MTS SYSTEMS CORP (Form: 10-K, Received: 11/28/2012 15:08:26)

Table of Contents

(MTS LOGO)

Annual Report on Form 10-K

For the Fiscal Year Ended September 29, 2012

MTS Systems Corporation

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 29, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _____________ to ______________

Commission File No. 0-2382

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, MN		55344
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (952) 937-4000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, $.25 par value per share		The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 229.405 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 x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).


Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $845,189,349.

As of November 23, 2012, the Registrant had outstanding 15,694,491 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held February 5, 2013 are incorporated by reference into Part III of this Form 10-K, to the extent described in such Part.

MTS Systems Corporation
Annual Report on Form 10-K

Table of Contents


PART I

Item 1.	Business	1
	Products and Markets by Business Segment	1
	Sales and Service	2
	Manufacturing and Engineering	3
	Sources and Availability of Raw Materials and Components	3
	Patents and Trademarks	3
	Seasonality	4
	Working Capital	4
	Customers	4
	Order Backlog	4
	Government Contracts	4
	Competition	5
	Research and Development	5
	Environmental Matters	5
	Employees	5
	Available Information	5
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	9
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Mine Safety Disclosures	10

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 8.	Financial Statements and Supplementary Data	40
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	40
Item 9A.	Controls and Procedures	40
Item 9B.	Other Information	41

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	41
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	42
Item 13.	Certain Relationships and Related Transactions, and Director Independence	42
Item 14.	Principal Accountant Fees and Services	42

PART IV

Item 15.	Exhibits and Financial Statement Schedules	42

Table of Contents


I tem 1.	Business

MTS Systems Corporation (the “Company” or “MTS”) is a leading global supplier of high-performance test systems and position sensors. The Company’s operations are organized and managed in two business segments, the Test segment and the Sensors segment, based upon global similarities within their markets, products, operations and distribution. The Test and Sensors segments represent approximately 80% and 20% of Company revenue, respectively. The Company was incorporated under Minnesota law in 1966.

P roducts and Markets by Business Segment

Test Segment : The Test segment (“Test”) provides testing solutions including hardware, software and service. Products are used by customers in their development of new products to characterize the product’s mechanical properties. The Company’s products simulate forces and motions that these customers expect their products to encounter in use. Mechanical testing in a lab setting is an accepted method to accelerate product development compared to reliance on full physical prototypes in real-world settings, proving ground testing and virtual testing because it provides more controlled simulation and accurate measurement. The need for mechanical simulation increases in proportion to the cost of a product, the range and complexity of the physical environment in which the product will be used, expected warranty or recall risk and expense, governmental regulation and potential legal liability. Because a significant portion of all of the products in Test are considered by customers to be capital expenditures, the Company believes the timing of purchases may be impacted by interest rates, customer capital spending, and product development cycles.

A typical test system includes a reaction frame to hold the prototype specimen, a hydraulic pump or electro-mechanical power source, piston actuators to create the force or motion, and a computer controller with specialized software to coordinate the actuator movement and record and manipulate results. Lower force and less dynamic testing can usually be accomplished with electro-mechanical power sources, which are generally less expensive than hydraulic systems. Higher force and more dynamic testing typically requires hydraulically powered systems, which are usually more expensive. In addition to these basic components, Test sells a variety of accessories and spare parts, as well as services, including installation, calibration, maintenance, training and consulting.

Test has a diverse set of customers by industry and geography. Regionally, the Americas, Europe and Asia represent approximately 30%, 30% and 40% of orders, respectively, based upon customer location.

Products and customers are grouped into the following three global markets:


•	Ground Vehicles: This market consists of automobile, truck, motorcycle, motorsports vehicles, construction equipment, agricultural equipment, rail, and off-road vehicle manufacturers and their suppliers. Test systems are utilized in customer testing of vehicles, subsystems and components. MTS offering examples include:
	o	Road simulators for the purpose of durability simulation;
	o	Tire performance and rolling resistance measurement systems; and
	o	Moving road-plane systems and balances used for aerodynamic measurements in wind tunnels.

	This is the largest Test market, representing approximately 45% of Test segment orders.

•	Materials: This market covers diverse industries such as power generation, aerospace, vehicles, and bio-medical. The Company’s products and services support customers in the research and development of products through the physical characterization of materials, such as ceramics, composites and steel. Bio-medical applications include systems to test durability and performance of implants, prostheses, and other medical and dental materials and devices. This global market represents approximately 30% of Test orders.

Table of Contents


	•	Structures: This market serves the structural testing needs in the fields of aerospace, wind energy, structural engineering, and petroleum, among others. The aerospace structural testing market consists of manufacturers of commercial, military, and private aircraft and their suppliers, who use the Company’s products, systems, and software to perform static and fatigue testing of aircraft and space vehicles. The wind energy market consists of wind turbine manufacturers and their component suppliers who use the Company’s products to reduce the cost and improve the reliability of blades, bearings, and entire wind turbines. Systems for structural engineering include high force static and dynamic testing, as well as seismic simulation tables used around the world to test the design of structures, such as bridges and buildings, and to help governments set building codes. Structural engineering customers include construction companies, government agencies, universities, and the manufacturers of building materials. This global market represents approximately 25% of Test orders.

Sensors Segment : The Sensors segment (“Sensors”) products are used by industrial machinery and mobile equipment manufacturers to automate the operation of their products for improved safety and end-user productivity. Examples of customer industries include manufacturers of plastic injection molding machines, steel mills, fluid power, oil and gas, medical, wood product processing equipment, mobile equipment, and energy. Sensors products are also used to measure fluid displacement, such as liquid levels for customers in the process industries.

Sensors manufactures products exclusively utilizing magnetostriction technology. MTS has developed a unique implementation of the technology, known as Temposonics ®. This technology offers high speed and precise non-contact position sensing and is ideal for use in harsh operating environments.

Sensors customers are also diverse by industry and geography. Regionally, the Americas, Europe and Asia represent approximately 25%, 50% and 25% of orders, respectively, based upon customer location.

Financial and geographical information about the Company’s segments is included in Item 7 of this Annual Report on Form 10-K and Note 4 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.

S ales and Service

Test Segment : Test products are sold worldwide through a direct field sales and service organization, independent representatives and distributors, and to a much lesser extent, catalogs for standard products and accessories. Direct field sales and service personnel are compensated through salary and order incentive programs. Independent representatives and distributors are either compensated through commissions based upon orders or discounts off list pricing.

In addition to field sales and service personnel throughout the United States and China, Test has sales and service subsidiaries in Toronto, Canada; Berlin, Germany; Paris, France; Cirencester, United Kingdom; Turin, Italy; Gothenburg, Sweden; Tokyo and Nagoya, Japan; Seoul, South Korea; and Shanghai and Shenzhen, China.

In fiscal 2012, product orders in Test ranged in value from a few hundred dollars to $20 million on an equivalent United States dollar basis. The average order size was approximately $150,000. Test also markets services to customers on a per-call and contract basis, accounting for virtually all of the Company’s Service Revenue in the Consolidated Statements of Income for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010. Service orders in fiscal 2012 ranged from $100 to over $2,000,000 on a United States dollar-equivalent basis.

Table of Contents

The timing and volume of large orders valued at $5 million or greater on a United States dollar-equivalent basis may produce volatility in orders, backlog, and quarterly operating results. Most customer orders are based on fixed-price quotations and typically have an average sales cycle of three to nine months due to the technical nature of the test systems and customer capital expenditure approval processes. The sales cycle for larger, more complex test systems may be two years or longer.

Sensors Segment : Sensors products are sold worldwide through a direct sales organization as well as through independent distributors. The direct sales organization is compensated through salary and commissions based upon revenue. The independent distributors pay the Company a wholesale price and re-sell the product to their customers. Sensors products are sold at unit prices ranging from $25 to $10,000, with an average sales price of approximately $500 on a United States dollar-equivalent basis. While the average sales cycle for Sensors is approximately one to four weeks for existing customers purchasing standard products, the sales cycle for a new account can range from three months to two years depending on customer testing and specification requirements.

M anufacturing and Engineering

Test Segment: Test systems are largely built to order and primarily engineered and assembled at the Company’s headquarters in Eden Prairie, Minnesota. The Company also operates manufacturing facilities in Shenzhen and Shanghai, China, which manufacture test systems serving the materials market. Some smaller system assembly is performed at Company locations in Berlin, Germany; Seoul, South Korea; and Shanghai, China. Installation of systems, training, service and consulting services are primarily delivered by Test at customer sites. The engineering and assembly cycle for a typical Test system ranges from 1 to 12 months, depending on the complexity of the system and the availability of components. The engineering and assembly cycle for larger, more complex systems may be up to three years.

Sensors Segment: Sensors are primarily built to order, engineered and assembled regionally at facilities located in Cary, North Carolina; Ludenscheid, Germany; and Tokyo, Japan. Assembly cycles generally vary from several days to several months, depending on the degree of product customization, the size of the order and manufacturing capacity.

S ources and Availability of Raw Materials and Components

A significant portion of test systems and sensors products consist of materials and component parts purchased from independent vendors. The Company is dependent, in certain situations, on a limited number of vendors to provide raw materials and components, such as mechanical and electronic components. However, the Company has not experienced any recent issues in procuring certain materials, parts, or components needed in its engineering or production processes.

As Test generally sells products and services based on fixed-price contracts, fluctuations in the cost of materials and components between the date of the order and the delivery date may impact the expected profitability. The material and component cost variability is considered in the estimation and customer negotiation process. The Company believes that fluctuations in the cost of raw materials and components have not had a significant impact on operating results during any of the fiscal years ended September 29, 2012, October 1, 2011, or October 2, 2010.

P atents and Trademarks

MTS specializes in the control and measurement of forces and motion. Technologies include precise actuation and measurement solutions, motion and force control, application expertise codified in user software and magnetostriction technology in the sensors market.

The Company relies on a combination of patents, copyrights, trademarks and proprietary trade secrets to protect its proprietary technology, some of which are material to the Test and Sensors segments. The Company has obtained numerous patents and trademarks worldwide, and actively files and renews patents and trademarks on a global basis to establish and protect its proprietary technology. The Company is also party to exclusive and non-exclusive license and confidentiality agreements relating to its own and third-party technologies. The Company aggressively protects certain of its processes, products, and strategies as proprietary trade secrets. The Company’s efforts to protect intellectual property and avoid disputes over proprietary rights include ongoing review of third-party patents and patent applications.

Table of Contents

S easonality

There is no significant seasonality to Test or Sensors segment revenue.

W orking Capital

Neither Test nor Sensors has significant finished product inventory, but maintains inventories of materials and components to facilitate on-time product delivery. Test may have varying levels of work-in-process projects that are classified as inventory or unbilled receivables, depending upon the manufacturing cycle, timing of orders, project revenue recognition and shipments to customers.

In Test, payments are often received from customers upon order or at milestones during the fulfillment of the order, depending upon the size and customization of the system. These are recorded as Advance Payments from Customers on the Company’s Consolidated Balance Sheets and reduced as revenue is recognized. Conversely, if revenue is recognized on a project prior to customer billing, an Unbilled Accounts Receivable is recorded on the Company’s Consolidated Balance Sheets until the customer is billed. Upon billing, it is recorded as Accounts Receivable. Changes in the average size, payment terms and revenue recognition for orders in Test may have a significant impact on Accounts Receivable, Unbilled Accounts Receivable, Advance Payments from Customers and Inventory. It has not been the Company’s practice to provide rights of return for its products. Payment terms vary and are subject to negotiation.

C ustomers

The Company does not have a significant concentration of sales with any individual customer. Therefore, the loss of any one customer would not have a material impact on the Company.

O rder Backlog

Most of the Company’s products are built to order. The Company’s backlog of orders, defined as firm orders from customers that remain unfulfilled, totaled approximately $299 million, $289 million, and $215 million at September 29, 2012, October 1, 2011, and October 2, 2010, respectively. The majority of this backlog is related to Test. Based on anticipated manufacturing schedules, the Company estimates that approximately $259 million of the backlog at September 29, 2012 will be converted to revenue during fiscal 2013. Delays may occur in the conversion of backlog into revenue as a result of export licensing compliance, technical difficulties, specification changes, manufacturing capacity, supplier issues, or access to the customer site for installation. While the backlog is subject to order cancellations, the Company has not historically experienced a significant number of order cancellations. During fiscal year 2012, two custom orders in Test totaling approximately $9 million were cancelled. These orders were booked in a previous fiscal year and were associated with a Test product line that was sold during fiscal 2012. One custom order in Test totaling approximately $0.5 million and $4 million was cancelled during fiscal year 2011 and 2010, respectively. Each of these cancelled orders was booked in a previous fiscal year.

G overnment Contracts

Revenue from U.S. Government contracts varies by year. A portion of the Company’s government business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. Government. In addition to contract terms, the Company must comply with procurement laws and regulations relating to the formation, administration, and performance of U.S. Government contracts. Failure to comply with these laws and regulations could lead to the termination of contracts at the election of the government or the suspension or debarment from U.S. Government contracting or subcontracting. U.S. Government revenue as a percentage of the Company’s total revenue was approximately 3%, 4% and 7% for fiscal years 2012, 2011 and 2010, respectively.

Table of Contents

C ompetition

Test : For relatively simple and inexpensive mechanical testing applications, customers may satisfy their needs internally by building their own test systems or using any of a number of the Company’s competitors who compete on price, performance, quality, and service. For larger and more complex mechanical test systems, Test competes directly with several companies throughout the world based upon customer value including application knowledge, engineering capabilities, technical features, price, quality and service.

Sensors : Sensors primarily competes on factors that include technical performance, price and service in new applications or in situations in which other position sensing technologies have been used. Competitors of Sensors are typically either larger companies that carry multiple sensor product lines or smaller, privately held companies throughout the world.

R esearch and Development

The Company invests in significant product, system, and software application development. The Company also occasionally contracts with its customers to advance the state of technology and increase product functionality. Costs associated with R&D were expensed as incurred, totaling $21.9 million, $14.8 million and $14.9 million for the fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010, respectively. During the fiscal years 2012, 2011 and 2010, the Company allocated certain of its resources towards capitalized software development activities. Total software development costs capitalized during the fiscal years 2012, 2011 and 2010 were $0.5 million, $3.7 million and $3.6 million, respectively.

E nvironmental Matters

The Company believes its operations are in compliance with all applicable material environmental regulations within the jurisdictions in which it operates.

E mployees

The Company had 2,147 employees as of September 29, 2012, including 1,157 employees located outside the United States.

A vailable Information

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available on the “Investor Relations” pages of the Company’s website, www.mts.com , as soon as reasonably practicable after the Company files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). The MTS Systems Corporation Code of Business Conduct (the “Code”), any waivers from and amendments to the Code, and the Company’s Corporate Governance Guidelines, Articles of Incorporation and Bylaws, as well as the Charters for the Audit, Compensation, and Governance and Nominating Committees of the Company’s Board of Directors are also available free of charge on the “Investor Relations” pages at www.mts.com . The Company’s SEC filings are also available at the SEC online EDGAR database at www.sec.gov , as well as the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Table of Contents


I tem 1A.	Risk Factors

The following summarizes, in no particular order, certain risks facing the Company that could adversely impact the Company’s businesses, financial condition and operating results. This list is not intended to be comprehensive or to predict in detail which risks could or will occur. All statements, other than statements of historic fact, in each of the Company’s public announcements and filings with the SEC are “forward-looking statements” within the meaning of the U.S. securities laws and should be read in light of these risk factors.

The Company’s business operations may be affected by government contracting risks. Government business is important to the Company. Revenue from U.S. Government contracts varies by year. Such revenue as a percent of the Company’s total revenue was approximately 3%, 4% and 7% for fiscal years 2012, 2011 and 2010, respectively.

The Company must comply with procurement laws and regulations relating to the formation, administration, and performance of U.S. Government contracts. Failure to comply with these laws and regulations could lead to suspension or debarment from U.S. Government contracting or subcontracting and result in administrative, civil or criminal penalties. Failure to comply could also have a material adverse effect on the Company’s reputation, its ability to secure future U.S. Government contracts and export control licenses, and its results of operations and financial condition. These laws and regulations also create compliance risks and affect how the Company does business with federal agency clients. U.S. Government contracts, as well as contracts with certain foreign governments with which we do business, are also subject to modification or termination by the government, either for the convenience of the government or for default as a result of the Company’s failure to perform under the applicable contract. Further, any investigation relating to, or suspension or debarment from, U.S. Government contracting could have a material impact on our results of operations as, during the duration of any suspension or debarment, the Company would be prohibited or otherwise limited in its ability to enter into prime contracts or subcontracts with U.S. Government agencies (to the extent that such contracts exceed $30,000), certain entities that receive U.S. Government funds or that are otherwise subject to the Federal Acquisition Regulation (FAR), and certain state government or commercial customers who decline to contract with suspended or debarred entities. A federal suspension could also impact the Company’s ability to obtain export control licenses, which have material importance to the Company’s business.

The Company’s business is significantly international in scope, which poses multiple risks. Sales outside of the United States, including export sales from U.S. business locations, accounted for approximately 75% of the Company’s revenue in fiscal 2012. Accordingly, the Company’s business is subject to the political, economic and other risks that are inherent in operating in foreign countries. These risks include, but are not limited to:


	•	exposure to the risk of currency value fluctuations, where payment for products is denominated in a currency other than U.S. dollars;
	•	variability in the U.S. dollar value of foreign currency-denominated assets, earnings and cash flows;
	•	difficulty enforcing agreements, including patent and trademarks, and collecting receivables through foreign legal systems;
	•	trade protection measures and import or export licensing requirements;
	•	tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign earnings;
	•	higher danger of terrorist activity, war or civil unrest, compared to domestic operations;
	•	imposition of tariffs, exchange controls or other restrictions;
	•	difficulty in staffing and managing global operations;
	•	required compliance with a variety of foreign laws and regulations; and
	•	changes in general economic and political conditions in countries where the Company operates, particularly in emerging markets.

Table of Contents

Volatility in the global economy could adversely affect results. Long-term disruptions in the capital and credit markets would likely adversely affect the Company’s customers’ operations and financing of both the Company’s international and U.S. customers and could therefore result in a decrease in orders. In addition, during periods of economic uncertainty, the Company’s customers’ spending patterns and financing availability could be negatively impacted, reducing demand for the Company’s products and services.

The Company’s business is subject to strong competition. The Company’s products are sold in competitive markets throughout the world. Competition is based on application knowledge, product features and design, brand recognition, reliability, technology, breadth of product offerings, price, delivery, customer relationships, and after-market support. If the Company is not perceived as competitive in overall value as measured by these criteria, its customers would likely choose solutions offered by its competitors or developed internally.

The Company may not achieve its growth plans for the expansion of the business. In addition to market penetration, the Company’s long-term success depends on its ability to expand the business through (a) new product development, (b) mergers and acquisitions (c) geographic expansion, and/or (d) service offerings.

New product development and service offerings requires that the Company maintain its ability to improve existing products, continue to bring innovative products and services to market in a timely fashion and adapt products and services to the needs and standards of current and potential customers. The Company’s products and services may become less competitive or eclipsed by technologies to which the Company does not have access or which render its solutions obsolete.

Mergers and acquisitions will be accompanied by risks that may include:


	•	difficulties identifying suitable acquisition candidates at acceptable costs;
	•	unavailability of capital to conduct acquisitions;
	•	failure to achieve the financial and strategic goals for the acquired and combined businesses;
	•	difficulty assimilating the operations and personnel of the acquired businesses;
	•	disruption of ongoing business and distraction of management from the ongoing business;
	•	dilution of existing stockholders and earnings per share;
	•	unanticipated, undisclosed or inaccurately assessed liabilities, legal risks and costs; and
	•	difficulties retaining key vendors, customers or employees of the Company’s or the acquired business.

Acquisitions of businesses having a significant presence outside the U.S. will increase the Company’s exposure to the risks of international operations discussed in these Risk Factors.

Geographic expansion will be primarily outside of the U.S., and hence will be disproportionately subject to the risks of international operations discussed in these Risk Factors.

The Company may experience difficulties obtaining the services of skilled employees. The Company relies on knowledgeable, experienced and skilled technical personnel, particularly engineers, sales management, and service personnel, to design, assemble, sell and service its products. The Company may be unable to attract, retain and motivate sufficient numbers of such people which could adversely affect its business.

The Company may fail to protect its intellectual property effectively, or may infringe upon the intellectual property of others. The Company has developed significant proprietary technology and other rights that are used in its businesses. The Company relies on trade secret, copyright, trademark and patent laws and contractual provisions to protect the Company’s intellectual property. While the Company takes enforcement of these rights seriously, other companies such as competitors or others in markets the Company does not participate in, may attempt to copy or use our intellectual property for their own benefit.

Table of Contents

In addition, the intellectual property of others also has an impact on the Company’s ability to offer some of its products and services for specific uses or at competitive prices. Competitors’ patents or other intellectual property may limit the Company’s ability to offer products and services to its customers. Any infringement on the intellectual property rights of others could result in litigation and adversely affect the Company’s ability to continue to provide, or could increase the cost of providing, products and services.

Intellectual property litigation is very costly and could result in substantial expense and diversions of the Company’s resources, both of which could adversely affect its businesses and financial condition and results. In addition, there may be no effective legal recourse against infringement of the Company’s intellectual property by third parties, whether due to limitations on enforcement of rights in foreign jurisdictions or as a result of other factors.

The business could be adversely affected by product liability and commercial litigation. The Company’s products or services may be claimed to cause or contribute to personal injury or property damage to its customers’ facilities. Additionally, the Company is, at times, involved in commercial disputes with third parties, such as customers, vendors and others. The ensuing claims may arise singularly, in groups of related claims, or in class actions involving multiple claimants. Such claims and litigation are frequently expensive and time-consuming to resolve, may result in substantial liability to the Company, which liability and related costs and expenses may not be recoverable through insurance or other forms of reimbursement.

The Company may experience difficulty obtaining materials or components for its products, or the cost of materials or components may increase. The Company purchases materials and components from third party suppliers, some of whom may be competitors. Other materials and components may be provided by a limited number of suppliers or by sole sources and could only be replaced with difficulty or at significant added cost. Additionally, some materials or components may become scarce, difficult to obtain in the market, or they may increase in price. This could adversely affect the lead-time within which the Company receives the materials or components, and in turn affect the Company’s commitments to its customers, or could adversely affect the material cost or quality.

Government regulation imposes significant costs and other constraints. The Company’s manufacturing operations and past and present ownership and operations of real property are subject to extensive and changing federal, state, local and foreign laws and regulations, including laws and regulations pertaining to environmental, health and safety matters, as well as the handling or discharge of hazardous materials into the environment. The Company expects to continue to incur costs to comply with these laws, and may incur penalties for any failure to do so. The Company may also be identified as a responsible party and be subject to liability relating to any investigation and clean-up of properties used for industrial purposes or the generation or disposal of hazardous substances. Some of the Company’s export sales require approval from the U.S. government. Changes in political relations between the U.S. and foreign countries and/or specific potential customers for which export licenses may be required, may cause a license application to be delayed or denied, or a previously issued license withdrawn, rendering the Company unable to complete a sale, or vulnerable to competitors who do not operate under such restrictions.

The backlog, sales, delivery and acceptance cycle for many of the Company’s products is irregular and may not develop as anticipated. Many of the Company’s products have a long sales, delivery and acceptance cycles. Events may cause recognition of orders, backlog and results of operations to be aberrant over shorter periods of time. These factors include the timing of individual large orders, design and manufacturing problems, capacity constraints, delays in product readiness, damage or delays in transit, problems in achieving technical performance requirements, and various customer-initiated delays. Any such delay may cause fluctuation in the Company’s reported periodic financial results.

Table of Contents

The Company’s customers are in cyclical industries. For many of the Company’s products, orders are subject to customers’ procurement cycles and their willingness and ability to invest in capital, especially in the cyclical automotive, aircraft and machine tool industries. Any event that adversely impacts those customers’ new product development activities may reduce their demand for the Company’s products.

Interest rate fluctuations could adversely affect results. Significant changes in interest rates may affect the Company’s business in several ways, depending on the Company’s financial position, and short-term financing needs. The Company may, in the future, use debt to purchase shares of the Company’s common stock, finance working capital needs or finance the growth of the business through acquisitions. Fluctuations in interest rates can increase borrowing costs. Increases in short-term interest rates may directly impact the amount of interest the Company is required to pay and reduce earnings accordingly. Conversely, lower interest rates will adversely impact the interest the Company earns on cash and short term investments.

The Company may be required to recognize impairment charges for long-lived assets. As of September 29, 2012, the net carrying value of long-lived assets (property, plant and equipment, goodwill and other intangible assets) totaled approximately $101.0 million. In accordance with generally accepted accounting principles, the Company periodically assesses these assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to the Company’s businesses, significant unexpected or planned changes in use of the assets, divestitures and market capitalization declines may result in impairments to goodwill and other long-lived assets. Future impairment charges could significantly affect results of operations in the periods recognized.

The Company will need to begin disclosing its use of “conflict minerals,” which will impose costs on the Company and could raise reputational and other risks. The SEC has promulgated final rules in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act, regarding disclosure of the use of certain minerals, known as conflict minerals, that are mined from the Democratic Republic of the Congo and adjoining countries. These new requirements will require due diligence efforts in fiscal year 2013 and thereafter, with initial disclosure requirements effective in May 2014. There will be costs associated with complying with these disclosure requirements, including costs to determine the source of any conflict minerals used in our products. In addition, the implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products. Also, we may face reputational challenges if we are unable to verify the origins for all metals used in our products through the procedures we may implement. We may also encounter challenges to satisfy customers that may require all of the components of products purchased to be certified as conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.


I tem 1B.	Unresolved Staff Comments

None.

Table of Contents


I tem 2.	Properties

The Company’s primary owned and leased facilities at September 29, 2012 were as follows:

Owned Property:


Location	Use of Facility	Square Footage
Eden Prairie, Minnesota, USA	Corporate headquarters and primary Test manufacturing and research		420,000
Cary, North Carolina, USA	Sensors manufacturing, research and North American sales and service administration		65,000
Berlin, Germany	Test manufacturing and European sales and service administration		80,000
Shenzhen, China	Test manufacturing, research and sales and service administration		75,000
Shanghai, China	Test manufacturing and sales and service administration		129,000

Leased Property :


Location	Use of Facility	Square Footage		Lease Expires
Chanhassen, Minnesota, USA	Test manufacturing		97,000		2014
Ludenscheid, Germany	Sensors headquarters, manufacturing, research and European sales and service administration		55,000		2017
Creteil, France	Test sales and service administration		16,000		2015
Tokyo, Japan	Test sales and service administration.		11,000		2013 - 2014
	Sensors manufacturing and Asia sales and service administration		13,000		2012 - 2015
Seoul, South Korea	Test sales, service administration and assembly		8,000		2014
Shanghai, China	Test sales, service administration and assembly		13,000		2015
Shenzhen, China	Test manufacturing, research and sales and service administration		13,000		2013
Berlin, Germany	Land under Berlin facility		97,000		2052
Shenzhen, China	Land under Shenzhen facility		155,000		2047
Shanghai, China	Land under Shanghai facility		161,000		2056

The Company also leases space in the United States, Europe and Asia for sales and service administration for Test, including locations in Michigan, France, United Kingdom, Sweden, Italy, and various other locations in the United States. Neither the amount of leased space nor the rental obligations in these locations are significant individually or in aggregate. Additional information relative to lease obligations is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, appearing under Item 7 of this Annual Report on Form 10-K.

The Company considers its current facilities adequate to support its operations during fiscal year 2013.


I tem 3.	Legal Proceedings

The information required hereunder is incorporated by reference from Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.


I tem 4.	Mine Safety Disclosures

Not applicable.

Table of Contents

P ART II


I tem 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Shares of the Company’s common stock are traded on the NASDAQ Global Select Market ^SM under the symbol MTSC.

The following table sets forth the low and high share prices for the fiscal quarters indicated. *


Quarter Ended	Low		High
January 1, 2011	$	30.33	$	39.46
April 2, 2011	$	35.89	$	48.72
July 2, 2011	$	37.48	$	46.19
October 1, 2011	$	28.00	$	44.90
December 31, 2011	$	29.48	$	42.40
March 31, 2012	$	41.37	$	54.82
June 30, 2012	$	36.85	$	53.72
September 29, 2012	$	37.50	$	54.99

* Source: NASDAQ Online ^SM at www.nasdaq.net.

