Defined Benefit Plans (Notes)

12 Months Ended

Oct. 03, 2020

DEFINED BENEFIT PLANS

As a result of the Rofin acquisition in fiscal 2017, we assumed all assets and liabilities of Rofin's defined benefit plans for the Rofin-Sinar Laser, GmbH ("RSL") and Rofin-Sinar Inc. ("RS Inc.") employees. The U.S. plan began in fiscal 1995 and is partially funded. Any new employees hired after January 1, 2007, are not eligible for the RS Inc. pension plan. As is the customary practice with German companies, the German pension plan is unfunded. Any new employees hired after 2000 are not eligible for the RSL pension plan. The measurement date of these pension plans is September 30 and actuarial gains and losses are deferred into OCI and amortized over future periods.

Effective January 1, 2012, the RS Inc. defined benefit plan was amended to exclude highly compensated employees, as defined by the Internal Revenue Service, from receiving future years of service under the RS Inc. defined benefit plan. A non-

qualified defined benefit plan was created to replace the benefits lost by the employees that were otherwise excluded from the qualified defined benefit plan. Effective August 31, 2018, both the RS Inc. plans were amended to freeze all future compensation benefit accruals. During fiscal 2020, we opened a lump sum payment election window for the RS Inc. defined benefit plan to allow certain participants the option to receive the entire value of their benefit as a single lump sum payment, resulting in payments of $1.0 million.

In addition, we have defined benefit plans in South Korea, Japan, Spain, and Italy, covering all full-time employees with at least one year of service, and a defined benefit plan in Germany covering two individuals. As is the customary practice with European and Asian companies, the plans are unfunded, with the exception of the Spanish plan which is partially funded. We have elected to recognize all actuarial gains and losses on these plans immediately, as incurred. The measurement date of these defined benefit plans is September 30.

For financial reporting purposes, the calculation of net periodic pension costs is based upon a number of actuarial assumptions including a discount rate for plan obligations, an assumed rate of return on pension assets and an assumed rate of compensation increase for employees covered by the plan. All of these assumptions were based upon management's judgment, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact future expense recognition and the cash funding requirements of our defined benefit plans.

Components of net periodic cost are as follows for fiscal 2020, 2019, and 2018 (in thousands):


	Fiscal
	2020		2019		2018
Service cost	$	2,153	$	1,955	$	2,262
Interest cost	857		1,308		1,230
Expected return on plan assets	(682)		(817)		(787)
Recognized net actuarial (gain) loss	(690)		470		240
Foreign exchange impacts	66		(79)		(56)
Recognition of curtailment gain due to plan freeze	—		—		(1,236)
Net periodic pension cost	$	1,704	$	2,837	$	1,653

The service cost component of net periodic costs is included in selling, general and administrative ("SG&A") expenses, and the interest costs, net actuarial (gain) loss and other components are included in Other-net within other income (expense) in the consolidated statements of operations.

The changes in projected benefit obligations and plan assets, as well as the ending balance sheet amounts for our defined benefit plans, are as follows (in thousands):


	Fiscal 2020		Fiscal 2019
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	60,437	$	51,499

Service cost	2,153		1,955
Interest cost	857		1,308
Assumption change	(1,783)		9,505
Experience (gain) loss	22		(308)
Foreign exchange rate impacts	2,433		(1,889)
Benefits paid – total	(3,010)		(1,633)
Settlement gain	(502)		—
Projected benefit obligation at end of year	$	60,607	$	60,437

Projected benefit obligation at end of year:
U.S. plans	$	18,775	$	18,892
Foreign plans	41,832		41,545
Projected benefit obligation at end of year	$	60,607	$	60,437

Change in plan assets:
Fair value of plan assets at beginning of year	$	12,997	$	12,486

Actual return on plan assets	1,218		539
Employer contributions	208		455
Benefits paid – funded plan	(1,522)		(483)
Fair value of plan assets at end of year	$	12,901	$	12,997


