, 2013, one reporting unit was assigned $15.0 million of goodwill while another was assigned $1.6 million. The fair value of a reporting unit is estimated using a discounted cash flow model that requires input of certain estimates and assumptions requiring our judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, and new product introductions. At September 28, 2013, the estimated fair value of the reporting unit assigned $1.6 million of goodwill is substantially in excess of its carrying value, while the estimated fair value of the reporting unit assigned $15.0 million of goodwill exceeds its carrying value by approximately 25%. While we believe the estimates and assumptions used in determining the fair value of our reporting units are reasonable, significant changes in estimates of future cash flows, such as those caused by unforeseen events or changes in market conditions could materially impact the fair value of a reporting unit which could result in the recognition of a goodwill impairment charge.
Software Development Costs: We incur 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, we compare 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: We are subject to warranty obligations on sales of our products. We record 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. 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.
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Income Taxes: We record a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results.
Quarterly Financial Information
Revenue and operating results reported on a quarterly basis do not necessarily reflect trends in demand for our products or our 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. Our use of the percentage-of-completion revenue recognition method for large, long-term projects generally has the effect of minimizing 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 our 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 September 28, 2013 and September 29, 2012 was as follows:
| | | | | | | | | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Total
Year | |
| | (expressed in thousands, except per share data) | |
2013 | | | | | | | | | | | | | | | | |
Revenue | | $ | 142,668 | | $ | 136,917 | | $ | 135,059 | | $ | 154,795 | | $ | 569,439 | |
Gross profit | | | 56,602 | | | 53,905 | | | 54,596 | | | 66,836 | | | 231,939 | |
Income before income taxes | | | 20,515 | | | 14,519 | | | 16,783 | | | 27,437 | | | 79,254 | |
Net income | | $ | 13,783 | | $ | 11,061 | | $ | 11,547 | | $ | 21,415 | | $ | 57,806 | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.88 | | $ | 0.70 | | $ | 0.73 | | $ | 1.38 | | $ | 3.69 | |
Diluted | | $ | 0.87 | | $ | 0.69 | | $ | 0.72 | | $ | 1.36 | | $ | 3.64 | |
| | | | | | | | | | | | | | | | |
2012 | | | | | | | | | | | | | | | | |
Revenue | | $ | 133,697 | | $ | 129,019 | | $ | 141,697 | | $ | 137,843 | | $ | 542,256 | |
Gross profit | | | 58,713 | | | 56,390 | | | 63,668 | | | 57,421 | | | 236,192 | |
Income before income taxes | | | 23,320 | | | 16,588 | | | 18,527 | | | 21,345 | | | 79,780 | |
Net income | | $ | 15,539 | | $ | 11,157 | | $ | 9,609 | | $ | 15,251 | | $ | 51,556 | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.99 | | $ | 0.70 | | $ | 0.60 | | $ | 0.95 | | $ | 3.24 | |
Diluted | | $ | 0.98 | | $ | 0.69 | | $ | 0.60 | | $ | 0.94 | | $ | 3.21 | |
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Operating results for the third quarter of fiscal year 2012 include the previously mentioned $7.8 million of costs resulting from the establishment in the quarter of an accrual related to U.S. Government matters.
Forward Looking Statements
Statements contained in this Annual Report on Form 10-K including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements in our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Item 1A, Risk Factors. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these forward looking statements with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K.
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Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Foreign Currency Exchange Risk
Approximately 75% of our revenue has historically been derived from customers outside of the United States and about 65% of this revenue (approximately 50% of our total revenue) is denominated in currencies other than the U.S. dollar. Our international subsidiaries have functional currencies other than our U.S. dollar reporting currency and, occasionally, transact business in currencies other than their functional currencies. These non-functional currency transactions expose us to market risk on assets, liabilities and cash flows recognized on these transactions.
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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
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
(Decrease) increase from currency translation on: | | | | | | | | | | |
Orders | | $ | (6,460 | ) | $ | (10,006 | ) | $ | 13,325 | |
Revenue | | | (8,091 | ) | | (8,453 | ) | | 11,771 | |
Net Income | | $ | (920 | ) | $ | (697 | ) | $ | 1,433 | |
The estimated net effect of currency translation on orders, revenue, and net income was unfavorable in fiscal year 2013 in comparison to fiscal year 2012, primarily driven by the unfavorable translation impact associated with the relative strengthening in the value of the U.S. dollar against the Japanese Yen throughout fiscal year 2013 compared to fiscal year 2012. This was partially offset by a favorable translation impact associated with the relative weakening in the value of the U.S. dollar against the Euro and Chinese Yuan throughout fiscal year 2013 as compared to fiscal year 2012.
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 2013 revenue of approximately $25.2 million.
We have operational procedures to mitigate these non-functional currency exposures. We also utilize foreign currency exchange contracts to exchange currencies at set exchange rates on future dates to offset expected gains or losses on specifically identified exposures.
Mark-to-market gains and losses on derivatives designated as cash flow hedges in our currency hedging program are recorded within Accumulated Other Comprehensive Income in the Consolidated Balance Sheet. We recognize gains and losses associated with the fair value of 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 upon which the underlying hedged transaction is reported. Net gains and losses on foreign currency transactions, included in the accompanying Consolidated Statements of Income, were a net loss of $1.7 million in fiscal year 2013, a net loss of $1.8 million in fiscal year 2012, and a net gain of $0.5 million in fiscal year 2011. See Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Interest Rates
We are also directly exposed to changes in market interest rates on cash, cash equivalents, short-term investments and debt and are 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 September 28, 2013, we had cash and cash equivalents of $48.3 million, most of which was invested in interest-bearing bank deposits or money market funds, with interest rates that are reset 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 $0.6 million on an annualized basis.
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Our short-term borrowings outstanding at the end of fiscal year 2013 consisted of $35.0 million utilization of the revolving credit facility. Borrowings under the credit facility require interest payments calculated at a floating rate and, therefore, are impacted by the effect of increases or decreases in market interest rates. Because we anticipate the borrowing to be outstanding for only a short period of time, we have elected not to mitigate this risk. A hypothetical increase or decrease of 1 percentage point in interest rates, assuming all other variables were held constant, would increase or decrease interest expense by approximately $0.4 million on an annualized basis.
At September 28, 2013, a discount rate of 3.6% and an expected rate increase in future compensation levels of 2.8% 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.
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Item 8. | Financial Statements and Supplementary Data |
The Company’s audited financial statements and notes thereto described in Item 15 of this Annual Report on Form 10-K, and appearing on pages F-1 through F-32 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.
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Item 9A. | Controls and Procedures |
Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 28, 2013, our disclosure controls and procedures were effective.
There were no changes that occurred during the fiscal quarter ended September 28, 2013 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting
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Management’s Report on Internal Control Over Financial Reporting |
Our 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. Our 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, we conducted an evaluation of the effectiveness of internal controls over financial reporting as of September 28, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control – Integrated Framework (1992). Based on management’s assessment using this framework, management concluded that our internal control over financial reporting is effective as of September 28, 2013. |
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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 its report, included in Item 8, on the effectiveness of our internal control over financial reporting. |
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Item 9B. | Other Information |
None.
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PART III
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Item 10. | Directors, Executive Officers and Corporate Governance |
The required information with respect to the our directors, our Code of Conduct, compliance with Section 16(a) of the Securities Exchange Act of 1934, and the our Audit Committee, including the Audit Committee financial experts, is incorporated by reference to the information set forth under the headings “Election of Directors” and “Other Information – Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 11, 2014.
Executive Officers serve at the discretion of and are elected by our Board of Directors. The business experience of the Executive Officers over the last five years, their age and the year in which such person became an Executive Officer are as follows:
| | | | | | |
Officer | | Business Experience | | Age | | Executive
Officer
Since |
| | | | | | |
Jeffrey A. Graves,
President and Chief Executive Officer | | President and Chief Executive Officer since May 2012. President and Chief Executive Officer of C&D Technologies, Inc. from July 2005 to May 2012. | | 52 | | 2012 |
| | | | | | |
William E. Bachrach,
Senior Vice President, Sensors | | Senior Vice President, Sensors since March 2013. Chief Operating Officer of ROAM Data from 2010 to March 2013; and President of Murata Power Solutions (formerly C&D Technologies Power Systems) from 2005 to 2009. | | 54 | | 2013 |
| | | | | | |
Arthur R. Baker III,
Senior Vice President and Chief Technology Officer | | Senior Vice President and Chief Technology Officer since October 2013. Senior Vice President, Test from October 2011 to October 2013; Vice President and General Manager of the Test Segment during October 2011; Vice President of Engineering and Operations from May 2010 to September 2011; and Vice President of Engineering from August 2005 to April 2010. | | 45 | | 2011 |
| | | | | | |
Susan E. Knight,
Senior Vice President and Chief Financial Officer | | Senior Vice President and Chief Financial Officer since November 2011. Vice President and Chief Financial Officer from October 2001 to October 2011. | | 59 | | 2001 |
| | | | | | |
Steven G. Mahon,
Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary | | Senior Vice President, General Counsel and Chief Compliance Officer since October 2011; Corporate Secretary since August 2012. Vice President & Assistant General Counsel for Alliant Techsystems Inc. from January 2003 to September 2011. | | 52 | | 2011 |
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| | | | | | |
Kristin E. Trecker,
Senior Vice President and Chief Human Resources Officer | | Senior Vice President and Chief Human Resources Officer since August 2012. Vice President and Chief Human Resources Officer from February 2012 to August 2012. Senior Vice President of Human Resources for Lawson Software, Inc. from 2006 to July 2011. | | 48 | | 2012 |
| | | | | | |
Mark D. Losee,
Senior Vice President and Chief Information Officer | | Senior Vice President and Chief Information Officer since September 2012. Director of IT from January 2012 to September 2012. Global Account Executive for Johnson Controls, Inc. from August 2009 to January 2012. Vice President, IT and Shared Services for Medtronic, Inc. for more than five years prior to his departure in August 2009. | | 56 | | 2012 |
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Item 11. | Executive Compensation |
The information required by this Item is incorporated by reference to the information set forth under headings “Executive Compensation,” “Election of Directors – Non-Employee Director Compensation,” and “Other Information – Compensation Committee Interlocks and Insider Participation” in our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 11, 2014.
| |
Item 12. | SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is incorporated by reference to the information set forth under the heading “Other Information - Security Ownership of Principal Shareholders and Management” and “- Information Regarding Equity Compensation Plans” in our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 11, 2014.
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is incorporated by reference to the information set forth under the headings “Election of Directors – Other Information Regarding the Board” and “Other Information – Related Party Transactions” in our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held February 11, 2014.
| |
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 our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 11, 2014.
