10-Q 1 q3mtsc10q20170701.htm 10-Q Document

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2017
or  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
  
Commission File Number: 0-02382 
 mtslogoa33.jpg
MTS SYSTEMS CORPORATION 
(Exact name of Registrant as specified in its charter) 
Minnesota
41-0908057
(State or other jurisdiction 
of incorporation or organization) 
(I.R.S. Employer Identification No.)
 
 
14000 Technology Drive 
Eden Prairie, Minnesota 
55344
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (952) 937-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒  Yes  ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒  Yes  ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
 
 
Non-accelerated filer ☐
Smaller reporting company ☐
(Do not check if smaller reporting company)
 
 
Emerging growth company ☐
If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes  ☒  No
As of August 3, 2017, there were 16,955,631 shares of Common Stock outstanding.




MTS Systems Corporation 
Quarterly Report on Form 10-Q 
For the Three Months Ended July 1, 2017 

Table of Contents

 

 
 
 

 

 
 
 

 
2

 
 
 
 
3

 
 
 
 
4

 
 
 
 
5

 
 
 
 
6-30

 
 
 
31-44

 
 
 
45

 
 
 
46

 
 
 
 
 
 
 
47

 
 
 
48

 
 
 
48

 
 
 
48

 
 
 
49

 
 
 
50



1



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements 


MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(in thousands, except per share data)
 
 
July 1, 2017
 
October 1, 2016
 
 
(Unaudited)
 
(Note)
Assets
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
101,620

 
$
84,780

Accounts receivable, net of allowance for doubtful accounts of $4,923 and $3,923, respectively
 
106,473

 
133,500

Unbilled accounts receivable
 
83,865

 
76,626

Inventories, net
 
129,447

 
132,566

Prepaid expenses and other current assets
 
23,341

 
12,793

Total current assets
 
444,746

 
440,265

Property and equipment, net
 
101,083

 
100,789

Goodwill
 
369,399

 
369,700

Intangible assets, net
 
257,794

 
266,789

Other long-term assets
 
4,338

 
5,061

Deferred income taxes
 
4,285

 
5,416

Total assets
 
$
1,181,645

 
$
1,188,020

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 

 
 

Current liabilities
 
 

 
 

Current maturities of long-term debt, net
 
$
19,523

 
$
9,850

Accounts payable
 
44,546

 
46,383

Accrued payroll and related costs
 
39,330

 
45,505

Advance payments from customers
 
78,488

 
72,728

Accrued warranty costs
 
5,495

 
5,718

Accrued income taxes
 
3,054

 
3,445

Accrued dividends
 
5,048

 
4,942

Other accrued liabilities
 
20,305

 
27,550

Total current liabilities
 
215,789

 
216,121

Long-term debt, less current maturities, net
 
440,400

 
455,001

Deferred income taxes
 
80,522

 
86,020

Non-current accrued income taxes
 
6,475

 
6,232

Defined benefit pension plan obligation
 
13,533

 
13,744

Other long-term liabilities
 
5,490

 
5,642

Total liabilities
 
762,209

 
782,760

 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, $0.25 par value; 64,000 shares authorized: 16,832 and 16,660 shares issued
and outstanding as of July 1, 2017 and October 1, 2016, respectively
 
4,208

 
4,165

Additional paid-in capital
 
162,344

 
154,879

Retained earnings
 
261,021

 
256,589

Accumulated other comprehensive income (loss)
 
(8,137
)
 
(10,373
)
Total shareholders' equity
 
419,436

 
405,260

Total liabilities and shareholders' equity
 
$
1,181,645

 
$
1,188,020

Note: The Consolidated Balance Sheet as of October 1, 2016 has been derived from the audited consolidated financial statements at that date.
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.

2



MTS SYSTEMS CORPORATION
Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)

 
 
Three Months Ended
 
Nine Months Ended
 
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Revenue
 
 

 
 

 
 

 
 

Product
 
$
167,592

 
$
137,549

 
$
514,987

 
$
373,415

Service
 
26,172

 
20,151

 
71,480

 
61,884

Total Revenue
 
193,764

 
157,700

 
586,467

 
435,299

Cost of Sales
 
 

 
 

 
 

 
 

Product
 
101,629

 
88,272

 
316,012

 
242,051

Service
 
16,579

 
11,315

 
42,579

 
37,480

Total Cost of Sales
 
118,208

 
99,587

 
358,591

 
279,531

Gross Profit
 
75,556

 
58,113

 
227,876

 
155,768

Operating Expenses
 
 

 
 

 
 

 
 

Selling and marketing
 
31,857

 
23,300

 
92,954

 
64,956

General and administrative
 
18,726

 
18,926

 
66,305

 
45,907

Research and development
 
8,356

 
6,198

 
26,298

 
17,244

Total Operating Expenses
 
58,939

 
48,424

 
185,557

 
128,107

Income From Operations
 
16,617

 
9,689

 
42,319

 
27,661

Interest expense, net
 
(7,711
)
 
(375
)
 
(22,409
)
 
(833
)
Other income (expense), net
 
(923
)
 
668

 
(1,086
)
 
465

Income Before Income Taxes
 
7,983

 
9,982

 
18,824

 
27,293

Income tax provision (benefit)
 
(2,627
)
 
2,832

 
(690
)
 
5,371

Net Income
 
$
10,610

 
$
7,150

 
$
19,514

 
$
21,922

 
 
 
 
 
 
 
 
 
Earnings Per Share
 
 

 
 

 
 

 
 

Basic
 
 

 
 

 
 

 
 

Earnings per share
 
$
0.56

 
$
0.46

 
$
1.03

 
$
1.46

Weighted average common shares outstanding
 
19,052

 
15,514

 
19,012

 
15,044

 
 
 
 
 
 
 
 
 
Diluted
 
 

 
 

 
 

 
 

Earnings per share
 
$
0.55

 
$
0.46

 
$
1.02

 
$
1.45

Weighted average common shares outstanding
 
19,138

 
15,660

 
19,108

 
15,169

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.30

 
$
0.30

 
$
0.90

 
$
0.90

 
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.        
                         

  

3



MTS SYSTEMS CORPORATION
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)

 
 
Three Months Ended
 
Nine Months Ended
 
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net income
 
$
10,610

 
$
7,150

 
$
19,514

 
$
21,922

Other comprehensive income (loss), net of tax
 
 

 
 

 
 

 
 

Foreign currency translation gain (loss) adjustments
 
5,811

 
(2,163
)
 
(794
)
 
(1,295
)
Derivative instruments
 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
(781
)
 
(91
)
 
2,360

 
(680
)
Net (gain) loss reclassified to earnings
 
153

 
142

 
(53
)
 
131

Defined benefit pension plan
 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
42

 
47

 
368

 
(75
)
Net (gain) loss reclassified to earnings
 
174

 
103

 
511

 
305

Currency exchange rate gain (loss)
 
(663
)
 
187

 
(156
)
 
67

Other comprehensive income (loss)
 
4,736

 
(1,775
)
 
2,236

 
(1,547
)
Comprehensive income
 
$
15,346

 
$
5,375

 
$
21,750

 
$
20,375

 
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.
 