At November 23, 2012, there were 879 holders of record of the Company’s common stock. This number does not reflect shareholders who hold their shares in the name of broker-dealers or other nominees.

Purchases of Company Equity Securities


Fiscal Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
First Quarter October 2, 2011- December 31, 2011		-	$	-		-		2,641,272
Second Quarter January 1, 2012 - March 31, 2012		-	$	-		-		2,641,272
Third Quarter April 1, 2012 - June 30, 2012		-	$	-		-		2,641,272
Fourth Quarter Fiscal Month July 1, 2012 - August 4, 2012		-	$	-		-		2,641,272
August 5, 2012 - September 1, 2012		-	$	-		-		2,641,272
September 2, 2012 - September 29, 2012		533,028	$	52.53		533,028		2,108,244
Fourth Quarter		533,028	$	52.53		533,028		2,108,244

Fiscal Year 2012		533,028	$	52.53		533,028		2,108,244

Table of Contents

The Company purchases its common stock to mitigate dilution related to new shares issued as employee equity compensation such as stock option, restricted stock, and employee stock purchase plan awards, as well as to return capital not immediately required to fund ongoing operations to shareholders.

The Company’s Board of Directors approved, and on February 11, 2011, announced, a 2.0 million share purchase authorization. The Company’s Board of Directors also approved, and on August 20, 2007 announced, a 3.0 million share purchase authorization. Authority over pricing and timing under both authorizations has been delegated to management. The share purchase authorizations have no expiration date. There are approximately 2.1 million shares available for purchase under the existing authorizations.

On August 21, 2012, the Company’s Board of Directors authorized an accelerated share purchase program to acquire shares of the Company’s common stock up to an aggregate purchase price of $40 million. On September 7, 2012, the Company entered into an accelerated share purchase agreement with an unrelated third party investment bank. In connection with the agreement, the Company made an initial $35.0 million payment to the investment bank and immediately received an initial delivery of approximately 0.5 million shares of its common stock with a fair value of $28.0 million as of the purchase date. Effective as of the date of the initial 0.5 million stock purchase, the transaction was accounted for as a share retirement, resulting in a reduction of common stock, additional paid-in capital and retained earnings of $0.1 million, $26.1 million and $1.8 million, respectively. The remaining $7.0 million of the Company’s initial payment to the investment bank was reported as a reduction in retained earnings. The specific number of shares that the Company will ultimately purchase under the accelerated share purchase agreement will be based on the volume weighted average price (“VWAP”) of the Company’s common stock during the purchase period, less an agreed upon discount. The agreement expires in the third quarter of fiscal year 2013; however the investment bank has the right to accelerate the end of the purchase period. Upon settlement of the contract, the Company will adjust common stock, as well as either additional paid-in capital or retained earnings, as appropriate, to reflect the final settlement amount. Upon settlement of the contract, the Company will adjust common stock, as well as either additional paid-in capital or retained earnings, as appropriate, to reflect the final settlement amount.

Dividend Policy

The Company’s dividend policy is to maintain a payout ratio that allows dividends to increase as earnings per share increases over time, while sustaining dividends through economic cycles. The Company’s dividend practice is to target, over time, a payout ratio of approximately 30% of net earnings per share. During fiscal year 2012, the Company declared quarterly cash dividends ranging between $0.25 and $0.30 per share to holders of its common stock, which resulted in a payout ratio of approximately 26%. During fiscal year 2011, the Company declared quarterly cash dividends ranging between $0.20 and $0.25 per share to holders of its common stock which also resulted in a payout ratio of approximately 26%.

Table of Contents

Debt Covenants

The Company’s unsecured credit facility includes certain financial covenants, including the ratio of consolidated total indebtedness to consolidated EBITDA, as well as the ratio of consolidated EBITDA to consolidated interest expense. These financial covenants may restrict the Company’s ability to pay dividends and purchase outstanding shares of common stock. At September 29, 2012 and October 1, 2011, the Company was in compliance with these financial covenants. Information on the Company’s debt agreements is included in Item 7 of this Annual Report on Form 10-K.

Shareholder Return Performance

The graph and table below set forth a comparison of the cumulative total return of the Company’s common stock over the last five fiscal years. Assuming a $100 investment on September 29, 2007 and reinvestment of dividends, the total return over the same periods is compared to the Russell 2000 Index and a peer group of companies in the Laboratory Apparatus and Analytical, Optical, Measuring, and Controlling Instruments Standard Industrial Code (SIC Code 3820) that are traded on the NASDAQ, AMEX and NYSE exchanges. The table and graph are not necessarily indicative of future investment performance.

(GRAPH)


	FISCAL YEAR ENDED
	9/29/07		9/27/08		10/3/09		10/2/10		10/1/11		9/29/12
MTS Systems Corporation	$	100.00	$	103.84	$	70.46	$	80.57	$	80.11	$	143.37
Russell 2000 Index		100.00		88.68		74.27		88.09		84.58		111.57
*SIC Code 3820 Peer Group (Modified to remove non-exchange traded companies)		100.00		84.78		74.37		95.41		90.87		114.19

Table of Contents


I tem 6.	Selected Financial Data

The table below provides selected historical financial data for the Company which should be read in conjunction with the Consolidated Financial Statements, the Notes to the Consolidated Financial Statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included in Items 7 and 8 of this Annual Report on Form 10-K. The statement of income data for each of the three fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 and the balance sheet data at September 29, 2012 and October 1, 2011 are derived from the audited Consolidated Financial Statements included elsewhere in this report. The statement of income data for the fiscal years ended October 3, 2009 and September 27, 2008 and the balance sheet data at October 2, 2010, October 3, 2009 and September 27, 2008 are derived from audited financial statements of the Company that are not included in this Annual Report on Form 10-K.

Five-Year Financial Summary
(September 29, 2012; October 1, 2011; October 2, 2010; October 3, 2009; September 27, 2008)
(expressed in thousands, except per share data and numbers of shareholders and employees)


	2012			2011			2010			2009 ¹			2008
Operations
Revenue	$	542,256		$	467,368		$	374,053		$	408,881		$	460,515
Gross profit		236,192			201,990			151,794			151,616			190,253
Gross profit as a % of revenue		43.6	%		43.2	%		40.6	%		37.1	%		41.3	%
Research and development expense	$	21,893		$	14,785		$	14,945		$	16,322		$	16,232
Research and development as a % of revenue		4.0	%		3.2	%		4.0	%		4.0	%		3.5	%
Effective income tax rate		35.4	%		30.5	%		31.7	%		27.2	%		28.0	%
Income before discontinued operations	$	51,556		$	50,942		$	18,576		$	17,394		$	47,110
Net income		51,556			50,942			18,576			17,394			49,191
Net income as a % of revenue		9.5	%		10.9	%		5.0	%		4.3	%		10.7	%
Diluted earnings per share of common stock before discontinued operations	$	3.21		$	3.24		$	1.14		$	1.03		$	2.68
Diluted earnings per share of common stock		3.21			3.24			1.14			1.03			2.80
Weighted average dilutive shares outstanding during the year ²		16,077			15,739			16,347			16,831			17,544
Net interest (expense) income	$	(305	)	$	(915	)	$	(1,052	)	$	(916	)	$	2,950
Depreciation and amortization		13,782			12,894			12,751			12,132			9,207

Financial Position
Cash, cash equivalents and short-term investments	$	79,852		$	104,095		$	76,611		$	118,885		$	114,099
Property and equipment, net		61,653			56,252			56,444			56,118			50,534
Total assets		409,438			427,859			346,405			386,914			399,157
Interest-bearing debt ³		-			40,000			40,000			40,000			26,308
Total shareholders’ investment		226,719			210,848			166,106			203,965			204,942
Interest-bearing debt as a % of shareholders’ investment		0.0	%		19.0	%		24.1	%		19.6	%		12.8	%
Return on equity ⁴		24.5	%		30.7	%		9.1	%		8.5	%		24.8	%
Return on invested capital ⁵		25.1	%		22.6	%		8.7	%		7.9	%		22.2	%

Other Statistics
Number of common shareholders of record at year-end ⁶		881			926			981			1,010			1,043
Number of employees at year-end		2,147			2,003			1,948			2,015			1,660
Orders	$	565,327		$	540,023		$	423,525		$	340,839		$	485,274
Backlog of orders at year-end		299,074			288,589			214,770			167,774			234,710
Dividends declared per share		1.05			0.85			0.60			0.60			0.60

Table of Contents

¹ The fiscal year ended October 3, 2009 was a 53-week fiscal year, whereas all other fiscal years presented were 52-week periods.

² Assumes the conversion of potential common shares using the treasury stock method.

³ Consists of short-term borrowings and the current and non-current portion of long-term debt.

⁴ Calculated by dividing Income Before Discontinued Operations by beginning Shareholders’ Investment.

⁵ The measure “Return on Invested Capital” (“ROIC”) is not a measure of performance presented in accordance with Generally Accepted Accounting Principles (GAAP). ROIC is calculated by dividing adjusted net income by average invested capital. Adjusted net income is calculated by excluding the cost related to the settlement of the U.S. Government investigation, after-tax interest expense and after-tax income from discontinued operations from reported net income. Average invested capital is defined as the aggregate of average interest bearing debt and average shareholder’s investment and is calculated as the sum of current and prior year ending amounts divided by two. Because the ratio is not prescribed or authorized by GAAP, the ROIC percentage is a non-GAAP financial measure. The Company believes ROIC is useful to investors as a measure of operating performance and of the effectiveness of the use of capital in its operations. The Company uses ROIC as one measure to monitor and evaluate operating performance relative to the invested capital of the Company. This measure should not be construed as an alternative to return on equity or any other measure determined in accordance with GAAP.

Reconciliation of the non-GAAP financial measure to the nearest GAAP measure:


	2012			2011			2010			2009			2008
	(expressed in thousands)
Net income	$	51,556		$	50,942		$	18,576		$	17,394		$	49,191
Expense to settle U.S. Government investigation		7,750			-			-			-			-
After-tax interest expense		535			808			893			1,275			682
After-tax income from discontinued operations		-			-			-			-			(2,081	)
Adjusted net income *	$	59,841		$	51,750		$	19,469		$	18,669		$	47,792

Total beginning shareholders’ investment	$	210,848		$	166,106		$	203,965		$	204,942		$	189,701
Total ending shareholders’ investment		226,719			210,848			166,106			203,965			204,942
Total beginning interest bearing debt		40,000			40,000			40,000			26,308			8,991
Total ending interest bearing debt		-			40,000			40,000			40,000			26,308
Sum of invested capital	$	477,567		$	456,954		$	450,071		$	475,215		$	429,942
Average invested capital*	$	238,784		$	228,477		$	225,036		$	237,608		$	214,971

Return on invested capital *		25.1	%		22.6	%		8.7	%		7.9	%		22.2	%

* Denotes Non-GAAP financial measure

⁶ Does not include shareholders whose stock is held in the name of broker dealers or other nominees.

Table of Contents


I tem 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

MTS Systems Corporation is a leading global supplier of high performance test systems and position sensors. The Company’s testing hardware and software solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS’ position sensors provide controls for a variety of industrial and vehicular applications. MTS had 2,147 employees and revenue of $542 million for the fiscal year ended September 29, 2012.

Fiscal Year
The Company’s fiscal year ends on the Saturday closest to September 30. The fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010 each consisted of 52 weeks.

Fiscal Year 2012 Compared to Fiscal Year 2011

Summary of Financial Results

Significant Items for fiscal year 2012 compared to fiscal year 2011 include:


	•	Orders increased 4.7% to a record-high $565.3 million, compared to $540.0 million for fiscal year 2011. Orders in fiscal year 2012 included four large (in excess of $5.0 million) Test orders totaling approximately $46 million, a decrease of $18 million compared to large Test orders in fiscal year 2011. Excluding the large orders, base orders increased 9.1%, reflecting 13.3% global growth in Test, partially offset by a 5.9% decline in Sensors. Backlog of $299.1 million is a record high, an increase of approximately $10.5 million compared to backlog at the end of fiscal year 2011.

	•	Revenue increased 16.0% to a record-high $542.3 million, compared to $467.4 million for fiscal year 2011. This increase was comprised of 21.5% growth in Test, resulting primarily from 36.8% higher beginning backlog as well as strong base order growth, partially offset by a 3.1% decline in Sensors which was driven by an unfavorable impact of currency translation.

	•	Income from operations increased 10.0% to a record-high $80.5 million, compared to $73.2 million for fiscal year 2011. This increase was primarily driven by higher gross profit, reflecting leverage from higher volume and productivity improvements in Test, net of $26.9 million higher operating expenses. The higher operating expenses principally resulted from continued investment in strategic and productivity initiatives, including research and development, higher headcount to support selling and compliance efforts, as well as the $7.8 million settlement cost related to the settlement of the U.S Government matters. See below for additional information regarding the U.S. Government matters during the current fiscal year.

	•	Operating activities generated a record-high cash flow of $65.0 million, driven by earnings and reduced working capital requirements.

	•	As was previously disclosed, on August 30, 2012, the Company reached an agreement with the U.S. Department of Commerce (“DOC”) and the U.S. Attorney’s Office for the District of Minnesota (“USAO”), settling for $7.8 million the DOC and USAO’s investigation into the Company’s past disclosures on its government certifications and its government contracting compliance policies, general compliance record and practices in areas including export controls and government contracts. For a more detailed discussion of the investigation by the DOC and USAO and the settlement agreement, please refer to Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.

Table of Contents

Detailed Financial Results

Total Company

Orders and Backlog

The following is a comparison of fiscal year 2012 and fiscal year 2011 orders, separately identifying the estimated impact of currency translation:


			Estimated
	2012		Business Change		Currency Translation			2011
	(expressed in millions)
Orders	$	565.3	$	35.3	$	(10.0	)	$	540.0

Orders totaled $565.3 million, an increase of $25.3 million, or 4.7%, compared to orders of $540.0 million for fiscal year 2011. Fiscal year 2012 orders included $46 million of large Test orders, compared to $64 million in fiscal year 2011. Test orders increased $31.4 million to $468.0 million, driven by strong global base order growth, while Sensors orders decreased $6.1 million to $97.3 million, including an estimated $3.4 million unfavorable impact of currency translation.

The following is a comparison of fiscal year 2012 and fiscal year 2011 orders by geography:


Geography	2012		2011		Variance			% Variance
	(expressed in millions)
Americas	$	153.4	$	162.1	$	(8.7	)		-5.4	%
Europe		170.8		183.2		(12.4	)		-6.8	%
Asia		241.1		194.7		46.4			23.8	%
Total Orders	$	565.3	$	540.0	$	25.3			4.7	%

Backlog of undelivered orders at September 29, 2012 was a record-high $299.1 million, an increase of approximately $10.5 million, or 3.6%, compared to backlog of $288.6 million at October 1, 2011. The Company believes backlog is not an absolute indicator of future revenue because a portion of the orders in backlog could be cancelled at the customer’s discretion. While the backlog is subject to order cancellations, the Company has not historically experienced a significant number of order cancellations. During fiscal 2012, two custom orders in Test totaling approximately $9 million were cancelled. These orders were booked in a previous fiscal year and were associated with a Test product line that was sold during fiscal 2012. During fiscal year 2011, one custom order in Test totaling approximately $0.5 million was cancelled. This order was booked in a previous fiscal year.

Table of Contents

Results of Operations

The following is a comparison of fiscal year 2012 and fiscal year 2011 statements of operations (in millions, except per share data):


	2012			2011			Variance			% Variance
Revenue	$	542.3		$	467.4		$	74.9			16.0	%
Cost of sales		306.1			265.4			40.7			15.3	%
Gross profit		236.2			202.0			34.2			16.9	%
Gross margin		43.6	%		43.2	%		0.4	% pts

Operating expenses:
Selling and marketing		74.6			69.8			4.8			6.9	%
General administrative		59.2			44.2			15.0			33.9	%
Research and development		21.9			14.8			7.1			48.0	%
Total operating expenses		155.7			128.8			26.9			20.9	%
Income from operations		80.5			73.2			7.3			10.0	%
Interest expense		(0.9	)		(1.3	)		0.4			-30.8	%
Interest income		0.6			0.4			0.2			50.0	%
Other (expense) income, net		(0.4	)		1.0			(1.4	)		NM

Income before income taxes		79.8			73.3			6.5			8.9	%
Provision for income taxes		28.2			22.4			5.8			25.9	%
Net income	$	51.6		$	50.9		$	0.7			1.4	%

Diluted earnings per share	$	3.21		$	3.24		$	(0.03	)		-0.9	%

The following is a comparison of fiscal year 2012 and fiscal year 2011 results of operations, separately identifying the estimated impact of currency translation:


				Estimated
	2012			Business Change		Currency Translation			2011
	(expressed in millions)
Revenue	$	542.3		$	83.4	$	(8.5	)	$	467.4
Cost of sales		306.1			46.4		(5.7	)		265.4
Gross profit		236.2			37.0		(2.8	)		202.0
Gross margin		43.6	%							43.2	%

Operating expenses:
Selling and marketing		74.6			6.1		(1.3	)		69.8
General administrative		59.2			15.3		(0.3	)		44.2
Research and development		21.9			7.3		(0.2	)		14.8
Total operating expenses		155.7			28.7		(1.8	)		128.8
Income from operations	$	80.5		$	8.3	$	(1.0	)	$	73.2

Revenue
Revenue was $542.3 million, an increase of $74.9 million, or 16.0%, compared to revenue of $467.4 million for fiscal year 2011. This increase was driven by 34.4% higher beginning backlog as well as strong standard short-cycle orders in Test, partially offset by a decline in Sensors resulting from an unfavorable impact of currency translation. Test revenue increased 21.5% to $442.0 million, while Sensors revenue decreased 3.1% to $100.3 million.

Table of Contents

The following is a comparison of fiscal year 2012 and fiscal year 2011 revenue by geography:


Geography	2012		2011		Variance		% Variance
	(expressed in millions)
Americas	$	169.5	$	135.5	$	34.0		25.1	%
Europe		167.8		150.1		17.7		11.8	%
Asia		205.0		181.8		23.2		12.8	%
Total Revenue	$	542.3	$	467.4	$	74.9		16.0	%

Although selective product price changes were implemented during each of these fiscal years, the overall impact of pricing changes did not have a material effect on revenue.

Gross profit
Gross profit was $236.2 million, an increase of $34.2 million, or 16.9%, compared to gross profit of $202.0 million for fiscal year 2011. Gross profit as a percentage of revenue was 43.6%, an increase of 0.4 percentage points from 43.2% for fiscal year 2011. The increase reflects leverage on higher volume and improved productivity in Test, partially offset by the unfavorable impact of a higher proportion of Test revenue compared to total Company revenue.

Selling and Marketing Expense
Selling and marketing expense was $74.6 million, an increase of $4.8 million, or 6.9%, compared to $69.8 million for fiscal year 2011. This increase was primarily due to higher compensation and benefits driven by increased headcount, higher sales commissions, as well as higher travel and other discretionary expenses to support selling efforts. This was partially offset by an estimated $1.3 million favorable impact of currency translation. Selling and marketing expense as a percentage of revenue was 13.8% on higher volume, compared to 14.9% for fiscal year 2011.

General and Administrative Expense
General and administrative expense was $59.2 million, an increase of $15.0 million, or 33.9%, compared to $44.2 million for fiscal year 2011. This increase was primarily driven by higher investment in strategic, productivity and compliance initiatives, as well as higher compensation and benefits driven by increased headcount, and includes the previously mentioned $7.8 million settlement cost related to the settlement of the U.S. Government matters. General and administrative expense as a percentage of revenue was 10.9%, compared to 9.5% for fiscal year 2011.

Research and Development Expense
Research and development expense was $21.9 million, an increase of $7.1 million, or 48.0%, compared to $14.8 million for fiscal year 2011. Planned expenditures were higher in both segments. In addition, the Company allocated certain of its resources towards capitalized software development activities during fiscal year 2012 and 2011. Total software development costs capitalized during fiscal years 2012 and 2011 were $0.5 million and $3.7 million, respectively. Research and development expense as a percentage of revenue was 4.0%, compared to 3.2% for fiscal year 2011.

Income from Operations
Income from operations was $80.5 million, an increase of $7.3 million, or 10.0%, compared to income from operations of $73.2 million for fiscal year 2011. This increase was primarily driven by higher volume and gross profit rate, partially offset by increased operating expenses, including the previously mentioned $7.8 million U.S. Government settlement costs. Operating income as a percentage of revenue was 14.8%, compared to 15.7% for fiscal year 2011.

Historically, the Company’s operating costs have been impacted by a level of inflation ranging from -1% to 4%. The Company uses a number of strategies to mitigate the effects of cost inflation including cost productivity initiatives such as global procurement strategies, as well as price increases. However, if the Company’s operating costs were to become subject to significant inflationary pressures, it may not be able to fully offset such higher costs.

Table of Contents

Interest Expense, net
Interest expense, net was $0.3 million, a decrease of $0.6 million, compared to $0.9 million for fiscal year 2011. Interest expense declined $0.4 million due to lower interest rates incurred on short-term borrowings as well as a reduction in the accrued interest liability associated with the Company’s uncertain tax positions. Interest income increased $0.2 million primarily due to interest earned on higher average cash balances maintained in interest-bearing accounts.

Other (Expense) Income, net
Other (expense) income, net was $0.4 million of net other expense, compared to $1.0 million of net other income in fiscal year 2011. The decrease was primarily due to $1.1 million of net losses on foreign currency transactions in fiscal year 2012 compared to $0.2 million of net gains on foreign currency transactions in fiscal year 2011.

Provision for Income Taxes
Provision for income taxes totaled $28.2 million, an increase of $5.8 million, compared to $22.4 million for the fiscal year 2011. This increase was primarily due to increased income before taxes as well as a higher effective tax rate. The effective tax rate for the fiscal year was 35.4%, an increase of 4.9 percentage points compared to 30.5% for fiscal year 2011. This increase was primarily driven by the previously mentioned settlement cost related to the U.S. Government matters, which is nondeductible for tax purposes, as well as a reduction in U.S. research and development tax credits. The enactment of legislation in the first quarter of fiscal year 2011 that retroactively extended the U.S. research and development tax credits provided a tax benefit of $1.0 million during fiscal year 2011. The U.S. research and development tax credit legislation expired as of the end of the first quarter of fiscal year 2012.

Net Income
Net income was $51.6 million, an increase of $0.7 million, compared to $50.9 million for fiscal year 2011. The increase was primarily driven by higher income from operations, partially offset by a higher effective tax rate and increased net losses on foreign currency transactions. Earnings per diluted share decreased $0.03 to $3.21, compared to $3.24 for fiscal year 2011. The decrease was primarily driven by the $0.48 per diluted share negative impact from the previously mentioned settlement cost related to the U.S. Government matters. Additionally, the increase in shares outstanding negatively impacted earnings per diluted share by $0.07.

Segment Results

Test Segment

Orders and Backlog

The following is a comparison of fiscal year 2012 and fiscal year 2011 orders for Test, separately identifying the estimated impact of currency translation:


			Estimated
	2012		Business Change		Currency Translation			2011
	(expressed in millions)
Orders	$	468.0	$	38.0	$	(6.6	)	$	436.6

Orders totaled $468.0 million, an increase of $31.4 million, or 7.2%, including an estimated 1.5% unfavorable impact of currency translation, compared to orders of $436.6 million for fiscal year 2011. Fiscal year 2012 orders included four large orders totaling approximately $46 million, of which $41 million was in the structures market and $5 million was in the ground vehicles market. Fiscal year 2011 orders included five large orders totaling approximately $64 million, of which $35 million was in the structures market and $29 million was in the ground vehicles market. Excluding the large orders, base orders increased 13.3%, reflecting strong growth in the ground vehicles, materials and structures markets. Test accounted for 82.8% of total Company orders, compared to 80.9% for fiscal year 2011.

Table of Contents

The following is a comparison of fiscal year 2012 and fiscal year 2011 orders for Test by geography:


Geography	2012		2011		Variance			% Variance
	(expressed in millions)
Americas	$	127.4	$	133.9	$	(6.5	)		-4.9	%
Europe		121.9		132.0		(10.1	)		-7.7	%
Asia		218.7		170.7		48.0			28.1	%
Total Orders	$	468.0	$	436.6	$	31.4			7.2	%

Backlog of undelivered orders at September 29, 2012 was $285.3 million, an increase of 5.2% from backlog of $271.2 million at October 1, 2011. As previously mentioned, backlog at the end of fiscal 2012 was negatively impacted by the cancellation of two custom orders totaling approximately $9 million. Also, as previously mentioned, backlog at the end of fiscal 2011 was negatively impacted by the cancellation of a custom order totaling approximately $0.5 million.

Results of Operations

The following is a comparison of fiscal year 2012 and fiscal year 2011 results of operations for Test separately identifying the estimated impact of currency translation:


				Estimated
	2012			Business Change		Currency Translation			2011
	(expressed in millions)
Revenue	$	442.0		$	83.3	$	(5.2	)	$	363.9
Cost of sales		262.1			45.0		(4.2	)		221.3
Gross profit		179.9			38.3		(1.0	)		142.6
Gross margin		40.7	%							39.2	%

Operating expenses:
Selling and marketing		59.6			6.6		(0.9	)		53.9
General administrative		45.2			12.8		-			32.4
Research and development		16.8			6.7		-			10.1
Total operating expenses		121.6			26.1		(0.9	)		96.4
Income from operations	$	58.3		$	12.2	$	(0.1	)	$	46.2

Revenue
Revenue was $442.0 million, an increase of $78.1 million, or 21.5%, compared to revenue of $363.9 million for fiscal year 2011. The increase was primarily due to 36.8% higher beginning backlog and strong base order growth, partially offset by an estimated $5.2 million unfavorable impact of currency translation.

Table of Contents

The following is a comparison of fiscal year 2012 and fiscal year 2011 revenue for Test by geography:


Geography	2012		2011		Variance		% Variance
	(expressed in millions)
Americas	$	141.0	$	108.2	$	32.8		30.3	%
Europe		119.1		98.6		20.5		20.8	%
Asia		181.9		157.1		24.8		15.8	%
Total Revenue	$	442.0	$	363.9	$	78.1		21.5	%

Gross Profit
Gross profit was $179.9 million, an increase of $37.3 million, or 26.2%, compared to gross profit of $142.6 million for fiscal year 2011. Gross profit as a percentage of revenue was 40.7%, an increase of 1.5 percentage points from 39.2% for fiscal year 2011. This increase was driven by leverage on higher volume and improved productivity.

Selling and Marketing Expense
Selling and marketing expense was $59.6 million, an increase of $5.7 million, or 10.6%, compared to $53.9 million for fiscal year 2011. This increase was primarily due to higher compensation and benefits driven by increased headcount, higher sales commissions, and higher travel and other discretionary expenses to support selling efforts. Also included was increased investment in marketing initiatives, partially offset by an estimated $0.9 million favorable impact of currency translation. Selling and marketing expense as a percentage of revenue was 13.5% on higher volume, compared to 14.8% for fiscal year 2011.

General and Administrative Expense
General and administrative expense was $45.2 million, an increase of $12.8 million, or 39.5%, compared to $32.4 million for fiscal year 2011. This increase was primarily driven by higher investment in strategic, productivity and compliance initiatives, as well as higher compensation and benefits driven by increased headcount. Also included was $6.1 million of the $7.8 million settlement costs related to the previously mentioned U.S. Government matters. General and administrative expense as a percentage of revenue was 10.2%, compared to 8.9% for fiscal year 2011.

Research and Development Expense
Research and development expense was $16.8 million, an increase of $6.7 million, or 66.3%, compared to $10.1 million for fiscal year 2011, due to a higher level of planned expenditures. As previously mentioned, $0.5 million and $3.7 million of costs associated with software development activities were capitalized in fiscal year 2012 and 2011, respectively. Research and development expense as a percentage of revenue was 3.8%, compared to 2.8% for fiscal year 2011.

