News Column

MTS SYSTEMS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 4, 2014

About MTS Systems Corporation

MTS Systems Corporation'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. MTS had 2,299 employees at September 28, 2013 and revenue of $569 million for the fiscal year ended September 28, 2013.



Terms

When we use the terms "we," "us," the "Company," or "our" in this report, unless the context otherwise requires, we are referring to MTS Systems Corporation.

Third Quarter of Fiscal 2014 refers to the three fiscal months ended June 28, 2014; Third Quarter of Fiscal 2013 refers to the three fiscal months ended June 29, 2013; First Nine Fiscal Months of 2014 refers to the nine fiscal months ended June 28, 2014; First Nine Fiscal Months of 2013 refers to the nine fiscal months ended June 29, 2013. Fiscal 2014 refers to the fiscal year ending September 27, 2014. Fiscal 2013 refers to the fiscal year ended September 28, 2013. Company Strategy Our goal is to grow profitably, generate strong cash flow, and deliver a strong return on invested capital to our shareholders by leveraging our leadership position in the research and development, product development and industrial equipment global end markets. Our desire is to be the innovation leader in creating test and measurement solutions to enable our customers' success. Through innovation we believe we can create value for our customers that will drive our growth. There are four global macro trends that will help enable this growth: energy scarcity; environmental concerns; continued globalization and the development of the emerging markets; and global demographics. These macro trends have significant implications for our customers, such as increasing the demand for new and more innovative products and increasing our customers' organizational complexity. We believe we have an excellent geographic footprint and are well positioned in both Test and Sensors to take advantage of these macro trends and deliver significant profitable growth in the years ahead. We are working toward our previously communicated goal of achieving $1 billion in annual revenue. Economic conditions and the competitive environment will impact the timing of when the $1 billion goal is achieved. Our three priorities to achieve this goal are: Accelerating innovation; Capturing opportunities in the rapidly emerging markets; and Realizing the potential of the Test service business. Our business model supports achieving our $1 billion revenue milestone through both organic growth and strategic acquisitions, assuming we continue to move aggressively to build our infrastructure, expand our offerings and execute on our opportunities with our key customers around the world. In order to accelerate our revenue growth over the next few years, investments in infrastructure, sales support and field service capacity and capability are essential. We began investing in earnest in both Fiscal years 2012 and 2013, and have continued investing in Fiscal 2014. 22



--------------------------------------------------------------------------------

Table of Contents Financial Results Total Company Orders and Backlog The following is a comparison of Third Quarter and First Nine Fiscal Months of 2014 and Third Quarter and First Nine Fiscal Months of 2013 orders, separately identifying the estimated impact of currency translation (in millions): Three Fiscal Three Fiscal Nine Fiscal Nine Fiscal Months Months Months Months Ended Estimated Ended Ended Estimated Ended June 28, Business Currency June 29,



June 28, Business Currency June 29,

2014 Change Translation 2013 2014 Change Translation 2013 Orders $ 149.6$ 18.0 $ 1.3 $ 130.3$ 451.6$ 43.7 $ 0.7 $ 407.2 Orders Orders in the Third Quarter of Fiscal 2014 were $149.6 million, an increase of $19.3 million, or 14.8%, compared to $130.3 million for the Third Quarter of Fiscal 2013. The increase is driven by base order growth in both the Test segment ("Test") and Sensors segment ("Sensors"). Test orders increased 16.5% reflecting product and service order growth of 17.9% and 9.9%, respectively. Product order growth was driven by ground vehicle and structures orders in Asia, while the service order growth was driven by new service contracts. Orders in the Third Quarter of Fiscal 2014 included two large custom Test orders totaling $12.7 million. Orders in the Third Quarter of Fiscal 2013 included one large $6.0 million custom Test order. Excluding the large orders, base orders increased 10.1%, reflecting growth of 10.8% in Test and 7.6% in Sensors. Orders in the First Nine Fiscal Months of 2014 totaled $451.6 million, an increase of $44.4 million, or 10.9%, compared to $407.2 million for the First Nine Fiscal Months of 2013. The increase is driven by base order growth in both Test and Sensors as well as variability in large orders. Orders in the First Nine Fiscal Months of 2014 included six large custom Test orders totaling $45.6 million. Orders in the First Nine Fiscal Months of 2013 included four large custom Test orders totaling $32.0 million. Excluding the large orders, base orders increased 8.2%, reflecting growth of 6.8% in Test and 14.0% in Sensors.



Backlog

Backlog of undelivered orders at the end of the Third Quarter of Fiscal 2014 was a record of$309.8 million, an increase of 10.1 % compared to $281.5 million at the end of the Third Quarter of Fiscal 2013. The increase in backlog was driven by strong year-over-year order growth, and more than offset the cancellation of a custom order in Test totaling approximately $11.1 million which was cancelled during the Second Quarter of Fiscal 2014. This order was booked in the previous fiscal year. While we are subject to order cancellations, historically, we have not experienced a significant number of order cancellations. 23



--------------------------------------------------------------------------------

Table of Contents

Results of Operations

The following is a comparison of Third Quarter and First Nine Fiscal Months of 2014 and Third Quarter and First Nine Fiscal Months of 2013 statements of operations (in millions, except per share data):