 

4



MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
 
Nine Months Ended
 
 
July 1, 2017
 
July 2, 2016
Cash Flows from Operating Activities
 
 

 
 

Net income
 
$
19,514

 
$
21,922

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 

 
 

Stock-based compensation
 
3,925

 
5,177

Excess tax benefits from stock-based compensation
 
(202
)
 
(187
)
Fair value adjustment to acquired inventory
 
7,975

 

Net periodic pension benefit cost
 
1,298

 
851

Depreciation and amortization
 
25,430

 
14,427

Amortization of debt issuance costs
 
2,698

 
141

Deferred income taxes
 
(4,399
)
 
872

Bad debt provision (recovery), net
 
1,345

 
334

Changes in operating assets and liabilities
 
 

 
 

Accounts and unbilled contracts receivable
 
16,992

 
(7,853
)
Inventories
 
(5,134
)
 
(6,938
)
Prepaid expenses
 
(2,071
)
 
(2,745
)
Accounts payable
 
(452
)
 
4,759

Accrued payroll and related costs
 
(5,204
)
 
2,798

Advance payments from customers
 
5,689

 
23,578

Accrued warranty costs
 
(232
)
 
159

Other assets and liabilities
 
(14,763
)
 
(11,555
)
Net Cash Provided by (Used in) Operating Activities
 
52,409

 
45,740

Cash Flows from Investing Activities
 
 

 
 

Purchases of property and equipment
 
(13,239
)
 
(16,194
)
Proceeds from sale of property and equipment
 
45

 
1,514

Purchases of business, net of acquired cash
 
(1,000
)
 

(Increase) decrease in restricted cash
 

 
(43,500
)
Net Cash Provided by (Used in) Investing Activities
 
(14,194
)
 
(58,180
)
Cash Flows from Financing Activities
 
 

 
 

Payment of long-term debt
 
(3,511
)
 

Payment of debt issuance costs for long-term debt
 
(186
)
 
(423
)
Payment of debt component of tangible equity units
 
(6,351
)
 

Payment of debt issuance costs for revolving credit facility
 
(49
)
 
(110
)
Proceeds from issuance of common stock, net of issuance costs
 

 
74,738

Proceeds from issuance of equity component of tangible equity units, net of issuance costs
 

 
84,824

Payment for capped call transaction
 

 
(7,935
)
Proceeds from issuance of debt component of tangible equity units
 

 
27,386

Payment of debt issuance costs for debt component of tangible equity units
 

 
(872
)
Receipts under short-term borrowings
 

 
20,000

Payments under short-term borrowings
 

 
(41,343
)
Excess tax benefits from stock-based compensation
 
202

 
187

Cash dividends
 
(14,976
)
 
(8,935
)
Proceeds from exercise of stock options and employee stock purchase plan
 
5,580

 
3,796

Payments to purchase and retire common stock
 
(1,652
)
 
(18,396
)
Net Cash Provided by (Used in) Financing Activities  
 
(20,943
)
 
132,917

Effect of Exchange Rate Changes on Cash and Cash Equivalents
 
(432
)
 
468

Cash and Cash Equivalents
 
 

 
 

Increase (decrease) during the period
 
16,840

 
120,945

Balance, beginning of period
 
84,780

 
51,768

Balance, end of period
 
$
101,620

 
$
172,713

 
 
 
 
 
Supplemental Disclosures of Cash Flows
 
 

 
 

Cash paid during the period for
 
 

 
 

Interest, net
 
$
21,917

 
$
658

Income taxes, net
 
10,538

 
11,391

Non-cash investing and financing activities
 
 
 
 
Property and equipment acquired under capital lease
 
2,452

 

Dividends declared not yet paid recorded in accrued dividends
 
5,048

 
4,935

Common stock issuance costs not yet paid recorded in accounts payable and other accrued liabilities
 

 
437

Issuance costs on equity component of tangible equity units not yet paid recorded in accounts payable and other accrued liabilities
 

 
313

Debt issuance costs net yet paid recorded in accounts payable and other accrued liabilities
 

 
486

The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these consolidated financial statements.

5



MTS SYSTEMS CORPORATION
Notes to Consolidated Financial Statements (Unaudited) 
(Dollars and shares in thousands, unless otherwise noted)

NOTE 1          BASIS OF PRESENTATION
 
The consolidated financial statements include the accounts of MTS Systems Corporation and its wholly owned subsidiaries. Significant intercompany account balances and transactions have been eliminated.

The terms “we,” “us,” the “Company,” or “our” in this report, unless the context otherwise requires, refer to MTS Systems Corporation and its wholly owned subsidiaries.
 
We have prepared the interim unaudited consolidated financial statements included herein pursuant to the rules and regulations of the United States (U.S.) Securities and Exchange Commission (SEC). The information furnished in these consolidated financial statements includes normal recurring adjustments and reflects all adjustments that are, in our opinion, necessary for a fair presentation of such financial statements. The consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP). U.S. GAAP requires us to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 1, 2016 filed with the SEC. Interim results of operations for the third fiscal quarter ended July 1, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.
 
We have a 5-4-4 week accounting cycle with the fiscal year ending on the Saturday closest to September 30. Fiscal year 2017 ending on September 30, 2017 will consist of 52 weeks. Fiscal year 2016 ended on October 1, 2016 and consisted of 52 weeks.
 
NOTE 2          RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and in August 2015, issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which amended ASU No. 2014-09 as to the effective date of the standard. The guidance, as amended, clarifies the principles for revenue recognition in transactions involving contracts with customers. The new revenue recognition guidance provides a five-step analysis to determine when and how revenue is recognized. The new guidance will require revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The guidance, as amended, defers the mandatory effective date of the new revenue recognition standard by one year.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify principal versus agent guidance in situations in which a revenue transaction involves a third party in providing goods or services to a customer. In such circumstances, an entity must determine whether the nature of its promise to the customer is to provide the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for the third party to provide the underlying goods or services (i.e., the entity is the agent in the transaction). To determine the nature of its promise to the customer, the entity must first identify each specified good or service to be provided to the customer and then (before transferring it) assess whether it controls each specified good or service. The new guidance clarifies how an entity should identify the unit of accounting (the specified good or service) for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, to amend ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable from other promises in the a contract and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost or an expense. The updated guidance also clarifies how an entity would evaluate the nature of its promise in granting a license of intellectual property, which determines whether the entity recognizes revenue over time or at a point in time, and other aspects relative to licensing.

6



In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update), which rescinds previous guidance on revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which amends ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy U.S. GAAP. The amendment also added an expedient to ease transition for contracts that were modified prior to adoption of the new revenue standard, clarifies how an entity should evaluate the collectibility threshold and when an entity can recognize non-refundable considerations received as revenue if the arrangement does not meet the standard's contract criteria. The amendment clarifies that fair value of non-cash considerations should be measured at contract inception when determining the transaction price and allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses the policy.

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends ASU 2014-09, Revenue from Contracts with Customers (Topic 606), providing thirteen corrections and improvements to the new revenue standard.

The aforementioned revenue standards and amendments are required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The new standards and amendments may be adopted retrospectively for all periods presented, or adopted using a modified retrospective approach. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, and interim periods within that annual period, which is our fiscal year 2018. We intend to adopt the aforementioned revenue standards and amendments for our fiscal year 2019 and are modeling the transition alternatives but have not finalized our decision regarding the method of implementation. We are currently reviewing and analyzing our sales contracts, policies and practices as compared to the new guidance and are working through implementation steps. We continue to evaluate our procedural and related system requirements related to the provisions of this standard. We intend to update and rewrite our revenue recognition accounting policy as needed to reflect the requirements of this standard. In fiscal year 2018, we expect to draft our new revenue disclosures. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

Other 
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under current inventory standards, the market value requires consideration of replacement cost, net realizable value and net realizable value less an approximately normal profit margin. The new guidance replaces market with net realizable value defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period, which is our fiscal year 2018. The amendment is to be applied prospectively with early adoption permitted. We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial condition, results of operations or disclosures.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 824), which requires lessees to recognize a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability on the balance sheet for all leases with terms greater than 12 months. Lessees can forgo recognizing a right-of-use asset and lease liability with lease terms of 12 months or less on the balance sheet through accounting policy elections as long as the lease does not include options to purchase the underlying assets that are reasonably certain to be exercised. The new guidance also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements. The standard is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is our fiscal year 2020. The amendment is to be applied using a modified retrospective approach, which includes a number of optional practical expedients, with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures.