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 – September 28, 2013 and September 29, 2012 |
42
Table of Contents
| | | |
| | | Consolidated Statements of Income for the Fiscal Years Ended September 28, 2013, September 29, 2012 and October 1, 2011 |
| | | |
| | | Consolidated Statements of Comprehensive Income for the Fiscal Years Ended September 28, 2013, September 29, 2012 and October 1, 2011 |
| | | |
| | | Consolidated Statements of Shareholders’ Investment for the Fiscal Years Ended September 28, 2013, September 29, 2012 and October 1, 2011 |
| | | |
| | | Consolidated Statements of Cash Flows for the Fiscal Years Ended September 28, 2013, September 29, 2012 and October 1, 2011 |
| | | |
| | | Notes to Consolidated Financial Statements |
| | | |
| (2) | Financial Statement Schedules: |
| | |
| | | See accompanying Index to Financial Statements on page F-1. |
| | | |
| (3) | Exhibits: |
| | |
Exhibit
Number | | Description |
| | |
3.1 | | Restated and Amended Articles of Incorporation, incorporated by reference to Exhibit 3.a of the Company’s Form 10-K for the fiscal year ended September 29, 2012. |
| | |
3.2 | | Amended and Restated Bylaws, incorporated by reference to Exhibit 3.b of the Company’s Current Report on Form 8-K filed November 28, 2011. |
| | |
10.1 | | Executive Variable Compensation Plan, incorporated by reference to Exhibit 5.02 of the Company’s Current Report on Form 8-K filed February 12, 2010. |
| | |
10.2 | | 2012 Employee Stock Purchase Plan, incorporated by reference to Appendix B of the Company’s Proxy Statement filed on December 28, 2010. |
| | |
10.3 | | 2006 Stock Incentive Plan, incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed February 7, 2006. |
| | |
10.4 | | 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 by reference to Exhibits 10.1, 10.2, 10.3 and 10.4 of the Company’s Current Report on Form 8-K filed October 27, 2008. |
| | |
10.5 | | Form of Notice of Grant of Restricted Stock (Director) under 2006 Stock Incentive Plan, incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed February 7, 2006. |
| | |
10.6 | | Uniform Terms and Conditions to Restricted Stock Awards (Director) under 2006 Stock Incentive Plan, incorporated by reference to Exhibit 99.3 of Company’s Current Report on Form 8-K filed February 7, 2006. |
| | |
10.7 | | Form of Notice of Grant of Employee Restricted Stock Units under 2006 Stock Incentive Plan, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed June 29, 2009. |
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Table of Contents
| | |
10.8 | | Uniform Terms and Conditions to Employee Restricted Stock Units under 2006 Stock Incentive Plan, incorporated by reference to Exhibit 10.2 of Company’s Current Report on Form 8-K filed June 29, 2009. |
| | |
10.9 | | 2011 Stock Incentive Plan, as amended by the First Amendment, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed February 9, 2011. |
| | |
10.10 | | Second Amendment to 2011 Stock Incentive Plan, incorporated by reference to Exhibit 99.2 of the Company’s Registration Statement on Form S-8 filed March 15, 2013. |
| | |
10.11 | | Form of Notice of Grant and Terms and Conditions of Employee Options under 2011 Stock Incentive Plan, incorporated by reference to Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed February 9, 2011. |
| | |
10.12 | | Form of Notice of Grant and Terms and Conditions of Employee Restricted Stock Units under 2011 Stock Incentive Plan, incorporated by reference to Exhibit 99.2 of the Company’s Registration Statement on Form S-8 filed February 9, 2011. |
| | |
10.13 | | Form of Notice of Grant and Terms and Conditions of Employee Restricted Stock under 2011 Stock Incentive Plan, incorporated by reference to Exhibit 99.3 of the Company’s Registration Statement on Form S-8 filed February 9, 2011. |
| | |
10.14 | | Form of Notice of Grant and Terms and Conditions of Restricted Stock for Directors under 2011 Stock Incentive Plan, incorporated by reference to Exhibit 99.4 of the Company’s Registration Statement on Form S-8 filed February 9, 2011. |
| | |
10.15 | | Letter Agreement, dated as of March 31, 2012, between the Company and Jeffrey A. Graves, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed April 9, 2012. |
| | |
10.16 | | Change in Control Agreement between the Company and Jeffrey A. Graves, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed April 9, 2012. |
| | |
10.17 | | Severance Agreement between the Company and Jeffrey A. Graves, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed April 9, 2012. |
| | |
10.18 | | 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. |
| | |
10.19 | | Change in Control Agreement, dated December 31, 2008, between the Company and Susan E. Knight incorporated by reference to Exhibit 10.p of the Company’s Form 10-K for the fiscal year ended October 3, 2009. |
| | |
10.20 | | Severance Agreement, dated October 6, 2011, between the Company and Steven G. Mahon, incorporated by reference to Exhibit 10.y of the Company’s Form 10-K for the fiscal year ended October 1, 2011. |
| | |
10.21 | | Change in Control Agreement, dated October 6, 2011, between the Company and Steven G. Mahon, incorporated by reference to Exhibit 10.z of the Company’s Form 10-K for the fiscal year ended October 1, 2011. |
44
Table of Contents
| | |
10.22 | | Change in Control Agreement dated November 22, 2011, between the Company and Arthur R. Baker, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed November 28, 2011. |
| | |
10.23 | | Severance Agreement, dated February 13, 2012, between the Company and Kristin Trecker, incorporated by reference to Exhibit 10.ff of the Company’s Form 10-K for the fiscal year ended September 29, 2012. |
| | |
10.24 | | Letter Agreement, dated February 25, 2013, between the Company and William E. Bachrach, incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q for the fiscal quarter ended March 30, 2013. |
| | |
10.25 | | 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 for the fiscal year ended October 2, 2004. |
| | |
10.26 | | 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 for the fiscal year ended October 2, 2004. |
| | |
10.27 | | Termination Agreement dated March 11, 2013 between MTS Sensor Technologie GmbH and Co. KG and Joachim Hellwig (filed herewith). |
| | |
10.28 | | Form of Indemnification Agreement between the Company and each of its directors and executive officers, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed September 1, 2006. |
| | |
10.29 | | Form of Change in Control Agreement (for executive officers of the Company), incorporated by reference to Exhibit 10.ee of the Company’s Form 10-K for the fiscal year ended September 29, 2012. |
| | |
10.30 | | Executive Severance Plan, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed October 3, 2013. |
| | |
10.31 | | Executive Change in Control Severance Plan, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed October 3, 2013. |
| | |
10.32 | | Administrative Agreement, dated as of September 19, 2011, between the Company and the U.S. Department of the Air Force, incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed September 20, 2011. |
| | |
10.33 | | Settlement Agreement, dated August 30, 2012, between the Company and the United States of America acting through the DOJ, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed August 30, 2012. |
| | |
10.34 | | Letter Agreement (with Annexes, Exhibit and ISDA) Regarding Accelerated Share Repurchase Program by and between the Company and J.P Morgan Securities, Inc., as agent for JPMorgan Chase Bank, National Association, London Branch, dated September 7, 2012, incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the fiscal quarter ended June 29, 2013. |
45
Table of Contents
| | |
10.35 | | Credit Agreement, dated September 28, 2012, among the Company, U.S. Bank National Association, HSBC Bank USA, National Association, Wells Fargo Bank, National Association, JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed October 4, 2012. |
| | |
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). |
| |
101.INS ** | XBRL Instance Document (filed herewith). |
| |
101.SCH ** | XBRL Taxonomy Extension Schema Document (filed herewith). |
| |
101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). |
| |
101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). |
| |
101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document (filed herewith). |
| |
101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith). |
| | |
** | | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
46
Table of Contents
SIGNATURES
Pursuant to the requirements 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/ JEFFREY A. GRAVES |
| | | Jeffrey A. Graves |
| | | President and Chief Executive Officer |
| | | |
Date: | November 27, 2013 | | |
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 dates indicated.
| | | | |
Signatures | | Title | | Date |
| | | | |
/s/ JEFFREY A. GRAVES | | President and | | November 27, 2013 |
Jeffrey A. Graves | | Chief Executive Officer | | |
| | and Director | | |
| | (Principal Executive Officer) | | |
| | | | |
/s/ SUSAN E. KNIGHT | | Chief Financial Officer | | November 27, 2013 |
Susan E. Knight | | and Senior Vice President | | |
| | (Principal Financial Officer and | | |
| | Principal Accounting Officer) | | |
| | | | |
/s/ DAVID J. ANDERSON | | Non-Executive | | November 27, 2013 |
David J. Anderson | | Chair of the Board | | |
| | | | |
/s/ JEAN-LOU CHAMEAU | | Director | | November 27, 2013 |
Jean-Lou Chameau | | | | |
| | | | |
/s/ DAVID D. JOHNSON | | Director | | November 27, 2013 |
David D. Johnson | | | | |
| | | | |
/s/ EMILY M. LIGGETT | | Director | | November 27, 2013 |
Emily M. Liggett | | | | |
| | | | |
/s/ WILLIAM V. MURRAY | | Director | | November 27, 2013 |
William V. Murray | | | | |
| | | | |
/s/ BARB J. SAMARDZICH | | Director | | November 27, 2013 |
Barb J. Samardzich | | | | |
| | | | |
/s/ GAIL P. STEINEL | | Director | | November 27, 2013 |
Gail P. Steinel | | | | |
| | | | |
/s/ CHUN HUNG (KENNETH) YU | | Director | | November 27, 2013 |
Chun Hung (Kenneth) Yu | | | | |
47
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 |
| | |
Consolidated Balance Sheets – September 29, 2012 and October 1, 2011 | | F-3 |
| | |
Consolidated Statements of Income for the Fiscal Years Ended September 29, 2012, October 1, 2011, and October 2, 2010 | | F-4 |
| | |
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended September 28, 2013, September 29, 2012, and October 1, 2011 | | F-5 |
| | |
Consolidated Statements of Shareholders’ Investment for the Fiscal Years Ended September 28, 2013, September 29, 2012, and October 1, 2011 | | F-6 |
| | |
Consolidated Statements of Cash Flows for the Fiscal Years Ended September 28, 2013, September 29, 2012 and October 1, 2011 | | F-7 |
| | |
Notes to Consolidated Financial Statements | | F-8 through F-36 |
| | |
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 September 28, 2013, and September 29, 2012, and the related consolidated statements of income, comprehensive income, shareholders’ investment, and cash flows for each of the fiscal years in the three-year period ended September 28, 2013. In connection with our audits of the consolidated financial statements, we have audited the accompanying financial statement Schedule II. We also have audited MTS Systems Corporation’s internal control over financial reporting as of September 29, 2013, based on criteria established in Internal Control – Integrated Framework (1992) 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 financial statement Schedule II 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 consolidated 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 September 28, 2013 and September 29, 2012, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended September 28, 2013, 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 September 28, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
| |
| /s/ KPMG LLP |
| |
Minneapolis, Minnesota | |
November 27, 2013 | |
F-2
Table of Contents
Consolidated Balance Sheets
(September 28 and September 29, respectively)
| | | | | | | |
Assets | | 2013 | | 2012 | |
| | (expressed in thousands) | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | 48,333 | | $ | 79,852 | |
Accounts receivable, net of allowance for doubtful accounts of $1,998 and $2,247 respectively | | | 102,860 | | | 84,119 | |
Unbilled accounts receivable | | | 75,988 | | | 51,306 | |
Inventories | | | 77,989 | | | 67,979 | |
Prepaid expenses and other current assets | | | 12,837 | | | 6,982 | |
Deferred income taxes | | | 11,256 | | | 10,665 | |
Total current assets | | | 329,263 | | | 300,903 | |
Property and equipment, net | | | 78,399 | | | 61,653 | |
Goodwill | | | 16,624 | | | 16,239 | |
Other intangibles, net | | | 19,656 | | | 23,077 | |
Other assets | | | 4,539 | | | 4,696 | |
Deferred income taxes | | | 2,796 | | | 2,870 | |
Total assets | | $ | 451,277 | | $ | 409,438 | |
| | | | | | | |
Liabilities and Shareholders’ Investment | | | | | | | |
| | | | | | | |
Current Liabilities: | | | | | | | |
Short-term borrowings | | $ | 35,000 | | $ | 230 | |
Accounts payable | | | 29,816 | | | 33,744 | |
Accrued payroll and related costs | | | 33,528 | | | 30,731 | |
Advance payments from customers | | | 44,929 | | | 65,833 | |
Accrued warranty costs | | | 4,694 | | | 3,984 | |
Accrued income taxes | | | 3,350 | | | 3,510 | |
Deferred income taxes | | | 3,037 | | | 2,627 | |
Other accrued liabilities | | | 19,809 | | | 19,573 | |
Total current liabilities | | | 174,163 | | | 160,232 | |
Deferred income taxes | | | 8,011 | | | 8,671 | |
