Company Quick10K Filing
Quick10K
MTS Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$56.85 18 $1,020
10-Q 2019-03-30 Quarter: 2019-03-30
10-Q 2018-12-29 Quarter: 2018-12-29
10-K 2018-09-29 Annual: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-30 Quarter: 2017-12-30
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-K 2016-10-01 Annual: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-Q 2016-01-02 Quarter: 2016-01-02
10-K 2015-10-03 Annual: 2015-10-03
10-Q 2015-06-27 Quarter: 2015-06-27
10-Q 2015-03-28 Quarter: 2015-03-28
10-Q 2014-12-27 Quarter: 2014-12-27
10-K 2014-09-27 Annual: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-Q 2013-12-28 Quarter: 2013-12-28
8-K 2019-07-16 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-02-13 Shareholder Vote
8-K 2019-02-04 Earnings, Exhibits
8-K 2018-11-26 Earnings, Exhibits
8-K 2018-08-08 Other Events, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-06-13 Enter Agreement, Exhibits
8-K 2018-03-12 Exit Costs
8-K 2018-02-13 Shareholder Vote
RF Regions Financial 15,130
RETA Reata Pharmaceuticals 2,620
MDRX Allscripts Healthcare Solutions 1,720
CWH Camping World Holdings 1,060
CENX Century Aluminum 702
UBFO United Security Bancshares 175
ATV Acorn 72
FLL Full House Resorts 60
WCFB WCF Bancorp 20
ESL Esterline Technologies 0
MTSC 2019-03-30
Part I - Financial Information
Item 1. Financial Statements
Note 1 Basis of Presentation
Note 2 Recently Issued Accounting Pronouncements
Note 3 Revenue
Note 4 Inventories
Note 5 Warranty Obligations
Note 6 Capital Assets
Note 7 Fair Value Measurements
Note 8 Derivative Instruments and Hedging Activities
Note 9 Financing
Note 10 Stock-Based Compensation
Note 11 Employee Benefit Plans
Note 12 Income Taxes
Note 13 Shareholders' Equity
Note 14 Earnings per Share
Note 15 Other Comprehensive Income (Loss)
Note 16 Business Segment Information
Note 17 Restructuring and Related Costs
Note 18 Business Acquisitions
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 exhibit311q2fy192019330.htm
EX-31.2 exhibit312q2fy192019330.htm
EX-32.1 exhibit321q2fy192019330.htm
EX-32.2 exhibit322q2fy192019330.htm

MTS Systems Earnings 2019-03-30

MTSC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q2fy19mtsc10q2019330.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 March 30, 2019
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: 000-02382 
 mtslogojpg.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 every Interactive Data File required to be submitted 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, a 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 ☐
Emerging growth company ☐
 
 
 
Non-accelerated filer ☐
Smaller reporting company ☐
 
If an emerging growth company, indicate 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.25 par value
MTSC
The Nasdaq Stock Market LLC
As of May 2, 2019, there were 17,954,477 shares of common stock outstanding.




MTS Systems Corporation 
Quarterly Report on Form 10-Q 
For the Three Months Ended March 30, 2019 

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements 

MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(in thousands, except per share data)
 
 
March 30, 2019
 
September 29, 2018
 
 
(Unaudited)
 
(Note)
Assets
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
74,122

 
$
71,804

Accounts receivable, net of allowance for doubtful accounts of $5,277 and $5,004, respectively
 
117,349

 
122,243

Unbilled accounts receivable, net
 
71,175

 
70,474

Inventories, net
 
179,071

 
139,109

Prepaid expenses and other current assets
 
32,307

 
24,572

Total current assets
 
474,024

 
428,202

Property and equipment, net
 
88,126

 
90,269

Goodwill
 
403,425

 
369,275

Intangible assets, net
 
287,101

 
246,138

Other long-term assets
 
3,900

 
2,263

Deferred income taxes
 
4,058

 
3,249

Total assets
 
$
1,260,634

 
$
1,139,396

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 

 
 

Current liabilities
 
 

 
 

Current maturities of long-term debt, net
 
$
28,076

 
$
32,738

Accounts payable
 
39,941

 
47,886

Accrued payroll and related costs
 
39,181

 
43,554

Advance payments from customers
 
102,033

 
80,131

Accrued warranty costs
 
4,741

 
5,418

Accrued income taxes
 
5,709

 
4,928

Accrued dividends
 
5,328

 
5,312

Other accrued liabilities
 
34,494

 
19,146

Total current liabilities
 
259,503

 
239,113

Long-term debt, less current maturities, net
 
436,344

 
355,640

Deferred income taxes
 
50,659

 
46,482

Non-current accrued income taxes
 
6,985

 
6,158

Defined benefit pension plan obligation
 
9,581

 
9,177

Other long-term liabilities
 
12,508

 
4,894

Total liabilities
 
775,580

 
661,464

 
 
 
 
 
Shareholders' Equity
 
 

 
 

Common stock, $0.25 par value; 64,000 shares authorized: 17,900 and 17,856 shares
issued and outstanding as of March 30, 2019 and September 29, 2018, respectively
 
4,475

 
4,464

Additional paid-in capital
 
176,918

 
171,407

Retained earnings
 
308,279

 
300,585

Accumulated other comprehensive income (loss)
 
(4,618
)
 
1,476

Total shareholders' equity
 
485,054

 
477,932

Total liabilities and shareholders' equity
 
$
1,260,634

 
$
1,139,396

Note: The Consolidated Balance Sheet as of September 29, 2018 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
 