In March 2016, the FASB issued ASU No. 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which amends existing guidance on extinguishing financial liabilities for certain prepaid stored-value products. The new standard requires recognition of the expected breakage amount or the value

7



that is ultimately not redeemed either proportionally in earnings as redemption occurs or when redemption is remote, if issuers are not entitled to breakage. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied either using a modified retrospective approach by recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the year or retrospectively to each period presented. Early adoption is permitted. We are currently evaluating the impact, if any, the adoption of this guidance may have on our financial condition, results of operations or disclosures.
 
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify certain aspects of accounting for share-based compensation arrangements, including modifications to the accounting for income taxes upon vesting or settlement of awards, employer tax withholding on share-based compensation, classification on the statement of cash flows and forfeitures. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period, which is our fiscal year 2018. Certain aspects of the amendment are to be applied using a retrospective transition method, while others are to be applied either prospectively or retrospectively. Early adoption is permitted, but all amendments must be adopted in the same period and must be reflected as of the beginning of the fiscal year that includes the interim period.
We are currently evaluating the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the accounting for credit losses on instruments measured at amortized cost by adding an impairment model that is based on expected losses rather than incurred losses. An entity will recognize as an allowance its estimate of expected credit losses, which is believed to result in more timely recognition of such losses as the standard eliminates the probable initial recognition threshold. The standard is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within that annual period, which is our fiscal year 2021. The amendment is to be applied using a modified-retrospective approach as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which adopted. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is our fiscal year 2020. We have not yet evaluated the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the classification of certain cash receipts and cash payments with the objective of reducing diversity in practice. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied retrospectively, but if impracticable to do so, the amendments related to that issue would be applied prospectively. Early adoption is permitted. We have not yet evaluated the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory when the transfer occurs. Current guidance requires companies to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied using a modified retrospective approach. Early adoption is permitted as of the beginning of an annual period. We have not yet evaluated the impact of adoption of this guidance will have on our financial condition, results of operations or disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The new guidance clarifies that a business must also include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606, Revenue from Contracts with Customers. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied prospectively with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial condition, results of operations or disclosures as the standard only applies to businesses acquired after the adoption date.

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income

8



statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period with only the service cost component eligible for capitalization in assets. Other components of the net periodic benefit cost are to be stated separately from the line items that include the service cost and outside of operating income. These components are not eligible for capitalization in assets. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied retrospectively. Early adoption is permitted as of the beginning of an annual period. We have not yet evaluated the impact of adoption of this guidance will have on our financial condition, results of operations or disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Modification guidance must be applied if the fair value, vesting conditions or classification of the awards changes. The standard is required to be adopted for annual periods beginning after December 15, 2017, including interim periods within that annual period, which is our fiscal year 2019. The amendment is to be applied prospectively to an award modified on or after the adoption date, with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial condition, results of operations or disclosures.

Adopted
In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force). The standard allows for a plan with a fiscal year end that does not coincide with the end of the calendar month to measure its investments and investment-related accounts using the month end closest to its fiscal year end. In previous guidance, the measurement date was required to coincide with the fiscal year end. We adopted ASU No. 2015-12 on a prospective basis for the annual period ending September 30, 2017. The adoption of this standard will not have a material effect on our fiscal year 2017 financial condition, results of operations or disclosures, as the measurement date and fiscal year end coincide.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under the existing business combination standard, an acquirer reports provisional amounts with respect to acquired assets and liabilities when their measurements are incomplete as of the end of the reporting period. The provisional amounts and the related impact on earnings are adjusted by restating prior period financial statements during the measurement period which cannot exceed one year from the date of acquisition. The new guidance requires that the cumulative impact of a measurement-period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified, eliminating the requirement to restate prior period financial statements. The new standard requires disclosure of the nature and amount of measurement-period adjustments as well as information with respect to the portion of the adjustments recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustments to provisional amounts had been recognized as of the acquisition date. We adopted ASU No. 2015-16 on a prospective basis for the annual period ending September 30, 2017, including interim periods within that annual period. The adoption of the standard had no effect on our financial condition, results of operations or disclosures for the three and nine months ended July 1, 2017, as the standard only applies to measurement period adjustments related to business acquisitions on a prospective basis.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge or Step 2 of the goodwill impairment analysis. Instead, an impairment charge will be recorded based on the excess of a reporting unit's carrying amount over its fair value using Step 1 of the goodwill impairment analysis. We early adopted ASU No. 2017-04 on a prospective basis for our annual and interim goodwill impairment testing performed subsequent to January 1, 2017. The adoption of this standard had no effect on our financial condition, results of operations or disclosures for the three and nine months ended July 1, 2017, as this standard only impacts the measurement of goodwill impairment charges on a prospective basis.


9



NOTE 3          INVENTORIES
 
Inventories consist of material, labor and overhead costs and are stated at the lower of cost or market value determined under the first-in, first-out accounting method. Certain inventories are measured using the weighted average cost method. Inventories were as follows: 
(in thousands)
 
July 1,
2017
 
October 1,
2016
Components, assemblies and parts
 
$
86,246

 
$
87,119

Customer projects in various stages of completion
 
31,419

 
32,575

Finished goods
 
11,782

 
12,872

Total inventories, net
 
$
129,447

 
$
132,566


NOTE 4          WARRANTY OBLIGATIONS
 
Sales of our products and systems are subject to limited warranty obligations that are included in customer contracts. For sales that include installation services, warranty obligations generally extend for a period of twelve to twenty-four months from the date of either shipment or acceptance based on the contract terms. Product obligations generally extend for a period of twelve to twenty-four months from the date of purchase. Certain products offered in our Sensors segment include a lifetime warranty. Under the terms of these warranties, we are obligated to repair or replace any components or assemblies deemed defective due to workmanship or materials. We reserve the right to reject warranty claims where it is determined that failure is due to normal wear, customer modifications, improper maintenance or misuse. We record general warranty provisions based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects our historical warranty claims experience over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. Warranty provisions are also recognized for certain unanticipated product claims that are individually significant.
 
Warranty provisions and claims were as follows: 
 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Beginning balance
 
$
5,240

 
$
4,872

 
$
5,718

 
$
4,695

Warranty claims
 
(1,208
)
 
(1,609
)
 
(3,051
)
 
(4,290
)
Warranty provisions
 
972

 
1,281

 
2,466

 
4,137

Adjustments to pre-existing warranties
 
470

 
312

 
353

 
312

Currency translation
 
21

 
(2
)
 
9

 

Ending balance
 
$
5,495

 
$
4,854

 
$
5,495

 
$
4,854


NOTE 5          CAPITAL ASSETS
 
Property and Equipment
Property and equipment are as follows: 
(in thousands)
 
July 1,
2017
 
October 1,
2016
Land and improvements
 
$
2,866

 
$
2,865

Buildings and improvements
 
59,764

 
59,350

Machinery and equipment
 
197,715

 
189,406

Assets held under capital leases
 
2,452

 

Total property and equipment, gross
 
262,797

 
251,621

 
 
 
 
 
Less: Accumulated depreciation
 
(161,714
)
 
(150,832
)
Total property and equipment, net
 
$
101,083

 
$
100,789



10



Assets held under capital leases, consisting of machinery and equipment, are recorded at the present value of minimum lease payments and are amortized on a straight-line basis over the estimated life of the asset or the lease term. Amortization of assets held as capital leases is included in depreciation expense in the Consolidated Statements of Income.
 