Non-current accrued income taxes | | | 4,311 | | | 1,666 | |
Pension benefit plan obligation | | | 4,434 | | | 7,761 | |
Other long-term liabilities | | | 3,821 | | | 4,389 | |
Total liabilities | | | 194,740 | | | 182,719 | |
| | | | | | | |
Shareholders’ Investment: | | | | | | | |
Common stock, $0.25 par value; 64,000 shares authorized: 15,408 and 15,640 shares issued and outstanding as of September 28, 2013 and September 29, 2012, respectively | | | 3,852 | | | 3,910 | |
Additional paid-in capital | | | - | | | 652 | |
Retained earnings | | | 240,348 | | | 211,256 | |
Accumulated other comprehensive income | | | 12,337 | | | 10,901 | |
Total shareholders’ investment | | | 256,537 | | | 226,719 | |
Total liabilities and shareholders’ investment | | $ | 451,277 | | $ | 409,438 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-3
Table of Contents
Consolidated Statements of Income
(For the Fiscal Years Ended September 28, September 29 and October 1, respectively)
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands, except per share data) | |
| | | | | | | | | | |
Revenue: | | | | | | | | | | |
Product | | $ | 497,620 | | $ | 476,306 | | $ | 400,840 | |
Service | | | 71,819 | | | 65,950 | | | 66,528 | |
Total Revenue | | | 569,439 | | | 542,256 | | | 467,368 | |
Cost of Sales: | | | | | | | | | | |
Product | | | 296,256 | | | 272,706 | | | 231,040 | |
Service | | | 41,244 | | | 33,358 | | | 34,338 | |
Total Cost of Sales | | | 337,500 | | | 306,064 | | | 265,378 | |
Gross Profit | | | 231,939 | | | 236,192 | | | 201,990 | |
Operating Expenses: | | | | | | | | | | |
Selling and marketing | | | 81,009 | | | 74,637 | | | 69,781 | |
General and administrative | | | 48,163 | | | 51,401 | | | 44,230 | |
Research and development | | | 22,812 | | | 21,893 | | | 14,785 | |
U.S. Government settlement | | | - | | | 7,750 | | | - | |
Total Operating Expenses | | | 151,984 | | | 155,681 | | | 128,796 | |
Income From Operations | | | 79,955 | | | 80,511 | | | 73,194 | |
Interest expense, net | | | (334 | ) | | (305 | ) | | (915 | ) |
Other (expense) income, net | | | (367 | ) | | (426 | ) | | 1,026 | |
Income Before Income Taxes | | | 79,254 | | | 79,780 | | | 73,305 | |
Provision for income taxes | | | 21,448 | | | 28,224 | | | 22,363 | |
Net Income | | $ | 57,806 | | $ | 51,556 | | $ | 50,942 | |
Earnings Per Share | | | | | | | | | | |
Basic | | $ | 3.69 | | $ | 3.24 | | $ | 3.29 | |
Diluted | | $ | 3.64 | | $ | 3.21 | | $ | 3.24 | |
| | | | | | | | | | |
Dividends declared per share | | $ | 1.20 | | $ | 1.05 | | $ | 0.85 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-4
Table of Contents
Consolidated Statements of Comprehensive Income
(For the Fiscal Years Ended September 28, September 29 and October 1, respectively)
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Net income | | $ | 57,806 | | $ | 51,556 | | $ | 50,942 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | | | 585 | | | (2,123 | ) | | 727 | |
Derivative instruments: | | | | | | | | | | |
Unrealized net gain (loss) | | | 1,349 | | | (291 | ) | | (741 | ) |
Net (gain) loss reclassified to earnings | | | (464 | ) | | 499 | | | 1,245 | |
Defined benefit pension plan: | | | | | | | | | | |
Unrealized net (loss) gain | | | (128 | ) | | (3,654 | ) | | 221 | |
Net loss reclassified to earnings | | | 363 | | | 54 | | | 106 | |
Currency exchange rate change | | | (269 | ) | | 127 | | | 50 | |
Other comprehensive income (loss) | | | 1,436 | | | (5,388 | ) | | 1,608 | |
Comprehensive income | | $ | 59,242 | | $ | 46,168 | | $ | 52,550 | |
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 (For the Fiscal Years Ended September 28, September 29 and October 1, respectively, expressed in thousands)
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated
Other
Comprehensive
Income | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | | Total
Shareholders’
Investment | |
| | Shares
Issued | | Amount | | | | | |
Balance, October 2, 2010 | | | 15,264 | | | 3,816 | | | - | | | 147,609 | | | 14,681 | | $ | 166,106 | |
Total comprehensive income | | | - | | | - | | | - | | | 50,942 | | | 1,608 | | | 52,550 | |
Exercise of stock options | | | 332 | | | 83 | | | 12,129 | | | - | | | - | | | 12,212 | |
Stock-based compensation | | | 18 | | | 5 | | | 2,699 | | | - | | | - | | | 2,704 | |
Tax shortfall from equity compensation | | | - | | | - | | | (307 | ) | | - | | | - | | | (307 | ) |
Issuance for employee stock purchase plan | | | 24 | | | 6 | | | 660 | | | - | | | - | | | 666 | |
Common stock purchased and retired | | | (6 | ) | | (2 | ) | | (9,862 | ) | | - | | | - | | | (9,864 | ) |
Dividends, $0.85 per share | | | - | | | - | | | - | | | (13,219 | ) | | - | | | (13,219 | ) |
Balance, October 1, 2011 | | | 15,632 | | | 3,908 | | | 5,319 | | | 185,332 | | | 16,289 | | | 210,848 | |
Total comprehensive income | | | - | | | - | | | - | | | 51,556 | | | (5,388 | ) | | 46,168 | |
Exercise of stock options | | | 491 | | | 123 | | | 17,132 | | | - | | | - | | | 17,255 | |
Stock-based compensation | | | 40 | | | 10 | | | 3,422 | | | - | | | - | | | 3,432 | |
Tax benefit from equity compensation | | | - | | | - | | | 521 | | | - | | | - | | | 521 | |
Issuance for employee stock purchase plan | | | 19 | | | 5 | | | 626 | | | - | | | - | | | 631 | |
Common stock purchased and retired | | | (542 | ) | | (136 | ) | | (26,368 | ) | | (8,819 | ) | | - | | | (35,323 | ) |
Dividends, $1.05 per share | | | - | | | - | | | - | | | (16,813 | ) | | - | | | (16,813 | ) |
Balance, September 29, 2012 | | | 15,640 | | | 3,910 | | | 652 | | | 211,256 | | | 10,901 | | | 226,719 | |
Total comprehensive income | | | - | | | - | | | - | | | 57,806 | | | 1,436 | | | 59,242 | |
Exercise of stock options | | | 243 | | | 61 | | | 7,833 | | | - | | | - | | | 7,894 | |
Stock-based compensation | | | 40 | | | 10 | | | 3,653 | | | - | | | - | | | 3,663 | |
Tax benefit from equity compensation | | | - | | | - | | | 1,835 | | | - | | | - | | | 1,835 | |
Issuance for employee stock purchase plan | | | 20 | | | 5 | | | 746 | | | - | | | - | | | 751 | |
Common stock purchased and retired | | | (535 | ) | | (134 | ) | | (14,719 | ) | | (9,914 | ) | | - | | | (24,767 | ) |
Dividends, $1.20 per share | | | - | | | - | | | - | | | (18,800 | ) | | - | | | (18,800 | ) |
Balance, September 28, 2013 | | | 15,408 | | $ | 3,852 | | $ | - | | $ | 240,348 | | $ | 12,337 | | $ | 256,537 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Consolidated Statements of Cash Flows (For the Fiscal Years Ended September 28, September 29, October 1, respectively)
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Cash Flows from Operating Activities: | | | | | | | | | | |
Net income | | $ | 57,806 | | $ | 51,556 | | $ | 50,942 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | | |
Stock-based compensation | | | 3,736 | | | 3,372 | | | 2,701 | |
Excess tax benefits from stock-based compensation | | | (1,807 | ) | | (1,228 | ) | | (432 | ) |
Net periodic pension benefit cost | | | 1,288 | | | 664 | | | 724 | |
Depreciation and amortization | | | 16,589 | | | 13,782 | | | 12,894 | |
Deferred income taxes | | | (1,010 | ) | | 29 | | | 5,357 | |
Bad debt (recovery) provision | | | (160 | ) | | 896 | | | 729 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts and unbilled contracts receivable | | | (43,179 | ) | | (398 | ) | | (44,714 | ) |
Inventories | | | (9,616 | ) | | (2,104 | ) | | (13,610 | ) |
Prepaid expenses | | | (1,587 | ) | | (919 | ) | | (268 | ) |
Accounts payable | | | (3,973 | ) | | 5,922 | | | 5,492 | |
Accrued payroll and related costs | | | 1,366 | | | (2,257 | ) | | 740 | |
Advance payments from customers | | | (21,082 | ) | | 2,251 | | | 19,123 | |
Accrued warranty costs | | | 632 | | | (1,223 | ) | | (2,191 | ) |
Contributions to pension benefit plan | | | (4,575 | ) | | (524 | ) | | (475 | ) |
Other assets and liabilities | | | 3,513 | | | (4,794 | ) | | 5,946 | |
Net Cash (Used in) Provided by Operating Activities | | | (2,059 | ) | | 65,025 | | | 42,958 | |
Cash Flows from Investing Activities: | | | | | | | | | | |
Additions to property and equipment | | | (29,690 | ) | | (15,625 | ) | | (10,145 | ) |
Cash Flows from Financing Activities: | | | | | | | | | | |
Net receipts (payments) under short-term borrowings | | | 34,708 | | | (40,458 | ) | | 37 | |
Excess tax benefits from stock-based compensation | | | 1,807 | | | 1,228 | | | 432 | |
Cash dividends | | | (19,113 | ) | | (15,874 | ) | | (9,300 | ) |
Proceeds from exercise of stock options and employee stock purchase plan | | | 8,645 | | | 17,886 | | | 12,878 | |
Payments to purchase and retire common stock | | | (24,767 | ) | | (35,323 | ) | | (9,864 | ) |
Net Cash Provided by (Used in) Financing Activities | | | 1,280 | | | (72,541 | ) | | (5,817 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | | | (1,050 | ) | | (1,102 | ) | | 488 | |
Cash and Cash Equivalents: | | | | | | | | | | |
(Decrease) increase during the year | | | (31,519 | ) | | (24,243 | ) | | 27,484 | |
Balance, beginning of year | | | 79,852 | | | 104,095 | | | 76,611 | |
Balance, end of year | | $ | 48,333 | | $ | 79,852 | | $ | 104,095 | |
Supplemental Disclosures of Cash Flows: | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | |
Interest | | $ | 146 | | $ | 947 | | $ | 1,284 | |
Income taxes | | | 22,565 | | | 33,789 | | | 7,061 | |
Non-cash financing activities: | | | | | | | | | | |
Dividends declared not yet paid | | $ | 4,545 | | $ | 4,858 | | $ | 3,919 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Operations
MTS Systems Corporation is a leading global supplier of high-performance test systems and position sensors. The Company’s testing 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 years ended September 28, 2013, September 29, 2012 and October 1, 2011 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
The Company recognizes revenue on a sales arrangement when it is realized or realizable and earned, which occurs when all of the following criteria have been met: persuasive evidence of an arrangement exists; delivery and title transfer has occurred or services have been rendered; the sales price is fixed and determinable; collectability is reasonably assured; and all significant obligations to the customer have been fulfilled.
Orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocols may contain multiple elements for revenue recognition purposes. The Company considers each deliverable that provides value to the customer on a standalone basis a separable element. Separable elements in these arrangements may include the design and manufacture of hardware and essential software, installation services, training and/or post contract software maintenance and support. The Company initially allocates consideration to each separable element using the relative selling price method. Selling prices are determined by the Company based on either vendor-specific objective evidence (“VSOE”) (the actual selling prices of similar products and services sold on a standalone basis) or, in the absence of VSOE, the Company’s best estimate of the selling price. Factors considered by the Company in determining estimated selling prices for applicable elements generally include overall economic conditions, customer demand, costs incurred by the Company to provide the deliverable, as well as the Company’s historical pricing practices. Under these arrangements, revenue associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement. Under arrangements where special acceptance protocols exist, installation services and training are not considered separable. Accordingly, revenue for the entire arrangement is recognized upon the completion of installation, training and fulfillment of any other significant obligations specific to the terms of the arrangement. Arrangements that do not contain any separable elements are typically recognized when the products are shipped and title has transferred to the customer.
Certain contractual arrangements require longer production periods, generally longer than six months (long-term contracts), and may contain non-routine installations and special acceptance protocols. These arrangements often include hardware and essential software, installation services, training and support. Long-term contractual arrangements involving essential software typically include significant production, modification, and customization. For long-term arrangements with essential software and all other long-term arrangements with complex installations and/or unusual acceptance protocols, revenue is recognized using the percentage-of-completion method, based on the cost incurred to-date relative to estimated total cost of the contract. Elements of an arrangement that do not separately fall within the scope of the percentage of completion method (e.g. training and post contract software maintenance and support) are recognized as the service is provided in amounts determined based on VSOE, or in the absence of VSOE, the Company’s best estimate of the selling price.
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Under the terms of the Company’s long-term contracts, revenue recognized using the percentage-of-completion method may not, in certain circumstances, be invoiced until completion of contractual milestones, upon shipment of the equipment, or upon installation and acceptance by the customer. Unbilled amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Accounts Receivable.
Revenue from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. Revenue from post contract software maintenance and support services is recognized ratably over the defined contractual period of the maintenance agreement.
