Schedule 14A


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Board Voting Recommendation
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE

RATIFICATION OF THE APPOINTMENT OF KPMG LLP.
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AUDIT COMMITTEE REPORT
The Audit Committee is currently composed of four directors who are independent, as defined by the applicable rules for companies listed on the NASDAQ Stock Market. The Audit Committee operates under a written charter adopted by the Board, a copy of which is available to shareholders on our website at www.mts.com (select "Investor Relations" and click on "Corporate Governance").
Management is responsible for preparing the financial statements, establishing and maintaining the system of internal controls over the financial reporting processes, and assessing the effectiveness of the Company's internal control over financial reporting. The independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements and internal controls in accordance with auditing standards generally accepted in the United States and for issuing reports on such audit. The Audit Committee's responsibility is to monitor and oversee these processes.
Management has represented to the Audit Committee that our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States and the Audit Committee has reviewed and extensively discussed the consolidated financial statements with management and KPMG, our independent registered public accounting firm.
In reviewing our fiscal 2016 audited consolidated financial statements, the Audit Committee discussed with KPMG matters required to be discussed by the applicable Public Company Accounting Oversight Board (PCAOB) Standards. In addition, the Audit Committee received from the independent registered public accounting firm the written disclosures required by the PCAOB regarding the independent registered public accounting firm's communications with the Audit Committee concerning independence and discussed with them their independence from us and our management. The Audit Committee determined that the tax services provided to our Company by our independent registered public accounting firm are compatible with the independent registered public accounting firm's independence.
Based upon the Audit Committee's discussions with management and KPMG and the Audit Committee's review of the representations of management and the reports of KPMG, the Audit Committee recommended that the Board include the audited consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 2016.

SUBMITTED BY THE AUDIT COMMITTEE

OF THE COMPANY'S BOARD OF DIRECTORS
David D. Johnson (Chair)

David J. Anderson

Randy J. Martinez

Gail P. Steinel
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EXECUTIVE COMPENSATION




Compensation Discussion and Analysis
This CD&A describes our executive compensation program for the Chief Executive Officer ("CEO"), Chief Financial Officer and other named executive officers of the Company. The Compensation and Leadership Development Committee (for purposes of this Executive Compensation Section, the "Committee") administers and makes decisions regarding our executive compensation and benefit programs. The following discussion should be read in conjunction with the Summary Compensation Table and related tables and footnote disclosure setting forth the compensation of our fiscal 2016 named executive officers:


Jeffrey A. Graves, President and CEO;



Jeffrey P. Oldenkamp, Senior Vice President and Chief Financial Officer;



William E. Bachrach, former President, Test;



David T. Hore, President, Sensors;



John V. Emholz, former Senior Vice President, Sensors; and



Catherine L. Powell, Senior Vice President, General Counsel and Corporate Secretary.
Mr. Oldenkamp provided a resignation notice to the Company on April 20, 2017 and his employment with the Company will end effective May 12, 2017.
Mr. Bachrach retired from the Company on January 13, 2017.
Mr. Emholz is one of our named executive officers for whom disclosure would have been provided because he was one of our three other most highly paid executive officers, but for the fact that he was not serving as an executive officer at the end of fiscal 2016. Mr. Emholz transitioned from the role of Senior Vice President, Sensors, effective as of July 6, 2016. In connection with such transition, we entered into a transition bonus agreement with Mr. Emholz and he remained employed by the Company as Senior Vice President, Sensors, including the corresponding compensation and benefits, until September 6, 2016, at which time Mr. Emholz's employment with the Company was terminated. He continues to be eligible to receive compensation pursuant to the Company's Executive Severance Plan.
Ms. Powell and the Company entered into a mutual separation agreement on April 18, 2017 pursuant to which the parties mutually agreed that Ms. Powell's employment with the Company will end effective May 5, 2017.
Executive Summary
The objectives of the Committee are to provide a market competitive compensation program that:


Aligns the financial interests of the executives with those of our shareholders, in both the short and long term;



Provides a balanced mix of base salary and incentive compensation that is linked to the achievement of our short-term and long-term goals;
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Attracts, motivates and retains highly competent executives; and



Differentiates between executives based upon individual strategic leadership, contributions to overall corporate and/or segment performance and level of responsibility within the organization.
A discussion of recent Company performance and the corresponding executive pay outcomes, demonstrates that our compensation program is functioning according to our established goals in most respects.

 

 

 

 

 

 

 

 

 

 


 

 


 

 


 

 


 

 




















 

 

Performance Highlights

 

 

 

Compensation Outcomes

 

 



















 

 

Fiscal 2016 Results Related to Target Levels for Incentive Plans



Total Adjusted Revenue, a non-GAAP financial measure, was $605.6 million (1) , up from the previous year's GAAP revenue of $563.9 million.



Adjusted ROIC, a non-GAAP financial measure, of 16.3% (2) , compared to 15.5% (3) in fiscal year 2015.



Adjusted diluted earnings per share (EPS), a non-GAAP financial measure, of $3.01 (2) , compared to the previous year's GAAP diluted EPS of $3.00.



Adjusted Working Capital Rate to Revenue ("WCRR"), a non-GAAP financial measure, was 24.0% (4) , compared to WCRR of 30.4% (5) in fiscal year 2015.

 

 

 

Annual Incentives



Based on achieving 92% of the adjusted EPS goal, 100% of the adjusted revenue goal and 121% of the adjusted WCRR goal, the fiscal year 2016 annual incentive payout for our CEO was 100% of target.



The payout was capped at target, as our incentive compensation plan restricts over-ranging in the event that the adjusted EPS goal is not achieved. Without the cap, payouts for the CEO would have been 123% of target during fiscal year 2016.

Long-Term Incentives



Three of the four outstanding stock option grants for our CEO were underwater as of October 1, 2016.



The performance-based restricted stock units granted in fiscal years 2016 and 2015 were tracking below target payout levels.

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Adjusted ROIC performance was below target levels in both fiscal years 2016 and 2015.

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Share prices were below the grant levels.

The overall result is compensation below the targeted opportunity.

 

 



















(1) For purposes of our incentive compensation plans, we use adjusted revenue, which is not a measure of performance presented in accordance with GAAP. Adjusted revenue is calculated by excluding PCB revenue for the three months ended October 1, 2016 of approximately $44,503,000 from our total fiscal year 2016 revenue of approximately $650,147,000. We use adjusted revenue as an incentive compensation measure as defined in the plan documents. This measure should not be construed as an alternative to revenue determined in accordance with GAAP.
(2) For purposes of our incentive compensation plans, we have calculated adjusted ROIC and adjusted diluted EPS for fiscal year 2016, which are not financial measures of performance presented in accordance with GAAP. Adjusted ROIC is calculated by dividing adjusted net income by average adjusted invested capital. Adjusted diluted EPS is calculated by
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dividing adjusted net income by adjusted diluted weighted average common shares outstanding. Adjusted net income is calculated by excluding the following from reported net income: PCB net income, acquisition-related expense, net of tax; acquisition integration expenses, net of tax; acquisition inventory step-up, net of tax; restructuring expense, net of tax; acquisition interest expense, net of tax; and after-tax interest expense. Adjusted diluted weighted average common shares outstanding is calculated by excluding the impact of our common stock offering and the issuance of 8.75% tangible equity units, or TEUs. Average invested capital is defined as the aggregate of average adjusted interest-bearing debt and average adjusted shareholders' equity and is calculated as the sum of current and prior year ending amounts divided by two. Because the calculations are not prescribed or authorized by GAAP, the adjusted ROIC percentage and adjusted diluted EPS amount are non-GAAP financial measures. We use adjusted ROIC and adjusted diluted EPS as incentive compensation measures as defined in the plan documents. These measures should not be construed as an alternative to return on equity, diluted EPS or any other measure determined in accordance with GAAP. For a reconciliation of these non-GAAP financial measures to the nearest GAAP measures, see page 58 of our Annual Report on Form 10-K for fiscal 2016.
(3) For the calculation of fiscal year 2015 ROIC, see page 20 of our Annual Report on Form 10-K for fiscal 2016.
(4) For purposes of our incentive compensation plans, we use adjusted WCRR for fiscal year 2016, which is not a measure of performance presented in accordance with GAAP. Adjusted WCRR is calculated by dividing the adjusted 12 month average net working capital by adjusted revenue. The adjusted 12 month average net working capital is calculated by excluding PCB accounts receivable, net, unbilled accounts receivable, inventories, net, accounts payable and advance payments from customers and averaging the quarterly adjusted net working capital for fiscal year 2016. Adjusted revenue is calculated by excluding PCB revenue for the three months ended October 1, 2016 of approximately $44,503,000 from fiscal year 2016 revenue of approximately $650,147,000. Because the ratio is not prescribed or authorized by GAAP, the adjusted WCRR is a non-GAAP financial measure. We use adjusted WCRR as an incentive compensation measure as defined in the plan documents. For a reconciliation of this non-GAAP financial measure to the nearest GAAP measures for fiscal year 2016, see page 59 of our Annual Report on Form 10-K for fiscal 2016.
(5) WCRR is calculated by dividing the 12 month average net working capital by full fiscal year revenue. The 12 month average net working capital is calculated by averaging the quarterly adjusted net working capital for fiscal year 2015. Because the ratio is not prescribed or authorized by GAAP, WCRR is a non-GAAP financial measure. For a reconciliation of this non-GAAP financial measure to the nearest GAAP measures for fiscal year 2015, see page 60 of our Annual Report on Form 10-K for fiscal 2016.
While we believe our executive compensation program is meeting our stated objectives, we do accept shareholder feedback on the design and performance-orientation of our programs. Specifically, we received approximately 98% support of our executive compensation programs at our last annual meeting of shareholders held in fiscal 2016 related to the compensation of our named executive officers. We continue to solicit shareholder feedback regarding our compensation programs, and take this input into consideration as we design future incentive compensation.
Fiscal 2016 Executive Compensation Highlights
Detailed below are some of the key actions and decisions with respect to our executive compensation programs for fiscal 2016 as approved by the Committee, with counsel from its independent compensation consultant, Willis Towers Watson:

Acquisition of PCB. The following executive compensation actions were reviewed by the Committee in connection with the acquisition of PCB.
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David T. Hore, former President of PCB, was appointed to serve as our President, Sensors in July 2016. While we typically do not enter into employment agreements with our executive officers, Mr. Hore had an existing employment agreement with PCB dated as of April 1, 2016 (the "Hore Employment Agreement") and, as part of the merger agreement with PCB, we agreed to assume the Hore Employment Agreement. Pursuant to the Hore Employment Agreement, Mr. Hore will receive compensation in the amount of $500,000 per year to be evaluated by us from time to time and annual cash bonus payments are discretionary on our part. The Hore
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Employment Agreement has a two-year term and provides for potential payments in the event of a termination of Mr. Hore's employment. Therefore, during the term of the Hore Employment Agreement, Mr. Hore will not participate in our Executive Severance Plan or the Executive Change in Control Severance Plan. In addition, as one of our new executive officers, Mr. Hore received a restricted stock unit award on August 15, 2016 with a fair market value of $270,000 in accordance with our typical policy for newly hired executive officers. We believe that executive hire equity grants are important to align our officers' interests with our shareholders' interests.°

We entered into a Transition Bonus Agreement (the "Emholz Transition Agreement") with John V. Emholz, our former Senior Vice President, effective as of July 6, 2016. Pursuant to the Emholz Transition Agreement, Mr. Emholz remained employed by the Company in his current position, including the corresponding compensation and benefits, for a period of 60 days following the closing of the acquisition on July 6, 2016, at which time Mr. Emholz's employment with the Company was terminated and he began to receive compensation pursuant to the Company's Executive Severance Plan further described below.



Compensation Overview for Fiscal 2016. The Committee granted performance restricted stock units ("PRSUs") using adjusted ROIC as a performance measure. The Committee believes that measuring adjusted ROIC over a three- year period is an appropriate measure for the PRSUs given its emphasis on profitability with a longer-term view. In fiscal 2016, the Committee continued with its practice of granting an even mix of stock options and PRSUs. The performance measure of adjusted ROIC is expressed as annual targets for the applicable three-year period and the annual performance is averaged over the performance period. The performance range has threshold, target and maximum performance expectations each cycle, with a 75% guaranteed threshold of target and up to a 125% maximum opportunity of target.


Strong Performance-Based Compensation Awards and Payouts. Our executive compensation is tightly linked with performance.
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As with past years, we adopted an Executive Variable Compensation ("EVC") Plan through which the named executive officers were eligible to earn cash incentive compensation based upon achievement of specific financial objectives for fiscal 2016, recommended by the Committee and approved by the Board, that are designed to challenge the named executive officers to high performance.

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The Committee actively considers the impact of unusual or one-time events on our financial performance in setting the performance goals under the EVC Plan.

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As named executive officers assume greater responsibility, a larger portion of their total cash compensation is risk based and dependent on Company and business segment performance.

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The Committee targets annual base salaries around the median base salaries of survey data, with the EVC Plan designed to allow the named executive officer to earn above-target compensation only when the named executive officer delivers and, as a Company, we deliver performance that is also above target.



Appropriate Comparisons. As part of our salary structure analysis, Willis Towers Watson reviews market data, adjusted for revenue size, to current base salaries. A proxy review based on compensation peer companies is also conducted to compare market data to the compensation peer companies. Recommendations are then provided to the Committee for setting base salary and long-term incentive ranges for our named executive officers.
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Stock Ownership Expectations. Our compensation programs encourage employees to build and maintain an ownership interest in the Company. We have established specific stock ownership guidelines for executive officers, which are reviewed annually by the Committee.


Emphasis on Quality Compensation Practices. We continue our commitment to compensation practices that we believe contribute to good governance.
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Our EVC Plan and 2011 Stock Incentive Plan each contain a recoupment, or "clawback," provision. These clawback provisions require executive officers to forfeit and allow us to recoup any payments or benefits received by them under the EVC Plan or the 2011 Stock Incentive Plan under certain circumstances, such as certain restatements of our financial statements, termination of employment for cause and breach of an agreement between us and the executive officer.

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The compensation consultant is retained directly by and reports to the Committee. The compensation consultant does not provide any services to management personally and had no prior relationship with any of our named executive officers.
Information Used in the Compensation Process
Independent Compensation Consultant
Under the Committee's charter, the Committee has the authority to select, retain and compensate executive compensation consultants and other advisors as it deems necessary to carry out its responsibilities. For assistance with fiscal 2016 compensation decisions, the Committee engaged Willis Towers Watson to provide it with information regarding compensation of executive officers, non-executive officers and directors. Specifically, Willis Towers Watson was asked by the Committee to:


provide information on executive compensation for each cash component of compensation (base salary and short-term incentive compensation);



provide information regarding competitive values and structures of long-term incentive compensation;



provide information regarding performance measures used in long-term incentive compensation programs; and



review and provide information on the compensation peer group used to confirm survey data related to some of our named executive officer positions.
Determining Competitive Compensation
The Committee annually assesses "competitive market" compensation for each component of compensation using a number of sources.
The Committee engaged Willis Towers Watson as its independent compensation consultant to review compensation levels for executive positions. For fiscal 2016, as in past years, a base salary benchmark tool was updated for the Committee based upon executive salary survey data that was adjusted for comparability by business, revenue, executive position and age of data. In setting salaries for fiscal 2016, executive salary survey data for executives was obtained from the 2015 Towers Watson Compensation DataBank Survey and the 2015 Towers Watson Compensation Survey Report for companies with less than $1 billion in revenue. The results of the benchmark tool
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were then referenced against proxy compensation data from our compensation peer group described below, which is used as a supplemental data source.
For each position, the base salary benchmark tool produces a median and a competitive salary range, with the minimum and maximum end of the range at approximately 80% and 120% of the median, respectively. The Committee used the benchmark tool to assess the median and range of competitive salaries for fiscal 2016 and compared these to the base salaries for the named executive officers to determine the need for adjustments.
Our direct competitors are either privately-owned companies or business units within much larger public companies and, as a result, a broad and reliable base of compensation data from these companies is not readily available. Accordingly, the compensation peer group we use to confirm the base salary data from our benchmark tool consists of durable goods manufacturing companies, most of which do not compete with us directly but several of which compete with us for management talent. Our compensation peer group is reviewed on an annual basis by the Committee with the assistance of its independent compensation consultant. Our compensation peer group used when determining fiscal 2016 compensation consisted of the following companies:

 

 

 

Badger Meter Inc.

 

GSI Group Inc.


Checkpoint Systems Inc.


 


John Bean Technologies Corporation


Cognex Corporation


 


Kimball Electronics, Inc.


Coherent Inc.


 


Methode Electronics, Inc.


CTS Corporation


 


National Instruments Corporation


Daktronics Inc.


 


Newport Corp.


ESCO Technologies Inc.


 


OSI Systems, Inc.


Fabrinet


 


RBC Bearings Inc.


FARO Technologies Inc.


 


Rofin-Sinar Technologies Inc.


FEI Company


 


Standex International Corporation
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