Goodwill
Changes to the carrying amount of goodwill are as follows:  
(in thousands)
 
Test
 
Sensors
 
Total
Balance, October 1, 2016
 
$
25,022

 
$
344,678

 
$
369,700

Adjustment related to finalization of purchase accounting1
 

 
(64
)
 
(64
)
Currency translation
 
(252
)
 
15

 
(237
)
Balance, July 1, 2017
 
$
24,770

 
$
344,629

 
$
369,399


1 
Goodwill from our acquisition of PCB Group, Inc. and its wholly owned subsidiaries (PCB) was finalized in the third quarter of fiscal year 2017. See Note 17 for additional information related to our acquisition of PCB.

Intangible Assets
Intangible assets are as follows: 
 
 
July 1, 2017
(in thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted
Average
Useful Life (in Years)
Software development costs
 
$
25,348

 
$
(15,607
)
 
$
9,741

 
6.0
Technology and patents
 
46,500

 
(8,508
)
 
37,992

 
14.9
Trademarks and trade names
 
6,807

 
(2,305
)
 
4,502

 
25.5
Customer lists
 
156,993

 
(10,856
)
 
146,137

 
15.8
Land-use rights
 
2,338

 
(416
)
 
1,922

 
26.2
Trade names
 
57,500

 

 
57,500

 
Indefinite
Total intangible assets
 
$
295,486

 
$
(37,692
)
 
$
257,794

 
15.0
 
 
 
October 1, 2016
(in thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted
Average
Useful Life (in Years)
Software development costs
 
$
23,184

 
$
(14,938
)
 
$
8,246

 
6.0
Technology and patents
 
46,672

 
(6,360
)
 
40,312

 
14.9
Trademarks and trade names
 
6,903

 
(1,911
)
 
4,992

 
25.5
Customer lists
 
156,987

 
(3,372
)
 
153,615

 
15.8
Land-use rights
 
2,369

 
(245
)
 
2,124

 
26.3
Trade names
 
57,500

 

 
57,500

 
Indefinite
Total intangible assets
 
$
293,615

 
$
(26,826
)
 
$
266,789

 
15.1
 
Amortization expense recognized during the three months ended July 1, 2017 and July 2, 2016 was $3,656 and $596, respectively. Amortization expense recognized during the nine months ended July 1, 2017 and July 2, 2016 was $10,984 and $1,793, respectively.

11



The estimated future amortization expense related to amortizable intangible assets is as follows: 
(in thousands)
Amortization Expense

Remainder of 2017
$
3,641

2018
13,701

2019
13,576

2020
13,295

2021
13,295

2022
13,112

Thereafter
129,674

 
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.

NOTE 6          FAIR VALUE MEASUREMENTS

In determining the fair value of financial assets and liabilities, we currently utilize market data or other assumptions that we believe market participants would use in pricing the asset or liability in the principal or most advantageous market and adjust for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to us at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities subject to fair value measurements on a recurring basis are as follows:
 
 
July 1, 2017
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Currency contracts 1
 
$

 
$
101

 
$

 
$
101

Interest rate swaps 2
 

 
3,491

 

 
3,491

Total assets
 
$

 
$
3,592

 
$

 
$
3,592

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Currency contracts 1
 
$

 
$
382

 
$

 
$
382

Total liabilities
 
$

 
$
382

 
$

 
$
382



12



 
 
October 1, 2016
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Currency contracts 1
 
$

 
$
149

 
$

 
$
149

Total assets
 
$

 
$
149

 
$

 
$
149

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Currency contracts 1
 
$

 
$
711

 
$

 
$
711

Total liabilities
 
$

 
$
711

 
$

 
$
711

 
1 
Based on observable market transactions of spot currency rates and forward currency rates on equivalently-termed instruments. Carrying amounts of the financial assets and liabilities are equal to the fair value. See Note 7 for additional information on derivative financial instruments.

2 
Based on London Interbank Offered Rate (LIBOR) and spot rates. Carrying amount of the financial asset is equal to the fair value. See Note 7 for additional information on derivative financial instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain financial instruments at fair value on a nonrecurring basis. These assets primarily include goodwill, intangible assets and other long-lived assets acquired either as part of a business acquisition, individually, or with a group of other assets, as well as property and equipment. These assets were initially, and are currently, measured and recognized at amounts equal to the fair value determined as of the date of acquisition or purchase subject to changes in value only for foreign currency translation. Periodically, these assets are tested for impairment by comparing their respective carrying values to the estimated fair value of the reporting unit or asset group in which they reside. In the event any of these assets were to become impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. Fair value measurements of reporting units are estimated using an income approach involving discounted or undiscounted cash flow models that contain certain Level 3 inputs requiring management judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, working capital requirements and new product introductions. Fair value measurements of the reporting units associated with our goodwill balances are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment testing if Step 1 of the goodwill impairment analysis is performed. Fair value measurements associated with our indefinite-lived intangible assets are estimated annually in the fourth quarter of each fiscal year for purposes of impairment testing. Fair value measurements associated with our intangible assets, other long-lived assets and property and equipment are estimated when events or changes in circumstances such as market value, asset utilization, physical change, legal factors or other matters indicate that the carrying value may not be recoverable. See Note 5 for additional information on goodwill, intangible assets, other long-lived assets and property and equipment.

Assets and Liabilities Not Measured at Fair Value
Certain financial instruments are not measured at fair value but are recorded at carrying amounts approximating fair value based on their short-term nature or variable interest rate. These financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and short-term borrowings.

Other Financial Instruments
Other financial instruments subject to fair value measurements include debt, which is recorded at carrying value in the Consolidated Balance Sheets. The carrying amount and estimated fair value of our debt are as follows:
 
 
July 1, 2017
(in thousands)
 
Carrying
Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Debt component of tangible equity units 3
 
$
18,634

 
$
22,514

 
$

 
$
22,514

 
$

Tranche B term loan 4
 
456,550

 
458,239

 

 
458,239

 

Total debt
 
$
475,184

 
$
480,753

 
$

 
$
480,753

 
$



13



 
 
October 1, 2016
(in thousands)
 
Carrying
Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Debt component of tangible equity units 3
 
$
24,985

 
$
28,080

 
$

 
$
28,080

 
$

Tranche B term loan 4
 
460,000

 
465,465

 

 
465,465

 

Total debt
 
$
484,985

 
$
493,545

 
$

 
$
493,545

 
$



3 
The fair value of the 8.75% tangible equity units (TEUs) is based on the most recently quoted price for the outstanding securities, adjusted for any known significant deviations in value. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange. See Note 12 for additional information on the TEUs.

4 
The fair value of the tranche B term loan is based on the most recently quoted prices for the outstanding debt instrument, adjusted for any known significant deviations in value. The estimated fair value of the debt obligation is not necessarily indicative of the amount that would be realized in a current market exchange. See Note 8 for additional information on debt instruments.