Six Months Ended
 
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Revenue
 
 

 
 

 
 

 
 

Product
 
$
206,690

 
$
165,453

 
$
381,769

 
$
334,694

Service
 
26,356

 
25,870

 
54,458

 
50,791

Total revenue
 
233,046

 
191,323

 
436,227

 
385,485

Cost of Sales
 
 

 
 

 
 

 
 

Product
 
129,579

 
101,133

 
237,746

 
201,627

Service
 
16,117

 
15,365

 
32,826

 
31,105

Total cost of sales
 
145,696

 
116,498

 
270,572

 
232,732

Gross profit
 
87,350

 
74,825

 
165,655

 
152,753

Operating expenses
 
 

 
 

 
 

 
 

Selling and marketing
 
33,395

 
30,597

 
65,484

 
62,625

General and administrative
 
22,105

 
18,992

 
43,183

 
39,554

Research and development
 
7,676

 
8,626

 
14,848

 
17,467

Total operating expenses
 
63,176

 
58,215

 
123,515

 
119,646

Income from operations
 
24,174

 
16,610

 
42,140

 
33,107

Interest expense, net
 
(7,368
)
 
(6,708
)
 
(14,186
)
 
(13,512
)
Other income (expense), net
 
270

 
274

 
319

 
51

Income before income taxes
 
17,076

 
10,176

 
28,273

 
19,646

Income tax provision (benefit)
 
2,916

 
1,738

 
3,612

 
(21,943
)
Net income
 
$
14,160

 
$
8,438

 
$
24,661

 
$
41,589

 
 
 
 
 
 
 
 
 
Earnings per share
 
 

 
 

 
 

 
 

Basic
 
 

 
 

 
 

 
 

Earnings per share
 
$
0.74

 
$
0.44

 
$
1.28

 
$
2.17

Weighted average common shares outstanding
 
19,251

 
19,150

 
19,234

 
19,137

 
 
 
 
 
 
 
 
 
Diluted
 
 

 
 

 
 

 
 

Earnings per share
 
$
0.73

 
$
0.44

 
$
1.27

 
$
2.16

Weighted average common shares outstanding
 
19,441

 
19,273

 
19,393

 
19,258

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.30

 
$
0.30

 
$
0.60

 
$
0.60

 
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
 
Six Months Ended
 
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Net income
 
$
14,160

 
$
8,438

 
$
24,661

 
$
41,589

Other comprehensive income (loss), net of tax
 
 

 
 

 
 

 
 

Foreign currency translation gain (loss) adjustments
 
(1,168
)
 
5,172

 
(2,671
)
 
7,671

Derivative instruments
 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
(392
)
 
240

 
(1,808
)
 
1,270

Net (gain) loss reclassified to earnings
 
(567
)
 
687

 
(1,481
)
 
790

Defined benefit pension plan
 
 

 
 

 
 

 
 

Unrealized net gain (loss)
 
959

 
(641
)
 
(586
)
 
(271
)
Net (gain) loss reclassified to earnings
 
95

 
95

 
191

 
186

Currency exchange rate gain (loss)
 
146

 
(181
)
 
261

 
(268
)
Other comprehensive income (loss)
 
(927
)
 
5,372

 
(6,094
)
 
9,378

Comprehensive income (loss)
 
$
13,233

 
$
13,810

 
$
18,567

 
$
50,967

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


 

4



MTS SYSTEMS CORPORATION
Consolidated Statements of Shareholders' Equity (Unaudited)
(in thousands)

 
 
Three Months Ended March 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
 
 
Shares
Issued
 
Amount
 
 
Retained
Earnings
 
 
Balance, December 29, 2018
 
17,872

 
$
4,468

 
$
173,065

 
$
299,493

 
$
(3,691
)
 
$
473,335

Total comprehensive income
 

 

 

 
14,160

 
(927
)
 
13,233

Exercise of stock options
 
3

 
1

 
105

 

 

 
106

Stock-based compensation
 
10

 
2

 
3,237

 

 

 
3,239

Issuance for employee stock purchase plan
 
16

 
4

 
553

 

 

 
557

Common stock purchased and retired
 
(1
)
 

 
(42
)
 

 

 
(42
)
Dividends, $0.30 per share
 

 

 

 
(5,374
)
 

 
(5,374
)
Balance, March 30, 2019
 
17,900

 
$
4,475

 
$
176,918

 
$
308,279

 
$
(4,618
)
 
$
485,054

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
 
 
Shares
Issued
 
Amount
 
 
Retained
Earnings
 
 
Balance, September 29, 2018
 
17,856

 
$
4,464

 
$
171,407

 
$
300,585

 
$
1,476

 
$
477,932

Total comprehensive income
 

 

 

 
24,661

 
(6,094
)
 
18,567

Cumulative effect of accounting change
 

 

 

 
(6,227
)
 

 
(6,227
)
Exercise of stock options
 
3

 
1

 
143

 

 

 
144

Stock-based compensation
 
33

 
8

 
5,211

 

 

 
5,219

Issuance for employee stock purchase plan
 
16

 
4

 
553

 

 

 
557

Common stock purchased and retired
 
(8
)
 
(2
)
 
(396
)
 

 

 
(398
)
Dividends, $0.60 per share
 

 

 

 
(10,740
)
 

 
(10,740
)
Balance, March 30, 2019
 
17,900

 
$
4,475

 
$
176,918

 
$
308,279

 
$
(4,618
)
 