The Company’s sales arrangements typically do not include specific performance-, cancellation-, termination-, or refund-type provisions. In the event a customer cancels a contractual arrangement, the Company would typically be entitled to receive reimbursement from the customer for actual costs incurred under the arrangement plus a reasonable margin.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Shipping and Handling
Freight revenue billed to customers is reported within Revenue 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. Gains and losses from foreign currency transactions are recognized in the Consolidated Statements of Income. The Company recorded net foreign currency transaction gains/(losses) of ($1.7) million, ($1.8) million, and $0.5 million during the fiscal year ended September 28, 2013, September 29, 2012, and October 1, 2011, 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 bank deposits and/or money market funds and are held in local currency denominations.
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 collectability 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.
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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 September 28, 2013 are expected to be invoiced during fiscal year 2014.
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 September 28, 2013 and September 29, 2012 were as follows:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Customer projects in various stages of completion | | $ | 19,194 | | $ | 17,704 | |
Components, assemblies and parts | | | 58,795 | | | 50,275 | |
Total | | $ | 77,989 | | $ | 67,979 | |
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. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value will be expensed in the period such a determination is made. The Company capitalized $0.5 million of software development costs during the fiscal year ended September 29, 2012. No software development costs were capitalized during the fiscal year ended September 28, 2013. Amortization expense for software development costs was $2.8 million, $2.6 million and $1.5 million for the fiscal years ended September 28, 2013, September 29, 2012 and October 1, 2011, respectively. See Note 3 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, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, 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 3 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, 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.
The Company has three reporting units, two of which are assigned goodwill. At September 28, 2013, one reporting unit was assigned $15.0 million of goodwill while another was assigned $1.6 million.
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. At both September 28, 2013 and September 29, 2012, there were no indefinite-lived intangible assets.
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 September 28, 2013 and September 29, 2012, the Company determined there was no impairment of its goodwill or intangible assets. See Note 3 to the Consolidated Financial Statements for additional information on goodwill and intangible assets.
Other Assets
Other assets at September 28, 2013 and September 29, 2012 primarily consisted of security deposits paid on leased property and cash redemption values on group insurance policies.
Warranty Obligations
Sales of the Company’s products and systems are subject to limited warranty obligations that are included in customer contracts. For sales that include installation services, warranty obligations typically extend for a period of twelve to twenty-four months from the date of either shipment or acceptance. Product obligations 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 September 28, 2013 and September 29, 2012, were as follows:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Beginning balance | | $ | 3,984 | | $ | 5,290 | |
Warranty claims | | | (6,267 | ) | | (5,175 | ) |
Warranty provisions | | | 6,748 | | | 3,652 | |
Adjustments to preexisting warranties | | | 151 | | | 300 | |
Translation adjustment | | | 78 | | | (83 | ) |
Ending balance | | $ | 4,694 | | $ | 3,984 | |
Derivative Financial Instruments
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, interest rate swaps and forward 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. At both September 28, 2013 and September 29, 2012, the Company did not have any foreign exchange contracts with credit-risk related contingent features. See Note 5 to the Consolidated Financial Statements for additional information on derivatives and hedging activities.
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. Using the treasury stock method, diluted earnings per share includes the potentially dilutive effect of common shares issued in connection with outstanding stock-based compensation options and grants. 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 less than 0.1 million, 0.4 million, and 0.4 million weighted common shares have been excluded from the diluted weighted shares outstanding calculation for the fiscal year ended September 28, 2013, September 29, 2012, and October 1, 2011, respectively. The potentially dilutive effect of common shares issued in connection with outstanding stock options is determined based on net income. A reconciliation of these amounts is as follows:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands, except per share data) | |
Net income | | $ | 57,806 | | $ | 51,556 | | $ | 50,942 | |
Weighted average common shares outstanding | | | 15,664 | | | 15,913 | | | 15,487 | |
Dilutive potential common shares | | | 197 | | | 164 | | | 252 | |
Weighted average dilutive common shares outstanding | | | 15,861 | | | 16,077 | | | 15,739 | |
Earnings per share: | | | | | | | | | | |
Basic | | $ | 3.69 | | $ | 3.24 | | $ | 3.29 | |
Diluted | | $ | 3.64 | | $ | 3.21 | | $ | 3.24 | |
Stock Purchases
During fiscal year 2012, the Company entered into an accelerated share purchase agreement with an unrelated third-party investment bank. In connection with the agreement, the Company made an initial $35.0 million payment to the investment bank and immediately received an initial delivery of approximately 0.5 million shares of its common stock with a fair value of $28.0 million as of the purchase date. Effective as of the date of the initial 0.5 million stock purchase, the transaction was accounted for as a share retirement, resulting in a reduction of common stock, additional paid-in capital and retained earnings of $0.1 million, $26.1 million and $1.8 million, respectively. The remaining $7.0 million of the Company’s initial payment to the investment bank was reported as a reduction in retained earnings. The agreement specified that the Company had the option to settle any obligation that it may have at the conclusion of the contract in either cash or shares of the Company’s common stock. These settlement alternatives had the same economic value to the Company. Based on the facts, during the entire term of the agreement, the forward contract met the requirements of ASC 480-10 and ASC 815-40 to be classified as permanent equity.
During fiscal year 2013, the Company received approximately 0.1 million shares of its common stock from the bank pursuant to the settlement of the accelerated share purchase program. The amount of shares received at settlement was determined based on the volume weighted average price of the Company’s stock during the purchase period. Upon settlement of the contract, the Company accounted for the 0.1 million shares received as a share retirement, resulting in a less than $0.1 million reduction and corresponding increase in common stock and paid-in capital, respectively.
During fiscal year 2011, the Company paid the bank $9.6 million pursuant to the settlement of an accelerated share purchase agreement that the Company entered into during fiscal year 2010. The settlement amount was determined based on the volume weighted average price of the Company’s stock during the purchase period. Upon settlement of the contract, the Company reduced additional paid-in capital by $9.6 million.
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.
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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.
Loss Contingencies
The Company establishes an accrual for loss contingencies when it is both probable that an asset has been impaired or a liability has been incurred, and the amount of the loss can be reasonably estimated. When loss contingencies are not probable and cannot be reasonably estimated, the Company does not establish an accrual. However, when there is at least a reasonable possibility that a loss has been incurred, but it is not probable or reasonably estimated, the Company discloses the nature of the loss contingency and an estimate of the possible loss or range of loss, as applicable. Any adjustment made to a loss contingency accrual during an accounting period affects the earnings of the period.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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. Actual 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 September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” ASU No. 2011-08 amends Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other,” and provides an entity with the option of first performing a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after completion of the qualitative assessment, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value to the carrying amount of the reporting unit as described in ASC 350. Under the amendments in ASU No. 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step impairment test. The provisions of ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company’s adoption of ASU No. 2011-08 during the first quarter of fiscal year 2013 did not affect the Company’s financial position, results of operations or cash flows.
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In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU No. 2011-05 amends ASC Topic 220, “Comprehensive Income,” to allow an entity the option to present the components of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ investment. The amendments to the ASC in ASU No. 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220)” which deferred certain provisions of ASU No. 2011-05 that specifically relate to the presentation of separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income for all periods presented. With the exception of the specific provisions deferred under ASU No. 2011-12, the provisions of ASU No. 2011-05 are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In the first quarter of fiscal year 2013, with the exception of the provisions specifically deferred under ASU No. 2011-12, the Company adopted the provisions of ASU No. 2011-05 and elected to present the components of net income and comprehensive income in two separate but consecutive statements. As a result, the Company included a new financial statement labeled “Consolidated Statements of Comprehensive Income.” The adoption of ASU No. 2011-05 did not affect the Company’s financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, “Reporting Amounts Reclassified Out of Accumulated Comprehensive Income” which requires an entity to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments to the ASC in ASU No. 2011-05 do not change the current requirements for reporting net income of other comprehensive income in the financial statements. The provisions of ASU No. 2013-02 are to be applied prospectively for reporting periods beginning after December 15, 2012. In the second quarter of fiscal year 2013, the Company adopted the provisions of ASU No. 2013-02 and elected to present significant amounts reclassified out of accumulated comprehensive income by the respective line items of net income in the Condensed Notes to the Consolidated Financial Statements. The adoption of ASU No. 2013-02 did not affect the Company’s financial position, results of operations or cash flows.
See Note 10 in the Condensed Notes to Consolidated Financial Statements for additional information on other comprehensive income and accumulated other comprehensive income.
2. Stock-Based Compensation:
The Company compensates officers, directors, and employees with stock-based compensation under the stock plan approved by the Company’s shareholders in 2011, and administered under the supervision of the Company’s Board of Directors. During fiscal year 2013, the Company’s shareholders approved a 1.3 million increase in the number of shares that can be issued under the 2011 stock plan, bringing the aggregate total to 2.3 million. During the years ended September 28, 2013, September 29, 2012 and October 1, 2011, the Company awarded stock options, restricted stock grants, and restricted stock units under the 2011 plan. At September 28, 2013, a total of 1,776,238 shares were available for future grant under the 2011 plan. Shares will be available for issuance under the 2011 stock plan until January 31, 2018.
During the year ended October 1, 2011, the Company issued shares of its common stock to participants in the Company’s Employee Stock Purchase Plan (“ESPP”) under a stock plan approved by the Company’s shareholders in 2002. During the fiscal year ended October 1, 2011, the Company’s shareholders approved a 2012 ESPP which was effective on January 1, 2012. The 2002 ESPP expired, and no further share issuances occurred after December 31, 2011. During the years ended September 28, 2013 and September 29, 2012, the Company issued shares of its common stock to participants under the 2012 ESPP. At September 28, 2013, a total of 720,185 shares were available for ESPP share issuances under the 2012 stock plan. Shares will be available for issuance under the 2012 ESPP until December 31, 2021.
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Stock-Based Compensation Expense
Stock-based compensation expense for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was as follows (in thousands):
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | |
Stock-based compensation expense by type of award: | | | | | | | | | | |
Employee stock options | | $ | 1,811 | | $ | 1,599 | | $ | 1,383 | |
Employee stock purchase plan (ESPP) | | | 199 | | | 184 | | | 159 | |
Restricted stock and restricted stock units | | | 1,653 | | | 1,650 | | | 1,162 | |
Amounts capitalized as inventory | | | (806 | ) | | (742 | ) | | (652 | ) |
Amounts recognized in income for amounts previously capitalized as inventory | | | 879 | | | 681 | | | 649 | |
| | | | | | | | | | |
Total stock-based compensation included in income from operations | | | 3,736 | | | 3,372 | | | 2,701 | |
Income tax benefit on stock-based compensation | | | (1,277 | ) | | (1,161 | ) | | (931 | ) |
Net compensation expense included in net income | | $ | 2,459 | | $ | 2,211 | | $ | 1,770 | |
At September 28, 2013, there was $1.4 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 1.1 years. At September 28, 2013, there was $0.8 million and $0.4 million of total restricted stock expense related to non-vested awards of restricted stock units and restricted stock, respectively, not yet recognized, each of which is expected to be recognized over a weighted average period of approximately 1.2 years.
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 September 28, 2013, September 29, 2012, and October 1, 2011 was $10.25, $8.36 and $9.45, respectively. The weighted average assumptions used to determine fair value of stock options granted during those fiscal years were as follows:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
Expected life (in years) | | | 3.1 | | | 3.5 | | | 3.0 | |
Risk-free interest rate | | | 0.4 | % | | 0.5 | % | | 0.8 | % |
Expected volatility | | | 33.8 | % | | 34.5 | % | | 35.4 | % |
Dividend yield | | | 2.3 | % | | 2.5 | % | | 1.8 | % |
The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. 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 both restricted stock and restricted stock units are valued based on the market value of the Company’s shares at the date of grant. The value of restricted stock 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.
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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.
Stock option activity for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | Shares | | WAEP* | | Shares | | WAEP* | | Shares | | WAEP* | |
Options outstanding at beginning of year | | | 754 | | $ | 36.84 | | | 1,048 | | $ | 35.80 | | | 1,329 | | $ | 34.53 | |
Granted | | | 24 | | $ | 52.81 | | | 324 | | $ | 40.14 | | | 292 | | $ | 43.61 | |
Exercised | | | (243 | ) | $ | 32.51 | | | (491 | ) | $ | 35.17 | | | (332 | ) | $ | 36.80 | |
Forfeited or expired | | | (17 | ) | $ | 39.21 | | | (127 | ) | $ | 43.79 | | | (241 | ) | $ | 36.91 | |
Options outstanding at end of year | | | 518 | | $ | 39.52 | | | 754 | | $ | 36.84 | | | 1,048 | | $ | 35.80 | |
Options eligible for exercise at year-end | | | 226 | | $ | 36.45 | | | 249 | | $ | 31.02 | | | 653 | | $ | 36.13 | |
*Weighted Average Exercise Price | | | | | | | | | | | | | | | | | | | |
Prior to the fiscal year ended September 28, 2013, the Company’s historical practice was to grant an annual Company-wide award of stock options to officers and employees in July. The timing of the Company-wide award was changed from July to December so that the grants will be aligned with a review of individual and Company performance. As a consequence of this timing shift, the only stock option awards granted during the fiscal year ended September 28, 2013 were related to inducement grants for a new officer as well as other new employees.