NOTE 7          DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
Our currency exchange contracts and interest rate swaps are designated as cash flow hedges and qualify as hedging instruments. We also have derivatives which are not designated as cash flow hedges and, therefore, are accounted for and reported under foreign currency guidance. Regardless of designation for accounting purposes, we believe all of our derivative instruments are hedges of transactional risk exposures. The fair value of our outstanding designated and undesignated derivative assets and liabilities are reported in the Consolidated Balance Sheets as follows: 
 
 
July 1, 2017
(in thousands)
 
Prepaid Expenses
and Other
Current Assets
 
Other Accrued
Liabilities
Designated hedge derivatives
 
 

 
 

Cash flow derivatives
 
$
101

 
$
339

Interest rate swaps
 
3,491

 

Total designated hedge derivatives
 
3,592

 
339

 
 
 
 
 
Hedge derivatives not designated
 
 

 
 

Balance sheet derivatives
 

 
43

Total hedge derivatives
 
$
3,592

 
$
382

 
 
 
October 1, 2016
(in thousands)
 
Prepaid Expenses
and Other
Current Assets
 
Other Accrued
Liabilities
Designated hedge derivatives
 
 

 
 

Cash flow derivatives
 
$
149

 
$
633

 
 
 
 
 
Hedge derivatives not designated
 
 

 
 

Balance sheet derivatives
 

 
78

Total hedge derivatives
 
$
149

 
$
711

  

14



A reconciliation of the net fair value of foreign exchange cash flow hedge assets and liabilities subject to master netting arrangements recorded in the Consolidated Balance Sheets to the net fair value that could have been reported in the respective Consolidated Balance Sheets is as follows: 
(in thousands)
 
Gross
Recognized
Amount
 
Gross
Offset
Amount
 
Net
Amount
Presented
 
Derivatives
Subject to
Offset
 
Cash
Collateral
Received
 
Net
Amount 1
July 1, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
$
3,592

 
$

 
$
3,592

 
$

 
$

 
$
3,592

Liabilities
 
339

 

 
339

 

 

 
339

 
 
 
 
 
 
 
 
 
 
 
 
 
October 1, 2016
 
 

 
 

 
 

 
 

 
 

 
 

Assets
 
$
149

 
$

 
$
149

 
$
(147
)
 
$

 
$
2

Liabilities
 
633

 

 
633

 
(147
)
 

 
486

 
1 
Net fair value of foreign exchange cash flow hedge assets and liabilities that could have been reported in the Consolidated Balance Sheets.

Cash Flow Hedging – Currency Risks
Currency exchange contracts utilized to maintain the functional currency value of expected financial transactions denominated in foreign currencies are designated as cash flow hedges. Qualifying gains and losses related to changes in the market value of these contracts are reported as a component of accumulated other comprehensive income (loss) (AOCI) within shareholders’ equity in the Consolidated Balance Sheets and reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The effective portion of the cash flow hedges represents the change in fair value of the hedge that offsets the change in the functional currency value of the hedged item. We periodically assess whether our currency exchange contracts are effective and, when a contract is determined to be no longer effective as a hedge, we discontinue hedge accounting prospectively. Subsequent changes in the market value of ineffective currency exchange contracts are recognized as an increase or decrease in revenue in the Consolidated Statements of Income as that is the same line item in which the underlying hedged transaction is reported. 

As of July 1, 2017 and October 1, 2016, we had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $31,825 and $29,092, respectively. Upon netting offsetting contracts to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding was $28,441 and $24,884 as of July 1, 2017 and October 1, 2016, respectively. As of July 1, 2017, the net market value of the foreign currency exchange contracts was a net liability of $238, consisting of $339 in liabilities and $101 in assets. As of October 1, 2016, the net market value of the foreign currency exchange contracts was a net liability of $484, consisting of $149 in assets and $633 in liabilities.
 
The pretax amounts recognized in AOCI on currency exchange contracts, including (gains) losses reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (loss) (OCI), are as follows:
 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Beginning unrealized net gain (loss) in AOCI
 
$
(115
)
 
$
(335
)
 
$
(400
)
 
$
608

Net (gain) loss reclassified into revenue (effective portion)
 
58

 
223

 
(679
)
 
205

Net gain (loss) recognized in OCI (effective portion)
 
(222
)
 
(143
)
 
800

 
(1,068
)
Ending unrealized net gain (loss) in AOCI
 
$
(279
)
 
$
(255
)
 
$
(279
)
 
$
(255
)
 
The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was $0 and $7 in the three and nine months ended July 1, 2017, respectively, and less than $1 in both the three and nine months ended July 2, 2016. As of July 1, 2017 and July 2, 2016, the amount projected to be reclassified from AOCI into earnings in the next twelve months was a net loss of $279 and $246, respectively. The maximum remaining maturity of any forward or optional contract as of July 1, 2017 and July 2, 2016 was 1.5 and 1.0 years, respectively.


15



Interest Rate Swaps
On October 20, 2016, we entered into a floating to fixed interest rate swap agreement to mitigate our exposure to interest rate increases related to a portion of our tranche B term loan facility. The total notional amount of the interest rate swap is $275,000 as of July 1, 2017. The swap agreement expires April 3, 2021. As a result of this agreement, every month we pay fixed interest at 1.256% in exchange for interest received at one month U.S. LIBOR. The market value of the interest rate swap as of July 1, 2017 was an asset of $3,491. The interest rate swap has been designated as a cash flow hedge. As a result, changes in the fair value of the interest rate swap are recorded in AOCI within shareholders’ equity in the Consolidated Balance Sheets.

The pretax amounts recognized in AOCI on interest rate swaps, including (gains) losses reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in OCI, are as follows:
 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Beginning unrealized net gain (loss) in AOCI
 
$
4,310

 
$

 
$

 
$

Net (gain) loss reclassified into interest expense (effective portion)
 
182

 

 
598

 

Net gain (loss) recognized in OCI (effective portion)
 
(1,001
)
 

 
2,893

 

Ending unrealized net gain (loss) in AOCI
 
$
3,491

 
$

 
$
3,491

 
$


As of July 1, 2017, the amount projected to be reclassified from AOCI into earnings in the next twelve months was a net gain of $96.

Foreign Currency Balance Sheet Derivatives
We also use foreign currency derivative contracts to maintain the functional currency value of monetary assets and liabilities denominated in non-functional foreign currencies. The gains and losses related to the changes in the market value of these derivative contracts are included in other income (expense), net in the Consolidated Statements of Income.
 
As of July 1, 2017 and October 1, 2016, we had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of $25,186 and $13,187, respectively. Upon netting offsetting contracts by counterparty banks to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding as of July 1, 2017 and October 1, 2016 was $7,282 and $1,347, respectively. As of July 1, 2017 and October 1, 2016, the net market value of the foreign exchange balance sheet derivative contracts was a net liability of $43 and $78, respectively.

The net gain (loss) recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts was as follows:
 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net gain (loss) recognized in other income (expense), net
 
$
(680
)
 
$
(64
)
 
$
(691
)
 
$
(898
)

NOTE 8          FINANCING

In the fourth quarter of fiscal year 2016, we entered into a credit agreement with U.S. Bank National Association and HSBC Bank USA, National Association as Co-Documentation Agents, Wells Fargo Bank, National Association as Syndication Agent, JPMorgan Chase Bank, N.A. as Administrative Agent and JP Morgan Chase Bank, N.A., Wells Fargo Securities, LLC as Joint Bookrunners and Joint Lead Arrangers and Bank of America, N.A. (the Credit Agreement). The Credit Agreement provides for senior secured credit facilities consisting of a $120,000 revolving credit facility (the Revolving Credit Facility) which expires on July 5, 2021 and a $460,000 tranche B term loan facility (the Term Facility) which expires on July 5, 2023. The proceeds of the Revolving Credit Facility can be drawn upon to refinance existing indebtedness and for working capital and other general corporate purposes up to a maximum of $120,000. The proceeds of the Term Facility were used for financing the acquisition of PCB.

The primary categories of borrowing include Alternate Base Rate (ABR) Borrowing, Swingline Loans and Eurocurrency Borrowing (each as defined in the Credit Agreement). ABR Borrowings and Swingline Loans made in U.S. dollars under the Credit Agreement bear interest at a rate per annum equal to the ABR plus the Applicable Rate (as defined in the Credit Agreement). The ABR is defined as the greater of (a) the Prime Rate (as defined in the Credit Agreement) in effect on such day,

16



(b) the New York Federal Reserve Bank (NYFRB) rate (as defined in the Credit Agreement) in effect on such day plus ½ of 1.00%, or (c) the Adjusted LIBOR (as defined in the Credit Agreement) for a one month interest period in dollars on such day plus 1.00%. The ABR for ABR Term Loans shall not be less than 1.75% per annum. The Applicable Rate for any ABR Revolving Loans will be based upon the leverage ratio applicable on such date. The Applicable Rate for ABR Term Loans was 3.25% per annum as of July 1, 2017.