$
485,054




5



 
 
Three Months Ended March 31, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
 
 
Shares
Issued
 
Amount
 
 
Retained
Earnings
 
 
Balance, December 30, 2017
 
17,780

 
$
4,445

 
$
164,577

 
$
289,105

 
$
3,453

 
$
461,580

Total comprehensive income
 

 

 

 
8,438

 
5,372

 
13,810

Stock-based compensation
 

 

 
1,663

 

 

 
1,663

Issuance for employee stock purchase plan
 
12

 
3

 
530

 

 

 
533

Common stock purchased and retired
 

 

 
(13
)
 

 

 
(13
)
Dividends, $0.30 per share
 

 

 

 
(5,343
)
 

 
(5,343
)
Balance, March 31, 2018
 
17,792

 
$
4,448

 
$
166,757

 
$
292,200

 
$
8,825

 
$
472,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 31, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
 
 
Shares
Issued
 
Amount
 
 
Retained
Earnings
 
 
Balance, September 30, 2017
 
17,760

 
$
4,440

 
$
163,632

 
$
261,258

 
$
(553
)
 
$
428,777

Total comprehensive income
 

 

 

 
41,589

 
9,378

 
50,967

Cumulative effect of accounting change
 

 

 
(33
)
 
33

 

 

Exercise of stock options
 
4

 
1

 
211

 

 

 
212

Stock-based compensation
 
30

 
7

 
3,171

 

 

 
3,178

Issuance for employee stock purchase plan
 
12

 
3

 
530

 

 

 
533

Common stock purchased and retired
 
(14
)
 
(3
)
 
(754
)
 

 

 
(757
)
Dividends, $0.60 per share
 

 

 

 
(10,680
)
 

 
(10,680
)
Balance, March 31, 2018
 
17,792

 
$
4,448

 
$
166,757

 
$
292,200

 
$
8,825

 
$
472,230


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



6



MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
 
Six Months Ended
 
 
March 30, 2019
 
March 31, 2018
Cash Flows from Operating Activities
 
 

 
 

Net income
 
$
24,661

 
$
41,589

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

 
 

Stock-based compensation
 
4,689

 
3,290

Fair value adjustment to acquired inventory
 
984

 

Net periodic pension benefit cost
 
584

 
597

Depreciation and amortization
 
18,468

 
17,348

(Gain) loss on sale or disposal of property and equipment
 
510

 
159

Amortization of debt issuance costs
 
2,099

 
2,626

Deferred income taxes
 
(1,243
)
 
(30,654
)
Bad debt provision (recovery), net
 
503

 
1,201

Other
 

 
(111
)
Changes in operating assets and liabilities
 
 

 
 

Accounts receivable and unbilled accounts receivable
 
(3,763
)
 
24,174

Inventories, net
 
(12,942
)
 
(14,441
)
Prepaid expenses
 
(4,106
)
 
(2,374
)
Accounts payable
 
(10,378
)
 
(901
)
Accrued payroll and related costs
 
(5,629
)
 
(11,921
)
Advance payments from customers
 
4,653

 
5,891

Accrued warranty costs
 
(671
)
 
157

Other assets and liabilities
 
12,250

 
628

Net Cash Provided by (Used in) Operating Activities
 
30,669

 
37,258

Cash Flows from Investing Activities
 
 

 
 

Purchases of property and equipment
 
(9,349
)
 
(5,368
)
Proceeds from sale of property and equipment
 
10

 
69

Purchases of business, net of acquired cash
 
(81,826
)
 

Other
 
(285
)
 
823

Net Cash Provided by (Used in) Investing Activities
 
(91,450
)
 
(4,476
)
Cash Flows from Financing Activities
 
 

 
 

Proceeds from issuance of long-term debt
 
80,391

 

Payment of long-term debt
 
(1,423
)
 
(45,949
)
Payment of debt component of tangible equity units
 
(4,818
)
 
(4,498
)
Payment of debt issuance costs for revolving credit facility
 
(542
)
 

Receipts under short-term borrowings
 
30,000

 
7,750

Payments under short-term borrowings
 
(30,000
)
 
(7,750
)
Cash dividends
 
(10,724
)
 
(10,667
)
Proceeds from exercise of stock options and employee stock purchase plan
 
701

 
745

Payments to purchase and retire common stock
 
(398
)
 
(757
)
Net Cash Provided by (Used in) Financing Activities  
 
63,187

 
(61,126
)
Effect of Exchange Rate Changes on Cash and Cash Equivalents
 
(88
)
 
3,989

Cash and Cash Equivalents
 
 

 
 

Increase (decrease) during the period
 
2,318

 
(24,355
)
Balance, beginning of period
 
71,804

 
108,733

Balance, end of period
 
$
74,122

 
$
84,378

 
 
 
 
 
Supplemental Disclosures
 
 

 
 

Cash paid during the period for
 
 

 
 

Interest
 
$
12,065

 
$
11,314

Income taxes
 
6,280

 
4,954

Non-cash investing and financing activities
 
 
 