Three Fiscal Months Ended Nine Fiscal Months Ended June 28, June 29, June 28, June 29, 2014 2013 % Variance 2014 2013 % Variance Revenue $ 145.5$ 135.1 7.7 % $ 421.2$ 414.6 1.6 % Cost of sales 87.8 80.5 9.1 % 253.4 249.5 1.6 % Gross profit 57.7 54.6 5.7 % 167.8 165.1 1.6 % Gross margin 39.7 % 40.4 % 39.8 % 39.8 % Operating expenses: Selling and marketing 22.6 20.3 11.3 % 66.5 59.0 12.7 % General administrative 11.4 11.6 -1.7 % 38.6 37.1 4.0 % Research and development 6.3 6.3 0.0 % 18.8 16.9 11.2 % Total operating expenses 40.3 38.2 5.5 % 123.9 113.0 9.6 % Income from operations 17.4 16.4 6.1 % 43.9 52.1 -15.7 % Interest expense, net (0.1 ) - NM (0.5 ) (0.2 ) 150.0 % Other (expense) income, net (0.1 ) 0.4 125.0 % (0.6 ) (0.1 ) 500.0 % Income before income taxes 17.2 16.8 2.4 % 42.8 51.8 -17.4 % Income tax provision 3.1 5.3 -41.5 % 11.7 15.4 -24.0 % Net income $ 14.1$ 11.5 22.6 % $ 31.1$ 36.4 -14.6 % Diluted earnings per share $ 0.92$ 0.72 27.8 % $ 2.01$ 2.29 -12.2 %

"NM" represents comparisons that are not meaningful to this analysis.



The following is a comparison of Third Quarter and First Nine Fiscal Months of 2014 and Third Quarter and First Nine Fiscal Months of 2013 results of operations, separately identifying the impact of currency translation and severance and related costs (in millions):

Three Three Nine Nine Fiscal Fiscal Fiscal Fiscal Months Severance Months Months Severance Months Ended Estimated and Ended Ended Estimated and Ended June 28, Business Currency Related June 29, June 28, Business Currency Related June 29, 2014 Change Translation Costs 2013 2014 Change Translation Costs 2013 Revenue $ 145.5$ 8.6 $ 1.8 $ - $ 135.1$ 421.2$ 6.0 $ 0.6 $ - $ 414.6 Cost of sales 87.8 5.4 1.3 0.6 80.5 253.4 (0.4 ) 0.8 3.5 249.5 Gross profit 57.7 3.2 0.5 (0.6 ) 54.6 167.8 6.4 (0.2 ) (3.5 ) 165.1 39.7 % 40.4 % 39.8 % - 39.8 % Operating expenses: Selling and marketing 22.6 1.2 0.3 0.8 20.3 66.5 5.6 0.1 1.8 59.0 General administrative 11.4 (0.4 ) 0.1 0.1 11.6 38.6 0.2 0.3 1.0 37.1 Research and development 6.3 - - - 6.3 18.8 1.8 0.1 - 16.9 Total operating expenses 40.3 0.8 0.4 0.9 38.2 123.9 7.6 0.5 2.8 113.0 Income from operations $ 17.4$ 2.4 $ 0.1 $ (1.5 )$ 16.4$ 43.9$ (1.2 )$ (0.7 )$ (6.3 )$ 52.1 24



--------------------------------------------------------------------------------

Table of Contents

Revenue

Revenue in the Third Quarter of Fiscal 2014 was $145.5 million, an increase of $10.4 million, or 7.7%, compared to $135.1 million for the Third Quarter of Fiscal 2013. The Test segment contributed $118.0 million in revenue, or 7.1% growth and Sensors segment contributed $27.3 million in revenue, or 10.5% growth as a result of strong third quarter orders in Fiscal 2014 and a higher beginning of period backlog. Revenue in the First Nine Fiscal Months of 2014 was $421.2 million, an increase of $6.6 million, or 1.6%, compared to $414.6 million for the First Nine Fiscal Months of 2013. The increase was driven by higher beginning of period backlog and increased order volume in Sensors and an estimated $0.6 million favorable impact of currency translation, partially offset by lower beginning of period backlog in Test. Test revenue decreased 0.8% to $342.6 million while Sensors revenue increased 13.6% to $78.6 million. As previously disclosed, productivity benefits from investments in Test business processes were expected to result in $4 to $5 million of cost savings during Fiscal 2014. The cost savings that began during the Second Quarter of Fiscal 2014 continued during the third quarter and are expected to continue over the last three months of Fiscal 2014 and will be reinvested primarily in the Test business to enable our long-term growth objectives. At the end of the third quarter, cost savings achieved to date were in line with the Company's expectations. Associated with these savings, we initiated workforce reduction and other cost reduction actions throughout the First Nine Fiscal Months of 2014. As a result of these cost reduction actions, we incurred severance and related costs. During the Third Quarter of Fiscal 2014, we incurred severance and related costs of $1.5 million, of which $0.6 million, $0.8 million, and $0.1 million were reported in Cost of Sales, Selling and Marketing, and General and Administrative expense, respectively. During the First Nine Fiscal Months of 2014, we incurred severance and related costs of $6.3 million, of which $3.5 million, $1.8 million, and $1.0 million were reported in Cost of Sales, Selling and Marketing, and General and Administrative expense, respectively. Gross Profit Gross profit in the Third Quarter of Fiscal 2014 was $57.7 million, an increase of $3.1 million, or 5.7%, compared to $54.6 million for the Third Quarter of Fiscal 2013. Gross profit as a percentage of revenue was 39.7%, a decrease of 0.7 percentage points from 40.4% for the Third Quarter of Fiscal 2013. The previously mentioned severance and related costs of $0.6 million unfavorably impacted gross profit as a percentage of revenue by 0.4 percentage points. Excluding these costs, the gross margin rate decreased 0.3 percentage points, primarily driven by an unfavorable mix of product and service sales in Test, as well as an unfavorable mix of product sales in Sensors, partially offset by leverage on higher volume in both segments, decreased compensation and benefits from lower than expected variable compensation as well as a decrease in discretionary contributions related to an employee retirement plan and decreased warranty expense in the Test segment. Gross profit in the First Nine Fiscal Months of 2014 was $167.8 million, an increase of $2.7 million, or 1.6%, compared to $165.1 million for the First Nine Fiscal Months of 2013. Gross profit as a percentage of revenue was flat at 39.8% for the First Nine Fiscal Months of 2014 and 2013. The previously mentioned severance and related costs of $3.5 million unfavorably impacted gross profit as a percentage of revenue by 0.9 percentage points which was offset by a 0.9 percentage point increase in gross margin primarily driven by the favorable impact of a relative increase in Sensors revenue, which is higher margin, compared to total Company revenue and a reduction in various miscellaneous manufacturing expenses. Selling and Marketing Expense Selling and marketing expense in the Third Quarter of Fiscal 2014 was $22.6 million, an increase of $2.3 million, or 11.3%, compared to $20.3 million for the Third Quarter of Fiscal 2013. Selling and marketing expense in the First Nine Fiscal Months of 2014 was $66.5 million, an increase of $7.5 million, or 12.7%, compared to $59.0 million for the First Nine Fiscal Months of 2013. Both increases were driven by higher compensation and benefits resulting from increased headcount, higher sales commissions, as well as the previously mentioned severance and related costs of $0.9 million and $1.8 million in the Third Quarter of Fiscal 2014 and the First Nine Fiscal Months of 2014, respectively. These increases were partially offset by decreased compensation and benefits from lower than expected variable compensation expense and a decrease in discretionary contributions related to an employee retirement plan. Selling and marketing expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 15.5%, compared to 15.0% for the Third Quarter of Fiscal 2013. Selling and marketing expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 15.8%, compared to 14.2% for the First Nine Fiscal Months of 2013. 25