Income from Operations
Income from operations was $58.3 million, an increase of $12.1 million, or 26.2%, compared to income from operations of $46.2 million for fiscal year 2011. This increase reflects higher revenue and gross profit, partially offset by increased operating expenses. Operating income as a percentage of revenue was 13.2%, compared to 12.7% for fiscal year 2011.

Table of Contents

Sensors Segment

Orders and Backlog

The following is a comparison of fiscal year 2012 and fiscal year 2011 orders for Sensors, separately identifying the estimated impact of currency translation:


			Estimated
	2012		Business Change			Currency Translation			2011
	(expressed in millions)
Orders	$	97.3	$	(2.7	)	$	(3.4	)	$	103.4

Orders totaled $97.3 million, a decrease of $6.1 million, or 5.9%, including an estimated 3.3% unfavorable impact of currency translation, compared to orders of $103.4 million for fiscal year 2011, primarily due to weaker global demand in the industrial market. Sensors accounted for 17.2% of total Company orders, compared to 19.1% for fiscal year 2011.

The following is a comparison of fiscal year 2012 and fiscal year 2011 orders for Sensors by geography:


Geography	2012		2011		Variance			% Variance
	(expressed in millions)
Americas	$	26.0	$	28.2	$	(2.2	)		-7.8	%
Europe		48.9		51.2		(2.3	)		-4.5	%
Asia		22.4		24.0		(1.6	)		-6.7	%
Total Orders	$	97.3	$	103.4	$	(6.1	)		-5.9	%

Backlog of undelivered orders at September 29, 2012 was $13.8 million, a decrease of 20.7% from backlog of $17.4 million at October 1, 2011.

Results of Operations

The following is a comparison of fiscal year 2012 and fiscal year 2011 results of operations for the Sensors segment, separately identifying the estimated impact of currency translation:


				Estimated
	2012			Business Change			Currency Translation			2011
	(expressed in millions)
Revenue	$	100.3		$	0.1		$	(3.3	)	$	103.5
Cost of sales		44.0			1.4			(1.5	)		44.1
Gross profit		56.3			(1.3	)		(1.8	)		59.4
Gross margin		56.2	%								57.4	%

Operating expenses:
Selling and marketing		15.0			(0.5	)		(0.4	)		15.9
General administrative		14.0			2.5			(0.3	)		11.8
Research and development		5.1			0.6			(0.2	)		4.7
Total operating expenses		34.1			2.6			(0.9	)		32.4
Income from operations	$	22.2		$	(3.9	)	$	(0.9	)	$	27.0

Revenue
Revenue was $100.3 million, a decrease of $3.2 million, or 3.1%, compared to revenue of $103.5 million for the fiscal year 2011. This decrease was primarily driven by an estimated $3.3 million unfavorable impact of currency translation.

Table of Contents

The following is a comparison of fiscal year 2012 and fiscal year 2011 revenue for the Sensors segment by geography:


Geography	2012		2011		Variance			% Variance
	(expressed in millions)
Americas	$	28.5	$	27.3	$	1.2			4.4	%
Europe		48.7		51.5		(2.8	)		-5.4	%
Asia		23.1		24.7		(1.6	)		-6.5	%
Total Revenue	$	100.3	$	103.5	$	(3.2	)		-3.1	%

Gross Profit
Gross profit was $56.3 million, a decrease of $3.1 million, or 5.2%, compared to gross profit of $59.4 million for fiscal year 2011. Gross profit as a percentage of revenue was 56.2%, a decrease of 1.2 percentage points from 57.4% for fiscal year 2011, primarily due to decreased leverage on lower volume.

Selling and Marketing Expense
Selling and marketing expense was $15.0 million, a decrease of $0.9 million, or 5.7%, compared to $15.9 million for fiscal year 2011. The decrease was driven by lower expenditures on marketing initiatives, as well as an estimated $0.4 million favorable impact of currency translation. Selling and marketing expense as a percentage of revenue was 15.0%, compared to 15.4% for fiscal year 2011.

General and Administrative Expense
General and administrative expense was $14.0 million, an increase of $2.2 million, or 18.6%, compared to $11.8 million for fiscal year 2011. This increase was primarily driven by $1.7 million of the $7.8 million settlement costs related to the previously mentioned U.S. Government matters, higher spending on strategic and compliance initiatives, and increased compensation and benefits. General and administrative expense as a percentage of revenue was 14.0%, compared to 11.4% for fiscal year 2011.

Research and Development Expense
Research and development expense was $5.1 million, an increase of $0.4 million, or 8.5%, compared to $4.7 million for fiscal year 2011, due to a higher level of planned expenditures. Research and development expense as a percentage of revenue was 5.1%, compared to 4.5% for fiscal year 2011.

Income from Operations
Income from operations was $22.2 million, a decrease of $4.8 million, or 17.8%, compared to income from operations of $27.0 million for fiscal year 2011, primarily due to lower gross profit and increased operating expenses. Operating income as a percentage of revenue was 22.1%, compared to 26.1% for fiscal year 2011.

Fiscal Year 2011 Compared to Fiscal Year 2010

Summary of Financial Results

Significant Items for fiscal year 2011 compared to fiscal year 2010 include:


	•	Orders increased 27.5% to $540.0 million, compared to orders of $423.5 million for fiscal year 2010. The increase in orders represents worldwide growth of 28.1% and 24.9% in Test and Sensors, respectively, reflecting strong base-order expansion in both. The results included five large (in excess of $5.0 million) Test orders totaling approximately $64 million, an increase of $31 million compared to large Test orders in fiscal year 2010. Backlog of undelivered orders at October 1, 2011 was $287.4 million, an increase of 34.1% from backlog of $214.3 million at October 2, 2010.

	•	Revenue increased 24.9% to $467.4 million, compared to revenue of $374.1 million for fiscal year 2010. This increase represents growth of 22.8% and 33.0% in Test and Sensors, respectively, both driven by higher beginning backlog and strong fiscal year orders.

Table of Contents


	•	Income from operations increased 158.7% to $73.2 million, compared to $28.3 million for fiscal year 2010. This increase was primarily driven by higher revenue and gross profit, net of $5.3 million increased operating expenses. Operating expenses in fiscal year 2011 included legal and consulting costs of $6.0 million related to investigations regarding U.S. Government matters. Operating expenses in fiscal year 2010 included a legal settlement charge of $6.3 million. As a percentage of revenue, operating expenses declined from 33.0% to 27.6%. See below for additional information regarding U.S. Government matters during fiscal year 2011.

	•	Earnings per diluted share increased to $3.24, compared to $1.14 for the fiscal year 2010. In addition to the benefit of higher income from operations, the reduction in shares outstanding, resulting from the Company’s share purchases in the fourth quarter of fiscal year 2010, as well as a lower effective tax rate, positively impacted earnings per diluted share by $0.12 and $0.06, respectively.

	•	Cash and cash equivalents at October 1, 2011 totaled $104.1 million, compared to $76.6 million at the end of fiscal year 2010. Cash flows from operations generated $43.0 million. During fiscal year 2011, the Company invested $10.1 million in capital expenditures, paid $9.6 million to settle an accelerated share repurchase agreement, and paid $9.3 million in dividends.

	•	As was previously disclosed, in January 2011, the DOC and the USAO notified the Company that they were investigating why the Company had not disclosed, on the Government’s Online Representations and Certifications Application (“ORCA Certification”), that the Company had pled guilty in 2008 to two misdemeanors in regard to making false statements related to certain export matters in 2003. In July 2011, the USAO expanded the scope of its inquiry to include the Company’s general compliance record and practices in areas including export controls and government contracts. For a more detailed discussion of the investigation by the DOC and USAO and the settlement agreement entered into in August 2012 that concluded the investigation, please refer to Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.

		Also as previously disclosed, in March 2011, the U.S. Department of the Air Force (the “Air Force”) issued a notice suspending the Company from all U.S. Government contracting and from directly or indirectly receiving the benefits of federal assistance programs, based on the factual and legal issues underlying the investigation; this suspension was lifted on September 19, 2011 in connection with the Company’s entry into an Administrative Agreement specifying certain ethics, compliance, reporting and monitoring obligations. During fiscal year 2011, the Company incurred $6.0 million of costs related to legal and consulting fees as part of the investigation, as well as increased compliance costs.

Detailed Financial Results

Total Company

Orders and Backlog

The following is a comparison of fiscal year 2011 and fiscal year 2010 orders, separately identifying the estimated impact of currency translation:


			Estimated
	2011		Business Change		Currency Translation		2010
	(expressed in millions)
Orders	$	540.0	$	103.2	$	13.3	$	423.5

Orders totaled $540.0 million, an increase of $116.5 million, or 27.5%, compared to orders of $423.5 million for fiscal year 2010, reflecting strong base-order growth across all geographies in both segments as well as the previously mentioned $31 million increase in large Test segment orders. Fiscal year 2011 orders included $64 million of large Test segment orders, compared to $33 million in fiscal year 2010. Test segment orders increased $95.9 million to $436.6 million, while Sensors segment orders increased $20.6 million to $103.4 million.

Table of Contents

The following is a comparison of fiscal year 2011 and fiscal year 2010 orders by geography:


Geography	2011		2010		Variance		% Variance
	(expressed in millions)
Americas	$	162.1	$	143.5	$	18.6		13.0	%
Europe		183.2		131.8		51.4		39.0	%
Asia		194.7		148.2		46.5		31.4	%
Total Orders	$	540.0	$	423.5	$	116.5		27.5	%

Backlog of undelivered orders at October 1, 2011 was $287.4 million, an increase of approximately $73.1 million, or 34.1%, compared to backlog of $214.3 million at October 2, 2010. The Company believes backlog is not an absolute indicator of future revenue because a portion of the orders in backlog could be cancelled at the customer’s discretion. While the backlog is subject to order cancellations, the Company has not historically experienced a significant number of order cancellations. During fiscal year 2011 and 2010, one custom order in Test totaling approximately $0.5 million and $4 million, respectively, was cancelled. Each of these cancelled orders was booked in a previous fiscal year.

Results of Operations

The following is a comparison of fiscal year 2011 and fiscal year 2010 statements of operations (in millions, except per share data):


	2011			2010			Variance			% Variance
Revenue	$	467.4		$	374.1		$	93.3			24.9	%
Cost of sales		265.4			222.3			43.1			19.4	%
Gross profit		202.0			151.8			50.2			33.1	%
Gross margin		43.2	%		40.6	%		2.6	% pts

Operating expenses:
Selling and marketing		69.8			65.9			3.9			5.9	%
General administrative		44.2			42.7			1.5			3.5	%
Research and development		14.8			14.9			(0.1	)		-0.7	%
Total operating expenses		128.8			123.5			5.3			4.3	%
Income from operations		73.2			28.3			44.9			158.7	%
Interest expense		(1.3	)		(1.4	)		0.1			-7.1	%
Interest income		0.4			0.4			-			0.0	%
Other income (expense), net		1.0			(0.1	)		1.1			NM

Income before income taxes		73.3			27.2			46.1			169.5	%
Provision for income taxes		22.4			8.6			13.8			160.5	%
Net income	$	50.9		$	18.6		$	32.3			173.7	%

Diluted earnings per share	$	3.24		$	1.14		$	2.10			184.2	%

Table of Contents

The following is a comparison of fiscal year 2011 and fiscal year 2010 results of operations, separately identifying the estimated impact of currency translation:


				Estimated
	2011			Business Change			Currency Translation		2010
	(expressed in millions)
Revenue	$	467.4		$	81.5		$	11.8	$	374.1
Cost of sales		265.4			35.8			7.3		222.3
Gross profit		202.0			45.7			4.5		151.8
Gross margin		43.2	%							40.6	%

Operating expenses:
Selling and marketing		69.8			2.5			1.4		65.9
General administrative		44.2			0.6			0.9		42.7
Research and development		14.8			(0.2	)		0.1		14.9
Total operating expenses		128.8			2.9			2.4		123.5
Income from operations	$	73.2		$	42.8		$	2.1	$	28.3

Revenue
Revenue was $467.4 million, an increase of $93.3 million, or 24.9%, compared to revenue of $374.1 million for fiscal year 2010. This increase was primarily due to 27.8% higher opening backlog as well as increased order volume, and an estimated $11.8 million favorable impact of currency translation. Test revenue increased 22.8% to $363.9 million, while Sensors revenue increased 33.0% to $103.5 million.

The following is a comparison of fiscal year 2011 and fiscal year 2010 revenue by geography:


Geography	2011		2010			Variance	% Variance
	(expressed in millions)
Americas	$	135.5	$	122.1	$	13.4		11.0	%
Europe		150.1		112.9		37.2		32.9	%
Asia		181.8		139.1		42.7		30.7	%
Total Revenue	$	467.4	$	374.1	$	93.3		24.9	%

Although selective product price changes were implemented during each of these fiscal years, the overall impact of pricing changes did not have a material effect on revenue.

Gross profit
Gross profit was $202.0 million, an increase of $50.2 million, or 33.1%, compared to gross profit of $151.8 million for fiscal year 2010. Gross profit as a percentage of revenue was 43.2%, an increase of 2.6 percentage points from 40.6% for fiscal year 2010. The increase was driven by leverage on higher volume, favorable product mix, and reduced warranty expense.

Selling and Marketing Expense
Selling and marketing expense was $69.8 million, an increase of $3.9 million, or 5.9%, compared to $65.9 million for fiscal year 2010. This increase was primarily due to higher sales commissions driven by higher volume, increased compensation and benefits on higher headcount, as well as an estimated $1.4 million unfavorable impact of currency translation. Selling and marketing expense as a percentage of revenue was 14.9% on higher volume, compared to 17.6% for fiscal year 2010.

General and Administrative Expense
General and administrative expense was $44.2 million, an increase of $1.5 million, or 3.5%, compared to $42.7 million for fiscal year 2010. This increase was primarily due to higher professional fees and other discretionary spending, and an estimated $0.9 million unfavorable impact of currency translation, partially offset by lower legal fees, as well as decreased salaries and benefits. Legal and consulting expenses for fiscal year 2011 included $6.0 million related to the previously mentioned U.S. Government matters, of which $4.7 million and $1.3 million was allocated to Test and Sensors, respectively. Legal expenses for fiscal year 2010 included $6.3 million of costs associated with a legal settlement. General and administrative expense as a percentage of revenue was 9.5% on higher volume, compared to 11.4% for fiscal year 2010.

Table of Contents

Research and Development Expense
Research and development expense was $14.8 million, relatively flat compared to $14.9 million for fiscal year 2010. Total software development costs capitalized during fiscal years 2011 and 2010 were $3.7 million and $3.6 million, respectively. Research and development expense as a percentage of revenue was 3.2% on higher volume, compared to 4.0% for fiscal year 2010.

Income from Operations
Income from operations was $73.2 million, an increase of $44.9 million, or 158.7%, compared to income from operations of $28.3 million for fiscal year 2010. This increase was primarily driven by volume and higher gross profit rate. Operating income as a percentage of revenue was 15.7%, compared to 7.6% for fiscal year 2010.

Interest Expense, net
Interest expense, net was $0.9 million, relatively flat compared to $1.0 million for fiscal year 2010.

Other Income (Expense), net
Other income (expense), net was $1.0 million of net other income, compared to $0.1 million of net other expense in fiscal year 2010. The increase was primarily due to net gains on foreign currency transactions compared to net losses on foreign currency transactions in fiscal year 2010, as well as $0.3 million higher royalty income.

Provision for Income Taxes
Provision for income taxes totaled $22.4 million, an increase of $13.8 million, compared to $8.6 million for fiscal year 2010. This increase was primarily due to increased income before taxes. The effective tax rate for fiscal year 2011 was 30.5%, a decrease of 1.2 percentage points compared to 31.7% for fiscal year 2010. The decrease in the effective tax rate was driven by the Company’s geographic mix of earnings, with foreign income generally taxed at lower rates than domestic income, as well as a $1.0 million tax benefit from the retroactive extension to fiscal year 2010 of United States research and development credits in fiscal year 2011. This decrease in the effective tax rate was partially offset by$0.8 million of tax benefits recognized in fiscal year 2010 upon the release of certain contingencies due to the lapse of statute of limitations, as well as the benefit of foreign tax credits associated with the cash repatriation of earnings.

Net Income
Net income was $50.9 million, or $3.24 per diluted share, for fiscal year 2011, an increase of 173.7% compared to $18.6 million, or $1.14 per diluted share, for fiscal year 2010. The increase was primarily driven by higher income from operations. Additionally, the reduction in shares outstanding, resulting from the Company’s share purchases in the fourth quarter of fiscal year 2010, as well as a lower effective tax rate, positively impacted earnings per diluted share by $0.12 and $0.06, respectively.

Table of Contents

Segment Results

Test Segment

Orders and Backlog

The following is a comparison of fiscal year 2011 and fiscal year 2010 orders for Test, separately identifying the estimated impact of currency translation:


			Estimated
	2011		Business Change		Currency Translation		2010
	(expressed in millions)
Orders	$	436.6	$	86.2	$	9.7	$	340.7

Orders totaled $436.6 million, an increase of $95.9 million, or 28.1%, compared to orders of $340.7 million for fiscal year 2010, primarily due to increased demand across all geographies, particularly in the ground vehicle market, as well as an estimated $9.7 million favorable impact of currency translation. Fiscal year 2011 orders included five large orders totaling approximately $64 million, of which $35 million was associated with the structures market and $29 million was associated with the ground vehicles market. Fiscal year 2010 orders included four large custom orders totaling approximately $33 million, of which $26 million was associated with the structures market and $7 million was associated with the ground vehicles market. Test accounted for 80.9% of total Company orders, compared to 80.4% for fiscal year 2010.

The following is a comparison of fiscal year 2011 and fiscal year 2010 orders for Test by geography:


Geography	2011		2010		Variance		% Variance
	(expressed in millions)
Americas	$	133.9	$	120.0	$	13.9		11.6	%
Europe		132.0		93.5		38.5		41.2	%
Asia		170.7		127.2		43.5		34.2	%
Total Orders	$	436.6	$	340.7	$	95.9		28.1	%

Backlog of undelivered orders at October 1, 2011 was $271.2 million, an increase of 36.8% from backlog of $198.2 million at October 2, 2010. As previously mentioned, backlog at the end of fiscal 2011 and 2010 each was negatively impacted by the cancellation of a custom order totaling approximately $0.5 million and $4 million, respectively.

Results of Operations

The following is a comparison of fiscal year 2011 and fiscal year 2010 results of operations for Test, separately identifying the estimated impact of currency translation:


				Estimated
	2011			Business Change			Currency Translation		2010
	(expressed in millions)
Revenue	$	363.9		$	59.8		$	7.8	$	296.3
Cost of sales		221.3			27.8			5.7		187.8
Gross profit		142.6			32.0			2.1		108.5
Gross margin		39.2	%							36.6	%

Operating expenses:
Selling and marketing		53.9			1.0			0.9		52.0
General administrative		32.4			(2.2	)		0.5		34.1
Research and development		10.1			(1.1	)		-		11.2
Total operating expenses		96.4			(2.3	)		1.4		97.3
Income from operations	$	46.2		$	34.3		$	0.7	$	11.2

Table of Contents

Revenue
Revenue was $363.9 million, an increase of $67.6 million, or 22.8%, compared to revenue of $296.3 million for fiscal year 2010. The increase was primarily due to 26.7% higher opening backlog as well as increased order volume, and an estimated $7.8 million favorable impact of currency translation.

The following is a comparison of fiscal year 2011 and fiscal year 2010 revenue for Test by geography:


Geography	2011		2010		Variance		% Variance
	(expressed in millions)
Americas	$	108.2	$	98.9	$	9.3		9.4	%
Europe		98.6		77.6		21.0		27.1	%
Asia		157.1		119.8		37.3		31.1	%
Total Revenue	$	363.9	$	296.3	$	67.6		22.8	%

Gross Profit
Gross profit was $142.6 million, an increase of $34.1 million, or 31.4%, compared to gross profit of $108.5 million for fiscal year 2010. Gross profit as a percentage of revenue was 39.2%, an increase of 2.6 percentage points from 36.6% for fiscal year 2010. These increases were driven by volume leverage, favorable product mix, and reduced warranty expense.

Selling and Marketing Expense
Selling and marketing expense was $53.9 million, an increase of $1.9 million, or 3.7%, compared to $52.0 million for fiscal year 2010. This increase was primarily due to increased sales commissions on higher volume and an estimated $0.9 million unfavorable impact of currency translation, partially offset by reduced discretionary spending on marketing initiatives. Selling and marketing expense as a percentage of revenue was 14.8% on higher volume, compared to 17.5% for fiscal year 2010.

General and Administrative Expense
General and administrative expense was $32.4 million, a decrease of $1.7 million, or 5.0%, compared to $34.1 million for fiscal year 2010. This decrease was primarily due to lower legal fees and reduced compensation and benefits, partially offset by higher professional fees and increased other discretionary spending. As previously mentioned, legal and consulting expenses for fiscal year 2011 included $4.7 million related to the U.S. Government matters while legal expenses for the fiscal year 2010 included legal settlement costs of $6.3 million. General and administrative expense as a percentage of revenue was 8.9% on higher volume, compared to 11.5% for fiscal year 2010.

Research and Development Expense
Research and development expense was $10.1 million, a decrease of $1.1 million, or 9.8%, compared to $11.2 million for fiscal year 2010, due to a lower level of planned expenditures. Research and development expense as a percentage of revenue was 2.8% on higher volume, compared to 3.8% for fiscal year 2010.

Income from Operations
Income from operations was $46.2 million, an increase of $35.0 million, or 312.5%, compared to income from operations of $11.2 million for fiscal year 2010. This increase primarily reflects higher gross profit. Operating income as a percentage of revenue was 12.7%, compared to 3.8% for fiscal year 2010.

Table of Contents

Sensors Segment

Orders and Backlog

The following is a comparison of fiscal year 2011 and fiscal year 2010 orders for Sensors, separately identifying the estimated impact of currency translation:


			Estimated
	2011		Business Change		Currency Translation		2010
	(expressed in millions)
Orders	$	103.4	$	17.0	$	3.6	$	82.8

Orders totaled $103.4 million, an increase of $20.6 million, or 24.9%, compared to orders of $82.8 million for fiscal year 2010, primarily due to higher volume across all geographies, as well as an estimated $3.6 million favorable impact of currency translation. Sensors segment accounted for 19.1% of total Company orders, compared to 19.6% for fiscal year 2010.

The following is a comparison of fiscal year 2011 and fiscal year 2010 orders for Sensors by geography:


Geography	2011		2010		Variance		% Variance
	(expressed in millions)
Americas	$	28.2	$	23.5	$	4.7		20.0	%
Europe		51.2		38.3		12.9		33.7	%
Asia		24.0		21.0		3.0		14.3	%
Total Orders	$	103.4	$	82.8	$	20.6		24.9	%

Backlog of undelivered orders at October 1, 2011 was $16.2 million, flat compared to backlog at October 2, 2010.

Results of Operations

The following is a comparison of fiscal year 2011 and fiscal year 2010 results of operations for Sensors, separately identifying the estimated impact of currency translation:


				Estimated
	2011			Business Change		Currency Translation		2010
	(expressed in millions)
Revenue	$	103.5		$	21.7	$	4.0	$	77.8
Cost of sales		44.1			8.0		1.6		34.5
Gross profit		59.4			13.7		2.4		43.3
Gross margin		57.4	%						55.7	%

Operating expenses:
Selling and marketing		15.9			1.5		0.5		13.9
General administrative		11.8			2.8		0.4		8.6
Research and development		4.7			0.9		0.1		3.7
Total operating expenses		32.4			5.2		1.0		26.2
Income from operations	$	27.0		$	8.5	$	1.4	$	17.1

Table of Contents

Revenue
Revenue was $103.5 million, an increase of $25.7 million, or 33.0%, compared to revenue of $77.8 million for fiscal year 2010. This increase was primarily driven by 43.0% higher opening backlog as well as increased worldwide order volume, and an estimated $4.0 million favorable impact of currency translation.

The following is a comparison of fiscal year 2011 and fiscal year 2010 revenue for Sensors by geography:


Geography	2011		2010		Variance		% Variance
	(expressed in millions)
Americas	$	27.3	$	23.2	$	4.1		17.7	%
Europe		51.5		35.3		16.2		45.9	%
Asia		24.7		19.3		5.4		28.0	%
Total Revenue	$	103.5	$	77.8	$	25.7		33.0	%

Gross Profit

Gross profit was $59.4 million, an increase of $16.1 million, or 37.2%, compared to gross profit of $43.3 million for fiscal year 2010. Gross profit as a percentage of revenue was 57.4%, an increase of 1.7 percentage points from 55.7% for fiscal year 2010. These increases were primarily due to volume and leverage.

Selling and Marketing Expense

Selling and marketing expense was $15.9 million, an increase of $2.0 million, or 14.4%, compared to $13.9 million for fiscal year 2010. This increase was primarily due to higher compensation, benefits and incentives, as well as expenditures on marketing initiatives. Selling and marketing expense as a percentage of revenue was 15.4% on higher volume, compared to 17.9% for fiscal year 2010.

General and Administrative Expense

General and administrative expense was $11.8 million, an increase of $3.2 million, or 37.2%, compared to $8.6 million for fiscal year 2010, primarily due to the previously mentioned $1.3 million of legal and consulting expenses related to the U.S. Government matters, as well as increased other discretionary spending, partially offset by lower compensation and benefits. General and administrative expense as a percentage of revenue was 11.4% on higher volume, compared to 11.1% for fiscal year 2010.

Research and Development Expense

Research and development expense was $4.7 million, an increase of $1.0 million, or 27.0%, compared to $3.7 million for fiscal year 2010, due to a higher level of planned expenditures. Research and development expense as a percentage of revenue was 4.5% on higher volume, compared to 4.8% for fiscal year 2010.

Income from operations

Income from operations was $27.0 million, an increase of $9.9 million, or 57.9%, compared to income from operations of $17.1 million for fiscal year 2010, primarily due to higher gross profit, partially offset by increased operating expenses. Operating income as a percentage of revenue was 26.1%, compared to 22.0% for fiscal year 2010.

Cash Flow Comparison - Fiscal Years 2012, 2011 and 2010

Total cash and cash equivalents decreased $24.2 million during fiscal year 2012. This decrease was driven by the repayment of interest bearing debt of $40.0 million, purchases of the Company’s common stock of $35.3 million, dividend payments of $15.9 million, and investment in property and equipment of $15.6 million. These decreases were partially offset by earnings of $69.1 million and $17.9 million of proceeds from the exercise of stock options.

Table of Contents

Total cash and cash equivalents increased $27.5 million during fiscal year 2011. This increase was driven by earnings of $72.9 million and $12.9 million of proceeds from the exercise of stock options, partially offset by $33.7 million increased working capital requirements, a $9.6 million payment to settle an accelerated share repurchase agreement, investment in property and equipment of $10.1 million, and dividend payments of $9.3 million.

Total cash and cash equivalents decreased $42.3 million during fiscal year 2010. This decrease was driven by purchases of the Company’s common stock of $38.2 million, dividend payments of $12.1 million, investment in property and equipment of $11.2 million, and $6.3 million deferred payments for the SANS acquisition. These decreases were partially offset by earnings of $36.4 million.

Cash flow from operating activities provided cash of $65.0 million during fiscal year 2012, compared to cash provided of $43.0 million and $33.2 million in fiscal year 2011 and 2010, respectively. Fiscal year 2012 cash flow from operating activities was primarily driven by earnings.

Fiscal year 2011 cash flow from operating activities was primarily due to earnings of $72.9 million, $19.1 million increased advance payments received from customers driven by higher custom orders, and $5.5 million increased accounts payable resulting from general timing of purchases and payments, partially offset by $44.7 million increased accounts and unbilled receivables resulting from higher volume as well as the general timing of billing and collections, and $13.6 million increased inventories to support future revenue.

Fiscal year 2010 cash flow from operating activities was primarily driven by earnings.

Cash flow from investing activities required the use of cash totaling $15.6 million during fiscal year 2012, compared to the use of cash totaling $10.1 million during fiscal year 2011, and $17.5 million use of cash during fiscal year 2010. The cash usage for fiscal years 2012 and 2011 both represent an investment in property and equipment.

During fiscal year 2010, the Company invested $11.2 million in property and equipment, and $6.3 million of deferred payments for the SANS acquisition.