Eurocurrency Borrowings made under the Credit Agreement bear interest at a rate per annum equal to the Adjusted LIBOR plus the Applicable Rate. The Adjusted LIBOR is defined as an interest rate per annum equal to (a) the LIBOR for such interest period multiplied by (b) the Statutory Reserve Rate (as defined in the Credit Agreement). The Applicable Rate for any Eurocurrency Revolving Loan will be based upon the leverage ratio applicable on such date. Based on our current leverage ratio, the Applicable Rate for a Eurocurrency Borrowing is 4.00%. The Adjusted LIBOR for Eurocurrency Term Loans will not be less than 0.75% per annum. The Applicable Rate for Eurocurrency Term Loans is 4.25% per annum as of July 1, 2017.

As of July 1, 2017, there were no borrowings against the Revolving Credit Facility and we had outstanding letters of credit drawn from the Revolving Credit Facility totaling $37,673, leaving $82,327 of unused borrowing capacity. Commitment fees are payable on the unused portion of the Revolving Credit Facility at rates between 0.25% and 0.50% based on the leverage ratio as of July 1, 2017. During the three and nine months ended July 1, 2017, commitment fees incurred totaled $106 and $320, respectively. During the three and nine months ended July 2, 2016, commitment fees incurred on our previous credit facility totaled $48 and $170, respectively.

Long-term debt consisted of the following:
(in thousands)
 
July 1,
2017
 
October 1,
2016
Long-term debt
 
 
 
 
Tranche B term loan, 1.00% amortizing per year, maturing July 5, 2023
 
$
456,550

 
$
460,000

Tangible equity units, 8.75% coupon, maturing July 1, 2019 1
 
18,634

 
24,985

Capital lease obligations
 
2,391

 

Total long-term debt
 
477,575

 
484,985

Less: Unamortized underwriting discounts, commissions and other expenses
 
(14,124
)
 
(16,843
)
Less: Current maturities of Tranche B term loan debt 2
 
(13,600
)
 
(4,600
)
Less: Current maturities of TEU debt 2
 
(8,996
)
 
(8,541
)
Less: Current maturities of capital lease obligations
 
(455
)
 

Total long-term debt, less current maturities, net
 
$
440,400

 
$
455,001


1 
See Note 12 for additional information on our TEUs issued in the third quarter of fiscal year 2016.

2 
Current maturities of long-term debt, net of $19,523 presented on our Consolidated Balance Sheet as of July 1, 2017, consisted of $13,600 of current maturities of tranche B term loan debt, including 1% annual payments and an estimate of the required annual Excess Cash Flow payment, $8,996 of current maturities of TEU debt and $455 of current maturities of capital lease obligations, less $3,528 of unamortized underwriting discounts, commissions and issuance costs.

The Term Facility was made available to us on July 5, 2016 to finance the acquisition of PCB. The loans under the Term Facility will amortize in equal quarterly installments in an aggregate annual amount equal to 1.00% of the original principal amount of the Term Facility. As of July 1, 2017, the applicable Adjusted LIBOR on the Eurocurrency Term Loan Borrowing was 1.23%, plus the Applicable Rate of 4.25%. The weighted average interest rate on Term Facility debt during the nine months ended July 1, 2017 was 5.10%.

The Credit Agreement governing the Term Facility requires us to prepay outstanding term loans, subject to certain exceptions, depending on the leverage ratio with (a) up to 50% of the Company's annual Excess Cash Flow (as defined in the Credit Agreement) and (b) 100% of the net cash proceeds of (i) certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and (ii) any incurrence or issuance of certain debt, other than debt permitted under the Credit Agreement. We may voluntarily prepay outstanding loans under the Term Facility at any time without premium or penalty. All obligations under the Credit Agreement are unconditionally guaranteed by certain of the Company's existing wholly owned domestic subsidiaries and are secured, subject to certain exceptions, by substantially all of the Company's assets and the assets of the Company's subsidiary guarantors.

17



On October 20, 2016, in order to mitigate our exposure to interest rate increases on our variable rate debt, we entered into a variable to fixed amortizing interest rate swap. See Note 7 for additional information on financing arrangements.
The interest rate swap will be reduced to the following notional amounts over the next five years:
(in thousands)
 
Notional Amount

October 3, 2017
 
$
255,000

October 3, 2018
 
225,000

October 3, 2019
 
180,000

October 3, 2020
 
125,000

April 3, 2021
 


Under the Credit Agreement, we are subject to customary affirmative and negative covenants, including, among others, restrictions on our ability to incur debt, create liens, dispose of assets, make investments, loans, advances, guarantees, and acquisitions, enter into transactions with affiliates, and enter into any restrictive agreements and customary events of default (including payment defaults, covenant defaults, change of control defaults, and bankruptcy defaults). The Credit Agreement also contains financial covenants, including the ratio of consolidated total indebtedness to adjusted consolidated earnings before income, taxes, depreciation and amortization (Adjusted EBITDA), as defined in the Credit Agreement, as well as the ratio of Adjusted EBITDA to consolidated interest expense. These covenants restrict our ability to pay dividends and purchase outstanding shares of our common stock. As of July 1, 2017 and October 1, 2016, we were in compliance with these financial covenants.

The TEUs had an estimated fair value of $22,514 and $28,080 as of July 1, 2017 and October 1, 2016, respectively. The fair value of the TEUs is based on the most recently quoted price for the outstanding securities, adjusted for any known significant deviations in value. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange. Tranche B term debt had an estimated fair value of $458,239 and $465,465 as of July 1, 2017 and October 1, 2016, respectively. The fair value of long-term debt is based on the most recently quoted price for the outstanding debt instrument, adjusted for any known significant deviations in value. The estimated fair value of these long-term obligations is not necessarily indicative of the amount that would be realized in a current market exchange.

NOTE 9          STOCK-BASED COMPENSATION
 
We compensate our officers, directors and employees with stock-based compensation under the 2011 Stock Incentive Plan (the 2011 Plan) and 2017 Stock Incentive Plan (the 2017 Plan) approved by our shareholders and administered under the supervision of our Board of Directors.

During fiscal year 2016, our shareholders approved a 1,500 share increase in the number of shares that could be issued under the 2011 Plan, bringing the aggregate total to 3,800 shares. In the third quarter of fiscal year 2017, the 2017 Plan was approved by our shareholders. The 2017 Plan provides stock incentive awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance stock units and other stock awards. Awards under the 2017 Plan may be granted to officers, directors, employees and key service providers. Effective upon approval of the 2017 Plan, no new awards may be granted under the 2011 Plan, and carryover activity for forfeitures and cancellations of unvested grants under the 2011 Plan will become available for issuance under the 2017 Plan. In addition to the carryover activity from the 2011 Plan, 1,500 shares are authorized for issuance under the 2017 Plan. As of July 1, 2017, a total of 1,513 shares were available for issuance under the 2017 Plan. Shares will be available for issuance under the 2017 Plan until June 6, 2027.
 
In fiscal year 2011, our shareholders approved a 2012 Employee Stock Purchase Plan (2012 ESPP) that was effective on January 1, 2012. During the nine months ended July 1, 2017 and July 2, 2016, we issued shares of our common stock to participants under the 2012 ESPP. As of July 1, 2017, a total of 639 shares were available for issuance under the 2012 ESPP. Shares will be available for issuance under the 2012 ESPP until December 31, 2021.