--------------------------------------------------------------------------------

Table of Contents

General and Administrative Expense General and administrative expense in the Third Quarter of Fiscal 2014 was $11.4 million, a decrease of $0.2 million, or 1.7%, compared to $11.6 million for the Third Quarter of Fiscal 2013. The decrease was primarily driven by reductions in compensation and benefits from lower than expected variable compensation and a decrease in discretionary contributions related to an employee retirement plan in the Third Quarter of Fiscal 2014. General and administrative expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 7.8%, compared to 8.6% for the Third Quarter of Fiscal 2013. General and administrative expense in the First Nine Fiscal Months of 2014 was $38.6 million, an increase of $1.5 million, or 4.0%, compared to $37.1 million for the First Nine Fiscal Months of 2013. The increases were primarily driven by higher legal expenses, higher compensation and benefits driven by increased headcount, as well the previously mentioned severance and related costs of $1.0 million in the First Nine Fiscal Months of 2014. General and administrative expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 9.2%, compared to 8.9% for the First Nine Fiscal Months of 2013. Research and Development Expense Research and development expense in the Third Quarter of Fiscal 2014 was $6.3 million, flat compared to the Third Quarter of Fiscal 2013. Research and development expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 4.3% on higher volume, compared to 4.7% for the Third Quarter of Fiscal 2013. Research and development expense in the First Nine Fiscal Months of 2014 was $18.8 million, an increase of $1.9 million, or 11.2%, compared to $16.9 million for the First Nine Fiscal Months of 2013. This increase was driven by higher compensation and benefits resulting from increased headcount in both Test and Sensors. Research and development expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 4.5%, compared to 4.1% for the First Nine Fiscal Months of 2013. Income from Operations Income from operations in the Third Quarter of Fiscal 2014 was $17.4 million, an increase of $1.0 million, or 6.1%, compared to income from operations of $16.4 million for the Third Quarter of Fiscal 2013. Excluding the previously mentioned severance and related costs of $1.5 million, income from operations increased 15.2%, driven by higher gross profit, partially offset by a $1.2 million increase in operating expenses resulting from ongoing investments for growth in sales. Operating income as a percentage of revenue for the Third Quarter of Fiscal 2014 was 12.0% on higher volume, compared to 12.1% for the Third Quarter of Fiscal 2013. Income from operations in the First Nine Fiscal Months of 2014 was $43.9 million, a decrease of $8.2 million, or 15.7%, compared to income from operations of $52.1 million for the First Nine Fiscal Months of 2013. Excluding the previously mentioned severance and related costs of $6.3 million, income from operations decreased 3.6% for the First Nine Fiscal Months of 2014, driven by an $8.1 million increase in operating expenses resulting from ongoing investments for growth in sales and research and development. Operating income as a percentage of revenue for the First Nine Fiscal Months of 2014 was 10.4%, compared to 12.6% for the First Nine Fiscal Months of 2013. Interest Expense, net Net interest expense in the Third Quarter of Fiscal 2014 was $0.1 million, compared to less than $0.1 million of net interest expense in the Third Quarter of Fiscal 2013. Net interest expense in the First Nine Fiscal Months of 2014 was $0.5 million, an increase of $0.3 million compared to the First Nine Fiscal Months of 2013. The increase was driven by a relatively higher level of outstanding borrowings under the Company's credit facility during the First Nine Fiscal Months of 2014 compared to the First Nine Fiscal Months of 2013. Other (Expense) Income, net Other (expense) income, net in the Third Quarter of Fiscal 2014 was $0.1 million of net other expense, compared to $0.4 million of net other income in the Third Quarter of Fiscal 2013. This decrease was driven by $0.3 million increased net losses on foreign currency transactions. Other expense, net in the First Nine Fiscal Months of 2014 was $0.6 million, compared to $0.1 million net other expense in the First Nine Fiscal Months of 2013, driven by royalty income in the First Nine Fiscal Months of 2013 that did not repeat in the First Nine Fiscal Months of 2014. The royalty income was associated with a Test product line that was sold by the Company in Fiscal 2012. 26