Options outstanding at September 28, 2013 had a weighted average remaining contractual term of 3.1 years, and an aggregate intrinsic value of $12.5 million. Options eligible for exercise at September 28, 2013 had a weighted average remaining contractual term of 2.6 years, and an aggregate intrinsic value of $6.1 million.
The total intrinsic value of stock options exercised during the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was $6.2 million, $5.8 million and $2.3 million, respectively.
Restricted Stock
The Company awards directors and key employees restricted stock and restricted stock units, respectively, that vest over three years. For restricted stock awarded to directors, participants are entitled to cash dividends and voting rights on unvested shares, but the sale and transfer of these shares is restricted during the vesting period. For restricted stock units awarded to employees, participants are not entitled to cash dividends and voting rights on unvested units.
Restricted stock activity for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | Shares | | WAGDFV* | | Shares | | WAGDFV* | | Shares | | WAGDFV* | |
Unvested shares at beginning of year | | | 27 | | $ | 41.52 | | | 30 | | $ | 33.61 | | | 29 | | $ | 27.18 | |
Granted | | | 12 | | $ | 56.44 | | | 12 | | $ | 49.03 | | | 13 | | $ | 42.89 | |
Vested | | | (15 | ) | $ | 37.20 | | | (15 | ) | $ | 31.26 | | | (12 | ) | $ | 28.32 | |
Unvested shares at end of year | | | 24 | | $ | 51.68 | | | 27 | | $ | 41.52 | | | 30 | | $ | 33.61 | |
*Weighted Average Grant Date Fair Value | |
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Restricted stock unit activity for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | Shares | | WAGDFV* | | Shares | | WAGDFV* | | Shares | | WAGDFV* | |
Outstanding at beginning of year | | | 62 | | $ | 38.90 | | | 37 | | $ | 33.37 | | | 59 | | $ | 25.51 | |
Granted | | | 3 | | $ | 55.38 | | | 60 | | $ | 39.26 | | | 18 | | $ | 42.50 | |
Vested | | | (26 | ) | $ | 37.61 | | | (26 | ) | $ | 32.68 | | | (22 | ) | $ | 24.71 | |
Forfeited | | | (1 | ) | $ | 40.79 | | | (9 | ) | $ | 29.90 | | | (18 | ) | $ | 27.50 | |
Outstanding at end of year | | | 38 | | $ | 40.91 | | | 62 | | $ | 38.90 | | | 37 | | $ | 33.37 | |
*Weighted Average Grant Date Fair Value | |
| | | | | | | | | | | | | | | | | | | | |
Prior to the fiscal year ended September 28, 2013, the Company’s historical practice was to grant an annual Company-wide award of restricted stock units to officers and employees in July. The timing of the Company-wide award was changed from July to December so that the grants will be aligned with a review of individual and Company performance. As a consequence of this timing shift, the only restricted stock units granted during the fiscal year ended September 28, 2013 were related to inducement grants for a new officer as well as other new employees.
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 2013 with the combined issuance of 19,937 shares at a weighted average price of $37.68. In fiscal years 2012 and 2011, purchases were 18,734 and 24,028 shares, respectively, with weighted average share prices of $33.65 and $27.72, respectively.
3. Capital Assets:
Property and Equipment
Property and equipment at September 28, 2013 and September 29, 2012 consist of the following:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Land and improvements | | $ | 1,713 | | $ | 1,711 | |
Buildings and improvements | | | 54,823 | | | 53,545 | |
Machinery and equipment | | | 145,785 | | | 118,838 | |
Total | | | 202,321 | | | 174,094 | |
Less accumulated depreciation | | | (123,922 | ) | | (112,441 | ) |
Property and equipment, net | | $ | 78,399 | | $ | 61,653 | |
Goodwill
Goodwill at September 28, 2013 and September 29, 2012 was $16.6 million and $16.2 million, respectively. The increase in goodwill during each of the years ended September 28, 2013 and September 29, 2012 was due to currency translation.
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Other Intangible Assets
Other intangible assets consist of the following:
| | | | | | | | | | | | | |
| | September 28, 2013 | |
| | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Value | | Weighted
Average
Useful Life
(in Years) | |
| | (dollar amounts expressed in thousands) | |
Software development costs | | $ | 15,860 | | $ | (8,885 | ) | $ | 6,975 | | | 5.7 | |
Patents | | | 10,308 | | | (3,676 | ) | | 6,632 | | | 15.3 | |
Trademarks and trade names | | | 6,149 | | | (1,244 | ) | | 4,905 | | | 30.2 | |
Land-use rights | | | 1,270 | | | (126 | ) | | 1,144 | | | 47.8 | |
Total | | $ | 33,587 | | $ | (13,931 | ) | $ | 19,656 | | | 14.3 | |
| | | | | | | | | | | | | |
| | September 29, 2012 | |
| | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying
Value | | Weighted
Average
Useful Life
(in Years) | |
| | (dollar amounts expressed in thousands) | |
Software development costs | | $ | 15,860 | | $ | (6,125 | ) | $ | 9,735 | | | 5.7 | |
Patents | | | 10,073 | | | (2,871 | ) | | 7,202 | | | 15.3 | |
Trademarks and trade names | | | 6,020 | | | (1,024 | ) | | 4,996 | | | 30.2 | |
Land-use rights | | | 1,241 | | | (97 | ) | | 1,144 | | | 47.8 | |
Total | | $ | 33,194 | | $ | (10,117 | ) | $ | 23,077 | | | 14.3 | |
Amortization expense recognized during the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was $3.7 million, $3.5 million, and $3.3 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) | |
2014 | | $ | 3,725 | |
2015 | | $ | 3,714 | |
2016 | | $ | 2,202 | |
2017 | | $ | 932 | |
2018 | | $ | 724 | |
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.
4. Business Segment Information:
The Company’s Chief Executive Officer (the Chief Operating Decision Maker) regularly reviews financial information for the Company’s two operating segments, “Test” and “Sensors.” Test provides testing equipment, systems, and services to the ground vehicles, materials and structures markets. Sensors provides high-performance position sensors for a variety of industrial and mobile hydraulic applications.
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In evaluating each segment’s performance, the Company’s Chief Executive Officer focuses on income from operations. This measure excludes interest income and expense, income taxes and other non-operating items. Corporate expenses, including costs associated with various support functions such as human resources, information technology, legal, finance and accounting, and general and administrative costs, are allocated to the reportable segments on the basis of revenue.
Financial information by reportable segment for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 were as follows:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Revenue | | | | | | | | | | |
Test | | $ | 474,119 | | $ | 442,012 | | $ | 363,918 | |
Sensors | | | 95,320 | | | 100,244 | | | 103,450 | |
Total Revenue | | $ | 569,439 | | $ | 542,256 | | $ | 467,368 | |
| | | | | | | | | | |
Income from Operations | | | | | | | | | | |
Test | | $ | 60,984 | | $ | 58,344 | | $ | 46,211 | |
Sensors | | | 18,971 | | | 22,167 | | | 26,983 | |
Total Income from Operations | | $ | 79,955 | | $ | 80,511 | | $ | 73,194 | |
| | | | | | | | | | |
Identifiable Assets | | | | | | | | | | |
Test | | $ | 360,037 | | $ | 315,357 | | $ | 333,290 | |
Sensors | | | 91,240 | | | 94,081 | | | 94,569 | |
Total Assets | | $ | 451,277 | | $ | 409,438 | | $ | 427,859 | |
| | | | | | | | | | |
Other Segment Data | | | | | | | | | | |
Test: | | | | | | | | | | |
Goodwill | | $ | 15,028 | | $ | 14,688 | | $ | 14,435 | |
Capital expenditures | | | 26,775 | | | 12,551 | | | 7,289 | |
Depreciation and amortization | | $ | 14,325 | | $ | 11,567 | | $ | 10,658 | |
Sensors: | | | | | | | | | | |
Goodwill | | $ | 1,596 | | $ | 1,551 | | $ | 1,592 | |
Capital expenditures | | | 2,915 | | | 3,074 | | | 2,856 | |
Depreciation and amortization | | $ | 2,264 | | $ | 2,215 | | $ | 2,236 | |
| | | | | | | | | | |
Geographic information was as follows: | | | | | | | | | | |
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Revenue | | | | | | | | | | |
United States | | $ | 137,750 | | $ | 140,305 | | $ | 109,133 | |
Europe | | | 178,610 | | | 167,828 | | | 150,132 | |
China | | | 127,368 | | | 103,977 | | | 104,461 | |
Asia, excluding China | | | 96,653 | | | 100,166 | | | 76,162 | |
Other | | | 29,058 | | | 29,980 | | | 27,480 | |
Total Revenue | | $ | 569,439 | | $ | 542,256 | | $ | 467,368 | |
| | | | | | | | | | |
Property and Equipment, Net | | | | | | | | | | |
United States | | $ | 55,509 | | $ | 40,522 | | | 35,972 | |
Europe | | | 13,838 | | | 12,059 | | | 11,362 | |
China | | | 7,661 | | | 7,377 | | | 6,944 | |
Asia, excluding China | | | 1,391 | | | 1,695 | | | 1,974 | |
Total Property and Equipment, Net | | $ | 78,399 | | $ | 61,653 | | $ | 56,252 | |
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Revenue by geographic area is presented based on customer location. No countries other than the United States and China 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. Revenue is not reported for each of the Company’s products and services because it is impracticable to do so.
5. Derivative Instruments and Hedging Activities
The Company’s currency exchange and interest rate swaps are designated as cash flow hedges and qualify as hedging instruments pursuant to ASC 815. The Company also has derivatives which are not designated as cash flow hedges and, therefore, are accounted for and reported under the guidance of ASC 830. Regardless of designation for accounting purposes, the Company believes that all of its derivative instruments are hedges of transactional risk exposures. The fair value of the Company’s outstanding designated and undesignated derivative assets and liabilities are reported in the September 28, 2013 and September 29, 2012 Consolidated Balance Sheet as follows:
| | | | | | | |
| | September 28, 2013 | |
| | Prepaid Expenses
and Other
Current Assets | | Other Accrued
Liabilities | |
Designated hedge derivatives: | | (expressed in thousands) | |
Foreign exchange cash flow hedges | | $ | 1,091 | | $ | 1,307 | |
Total designated hedge derivatives | | | 1,091 | | | 1,307 | |
| | | | | | | |
Derivatives not designated as hedges: | | | | | | | |
Foreign exchange balance sheet derivatives | | | - | | | 167 | |
Total hedge and other derivatives | | $ | 1,091 | | $ | 1,474 | |
| | | | | | | |
| | September 29, 2012 | |
| | Prepaid Expenses
and Other
Current Assets | | Other Accrued
Liabilities | |
Designated hedge derivatives: | | (expressed in thousands) | |
Foreign exchange cash flow hedges | | $ | 432 | | $ | 1,157 | |
Total designated hedge derivatives | | | 432 | | | 1,157 | |
| | | | | | | |
Derivatives not designated as hedges: | | | | | | | |
Foreign exchange balance sheet derivatives | | | - | | | 415 | |
Total hedge and other derivatives | | $ | 432 | | $ | 1,572 | |
Cash Flow Hedging – Currency Risks
Currency exchange contracts utilized to maintain the functional currency value of expected financial transactions denominated in foreign currencies are designated as cash flow hedges. Qualifying gains and losses related to changes in the market value of these contracts are reported as a component of Accumulated Other Comprehensive Income (“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, because that is the same line item in which the underlying hedged transaction is reported.
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At September 28, 2013 and September 29, 2012, the Company had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $65.7 million and $60.4 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 $48.0 million and $49.7 million at September 28, 2013 and September 29, 2012, respectively. At September 28, 2013, the net market value of the foreign currency exchange contracts was a net liability of $0.2 million, consisting of $1.3 million in liabilities and $1.1 million in assets. At September 29, 2012, the net market value of the foreign currency exchange contracts was a net liability of $0.7 million, consisting of $1.1 million in liabilities and $0.4 million in assets.