Cash flow from financing activities required the use of cash of $72.5 million during fiscal year 2012, compared to $5.8 million and $49.2 million used in fiscal year 2011 and 2010, respectively. The cash usage for fiscal year 2012 was primarily due to $40.0 million repayment of all outstanding borrowings on the Company’s credit facility, purchases of the Company’s stock of $35.3 million, including purchases of stock related to stock-based compensation arrangements of $0.3 million, and payment of cash dividends of $15.9 million. These cash usages were partially offset by $17.9 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan.

During fiscal year 2011, the Company’s cash usage primarily resulted from the use of $9.6 million to settle an accelerated share purchase agreement that was initially entered into during the fourth quarter of fiscal year 2010, purchases of stock related to stock-based compensation arrangements of $0.3 million, and payment of cash dividends of $9.3 million. These cash usages were partially offset by $13.0 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan.

During fiscal year 2010, the Company’s cash usage primarily resulted from purchases of the Company’s common stock of $38.2 million, including purchases of stock related to stock-based compensation arrangements of $0.1 million, payment of cash dividends of $12.1 million, partially offset by $1.0 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan.

Table of Contents

During fiscal year 2012, the Company made an initial payment of $35.0 million under an accelerated share purchase program and received an initial delivery of approximately 0.5 million shares of its common stock. Also during fiscal year 2012, the Company purchased less than 0.1 million shares of its common stock related to stock-based compensation arrangements for $0.3 million. During fiscal year 2011, the Company purchased less than 0.1 million shares of its common stock for $0.3 million. During fiscal year 2010, the Company purchased approximately 1.4 million shares of its common stock, of which 0.9 million shares were purchased under an accelerated share purchase program, for $38.2 million.

Liquidity and Capital Resources
The Company had cash and cash equivalents of $79.9 million at September 29, 2012. Of this amount, approximately $16.3 million was located in North America, $41.8 million in Europe, and $21.8 million in Asia. Of the $63.6 million of cash located outside of North America, approximately $48.5 million is not available for use in the U.S. without the incurrence of U.S. federal and state income tax consequences.

The North American balance was primarily invested in money market funds and bank deposits. In Europe, the balances were primarily invested in Euro money market funds, time deposits and bank deposits. In Asia, the balances were primarily invested in money market funds and bank deposits. In accordance with its investment policy, the Company places cash equivalent investments with issuers who have high-quality investment credit ratings. In addition, the Company limits the amount of investment exposure it has with any particular issuer. The Company’s investment objectives are to preserve principal, maintain liquidity, and achieve the best available return consistent with its primary objectives of safety and liquidity. At September 29, 2012, the Company held no short-term investments.

At September 29, 2012, the Company’s capital structure was comprised of $0.2 million in short-term, non-interest-bearing debt and $226.7 million in Shareholders’ Investment. Total interest-bearing debt at October 1, 2011 was $40.0 million. On September 28, 2012, the Company entered into a credit agreement that provides for a five-year, $100 million senior unsecured revolving credit facility maturing September 28, 2017. This agreement replaces the $75 million senior unsecured credit facility that was scheduled to expire in December 2012. At September 29, 2012, the Company had no borrowings outstanding under the credit facility. Under the terms of the credit facility, the Company has agreed to certain financial covenants, including, among other covenants, the ratio of consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and the ratio of consolidated EBITDA to consolidated interest expense. These covenants may restrict the Company’s ability to pay dividends and purchase outstanding shares of common stock. At September 29, 2012, the Company was in compliance with these financial covenants.

Shareholders’ Investment increased by $15.9 million during fiscal year 2012, primarily due to higher net income of $51.6 million and $17.9 million received from stock option exercises and stock purchases under the Company’s employee stock purchase plan, partially offset by $35.3 million in purchases of the Company’s common stock and $16.8 million in dividends declared.

The Company believes that its liquidity, represented by funds available from cash, cash equivalents, credit facility, and anticipated cash from operations are adequate to fund ongoing operations, internal growth opportunities, capital expenditures, dividends and share purchases, as well as to fund strategic acquisitions.

At September 29, 2012, the Company’s contractual obligations were as follows:


			Payments Due by Period (expressed in thousands)
Contractual Obligations ⁽¹⁾	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Operating Lease Obligations	$	11,545	$	4,581	$	4,463	$	1,397	$	1,104
Other Long-Term Obligations ⁽²⁾		13,236		1,280		3,089		1,599		7,268
Total	$	24,781	$	5,861	$	7,552	$	2,996	$	8,372


	(1)	Long-term income tax liabilities for uncertain tax positions have been excluded from the contractual obligations table as the Company is not able to make a reasonably reliable estimate of the amount and period of related future payments. At September 29, 2012, the Company’s long-term liability for uncertain tax positions was $1.7 million.

	(2)	Other long-term obligations include liabilities under pension and other retirement plans.

Table of Contents

At September 29, 2012 the Company had letters of credit and guarantees outstanding totaling $19.1 million and $30.5 million, respectively, primarily to bond advance payments and performance related to customer contracts in Test. The Company’s operating leases are primarily for office space and automobiles.

Off-Balance Sheet Arrangements
At the end of fiscal year 2012, the Company did not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies
The Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the Company to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Company’s results of operations and financial position, may require the application of a higher level of judgment by the Company’s management, and as a result, are subject to an inherent degree of uncertainty. For further information see “Summary of Significant Accounting Policies” under Note 1 to the Consolidated Financial Statements, included in Item 8 of this Annual Report on Form 10-K.

Revenue Recognition: The Company is required to comply with a variety of technical accounting requirements in order to achieve consistent and accurate revenue recognition. The most significant area of judgment and estimation is percentage of completion contract accounting. The Company develops cost estimates that include materials, component parts, labor and overhead costs. Detailed costs plans are developed for all aspects of the contracts during the bidding phase of the contract. Cost estimates are largely based on actual historical performance of similar projects combined with current knowledge of the projects in progress. Significant factors that impact the cost estimates include technical risk, inflationary cost of materials and labor, changes in scope and schedule, and internal and subcontractor performance. Actual costs incurred during the project phase are monitored and compared to the estimates on a monthly basis. Cost estimates are revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident.

Inventories: The Company maintains a material amount of inventory to support its engineering and manufacturing operations. This inventory is stated at the lower of cost or market. On a regular basis, the Company reviews its inventory and identifies that which is excess, slow moving, and obsolete by considering factors such as inventory levels, expected product life, and forecasted sales demand. Any identified excess, slow moving, and obsolete inventory is written down to its market value through a charge to income from operations. It is possible that additional inventory write-down charges may be required in the future if there is a significant decline in demand for the Company’s products and the Company does not adjust its manufacturing production accordingly.

Impairment of Long-Lived Assets: The Company reviews the carrying value of long-lived assets or asset groups, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, the Company recognizes an asset impairment charge against operations. The amount of the impairment loss recorded is the amount by which the carrying value of the impaired asset or asset group exceeds its fair value.

Table of Contents

Goodwill: The Company tests goodwill at least annually for impairment. Goodwill is also tested for impairment as changes in circumstances occur indicating that the carrying value may not be recoverable. Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired.

The Company has three reporting units, two of which are assigned goodwill. At September 29, 2012, one reporting unit was assigned $14.7 million of goodwill while another was assigned $1.5 million. The fair value of a reporting unit is estimated using a discounted cash flow model that requires input of certain estimates and assumptions requiring management judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, and new product introductions. At September 29, 2012, the estimated fair value of the reporting unit assigned $1.5 million of goodwill is substantially in excess of its carrying value, while the estimated fair value of the reporting unit assigned $14.7 million of goodwill exceeds its carrying value by approximately 28%. While the Company believes the estimates and assumptions used in determining the fair value of its reporting units are reasonable, significant changes in estimates of future cash flows, such as those caused by unforeseen events or changes in market conditions could materially impact the fair value of a reporting unit which could result in the recognition of a goodwill impairment charge.

Software Development Costs: The Company incurs costs associated with the development of software to be sold, leased, or otherwise marketed. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized software costs, the Company compares expected product performance, utilizing forecasted revenue amounts, to the total costs incurred to date and estimates of additional costs to be incurred. If revised forecasted product revenue is less than, and/or revised forecasted costs are greater than, the previously forecasted amounts, the net realizable value may be lower than previously estimated, which could result in the recognition of an impairment charge in the period in which such a determination is made.

Warranty Obligations: The Company is subject to warranty obligations on sales of its products. The Company records general warranty provisions based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty claims experience over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. A certain amount of judgment is required in determining appropriate reserve levels for anticipated warranty claims. While these reserve levels are based on historical warranty experience, they may not reflect the actual claims that will occur over the upcoming warranty period, and additional warranty reserves may be required.

Income Taxes: The Company records a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of its deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.

Table of Contents

Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ investment. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU 2011-05 should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 which, for the Company, will be the beginning of fiscal year 2013. Early adoption is permitted. The adoption of ASU 2011-05 will not have a material impact on the Company’s consolidated financial statements.

Quarterly Financial Information
Revenue and operating results reported on a quarterly basis do not necessarily reflect trends in demand for the Company’s products or its operating efficiency. Revenue and operating results in any quarter may be significantly affected by customer shipments, installation timing, or the timing of the completion of one or more contracts where revenue is recognized upon shipment or customer acceptance rather than on the percentage-of-completion method of revenue recognition. The Company’s use of the percentage-of-completion revenue recognition method for large, long-term projects generally has the effect of smoothing significant fluctuations from quarter to quarter. See Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the Company’s revenue recognition policy. Quarterly earnings also vary as a result of the use of estimates including, but not limited to, the rates used in recording federal, state, and foreign income tax expense. See Notes 1 and 7 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information on the Company’s use of estimates and income tax related matters, respectively.

Selected quarterly financial information for the fiscal years ended September 29, 2012 and October 1, 2011 was as follows:


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total Year
	(expressed in thousands, except per share data)
2012
Revenue	$	133,697	$	129,019	$	141,697	$	137,843	$	542,256
Gross profit		58,713		56,390		63,668		57,421		236,192
Income before income taxes		23,320		16,588		18,527		21,345		79,780
Net income	$	15,539	$	11,157	$	9,609	$	15,251	$	51,556
Earnings per share:
Basic	$	0.99	$	0.70	$	0.60	$	0.95	$	3.24
Diluted	$	0.98	$	0.69	$	0.60	$	0.94	$	3.21

2011
Revenue	$	105,876	$	113,061	$	116,832	$	131,599	$	467,368
Gross profit		46,672		48,907		49,830		56,581		201,990
Income before income taxes		18,104		17,606		16,406		21,189		73,305
Net income	$	13,289	$	11,808	$	10,953	$	14,892	$	50,942
Earnings per share:
Basic	$	0.87	$	0.77	$	0.70	$	0.95	$	3.29
Diluted	$	0.86	$	0.75	$	0.69	$	0.94	$	3.24

Table of Contents

Forward Looking Statements
Statements contained in this Annual Report on Form 10-K including, but not limited to, the discussion under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, that are not statements of historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements in our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services; (iii) statements of assumptions underlying such statements; (iv) statements regarding business relationships with vendors, customers or collaborators; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Item 1A, Risk Factors. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K.


I tem 7A.	Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk
Approximately 75% of the Company’s revenue has historically been derived from customers outside of the United States and about 60% of this revenue (approximately 45% of the Company’s total revenue) is denominated in currencies other than the U.S. dollar. The Company’s international subsidiaries have functional currencies other than the Company’s U.S. dollar reporting currency and, occasionally, transact business in currencies other than their functional currencies. These non-functional currency transactions expose the Company to market risk on assets, liabilities and cash flows recognized on these transactions.

Table of Contents

The strengthening of the U.S. dollar relative to foreign currencies decreases the value of foreign currency-denominated revenue and earnings when translated into U.S. dollars. Conversely, a weakening of the U.S. dollar increases the value of foreign currency-denominated revenue and earnings. The following table illustrates financial results utilizing currency exchange rates from the prior year to estimate the impact of currency on the following financial items:

Foreign Currency Exchange Rates


	2012			2011		2010
	(expressed in thousands)
(Decrease) increase from currency translation on:
Orders	$	(10,006	)	$	13,325	$	3,430
Revenue		(8,453	)		11,771		3,333
Net Income	$	(697	)	$	1,433	$	105

The estimated net effect of currency translation on orders, revenue, and net income was unfavorable in fiscal year 2012 in comparison to fiscal year 2011, primarily driven by the unfavorable translation impact associated with the relative strengthening in the value of the U.S. dollar against the Euro throughout fiscal year 2012 compared to fiscal year 2011. This was partially offset by a favorable translation impact associated with the relative weakening in the value of the U.S. dollar against the Japanese Yen and Chinese Yuan throughout fiscal year 2012 as compared to fiscal year 2011.

A hypothetical 10% appreciation or depreciation in foreign currencies against the U.S. dollar, assuming all other variables are held constant, would result in an increase or decrease in fiscal year 2012 revenue of approximately $24.7 million.

The Company has operational procedures to mitigate these non-functional currency exposures. The Company also utilizes foreign currency exchange contracts to exchange currencies at set exchange rates on future dates to offset expected gains or losses on specifically identified exposures.

Mark-to-market gains and losses on derivatives designated as cash flow hedges in the Company’s currency hedging program, as well as on the translation of non-current assets and liabilities, are recorded within Accumulated Other Comprehensive Income in the Consolidated Balance Sheet. The Company recognizes gains and losses on fair value and cash flow hedges at the time a gain or loss is recognized on the hedged exposure in the Consolidated Statement of Income, or at the time the cash flow hedge is determined to be ineffective. The associated mark-to-market gains and losses are reclassified from Accumulated Other Comprehensive Income to the same line item in the Consolidated Statements of Income that the underlying hedged transaction is reported. Net gains and losses on foreign currency transactions, included in the accompanying Consolidated Statements of Income, were a net loss of $1.8 million in fiscal year 2012, net gain of $0.5 million in fiscal year 2011, and a net loss of $0.1 million in fiscal year 2010. See Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Interest Rates
The Company is also directly exposed to changes in market interest rates on cash, cash equivalents, short-term investments, and debt and is indirectly exposed to the impact of market interest rates on overall business activity.

On floating-rate investments, increases and decreases in market interest rates will increase or decrease future interest income, respectively. On floating-rate debt, increases or decreases in market interest rates will increase or decrease future interest expense, respectively. On fixed-rate investments, increases or decreases in market interest rates do not impact future interest income but may decrease or increase the fair market value of the investments, respectively.

At September 29, 2012, the Company had cash and cash equivalents of $79.9 million, most of which was invested in interest-bearing bank deposits or money market funds, with interest rates that are reset every 1-89 days. A hypothetical increase or decrease of 1% in market interest rates, assuming all other variables were held constant, would increase or decrease interest income by approximately $1.2 million on an annualized basis.

Table of Contents

The Company’s short-term borrowings outstanding at the end of fiscal year 2012 consisted of $0.2 million in non-interest bearing notes payable to vendors. At the end of fiscal year 2012, the Company had no outstanding floating rate debt.

A discount rate of 3.6% and an expected rate increase in future compensation levels of 3.0% was used in the calculation of the pension liability related to the non-contributory, defined benefit pension plan of one of the Company’s international subsidiaries. In addition, a 5.2% expected rate of return was used in the calculation of the plan assets associated with this defined benefit pension plan.


I tem 8.	Financial Statements and Supplementary Data

The Company’s audited financial statements and notes thereto described in Item 15 of this Annual Report on Form 10-K, and appearing on pages F-1 through F-32 of this report, are incorporated by reference herein. See also “Quarterly Financial Data” in Management’s Discussion and Analysis under Item 7 of this Annual Report on Form 10-K, which is incorporated herein by reference.


I tem 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.


I tem 9A.	Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “1934 Act”)) as of September 29, 2012. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in internal control over financial reporting during the fiscal quarter ended September 29, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal controls over financial reporting as of September 29, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on management’s assessment using this framework, management concluded that the Company’s internal control over financial reporting is effective as of September 29, 2012.

KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of this audit, has issued its report, included in Item 8, on the effectiveness of the Company’s internal control over financial reporting.

Table of Contents


Item 9B.	O ther Information

None.

P ART III


Item 10.	D irectors, Executive Officers and Corporate Governance

The required information with respect to the directors of the Company, the Company’s Code of Business Conduct, compliance with Section 16(a) of the Securities Exchange Act of 1934, and the Company’s Audit Committee, including the Audit Committee financial experts, is incorporated herein by reference to the information set forth under the headings “Election of Directors” and “Other Information” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 5, 2013.

Executive Officers serve at the discretion of and are elected by the Company’s Board of Directors. Business experience of the Executive Officers over the last five years is as follows:


Officer	Business Experience	Age	Executive Officer Since

Jeffrey A. Graves, President and Chief Executive Officer	President and Chief Executive Officer since May 2012. President and Chief Executive Officer of C&D Technologies, Inc. from July 2005 to May 2012.	51	2012

Arthur R. Baker III, Senior Vice President, Test	Senior Vice President, Test since November 2011. Vice President and General Manager of the Test Segment during October 2011. Vice President of Engineering and Operations from May 2010 to September 2011. Vice President of Engineering from August 2005 to April 2010.	44	2011

Joachim Hellwig, Senior Vice President, Sensors	Senior Vice President, Sensors since November 2011. Vice President, Sensors from January 2003 to October 2011.	63	2003

Susan E. Knight, Senior Vice President and Chief Financial Officer	Senior Vice President and Chief Financial Officer since November 2011. Vice President and Chief Financial Officer from October 2001 to October 2011.	58	2001

Steven G. Mahon, Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary	Senior Vice President, General Counsel and Chief Compliance Officer since October 2011; Corporate Secretary since August 2012. Vice President & Assistant General Counsel for Alliant Techsystems Inc. from January 2003 to September 2011.	51	2011

Kristin E. Trecker, Senior Vice President and Chief Human Resources Officer	Senior Vice President and Chief Human Resources Officer since August 2012. Vice President and Chief Human Resources Officer from February 2012 to August 2012. Senior Vice President of Human Resources for Lawson Software, Inc. from 2006 to July 2011.	47	2012

Mark D. Losee, Senior Vice President and Chief Information Officer	Senior Vice President and Chief Information Officer since September 2012. Director of IT from January 2012 to September 2012. Global Account Executive for Johnson Controls, Inc. from August 2009 to January 2012. Vice President, IT and Shared Services for Medtronic, Inc. for more than five years prior to his departure in August 2009.	55	2012

Table of Contents


I tem 11.	Executive Compensation

The information required by this Item is incorporated herein by reference to the information set forth under headings “Executive Compensation,” “Election of Directors,” and “Other Information – Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 5, 2013.


I tem 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Certain information required by this Item is incorporated herein by reference to the information set forth under the headings “Approval of Amendment to the MTS Systems Corporation 2011 Stock Incentive Plan” and “Other Information - Security Ownership of Principal Shareholders and Management” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 5, 2013.


I tem 13.	Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated herein by reference to the information set forth under the headings “Election of Directors – Other Information Regarding the Board” and “Other Information – Related Party Transactions” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held February 5, 2013.


I tem 14.	Principal Accountant Fees and Services

The information required by this Item is incorporated by reference to the information set forth under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on February 5, 2013.

P ART IV


I tem 15.	Exhibits and Financial Statement Schedules

	The following documents are filed as part of this report:


	(1)	Consolidated Financial Statements:

Table of Contents


		Report of Independent Registered Public Accounting Firm

		Consolidated Balance Sheets – September 29, 2012 and October 1, 2011

		Consolidated Statements of Income for the Fiscal Years Ended
		September 29, 2012, October 1, 2011 and October 2, 2010

		Consolidated Statements of Shareholders’ Investment and Comprehensive
		Income for the Fiscal Years Ended September 29, 2012,
		October 1, 2011 and October 2, 2010

		Consolidated Statements of Cash Flows for the Fiscal Years
		Ended September 29, 2012, October 1, 2011 and October 2, 2010

		Notes to Consolidated Financial Statements

(2)	Financial Statement Schedules:

		See accompanying Index to Financial Statements on page F-1.

(3)	Exhibits:


Exhibit
Number		Description

3.a		Restated and Amended Articles of Incorporation (Filed herewith).

3.b		Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.b of the Company’s Form 8-K Current Report filed on November 28, 2011.

10.a		Executive Variable Compensation Plan, incorporated herein by reference to Exhibit 5.02 of the Company’s Form 8-K Current Report filed on February 12, 2010.

10.b		2002 Employee Stock Purchase Plan, as amended, incorporated herein by reference to Exhibit 10.d of the Company’s Form 10-K filed for the fiscal year ended October 1, 2005.

10.c		2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 of the Company’s Form 8-K Current Report filed on February 7, 2006.

10.d		2011 Stock Incentive Plan, incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement filed on February 9, 2011.

10.e		Form of Notice of Grant of Restricted Stock (Director) under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.2 of the Company’s Form 8-K Current Report filed on February 7, 2006.

10.f		Uniform Terms and Conditions to Restricted Stock Awards (Director) under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.3 of Company’s Form 8-K Current Report filed on February 7, 2006.

10.g		Description of the terms of employment of Susan E. Knight, pursuant to an offer letter, incorporated by reference to Exhibit 10.r of the Company’s Form 10-Q/A for the fiscal quarter ended December 31, 2001.

Table of Contents


10.h		Letter dated February 6, 1987 from MTS Sensor Technologie GmbH and Co. KG (formerly, Hellwig GmbH) regarding its pension commitment to Joachim Hellwig, incorporated by reference to Exhibit 10.p of the Company’s Form 10-K filed for fiscal year ended October 2, 2004.

10.i		Employment Contract dated January 1, 1991 between MTS Sensor Technologie GmbH and Co. KG and Joachim Hellwig, incorporated by reference to Exhibit 10.q of the Company’s Form 10-K filed for fiscal year ended October 2, 2004.

10.j		Form of Indemnification Agreement between the Company and each of its directors and executive officers, incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K Current Report filed on September 1, 2006.

10.k		First Amendment to the Company’s 2006 Stock Incentive Plan, First Amendment to the Company’s Executive Variable Compensation Plan, amendments to the Company’s Executive Deferred Compensation Plan (2005), and amendments to the Company’s form of change in control agreements, incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 and 10.4 of the Company’s Form 8-K Current Report filed on October 27, 2008.

10.l		Change in Control Agreement, dated December 31, 2008, between the Company and Susan E. Knight incorporated herein by reference to Exhibit 10.p of the Company’s Form 10-K filed for the fiscal year ended October 3, 2009.

10.m		Form of Notice of Grant of Employee Restricted Stock Units under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K Current Report filed on June 29, 2009.

10.n		Uniform Terms and Conditions to Employee Restricted Stock Units under 2006 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of Company’s Form 8-K Current Report filed on June 29, 2009.

10.o		Form of Notice of Grant and Terms and Conditions of Employee Options under 2011 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 of the Company’s Registration Statement on Form S-8 filed February 9, 2011.

10.p		Form of Notice of Grant and Terms and Conditions of Employee Restricted Stock Units under 2011 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.2 of the Company’s Registration Statement on Form S-8 filed February 9, 2011.

10.q		Form of Notice of Grant and Terms and Conditions of Employee Restricted Stock under 2011 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.3 of the Company’s Registration Statement on Form S-8 filed February 9, 2011.

10.r		Form of Notice of Grant and Terms and Conditions of Restricted Stock for Directors under 2011 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.4 of the Company’s Registration Statement on Form S-8 filed February 9, 2011.

10.s		Administrative Agreement, dated as of September 19, 2011, between the Company and the U.S. Department of the Air Force, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed September 20, 2011.

10.t		Severance Agreement, dated October 6, 2011, between the Company and Steven G. Mahon, incorporated by reference to Exhibit 10.y of the Company’s Form 10-K for the fiscal year ended October 1, 2011.

Table of Contents


10.u		Change in Control Agreement, dated October 6, 2011, between the Company and Steven G. Mahon, incorporated by reference to Exhibit 10.z of the Company’s Form 10-K for the fiscal year ended October 1, 2011.

10.v		Interim Chief Executive Officer Bonus Award Agreement, dated November 22, 2011, between the Company and William V. Murray, incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K filed November 28, 2011.

10.w		Change in Control Agreement dated November 22, 2011, between the Company and Arthur R. Baker, incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K filed November 28, 2011.

10.x		Consulting Agreement, effective as of January 9, 2012, between the Company and Kathleen M. Staby, incorporated by reference to Exhibit 10 of the Company’s Form 8-K filed January 10, 2012.

10.y		Letter Agreement, dated as of March 31, 2012, between the Company and Jeffrey A. Graves, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 9, 2012.

10.z		Change in Control Agreement between the Company and Jeffrey A. Graves, incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed April 9, 2012.

10.aa		Severance Agreement between the Company and Jeffrey A. Graves, incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed April 9, 2012.

10.bb		Settlement Agreement, dated August 30, 2012, between the Company and the United States of America acting through the DOJ, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed August 30, 2012.

10.cc		Letter Agreement, dated September 7, 2012, Regarding Accelerated Share Repurchase Program between the Company and J.P. Morgan, as agent for JPMorgan Chase Bank, National Association, London Branch, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed September 10, 2012.

10.dd		Credit Agreement, dated September 28, 2012, among the Company, U.S. Bank National Association, HSBC Bank USA, National Association, Wells Fargo Bank, National Association, JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed October 4, 2012.

10.ee		Form of Change in Control Agreement (for executive officers of the Company) (Filed herewith).

10.ff		Severance Agreement, dated February 13, 2012, between the Company and Kristin Trecker (Filed herewith).

21.		Subsidiaries of the Company (Filed herewith).

23.		Consent of Independent Registered Public Accounting Firm (Filed herewith).

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

Table of Contents

SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		MTS SYSTEMS CORPORATION

		By:	/s/ JEFFREY A. GRAVES
			Jeffrey A. Graves
			President and Chief Executive Officer

Date:	November 28, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:


Signatures	Title	Date

/s/ JEFFREY A. GRAVES	President and Chief Executive Officer	November 28, 2012
Jeffrey A. Graves	President and Chief Executive Officer

/s/ SUSAN E. KNIGHT	Chief Financial Officer	November 28, 2012
Susan E. Knight	and Senior Vice President

/s/ DAVID J. ANDERSON	Non- Executive	November 27, 2012
David J. Anderson	Chair of the Board

/s/ JEAN-LOU CHAMEAU	Director	November 27, 2012
Jean-Lou Chameau

/s/ BRENDAN C. HEGARTY	Director	November 27, 2012
Brendan C. Hegarty

/s/ EMILY M. LIGGETT	Director	November 27, 2012
Emily M. Liggett

s/ WILLIAM V. MURRAY	Director	November 27, 2012
William V. Murray

/s/ BARB J. SAMARDZICH	Director	November 27, 2012
Barb J. Samardzich

/s/ GAIL P. STEINEL	Director	November 27, 2012
Gail P. Steinel

Table of Contents

MTS Systems Corporation and Subsidiaries

Index to Financial Statements


CONSOLIDATED FINANCIAL STATEMENTS		Page

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets – September 29, 2012 and October 1, 2011		F-3

Consolidated Statements of Income for the Fiscal Years Ended September 29, 2012, October 1, 2011, and October 2, 2010		F-4

Consolidated Statements of Shareholders’ Investment and Comprehensive Income for the Fiscal Years Ended September 29, 2012, October 1, 2011 and October 2, 2010		F-5

Consolidated Statements of Cash Flows for the Fiscal Years Ended September 29, 2012, October 1, 2011 and October 2, 2010		F-6

Notes to Consolidated Financial Statements		F-7 through F-32

Financial Statement Schedule


Schedule	Description

II	Summary of Consolidated Allowances For Doubtful Accounts	F-33

F-1

Table of Contents

R e port of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
MTS Systems Corporation:

We have audited the accompanying consolidated balance sheets of MTS Systems Corporation and subsidiaries as of September 29, 2012, and October 1, 2011, and the related consolidated statements of income, shareholders’ investment and comprehensive income, and cash flows for each of the fiscal years in the three-year period ended September 29, 2012. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. We also have audited MTS Systems Corporation and subsidiaries’ internal control over financial reporting as of September 29, 2012, based on criteria established in “Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)”. MTS Systems Corporation and subsidiaries’ management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A of this Form 10-K. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTS Systems Corporation and subsidiaries as of September 29, 2012 and October 1, 2011, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended September 29, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, MTS Systems Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 29, 2012, based on criteria established in “Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.”