During the nine months ended July 1, 2017, we granted approximately 288 stock options, 118 restricted stock units and 35 performance restricted stock units to directors, officers and employees under the 2011 Plan and the 2017 Plan. During the nine months ended July 2, 2016, we granted approximately 316 stock options, 74 restricted stock units and 21 performance restricted stock units to directors, officers and employees under the 2011 Plan.
 

18



Stock Options
Stock options are granted at an exercise price equal to the closing market price of our stock on the date of grant. The fair value of stock options granted under our 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. Generally, stock options vest proportionally on the first three anniversaries of the grant date and expire, depending on the date of grant, five or seven years from the grant date.
The weighted average per share fair value of the stock options granted during the nine months ended July 1, 2017 and July 2, 2016 was $8.91 and $11.71, respectively. The weighted average assumptions used to determine the fair value of these stock options were as follows: 
 
 
Nine Months Ended
 
 
July 1, 2017
 
July 2, 2016
Expected life (in years)
 
4.0

 
4.1

Risk-free interest rate
 
1.6
%
 
1.5
%
Expected volatility
 
29.2
%
 
26.7
%
Dividend yield
 
2.6
%
 
2.0
%
 
The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. We estimate 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. 
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units
We award restricted stock units to directors. Restricted stock units vest one year from the date of the grant, provided the director continues to serve on the Board of Directors. The directors are not entitled to cash dividend equivalents on restricted stock units and they do not have voting rights on the unvested shares until they become owners of the shares, unless otherwise approved by the Compensation and Leadership Development Committee of the Board of Directors. Additionally, in fiscal year 2013, we awarded restricted stock to our directors that vest proportionately on the first three anniversaries of the grant date. For restricted stock awarded to directors, participants are entitled to cash dividends and voting rights on unvested shares, but the sale and transfer of these shares is restricted during the vesting period. Restricted stock and restricted stock units are valued based on the market value of the shares at the date of grant with the value allocated to expense evenly over the restricted period.

We award restricted stock units and performance restricted stock units to key employees. Restricted stock units vest proportionally on the first three anniversaries of the grant date. Performance restricted stock units vest based on attainment of return on invested capital performance targets at the end of one, two and three year performance periods. Participants awarded restricted stock units and performance restricted stock units are not entitled to cash dividends or voting rights on unvested units. Performance restricted stock units are valued based on the market value of the shares at the date of grant with the value recognized as an expense over the life of the performance period. Once the performance criteria has been met, the value of the performance restricted stock units is finalized.
 
The fair value of the restricted stock units and performance restricted stock units granted during the nine months ended July 1, 2017 and July 2, 2016 was $45.00 and $57.73, respectively, representing the market value of our shares at the date of grant less the present value of estimated foregone dividends over the vesting period.
NOTE 10          EMPLOYEE BENEFIT PLANS

One of our 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. We use a September 30 measurement date for this defined benefit retirement plan.
 
We recognize the funded status of the defined benefit pension in our Consolidated Balance Sheets, recognize changes in that funded status in the year in which the changes occur through comprehensive income and measure the plan’s assets and obligations that determine the plan’s funded status as of the end of our fiscal year.

19



Net periodic benefit costs for our defined benefit retirement plan included the following components:
 
 
Three Months Ended
 
Nine Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Service cost
 
$
356

 
$
246

 
$
1,047

 
$
728

Interest cost
 
108

 
153

 
317

 
455

Expected return on plan assets
 
(271
)
 
(259
)
 
(797
)
 
(769
)
Net amortization and deferral
 
249

 
147

 
731

 
437

Net periodic benefit cost
 
$
442

 
$
287

 
$
1,298

 
$
851

 
The weighted average expected long-term rate of return on plan assets used to determine the net periodic benefit cost for each of the three and nine months ended July 1, 2017 and July 2, 2016 was 5.5%.

NOTE 11          INCOME TAXES

The income tax benefit for the three and nine months ended July 1, 2017 included certain discrete benefits of $2,801 recognized during the three months ended July 1, 2017 which consisted of additional U.S. tax benefits for prior fiscal years associated with domestic manufacturing, deductible PCB acquisition-related expenses and U.S. R&D tax credit. Excluding the impact of these discrete benefits, the effective tax rate for the three and nine months ended July 1, 2017 declined compared to the prior year periods primarily due to lower income before taxes and a more favorable geographic mix of earnings.

The income tax provision for the three months ended July 2, 2016 included a one-time tax cost of $577 associated with non-deductible PCB acquisition-related expenses. The income tax provision for the nine months ended July 2, 2016 included a $2,283 discrete benefit for retroactive reinstatement of the U.S. R&D tax credit as well as a one-time tax cost of $577 associated with non-deductible PCB acquisition-related expenses.

As of July 1, 2017, the liability for unrecognized tax benefits was $6,475, of which $3,700 would favorably affect our effective tax rate, if recognized. As of October 1, 2016, the liability for unrecognized tax benefits was $6,232, of which $3,429 would favorably affect our effective tax rate, if recognized. As of July 1, 2017, we do not expect significant changes in the amount of unrecognized tax benefits during the next twelve months.
 
NOTE 12          SHAREHOLDERS' EQUITY
(Dollars and shares in thousands, except per share and per TEU data)

Share Issuance
During the third quarter of fiscal year 2016, we issued 1,897 shares of our common stock at $42.00 per share in a registered public offering primarily to finance the acquisition of PCB, to repay amounts outstanding under our existing revolving credit facility and to pay related costs, fees and expenses. Total net proceeds for fiscal year 2016 were as follows:
(in thousands)
Common Stock
 
Additional
Paid-in Capital
 
Total
Public offering
$
474

 
$
79,221

 
$
79,695

Less: Underwriting discounts and commissions

 
(4,782
)
 
(4,782
)
Less: Other expenses1

 
(612
)
 
(612
)
Issuance of common stock, net
$
474

 
$
73,827

 
$
74,301


1 
Other expenses include direct and incremental costs related to the issuance of the common stock.


20



Tangible Equity Units
During the third quarter of fiscal year 2016, we issued 1,150 8.75% TEUs in a registered public offering primarily to finance the acquisition of PCB, to repay amounts outstanding under our existing revolving credit facility and to pay related costs, fees and expenses. Total proceeds, net of underwriting discounts, commissions and other expenses were $110,926. Each TEU has a stated amount of $100 per TEU and is comprised of a prepaid stock purchase contract and a senior amortizing note having a final installment payment date of July 1, 2019. We allocated the proceeds from the issuance of the TEUs between equity and debt based on the relative fair values of the respective components of each TEU. The fair value of the prepaid stock purchase contracts, net of underwriting discounts, commissions and other expenses, was recorded in additional paid-in capital in the Consolidated Balance Sheets. The fair value of the senior amortizing note, net of underwriting discounts, commissions and other expenses, was split between current maturities of long-term debt, net and long-term debt, less current maturities, net in the Consolidated Balance Sheets. Underwriting discounts, commissions and other costs directly associated with the TEU-related debt will be amortized using the effective interest rate method over the three year term of the instrument.

The aggregate values assigned upon issuance to each component of the TEUs, based on the relative fair value of the respective components, were as follows:
(in thousands, except fair value price per TEU)
Equity Component
 
Debt Component
 
Total
Fair value price per TEU2
$
76.19

 
$
23.81

 
$
100.00

 
 
 
 
 
 
Gross proceeds
$
87,614

 
$
27,386

 
$
115,000

Less: Underwriting discounts and commissions
(2,628
)
 
(822
)
 
(3,450
)
Less: Other expenses3
(475
)
 
(149
)
 
(624
)
Issuance of TEUs, net
$
84,511

 
$
26,415

 
$
110,926


2 
The fair value price allocation between equity and debt for each TEU was determined using a discounted cash flow model.