The pretax amounts recognized in AOCI on currency exchange contracts for the fiscal years ended September 28, 2013 and September 29, 2012, including gains (losses) reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (“OCI”), are as follows:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Beginning unrealized net loss in AOCI | | $ | (648 | ) | $ | (365 | ) |
Net (gain) loss reclassified into Revenue (effective portion) | | | (733 | ) | | 162 | |
Net gain (loss) recognized in OCI (effective portion) | | | 2,135 | | | (445 | ) |
Ending unrealized net gain (loss) in AOCI | | $ | 754 | | $ | (648 | ) |
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 September 28, 2013, September 29, 2012 and October 1, 2011. At September 28, 2013, the amount projected to be reclassified from AOCI into earnings in the next 12 months was a net gain of $0.8 million. The maximum remaining maturity of any forward or optional contract at September 28, 2013 was 1.0 years.
Cash Flow Hedging - Interest Rate Risks
During the fiscal years ended September 29, 2012 and October 1, 2011, the Company used floating to fixed interest rate swaps to mitigate its exposure to future changes in interest rates related to its floating rate indebtedness. The Company had designated these interest rate swap arrangements as cash flow hedges. As a result, changes in the fair value of the interest rate swaps were recorded in AOCI within Shareholders’ Investment on the Consolidated Balance Sheets throughout the entire contractual term of each of the interest rate swap arrangements.
During the fiscal year ended September 29, 2012, all of the Company’s interest rate swap arrangements expired. The Company had no interest rate swap arrangements during the fiscal year ending September 28, 2013.
During the periods each of the interest rates swaps were outstanding, the Company paid fixed interest in exchange for interest received at monthly U.S. LIBOR.
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The pretax amounts recognized in AOCI on interest rate swaps and forward interest rate swaps for fiscal year ended September 29, 2012:
| | | | |
| | 2012 | |
| | (expressed in thousands) | |
Beginning unrealized net loss in AOCI | | $ | (617 | ) |
Net loss reclassified into interest expense (effective portion) | | | 630 | |
Net loss recognized in OCI (effective portion) | | | (13 | ) |
Ending unrealized net loss in AOCI | | $ | - | |
Foreign Currency Balance Sheet Derivatives
The Company also uses foreign currency derivative contracts to maintain the functional currency value of monetary assets and liabilities denominated in non-functional foreign currencies. The gains and losses related to the changes in the market value of these derivative contracts are included in Other (Expense) Income, net on the Consolidated Statements of Income.
At September 28, 2013 and September 29, 2012, the Company had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of $26.7 million and $51.4 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 September 28, 2013 and September 29, 2012 was $8.6 and $6.6 million, respectively. At September 28, 2013 and September 29, 2012, the net market value of the foreign exchange balance sheet derivative contracts was a net liability of $0.2 million and $0.4 million, respectively.
The net losses recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts for the fiscal years ended September 28, 2013, September 29, 2012 and October 1, 2011 are as follows:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Net loss recognized in Other (expense) income, net | | $ | (258 | ) | $ | (294 | ) | $ | (464 | ) |
6. Fair Value Measurements
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 in the principal or most advantageous market, and adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
| |
| Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to the Company at the measurement date. |
| |
| Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| |
| Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. |
The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.
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Financial Instruments Measured at Fair Value on a Recurring Basis
Financial assets and liabilities subject to fair value measurements on a recurring basis are as follows:
| | | | | | | | | | | | | |
| | September 28, 2013 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
Assets: | | (expressed in thousands) | |
Currency contracts(1) | | $ | - | | $ | 1,091 | | $ | - | | $ | 1,091 | |
Total assets | | $ | - | | $ | 1,091 | | $ | - | | $ | 1,091 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | |
Currency contracts(1) | | $ | - | | $ | 1,474 | | $ | - | | $ | 1,474 | |
Total liabilities | | $ | - | | $ | 1,474 | | $ | - | | $ | 1,474 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | September 29, 2012 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
Assets: | | (expressed in thousands) | |
Currency contracts(1) | | $ | - | | $ | 432 | | $ | - | | $ | 432 | |
Total assets | | $ | - | | $ | 432 | | $ | - | | $ | 432 | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | |
Currency contracts(1) | | $ | - | | $ | 1,572 | | $ | - | | $ | 1,572 | |
Total liabilities | | $ | - | | $ | 1,572 | | $ | - | | $ | 1,572 | |
| | |
| (1) | Based on observable market transactions of spot currency rates and forward currency rates on equivalently-termed instruments. |
Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s goodwill, intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part of a business combination, individually or with a group of other assets. These nonfinancial assets were initially, and are currently, measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Periodically, these nonfinancial assets are tested for impairment, by comparing their respective carrying values to the estimated fair value of the reporting unit or asset group in which they reside. In the event any of these nonfinancial assets were to become impaired, the Company would recognize an impairment loss equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. Fair value measurements of reporting units are estimated using an income approach involving discounted or undiscounted cash flow models that contain certain Level 3 inputs requiring management judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, working capital requirements, and new product introductions. Fair value measurements of the reporting units associated with the Company’s goodwill balances are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment testing. Fair value measurements associated with the Company’s intangible assets and other long-lived assets are estimated when events or changes in circumstances such as market value, asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable.
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.
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These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings.
7. Financing:
Short-term borrowings at September 28, 2013 and September 29, 2012 consist of the following:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Bank line of credit, monthly U.S. LIBOR plus 87.5 basis points, in effect at September 28, 2013, maturing October 2013, with optional month-to-month term renewal and loan repricing until September 2017 | | $ | 35,000 | | $ | - | |
Notes payable, non-interest bearing | | | - | | | 230 | |
Total Short-Term Borrowings | | $ | 35,000 | | $ | 230 | |
On September 28, 2012, the Company entered into a credit agreement (“Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and other financial institutions that may become parties to the Credit Agreement from time to time. This agreement replaced the $75 million senior unsecured credit facility that was scheduled to expire in December 2012. The Credit Agreement provides for a five-year, $100 million senior unsecured revolving credit facility (“Credit Facility”) maturing September 28, 2017. The Company may use the Credit Facility for working capital financing, permitted acquisitions, share purchases, or other lawful corporate purposes. At September 28, 2013, outstanding borrowings under the Credit Facility were $35.0 million. At September 29, 2012, the Company had no borrowings outstanding under the Credit Facility. At September 28, 2013, the Company had outstanding letters of credit drawn from the Credit Facility totaling $14.3 million, leaving approximately $50.7 million of unused borrowing capacity. At September 29, 2012, the Company had outstanding letters of credit drawn from the Credit Facility totaling $10.1 million, leaving approximately $89.9 million of unused borrowing capacity.
The weighted average interest rate on outstanding borrowings under the Credit Facility during the fiscal years ended September 28, 2013 and September 29, 2012 was 1.57% and 0.70%, respectively. During the fiscal year ended September 29, 2012, the Company used floating to fixed interest rate swaps to mitigate its exposure to future changes in interest rates related to its floating rate indebtedness. During the period the interest rate swaps were outstanding, the Company paid fixed interest in exchange for interest received at monthly U.S. LIBOR. For the fiscal year ended September 29, 2012, the overall effective weighted average interest rate applicable to outstanding credit facility borrowing and interest rate swap arrangements was 2.54%.
Request for borrowings will be categorized by the Company and the Lenders as defined in the Credit Agreement. The primary categories of borrowing include Eurocurrency Borrowing, Alternate Base Rate (“ABR”) Borrowing, and Swingline Loans. ABR Borrowings and Swingline Loans made in U.S. Dollars under the Credit Agreement bear interest at a rate per annum equal to the Alternate Base Rate (defined as the greater of (a) the Prime Rate (as defined in the Credit Agreement) in effect on such day, (b) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus ½ of 1%, or (c) the Adjusted LIBO Rate (as defined in the Credit Agreement) for a one month Interest Period on such day plus 1%), plus the ABR Spread based upon the Leverage Ratio applicable on such date. Eurocurrency Borrowings made under the Credit Agreement bear interest at a rate per annum equal to the Adjusted LIBO Rate for the interest period in effect for such Eurocurrency Borrowing plus the Eurocurrency Spread based upon the Leverage Ratio applicable on such date. At September 28, 2013, the prime rate of 3.25% was the applicable Alternate Base Rate, plus ABR Spread ranging from 0% to 0.50% based on the Leverage Ratio. At September 28, 2013, the applicable Adjusted LIBO rate was 0.25%, plus Eurocurrency Spread ranging from 0.875% to 1.50% based on the Leverage Ratio. Commitment fees are payable on the unused portion of the Credit Facility at rates between 0.15% and 0.30%, based on the Company’s leverage ratio. During each of the fiscal years ended September 28, 2013 and September 29, 2012, commitment fees incurred on the Credit Facility were $0.1 million and less than $0.1 million, respectively.
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Under the Credit Agreement, the Company and each Borrower party thereto are subject to customary affirmative and negative covenants, including restrictions on their ability to incur debt, create liens, dispose of assets, make investments, loans, advances, guarantees and acquisitions, enter into transactions with affiliates, and enter into any restrictive agreements, and customary events of default (including payment defaults, covenant defaults, change of control defaults and bankruptcy defaults). The Credit Agreement also contains financial covenants, including the ratio of consolidated total indebtedness to 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 September 28, 2013 and September 29, 2012, the Company was in compliance with these financial covenants.
Notes payable at September 29, 2012 consisted of non-interest bearing notes payable to vendors by the Company’s Japanese Sensors subsidiary.
At September 28, 2013, the Company had outstanding letters of credit and guarantees totaling $20.4 million and $24.7 million, respectively, primarily to bond advance payments and performance related to customer contracts in Test.
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8. Income Taxes:
The components of income before income taxes for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 were as follows:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Income before income taxes: | | | | | | | | | | |
Domestic | | $ | 49,921 | | $ | 45,152 | | $ | 35,243 | |
Foreign | | | 29,333 | | | 34,628 | | | 38,062 | |
Total | | $ | 79,254 | | $ | 79,780 | | $ | 73,305 | |
The provision for income taxes for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was as follows:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Current provision (benefit): | | | | | | | | | | |
Federal | | $ | 13,241 | | $ | 16,834 | | $ | 5,855 | |
State | | | 781 | | | 1,058 | | | 553 | |
Foreign | | | 8,618 | | | 11,575 | | | 10,627 | |
Deferred | | | (1,192 | ) | | (1,243 | ) | | 5,328 | |
Total provision | | $ | 21,448 | | $ | 28,224 | | $ | 22,363 | |
A reconciliation from the federal statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 is as follows:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | |
United States federal statutory income tax rate | | | 35 | % | | 35 | % | | 35 | % |
Impact from foreign operations | | | (1 | ) | | (2 | ) | | (2 | ) |
State income taxes, net of federal benefit | | | 1 | | | 1 | | | 1 | |
Research and development tax credits | | | (5 | ) | | (1 | ) | | (3 | ) |
Domestic production activities deduction | | | (2 | ) | | (2 | ) | | (1 | ) |
Reversal of valuation allowances against deferred tax assets | | | - | | | (1 | ) | | - | |
Nondeductible expense to settle U.S. Government investigation | | | - | | | 4 | | | - | |
Nondeductible stock option expense and other permanent items | | | (1 | ) | | 1 | | | 1 | |
Effective income tax rate | | | 27 | % | | 35 | % | | 31 | % |
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A summary of the deferred tax assets and liabilities for the fiscal years ended September 28, 2013 and September 29, 2012 is as follows:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Deferred Tax Assets: | | | | | | | |
Accrued compensation and benefits | | $ | 8,826 | | $ | 7,994 | |
Inventory reserves | | | 4,264 | | | 3,223 | |
Intangible and other assets | | | 3,081 | | | 2,754 | |
Allowance for doubtful accounts | | | 380 | | | 458 | |
Foreign net operating loss carryovers | | | 376 | | | 470 | |
Unrealized derivative instrument losses | | | - | | | 255 | |
Other | | | 320 | | | 533 | |
Total deferred tax asset before valuation allowance | | | 17,247 | | | 15,687 | |
Less valuation allowance | | | (105 | ) | | (180 | ) |
Total Deferred Tax Assets | | $ | 17,142 | | $ | 15,507 | |
| | | | | | | |
Deferred Tax Liabilities: | | | | | | | |
Property and equipment | | $ | 10,222 | | $ | 10,680 | |
Foreign deferred revenue and other | | | 3,246 | | | 2,590 | |
Unrealized derivative instrument gains | | | 670 | | | - | |
Total Deferred Tax Liabilities | | $ | 14,138 | | $ | 13,270 | |
Net Deferred Tax Assets | | $ | 3,004 | | $ | 2,237 | |
As of September 28, 2013, the Company’s German, Swiss and Swedish subsidiaries had net operating loss carryovers of $0.7 million, $0.5 million and $0.3 million respectively. These net operating loss carryovers will not expire under local tax law except for Switzerland, which has a seven year limitation. The Company has determined that the benefit of the Swiss subsidiary’s $0.5 million net operating loss is not likely to be realized. Accordingly, as of September 28, 2013, the Company had a full valuation against the carryover in the amount of $0.1 million.