 
Dividends declared not yet paid
 
5,328

 
5,291

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

7



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 "MTS," "we," "us," "the Company" or "our" in this Quarterly Report on Form 10-Q, 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 (GAAP). 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 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 September 29, 2018 filed with the SEC. Interim results of operations for the second fiscal quarter ended March 30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year. 
We have a 5-4-4 week, quarterly accounting cycle with our fiscal year ending on the Saturday closest to September 30. Fiscal year 2019 ending on September 28, 2019 will consist of 52 weeks. Fiscal year 2018 ended on September 29, 2018 and consisted of 52 weeks. 
Changes to Significant Accounting Policies
The following accounting policies have been updated since our fiscal year 2018 Annual Report on Form 10-K.
Revenue Recognition
As described in Note 2, we adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), followed by related amendments on September 30, 2018 under the modified retrospective transition method. Our new revenue recognition accounting policy and disclosures relative to this guidance are included in Note 3.
NOTE 2          RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 
Leases 
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), followed by related amendments (collectively, "the new lease standard"), which requires lessees to recognize most leases on the balance sheet for the rights and obligations created by those leases. Under the new lease standard, a company recognizes a right-of-use asset, representing the right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than 12 months. The new guidance requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from a company's leases. Adoption of the new lease standard is required for annual periods beginning after December 15, 2018, including interim periods within that annual period, which is our fiscal year 2020. The new guidance is required to be adopted using a modified retrospective transition method, and an optional transition method may be elected to use the effective date as the date of initial application on transition.
We intend to adopt the new lease standard for our fiscal year 2020 under the optional transition method with an effective date of September 29, 2019. As a result, we will not adjust our comparative period financial information or make the new required lease disclosures for periods before the effective date, and we will record the impact from adoption as a cumulative-effect reduction to retained earnings as of the effective date. We are currently planning to elect the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs, and we are currently evaluating the other practical expedients available under the new guidance. We continue to make progress with preparation for the adoption and implementation of the new lease standard, including assessing the completeness of our lease arrangements, evaluating practical expedients and accounting policy elections, revising our lease-related accounting policies, assessing impacts to controls, and implementing a lease software solution. We anticipate the adoption of the new lease standard will result in an increase in assets and liabilities on our Consolidated Balance Sheet. The impact on our Consolidated Statement

8



of Income and Consolidated Statement of Cash Flows is being evaluated. We continue to evaluate the impact that these changes in methodology will have on our financial condition, results of operations and disclosures.
Other
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. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, which clarifies that a receivable arising from an operating lease that is accounted for by a lessor in accordance with Topic 842 is not within the scope of Subtopic 326. These standards are 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 amendments are 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 may have on our financial condition, results of operations or disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, amends and adds disclosure requirements for fair value measurements. 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. Certain disclosures in the amendment are to be applied using a retrospective approach while other disclosures are to be applied using a prospective approach. Early adoption is permitted. We have not yet evaluated the impact the adoption of this guidance may have on our financial condition, results of operations or disclosures.
In August 2018, the FASB issued ASU No. 2018-14, Compensation–Retirement Benefits–Defined Benefit Plans–General (Subtopic 715-20): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans, which eliminates, amends and adds disclosure requirements for defined benefit pension and other postretirement plans. The standard is required to be adopted for annual periods ending after December 15, 2020, which is our fiscal year 2021. The amendment is to be applied using a retrospective approach with early adoption permitted. We have not yet evaluated the impact the adoption of this guidance may have on our financial condition, results of operations or disclosures.
Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), followed by related amendments (collectively, "the new revenue standard" or "ASC 606") to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new revenue standard, a company recognizes revenue 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. Determination of when and how revenue is recognized is based on a five-step analysis. Enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers are required.
We adopted the new revenue standard on September 30, 2018 for our fiscal year 2019 under the modified retrospective transition method. As of September 30, 2018, we recorded a cumulative-effect reduction to the opening balance of our fiscal year 2019 retained earnings of $6,227, net of tax, for the net deferral of previously recognized revenue and related cost of sales, partially offset by the capitalization and deferral of pre-contract costs. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 3 for our new revenue recognition accounting policy and disclosures relative to this guidance.
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 that is ultimately not redeemed either proportionally in earnings as redemption occurs or when redemption is remote, if issuers are not entitled to breakage. We adopted the new standard on a modified retrospective basis for the annual period ending September 28, 2019, including interim periods within that annual period. The adoption of this guidance had no impact 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

9



transfers of assets until the asset has been sold to an outside party or otherwise recognized. We adopted the new standard on a modified retrospective basis for the annual period ending September 28, 2019, including interim periods within that annual period. The adoption of this guidance had no impact on our financial condition, results of operations or disclosures.
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 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. We adopted the new standard for the annual period ending September 28, 2019, including interim periods within that annual period, retrospectively for the presentation in the income statement of the service cost component and the other components of net periodic pension cost and prospectively for the capitalization in assets of the service cost component of net periodic pension cost. The adoption of this guidance did not have a material impact on our current or prior year financial condition, results of operations or disclosures. Therefore, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model in Accounting Standards Codification (ASC) 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. We early adopted the new standard on a modified retrospective basis for the annual period ending September 28, 2019, including interim periods within that annual period. The adoption of this guidance had no impact on our current or prior year financial condition, results of operations or disclosures.
NOTE 3          REVENUE 
Adoption
We adopted the new revenue standard on September 30, 2018 for our fiscal year 2019 under the modified retrospective transition method. We applied the new revenue standard to all contracts which were not completed as of the effective date and elected not to apply contract modification guidance retrospectively. As a result of adoption, we recorded a cumulative-effect reduction to the opening balance of our fiscal year 2019 retained earnings of $6,227, net of tax, for the net deferral of previously recognized revenue and related cost of sales, partially offset by the capitalization and deferral of pre-contract costs.
The timing of revenue recognition for the majority of our products and contracts remains substantially unchanged under the new revenue standard, with the exception of certain contracts in our Test & Simulation segment (Test & Simulation). Dependent on contract-specific terms that evidence customer control of the work in process or an enforceable right to payment with no alternative use, certain contracts have a delay in revenue recognition until the customer takes control of the product, while certain contracts accelerate the recognition of revenue over the life of the contract. Under the new revenue standard, certain costs to obtain contracts (i.e., pre-contract costs) are capitalized at contract inception and recognized as revenue is earned. While we do not expect the adoption of the new revenue standard to have a significant impact on annual revenue recognized, our financial condition or results of operations, we do expect that it will have an impact on the timing of revenue recognition in interim periods.