3 
Other expenses include direct and incremental costs related to the issuance of the TEUs.

Equity Component
Unless settled earlier at the option of the holder, each purchase contract will automatically settle on July 1, 2019. A minimum of 1.9841 shares and a maximum of 2.3810 shares of our common stock, subject to adjustment based upon the applicable market value discussed below, will be delivered to the holder of each prepaid stock purchase contract at the settlement date.

The number of shares of our common stock issuable upon settlement of each purchase contract will be determined as follows:
 
if the applicable market value is equal to or greater than the threshold appreciation price of $50.40 per share, holders will receive 1.9841 shares of common stock per purchase contract, or the minimum settlement rate, resulting in the issuance of 2,282 shares of our common stock;
 
if the applicable market value is greater than the reference price of $42.00 per share, but less than the threshold appreciation price of $50.40 per share, holders will receive a number of shares of common stock equal to $100 per TEU divided by the applicable market value; or
 
if the applicable market value is less than or equal to the reference price of $42.00 per share, holders will receive 2.3810 shares of common stock per purchase contract, or the maximum settlement rate, resulting in the issuance of 2,738 shares of our common stock.

The "applicable market value" is defined as the average of the daily volume-weighted average price of the common stock on each of the
20 consecutive trading days beginning on, and including, the 23rd scheduled trading day immediately preceding July 1, 2019.

Debt Component
The amortizing senior note was issued with an initial principal amount of $27,386 or $23.81 per TEU. Equal quarterly cash installments of $2.1875 per amortizing note (except for the October 1, 2016 installment payment, which was $2.5764 per amortizing note) will be paid, which in the aggregate will be equivalent to a 8.75% cash distribution per year with respect to each $100 stated amount per TEU. Each installment will constitute a payment of interest and partial repayment of principal.


21



Earnings Per Common Share
The TEUs have a dilutive effect on our earnings per share. The 1.9841 minimum shares to be issued are included in the calculation of basic weighted average shares outstanding. The 0.3969 difference between the minimum shares and the 2.3810 maximum shares are potentially dilutive, and accordingly, are included in our diluted earnings per share on a pro rata basis to the extent the applicable market value is higher than the reference price but less than the threshold appreciation price. See Note 13 for additional information regarding the calculation of earnings per share.

Capped Call Transactions
In connection with the pricing of the TEUs during the third quarter of fiscal year 2016, we entered into capped call transactions with third parties. The capped calls are expected to reduce the potential dilution to our common stock upon settlement of the TEUs to the extent the market price per share of our common stock exceeds the applicable strike price of the capped calls. The capped calls have a strike price of $50.40 per share, a cap price of $58.80 per share and are exercisable when the TEUs are converted. If, upon conversion of the TEUs, the price of our common stock is above the strike price of the capped calls, the third parties will deliver shares of common stock to us with an aggregate value approximately equal to the difference between the price of the common stock at the conversion date (with a maximum price for purposes of this calculation equal to the cap price) and the strike price, multiplied by the number of shares of common stock related to the portion of the capped calls being exercised. The capped calls allow for net share settlement when the TEUs are exercised and expire on July 1, 2019. We paid $7,935 for the capped calls in the third quarter of fiscal year 2016 and recorded the payment as a reduction of additional paid-in capital in the Consolidated Balance Sheets.

NOTE 13          EARNINGS PER SHARE
 
Basic earnings per share is computed by dividing net income by the daily weighted average number of common shares outstanding during the applicable period. The TEUs are assumed to be settled at the minimum settlement amount of 1.9841 shares per TEU when calculating weighted-average common shares outstanding for purposes of basic earnings per share.

Using the treasury stock method, diluted earnings per share includes the potentially dilutive effect of common shares issued in connection with outstanding stock-based compensation options and grants. The potentially dilutive effect of common shares issued in connection with outstanding stock-based compensation options and grants is determined based on the average market price for the period. For diluted earnings per share, the TEUs are assumed to be settled at a conversion factor based on our daily volume-weighted average price per share of our common stock for the 20 consecutive trading days preceding the end of the current fiscal year quarter not to exceed 2.3810 shares of common stock per TEU.

Under the treasury stock method, shares associated with certain stock options have been excluded from the diluted weighted average shares outstanding calculation because the exercise of those options would lead to a net reduction in common shares outstanding or anti-dilution. As a result, stock options to acquire 813 and 733 weighted common shares have been excluded from the diluted weighted average common shares outstanding calculation for the three months ended July 1, 2017 and July 2, 2016, respectively. Stock options to acquire 702 and 657 weighted common shares have been excluded from the diluted weighted average common shares outstanding calculation for the nine months ended July 1, 2017 and July 2, 2016, respectively.

In connection with the pricing of the TEUs, we entered into capped call transactions. The capped call transactions will not be reflected in the calculation of diluted earnings per share until settled as they are anti-dilutive. See Note 12 for additional information on our equity instruments.


22



Basic and diluted earnings per share were calculated as follows:
 
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share data)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net income
 
$
10,610

 
$
7,150

 
$
19,514

 
$
21,922

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
19,052

 
15,514

 
19,012

 
15,044

Effect of dilutive securities
 
 
 
 
 
 
 
 
Stock-based compensation
 
86

 
82

 
96

 
104

Tangible equity units
 

 
64

 

 
21

Weighted average dilutive common shares outstanding
 
19,138

 
15,660

 
19,108

 
15,169

 
 
 
 
 
 
 
 
 
Earnings per share
 
 

 
 

 
 

 
 

Basic
 
$
0.56

 
$
0.46

 
$
1.03

 
$
1.46

Diluted
 
0.55

 
0.46

 
1.02

 
1.45


NOTE 14          OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss), a component of shareholders’ equity, consists of foreign currency translation adjustments, gains or losses on derivative instruments and defined benefit pension plan adjustments.
 
Income tax expense or benefit allocated to each component of other comprehensive income (loss) was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
July 1, 2017
(in thousands)
 
Pretax
 
Tax
 
Net
 
Pretax
 
Tax
 
Net
Foreign currency translation gain (loss) adjustments
 
$
5,811

 
$

 
$
5,811

 
$
(794
)
 
$

 
$
(794
)
Derivative instruments
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
(1,223
)
 
442

 
(781
)
 
3,693

 
(1,333
)
 
2,360

Net (gain) loss reclassified to earnings
 
240

 
(87
)
 
153

 
(81
)
 
28

 
(53
)
Defined benefit pension plan
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
60

 
(18
)
 
42

 
527

 
(159
)
 
368

Net (gain) loss reclassified to earnings
 
249

 
(75
)
 
174

 
731

 
(220
)
 
511

Currency exchange rate gain (loss)
 
(663
)
 

 
(663
)
 
(156
)
 

 
(156
)
Other comprehensive income (loss)
 
$
4,474

 
$
262

 
$
4,736

 
$
3,920

 
$
(1,684
)
 
$
2,236

 

23



 
 
Three Months Ended
 
Nine Months Ended
 
 
July 2, 2016
(in thousands)
 
Pretax
 
Tax
 
Net
 
Pretax
 
Tax
 
Net
Foreign currency translation gain (loss) adjustments
 
$
(2,163
)
 
$

 
$
(2,163
)
 
$
(1,295
)
 
$

 
$
(1,295
)
Derivative instruments
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
(143
)
 
52

 
(91
)
 
(1,068
)
 
388

 
(680
)
Net (gain) loss reclassified to earnings
 
223

 
(81
)
 
142

 
205

 
(74
)
 
131

Defined benefit pension plan
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
67

 
(20
)
 
47

 
(107
)
 
32

 
(75
)
Net (gain) loss reclassified to earnings
 
147

 
(44
)
 
103

 
437

 
(132
)
 
305

Currency exchange rate gain (loss)
 
187

 

 
187

 
67

 

 
67

Other comprehensive income (loss)
 
$
(1,682
)
 
$