As of September 29, 2012 the company’s Swedish subsidiary had a full valuation allowance against its deferred tax asset in the amount of $0.1 million. During fiscal year 2013, based on current year and forecasted income, it was determined that the benefit was more likely than not to be realized and, therefore, the valuation allowance was reversed.
Prior to fiscal year 2012, the Company had determined that the benefit of the German subsidiary’s net operating loss carryover was not likely to be realized. Accordingly, as of October 1, 2011, the Company had a full valuation allowance against the German subsidiary’s deferred tax asset in the amount of $0.6 million. During fiscal year 2012, it was determined that the benefit was more likely than not to be realized and, therefore, the valuation allowance was reversed.
During fiscal year 2013, the Company repatriated $14.5 million of current earnings from its German and Japanese subsidiaries. The Company recorded $0.5 million tax benefit during fiscal year 2013 related to these repatriations. On January 2, 2013, the American Taxpayer Relief Act of 2012 (Act) was signed into law. The Act included legislation which reinstated the United States (“U.S.”) Research and Development (“R&D”) tax credit retroactively from January 1, 2012 and extended it through December 31, 2013. Also, during the fourth quarter of fiscal year 2013, new favorable guidance was issued related to the U.S. R&D tax credit. As a result of these events, during fiscal year 2013, the Company recognized a retroactive tax benefit of approximately $2.4 million for R&D tax credits associated with prior fiscal years.
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During fiscal year 2012, the Company repatriated $20.2 million of current earnings from its German, Japanese and Korean subsidiaries. The Company recorded $0.5 million tax expense during fiscal year 2012 related to these repatriations. Also during fiscal year 2012, the Company was only allowed to recognize research and development credits on applicable spending during the first fiscal quarter, as the provision in the U.S. tax law allowing for these credits expired on December 31, 2011. As was previously disclosed, in the fourth quarter of fiscal year 2012, the Company reached an agreement with the DOC and the USAO, settling for $7.8 million the DOC and USAO’s investigation into the Company’s past disclosures on its government certifications and its government contracting compliance policies, general compliance record and practices in areas including export controls and government contracts. During the third quarter of fiscal year 2012, the Company accrued a loss contingency equal to the settlement amount. The $7.8 million settlement costs were non-deductible for income tax purposes.
During fiscal year 2011, the Company repatriated $14.9 million of current earnings from its German and Japanese subsidiaries. The Company recorded a $0.5 million tax expense during fiscal year 2011 related to these repatriations. Also during fiscal year 2011, U.S. R&D tax credit legislation was extended with an effective date retroactive to January 1, 2010. This legislation allowed the Company to recognize $2.8 million of tax benefits in fiscal year 2011, partly due to tax credits available on applicable research and development spending by the Company during the last three fiscal quarters of fiscal year 2010 and partly due to a full year of credit for fiscal year 2011.
In accordance with ASC 740-30, the Company has not recognized a deferred tax liability for the undistributed earnings of certain of its foreign operations because those subsidiaries have invested or will invest the undistributed earnings indefinitely. At September 28, 2013, undistributed earnings were approximately $82 million. Because of the availability of U.S. foreign tax credits, it is impractical for the Company to determine the amount of U.S. federal tax liability that would be payable if these earnings were not indefinitely reinvested. Deferred taxes are recorded for earnings of foreign operations when the Company determines that such earnings are no longer indefinitely reinvested.
A summary of changes in the Company’s liability for unrecognized tax benefits for the fiscal years ended September 28, 2013 and September 29, 2012 is as follows:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Beginning balance | | $ | 1,666 | | $ | 5,106 | |
Increase due to tax positions related to the current year | | | 913 | | | 343 | |
Increase (decrease) due to tax positions related to prior years | | | 1,726 | | | (1,398 | ) |
Decrease due to lapse of statute of limitations | | | - | | | (2,389 | ) |
Exchange rate change | | | 6 | | | 4 | |
Ending balance | | $ | 4,311 | | $ | 1,666 | |
Included in the balance of unrecognized tax benefits at September 28, 2013 are potential benefits of $2.7 million that, if recognized, would affect the effective tax rate.
At both September 28, 2013 and September 29, 2012, the Company had accrued interest related to uncertain income tax positions of approximately $0.1 million. At September 28, 2013 and September 29, 2012, no accrual for penalties related to uncertain tax positions existed. Interest and penalties related to uncertain tax positions are included in Interest Expense, net and General and Administrative Expense, respectively, on the Consolidated Statements of Income.
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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 2011 and with limited exceptions, state and foreign income tax examinations for fiscal years before 2008. During 2012, the Internal Revenue Service (“IRS”) completed the audit of the Company’s consolidated income tax returns for fiscal years 2009 and 2010. During 2012, the Minnesota Department of Revenue completed the audit of fiscal years 2006 through 2008. The Company’s German tax returns have been examined by the tax authorities through fiscal year 2008. The Company’s Japanese tax returns have been examined by the tax authorities through fiscal year 2010. The Company’s Chinese tax returns for calendar years 2008 through 2011 have not been examined by the tax authorities. The Company’s Chinese tax return for calendar year 2012 is currently being examined. As of September 28, 2013, the Company does not expect significant changes in the amount of unrecognized tax benefits during the next twelve months.
At September 28, 2013 and September 29, 2012, the Company and certain of its foreign subsidiaries were expected to receive income tax refunds within the next fiscal year. As a result, at September 28, 2013 and September 29, 2012, the Company recognized a current income tax receivable of $5.9 million and $2.1 million, respectively, which is included in Prepaid Expenses and Other Current Assets on the Consolidated Balance Sheets.
9. Employee Benefit Plans:
Retirement Savings Plan
The Company offers a contributory retirement savings plan that has two components: (1) a 401(k) component with a Company match and (2) a fiscal year Company contribution.
The 401(k) component of the retirement savings plan allows eligible U.S. 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 $2.4 million, $2.2 million, and $2.0 million in fiscal years 2013, 2012, and 2011, 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 U.S. 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’s 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 $3.0 million, $2.7 million, and $2.5 million in fiscal years 2013, 2012, and 2011, respectively.
Defined Benefit Pension Plan
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.
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.
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The pretax amount recognized in Accumulated Other Comprehensive Income as of September 28, 2013 and September 29, 2012 consists of the following:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Actuarial net loss | | $ | 7,819 | | $ | 7,770 | |
The portion of the pretax amount in Accumulated Other Comprehensive Income at September 29, 2012 that was recognized in earnings during the fiscal year ended September 28, 2013 was $0.5 million. The portion of the pretax amount in Accumulated Other Comprehensive Income at September 28, 2013 that is expected to be recognized as a component of net periodic retirement cost during the next fiscal year is $0.5 million.
The following is a summary of the changes in benefit obligations and plan assets during the fiscal years ended September 28, 2013 and September 29, 2012:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Change in benefit obligation: | | | | | | | |
Projected benefit obligation, beginning of year | | $ | 21,397 | | $ | 15,922 | |
Service cost | | | 690 | | | 412 | |
Interest cost | | | 768 | | | 835 | |
Actuarial loss | | | 269 | | | 5,504 | |
Exchange rate change | | | 1,130 | | | (752 | ) |
Benefits paid | | | (563 | ) | | (524 | ) |
Projected benefit obligation, end of year | | $ | 23,691 | | $ | 21,397 | |
| | | | | | | |
Change in plan assets: | | | | | | | |
Fair value of plan assets, beginning of year | | $ | 13,058 | | $ | 12,676 | |
Actual return on plan assets | | | 775 | | | 931 | |
Employer contributions | | | 4,575 | | | 524 | |
Exchange rate change | | | 744 | | | (549 | ) |
Benefits paid | | | (563 | ) | | (524 | ) |
Fair value of plan assets, end of year | | $ | 18,589 | | $ | 13,058 | |
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 September 28, 2013 and September 29, 2012:
| | | | | | | |
| | 2013 | | 2012 | |
| | (expressed in thousands) | |
Funded status: | | | | | | | |
Funded status, end of year | | $ | (5,102 | ) | $ | (8,339 | ) |
Accumulated other comprehensive loss | | | 7,819 | | | 7,770 | |
Net amount recognized | | $ | 2,717 | | $ | (569 | ) |
| | | | | | | |
Amounts recognized in consolidated balance sheets: | | | | | | | |
Accrued payroll and related costs | | $ | (668 | ) | $ | (578 | ) |
Pension benefit plan obligation | | | (4,434 | ) | | (7,761 | ) |
Deferred income taxes | | | 2,360 | | | 2,345 | |
Accumulated other comprehensive income, net of tax | | | 5,459 | | | 5,425 | |
Net amount recognized | | $ | 2,717 | | $ | (569 | ) |
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The weighted average assumptions used to determine the defined benefit retirement plan obligation at September 28, 2013 and September 29, 2012, and also the net periodic benefit cost for the following fiscal year, were as follows:
| | | | | | | |
| | 2013 | | 2012 | |
Discount rate | | | 3.6 | % | | 3.6 | % |
Expected rate of return on plan assets | | | 5.5 | % | | 5.2 | % |
Expected rate of increase in future compensation levels | | | 2.8 | % | | 3.0 | % |
The discount rate is calculated based on zero-coupon bond yields published by the Deutsche Bundesbank for maturities that match the weighted average duration of the pension liability, adjusted for the average credit spread of corporate bond rates above the government bond yields.
The expected rate of return on plan assets represents the weighted average of the expected returns on individual asset categories in the portfolio. The Company uses investment services to assist with determining the overall expected rate of return on pension plan assets. Factors considered in the Company’s determination include historical long-term investment performance and estimates of future long-term returns by asset class.
The overall objective of the Company’s investment policy and strategy for the defined benefit retirement plan is to maintain sufficient liquidity to pay benefits and minimize the volatility of returns while earning the highest possible rate of return over time to satisfy the benefit obligations. The plan fiduciaries assist the Company with setting 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.
At both September 28, 2013 and September 29, 2012, plan assets were invested in a single mutual fund, the underlying assets of which are allocated to fixed income, equity, and cash and cash equivalents categories (see table below). During the fourth quarter of fiscal year 2013, in an effort to increase the long-term expected return, the plan assets were transferred from one single mutual fund to another through a sale and simultaneous purchase, respectively. The new mutual fund targets a higher exposure to equity markets and is able to generate a higher overall return on a long-term basis. Any decisions to change the asset allocation are made by the plan fiduciaries. However, investment into equity and fixed income securities is limited to a maximum of 65% of total plan assets with a targeted allocation of assets of 50% equity and 50% fixed income.