10



The impact of adopting the new revenue standard on our Consolidated Statements of Income and Consolidated Balance Sheets is as follows:
Consolidated Statements of Income
 
Three Months Ended March 30, 2019
 
 
As Reported
 
Balances without Adoption of ASC 606
 
Effect of Change
Revenue
 
$
233,046

 
$
224,665

 
$
8,381

Cost of sales
 
145,696

 
140,312

 
5,384

Gross profit
 
87,350

 
84,353

 
2,997

Selling and marketing
 
33,395

 
33,239

 
156

Income tax provision (benefit)
 
2,916

 
2,422

 
494

Net income
 
14,160

 
11,813

 
2,347

 
 
 
 
 
 
 
 
 
Six Months Ended March 30, 2019
 
 
As Reported
 
Balances without Adoption of ASC 606
 
Effect of Change
Revenue
 
$
436,227

 
$
423,103

 
$
13,124

Cost of sales
 
270,572

 
260,732

 
9,840

Gross profit
 
165,655

 
162,371

 
3,284

Selling and marketing
 
65,484

 
65,491

 
(7
)
Income tax provision (benefit)
 
3,612

 
3,037

 
575

Net income
 
24,661

 
21,945

 
2,716

 
 
 
 
 
 
 
Consolidated Balance Sheets
 
March 30, 2019
 
 
As Reported
 
Balances without Adoption of ASC 606
 
Effect of Change
Assets
 
 
 
 
 
 
Accounts receivable, net
 
$
117,349

 
$
121,678

 
$
(4,329
)
Unbilled accounts receivable, net
 
71,175

 
79,819

 
(8,644
)
Inventories, net
 
179,071

 
160,914

 
18,157

Prepaid expenses and other current assets
 
32,307

 
28,216

 
4,091

Other long-term assets
 
3,900

 
2,794

 
1,106

Deferred income taxes
 
4,058

 
3,417

 
641

Liabilities and Shareholders' Equity
 
 
 
 
 
 
Advance payments from customers
 
102,033

 
100,589

 
1,444

Accrued income taxes
 
5,709

 
5,861

 
(152
)
Other accrued liabilities
 
34,494

 
20,855

 
13,639

Deferred income taxes
 
50,659

 
51,886

 
(1,227
)
Other long-term liabilities
 
12,508

 
11,748

 
760

Accumulated other comprehensive income (loss)
 
(4,618
)
 
(4,687
)
 
69

Retained earnings
 
308,279

 
311,790

 
(3,511
)

11



The cumulative effect of the changes made to our September 29, 2018 Consolidated Balance Sheet from the modified retrospective adoption of the new revenue standard is as follows:
Consolidated Balance Sheets
 
 
 
 
Balance at September 29, 2018
 
Adjustments due to ASC 606 Adoption
 
Balance at September 30, 2018
Assets
 
 
 
 
 
 
Accounts receivable, net
 
$
122,243

 
$
(4,481
)
 
$
117,762

Unbilled accounts receivable, net
 
70,474

 
(8,002
)
 
62,472

Inventories, net
 
139,109

 
16,727

 
155,836

Prepaid expenses and other current assets
 
24,572

 
4,651

 
29,223

Other long-term assets
 
2,263

 
1,060

 
3,323

Deferred income taxes
 
3,249

 
643

 
3,892

Liabilities and Shareholders' Equity
 
 
 
 
 
 
Advance payments from customers
 
80,131

 
13,568

 
93,699

Other accrued liabilities
 
19,146

 
(2,504
)
 
16,642

Deferred income taxes
 
46,482

 
(1,228
)
 
45,254

Other long-term liabilities
 
4,894

 
6,989

 
11,883

Retained earnings
 
300,585

 
(6,227
)
 
294,358

Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods or providing those services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are known, the contract has commercial substance and collectability of consideration is probable.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under the new revenue standard. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Many of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. In situations when our contract includes distinct goods or services that are substantially the same and have the same pattern of transfer to the customer over time, they are recognized as a series of distinct goods or services. For contracts with multiple performance obligations, we allocate the contract's transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.
We do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Revenue is recorded net of taxes collected from customers, and taxes collected are recorded as current liabilities until remitted to the relevant government authority. Shipping and handling costs associated with outbound freight after control of a product has transferred are accounted for as a fulfillment cost and are included in cost of sales in the Consolidated Statements of Income.
The following is a description of the product offerings, end markets, typical revenue transactions and payment terms for each of our two reportable segments. See Note 16 for further information on reportable segments.
Test & Simulation
Test & Simulation manufactures and sells equipment and related software and services which are used by customers to characterize a product's mechanical properties or performance. Our solutions simulate forces and motions that customers expect their products to encounter in use or are necessary to properly characterize the product's performance. Primary Test & Simulation markets include transportation, infrastructure, energy, aerospace, materials science, medical, flight training and amusement parks. A typical system is a comprehensive solution which includes a reaction frame to hold the prototype specimen; a hydraulic or electro-mechanical power source; actuators to create the force or motion; and a computer controller with specialized software to coordinate the actuator movement and to measure, record and manipulate results. Our portfolio of Test & Simulation solutions includes standard, configurable testing products; engineered products which combine standard product configurations with a moderate degree of customization per customer specifications; and highly customized, highly