--------------------------------------------------------------------------------

Table of Contents

Provision for Income Taxes Provision for income taxes in the Third Quarter of Fiscal 2014 totaled $3.1 million, a decrease of $2.2 million, or 41.5%, compared to $5.3 million for the Third Quarter of Fiscal 2013. The effective tax rate for the Third Quarter of Fiscal 2014 was 17.7%, a decrease of 13.5 percentage points compared to a tax rate of 31.2% for the Third Quarter of Fiscal 2013. The decrease was primarily driven by the recognition of additional federal and state research and development tax credit benefits of $2.6 million related to years prior to Fiscal 2014. Provision for income taxes in the First Nine Fiscal Months of 2014 totaled $11.8 million, a decrease of $3.7 million, or 24.0%, compared to $15.4 million for the First Nine Fiscal Months of 2013. The decrease is primarily due to lower income before income taxes and a lower effective tax rate. The effective tax rate for the First Nine Fiscal Months of 2014 was 27.5%, a decrease of 2.3 percentage points compared to a tax rate of 29.8% for the First Nine Fiscal Months of 2013. The decrease was primarily driven by the previously mentioned federal and state research and development tax credit benefits of $2.6 million. This was offset by changes in certain foreign tax rates and by the recognition in Fiscal 2013 of $1.0 million in tax benefits due to the enactment of tax legislation in the Second Quarter of Fiscal 2013 that retroactively extended the U.S. research and development tax credit. The U.S. research and development tax credit expired as of the end of the First Quarter of Fiscal 2014. Net income Net income in the Third Quarter of Fiscal 2014 was $14.1 million, an increase of $2.6 million, or 22.5%, compared to $11.5 million for the Third Quarter of Fiscal 2013. The increase was primarily driven by higher income from operations and a lower effective tax rate. Earnings per diluted share were $0.92, an increase of $0.20 per share, or 27.8%, compared to $0.72 per share for the Third Quarter of Fiscal 2013. The previously mentioned $1.5 million charge for severance and related costs in the Third Quarter of Fiscal 2014 negatively impacted earnings per diluted share by $0.07 which was offset by a $0.17 favorable impact to earnings per diluted share as a result of research and development tax credits. Net income in the First Nine Fiscal Months of 2014 was $31.1 million, a decrease of $5.3 million, or 14.6%, compared to $36.4 million for the First Nine Fiscal Months of 2013. The decrease was primarily driven by lower income from operations, partially offset by a lower effective tax rate. Earnings per diluted share were $2.01, a decrease of $0.28 per share, or 12.2%, compared to $2.29 per share for the First Nine Fiscal Months of 2013. The previously mentioned $6.3 million charge for severance and related costs in the First Nine Fiscal Months of 2014 negatively impacted earnings per diluted share by $0.28 which was partially offset by a net $0.10 favorable impact to earnings per diluted share as a result of research and development tax credits. Segment Results Test Segment Orders and Backlog The following is a comparison of Third Quarter and First Nine Fiscal Months of 2014 and Third Quarter and First Nine Fiscal Months of 2013 orders for Test, separately identifying the estimated impact of currency translation (in millions): Three Fiscal Three Fiscal Nine Fiscal Nine Fiscal Months Months Months Months Ended Estimated Ended Ended Estimated Ended June 28, Business Currency June 29,

June 28, Business Currency June 29, 2014 Change Translation 2013 2014 Change Translation 2013 Orders $ 122.8$ 16.6 $ 0.8 $ 105.4$ 370.2$ 33.9 $ 0.5 $ 335.8 Orders Orders in the Third Quarter of Fiscal 2014 totaled $122.8 million, an increase of $17.4 million, or 16.5%, compared to orders of $105.4 million for the Third Quarter of Fiscal 2013, primarily driven by 10.8% growth in base orders as well as an increase in large orders. Third Quarter of Fiscal 2014 orders included two large orders in Asia totaling $12.7 million, one of which was a $6.8 million order in the ground vehicle market for a suspension testing system with the other being a $6.0 million order in the ground vehicle market for components to a rolling road wind tunnel measurement system. Orders in the Third Quarter of Fiscal 2013 included one large Americas' order in the ground vehicles market totaling $6.0 million for aerodynamic testing. The 10.8% increase in base orders was fueled by 10.0% orders growth in the service business in the European markets, as well as growth in the Asian material's market. Currency translation favorably impacted orders by approximately $0.8 million. Test accounted for 82.1% of total Company orders, compared to 80.9% for the Third Quarter of Fiscal 2013. 27



--------------------------------------------------------------------------------

Table of Contents

Orders in the First Nine Fiscal Months of 2014 totaled $370.2 million, an increase of $34.4 million, or 10.2%, compared to orders of $335.8 million for the First Nine Fiscal Months of 2013, primarily driven by 6.8% growth in base orders as well as variability in large orders. Large orders for the First Nine Fiscal Months of 2014 were $45.6 million. These orders included two large orders in China totaling $13.9 million, one of which was an $8.0 million order in the structures market for seismic testing with the other being a $5.9 million ground vehicle order for suspension testing, two large orders in the Americas totaling $19.0 million, one of which was a $12.2 million order in the ground vehicles market for a rolling road system with the other being a $6.8 million order in the structures market for aircraft structural testing, as well as the two previously mentioned large Americas orders totaling $12.7 million. Orders in the First Nine Fiscal Months of 2013 totaled $32.0 million and included two large European orders in the ground vehicles market totaling $17.0 million, one of which was for a rolling road wind tunnel measurement system with the other being for a transmission test system, as well as two large Americas' orders totaling $15.0 million, one of which was for a vehicle motion simulator in the structures market with the other being the previously mentioned aerodynamic test system in the ground vehicles market. Currency translation favorably impacted orders by approximately $0.5 million. Test accounted for 82.0% of total Company orders, compared to 82.5% for the First Nine Fiscal Months of 2013.



Backlog

Backlog of undelivered orders at the end of the third quarter was $291.7 million, an increase of 9.4% compared to backlog of $266.6 million at the end of the Third Quarter of Fiscal 2013. Third Quarter of Fiscal 2014 beginning of period backlog was unfavorably impacted by a custom order in Test totaling approximately $11.1 million that was cancelled during the Second Quarter of Fiscal 2014. This order was booked in the previous fiscal year.