	/s/ KPMG LLP

Minneapolis, Minnesota
November 28, 2012

F-2

Table of Contents

C o nsolidated Balance Sheets
(September 29 and October 1, respectively)


Assets	2012		2011
	(expressed in thousands)
Current Assets:
Cash and cash equivalents	$	79,852	$	104,095
Accounts receivable, net of allowance for doubtful accounts of $2,247 and $1,534 respectively		84,119		82,510
Unbilled accounts receivable		51,306		54,554
Inventories		67,979		65,987
Prepaid expenses and other current assets		6,982		4,354
Deferred income taxes		10,665		12,556
Total current assets		300,903		324,056
Property and equipment, net		61,653		56,252
Goodwill		16,239		16,027
Other intangibles, net		23,077		25,843
Other assets		4,696		4,568
Deferred income taxes		2,870		1,113
Total assets	$	409,438	$	427,859

Liabilities and Shareholders’ Investment

Current Liabilities:
Short-term borrowings	$	230	$	40,285
Accounts payable		33,744		27,794
Accrued payroll and related costs		30,731		33,577
Advance payments from customers		65,833		63,307
Accrued warranty costs		3,984		5,290
Accrued income taxes		3,510		5,453
Deferred income taxes		2,627		2,285
Other accrued liabilities		19,573		17,623
Total current liabilities		160,232		195,614
Deferred income taxes		8,671		9,190
Non-current accrued income taxes		1,666		5,106
Pension benefit plan obligation		7,761		2,691
Other long-term liabilities		4,389		4,410
Total liabilities		182,719		217,011

Shareholders’ Investment:
Common stock, 25¢ par value; 64,000 shares authorized: 15,640 and 15,632 shares issued and outstanding as of September 29, 2012 and October 1, 2011, respectively		3,910		3,908
Additional paid-in capital		652		5,319
Retained earnings		211,256		185,332
Accumulated other comprehensive income		10,901		16,289
Total shareholders’ investment		226,719		210,848
Total liabilities and shareholders’ investment	$	409,438	$	427,859

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

F-3

Table of Contents

C o nsolidated Statements of Income
For the Fiscal Years Ended September 29, October 1 and October 2, respectively


	2012			2011			2010
	(expressed in thousands, except per share data)

Revenue:
Product	$	476,306		$	400,840		$	315,691
Service		65,950			66,528			58,362
Total Revenue		542,256			467,368			374,053
Cost of Sales:
Product		272,706			231,040			192,454
Service		33,358			34,338			29,805
Total Cost of Sales		306,064			265,378			222,259
Gross Profit		236,192			201,990			151,794
Operating Expenses:
Selling and marketing		74,637			69,781			65,841
General and administrative		59,151			44,230			42,663
Research and development		21,893			14,785			14,945
Total Operating Expenses		155,681			128,796			123,449
Income From Operations		80,511			73,194			28,345
Interest expense		(849	)		(1,283	)		(1,418	)
Interest income		544			368			366
Other (expense) income, net		(426	)		1,026			(81	)
Income Before Income Taxes		79,780			73,305			27,212
Provision for income taxes		28,224			22,363			8,636
Net Income	$	51,556		$	50,942		$	18,576
Earnings Per Share
Basic	$	3.24		$	3.29		$	1.14
Diluted	$	3.21		$	3.24		$	1.14

Dividends declared per share	$	1.05		$	0.85		$	0.60

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

F-4

Table of Contents

C o nsolidated Statements of Shareholders’ Investment and Comprehensive Income
(For the Fiscal Years Ended September 29, October 1 and October 2, respectively, expressed in thousands)


													Accumulated
	Common Stock						Additional						Other			Total
	Shares						Paid-In			Retained			Comprehensive			Shareholders
	Issued			Amount			Capital			Earnings			Income			Investment
Balance, October 3, 2009		16,564		$	4,141		$	-		$	174,301		$	25,523		$	203,965
Net income		-			-			-			18,576			-			18,576
Foreign currency translation		-			-			-			-			(10,100	)		(10,100	)
Pension benefit obligation adjustments, Net of tax		-			-			-			-			(1,130	)		(1,130	)
Derivative instruments, net of tax		-			-			-			-			388			388
Total comprehensive income		-			-			-			18,576			(10,842	)		7,734
Exercise of stock options		16			4			319			-			-			323
Stock-based compensation		19			5			2,378			-			-			2,383
Tax shortfall from equity compensation		-			-			(1,151	)		-			-			(1,151	)
Issuance for employee stock purchase plan		33			8			684			-			-			692
Common stock purchased and retired		(1,368	)		(342	)		(2,230	)		(35,584	)		-			(38,156	)
Dividends, $0.60 per share		-			-			-			(9,684	)		-			(9,684	)
Balance, October 2, 2010		15,264			3,816			-			147,609			14,681			166,106
Net income		-			-			-			50,942			-			50,942
Foreign currency translation		-			-			-			-			777			777
Pension benefit obligation adjustments, net of tax		-			-			-			-			327			327
Derivative instruments, net of tax		-			-			-			-			504			504
Total comprehensive income		-			-			-			50,942			1,608			52,550
Exercise of stock options		332			83			12,129			-			-			12,212
Stock-based compensation		18			5			2,699			-			-			2,704
Tax shortfall from equity compensation		-			-			(307	)		-			-			(307	)
Issuance for employee stock purchase plan		24			6			660			-			-			666
Common stock purchased and retired		(6	)		(2	)		(9,862	)		-			-			(9,864	)
Dividends, $0.85 per share		-			-			-			(13,219	)		-			(13,219	)
Balance, October 1, 2011		15,632			3,908			5,319			185,332			16,289			210,848
Net income		-			-			-			51,556			-			51,556
Foreign currency translation		-			-			-			-			(1,996	)		(1,996	)
Pension benefit obligation adjustments, net of tax		-			-			-			-			(3,600	)		(3,600	)
Derivative instruments, net of tax		-			-			-			-			208			208
Total comprehensive income		-			-			-			51,556			(5,388	)		46,168
Exercise of stock options		491			123			17,132			-			-			17,255
Stock-based compensation		40			10			3,422			-			-			3,432
Tax benefit from equity compensation		-			-			521			-			-			521
Issuance for employee stock purchase plan		19			5			626			-			-			631
Common stock purchased and retired		(542	)		(136	)		(26,368	)		(8,819	)		-			(35,323	)
Dividends, $1.05 per share		-			-			-			(16,813	)		-			(16,813	)
Balance, September 29, 2012		15,640		$	3,910		$	652		$	211,256		$	10,901		$	226,719

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

F-5

Table of Contents

C onsolidated Statements of Cash Flows
(For the Fiscal Years Ended September 29, October 1, October 2, respectively)


	2012			2011			2010
	(expressed in thousands)
Cash Flows from Operating Activities:
Net income	$	51,556		$	50,942		$	18,576
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		3,372			2,701			2,448
Excess tax benefits from stock-based compensation		(1,228	)		(432	)		(65	)
Net periodic pension benefit cost		664			724			401
Depreciation and amortization		13,782			12,894			12,751
Deferred income taxes		29			5,357			2,121
Bad debt provision		896			729			159
Changes in operating assets and liabilities:
Accounts and unbilled contracts receivable		(398	)		(44,714	)		5,599
Inventories		(2,104	)		(13,610	)		(5,408	)
Prepaid expenses		(919	)		(268	)		(45	)
Accounts payable		5,922			5,492			3,152
Accrued payroll and related costs		(2,257	)		740			7,441
Advance payments from customers		2,251			19,123			(2,415	)
Accrued warranty costs		(1,223	)		(2,191	)		(2,093	)
Other assets and liabilities		(5,318	)		5,471			(9,432	)
Net Cash Provided by Operating Activities		65,025			42,958			33,190
Cash Flows from Investing Activities:
Additions to property and equipment		(15,625	)		(10,145	)		(11,214	)
Payments for acquisition		-			-			(6,314	)
Net Cash Used in Investing Activities		(15,625	)		(10,145	)		(17,528	)
Cash Flows from Financing Activities:
Net (payments) receipts under short-term borrowings		(40,458	)		37			29
Excess tax benefits from stock-based compensation		1,228			432			65
Cash dividends		(15,874	)		(9,300	)		(12,107	)
Proceeds from exercise of stock options and employee stock purchase plan		17,886			12,878			1,015
Payments to purchase and retire common stock		(35,323	)		(9,864	)		(38,156	)
Net Cash Used in Financing Activities		(72,541	)		(5,817	)		(49,154	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(1,102	)		488			(8,782	)
Cash and Cash Equivalents:
(Decrease) increase during the year		(24,243	)		27,484			(42,274	)
Balance, beginning of year		104,095			76,611			118,885
Balance, end of year	$	79,852		$	104,095		$	76,611
Supplemental Disclosures of Cash Flows:
Cash paid during the year for:
Interest	$	947		$	1,284		$	1,549
Income taxes		33,789			7,061			9,669
Non-cash financing activities:
Dividends declared not yet paid	$	4,858		$	3,919		$	-

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

F-6

Table of Contents

N otes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies:

Nature of Operations
MTS Systems Corporation is a leading global supplier of high performance test systems and position sensors. The Company’s hardware and software solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS’ position sensors provide controls for a variety of industrial and vehicular applications.

Fiscal Year
The Company’s fiscal year ends on the Saturday closest to September 30. The Company’s fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010 consisted of 52 weeks.

Consolidation
The Consolidated Financial Statements include the accounts of MTS Systems Corporation and its wholly owned subsidiaries (the “Company”). Significant intercompany balances and transactions have been eliminated.

Revenue Recognition
The Company recognizes revenue on a sales arrangement when it is realized or realizable and earned, which occurs when all of the following criteria have been met: persuasive evidence of an arrangement exists; delivery and title transfer has occurred or services have been rendered; the sales price is fixed and determinable; collectability is reasonably assured; and all significant obligations to the customer have been fulfilled.

Orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocols may contain multiple elements for revenue recognition purposes. The Company considers each deliverable that provides value to the customer on a standalone basis a separable element. Separable elements in these arrangements may include the design and manufacture of hardware and essential software, installation services, training and/or post contract software maintenance and support. The Company initially allocates consideration to each separable element using the relative selling price method. Selling prices are determined by the Company based on either vendor-specific objective evidence (“VSOE”) (the actual selling prices of similar products and services sold on a standalone basis) or, in the absence of VSOE, the Company’s best estimate of the selling price. Factors considered by the Company in determining estimated selling prices for applicable elements generally include overall economic conditions, customer demand, costs incurred by the Company to provide the deliverable, as well as the Company’s historical pricing practices. Under these arrangements, revenue associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement. Under arrangements where special acceptance protocols exist, installation services and training are not considered separable. Accordingly, revenue for the entire arrangement is recognized upon the completion of installation, training and fulfillment of any other significant obligations specific to the terms of the arrangement. Arrangements that do not contain any separable elements are typically recognized when the products are shipped and title has transferred to the customer.

Certain contractual arrangements require longer production periods, generally longer than six months (long-term contracts), and may contain non-routine installations and special acceptance protocols. These arrangements often include hardware and essential software, installation services, training and support. Long-term contractual arrangements involving essential software typically include significant production, modification, and customization. For long-term arrangements with essential software and all other long-term arrangements with complex installations and/or unusual acceptance protocols, revenue is recognized using the percentage-of-completion method, based on the cost incurred to-date relative to estimated total cost of the contract. Elements of an arrangement that do not separately fall within the scope of the percentage of completion method (e.g. training and post contract software maintenance and support) are recognized as the service is provided in amounts determined based on VSOE, or in the absence of VSOE, the Company’s best estimate of the selling price.

F-7

Table of Contents

Under the terms of the Company’s long-term contracts, revenue recognized using the percentage-of-completion method may not, in certain circumstances, be invoiced until completion of contractual milestones, upon shipment of the equipment, or upon installation and acceptance by the customer. Unbilled amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Accounts Receivable.

Revenue from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. Revenue from post contract software maintenance and support services is recognized ratably over the defined contractual period of the maintenance agreement.

The Company’s sales arrangements typically do not include specific performance-, cancellation-, termination-, or refund-type provisions. In the event a customer cancels a contractual arrangement, the Company would typically be entitled to receive reimbursement from the customer for actual costs incurred under the arrangement plus a reasonable margin.

Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.

Shipping and Handling
Freight revenue billed to customers is reported within Revenue on the Consolidated Statements of Income, and expenses incurred for shipping products to customers are reported within Cost of Sales on the Consolidated Statements of Income.

Research and Development
Research and development costs associated with new products are charged to operations as incurred.

Foreign Currency
The financial position and results of operations of the Company’s foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities are translated using fiscal period-end exchange rates, and monthly statements of income are translated using average exchange rates applicable to each month, with the resulting translation adjustments recorded as a separate component of Shareholders’ Investment. Gains and losses from foreign currency transactions are recognized in the Consolidated Statements of Income. The Company recorded net foreign currency transaction gains/(losses) of ($1.8) million, $0.5 million, and ($0.1) million during the fiscal year ended September 29, 2012, October 1, 2011, and October 2, 2010, respectively.

Cash and Cash Equivalents
Cash and cash equivalents represent cash, demand deposits, and highly liquid investments with original maturities of three months or less. Cash equivalents are recorded at cost, which approximates fair value. Cash equivalents, both inside and outside the United States, are invested in money market funds and bank deposits in local currency denominations.

Accounts Receivable and Long-Term Contracts
The Company grants credit to customers, but it generally does not require collateral or other security from domestic customers. When deemed appropriate, receivables from customers located outside the United States are supported by letters of credit from financial institutions. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of those specific customers. The Company records an allowance to reduce receivables to the amount that is reasonably believed to be collectible and considers factors such as the financial condition of the customer and the aging of the receivables. If there is a deterioration of a customer’s financial condition, if the Company becomes aware of additional information related to the credit worthiness of a customer, or if future actual default rates on trade receivables in general differ from those currently anticipated, the Company may have to adjust its allowance for doubtful accounts, which would affect earnings in the period the adjustments were made.

F-8

Table of Contents

The Company enters into long-term contracts for customized equipment sold to its customers. Under the terms of such contracts, revenue recognized using the percentage-of-completion method may be invoiced upon completion of contractual milestones, shipment to the customer, or installation and customer acceptance. Unbilled amounts relating to these contracts are reflected as Unbilled Accounts Receivable in the accompanying Consolidated Balance Sheets. Amounts unbilled at September 29, 2012 are expected to be invoiced during fiscal year 2013.

Inventories
Inventories consist of material, labor, and overhead costs and are stated at the lower of cost or market value, determined under the first-in, first-out accounting method. Inventories at September 29, 2012 and October 1, 2011 were as follows:


	2012		2011
	(expressed in thousands)
Customer projects in various stages of completion	$	17,704	$	19,026
Components, assemblies and parts		50,275		46,961
Total	$	67,979	$	65,987

Software Development Costs
The Company capitalizes certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials and services, salary and benefits of the Company’s development and technical support staff, and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on the Company’s product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and the Company has established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the product’s estimated economic life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.

The Company’s capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value will be expensed in the period such a determination is made. The Company reached technological feasibility for certain software products and, as a result, capitalized $0.5 million and $3.7 million of software development costs during the fiscal years ended September 29, 2012 and October 1, 2011, respectively. Amortization expense for software development costs was $2.6 million, $1.5 million and $1.3 million for the fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010, respectively. See Note 3 to the Consolidated Financial Statements for additional information on capitalized software development costs.

Impairment of Long-lived Assets
The Company reviews the carrying value of long-lived assets or asset groups, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, the Company recognizes an asset impairment charge against operations. The amount of the impairment loss recorded is the amount by which the carrying value of the impaired asset or asset group exceeds its fair value.

F-9

Table of Contents

Property and Equipment
Property and equipment is stated at cost. Additions, replacements, and improvements are capitalized at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is recorded over the following estimated useful lives of the property:

Buildings and improvements: 10 to 40 years
Machinery and equipment: 3 to 10 years

Building and equipment additions are generally depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax purposes. See Note 3 to the Consolidated Financial Statements for additional information on property and equipment.

Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of the net assets of businesses acquired. Goodwill is not amortized, but instead tested at least annually for impairment. Goodwill is also tested for impairment as changes in circumstances occur indicating that the carrying value may not be recoverable. Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired.

The Company has three reporting units, two of which are assigned goodwill. At September 29, 2012, one reporting unit was assigned $14.7 million of goodwill while another was assigned $1.5 million.

Impairment testing for indefinite-lived intangible assets requires a comparison between the fair value and the carrying value of the asset. If the carrying value of the asset exceeds its fair value, the asset is reduced to fair value. At both September 29, 2012 and October 1, 2011, there were no indefinite-lived intangible assets.

Intangible assets with finite lives are amortized on a straight-line basis over the expected period to be benefited by future cash flows, and reviewed for impairment. Fair values of goodwill and intangible assets are primarily determined using discounted cash flow analyses. At both September 29, 2012 and October 1, 2011, the Company determined there was no impairment of its goodwill or intangible assets. See Note 3 to the Consolidated Financial Statements for additional information on goodwill and intangible assets.

Other Assets
Other assets at September 29, 2012 and October 1, 2011 include security deposits paid on leased property and cash redemption values on group insurance policies.

Warranty Obligations
Sales of the Company’s products and systems are subject to limited warranty obligations that are included in customer contracts. For sales that include installation services, warranty obligations typically extend for a period of twelve to twenty-four months from the date of either shipment or acceptance. Product obligations typically extend for a period of twelve to twenty-four months from the date of purchase. Under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies it deems defective due to workmanship or materials. The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance, or misuse. The Company records general warranty provisions based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty claims experience over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. In addition, warranty provisions are also recognized for certain nonrecurring product claims that are individually significant.

F-10

Table of Contents

Warranty provisions and claims for the years ended September 29, 2012 and October 1, 2011, were as follows:


	2012			2011
	(expressed in thousands)
Beginning balance	$	5,290		$	7,505
Warranty claims		(5,175	)		(5,679	)
Warranty provisions		3,652			2,970
Adjustments to preexisting warranties		300			518
Translation adjustment		(83	)		(24	)
Ending balance	$	3,984		$	5,290

Derivative Financial Instruments
The Company’s results of operations could be materially impacted by changes in foreign currency exchange rates, as well as interest rates on its floating rate indebtedness. In an effort to manage exposure to these risks, the Company periodically enters into forward and option currency exchange contracts, interest rate swaps and forward interest rate swaps. Because the market value of these hedging contracts is derived from current market rates, they are classified as derivative financial instruments. The Company does not use derivatives for speculative or trading purposes. The derivative contracts contain credit risk to the extent that the Company’s bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality. For derivative instruments executed under master netting arrangements, the Company has the contractual right to offset fair value amounts recognized for the right to reclaim cash collateral with obligations to return cash collateral. The Company does not offset fair value amounts recognized on these derivative instruments. At both September 29, 2012 and October 1, 2011, the Company did not have any foreign exchange contracts with credit-risk related contingent features.

The Company’s currency exchange and interest rate swaps are designated as cash flow hedges and qualify as hedging instruments pursuant to ASC 815. The Company also has derivatives which are not designated as cash flow hedges and, therefore, are accounted for and reported under the guidance of ASC 830. Regardless of designation for accounting purposes, the Company believes that all of its derivative instruments are hedges of transactional risk exposures. The fair value of the Company’s outstanding designated and undesignated derivative assets and liabilities are reported in the September 29, 2012 and October 1, 2011 Consolidated Balance Sheet as follows:


	September 29, 2012
	Prepaid Expenses and Other Current Assets		Other Accrued Liabilities
Designated hedge derivatives:	(expressed in thousands)
Foreign exchange cash flow hedges		432	$	1,157
Total designated hedge derivatives		432		1,157

Derivatives not designated as hedges:
Foreign exchange balance sheet derivatives		-		415
Total hedge and other derivatives	$	432	$	1,572

F-11

Table of Contents


	October 1, 2011
	Prepaid Expenses and Other Current Assets		Other Accrued Liabilities
Designated hedge derivatives:	(expressed in thousands)
Foreign exchange cash flow hedges	$	746	$	1,041
Interest rate swaps		-		617
Total designated hedge derivatives		746		1,658

Derivatives not designated as hedges:
Foreign exchange balance sheet derivatives		222		-
Total hedge and other derivatives	$	968	$	1,658

Cash Flow Hedging – Currency Risks

Currency exchange contracts utilized to maintain the functional currency value of expected financial transactions denominated in foreign currencies are designated as cash flow hedges. Qualifying gains and losses related to changes in the market value of these contracts are reported as a component of Accumulated Other Comprehensive Income (“AOCI”) within Shareholders’ Investment on the Consolidated Balance Sheets and reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The effective portion of the cash flow hedges represents the change in fair value of the hedge that offsets the change in the functional currency value of the hedged item. The Company periodically assesses whether its currency exchange contracts are effective and, when a contract is determined to be no longer effective as a hedge, the Company discontinues hedge accounting prospectively. Subsequent changes in the market value of ineffective currency exchange contracts are recognized as an increase or decrease in Revenue on the Consolidated Statement of Income, as that is the same line item in which the underlying hedged transaction is reported.

At September 29, 2012 and October 1, 2011, the Company had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $60.4 million and $54.7 million, respectively. Upon netting offsetting contracts to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding were $49.7 million and $46.8 million at September 29, 2012 and October 1, 2011, respectively. At September 29, 2012, the net market value of the foreign currency exchange contracts was a net liability of $0.7 million, consisting of $1.1 million in liabilities and $0.4 million in assets. At October 1, 2011 the net market value of the foreign currency exchange contracts was a net liability of $0.3 million, consisting of $1.0 million in liabilities and $0.7 million in assets.

The pretax amounts recognized in AOCI on currency exchange contracts for the fiscal years ended September 29, 2012 and October 1, 2011, including gains (losses) reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (“OCI”), are as follows:


	2012			2011
	(expressed in thousands)
Beginning unrealized net loss in AOCI	$	(365	)	$	(384	)
Net loss reclassified into Revenue (effective portion)		162			1,005
Net loss reclassified into Revenue upon the removal of hedge designations on underlying foreign currency transactions that were cancelled		-			12
Net loss recognized in OCI (effective portion)		(445	)		(998	)
Ending unrealized net loss in AOCI	$	(648	)	$	(365	)

F-12

Table of Contents

The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was less than $0.1 million in each of the fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010. At September 29, 2012, the amount projected to be reclassified from AOCI into earnings in the next 12 months was a net loss of $0.9 million. The maximum remaining maturity of any forward or optional contract at September 29, 2012 was 1.8 years.

Cash Flow Hedging - Interest Rate Risks

During the fiscal years ended September 29, 2012 and October 1, 2011, the Company used floating to fixed interest rate swaps to mitigate its exposure to future changes in interest rates related to its floating rate indebtedness. The Company had designated these interest rate swap arrangements as cash flow hedges. As a result, changes in the fair value of the interest rate swaps were recorded in AOCI within Shareholders’ Investment on the Consolidated Balance Sheets throughout the entire contractual term of each of the interest rate swap arrangements.

During the fiscal year ended September 29, 2012, all of the Company’s interest rate swap arrangements expired and, as a result, the Company had no outstanding interest rate swap arrangements at September 29, 2012. At October 1, 2011, the Company had outstanding interest rate swaps with total notional amounts of $24.0 million. In January 2011, the Company entered into forward interest rate swaps with a total notional amount of $27.0 million effective December 2011 to pay fixed interest rates ranging from 1.02% to 1.08% in exchange for interest received at monthly U.S. LIBOR.

During the periods each of the interest rates swaps were outstanding, the Company paid fixed interest in exchange for interest received at monthly U.S. LIBOR. At October 1, 2011, the weighted-average interest rate payable by the Company under the terms of the credit facility borrowings and outstanding interest rate swaps was 2.47%. At October 1, 2011, there was a 45 basis-point differential between the variable rate interest paid by the Company on its outstanding credit facility borrowings and the variable rate interest received on the interest rate swaps. As a result of this differential, the overall effective interest rate applicable to outstanding credit facility borrowings, under the terms of the credit facility and interest rate swap agreements at October 1, 2011, was 2.92%.

The total market value of interest rate swaps and forward interest rate swaps at October 1, 2011 was a liability of $0.6 million. The pretax amounts recognized in AOCI on interest rate swaps and forward interest rate swaps for fiscal years ended September 29, 2012 and October 1, 2011 are as follows:


	2012			2011
	(expressed in thousands)
Beginning unrealized net loss in AOCI	$	(617	)	$	(1,406	)
Net loss reclassified into interest expense (effective portion)		630			965
Net loss recognized in OCI (effective portion)		(13	)		(176	)
Ending unrealized net loss in AOCI	$	-		$	(617	)

Foreign Currency Balance Sheet Derivatives

The Company also uses foreign currency derivative contracts to maintain the functional currency value of monetary assets and liabilities denominated in non-functional foreign currencies. The gains and losses related to the changes in the market value of these derivative contracts are included in Other Income (Expense), net on the Consolidated Statements of Income.

At September 29, 2012 and October 1, 2011, the Company had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of $51.4 million and $15.9 million, respectively. Upon netting offsetting contracts by counterparty banks to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding at September 29, 2012 and October 1, 2011 was $6.6 and $4.4 million, respectively. At September 29, 2012, the net market value of the foreign exchange balance sheet derivative contracts was a net liability of $0.4 million. At October 1, 2011, the net market value of the foreign exchange balance sheet derivative contracts was a net asset of $0.2 million.

F-13

Table of Contents

The net losses recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts for the fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010 are as follows:


	2012			2011			2010
	(expressed in thousands)
Net loss recognized in Other (expense) income, net	$	(294	)	$	(464	)	$	(834	)

Income Taxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of its deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results. See Note 7 to the Consolidated Financial Statements for additional information on income taxes.

Earnings Per Common Share

Basic earnings per share are computed by dividing net earnings by the daily weighted average number of common shares outstanding during the applicable periods. Using the treasury stock method, diluted earnings per share includes the potentially dilutive effect of common shares issued in connection with outstanding stock-based compensation options and grants. Under the treasury stock method, shares associated with certain stock options have been excluded from the diluted weighted average shares outstanding calculation because the exercise of those options would lead to a net reduction in common shares outstanding. As a result, stock options to acquire 0.4 million, 0.4 million, and 1.2 million weighted common shares have been excluded from the diluted weighted shares outstanding calculation for the fiscal year ended September 29, 2012, October 1, 2011, and October 2, 2010, respectively. The potentially dilutive effect of common shares issued in connection with outstanding stock options is determined based on income before discontinued operations. A reconciliation of these amounts is as follows:


	2012		2011		2010
	(expressed in thousands, except per share data)
Net income	$	51,556	$	50,942	$	18,576
Weighted average common shares outstanding		15,913		15,487		16,281
Dilutive potential common shares		164		252		66
Weighted average dilutive common shares outstanding		16,077		15,739		16,347
Earnings per share:
Basic	$	3.24	$	3.29	$	1.14
Diluted	$	3.21	$	3.24	$	1.14

F-14

Table of Contents

Stock Purchases

During the fourth quarter of fiscal year 2012, the Company entered into an accelerated share purchase agreement with an unrelated third party investment bank. This forward contract is indexed to, and potentially settled in, the Company’s common stock. This forward contract meets the requirements of ASC 815-40 to be classified as permanent equity. In connection with the agreement, the Company made an initial $35.0 million payment to the investment bank and immediately received an initial delivery of approximately 0.5 million shares of its common stock with a fair value of $28.0 million as of the purchase date. Effective as of the date of the initial 0.5 million stock purchase, the transaction was accounted for as a share retirement, resulting in a reduction of common stock, additional paid-in capital and retained earnings of $0.1 million, $26.1 million and $1.8 million, respectively. The remaining $7.0 million of the Company’s initial payment to the investment bank was reported as a reduction in retained earnings. As long as the forward contract continues to meet the requirements to be classified as permanent equity, the Company will not record future changes in its fair value. The contract continued to meet those requirements as of September 29, 2012 and the Company expects it will continue to meet those requirements through the settlement date. The agreement expires in the third quarter of fiscal year 2013; however the investment bank has the right to accelerate the end of the purchase period. Upon settlement of the contract, the Company will adjust common stock, as well as either additional paid-in capital or retained earnings, as appropriate, to reflect the final settlement amount.