12



engineered testing solutions built to address the customer's unique business need, which can include development of first-of-a-kind technology. To complement our Test & Simulation products, we provide our customers with a spectrum of services to maximize product performance including installation, product life cycle management, professional training, calibration and metrology, technical consulting and onsite and factory repair and maintenance. In addition, we sell a variety of accessories and spare parts. The manufacturing cycle for a typical system ranges from weeks to 12 months, depending on the complexity of the system and the availability of components, and can be up to three years for larger, more complex systems. For certain contracts, the order to revenue cycle may extend beyond the manufacturing cycle, such as when the manufacturing start date is driven by the customer's project timeline or when the contract terms require equipment installation and commissioning and customer acceptance prior to point-in-time revenue recognition.
Test & Simulation contracts often have multiple performance obligations, most commonly due to the contract covering multiple phases of the product life cycle (i.e., equipment design and production, installation and commissioning, extended warranty and software maintenance). The primary method used to estimate standalone selling price is the expected cost plus a margin approach under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.
Test & Simulation revenue is recognized either over time as work progresses or point-in-time, depending on contract-specific terms and the pattern of transfer of control of the product or service to the customer. Revenue from services is recognized in the period the service is performed or ratably over the period of the related service contract. Equipment revenue is recognized over time when: (i) control is transferred to the customer over time as work progresses; or (ii) contract terms evidence customer control of the work in process or an enforceable right to payment with no alternative use. Equipment revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the performance obligation. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Equipment contract costs include materials, component parts, labor and overhead costs.
Equipment revenue is recognized point-in-time when either: (i) control is transferred to the customer at a point-in-time when obligations under the terms of the contract are satisfied; or (ii) contract terms do not evidence customer control of the work in process or an enforceable right to payment with no alternative use, and consequently revenue is deferred as work progresses. Satisfaction of performance obligations under the terms of the contract occurs either upon product shipment (as evidenced by delivery or shipment terms), completion of equipment installation and commissioning, or customer acceptance.
For our Test & Simulation contracts with customers, payment terms vary and are subject to negotiation. Typical payment terms include progress payments based on specified events or milestones. For some contracts, we are entitled to receive an advance payment.
Sensors
Our Sensors segment (Sensors) manufactures and sells high-performance sensors which provide measurements of vibration, pressure, position, force and sound in a variety of applications. Our Sensors products are used to enable automation, enhance precision and safety, and lower our customers' production costs by improving performance and reducing downtime. Primary Sensors markets include automotive, aerospace and defense, industrial, and research and development. Our Sensors products are sold as configurable, standard units; utilize piezoelectric or magnetostriction technology; and are ideal for use in harsh operating environments to provide accurate and reliable sensor information. To complement our Sensors products, we also provide spare parts and services. The cycle from contract inception to shipment of equipment is typically one to three months, with the exception of certain high-volume contracts which are fulfilled in a series of shipments over an extended period.
Our Sensors contracts generally have a single performance obligation which is satisfied at a point in time. The performance obligation is a stand-alone sensor product, accessory, service or software license. Sensors contracts are generally fixed-price purchase order fulfillment contracts, and the transaction price is equal to the observable consideration in the contract. Revenue is recognized when obligations under the terms of the contract with our customer are satisfied; generally this occurs with the transfer of control upon product shipment (as evidenced by shipment or delivery terms) or with the performance of the service.
For our Sensors contracts with customers, payment terms are generally within 90 days. The timing of satisfying our Sensors performance obligations does not vary significantly from the typical timing of payment. For certain high-volume contracts, we are entitled to receive an advance payment.

13



Disaggregation of Revenue
We disaggregate our revenue by reportable segment, sales type (product or service), the timing of recognition of revenue for transfer of goods or services to customers (point-in-time or over time), and geographic market based on the billing location of the customer. See Note 16 for further information on our reportable segments and intersegment revenue.
 
 
Three Months Ended March 30, 2019
 
 
Test & Simulation
 
Sensors
 
Intersegment
 
Total
Sales type
 
 
 
 
 
 
 
 
Product
 
$
126,511

 
$
80,540

 
$
(361
)
 
$
206,690

Service
 
24,521

 
1,835

 

 
26,356

Total revenue
 
$
151,032

 
$
82,375

 
$
(361
)
 
$
233,046

 
 
 
 
 
 
 
 
 
Timing of recognition
 
 
 
 
 
 
 
 
Point-in-time
 
$
98,360

 
$
82,375

 
$
(361
)
 
$
180,374

Over time
 
52,672

 

 

 
52,672

Total revenue
 
$
151,032

 
$
82,375

 
$
(361
)
 
$
233,046

 
 
 
 
 
 
 
 
 
Geographic market
 
 
 
 
 
 
 
 
Americas
 
$
51,399

 
$
38,975

 
$
(361
)
 
$
90,013

Europe
 
29,536

 
27,653

 

 
57,189

Asia
 
70,097

 
15,747

 