Results of Operations

The following is a comparison of Third Quarter and First Nine Fiscal Months of 2014 and Third Quarter and First Nine Fiscal Months of 2013 results of operations for Test, separately identifying the impact of currency translation and severance and related costs (in millions): Three Three Nine Nine Fiscal Fiscal Fiscal Fiscal Months Severance Months Months Severance Months Ended Estimated and Ended Ended Estimated and Ended June 28, Business Currency Related June 29, June 28, Business Currency Related June 29, 2014 Change Translation Costs 2013 2014 Change Translation Costs 2013 Revenue $ 118.2$ 6.6 $ 1.2 $ - $ 110.4$ 342.6$ (3.4 ) $ 0.6 $ - $ 345.4 Cost of sales 75.4 3.5 1.0 0.6 70.3 217.9 (5.6 ) 0.7 3.5



219.3

Gross profit 42.8 3.1 0.2 (0.6 ) 40.1 124.7 2.2 (0.1 ) (3.5 ) 126.1 36.2 % 36.3 % 36.4 % 36.5 % Operating expenses: Selling and marketing 17.8 1.3 0.2 0.8 15.5 51.8 3.7 0.2 1.8



46.1

General

administrative 8.7 (0.3 ) - 0.1 8.9 29.8 0.7 0.2 1.0 27.9 Research and development 4.5 (0.3 ) - - 4.8 13.8 1.0 - - 12.8 Total operating expenses 31.0 0.7 0.2 0.9 29.2 95.4 5.4 0.4 2.8 86.8 Income from operations $ 11.8$ 2.4 $ - $ (1.5 )$ 10.9$ 29.3$ (3.2 )$ (0.5 )$ (6.3 )$ 39.3 Revenue Revenue in the Third Quarter of Fiscal 2014 was $118.2 million, an increase of $7.8 million, or 7.1%, compared to revenue of $110.4 million for the Third Quarter of Fiscal 2013. This increase was primarily driven by higher beginning of period backlog, higher conversion of custom order backlog, and an estimated $1.2 million favorable impact of currency translations. 28



--------------------------------------------------------------------------------

Table of Contents

Revenue in the First Nine Fiscal Months of 2014 was $342.6 million, a decrease of $2.8 million, or 0.8%, compared to revenue of $345.4 million for the First Nine Fiscal Months of 2013, including an estimated $0.6 million favorable impact of currency translation. This decrease was primarily driven by lower beginning of period backlog as well as the timing of conversion of custom order backlog, partially offset by growth in service and short cycle products. Gross Profit Gross profit in the Third Quarter of Fiscal 2014 was $42.8 million on higher volume, an increase of $2.7 million, or 6.7%, compared to $40.1 million for the Third Quarter of Fiscal 2013. Gross profit as a percentage of revenue was 36.2%, a decrease of 0.1 percentage points from 36.3% for the Third Quarter of Fiscal 2013. The previously mentioned severance and related costs of $0.6 million unfavorably impacted gross profit as a percentage of revenue by 0.4 percentage points. Excluding these costs, the gross margin rate increased by 0.3 percentage points primarily as a result of reductions in compensation and benefits from lower than expected variable compensation expense and discretionary contributions related to an employee retirement plan of 0.8 percentage points, 0.5 percentage points in favorable volume leverage and 0.4 percentage points of lower warranty expense. These increases were partially offset by approximately 2.1 percentage points from a higher mix of custom projects that typically have a lower margin. Gross profit in the First Nine Fiscal Months of 2014 was $124.7 million on lower volume, a decrease of $1.4 million, or 1.1%, compared to $126.1 million for the First Nine Fiscal Months of 2013. Gross profit as a percentage of revenue was 36.4%, a decrease of 0.1 percentage points from 36.5% for the Third Quarter of Fiscal 2013. The previously mentioned severance and related costs of $3.5 million unfavorably impacted gross profit as a percentage of revenue by 1.0 percentage points. Excluding these costs, the gross margin rate increased by 0.9 percentage points. The increased gross profit rate was driven by reductions in compensation and benefits from lower than expected variable rate compensation and discretionary contributions related to an employee retirement plan, leverage on higher volume and reduced warranty expenses, partially offset by unfavorable product mix from a higher content of custom projects. Selling and Marketing Expense Selling and marketing expense in the Third Quarter of Fiscal 2014 was $17.8 million, an increase of $2.3 million, or 14.8%, compared to $15.5 million for the Third Quarter of Fiscal 2013. Selling and marketing expense in the First Nine Fiscal Months of 2014 was $51.8 million, an increase of $5.7 million, or 12.4%, compared to $46.1 million for the First Nine Fiscal Months of 2013. Both increases were driven by continued investment in sales expansion to drive future revenue growth, higher sales commissions, as well as the previously mentioned severance and related costs of $0.8 million and $1.8 million in the Third Quarter of Fiscal 2014 and the First Nine Fiscal Months of 2014, respectively. The continued investment in sales expansion primarily consists of higher compensation and benefits resulting from increased headcount. Selling and marketing expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 15.1%, compared to 14.0% for the Third Quarter of Fiscal 2013. Selling and marketing expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 15.1%, compared to 13.3% for the First Nine Fiscal Months of 2013. General and Administrative Expense General and administrative expense in the Third Quarter of Fiscal 2014 was $8.7 million, a decrease of $0.2 million, or 2.2%, compared to the Third Quarter of Fiscal 2013, resulting from a reduction in compensation and benefits from lower than expected variable compensation expense and discretionary contributions to an employee retirement plan. General and administrative expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 7.4% on higher volume, compared to 8.1% for the Third Quarter of Fiscal 2013. General and administrative expense in the First Nine Fiscal Months of 2014 was $29.8 million, an increase of $1.9 million, or 6.8%, compared to $27.9 million for the First Nine Fiscal Months of 2013. This increase was primarily driven by higher legal expenses, higher compensation and benefits driven by increased headcount, as well as the previously mentioned severance and related costs of $1.0 million in the First Nine Fiscal Months of 2014. These increases were partially offset by a lower level of investment in productivity and infrastructure initiatives. General and administrative expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 8.7%, compared to 8.1% for the First Nine Fiscal Months of 2013. Research and Development Expense Research and development expense in the Third Quarter of Fiscal 2014 was $4.5 million, a decrease of $0.3 million, or 6.3%, compared to $4.8 million for the Third Quarter of Fiscal 2013. The decrease in research and development was primarily attributable to favorable reductions in compensation and benefits from lower than expected variable compensation expense and discretionary contributions related to an employee retirement plan which are mostly offset by a shift in research and development resources to revenue generating activities. Research and development expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 3.8%, compared to 4.3% for the Third Quarter of Fiscal 2013. 29