Fair value of plan assets at end of year:
U.S. plans	$	12,645	$	12,766
Foreign plans	256		231
Fair value of plan assets at end of year	12,901		12,997
Unfunded status at end of year	$	(47,706)	$	(47,440)

Amounts recognized in the consolidated balance sheet:
Accrued benefit liability – current	$	(1,896)	$	(1,578)
Accrued benefit liability – non current	(45,810)		(45,862)
Accumulated other comprehensive (gain) loss (pre-tax)	456		2,590

The information for plans with an accumulated benefit obligation in excess of plan assets is as follows (in thousands):


	Fiscal year-end
	2020		2019
Projected benefit obligation	$	60,607	$	60,437
Accumulated benefit obligation	56,847		55,941
Fair value of plan assets	12,901		12,997

The weighted-average rates used to determine the net periodic benefit costs are as follows:


	Fiscal 2020		Fiscal 2019
Discount rate:
U.S.	2.3	%	3.0	%
Foreign	1.2	%	0.8	%
Expected return on plan assets:
U.S.	5.0	%	5.8	%
Rate of compensation increase
U.S.	—	%	—	%
Foreign	2.2	%	2.1	%

We recognize the over (under) funded status of the defined benefit plans in our consolidated balance sheets. We also recognize, in other comprehensive income (loss), certain gains and losses that arise for the period but are deferred under current pension accounting rules. A one percent change in the discount rate or the expected rate of return on plan assets would not have a material impact on the projected benefit obligation or the net periodic benefit cost. The decrease in discount rates for U.S. and foreign plans was the primary reason for the assumption change and the increase in the projected benefit obligation.

Expected benefit payments for each of the next five fiscal years and the five years aggregated thereafter is as follows (in thousands):


	Amount
2021	$	2,597
2022	3,009
2023	2,492
2024	2,863
2025	2,942
2026-2030	16,329
Total	$	30,232

Our pension plan asset allocations at October 3, 2020 and September 28, 2019 by asset category are as follows:


	Allocation
	Target		Fiscal 2020		Fiscal 2019
Equity securities	30	%	32	%	33	%
Debt securities	70	%	68	%	67	%
Total plan assets	100	%	100	%	100	%

We employ a total return investment approach whereby a mix of equity, debt securities and government securities are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by maximizing investment returns within that prudent level of risk. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks as well as growth, value and small and large capitalizations. Additionally, cash balances are

maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through semi-annual investment portfolio reviews.

Investments in our defined benefit plan are stated at fair value. Level 1 assets are valued using quoted market prices that represent the asset value of the shares held by the trusts. The level 2 assets are investments in pooled funds, which are valued using a model to reflect the valuation of their underlying assets that are publicly traded with observable values. The fair value of level 3 pension plan assets are measured by compiling the portfolio holdings and independently valuing the securities in those portfolios.

The fair values of our pension plan assets, by level within the fair value hierarchy, at October 3, 2020 are as follows:


Asset categories	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money market	$	469	$	—	$	—	$	469
Equity securities:
Small cap	—		50		—		50
Mid cap	—		143		—		143
Large cap	—		293		—		293
Total market stock	—		2,140		—		2,140
International	—		1,166		—		1,166
Emerging markets	—		197		—		197
Debt securities:
Bonds and mortgages	—		3,323		—		3,323
Inflation protected	—		—		—		—
High yield	—		272		—		272
Liability driven investments	—		4,848		—		4,848
Total plan assets	$	469	$	12,432	$	—	$	12,901

The fair values of our pension plan assets, by level within the fair value hierarchy, at September 28, 2019 are as follows:


Asset categories	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money market	$	503	$	—	$	—	$	503
Equity securities:
Small cap	—		135		—		135
Mid cap	—		250		—		250
Large cap	—		751		—		751
Total market stock	—		1,689		—		1,689
International	—		1,276		—		1,276
Emerging markets	—		204		—		204
Debt securities:
Bonds and mortgages	—		3,110		—		3,110
Inflation protected	—		634		—		634
High yield	—		634		—		634
Liability driven investments	—		$	3,811	—		3,811
Total plan assets	$	503	$	12,494	$	—	$	12,997