The actual defined benefit retirement plan asset allocations within the balanced mutual fund at September 28, 2013 and September 29, 2012 are as follows:
| | | | | | | |
| | Percentage of Plan Assets | |
| | 2013 | | 2012 | |
Fixed income securities(1) | | | 53.0 | % | | 73.0 | % |
Equity securities(2) | | | - | % | | 20.0 | % |
Cash and cash equivalents(3) | | | 47.0 | % | | 2.0 | % |
Other(4) | | | - | % | | 5.0 | % |
| | | 100.0 | % | | 100.0 | % |
| | |
| (1) | Fixed income securities are comprised primarily of international government agency and international corporate bonds with investment grade ratings. |
| | |
| (2) | Equity securities consist of an international mutual fund that invests solely in international stocks that are actively traded on international exchanges. |
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| | |
| (3) | At September 28, 2013, cash and cash equivalents include deposit accounts holding cash in Euros and other currencies and term deposits primarily held as collateral for equity futures. The market values of the equity and futures are linked to the values of equity indexes of developed country markets, including U.S., Great Britain, Europe, Canada, Switzerland and Japan. At September 29, 2012, cash and cash equivalents include deposit accounts holding cash in Euros. |
| | |
| (4) | Other asset holdings are comprised primarily of international bond futures and a derivatives-based mutual fund that invests in various assets. |
As of September 28, 2013 and September 29, 2012, the fair value of the defined benefit retirement plan assets, which are subject to fair value measurements as described in Note 6 to the Consolidated Financial Statements, are as follows:
| | | | | | | | | | | | | |
| | September 28, 2013 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (expressed in thousands) | |
Mutual fund(1) | | $ | - | | $ | 18,589 | | $ | - | | $ | 18,589 | |
| | | | | | | | | | | | | |
| | September 29, 2012 | |
| | Level 1 | | Level 2 | | Level 3 | | Total | |
| | (expressed in thousands) | |
Mutual fund(1) | | $ | - | | $ | 13,058 | | $ | - | | $ | 13,058 | |
| | |
| (1) | The fair value of the mutual fund is generally valued based on closing prices from national exchanges, if the underlying securities are traded on an active market, or fixed income pricing models that use observable market inputs. |
Net periodic benefit cost for the Company’s defined benefit retirement plan for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 included the following components:
| | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | (expressed in thousands) | |
Service cost | | $ | 690 | | $ | 412 | | $ | 481 | |
Interest cost | | | 768 | | | 835 | | | 795 | |
Expected return on plan assets | | | (690 | ) | | (660 | ) | | (704 | ) |
Net amortization and deferral | | | 520 | | | 77 | | | 152 | |
Net periodic benefit cost | | $ | 1,288 | | $ | 664 | | $ | 724 | |
The accumulated benefit obligation of the Company’s defined benefit retirement plan as of September 28, 2013 and September 29, 2012 was $21.7 million and $19.5 million, respectively.
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:
| | | | |
Fiscal Year | | Pension
Benefits | |
| | (expressed in
thousands) | |
2014 | | $ | 668 | |
2015 | | | 747 | |
2016 | | | 824 | |
2017 | | | 895 | |
2018 | | | 937 | |
2019 through 2023 | | | 5,645 | |
| | $ | 9,716 | |
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Other Retirement Plans
Certain of the Company’s international subsidiaries have non-contributory, unfunded postretirement benefit plans that provide retirement benefits for eligible employees and managing directors. Generally, these postretirement plans provide benefits that accumulate based on years of service and compensation levels. At September 28, 2013 and September 29, 2012, the aggregate liabilities associated with these postretirement benefit plans was $4.4 million and $3.2 million, respectively.
10. Other Comprehensive Income:
Other Comprehensive Income (Loss), a component of Shareholders’ Investment, consists of foreign currency translation adjustments, gains or losses on derivative instruments, and defined benefit pension plan adjustments.
Income tax expense or benefit allocated to each component of Other Comprehensive Income (Loss) for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | Pretax
Amount | | Tax
(Expense)
or Benefit | | Net of
Tax
Amount | | Pretax
Amount | | Tax
(Expense)
or Benefit | | Net of
Tax
Amount | | Pretax
Amount | | Tax
(Expense)
or Benefit | | Net of
Tax
Amount | |
| | (expressed in thousands) | |
Foreign currency translation adjustments | | $ | 585 | | $ | - | | $ | 585 | | $ | (2,123 | ) | $ | - | | $ | (2,123 | ) | $ | 727 | | $ | - | | $ | 727 | |
Derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized net gain (loss) | | | 2,135 | | | (786 | ) | | 1,349 | | | (458 | ) | | 167 | | | (291 | ) | | (1,174 | ) | | 433 | | | (741 | ) |
Net (gain) loss reclassified to earnings | | | (733 | ) | | 269 | | | (464 | ) | | 792 | | | (293 | ) | | 499 | | | 1,982 | | | (737 | ) | | 1,245 | |
Defined benefit pension plan: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized net (loss) gain | | | (184 | ) | | 56 | | | (128 | ) | | (5,233 | ) | | 1,579 | | | (3,654 | ) | | 317 | | | (96 | ) | | 221 | |
Net loss reclassified to earnings | | | 520 | | | (157 | ) | | 363 | | | 77 | | | (23 | ) | | 54 | | | 152 | | | (46 | ) | | 106 | |
Currency exchange rate change | | | (269 | ) | | - | | | (269 | ) | | 127 | | | - | | | 127 | | | 50 | | | - | | | 50 | |
Other comprehensive income (loss) | | $ | 2,054 | | $ | (618 | ) | $ | 1,436 | | $ | (6,818 | ) | $ | 1,430 | | $ | (5,388 | ) | $ | 2,054 | | $ | (446 | ) | $ | 1,608 | |
The changes in the net-of-tax balances of each component of AOCI during the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | |
| | Foreign
Currency
Translation
Adjustments | | Unrealized
Gain on
Derivative
Instruments | | Defined
Benefit
Pension Plan
Adjustments | | Total | | Foreign
Currency
Translation
Adjustments | | Unrealized
Gain on
Derivative
Instruments | | Defined
Benefit
Pension Plan
Adjustments | | Total | | Foreign
Currency
Translation
Adjustments | | Unrealized
Gain on
Derivative
Instruments | | Defined
Benefit
Pension Plan
Adjustments | | Total | |
| | (expressed in thousands) | |
Beginning balance | | $ | 16,734 | | $ | (408 | ) | $ | (5,425 | ) | $ | 10,901 | | $ | 18,857 | | $ | (616 | ) | $ | (1,952 | ) | $ | 16,289 | | $ | 18,130 | | $ | (1,120 | ) | $ | (2,329 | ) | $ | 14,681 | |
Other comprehensive income (loss) before reclassifications | | | 585 | | | 1,349 | | | (397 | ) | | 1,537 | | | (2,123 | ) | | (291 | ) | | (3,527 | ) | | (5,941 | ) | | 727 | | | (741 | ) | | 271 | | | 257 | |
Amounts reclassified to earnings | | | - | | | (464 | ) | | 363 | | | (101 | ) | | - | | | 499 | | | 54 | | | 553 | | | - | | | 1,245 | | | 106 | | | 1,351 | |
Other comprehensive income (loss) | | | 585 | | | 885 | | | (34 | ) | | 1,436 | | | (2,123 | ) | | 208 | | | (3,473 | ) | | (5,388 | ) | | 727 | | | 504 | | | 377 | | | 1,608 | |
Ending balance | | $ | 17,319 | | $ | 477 | | $ | (5,459 | ) | $ | 12,337 | | $ | 16,734 | | $ | (408 | ) | $ | (5,425 | ) | $ | 10,901 | | $ | 18,857 | | $ | (616 | ) | $ | (1,952 | ) | $ | 16,289 | |
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The effect on certain line items in the Consolidated Statements of Income of amounts reclassified out of AOCI for the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011 was as follows:
| | | | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 | | Affected Line Item in the
Consolidated Statements
of Income | |
| | (expressed in thousands) | |
Derivative instruments: | | | | | | | | | | | | | |
Currency exchange contracts | | $ | 733 | | $ | (162 | ) | $ | (1,017 | ) | | Revenue | |
Interest rate swaps | | | - | | | (630 | ) | | (965 | ) | | Interest expense, net | |
Total net gains (losses) included in income before income taxes | | | 733 | | | (792 | ) | | (1,982 | ) | | | |
Income tax (expense) benefit | | | (269 | ) | | 293 | | | 737 | | | | |
Total net gains (losses) included in net income | | | 464 | | | (499 | ) | | (1,245 | ) | | | |
| | | | | | | | | | | | | |
Defined benefit pension plan: | | | | | | | | | | | | | |
Actuarial losses | | | (171 | ) | | (25 | ) | | (50 | ) | | Cost of sales | |
Actuarial losses | | | (155 | ) | | (23 | ) | | (45 | ) | | Selling and marketing | |
Actuarial losses | | | (194 | ) | | (29 | ) | | (57 | ) | | General and administrative | |
Total losses included in income before income taxes | | | (520 | ) | | (77 | ) | | (152 | ) | | | |
Income tax benefit | | | 157 | | | 23 | | | 46 | | | | |
Total net losses included in net income | | | (363 | ) | | (54 | ) | | (106 | ) | | | |
| | | | | | | | | | | | | |
Total net-of-tax reclassifications out of accumulated other comprehensive income included in net income | | $ | 101 | | $ | (553 | ) | $ | (1,351 | ) | | | |
11. Commitments and Contingencies:
Government Investigation
As previously reported by the Company, including in its Annual Report on Form 10-K for the fiscal year ended October 1, 2011 (the “2011 Form 10-K”), in January 2011, the U.S. Department of Commerce (“DOC”) and the U.S. Attorney’s Office for the District of Minnesota (“USAO”) began an investigation into the Company’s past disclosures on the U.S. Government’s Online Representations and Certifications Application (“ORCA Certification”) and later expanded the scope of inquiry to include the Company’s government contracting compliance policies and general compliance record and practices in areas including export controls and government contracts. During the third quarter of fiscal year 2012, the Company began negotiations for settlement of the matter. On August 30, 2012, the Company reached an agreement with the USAO and obtained the approval of the Department of Justice (“DOJ”), settling, for $7.8 million, the DOC and USAO’s investigation described above. The agreement concluded the DOC and USAO investigation.
Other Investigative Matters
As previously reported by the Company with disclosures starting in March 2012, the Company investigated certain gift, travel, entertainment and other expenses incurred in connection with some of the Company’s operations in the Asia Pacific region. The investigation focused on possible violations of Company policy, corresponding internal control issues and possible violations of applicable law, including the Foreign Corrupt Practices Act. Substantial investigative work has been completed and the Company has taken remedial actions, including changes to internal control procedures and removing certain persons formerly employed in its Korea office. The Company voluntarily disclosed this matter to the Department of Justice and the SEC. Additionally, the Company disclosed this matter to the U.S. Air Force pursuant to its Administrative Agreement with the U.S. Air Force. The Company presented the results of its investigation and its corrective actions to representatives of the Department of Justice and the SEC on January 16, 2013. The Company cannot predict the outcome of this matter at this time or whether it will have a material adverse impact on its business prospects, financial condition, operating results or cash flows.
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Litigation
The Company is subject to various claims, legal actions, and complaints arising in the ordinary course of business. Management believes the final resolution of legal matters outstanding as of September 28, 2013 will not have a material adverse effect on the consolidated financial position or results of operations of the Company. The Company expenses legal costs as incurred.
Leases
Total lease expense was $5.6 million, $5.3 million, and $5.3 million for fiscal years 2013, 2012, and 2011, 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) | |
2014 | | $ | 4,288 | |
2015 | | | 2,316 | |
2016 | | | 1,282 | |
2017 | | | 619 | |
2018 | | | 256 | |
Thereafter | | | 1,060 | |
| | $ | 9,821 | |
12. Related Party Transactions:
During the fiscal years ended September 28, 2013, September 29, 2012, and October 1, 2011, MTS Sensors purchased mechanical components and remote-mechanic workbench services from Mark-Tronik GmbH (“Mark-Tronik”) aggregating approximately $1.4 million, $1.7 million and $2.0 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 a former member of management of the Company. At both September 28, 2013 and September 29, 2012, net outstanding payments due to Mark-Tronik by MTS Sensors were $0.1 million.
13. Subsequent Events (unaudited):
Restructuring Activities
On November 14, 2013, the Company announced that it expects to realize productivity improvements in business processes gained through investments in infrastructure and technology. The Company will adjust its workforce for the process and automation-related changes and expects to incur $4 to $6 million in severance and related costs during the first six months of fiscal year 2014.
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MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES
FOR DOUBTFUL ACCOUNTS
FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 2013, SEPTEMBER 29, 2012, AND
OCTOBER 1, 2011,
(expressed in thousands)
| | | | | | | | | | | | | |
| | Balance
Beginning of
Year | | Provisions/
(Recoveries) | | Amounts
Written-off/
Payments | | Balance
End of Year | |
| | | | | | | | | |
| | | | | | | | | | | | | |
Allowance for Doubtful Accounts: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2013 | | $ | 2,247 | | $ | (160 | ) | $ | (89 | ) | $ | 1,998 | |
| | | | | | | | | | | | | |
2012 | | | 1,534 | | | 896 | | | (183 | ) | | 2,247 | |
| | | | | | | | | | | | | |
2011 | | | 1,358 | | | 729 | | | (553 | ) | | 1,534 | |
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