--------------------------------------------------------------------------------

Table of Contents

Research and development expense in the First Nine Fiscal Months of 2014 was $13.8 million, an increase of $1.0 million, or 7.8%, compared to $12.8 million for the First Nine Fiscal Months of 2013. This increase was primarily driven by higher compensation and benefits resulting from increased headcount. Research and development expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 4.0%, compared to 3.7% for the First Nine Fiscal Months of 2013. Income from Operations Income from operations in the Third Quarter of Fiscal 2014 was $11.8 million, an increase of $0.9 million, or 8.3%, compared to $10.9 million for the Third Quarter of Fiscal 2013. Excluding the previously mentioned severance and related costs of $1.5 million, income from operations increased 22.0%. This increase was driven by higher gross profit, partially offset by a $1.5 million increase in operating expenses. Operating income as a percentage of revenue for the Third Quarter of Fiscal 2014 was 10.0%, compared to 9.9% for the Third Quarter of Fiscal 2013. Income from operations in the First Nine Fiscal Months of 2014 was $29.3 million, a decrease of $10.0 million, or 25.4%, compared to $39.3 million for the First Nine Fiscal Months of 2013. Excluding the previously mentioned severance and related costs of $6.3 million, income from operations decreased 9.4%, driven by decreased gross profit as well as a $6.4 million increase in operating expenses. Operating income as a percentage of revenue for the First Nine Fiscal Months of 2014 was 8.6%, compared to 11.4% for the First Nine Fiscal Months of 2013. Sensors Segment Orders and Backlog The following is a comparison of Third Quarter and First Nine Fiscal Months of 2014 and Third Quarter and First Nine Fiscal Months of 2013 orders for Sensors, separately identifying the estimated impact of currency translation (in millions): Three Fiscal Three Fiscal Nine Fiscal Nine Fiscal Months Months Months Months Ended Estimated Ended Ended Estimated Ended June 28, Business Currency June 29,



June 28, Business Currency June 29,

2014 Change Translation 2013 2014 Change Translation 2013 Orders $ 26.8 $ 1.4 $ 0.5 $ 24.9 $ 81.4$ 9.8 $ 0.2 $ 71.4 Orders Orders in the Third Quarter of Fiscal 2014 totaled $26.8 million, an increase of $1.9 million, or 7.6%, including an estimated 2.0% favorable impact of currency translation, compared to orders of $24.9 million for the Third Quarter of Fiscal 2013. The industrial market was up 6.0% on growth in the Americas. The mobile hydraulic market was up 17.9% from strong demand in Europe and Asia. We continued to see broad-based increases in demand across multiple markets, and growth was achieved from both new and existing customers. Sensors accounted for 17.9% of total Company orders, compared to 19.1% for the Third Quarter of Fiscal 2013. Orders in the First Nine Fiscal Months of 2014 totaled $81.4 million, an increase of $10.0 million, or 14.0%, compared to orders of $71.4 million for the First Nine Fiscal Months of 2013. The industrial and mobile hydraulic markets were up 11.7% and 26.4%, respectively, driven by strong demand in all geographic regions. Sensors accounted for 18.0% of total Company orders, compared to 17.5% for the First Nine Fiscal Months of 2013.



Backlog

Backlog of undelivered orders at the end of the third quarter was $18.1 million, an increase of 21.5% compared to backlog of $14.9 million at the end of the Third Quarter of Fiscal 2013.