The specific number of shares that the Company will ultimately purchase under the accelerated share purchase agreement will be based on the volume weighted average price (“VWAP”) of the Company’s common stock during the purchase period, less an agreed upon discount, unless such discounted VWAP were to fall below a specified floor price, in which case the floor price would be in effect. The maximum amount of shares of common stock the Company can be required to issue to settle the agreement cannot exceed 2.0 million. At September 29, 2012, if the accelerated share purchase agreement had been settled on that date, the investment bank would have been required to deliver to the Company approximately 128,000 shares of the Company’s common stock. For every $1.00 increase or decrease in the Company’s VWAP, the settlement amount changes by approximately 12,000 shares.

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant, and recognizes the cost over the period during which an employee is required to provide services in exchange for the award.

For purposes of determining estimated fair value of stock-based payment awards, the Company utilizes a Black-Scholes option pricing model, which requires the input of certain assumptions requiring management judgment. Because the Company’s employee stock option awards have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect fair value estimates, existing models may not provide a reliable single measure of the fair value of employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time that could result in changes to these assumptions and methodologies and thereby materially impact the fair value determination of future grants of stock-based payment awards. If factors change and the Company employs different assumptions in future periods, the compensation expense recorded may differ significantly from the stock-based compensation expense recorded in the current period. See Note 2 to the Consolidated Financial Statements for additional information on stock-based compensation.

Comprehensive Income

Comprehensive Income, a component of Shareholders’ Investment, for the fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010 consists of net income, pension benefit plan adjustments, derivative instrument gains or losses and foreign currency translation adjustments.

F-15

Table of Contents

The accumulated balances for each component of Accumulated Other Comprehensive Income were as follows:


	Derivative Financial Instrument Unrealized Loss			Pension Benefit Plan Adjustments			Foreign Currency Translation Adjustment			Total Accumulated Other Comprehensive Income
	(expressed in thousands)
Balances at October 3, 2009	$	(1,508	)	$	(1,222	)	$	28,253		$	25,523
Foreign exchange translation adjustments		-			23			(10,123	)		(10,100	)
Pension benefit plan adjustments, net of tax of ($493)		-			(1,141	)		-			(1,141	)
Change in unrealized loss, net of tax of ($277)		(470	)		-			-			(470	)
Realized loss, net of tax of $517		858			11			-			869
Balances at October 2, 2010		(1,120	)		(2,329	)		18,130			14,681
Foreign exchange translation adjustments		-			50			727			777
Pension benefit plan adjustments, net of tax of $96		-			221			-			221
Change in unrealized loss, net of tax of ($433)		(741	)		-			-			(741	)
Realized loss, net of tax of $783		1,245			106			-			1,351
Balances at October 1, 2011		(616	)		(1,952	)		18,857			16,289
Foreign exchange translation adjustments		-			127			(2,123	)		(1,996	)
Pension benefit plan adjustments, net of tax of ($1,579)		-			(3,654	)		-			(3,654	)
Change in unrealized loss, net of tax of ($167)		(291	)		-			-			(291	)
Realized loss, net of tax of $316		499			54			-			553
Balances at September 29, 2012	$	(408	)	$	(5,425	)	$	16,734		$	10,901

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements, and reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Additionally, the Company frequently undertakes significant technological innovation on certain of its long-term contracts, involving performance risk that may result in delayed delivery of product and/or revenue and gross profit variation due to changes in the ultimate costs of these contracts versus estimates.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” ASU 2011-05 amends Topic 220, “Comprehensive Income,” to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ investment. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU 2011-05 should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 which, for the Company, will be the beginning of fiscal year 2013. Early adoption is permitted. The adoption of ASU 2011-05 will not have a material impact on the Company’s consolidated financial statements.

F-16

Table of Contents

2. Stock-Based Compensation:

The Company compensates officers, directors, and employees with stock-based compensation under two stock plans approved by the Company’s shareholders in 2006 and 2011, and administered under the supervision of the Company’s Board of Directors. During the year ended October 2, 2010, the Company awarded stock options, restricted stock grants, and restricted stock units, under the 2006 plan. The 2006 plan expired, and no further grants were made after January 31, 2011. During the years ended September 29, 2012 and October 1, 2011, the Company awarded stock options, restricted stock grants, and restricted stock units under the 2011 plan. At September 29, 2012, a total of 517,880 shares were available for future grant under the 2011 stock plan. Shares will be available for issuance under the 2011 stock plan until January 31, 2018.

During the years ended October 1, 2011 and October 2, 2010, the Company issued shares of its common stock to participants in the Company’s Employee Stock Purchase Plan (“ESPP”) under a stock plan approved by the Company’s shareholders in 2002. During the fiscal year ended October 1, 2011, the Company’s shareholders approved a 2012 ESPP which was effective on January 1, 2012. The 2002 ESPP expired, and no further share issuances occurred after December 31, 2011. During the year ended September 29, 2012, the Company issued shares of its common stock to participants under the 2012 ESPP. At September 29, 2012, a total of 740,122 shares were available for ESPP share issuances under the 2012 stock plan. Shares will be available for issuance under the 2012 ESPP until December 31, 2021.

Stock-Based Compensation Expense

Stock-based compensation expense for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share data):


	2012			2011			2010

Stock-based compensation expense by type of award:
Employee stock options	$	1,599		$	1,383		$	1,519
Employee stock purchase plan (ESPP)		184			159			175
Restricted stock grants and units		1,650			1,162			691
Amounts capitalized as inventory		(742	)		(652	)		(639	)
Amounts recognized in income for amounts previously capitalized as inventory		681			649			702

Total stock-based compensation included in income from operations		3,372			2,701			2,448
Income tax benefit on stock-based compensation		(1,161	)		(931	)		(828	)
Net compensation expense included in net income	$	2,211		$	1,770		$	1,620

At September 29, 2012, there was $3.2 million of total stock option expense related to non-vested awards not yet recognized, which is expected to be recognized over a weighted average period of approximately 1.5 years. At September 29, 2012, there was $1.8 million and $0.3 million of total restricted stock expense related to non-vested awards of restricted stock units and restricted stock grants, respectively, not yet recognized, which is expected to be recognized over a weighted average period of approximately 1.5 years and 1.0 years, respectively.

F-17

Table of Contents

The fair value of stock options granted under stock-based compensation programs has been estimated as of the date of each grant using the multiple option form of the Black-Scholes valuation model, based on the grant price and assumptions regarding the expected grant life, stock price volatility, dividends, and risk-free interest rates. Each vesting period of an option award is valued separately, with this value being recognized evenly over the vesting period. The weighted average per share fair value of stock options granted during the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was $8.36, $9.45 and $6.73, respectively. The weighted average assumptions used to determine fair value of stock options granted during those fiscal years were as follows:


	2012			2011			2010
Expected life (in years)		3.5			3.0			2.9
Risk-free interest rate		0.5	%		0.8	%		1.0	%
Expected volatility		34.5	%		35.4	%		40.0	%
Dividend yield		2.5	%		1.8	%		2.1	%

The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. The Company estimates stock price volatility based on a historical weekly price observation. The dividend yield assumption is based on the annualized current dividend divided by the share price on the grant date.

Awards of both restricted stock grants and restricted stock units are valued based on the market value of the Company’s shares at the date of grant. The value of restricted stock grants and restricted stock units is allocated to expense evenly over the restricted period. Employee stock purchase plan share awards are valued based on the value of the discount feature plus the fair value of the optional features, which is determined as of the date of grant using the Black-Scholes valuation model. The value of these share awards is allocated to expense evenly over each purchase period.

Stock Options

Stock options are granted at exercise prices equal to the closing market price of the Company’s stock on the date of grant. Generally, options vest proportionally on the first three anniversaries of the grant date and expire five years from the grant date.

Stock option activity for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share amounts):


	2012					2011					2010
		Shares			WAEP*		Shares			WAEP*		Shares			WAEP*
Options outstanding at beginning of year		1,048		$	35.80		1,329		$	34.53		1,492		$	35.56
Granted		324		$	40.14		292		$	43.61		252		$	28.62
Exercised		(491	)	$	35.17		(332	)	$	36.80		(16	)	$	20.55
Forfeited or expired		(127	)	$	43.79		(241	)	$	36.91		(399	)	$	35.20
Options outstanding at end of year		754		$	36.84		1,048		$	35.80		1,329		$	34.53
Options eligible for exercise at year-end		249		$	31.02		653		$	36.13		811		$	38.93
*Weighted Average Exercise Price

Options outstanding at September 29, 2012 had a weighted average remaining contractual term of 3.6 years, and an aggregate intrinsic value of $12.6 million. Options eligible for exercise at September 29, 2012 had a weighted average remaining contractual term of 2.2 years, and an aggregate intrinsic value of $5.6 million.

The total intrinsic value of stock options exercised during the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was $5.8 million, $2.3 million and $0.1 million, respectively.

F-18

Table of Contents

Restricted Stock

The Company awards directors and key employees restricted stock grants and restricted stock units that vest over three years. For restricted stock grants awarded to directors, participants are entitled to cash dividends and voting rights on unvested shares, but the sale and transfer of these shares is restricted during the vesting period. For restricted stock grants awarded to employees, participants are not entitled to cash dividends and voting rights on unvested shares.

Restricted stock grant activity for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share amounts):


	2012					2011					2010
	Shares			WAGDFV*		Shares			WAGDFV*		Shares			WAGDFV*
Unvested shares at beginning of year		30		$	33.61		29		$	27.18		36		$	28.72
Granted		12		$	49.03		13		$	42.89		20		$	26.47
Vested		(15	)	$	31.26		(12	)	$	28.32		(10	)	$	33.71
Forfeited		-		$	-		-		$	-		(17	)	$	25.85
Unvested shares at end of year		27		$	41.52		30		$	33.61		29		$	27.18
*Weighted Average Grant Date Fair Value

Restricted stock unit activity for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows (in thousands, except per share amounts):


	2012					2011					2010
	Shares			WAGDFV*		Shares			WAGDFV*		Shares			WAGDFV*
Outstanding at beginning of year		37		$	33.37		59		$	25.51		38		$	20.55
Granted		60		$	39.26		18		$	42.50		37		$	28.62
Vested		(26	)	$	32.68		(22	)	$	24.71		(12	)	$	20.55
Forfeited		(9	)	$	29.90		(18	)	$	27.50		(4	)	$	21.61
Outstanding at end of year		62		$	38.90		37		$	33.37		59		$	25.51
*Weighted Average Grant Date Fair Value

Employee Stock Purchase Plan

The Company’s U.S. employees are eligible to participate in the Company’s Employee Stock Purchase Plan (“ESPP”). Employee purchases of Company stock are funded by payroll deductions over calendar six-month periods. The purchase price is 85% of the lower of the market price at either the beginning or end of the six-month period. The shares are required to be held by the employee for at least eighteen months subsequent to the purchase. Two purchase periods closed in fiscal year 2012 with the combined issuance of 18,734 shares at a weighted average price of $33.65. In fiscal years 2011 and 2010, purchases were 24,028 and 33,249 shares, respectively, with weighted average share prices of $27.72 and $20.82, respectively.

3. Capital Assets:

Property and Equipment

Property and equipment at September 29, 2012 and October 1, 2011 consist of the following:


	2012			2011
	(expressed in thousands)
Land and improvements	$	1,711		$	1,713
Buildings and improvements		53,545			52,764
Machinery and equipment		118,838			108,143
Total		174,094			162,620
Less accumulated depreciation		(112,441	)		(106,368	)
Property and equipment, net	$	61,653		$	56,252

F-19

Table of Contents

Goodwill

Goodwill at September 29, 2012 and October 1, 2011 was $16.2 million and $16.0 million, respectively. The increase in goodwill during each of the years ended September 29, 2012 and October 1, 2011 was due to currency translation.

Other Intangible Assets

Other intangible assets consist of the following:


	September 29, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Weighted Average Useful Life (in Years)
	(expressed in thousands)
Software development costs	$	15,860	$	(6,125	)	$	9,735		5.7
Patents		10,073		(2,871	)		7,202		15.3
Trademarks and trade names		6,020		(1,024	)		4,996		30.2
Land-use rights		1,241		(97	)		1,144		47.8
Total	$	33,194	$	(10,117	)	$	23,077		14.3

	October 1, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Weighted Average Useful Life (in Years)
	(expressed in thousands)
Software development costs	$	15,370	$	(3,574	)	$	11,796		5.8
Patents		9,903		(2,114	)		7,789		15.3
Trademarks and trade names		5,924		(815	)		5,109		30.2
Land-use rights		1,219		(70	)		1,149		47.8
Total	$	32,416	$	(6,573	)	$	25,843		14.5

Amortization expense recognized during the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was $3.5 million, $3.3 million, and $3.0 million, respectively. The estimated future amortization expense related to other intangible assets for the next five fiscal years is as follows:


Fiscal Year	Amortization Expense
	(expressed in thousands)
2013	$	3,705
2014	$	3,704
2015	$	3,693
2016	$	2,181
2017	$	916

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.

F-20

Table of Contents

4. Business Segment Information:

The Company’s Chief Executive Officer and management regularly review financial information for the Company’s two operating segments “Test” and “Sensors.” Test provides testing equipment, systems, and services to the ground vehicles, materials and structures markets. Sensors provides high-performance position sensors for a variety of industrial and mobile hydraulic applications.

In evaluating each segment’s performance, management focuses on income from operations. This measure excludes interest income and expense, income taxes and other non-operating items. Corporate expenses, including costs associated with various support functions such as human resources, information technology, legal, finance and accounting, and general and administrative costs, are allocated to the reportable segments on the basis of revenue.

Financial information by reportable segment for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 were as follows:


	2012		2011		2010
	(expressed in thousands)
Revenue
Test	$	442,012	$	363,918	$	296,230
Sensors		100,244		103,450		77,823
Total Revenue	$	542,256	$	467,368	$	374,053

Income from Operations
Test	$	58,344	$	46,211	$	11,204
Sensors		22,167		26,983		17,141
Total Income from Operations	$	80,511	$	73,194	$	28,345

Identifiable Assets
Test	$	315,357	$	333,290	$	261,109
Sensors		94,081		94,569		85,296
Total Assets	$	409,438	$	427,859	$	346,405

Other Segment Data
Test:
Goodwill	$	14,688	$	14,435	$	13,817
Capital expenditures		12,551		7,289		8,702
Depreciation and amortization	$	11,567	$	10,658	$	10,686
Sensors:
Goodwill	$	1,551	$	1,592	$	1,612
Capital expenditures		3,074		2,856		2,512
Depreciation and amortization	$	2,215	$	2,236	$	2,065

F-21

Table of Contents


Geographic information was as follows:
	2012		2011		2010
	(expressed in thousands)
Revenue
United States	$	140,305	$	109,133	$	109,638
Europe, excluding Germany		114,521		107,111		71,155
China		103,977		104,461		77,600
Asia, excluding China		100,166		76,162		61,213
Germany		53,307		43,021		41,710
Other		29,980		27,480		12,737
Total Revenue	$	542,256	$	467,368	$	374,053

Property and Equipment, Net
United States	$	40,522	$	35,972		36,216
Germany		11,255		10,585		10,748
China		7,377		6,944		6,915
Asia, excluding China		1,695		1,974		2,028
Europe, excluding Germany		804		777		537
Total Property and Equipment, Net	$	61,653	$	56,252	$	56,444

Revenue by geographic area is presented based on customer location. No countries other than the United States, China, and Germany had revenue in excess of 10% of the Company’s total revenue during any of the periods presented. No single customer accounted for 10% or more of the Company’s consolidated revenue for any of the periods presented. Revenue is not reported for each of the Company’s products and services because it is impracticable to do so.

5. Fair Value Measurements

In determining the fair value of financial assets and liabilities, the Company currently utilizes market data or other assumptions that it believes market participants would use in pricing the asset or liability in the principal or most advantageous market, and adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:


	Level 1 Inputs: Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible to the Company at the measurement date.

	Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

	Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.

F-22

Table of Contents

Financial Instruments Measured at Fair Value on a Recurring Basis
Financial assets and liabilities subject to fair value measurements on a recurring basis are as follows:


	September 29, 2012
	Level 1		Level 2		Level 3		Total
Assets:	(expressed in thousands)
Currency contracts ⁽¹⁾	$	-	$	432	$	-	$	432
Total assets	$	-	$	432	$	-	$	432

Liabilities:
Currency contracts ⁽¹⁾	$	-	$	1,572	$	-	$	1,572
Total liabilities	$	-	$	1,572	$	-	$	1,572

	October 1, 2011
	Level 1		Level 2		Level 3		Total
Assets:	(expressed in thousands)
Currency contracts ⁽¹⁾	$	-	$	968	$	-	$	968
Total assets	$	-	$	968	$	-	$	968

Liabilities:
Currency contracts ⁽¹⁾	$	-	$	1,041	$	-	$	1,041
Interest rate swaps ⁽²⁾		-		617		-		617
Total liabilities	$	-	$	1,658	$	-	$	1,658


	(1)	Based on observable market transactions of spot currency rates and forward currency rates on equivalently-termed instruments.

	(2)	Based on LIBOR and swap rates.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s goodwill, intangible assets and other long-lived assets are nonfinancial assets that were acquired either as part of a business combination, individually or with a group of other assets. These nonfinancial assets were initially, and are currently, measured and recognized at amounts equal to the fair value determined as of the date of acquisition. Periodically, these nonfinancial assets are tested for impairment, by comparing their respective carrying values to the estimated fair value of the reporting unit or asset group in which they reside. In the event any of these nonfinancial assets were to become impaired, the Company would recognize an impairment loss equal to the amount by which the carrying value of the reporting unit, impaired asset or asset group exceeds its estimated fair value. Fair value measurements of reporting units are estimated using an income approach involving discounted or undiscounted cash flow models that contain certain Level 3 inputs requiring management judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, working capital requirements, and new product introductions. Fair value measurements of the reporting units associated with the Company’s goodwill balances are estimated at least annually in the fourth quarter of each fiscal year for purposes of impairment testing. Fair value measurements associated with the Company’s intangible assets and other long-lived assets are estimated when events or changes in circumstances such as market value, asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable.

Financial Instruments not Measured at Fair Value
Certain of the Company’s financial instruments are not measured at fair value but nevertheless are recorded at carrying amounts approximating fair value, based on their short-term nature or variable interest rate.

F-23

Table of Contents

These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings.

6. Financing:

Short-term borrowings at September 29, 2012 and October 1, 2011 consist of the following:


	2012		2011
	(expressed in thousands)
Bank line of credit, monthly U.S. LIBOR plus 45 basis points, retired in September 2012	$	-	$	40,000
Notes payable, non-interest bearing		230		285
Total Short-Term Borrowings	$	230	$	40,285

On September 28, 2012, the Company entered into a credit agreement (“Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and other financial institutions that may become parties to the Credit Agreement from time to time. This agreement replaces the $75 million senior unsecured credit facility that was scheduled to expire in December 2012. The new Credit Agreement provides for a five-year, $100 million senior unsecured revolving credit facility (“Credit Facility”) maturing September 28, 2017. The Company may use the Credit Facility for working capital financing, permitted acquisitions, share purchases, or other lawful corporate purposes. At September 29, 2012, the Company had no borrowings outstanding under the $100 million Credit Facility. At October 1, 2011, outstanding borrowings under the $75 million Credit Facility were $40.0 million. At September 29, 2012, the Company had outstanding letters of credit drawn from the $100 million Credit Facility totaling $10.1 million, leaving approximately $89.9 million of unused borrowing capacity. At October 1, 2011, the Company had outstanding letters of credit drawn from the $75 million Credit Facility totaling $11.3 million, leaving approximately $23.7 million of unused borrowing capacity.

The weighted average interest rate on outstanding borrowings under the $75 million Credit Facility during the fiscal years ended September 29, 2012 and October 1, 2011 was 0.70% and 0.70%, respectively. In order to mitigate its exposure to interest rate increases on its floating rate indebtedness, the Company has entered into floating to fixed interest rate swaps. As of September 29, 2012, all such interest rate swaps have matured. See Note 1 to the Consolidated Financial Statements for additional information on the interest rate swaps.

Request for borrowings will be categorized by the Company and the Lenders as defined in the Credit Agreement. The primary categories of borrowing include Eurocurrency Borrowing, Alternate Base Rate (“ABR”) Borrowing, and Swingline Loans. ABR Borrowings and Swingline Loans made in U.S. Dollars under the Credit Agreement bear interest at a rate per annum equal to the Alternate Base Rate (defined as the greater of (a) the Prime Rate (as defined in the Credit Agreement) in effect on such day, (b) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus ½ of 1%, or (c) the Adjusted LIBO Rate (as defined in the Credit Agreement) for a one month Interest Period on such day plus 1%), plus the ABR Spread based upon the Leverage Ratio applicable on such date. Eurocurrency Borrowings made under the Credit Agreement bear interest at a rate per annum equal to the Adjusted LIBO Rate for the interest period in effect for such Eurocurrency Borrowing plus the Eurocurrency Spread based upon the Leverage Ratio applicable on such date. At September 29, 2012, the prime rate of 3.25% was the applicable Alternate Base Rate, plus ABR Spread ranging from 0% to 0.50% based on the Leverage Ratio. At September 29, 2012, the applicable Adjusted LIBO rate was 0.36%, plus Eurocurrency Spread ranging from 0.875% to 1.50% based on the Leverage Ratio. Commitment fees are payable on the unused portion of the Credit Facility at rates between 0.15% and 0.30%, based on the Company’s leverage ratio. During each of the fiscal years ended September 29, 2012 and October 1, 2011, commitment fees incurred on the Credit Facility were less than $0.1 million.

F-24

Table of Contents

Under the Credit Agreement, the Company and each Borrower party thereto are subject to customary affirmative and negative covenants, including restrictions on their ability to incur debt, create liens, dispose of assets, make investments, loans, advances, guarantees and acquisitions, enter into transactions with affiliates, and enter into any restrictive agreements, and customary events of default (including payment defaults, covenant defaults, change of control defaults and bankruptcy defaults). The Credit Agreement also contains financial covenants, including the ratio of consolidated total indebtedness to consolidated EBITDA, as well as the ratio of consolidated EBITDA to consolidated interest expense. These covenants restrict the Company’s ability to pay dividends and purchase outstanding shares of common stock. At September 29, 2012 and October 1, 2011, the Company was in compliance with these financial covenants.

Notes payable at September 29, 2012 and October 1, 2011 consisted of non-interest bearing notes payable to vendors by the Company’s Japanese Sensors subsidiary.

At September 29, 2012, the Company had outstanding letters of credit and guarantees totaling $19.1 million and $30.5 million, respectively, primarily to bond advance payments and performance related to customer contracts in Test.

7. Income Taxes:

The components of income before income taxes for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 were as follows:


	2012		2011		2010
	(expressed in thousands)
Income before income taxes:
Domestic	$	45,152	$	35,243	$	10,659
Foreign		34,628		38,062		16,553
Total	$	79,780	$	73,305	$	27,212

The provision for income taxes for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 was as follows:


	2012			2011		2010
	(expressed in thousands)
Current provision (benefit):
Federal	$	16,834		$	5,855	$	357
State		1,058			553		65
Foreign		11,575			10,627		6,046
Deferred		(1,243	)		5,328		2,168
Total provision	$	28,224		$	22,363	$	8,636

A reconciliation from the federal statutory income tax rate to the Company’s effective income tax rate for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 is as follows:


	2012			2011			2010

United States federal statutory income tax rate		35	%		35	%		35	%
Impact from foreign operations		(2	)		(2	)		(4	)
Settlement of audits, favorable resolution of accrued tax matters		-			-			(2	)
State income taxes, net of federal benefit		1			1			1
Research and development tax credits		(1	)		(3	)		(1	)
Domestic production activities deduction		(2	)		(1	)		-
Reversal of valuation allowances against deferred tax assets		(1	)		-			-
Nondeductible expense to settle U.S. Government investigation		4			-			-
Nondeductible stock option expense and other permanent items		1			1			3
Effective income tax rate		35	%		31	%		32	%

F-25

Table of Contents

A summary of the deferred tax assets and liabilities for the fiscal years ended September 29, 2012 and October 1, 2011 is as follows:


	2012			2011
	(expressed in thousands)
Deferred Tax Assets:
Accrued compensation and benefits	$	7,994		$	7,584
Inventory reserves		3,223			3,299
Intangible and other assets		2,754			4,851
Allowance for doubtful accounts		458			216
Foreign net operating loss carryovers		470			758
Unrealized derivative instrument losses		255			495
Other		533			621
Total deferred tax asset before valuation allowance		15,687			17,824
Less valuation allowance		(180	)		(643	)
Total Deferred Tax Assets	$	15,507		$	17,181

Deferred Tax Liabilities:
Property and equipment	$	10,680		$	12,221
Foreign deferred revenue and other		2,590			2,766
Total Deferred Tax Liabilities	$	13,270		$	14,987
Net Deferred Tax Assets	$	2,237		$	2,194

As of September 29, 2012, one of the Company’s German subsidiaries had a net operating loss carryover of $1.1 million. This net operating loss carryover will not expire under local tax law. The Company has determined that it is more likely than not that it will realize its deferred tax asset associated with this net operating loss. Prior to fiscal year 2012, the Company had determined that the benefit of the German subsidiary’s net operating loss carryover was not likely to be realized. Accordingly, as of October 1, 2011, the Company had a full valuation allowance against the German subsidiary’s deferred tax asset in the amount of $0.6 million. During fiscal year 2012, based on current year and forecasted income, it was determined that the benefit was more likely than not to be realized and, therefore, the valuation allowance was reversed.

During fiscal year 2012, the Company repatriated $20.2 million of current earnings from its German, Japanese and Korean subsidiaries. The Company recorded $0.5 million tax benefit during fiscal year 2012 related to these repatriations. Also during fiscal year 2012, the Company was only allowed to recognize research and development credits on applicable spending during the first fiscal quarter, as the provision in the U.S. tax law allowing for these credits expired on December 31, 2011.

During fiscal year 2011, the Company repatriated $14.9 million of current earnings from its German and Japanese subsidiaries. The Company recorded $0.5 million tax expense during fiscal year 2011 related to these repatriations. Also during fiscal year 2011, U.S. research and development tax credit legislation was extended with an effective date retroactive to January 1, 2010. This legislation allowed the Company to recognize $2.8 million of tax benefits in fiscal year 2011, partly due to tax credits available on applicable research and development spending by the Company during the last three fiscal quarters of fiscal year 2010 and partly due to a full year of credit for fiscal year 2011.

F-26

Table of Contents

During fiscal year 2010, the Company repatriated $51.0 million of historic earnings from its German, Japanese, Korean and Canadian subsidiaries, a portion of which constituted previously taxed income. The Company recorded a $0.3 million tax benefit during fiscal year 2010 related to these dividends. Also during fiscal year 2010, the Company was only allowed to recognize research and development credits on applicable spending during the first fiscal quarter, as the provision in the U.S. tax law allowing for these credits expired on December 31, 2009.

In accordance with ASC 740-30, the Company has not recognized a deferred tax liability for the undistributed earnings of certain of its foreign operations because those subsidiaries have invested or will invest the undistributed earnings indefinitely. At September 29, 2012, undistributed earnings were approximately $74 million. Because of the availability of U.S. foreign tax credits, it is impractical for the Company to determine the amount of U.S. federal tax liability that would be payable if these earnings were not indefinitely reinvested. Deferred taxes are recorded for earnings of foreign operations when the Company determines that such earnings are no longer indefinitely reinvested.

A summary of changes in the Company’s liability for unrecognized tax benefits for the fiscal years ended September 29, 2012 and October 1, 2011 is as follows:


	2012			2011
	(expressed in thousands)
Beginning balance	$	5,106		$	4,181
Increase due to tax positions related to the current year		343			1,408
Decrease due to tax positions related to prior years		(1,398	)		(240	)
Decrease due to lapse of statute of limitations		(2,389	)		(232	)
Exchange rate change		4			(11	)
Ending balance	$	1,666		$	5,106

Included in the balance of unrecognized tax benefits at September 29, 2012 are potential benefits of $0.5 million that, if recognized, would affect the effective tax rate. Included in the balance of unrecognized tax benefits at October 1, 2011 are potential benefits of $1.5 million that, if recognized, would affect the effective tax rate.