 
85,844

Total revenue
 
$
151,032

 
$
82,375

 
$
(361
)
 
$
233,046

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended March 30, 2019
 
 
Test & Simulation
 
Sensors
 
Intersegment
 
Total
Sales type
 
 
 
 
 
 
 
 
Product
 
$
225,419

 
$
157,040

 
$
(690
)
 
$
381,769

Service
 
51,173

 
3,285

 

 
54,458

Total revenue
 
$
276,592

 
$
160,325

 
$
(690
)
 
$
436,227

 
 
 
 
 
 
 
 
 
Timing of recognition
 
 
 
 
 
 
 
 
Point-in-time
 
$
177,979

 
$
160,325

 
$
(690
)
 
$
337,614

Over time
 
98,613

 

 

 
98,613

Total revenue
 
$
276,592

 
$
160,325

 
$
(690
)
 
$
436,227

 
 
 
 
 
 
 
 
 
Geographic market
 
 
 
 
 
 
 
 
Americas
 
$
90,888

 
$
76,704

 
$
(690
)
 
$
166,902

Europe
 
58,163

 
53,001

 

 
111,164

Asia
 
127,541

 
30,620

 

 
158,161

Total revenue
 
$
276,592

 
$
160,325

 
$
(690
)
 
$
436,227

Contract Assets and Liabilities
Contract assets and contract liabilities are as follows:
 
 
March 30,
2019
 
September 29,
2018
Contract assets
 
$
71,175

 
$
70,474

Contract liabilities
 
109,763

 
80,131


14



The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled accounts receivable (contract assets) and advance payments from customers (contract liabilities). Contract balances are classified as assets or liabilities on a contract-by-contract basis at the end of each reporting period. Contract liabilities represent payments received from customers at contract inception and at milestones per contract provisions. These payments are recorded in advance payments from customers and other long-term liabilities in our Consolidated Balance Sheets (current and non-current portions, respectively) and are liquidated as revenue is recognized. Conversely, when billing occurs subsequent to revenue recognition for contracts recognized over time, balances are recorded in unbilled accounts receivable, net in our Consolidated Balance Sheets. As customers are billed, unbilled accounts receivable balances are transferred to accounts receivable, net in the Consolidated Balance Sheets.
Significant changes in contract assets and contract liabilities are as follows:
 
 
Contract Assets
Balance, September 29, 2018
 
$
70,474

Cumulative transition adjustment upon adoption
 
(8,002
)
Changes in estimated stage of completion
 
69,857

Transfers to accounts receivable, net
 
(62,265
)
Acquisitions1
 
1,518

Other
 
(407
)
Balance, March 30, 2019
 
$
71,175

 
 
 
 
 
Contract Liabilities
Balance, September 29, 2018
 
$
80,131

Cumulative transition adjustment upon adoption
 
20,557

Revenue recognized included in balance at beginning of period
 
(58,947
)
Increases due to payments received, excluding amounts recognized as revenue during period
 
64,121

Acquisitions1
 
4,777

Other
 
(876
)
Balance, March 30, 2019
 
$
109,763

1    See Note 18 for additional information regarding acquisitions.
Remaining Performance Obligations
As of March 30, 2019, we had approximately $224,000 of remaining performance obligations on contracts with an original expected duration of one year or more which are primarily related to Test & Simulation. As of March 30, 2019, we expect to recognize approximately 74% of these remaining performance obligations as revenue within one year, an additional 24% within two years and the balance thereafter. We do not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less.
Contract Estimates
For contracts recognized over time, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, and internal and subcontractor performance.
Pricing is established at or prior to the time of sale with our customers, and we record sales at the agreed-upon selling price. The terms of a contract or the historical business practice can give rise to variable consideration due to but not limited to volume discounts, penalties and early payment discounts. We estimate variable consideration at the most likely amount we will receive from customers. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for such transaction will not occur, or when the uncertainty associated with the variable consideration is resolved. In general, variable consideration in our contracts relates to the entire contract. As a result, the variable consideration is allocated proportionately to all performance obligations. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us at contract

15



inception. There are no significant instances where variable consideration is constrained and not recorded at the initial time of sale.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the period it is identified. Our review of contract-related estimates has not resulted in adjustments that are significant to our results of operations.
Contract Modifications
When contracts are modified to account for changes in contract specifications and requirements, we consider whether the modification either creates new, or changes existing, enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original product or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct and at a relative stand-alone selling price, they are accounted for as a new contract and performance obligation and recognized prospectively.
Warranties and Returns
For both Test & Simulation and Sensors, we provide a manufacturer's warranty on our products and systems which is included in customer contracts. At the time a sale is recognized, we record estimated future warranty costs. See Note 5 for further discussion of our product warranty liabilities. We also offer separately-priced extended warranties or service-type contracts on certain products for which revenue is recognized over the contractual period or as services are rendered.
Our sales terms generally do not allow for a right of return except for situations where the product fails. When the right of return exists, we recognize revenue for the transferred products at the expected amount of consideration for which we will be entitled.
Pre-contract Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer (i.e., pre-contract costs) when costs are considered recoverable. Capitalized pre-contract costs, consisting primarily of Test & Simulation sales commissions, are amortized as the related revenue is recognized. We recognized total capitalized pre-contract costs of $5,936 in prepaid expenses and other current assets and other long-term assets in the Consolidated Balance Sheets as of March 30, 2019 and related expense of $1,249 and $3,869 in the Consolidated Statements of Income during the three and six months ended March 30, 2019, respectively.
NOTE 4          INVENTORIES 
Inventories consist of material, labor and overhead costs and are stated at the lower of cost or net realizable value determined under the first-in, first-out accounting method. Certain inventories are measured using the weighted average cost method. Inventories, net are as follows: 
 
 
March 30,
2019
 
September 29,
2018
Components, assemblies and parts
 
$
105,669

 
$
93,020

Customer projects in various stages of completion
 
62,922

 
35,675

Finished goods
 
10,480

 
10,414

Total inventories, net
 
$
179,071

 
$
139,109

We adopted the new revenue standard effective September 30, 2018 under the modified retrospective transition method which impacted inventories, net. See Note 3 for the impact of this adoption on our Consolidated Balance Sheets.

16



NOTE 5          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 12 to 24 months from the date of either shipment or acceptance based on the contract terms. Product obligations generally extend for a period of 12 to 24 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 12-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.
Changes to accrued warranty costs are as follows: 
 
 
Three Months Ended
 
Six Months Ended
 
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Beginning accrued warranty costs
 
$
5,229

 
$
5,832

 
$
5,418

 
$
6,018

Warranty claims
 
(1,167
)
 
(1,410
)
 
(2,446
)
 
(2,585
)
Warranty provisions
 
697

 
1,742

 
1,791

 
2,727

Adjustments to preexisting warranties
 
(15
)
 
14

 
(15
)
 
14

Currency translation
 
(3
)
 
13

 
(7
)
 
17

Ending accrued warranty costs
 
$
4,741

 
$
6,191

 
$
4,741

 
$
6,191

NOTE 6          CAPITAL ASSETS 
Property and Equipment
Property and equipment, net are as follows: 
 
 
March 30,
2019
 
September 29,
2018
Land and improvements
 
$
2,881

 
$
2,881

Buildings and improvements
 
58,692

 
58,880

Machinery and equipment
 
210,065

 
203,647

Assets held under capital leases
 
2,796

 
2,815

Total property and equipment
 
274,434

 
268,223

Less: Accumulated depreciation
 
(186,308
)
 
(177,954
)
Total property and equipment, net
 
$
88,126

 
$
90,269

Goodwill
Changes to the carrying amount of goodwill are as follows:  
 
 
Test & Simulation
 
Sensors
 
Total
Balance, September 29, 2018
 
$
24,631

 
$
344,644

 
$
369,275

Acquisitions 1
 
34,387

 

 
34,387

Currency translation
 
(208
)
 
(29
)
 
(237
)
Balance, March 30, 2019
 
$
58,810

 
$
344,615

 
$
403,425

1    See Note 18 for additional information regarding acquisitions.

17



Intangible Assets
Intangible assets are as follows: 
 
 
March 30, 2019
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted
Average
Useful Life (in Years)
Software development costs 2
 
$
35,297

 
$
(15,859
)
 
$
19,438

 
6.3
Technology and patents
 
59,055

 
(14,110
)
 
44,945

 
14.9
Trademarks and trade names
 
12,697

 
(3,442
)
 
9,255

 
20.7
Customer lists
 
179,919

 
(28,831
)
 
151,088

 
15.7
Land-use rights
 
2,360

 
(858
)
 
1,502

 
26.2
Other
 
3,705

 
(332
)
 
3,373

 
4.0
Trade names
 
57,500

 

 
57,500

 
Indefinite
Total intangible assets
 
$
350,533

 
$
(63,432
)
 
$
287,101

 
14.5
 
 
 
September 29, 2018
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted
Average
Useful Life (in Years)
Software development costs 2
 
$
31,251

 
$
(15,860
)
 
$
15,391

 
6.5
Technology and patents
 
46,405

 
(12,188
)
 
34,217

 
14.9
Trademarks and trade names
 
6,754

 
(2,987
)
 
3,767

 
25.4
Customer lists
 
156,971

 
(23,314
)
 
133,657

 
15.8
Land-use rights
 
2,336

 
(730
)
 
1,606

 
26.0
Trade names
 
57,500

 

 
57,500

 
Indefinite
Total intangible assets
 
$
301,217

 
$
(55,079
)
 
$
246,138

 
14.8
 
2 
The gross carrying amount of software development costs as of March 30, 2019 and September 29, 2018 includes $19,438 and $15,391, respectively, of intangible assets not yet placed in service.
Amortization expense recognized related to finite-lived intangible assets is as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
March 30,
2019
 
March 31,
2018
 
March 30,
2019
 
March 31,
2018
Amortization expense
 
$
4,403

 
$
3,456

 
$
8,219

 
$
6,935

Estimated future amortization expense related to finite-lived intangible assets is as follows: 
 
Amortization Expense
Remainder of 2019
$
8,695

2020
17,108

2021
18,164

2022
19,036

2023
18,139

2024
17,770

Thereafter
130,689

 
Future amortization amounts presented above are estimates. Actual future amortization expense may be different due to fluctuations in foreign currency exchange rates, future acquisitions, impairments, changes in amortization periods or other factors.

18



NOTE 7          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 that 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:
 
 
March 30, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Currency contracts 1
 
$

 
$
411

 
$

 
$
411

Interest rate swaps 2
 

 
3,684

 

 
3,684

Total assets
 

 
4,095

 

 
4,095

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Currency contracts 1
 

 
78

 

 
78

Total liabilities
 
$

 
$
78

 
$

 
$
78

 
 
September 29, 2018
 
 
Level 1
 
Level 2