30



--------------------------------------------------------------------------------

Table of Contents

Results of Operations

The following is a comparison of Third Quarter and First Nine Fiscal Months of 2014 to Third Quarter and First Nine Fiscal Months of 2013 results of operations for Sensors, separately identifying the estimated impact of currency translation (in millions): Three Three Nine Nine Fiscal Fiscal Fiscal Fiscal Months Months Months Months Ended Estimated Ended Ended Estimated Ended June 28, Business Currency June 29, June 28, Business Currency June 29, 2014 Change Translation 2013 2014 Change Translation 2013 Revenue $ 27.3$ 2.0 $ 0.6 $ 24.7$ 78.6$ 9.4 $ - $ 69.2 Cost of sales 12.4 1.9 0.3 10.2 35.5 5.2 0.1 30.2 Gross profit 14.9 0.1 0.3 14.5 43.1 4.2 (0.1 ) 39.0 54.7 % 58.7 % 54.8 % 56.4 % Operating expenses: Selling and marketing 4.8 (0.1 ) 0.1 4.8 14.7 1.9 (0.1 ) 12.9 General administrative 2.7 (0.1 ) 0.1 2.7 8.8 (0.5 ) 0.1 9.2 Research and development 1.8 0.3 - 1.5 5.0 0.8 0.1 4.1 Total operating expenses 9.3 0.1 0.2 9.0 28.5 2.2 0.1 26.2 Income from operations $ 5.6$ 0.0 $ 0.1 $ 5.5$ 14.6$ 2.0$ (0.2 )$ 12.8 Revenue Revenue in the Third Quarter of Fiscal 2014 was $27.3 million, an increase of $2.6 million, or 10.5%, compared to revenue of $24.7 million for the Third Quarter of Fiscal 2013, including an estimated $0.6 million favorable impact of currency translation. Revenue in the First Nine Fiscal Months of 2014 was $78.6 million, an increase of $9.4 million, or 13.6%, compared to revenue of $69.2 million for the First Nine Fiscal Months of 2013. Both increases were primarily driven by higher beginning of period backlog and increased order volume. Gross Profit Gross profit in the Third Quarter of Fiscal 2014 was $14.9 million on higher volume, an increase of $0.4 million, or 2.8%, compared to $14.5 million for the Third Quarter of Fiscal 2013. Gross profit as a percentage of revenue was 54.7%, a decrease of 4.0 percentage points from 58.7% for the Third Quarter of Fiscal 2013. Gross profit in the First Nine Fiscal Months of 2014 was $43.1 million on higher volume, an increase of $4.1 million, or 10.5%, compared to $39.0 million for the First Nine Fiscal Months of 2013. Gross profit as a percentage of revenue was 54.8%, a decrease of 1.6 percentage points from 56.4% for the First Nine Fiscal Months of 2013. The lower gross margin rates were driven by significant sales improvement in certain industrial and mobile hydraulic markets that have a lower margin rate. Selling and Marketing Expense Selling and marketing expense in the Third Quarter of Fiscal 2014 was $4.8 million, flat compared to the Third Quarter of Fiscal 2013. Selling and marketing expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 17.6% on higher volume compared to 19.4% for the Third Quarter of Fiscal 2013 Selling and marketing expense in the First Nine Fiscal Months of 2014 was $14.7 million, an increase of $1.8 million, or 14.0%, compared to $12.9 million for the First Nine Fiscal Months of 2013. This increase was primarily due to higher compensation and benefits driven by increased headcount to support future sales growth. Selling and marketing expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 18.7%, compared to 18.6% for the First Nine Fiscal Months of 2013. 31



--------------------------------------------------------------------------------

Table of Contents

General and Administrative Expense General and administrative expense in the Third Quarter of Fiscal 2014 was $2.7 million, flat compared to the Third Quarter of Fiscal 2013. General and administrative expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 9.9% on higher volume, compared to 10.9% for the Third Quarter of Fiscal 2013. General and administrative expense in the First Nine Fiscal Months of 2014 was $8.8 million, a decrease of $0.4 million, or 4.3%, compared to $9.2 million for the First Nine Fiscal Months of 2013. This decrease was primarily driven by expenses recognized in the First Nine Fiscal Months of 2013 related to a senior management transition. General and administrative expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 11.2%, compared to 13.3% for the First Nine Fiscal Months of 2013. Research and Development Expense Research and development expense in the Third Quarter of Fiscal 2014 was $1.8 million, an increase of $0.3 million, or 20.0%, compared to $1.5 million for the Third Quarter of Fiscal 2013. Research and development expense in the First Nine Fiscal Months of 2014 was $5.0 million, an increase of $0.9 million, or 22.0%, compared to $4.1 million for the First Nine Fiscal Months of 2013. Both increases were primarily driven by higher compensation and benefits resulting from increased headcount. Research and development expense as a percentage of revenue for the Third Quarter of Fiscal 2014 was 6.6%, compared to 6.1% for the Third Quarter of Fiscal 2013. Research and development expense as a percentage of revenue for the First Nine Fiscal Months of 2014 was 6.4%, compared to 5.9% for the First Nine Fiscal Months of 2013. Income from Operations Income from operations in the Third Quarter of Fiscal 2014 was $5.6 million, an increase of $0.1 million, or 1.80%, compared to income from operations of $5.5 million for the Third Quarter of Fiscal 2013, as the leverage from higher volume was largely offset by unfavorable product mix. Operating income as a percentage of revenue for the Third Quarter of Fiscal 2014 was 20.5% on higher volume compared to 22.3% for the Third Quarter of Fiscal 2013 Income from operations in the First Nine Fiscal Months of 2014 was $14.6 million, an increase of $1.8 million, or 14.1%, compared to income from operations of $12.8 million for the First Nine Fiscal Months of 2013. The increase was driven by higher gross profit, partially offset by increased operating expenses. Operating income as a percentage of revenue for the First Nine Fiscal Months of 2014 was 18.6% on higher volume, compared to 18.5% for the First Nine Fiscal Months of 2013.



Capital Resources and Liquidity

We had cash and cash equivalents of $56.6 million at the end of the Third Quarter of Fiscal 2014. Of this amount, $12.1 million was located in North America, $25.0 million in Europe, and $19.5 million in Asia. Of the $47.5 million of cash located outside of the U.S., approximately $31.0 million is not available for use in the U.S. without the incurrence of U.S. federal and state income tax. 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 the end of the Third Quarter of Fiscal 2014, we held no short-term investments. Total cash and cash equivalents increased $8.3 million in the First Nine Fiscal Months of 2014, primarily due to earnings and proceeds received from short-term borrowings, partially offset by the acquisition of REI, purchases of our common stock, investment in property and equipment, dividend payments, and increased working capital requirements. Total cash and cash equivalents decreased $26.3 million in the First Nine Fiscal Months of 2013, primarily due to increased working capital requirements, investment in property and equipment, and dividend payments, partially offset by earnings. Cash flows from operating activities provided cash totaling $49.0 million for the First Nine Fiscal Months of 2014, compared to cash provided of $1.9 million for the First Nine Fiscal Months of 2013. Cash provided for the First Nine Fiscal Months of 2014 was primarily due to earnings and $5.1 million increased advance payments received from customers driven by the mix of orders in the quarter, partially offset by $5.1 million decreased accounts payable resulting from general timing of purchases and payments, $2.7 million increased inventories to support future revenue, and $0.7 million increased accounts and unbilled receivables resulting from general timing of billing and collections. 32