At September 29, 2012 and October 1, 2011, the Company had accrued interest related to uncertain income tax positions of approximately $0.1 million and $0.4 million, respectively. At September 29, 2012 and October 1, 2011, no accrual for penalties related to uncertain tax positions existed. Interest and penalties related to uncertain tax positions are included in Interest Expense and General and Administrative Expense, respectively, on the Consolidated Statements of Income.

The Company is subject to U.S. federal income tax as well as income tax of numerous state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for fiscal years before 2011 and with limited exceptions, state and foreign income tax examinations for fiscal years before 2008. During 2012, the Internal Revenue Service (IRS) completed the audit of the Company’s consolidated income tax returns for fiscal years 2009 and 2010. During 2012, the Minnesota Department of Revenue completed the audit of fiscal years 2006 through 2008. The Company’s French tax returns have been examined by the tax authorities through fiscal year 2010. The Company’s German tax returns have been examined by the tax authorities through fiscal year 2008. The Company’s Japanese tax returns have been examined by the tax authorities through fiscal year 2010. The Company’s Chinese tax returns for calendar years 2008 through 2011 have not been examined by the tax authorities. As of September 29, 2012, the Company does not expect significant changes in the amount of unrecognized tax benefits during the next twelve months.

At September 29, 2012 and October 1, 2011, the Company and certain of its foreign subsidiaries were expected to receive income tax refunds within the next fiscal year. As a result, at September 29, 2012 and October 1, 2011, the Company recognized a current income tax receivable of $2.1 million and $0.1 million, respectively, which is included in Prepaid Expenses and Other Current Assets on the Consolidated Balance Sheets.

F-27

Table of Contents

8. Employee Benefit Plans:

Retirement Savings Plan
The Company offers a contributory retirement savings plan that has two components: (1) a 401(k) component with a Company match and (2) a fiscal year Company contribution.

The 401(k) component of the retirement savings plan allows eligible U.S. employees to contribute a portion of their pre-tax income to the plan each pay period. The Company matches 50% of employees’ pre-tax contributions (excluding “catch-up” contributions that employees age 50 or older may make to the plan), up to 6% of compensation, subject to limitations imposed by federal law. The Company’s matching contributions were $2.2 million, $2.0 million, and $1.9 million in fiscal years 2012, 2011, and 2010, respectively. Employees may also contribute a percentage of their salary to the plan on an after-tax basis.

The Company also provides an annual fiscal year contribution to the retirement plan for eligible U.S. employees. Employees who are active as of the end of the fiscal year and whom have been paid for 1,000 hours or more of service during a plan year are eligible for a fiscal year contribution. After three years as a participant, employees have a vested interest equal to 100% of the total Company’s fiscal year contributions. The plan provides for a minimum fiscal year contribution of 3% of participant compensation below the Social Security taxable wage base and 6% of participant compensation in excess of the Social Security taxable wage base, up to the maximum contribution allowed by federal law. The Company’s Board of Directors approves any changes to the contribution levels under the plan. The Company’s fiscal year contributions under the plan totaled $2.7 million, $2.5 million, and $2.4 million in fiscal years 2012, 2011, and 2010, respectively.

Defined Benefit Pension Plan
One of the Company’s German subsidiaries has a non-contributory, defined benefit retirement plan for eligible employees. This plan provides benefits based on the employee’s years of service and compensation during the years immediately preceding retirement, termination, disability, or death, as defined in the plan. The Company uses a September 30 measurement date for this defined benefit retirement plan.

The Company recognizes the funded status of the defined benefit pension in its statement of financial position, recognizes changes in that funded status in the year in which the changes occur through comprehensive income, and measures the plan’s assets and its obligations that determine its funded status as of the end of the Company’s fiscal year.

The pretax amount recognized in Accumulated Other Comprehensive Income as of September 29, 2012 and October 1, 2011 consists of the following:


	2012		2011
	(expressed in thousands)
Actuarial net loss	$	7,770	$	2,796

The portion of the pretax amount in Accumulated Other Comprehensive Income at October 1, 2011 that was recognized in earnings during the fiscal year ended September 29, 2012 was $0.1 million. The portion of the pretax amount in Accumulated Other Comprehensive Income at September 29, 2012 that is expected to be recognized as a component of net periodic retirement cost during the next fiscal year is $0.5 million.

F-28

Table of Contents

The following is a summary of the changes in benefit obligations and plan assets during the fiscal years ended September 29, 2012 and October 1, 2011:


	2012			2011
	(expressed in thousands)
Change in benefit obligation:
Projected benefit obligation, beginning of year	$	15,922		$	16,885
Service cost		412			481
Interest cost		835			795
Actuarial loss (gain)		5,504			(1,428	)
Exchange rate change		(752	)		(336	)
Benefits paid		(524	)		(475	)
Projected benefit obligation, end of year	$	21,397		$	15,922

Change in plan assets:
Fair value of plan assets, beginning of year	$	12,676		$	13,334
Actual return on plan assets		931			(372	)
Employer contributions		524			475
Exchange rate change		(549	)		(286	)
Benefits paid		(524	)		(475	)
Fair value of plan assets, end of year	$	13,058		$	12,676

The following is a summary of the funded status of the defined benefit retirement plan and amounts recognized in the Company’s Consolidated Balance Sheets at September 29, 2012 and October 1, 2011:


	2012			2011
	(expressed in thousands)
Funded status:
Funded status, end of year	$	(8,339	)	$	(3,246	)
Accumulated other comprehensive loss		7,770			2,796
Net amount recognized	$	(569	)	$	(450	)

Amounts recognized in consolidated balance sheets:
Accrued payroll and related costs	$	(578	)	$	(555	)
Pension benefit plan obligation		(7,761	)		(2,691	)
Deferred income taxes		2,345			844
Accumulated other comprehensive income, net of tax		5,425			1,952
Net amount recognized	$	(569	)	$	(450	)

The weighted average assumptions used to determine the defined benefit retirement plan obligation at September 29, 2012 and October 1, 2011, and also the net periodic benefit cost for the following fiscal year, were as follows:


	2012			2011
Discount rate		3.6	%		5.4	%
Expected rate of return on plan assets		5.2	%		5.4	%
Expected rate of increase in future compensation levels		3.0	%		3.0	%

The discount rate is calculated based on zero-coupon bond yields published by the Deutsche Bundesbank for maturities that match the weighted average duration of the pension liability, adjusted for the average credit spread of corporate bond rates above the government bond yields.

F-29

Table of Contents

The expected rate of return on plan assets represents the weighted average of the expected returns on individual asset categories in the portfolio. The Company uses investment services to assist with determining the overall expected rate of return on pension plan assets. Factors considered in the Company’s determination include historical long-term investment performance and estimates of future long-term returns by asset class.

The overall objective of the Company’s investment policy and strategy for the defined benefit retirement plan is to maintain sufficient liquidity to pay benefits and minimize the volatility of returns while earning the highest possible rate of return over time to satisfy the benefit obligations. The plan fiduciaries assist the Company with setting the long-term strategic investment objectives for the defined benefit retirement plan assets. The objectives include preserving the funded status of the trust and balancing risk and return. Investment performance and plan asset mix are reviewed periodically.

Plan assets are currently invested in a single mutual fund, the underlying assets of which are allocated to fixed income, equity, cash and cash equivalents, and other investment categories (see table below). Any decisions to change the asset allocation are made by the plan fiduciaries. However, investment into equity securities is limited to a maximum of 40% of total plan assets while investment into fixed income securities is not limited.

The actual defined benefit retirement plan asset allocations within the balanced mutual fund at September 29, 2012 and October 1, 2011 are as follows:


	Percentage of Plan Assets
	2012			2011
Fixed income securities ⁽¹⁾		73.0	%		80.6	%
Equity securities ⁽²⁾		20.0	%		15.3	%
Cash and cash equivalents		2.0	%		0.5	%
Other ⁽³⁾		5.0	%		3.6	%
		100.0	%		100.0	%


	(1)	Fixed income securities are comprised primarily of international government agency and international corporate bonds with investment grade ratings.

	(2)	Equity securities consist of an international mutual fund that invests solely in international stocks that are actively traded on international exchanges.

	(3)	Other asset holdings are comprised primarily of international bond futures and a derivatives-based mutual fund that invests in various assets.

As of September 29, 2012 and October 1, 2011, the fair value of the defined benefit retirement plan assets, which are subject to fair value measurements as described in Note 5 to the Consolidated Financial Statements, are as follows:


	September 29, 2012
	Level 1		Level 2		Level 3		Total
	(expressed in thousands)
Mutual fund ⁽¹⁾	$	-	$	13,058	$	-	$	13,058

	October 1, 2011
	Level 1		Level 2		Level 3		Total
	(expressed in thousands)
Mutual fund ⁽¹⁾	$	-	$	12,676	$	-	$	12,676


	(1)	The fair value of the mutual fund is generally valued based on closing prices from national exchanges, if the underlying securities are traded on an active market, or fixed income pricing models that use observable market inputs.

F-30

Table of Contents

Net periodic benefit cost for the Company’s defined benefit retirement plan for the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010 included the following components:


	2012			2011			2010
	(expressed in thousands)
Service cost	$	412		$	481		$	349
Interest cost		835			795			784
Expected return on plan assets		(660	)		(704	)		(748	)
Net amortization and deferral		77			152			16
Net periodic benefit cost	$	664		$	724		$	401

The accumulated benefit obligation of the Company’s defined benefit retirement plan as of September 29, 2012 and October 1, 2011 was $19.5 million and $14.7 million, respectively.

The future pension benefit payments, which reflect expected future service, for the next five fiscal years, and the combined five fiscal years thereafter, are as follows:


Fiscal Year	Pension Benefits
		(expressed in thousands)
2013	$	578
2014		655
2015		705
2016		777
2017		844
2018 through 2022		5,017
	$	8,576

Other Retirement Plans
Certain of the Company’s international subsidiaries have non-contributory, unfunded postretirement benefit plans that provide retirement benefits for eligible employees and managing directors. Generally, these postretirement plans provide benefits that accumulate based on years of service and compensation levels. At September 29, 2012 and October 1, 2011, the aggregate liabilities associated with these postretirement benefit plans was $3.2 million and $3.4 million, respectively.

9. Commitments and Contingencies:

Government Investigation
As previously reported by the Company, including in its Annual Report on Form 10-K for the fiscal year ended October 1, 2011 (the “2011 Form 10-K”), in January 2011, the U.S. Department of Commerce (“DOC”) and the U.S. Attorney’s Office for the District of Minnesota (“USAO”) began an investigation into the Company’s past disclosures on the U.S. Government’s Online Representations and Certifications Application (“ORCA Certification”) and later expanded the scope of inquiry to include the Company’s government contracting compliance policies and general compliance record and practices in areas including export controls and government contracts.

On August 30, 2012, the Company reached an agreement with the USAO and obtained the approval of the Department of Justice (“DOJ”), settling, for $7.8 million, the DOC and USAO’s investigation described above. The agreement concluded the DOC and USAO investigation.

F-31

Table of Contents

Other Investigative Matters
As previously reported, the Company investigated certain gift, travel, entertainment and other expenses incurred in connection with some of the Company’s operations in the Asia Pacific region. The investigation focused on possible violations of Company policy, corresponding internal control issues and possible violations of applicable law, including the Foreign Corrupt Practices Act. Substantial investigative work has been completed and the Company has taken remedial actions, including changes to internal control procedures and removing certain persons formerly employed in its Korea office. The Company voluntarily disclosed this matter to the DOJ and the SEC. Additionally, the Company disclosed this matter to the U.S. Air Force pursuant to its Administrative Agreement. The Company cannot predict the outcome of this matter at this time or whether it will have a material adverse impact on its business prospects, financial condition, operating results or cash flows.

Litigation
During the fiscal year ended October 2, 2010, the Company settled a legal claim for patent infringement of $7.5 million. Of the total settlement amount, $6.3 million was expensed during the fiscal year ended October 2, 2010.

The Company is subject to various claims, legal actions, and complaints arising in the ordinary course of business. Management believes the final resolution of legal matters outstanding as of September 29, 2012 will not have a material adverse effect on the consolidated financial position or results of operations of the Company. The Company expenses legal costs as incurred.

Leases
Total lease expense was $5.3 million for each of the fiscal years 2012, 2011, and 2010. The Company has operating lease commitments for equipment, land, and facilities that expire on various dates through 2056. Minimum annual rental commitments for the next five fiscal years and thereafter are as follows:


Year	Payments
	(expressed in thousands)
2013	$	4,581
2014		2,757
2015		1,706
2016		932
2017		465
Thereafter		1,104
	$	11,545

10. Related Party Transactions:

During the fiscal years ended September 29, 2012, October 1, 2011, and October 2, 2010, MTS Sensors purchased mechanical components and remote-mechanic workbench services from Mark-Tronik GmbH (“Mark-Tronik”) aggregating approximately $1.7 million, $2.0 million and $1.5 million, respectively. MTS Sensors is owned by MTS Systems GmbH, a wholly-owned subsidiary of the Company. The owner and general manager of Mark-Tronik is a related party to a member of management of the Company. At September 29, 2012 and October 1, 2011, net outstanding payments due to Mark-Tronik by MTS Sensors were $0.1 million and less than $0.1 million, respectively.

During the fiscal years ended October 1, 2011 and October 2, 2010, the Company purchased legal services from Gray Plant Mooty and Bennett, P.A. (“GPM”) aggregating to approximately $1.2 million and $0.3 million, respectively. A shareholder of GPM was a related party to a former employee that was a member of management of the Company during each of the fiscal years ended October 1, 2011 and October 2, 2010. At October 1, 2011, net outstanding payments due to GPM by the Company was less than $0.1 million.

F-32

Table of Contents

M TS SYSTEMS CORPORATION AND SUBSIDIARIES

SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES

FOR DOUBTFUL ACCOUNTS

FOR THE FISCAL YEARS ENDED SEPTEMBER 29, 2012, OCTOBER 1, 2011,
AND OCTOBER 2, 2010,

(expressed in thousands)


	Balance Beginning of Year		Provisions/ (Recoveries)		Amounts Written-off/ Payments			Balance End of Year
Allowance for Doubtful Accounts:

2012	$	1,534	$	896	$	(183	)	$	2,247

2011		1,358	$	729	$	(553	)		1,534

2010		1,410		159		(211	)		1,358

F-33

Exhibit 3.a

AMENDED AND
RESTATED ARTICLES OF INCORPORATION

MTS SYSTEMS CORPORATION

(Reflecting Amendments through May 27, 1998)

___________________

ARTICLE I

The name of this corporation shall be MTS SYSTEMS CORPORATION.

ARTICLE II

The purpose of this corporation shall be:

(a) To engage in the research, experimentation, development, designing, production, manufacturing, compounding, processing, fabrication, application, utilization, installation, repair, servicing, buying, selling, distributing, and dealing in and with test systems, structural loading systems, plastics and plastic materials, chemicals, paper products, metals, electronic and electrical components and products, machinery, instruments, equipment, devices, implements, tools, and all other articles and products of commerce; and to engage in such incidental, convenient, or necessary functions as may be deemed advisable therewith, either within or without the State of Minnesota or the United States of America, or both;

(b) To render consultative, engineering and expert advice and service to others;

(c) To apply for, prosecute, acquire, own, employ, transfer, sell, license and otherwise deal in or with patents, trademarks, and copyrights relating in any manner to the business or activities of the corporation;

(d) To deal in and distribute, either as principal or agent, and either as manufacturer, jobber, wholesaler or retailer, commodities, goods, wares and merchandise and other articles of every kind, character and description;

(e) To acquire, own, hold, manage and operate either separately or as part of the business of this corporation, other businesses, firms, corporations or enterprises;

(f) To acquire, hold, pledge, vote, sell and dispose of shares, bonds, securities and other evidences of indebtedness of any person or domestic or foreign corporation, firm or government, whether for the purpose of investment of the funds of this corporation or for the purpose of exercising control or management over the affairs of other persons, firms or corporations, or for both purposes;

(g) To purchase, lease or otherwise acquire, to own, hold, manage, operate or employ, to mortgage, pledge, or otherwise encumber, and to sell, let, exchange or otherwise dispose of real property or personal property or mixed real and personal property;

(h) To enter into partnerships, joint ventures, and agreements of all kinds with other persons, firms, partnerships and corporations;

(i) To borrow money and secure credit upon such terms and security as may be deemed necessary or advantageous, and if deemed necessary or appropriate, to pledge or mortgage any or all of the assets of the corporation to secure such loan or credit;

(j) To do any and all other acts and things in addition to those enumerated and specified above which may be advantageous, necessary, expedient or convenient to the conduct of the business or the attainment of the purposes of the corporation.

The foregoing clauses and statement of purposes shall also be a statement of the powers of this corporation, but the declaration of purposes and powers herein set forth shall not be deemed to limit or restrict in any manner the powers of this corporation, which shall possess all of the powers bestowed upon or permitted to it by law which are not inconsistent with those set forth herein.

ARTICLE III

The duration of this corporation shall be perpetual.

ARTICLE IV

The location and post office address of this corporation in the State of Minnesota shall be at such place as may be designated for that purpose by the Board of Directors from time to time. Until some other place is so designated, the location and post office address of the office of this corporation is: 14000 Technology Drive, Eden Prairie, Minnesota 55344-2290.

ARTICLE V

The amount of stated capital with which this corporation will begin business will be not less than $1,000.00.

ARTICLE VI

The number of shares of the total authorized capital stock of the corporation shall be Sixty-Four Million (64,000,000), all of which are common shares of capital stock. Each common share of capital stock shall have the par value of twenty-five cents ($.25). Each share shall entitle the holder thereof to one vote for each share held by the shareholder, but shareholders shall have no pre-emptive right to subscribe for or purchase securities of the corporation, and all shares shall be equal in all respects and shall confer equal rights upon the holders thereof, including equal rights in and to dividends and distributions and upon dissolution.

ARTICLE VII

Section 1 . The management and conduct of the business of this corporation shall be vested in a Board of Directors and in such officers and agents as may be elected or designated by the Board of Directors. Such officers and agents hall have the authority and duties in the management of the business of the corporation as may be prescribed in the By-Laws, or, in the absence of a controlling provision therein, as determined by the Board of Directors.

Section 2 . The Board of Directors shall consist of such number of Directors, not less than three, as shall be stated in the By-Laws, or, in the absence of a controlling provision therein, as determined by the shareholders at any annual meeting or meeting called for the purpose of electing a Director or Directors.

Section 3 . The terms of office of the Directors of this corporation shall be for one year and until their respective successors are elected and qualified except that the terms of office of the Directors named herein shall be for the period stated herein subject to the right of the shareholders to remove any of said Directors in the manner provided by statute prior to the end of their respective terms and thereupon to elect a new Director or Directors for the remainder of such term or terms.

Section 4 . The Board of Directors shall have the power and authority to fill any vacancy caused by the death, resignation or inability to serve any director. Newly created directorships resulting from an increase in the authorized number of directors by action of the board of directors may be filled by a two-thirds vote of the directors serving at the time of such increase.

ARTICLE VIII

Section 1 . The Board of Directors shall have the general management and control of the business and affairs of this corporation and shall exercise all of the powers that may be exercised or performed by this corporation. The Board of Directors shall have the power and authority to delegate such duties, power and authority relating to the management and conduct of the business and affairs of this corporation to such officers and agents elected or designated by it as it may deem proper or appropriate, and as may be permitted by the By- Laws or applicable statutes or laws.

Section 2 . The Board of Directors shall have the authority to accept or reject subscriptions for shares made before or after incorporation, and may grant rights to convert any securities of this corporation into shares of any class or classes or grant options to purchase or subscribe for shares or other securities of the corporation. The Board of Directors shall from time to time fix and determine the consideration for which the corporation shall issue and sell its shares, and also the dividends to be paid by the corporation upon its shares.

Section 3 . The Board of Directors shall have the authority to make and alter the By- Laws, subject to the power of the shareholders to change or repeal such By-Laws.

ARTICLE IX

The holders of a majority of the outstanding voting shares of capital stock of this corporation shall have power to authorize the sale, lease, exchange or other disposition of all or substantially all of the property and assets of this corporation, including its good will, to amend the Articles of Incorporation of this corporation, and to adopt or reject an agreement of consolidation or merger.

ARTICLE X

No director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived any improper personal benefit; or (v) for any act or omission occurring prior to the date when this provision becomes effective.

The provision of this Article shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of this Article.

If the Minnesota Statutes hereafter are amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the amended Minnesota Statutes.

Exhibit 10.ee


MTS Systems Corporation 14000 Technology Drive Eden Prairie, MN 55344-2290 Telephone 952-937-4000 Fax 952-937-4515

THIS CHANGE IN CONTROL AGREEMENT is made and entered into by and between MTS Systems Corporation, a Minnesota corporation with its principal offices at 14000 Technology Drive, Eden Prairie, MN 55344 (the “Company”) and ______ (the “Executive”), residing at ______, and shall be effective as of this ______.

WHEREAS, the Company considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders; and

WHEREAS, the Executive is expected to make, due to the Executive’s future intimate knowledge of the business and affairs of the Company, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of the Company; and

WHEREAS, the Company, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive’s duties, to the detriment of the Company and its shareholders; and

WHEREAS, it is in the best interests of the Company and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including the Executive, to their assigned duties without distraction and to ensure the continued availability to the Company of the Executive in the event of a Change in Control; and

WHEREAS, the Company intends that the Agreement be exempt from the requirements applicable to nonqualified deferred compensation plans pursuant to Section 409A of the Code and regulations promulgated thereunder, and this Agreement shall be construed and administered in a manner that is consistent with and gives effect to such intention.

THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows:

Change in Control Agreement

1. Term of Agreement . This Agreement shall be effective from and after the date hereof and shall continue in effect through December 31, 2012 , and shall automatically be extended for successive one-year periods thereafter unless the Board of Directors of the Company (the “Board”) shall have approved, and the Executive is notified in writing, prior to January 1, 2013 and each January 1 thereafter, that the term of this Agreement shall not be extended or further extended; provided , however , that if a Change in Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of 24 months from the date of the occurrence of a Change in Control or, if an event triggering the Company’s severance payment obligations to the Executive under Section 4(d) has occurred during such 24-month period, this Agreement shall continue in effect until the benefits payable to the Executive hereunder have been paid in full. In the event that more than one Change in Control shall occur during the original or any extended term of this Agreement, the 24-month period shall follow the last Change in Control. This Agreement shall neither impose nor confer any further rights or obligations on the Company or the Executive on the day after the end of the term of this Agreement. Expiration of the term of this Agreement of itself and without subsequent action by the Company or the Executive shall not end the employment relationship between the Company and the Executive.

2. Change in Control . No benefits shall be payable hereunder unless there shall have been a Change in Control. For purposes of this Agreement, a “Change in Control” of the Company shall mean a change in control which would be required to be reported in response to Item 6(e) on Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement, including, without limitation, if:


	(a) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities; or

	(b) During any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), the Incumbent Directors cease for any reason to constitute at least a majority of the Board of Directors. The term “Incumbent Directors” shall mean those individuals who are members of the Board of Directors on the effective date of this Agreement and any individual who subsequently becomes a member of the Board of Directors (other than a director designated by a person who has entered into agreement with the Company to effect a transaction contemplated by Section 2(c)) whose election or nomination for election by the Company’s shareholders was approved by a vote of at least a majority of the then Incumbent Directors; or

Change in Control Agreement

(c) (i) The Company consummates a merger, consolidation, share exchange, division or other reorganization of the Company with any corporation or entity, other than an entity owned at least 80% by the Company, unless immediately after such transaction, the shareholders of the Company immediately prior to such transaction beneficially own, directly or indirectly 51% or more of the combined voting power of resulting entity’s outstanding voting securities as well as 51% or more of the Total Market Value of the resulting entity, or in the case of a division, 51% or more of the combined voting power of the outstanding voting securities of each entity resulting from the division as well as 51% or more of the Total Market Value of each such entity, in each case in substantially the same proportion as such shareholders owned shares of the Company prior to such transaction; (ii) the shareholders of the Company approve an agreement for the sale or disposition (in one transaction or a series of transactions) of assets of the Company, the total consideration of which is greater than 51% of the Total Market Value of the Company, or (iii) the Company adopts a plan of complete liquidation or winding-up of the Company. “Total Market Value” shall mean the aggregate market value of the Company’s or the resulting entity’s outstanding common stock (on a fully diluted basis) plus the aggregate market value of the Company’s or the resulting entity’s other outstanding equity securities as measured by the exchange rate of the transaction or by such other method as the Board determines where there is not a readily ascertainable exchange rate.

3. Termination Following Change in Control . If a Change in Control shall have occurred during the term of this Agreement, the Executive shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of the Executive’s death or Retirement, (B) by the Company for Cause or Disability, or (C) by the Executive other than for Good Reason. The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by the Executive) to ensure that any termination described in this Section 3 constitutes a Separation from Service as defined in subsection 3(h).

(a) Disability . Termination by the Company or the Executive of the Executive’s employment based on “Disability” may occur in the event the Executive has incurred or is afflicted with any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, and as a result, has become eligible for and begun receiving income replacement benefits under the terms of the Company’s long-term disability plan or policy as may be in effect from time to time.

Change in Control Agreement


	(b) Retirement . Termination by the Company or the Executive of the Executive’s employment based on “Retirement” shall mean termination on or after attaining age sixty-five (65).

	(c) Cause . For purposes of this Agreement, “Cause” shall mean:


	(i) the willful and continued failure by the Executive (other than any such failure resulting from (1) the Executive’s incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason or (3) the Company’s active or passive obstruction of the performance of the Executive’s duties and responsibilities) to perform substantially the duties and responsibilities of the Executive’s position with the Company after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the duties or responsibilities;

	(ii) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct which, in the good faith opinion of the Company, would impair the Executive’s ability to perform his or her duties or impair the business reputation of the Company; or

	(iii) the willful engaging by the Executive in fraud or dishonesty that is demonstrably and materially injurious to the Company, monetarily or otherwise.

No act, or failure to act, on the Executive’s part shall be deemed “willful” unless committed, or omitted by the Executive in bad faith and without reasonable belief that the Executive’s act or failure to act was in the best interest of the Company and the Executive shall have either failed to correct, or failed to take all reasonable steps to correct, such act or failure to act within sixty (60) days from the Executive’s receipt of written notice from the Company demanding that the Executive take such action. The Executive shall not be terminated for Cause unless and until the Company shall have delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive’s counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive’s conduct was Cause and specifying the particulars thereof in detail.

Change in Control Agreement

(d) Good Reason . The Executive shall be entitled to terminate his or her employment for Good Reason; provided, however, that no such termination under this Section 3(d) shall be effective unless: (A) the Executive provides written notice to the Chair of the Board of Directors of the Company of the existence of a condition specified in paragraphs (i) through (v) below within 90 days of the initial existence of the condition; (B) the Company does not remedy such condition within 30 days of the date of such notice; and (C) the Executive terminates employment within 90 days following the last day of the remedial period described above. For purposes of this Agreement, “Good Reason” shall mean, without the Executive’s express written consent, any of the following:


	(i) the assignment to the Executive of any duties inconsistent in any respect with the Executive’s authority, duties or responsibilities with respect to the Executive’s position immediately prior to the Change in Control, or any action by the Company that results in a diminution in such authority, duties or responsibilities (whether or not occurring solely as a result of the Company’s ceasing to be a publicly traded entity);

	(ii) a material reduction in the Executive’s base compensation in effect immediately prior to the Change in Control;

	(iii) a material reduction in the budget over which the Executive retains authority;

	(iv) a material change in the geographic location at which the Executive must perform services for the Company; and

	iv) Any material violation of this Agreement by the Company, including but not limited to any purported termination of the Executive’s employment that is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement

For purposes of this Section 3(d), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive’s mental or physical incapacity following the occurrence of an event described above in paragraphs (i) through (v) shall not affect the Executive’s ability to terminate employment for Good Reason and the Executive’s death following delivery of a Notice of Termination for Good Reason shall not affect the Executive’s estate’s entitlement to the payments and benefits provided hereunder upon a termination of employment for Good Reason.

Change in Control Agreement


	(e) Notice of Termination . Any purported termination of the Executive’s employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 9. For purposes of this Agreement, a “Notice of Termination” shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of the Executive’s employment.

	(f) Date of Termination . For purposes of this Agreement, “Date of Termination” shall mean:


	(i) If the Executive’s employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall have been absent from full-time performance of duties for at least three (3) months and shall not have returned to the full-time performance of the Executive’s duties during such 30 day period, in accordance with Section 3(a) hereof);

	(ii) If the Executive’s employment is terminated pursuant to subsections (b) or (c) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to subsection (b) above shall not be less than 10 days, and in the case of a termination pursuant to subsection (c) above shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given); and

	(iii) Notwithstanding anything contained herein to the contrary, the date on which a Separation from Service takes place.

(g) Dispute of Termination . If, within 10 days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company shall continue to pay the Executive full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this subsection. Amounts paid under this subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts under this Agreement.

Change in Control Agreement

(h) Separation from Service . Separation from Service means the Executive’s termination of employment (as defined in this subsection 3(h)) from the Company and its Affiliates. A Executive incurs a termination of employment that constitutes a Separation from Service if the Executive and the Compensation Committee of the Board of Directors of the Company reasonably anticipate either than the Executive will not perform any additional services after a certain date for the Company and any Affiliate (the “Company Group”), or that the Executive’s level of bona fide services for the Company Group will permanently decrease to no more than 20% of the average level of bona fide services performed over the immediately preceding 36-month period. The Executive does not incur a Separation from Service if on military leave, sick leave, or other bona fide leave of absence if such leave does not exceed a period of 6 months, or if longer, the period for which a statute or contract provides the Executive with the right to reemployment with the Company Group, provided that there is a reasonable expectation that the Executive will return to perform further services. If an Executive’s leave exceeds 6 months but the Executive is not entitled to reemployment under a statute or contract, the Executive incurs a Separation from Service on the next day following the expiration of 6 months. Where a leave of absence is due to a Disability, the 6 month leave period described above shall be 12 months unless the leave is earlier terminated. The service of the Executive as a director of the board of any entity in the Company Group will not be considered in determining whether the Executive has incurred a Separation from Service as an employee of the Company Group. The Compensation Committee will determine whether a Executive has incurred a Separation from Service based on the facts and circumstances and in accordance with Treas. Reg. §1.409A-1(h)(1)(ii). For purposes of this subsection 3(h), “Affiliate” means an entity that would be considered with the Company a single employer under Sections 414(b) and (c) and 1563(a) of the Code, except that 50% shall be substituted for the 80% each place it appears in Sections 414(b) and (c) and 1563(a) of the Code.

Change in Control Agreement

4. Compensation Upon Termination or During Disability . Following a Change in Control of the Company, as defined in subsection 2(a), upon termination of the Executive’s employment or during a period of Disability, the Executive shall be entitled to the following benefits:


	(a) During any period that the Executive fails to perform full-time duties with the Company as a result of a Disability, the Company shall pay the Executive, the Executive’s base salary as in effect at the commencement of any such period and the amount of any other form or type of compensation otherwise payable for such period if the Executive were not so disabled, until such time as the Executive is determined to be eligible for long term disability benefits in accordance with the Company’s insurance programs then in effect or the Executive is terminated for Disability.”

	(b) If the Executive’s employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason or Disability, the Company shall pay to the Executive his or her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligation to the Executive under this Agreement, except with respect to any benefits to which the Executive is entitled under any Company pension or welfare benefit plan, insurance program or as otherwise required by law.

	(c) If the Executive’s employment shall be terminated by the Company or by the Executive for Disability or Retirement, or by reason of death, the Company shall immediately commence payment to the Executive (or the Executive’s designated beneficiaries or estate, if no beneficiary is designated) of any and all benefits to which the Executive is entitled under the Company’s retirement and insurance programs then in effect.

	(d) If the Executive’s employment shall be terminated (A) by the Company other than for Cause, Retirement, Disability or the Executive’s death or (B) by the Executive for Good Reason, then the Executive shall be entitled to the benefits provided below:


	(i) The Company shall pay the Executive, through the Date of Termination, the Executive’s base salary as in effect at the time the Notice of Termination is given and any other form or type of compensation otherwise payable for such period;

Change in Control Agreement


	(ii) In lieu of any further salary payments for periods subsequent to the Date of Termination, the Company shall pay a severance payment (the “Severance Payment”) equal to two times the Executive’s Annual Compensation as defined below. For purposes of this Section 4, “Annual Compensation” shall mean the Executive’s annual salary (regardless of whether all or any portion of such salary has been contributed to a deferred compensation plan), the average annual Management Variable Compensation (“MVC”) earned by the Executive during the three (3) fiscal years immediately preceding the Date of Termination or, if less, the actual number of fiscal years the Executive has participated in the MVC plan, and any other type or form of compensation paid to the Executive by the Company (or any corporation (an “Affiliate”) affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986 as it may be amended from time to time (the “Code”)) and included in the Executive’s gross income for federal tax purposes during the 12-month period ending immediately prior to the Date of Termination, but excluding: a) any amount actually paid to the Executive as a cash payment of the target bonus (regardless of whether all or any portion of such Company bonus was contributed to a deferred compensation plan); b) compensation income recognized as a result of the exercise of stock options or sale of the stock so acquired; and c) any payments actually or constructively received from a plan or arrangement of deferred compensation between Company and the Executive. All of the items included in Annual Compensation shall be those in effect on the Date of Termination and shall be calculated without giving effect to any reduction in such compensation that would constitute a breach of this Agreement. The Severance Payment shall be made in a single lump sum within 30 days after the Date of Termination;

	(iii) For the 18-month period after the Date of Termination (the “Benefit Continuation Period”), the Company shall arrange to provide, at its sole expense, the Executive with life, disability, accident and health insurance benefits substantially similar to those that the Executive is receiving or entitled to receive immediately prior to the Notice of Termination. The Executive shall be responsible for the payment of his or her portion of the premiums for such benefits at the same relative percentage of total premiums as the Executive paid prior to the Date of Termination . Following the end of the Benefit Continuation Period, the Executive shall be eligible for continued health coverage as required by Code Section 4980B or other applicable law (“COBRA Coverage”), as if the Executive’s employment with the Company had terminated as of the end of the Benefit Continuation Period, and the Company shall take such actions as are necessary to cause such COBRA Coverage not to be offset by the provision of benefits under this paragraph (iii) and to cause the period of COBRA Coverage to commence at the end of the Benefit Continuation Period. The cost of providing such benefits shall be in addition to (and shall not reduce) the Severance Payment. Benefits otherwise receivable by the Executive pursuant to this paragraph (iii) shall be reduced to the extent comparable benefits are actually received by the Executive during the Benefit Continuation Period, and any such benefits actually received by Executive shall be reported to the Company; and

Change in Control Agreement

(iv) The Company shall also pay to the Executive all legal fees and expenses incurred by the Executive as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement); provided that such payment for legal fees and expenses shall be made not later than the last day of the calendar year following the year in which the Executive incurred the fees and expenses and the Executive’s right to such payment may not be liquidated or exchanged for any other benefit.


	(e) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 (except as expressly provided in Section 4(d)(iii)) be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise.

	(f) The Executive shall be entitled to receive all benefits payable to the Executive under the Company pension and welfare benefit plans or any successor of such plan and any other plan or agreement relating to retirement benefits which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4.

	(g) The Executive shall be entitled to exercise all rights and to receive all benefits accruing to the Executive under any and all Company stock purchase and stock option plans or programs, or any successor to any such plans or programs, which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 4.

Change in Control Agreement

(h) The Company will indemnify the Executive (and the Executive’s legal representative or other successors) to the fullest extent permitted (including payment of expenses in advance of final disposition of the proceeding) by the laws of the State of Minnesota, as in effect at the time of the subject act or omission, or the Articles of Incorporation and By-Laws of the Company as in effect at such time or on the date of this Agreement, whichever affords or afforded greater protection to the Executive; and the Executive shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Executive or the Executive’s legal representatives in connection with any action, suit or proceeding to which the Executive (or the Executive’s legal representative or other successors) may be made a party by reason of the Executive’s being or having been a director, officer or employee of the Company or any of its subsidiaries or his or her serving or having served any other enterprise as a director, officer or employee at the request of the Company, provided that the Company shall cause to be maintained in effect for not less than six years from the date of a Change in Control (to the extent available) policies of directors’ and officers’ liability insurance of at least the same coverage as those maintained by the Company on the date of this Agreement and containing terms and conditions which are no less advantageous than such policies.

Notwithstanding anything herein to the contrary, if the Executive’s employment is governed by a separate written employment agreement that provides benefits upon a termination of employment, the aggregate of any payments or benefits payable under such employment agreement shall offset and reduce the aggregate of payments and benefits under this Agreement.

5. Non-Compete and Confidentiality .

(a) Noncompetition . Except as provided in subsection (c) below, the Executive agrees that, as a condition of receiving benefits under this Agreement, the Executive will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any “Conflicting Product” which as used herein means any product, process, system or service of any person, firm, corporation, organization other than the Company, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by the Company. The Executive agrees that violation of this covenant not to compete with the Company shall result in immediate cessation of all benefits hereunder, other than insurance benefits, which the Executive may continue where permitted under federal and state law at his or her own expense.

Change in Control Agreement


	(b) Confidentiality . The Executive further agrees and acknowledges the Executive’s existing obligation that at all times during and subsequent to his or her employment with MTS, the Executive will not divulge or appropriate to the Executive’s own use or the uses of others any secret or confidential information or knowledge pertaining to the business of MTS, or any of its subsidiaries, obtained during his or her employment by MTS or any of its subsidiaries.

	(c) Waiver - Unfriendly Change in Control . Notwithstanding anything herein to the contrary: the restriction on competition under subsection (a) shall not apply if the Executive’s employment terminates following a Change in Control which has not been approved by a majority of the Incumbent Directors in office immediately prior to the Change in Control (an “Unfriendly Change in Control”). Furthermore, in such event, the Company waives any other restriction on the Executive’s employment and consents unconditionally to any employment the Executive may subsequently obtain.

6. Limits on Payments and Benefits . In the event that the vesting, acceleration and payment of any equity awards or other compensation or benefits, together with all other payments and the value of any benefit received or to be received by the Executive would result in all or a portion of such payment being subject to excise tax under Section 4999 of the Code, then the amounts due under Section 4 that the Company shall pay to the Executive shall be either (A) the full payment or (B) such lesser amount determined by the Company in accordance with this Section 6 that would result in no portion of the payment being subject to excise tax under Section 4999 of the Code (the “Excise Tax”), whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the Excise Tax, results in the receipt by the Executive, on an after-tax basis, of the greatest amount of the payment notwithstanding that all or some portion of the payment may be taxable under Section 4999 of the Code. In the event the amounts due under Section 4 are reduced, the amounts shall be reduced in the following order of priority: first, with respect to any amount that does not constitute the “deferral of compensation” under Section 409A of the Code and regulations promulgated thereunder, disregard the acceleration in the time of payment and then disregard the acceleration of vesting as a result of a Change in Control and second, with respect to any amount that constitutes the “deferral of compensation” under Section 409A of the Code and regulations promulgated thereunder, disregard the acceleration in the time of payment and then disregard the acceleration of vesting as a result of a Change in Control first with respect to Company funded amounts and then the Executive’s deferrals, in each case only to the extent necessary to satisfy (B) above. All determinations required to be made under this Section 14 shall be made by a nationally recognized accounting firm that is the Company’s outside auditor immediately prior to the event triggering the payments that are subject to the Excise Tax (the “Accounting Firm”). The Company shall cause the Accounting Firm to provide detailed supporting calculations of its determinations to the Company and Executive. Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling Executive to an amount due under this Agreement. All fees and expenses of the Accounting Firm shall be borne solely by the Company. The Accounting Firm’s determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). For the purposes of all calculations under Section 280G of the Code and the application of this Section 6, all determination as to present value shall use 120 percent of the applicable Federal rate (determined under Section 1274(d) of the Code) compounded based on the nature of the payment, as in effect on the date of this Agreement, but if not otherwise specified, the Company and Executive agree to compound such rate on a semiannual basis. The determination by the Accounting Firm shall be final and binding on the Company and the Executive.

Change in Control Agreement

7. Funding of Payments . In order to assure the performance of the Company or its successor of its obligations under this Agreement, the Company may deposit in a so-called “rabbi” trust an amount equal to the maximum payment that will be due the Executive under the terms hereof; provided, however, that the Company shall deposit in trust the amount equal to the maximum payment due Executive immediately upon an Unfriendly Change in Control. Under such written trust instrument, the trustee shall be instructed to pay to the Executive (or the Executive’s legal representative, as the case may be) the amount to which the Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to the Company. If the Company deposits funds in trust, payment shall be made no later than the occurrence of the Change in Control. The written instrument governing the trust shall be irrevocable from and after such Change in Control and shall contain such provisions protective of the Executive as are contained in similar trust agreements approved by the Internal Revenue Service in published private letter rulings (provided that the assets of the trust shall be reachable by creditors of the Company as required by such rulings). The trustee shall be a national bank selected by the Company with the consent of the Executive, with trust powers and whose principal officers are located in the Minneapolis/St. Paul metropolitan area. The trustee shall invest the assets of the trust in any readily marketable securities of U.S. corporations (other than the Company, its successor, or any affiliate of the Company or its successor). If and to the extent there are not amounts in trust sufficient to pay Executive under this Agreement, the Company shall remain liable for any and all payments due to Executive.

Change in Control Agreement

8. Successors; Binding Agreement .

(a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to 51% or more of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to the compensation and benefits from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive terminated his or her employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

(b) This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, successors, heirs, and designated beneficiaries. If the Executive should die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s designated beneficiaries, or, if there is no such designated beneficiary, to the Executive’s estate.

9. Notice . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of the Company, to its principal office to the attention of each of the then directors of the Company with a copy to its Secretary, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

Change in Control Agreement

10. Non-application of Section 409A of the Code . It is the intent of the Company and the Executive that this Agreement satisfy those requirements of Section 409A of the Code to constitute first a “short term deferral” and then a “separation pay plan” to exempt the payments hereunder from the definition of a “nonqualified deferred compensation plan” under Section 409A of the Code, and the Agreement shall be so administered and interpreted in manner consistent with, and that gives effect to, such intention. The Company shall have the authority, without the consent of the Executive to amend such provision to maintain to maximum extent practicable the intent that this Agreement remains exempt from the requirements applicable to a “nonqualified deferred compensation plan” under Section 409A of the Code and regulations and other guidance promulgated thereunder.

11. Miscellaneous . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other-party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota.

12. Validity . The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

IN WITNESS WHEREOF, the undersigned officer, on behalf of MTS Systems Corporation, and the Executive have hereunto set their hands as of the date first above written.


	MTS SYSTEMS CORPORATION

	By
		Its

	EXECUTIVE:

Exhibit 10.ff

(MESSAGE)

SEVERENCE AGREEMENT

THIS SEVERANCE AGREEMENT is made and entered into by and between MTS Systems Corporation, a Minnesota corporation with its principal offices at 14000 Technology Drive, Eden Prairie, MN 55344 (the “Company”) and Kristin Trecker (the “Executive”), and shall be effective as of his Employment Date as defined below.

WHEREAS, it is in the best interests of the Company and its stockholders to reinforce and encourage the attention and dedication of the Executive, to his assigned duties without distraction and to ensure the continued availability to the Company of the Executive for the period immediately following his initial employment.

THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows:

1. Term of Agreement . This Agreement shall be effective from and after the date of hire of the Executive (the “Employment Date”), shall continue in effect through the second anniversary of the Employment Date and immediately thereafter, shall expire and all rights under it shall terminate and be of no further force and effect. Provided , however , that if a Change in Control shall occur during the term of this Agreement, the separate Change in Control Agreement shall thereafter be effective and supersede this Agreement. This Agreement shall neither impose nor confer any further rights or obligations on the Company or the Executive on the day after the end of the term of this Agreement. Expiration of the term of this Agreement of itself shall not end the employment relationship between the Company and the Executive.

2. Termination . During the term of this Agreement, the Executive shall be entitled to the benefits provided in Section 3 unless such termination is (A) because of the Executive’s death, (B) by the Company for Cause or Disability, or (C) by the Executive other than for Good Reason. The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by the Executive) to ensure that any termination described in this Section 2 constitutes a Separation from Service as defined in subsection 2(f).


	(b) Cause . For purposes of this Agreement, “Cause” shall mean:


	(i) the willful and continued failure by the Executive (other than any such failure resulting from (1) the Executive’s incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason or (3) the Company’s active or passive obstruction of the performance of the Executive’s duties and responsibilities) to perform substantially the duties and responsibilities of the Executive’s position with the Company after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer (the “CEO”), which demand specifically identifies the manner in which the CEO believes that the Executive has not substantially performed the duties or responsibilities;

	(ii) the conviction of the Executive by a court of competent jurisdiction for felony criminal conduct which, in the good faith opinion of the Company, would impair the Executive’s ability to perform his or her duties or impair the business reputation of the Company; or

	(iii) the willful engaging by the Executive in fraud or dishonesty that is demonstrably and materially injurious to the Company, monetarily or otherwise.

(c) Good Reason . The Executive shall be entitled to terminate his or her employment for Good Reason; provided, however, that no such termination under this Section 3(c) shall be effective unless: (A) the Executive provides written notice to the Chief Executive Officer of the Company of the existence of a condition specified in paragraphs (i) through (v) below within 90 days of the initial existence of the condition; (B) the Company does not remedy such condition within 30 days of the date of such notice; and (C) the Executive terminates employment within 90 days following the last day of the remedial period described above. For purposes of this Agreement, “Good Reason” shall mean, without the Executive’s express written consent, any of the following:


	(i) the assignment to the Executive of any duties inconsistent in any respect with the Executive’s authority, duties or responsibilities with respect to the Executive’s, or any action by the Company that results in a diminution in such authority, duties or responsibilities (whether or not occurring solely as a result of the Company’s ceasing to be a publicly traded entity);

	(ii) a material reduction in the Executive’s base salary;

	(iii) a material reduction in the budget over which the Executive retains authority;

	(iv) a material change in the geographic location at which the Executive must perform services for the Company; and

	(v) any material violation of this Agreement by the Company, including but not limited to any purported termination of the Executive’s employment that is not made pursuant to a Notice of Termination satisfying the requirements of this Agreement.



	(d) Notice of Termination . Any purported termination of the Executive’s employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a “Notice of Termination” shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of the Executive’s employment.

	(e) Date of Termination . For purposes of this Agreement, “Date of Termination” shall mean the date specified in the Notice of Termination which shall not be less than 10 nor more than 30 days, respectively, from the date such Notice of Termination is given and on which occurs a Separation from Service as defined in Section 2(f) below.

	(f) Separation from Service . Separation from Service means the Executive’s termination of employment (as defined in this subsection) from the Company and its Affiliates. A Executive incurs a termination of employment that constitutes a Separation from Service if the Executive and the Company reasonably anticipate either than the Executive will not perform any additional services after a certain date for the Company and any Affiliate (the “Company Group”), or that the Executive’s level of bona fide services for the Company Group will permanently decrease to no more than 20% of the average level of bona fide services performed over the immediately preceding 36-month period. The Executive does not incur a Separation from Service if on military leave, sick leave, or other bona fide leave of absence if such leave does not exceed a period of 6 months, or if longer, the period for which a statute or contract provides the Executive with the right to reemployment with the Company Group, provided that there is a reasonable expectation that the Executive will return to perform further services. If an Executive’s leave exceeds 6 months but the Executive is not entitled to reemployment under a statute or contract, the Executive incurs a Separation from Service on the next day following the expiration of 6 months. The service of the Executive as a director of the board of any entity in the Company Group will not be considered in determining whether the Executive has incurred a Separation from Service as an employee of the Company Group. The Company will determine whether Executive has incurred a Separation from Service based on the facts and circumstances and in accordance with Treas. Reg. §1.409A-1(h)(1)(ii). For purposes of this subsection 3(h), “Affiliate” means an entity that would be considered with the Company a single employer under Sections 414(b) and (c) and 1563(a) of the Code, except that 50% shall be substituted for the 80% each place it appears in Sections 414(b) and (c) and 1563(a) of the Code.

3. Compensation Upon Termination . Upon termination of the Executive’s employment (A) by the Company other than for Cause, Disability or the Executive’s death or (B) by the Executive for Good Reason, the Executive shall be entitled to the following benefits:


	(a) The Company shall pay the Executive, through the Date of Termination, the Executive’s base salary as in effect at the time the Notice of Termination is given and any other form or type of compensation otherwise payable for such period.


	(b) Upon receipt of a release in a form acceptable to the Company (the “Release”) executed by the Executive, the Company shall pay a severance amount (the “Severance Benefit”) equal to the sum of: (i) the annual base salary as in effect immediately prior to the Date of Termination (without giving effect to any reduction that would constitute Good Reason), plus (ii) the average of the Executive Variable Compensation Plan bonuses actually paid in the three fiscal years (or if less, the period of the Executive’s employment) ending prior to the Date of Termination, which Severance Benefit shall be divided and paid in equal installments on each payroll pay date during the 12 month period beginning after the Executive’s Date of Termination immediately following the rescission period set forth in the Release.

	(c) The Executive shall be entitled to receive all benefits payable to the Executive under the Company pension and welfare benefit plans or any successor of such plan and any other plan or agreement relating to retirement benefits which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 3.

	(d) The Executive shall be entitled to exercise all rights and to receive all benefits accruing to the Executive under any and all Company stock purchase and stock option plans or programs, or any successor to any such plans or programs, which shall be in addition to, and not reduced by, any other amounts payable to the Executive under this Section 3.

The Executive shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits after the Date of Termination, or otherwise.

4. Forfeiture and Recapture of Severance Benefit . Executive acknowledges and agrees that the Company and its shareholders need to protect themselves from Conduct Detrimental to the Company and the provisions of this Section are designed to protect the Company and its shareholders from Conduct Detrimental to the Company.


	(a) The Company shall have no obligation to pay Executive the Severance Benefit pursuant to Section 3(b) and Executive agrees to repay any portion of such Severance Benefit previously paid, if the Company establishes, by a preponderance of the evidence, that Executive engaged in Conduct Detrimental to the Company during the Employment Period or during the two-year period following the termination of Executive’s employment.

	(b) “Conduct Detrimental to the Company,” as used in this Section, means:


	(i) conduct that results in the Executive’s termination for Cause as defined in Section 3(c) (or that would have resulted in termination for Cause if known by the Company prior to the termination of Executive’s employment);

	(ii) Executive engages in conduct in violation of the MTS Employee Agreements document between the Executive and the Company;

	(iii) Executive violates the provisions of Section 5 of this Agreement; or

	(iv) The Company’s financial statements are required to be restated resulting from errors, omissions or fraud by the Executive during his Term of Employment.

(c) Notwithstanding the above, the Company shall offset against any Severance Benefit due and owing to the Executive any incentive compensation paid to the Executive by the Company that the Executive is required by law or the terms of any incentive compensation plan or agreement, to repay to the Company as a result of any material misstatement of the Company’s financial statement or for any other reason, regardless of the Executive’s culpability.

5. Noncompetition . The Executive agrees that, as a condition of receiving any Severance Benefits under this Agreement, the Executive will not render services directly or indirectly to any competing organization, wherever located, for a period of one year following the Date of Termination, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any “Conflicting Product” which as used herein means any product, process, system or service of any person, firm, corporation, organization other than the Company, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by the Company.

6. Binding Agreement . This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, successors, heirs, and designated beneficiaries. If the Executive should die while before all Severance Benefit have been paid, any payments then remaining shall cease and no further payments shall be due under this Agreement.

7. Remedies . In addition to any other remedies available at law or under the terms of this Agreement, the Company will be entitled to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of this Agreement, in particular, Section 5, it being agreed that money damages alone would be an inadequate remedy for such breach. The rights and remedies of the Company under this Agreement are cumulative and not alternative. If the Company Bank brings a claim against the Executive under this Section, the non-prevailing party shall reimburse the prevailing party for its reasonable attorney’s fees and costs

8. Notice . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the last known residence address of the Executive or in the case of the Company, to its CEO, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

9. Non-application of Section 409A of the Code . It is the intent of the Company and the Executive that this Agreement satisfy those requirements of Section 409A of the Code to constitute a “separation pay plan” to exempt the payments hereunder from the definition of a “nonqualified deferred compensation plan” under Section 409A of the Code, and the Agreement shall be so administered and interpreted in manner consistent with, and that gives effect to, such intention. The Company shall have the authority, without the consent of the Executive to amend such provision to maintain to maximum extent practicable the intent that this Agreement remains exempt from the requirements applicable to a “nonqualified deferred compensation plan” under Section 409A of the Code and regulations and other guidance promulgated thereunder.

10. Miscellaneous . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party hereto at any time of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other-party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota.

11. Validity . The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

IN WITNESS WHEREOF, the undersigned officer, on behalf of MTS Systems Corporation, and the Executive have hereunto set their hands as of the date first above written.


MTS SYSTEMS CORPORATION

By		/S/ William V. Murray
	Its	Interim CEO

EXECUTIVE:

		/S/ Kristin Trecker




		Exhibit 21

Subsidiaries of the Registrant		Country, State or Province of Formation

MTS Japan Ltd.		Japan

MTS Sensor Technology Corp		Japan

MTS Korea, Inc.		South Korea

MTS Systems (China) Co., Ltd.		China (PRC)

MTS Systems GmbH		Germany

MTS Systems Norden AB		Sweden
MTS Systems Ltd.		United Kingdom
MTS Systems Srl		Italy
MTS Holdings France, SARL		France
MTS Systems SAS		France
MTS Sensor Technologie GmbH and Co. KG		Germany
MTS Automotive Sensors GmbH		Germany
MTS Sensor Technologie und Verwaltungs-GmbH		Germany

MTS Systems (Hong Kong), Inc.		Minnesota

MTS Systems Switzerland GmbH		Switzerland

MTS Testing Systems (Canada) Ltd.		Ontario

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors
MTS Systems Corporation:

We consent to the incorporation by reference in the registration statements (Nos. 333-82582, 333-136113, 333-172136 and 333-172137) on Form S-8 of MTS Systems Corporation and subsidiaries of our report dated November 27, 2012, with respect to the consolidated balance sheets of MTS Systems Corporation and subsidiaries as of September 29, 2012 and October 1, 2011, and the related consolidated statements of income, shareholders’ investment and comprehensive income, and cash flows, and the related financial statement schedule II for each of the years in the three-year period ended September 29, 2012, and the effectiveness of internal control over financial reporting as of September 29, 2012, which report appears in the September 29, 2012 annual report on MTS Systems Corporation and subsidiaries.

/s/ KPMG LLP

Minneapolis, Minnesota
November 28, 2012

Exhibit 31.1

CERTIFICATION

I, Jeffrey A. Graves, certify that:

1. I have reviewed this annual report on Form 10-K of MTS Systems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 28, 2012


	/s/ Jeffrey A. Graves
	Jeffrey A. Graves
	President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Susan E. Knight, certify that:

1. I have reviewed this annual report on Form 10-K of MTS Systems Corporation;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 28, 2012


	/s/ Susan E. Knight
	Susan E. Knight
	Senior Vice President and Chief Financial Officer

Exhibit 32.1

MTS SYSTEMS CORPORATION
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)

The undersigned, Jeffrey A. Graves, the Chief Executive Officer of MTS Systems Corporation (the “Company”), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2012 (the “Report”).

The undersigned hereby certifies that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Date: November 28, 2012


	/s/ Jeffrey A. Graves
	Jeffrey A. Graves
	President and Chief Executive Officer

Exhibit 32.2

MTS SYSTEMS CORPORATION
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)

The undersigned, Susan E. Knight, the Chief Financial Officer of MTS Systems Corporation (the “Company”), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2012 (the “Report”).

The undersigned hereby certifies that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

Date: November 28, 2012


	/s/ Susan E. Knight
	Susan E. Knight
	Senior Vice President and Chief Financial Officer