--------------------------------------------------------------------------------

Table of Contents

Cash provided for the First Nine Fiscal Months of Fiscal 2013 was primarily from earnings, substantially offset by $19.0 million increased accounts and unbilled receivables resulting from general timing of billings and collections, $11.7 million increased inventories to support future revenue, $5.5 million decreased accounts payable resulting from general timing of purchases and payments, and $11.9 million decreased advance payments received from customers driven by the mix and timing of orders. Cash flows from investing activities required the use of cash totaling $30.7 million for the First Nine Fiscal Months of 2014, compared to the use of cash totaling $23.2 million for the First Nine Fiscal Months of 2013. The cash usage for the First Nine Fiscal Months of 2014 was due to $14.7 million in payments associated with the acquisition of REI, and $16.0 million investment in property and equipment. The cash usage in the First Nine Fiscal Months of 2013 reflects investment in property and equipment. The decreased investment in property and equipment was driven by a lower level of investment in various growth and productivity initiatives. Cash flows from financing activities used cash totaling $10.3 million for the First Nine Fiscal Months of 2014, compared to the cash used totaling $2.3 million for the First Nine Fiscal Months of 2013. The cash used for the First Nine Fiscal Months of 2014 was primarily due to the use of $30.8 million to purchase approximately 450,000 shares of our common stock, as well as dividend payments of $13.7 million partially offset by $30.0 million proceeds from short-term borrowings, and $3.6 million received in connection with stock option exercises. The cash used for the First Nine Fiscal Months of 2013 was primarily due to cash dividend payments totaling $14.4 million as well as the use of $2.6 million to purchase approximately 45,500 shares of the Company's common stock, partially offset by $9.7 million net proceeds received from short-term borrowings and $4.3 million received in connection with stock option exercises. Under the terms of our borrowing agreements, we have agreed to certain financial covenants. At the end of the Third Quarter of Fiscal 2014, we were in compliance with the financial terms and conditions of those agreements.



Off-Balance Sheet Arrangements

As of June 28, 2014, 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, and GAAP requires 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 our Annual Report on Form 10-K for Fiscal Year 2013. 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 cost 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. 33



--------------------------------------------------------------------------------

Table of Contents

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 June 28, 2014, one reporting unit was assigned $31.7 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 was substantially in excess of its carrying value, while the estimated fair value of the reporting unit assigned $14.9 million of goodwill exceeded 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 that 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 months. 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. 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. 34



--------------------------------------------------------------------------------

Table of Contents

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with customers (Topic 606)". This update clarifies the principles for revenue recognition in transactions involving contracts with customers. The new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The guidance will be effective for the Company's interim and annual reporting periods beginning after December 15, 2016, which is the Company's Fiscal year 2018. Early adoption is not permitted. The Company has not yet evaluated what impact, if any, the adoption of this guidance may have on the Company's financial condition, results of operations, or disclosures.



Other Matters

Our dividend policy is to maintain a payout ratio that allows dividends to increase with the long-term growth of earnings per share, while sustaining dividends through economic cycles. Our dividend practice is to target over time a payout ratio of approximately 25% of net earnings per share.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" regarding financial projections made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 that are subject to certain risks and uncertainties, as well as assumptions, that could cause actual results to differ materially from historical results and those presently anticipated or projected. Words such as "may," "will," "should," "expects," "intends," "projects," "plans," "believes," "estimates," "targets," "anticipates," and similar expressions are used to identify these forward-looking statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those factors described in Part I, Item 1A, "Risk Factors" of our 2013 Form 10-K. Such important factors include:



We may not achieve our growth plans for the expansion of our business

because our long-term success depends on our ability to expand our

business through new product development, mergers and acquisitions,

geographic expansion, and service offerings, all of which are subject to

inherent risks including, but not limited to: market demand; market

acceptance of products; and the Company's ability to advance its

technology

The changes we are making in our Test segment processes and operating

systems may not deliver the results we require for growth of the

business

Our business operations may be affected by government contracting risks

Our business is significantly international in scope, which poses multiple risks including, but not limited to: currency value fluctuations; difficulty enforcing agreements and collecting receivables; trade protection measures and import and export matters; tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign earnings; higher danger of terrorist activity; imposition of tariffs, exchange controls and other restrictions; difficulty in staffing and managing global operations; and compliance with a variety of foreign laws and regulations; changes in general economic and political conditions where we operate, particularly in emerging markets



We may be required to recognize impairment charges for long-lived assets

Volatility in the global economy could adversely affect results

Our business is subject to strong competition

We are subject to risks because we design and manufacture first-of-kind

products We may experience difficulties obtaining the services of skilled employees We may fail to protect our intellectual property effectively, or may infringe upon the intellectual property of others



Our business could be adversely affected by product liability claims and

commercial litigation We may experience difficulty obtaining materials or components for our products, or the cost of materials or components may increase 35



--------------------------------------------------------------------------------

Table of Contents



Government regulation imposes significant costs and other constraints

The backlog, sales, delivery and acceptance cycle for many of our products is irregular and may not develop as anticipated Our customers are in cyclical industries and a downturn in those industries could adversely affect results



We will need to begin disclosing our use of "conflict minerals," which

will impose costs on us and could raise reputational and other risks that could adversely affect results Interest rate fluctuations could adversely affect results 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 risks with caution and form your own critical and independent conclusions about the likely effect of these risks on our future performance. Forward-looking statements speak only as of the date on which such 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 Forms 8-K to be filed by the Company in Fiscal 2014.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters