EXHIBIT 13
SIX YEAR FINANCIAL SUMMARY
(SEPTEMBER 30)
2000 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES)
OPERATIONS(5)
- --------------------------------------------------------------------------------------------------------------------------------
Net revenue $ 391,853 $ 390,542 $362,163 $ 323,424 $278,170 $ 247,793
United States revenue 194,056 200,556 200,490 156,877 140,249 136,862
International revenue 197,797 189,986 161,673 166,547 137,921 110,931
Gross profit 134,000 151,171 142,227 132,073 116,047 99,923
Income before income taxes 6,095 18,770 33,448 29,986(1) 21,813 15,244
Net income 3,624 12,445 21,539 19,237(1) 15,170 11,105
Net income per share, diluted basis .17 .59 1.01 .92(1) .72 .55
Research and development expense 24,619 26,966 24,348 19,798 19,776 15,471
Net interest expense 4,892 4,597 1,948 1,125 1,123 2,424
Depreciation and amortization 15,294 14,424 10,880 9,608 8,673 7,912
FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------------------------------------
Current assets $ 225,273 $ 223,651 $204,311 $ 162,814 $137,584 $ 138,159
Current liabilities 108,648 104,713 110,223 83,413 63,465 69,312
Current ratio 2.1:1 2.1:1 1.9:1 2.0:1 2.2:1 2.0:1
Net working capital 116,625 118,938 94,088 79,401 74,119 68,847
Property and equipment, net 72,081 73,633 69,942 51,790 49,476 49,465
Total assets 330,234 333,347 313,022 229,075 197,679 198,320
Interest bearing debt 75,712 71,637 74,682 12,865 11,836 22,965
Shareholders' investment 157,854 162,859 152,689 133,524 120,578 113,311
Shareholders' investment per share 7.61 7.80 7.39 6.56 5.90 5.54
OTHER STATISTICS AND RATIOS
- --------------------------------------------------------------------------------------------------------------------------------
Diluted shares outstanding(2) 20,935 21,184 21,330 20,945 21,184 20,258
Number of common shareholders of record 2,229(3) 2,055 1,760 1,575 1,523 1,395
Number of employees 2,350 2,436 2,424 2,125 1,866 1,729
New orders $ 415,879 $ 350,190 $352,282 $ 380,870 $302,824 $ 261,487
Backlog of orders $ 162,955 $ 146,833 $187,185 $ 190,784 $130,621 $ 105,967
Gross profit percent 34.2% 38.7% 39.3% 40.8% 41.7% 40.3%
Research and development costs
as a percent of net revenue 6.3% 6.9% 6.7% 6.1% 7.1% 6.2%
Net income as a percent of net revenue .9% 3.2% 5.9% 5.9%(1) 5.5% 4.5%
Effective tax rate 41% 34% 36% 36% 31% 27%
Interest bearing debt to shareholders'
investment percent 48.0% 44.0% 48.9% 9.6% 9.8% 20.3%
Return on average net assets(4) 4.9% 10.7% 20.9% 22.7% 17.6% 13.2%
Return on beginning
shareholders' investment per share 2.2% 8.0% 15.4% 15.6%(1) 13.0% 10.6%
Cash dividends paid per share $ .24 $ .24 $ .24 $ .20 $ .16 $ .14
- --------------------------------------------------------------------------------------------------------------------------------
(1) EXCLUDES AN AFTER-TAX GAIN OF $2,654,000 FROM THE SALE OF LAND IN MAY 1997,
WHICH IS EQUAL TO $.13 PER SHARE.
(2) PRESENTED ON A WEIGHTED AVERAGE BASIS OF COMMON SHARES ASSUMING CONVERSION
OF POTENTIAL COMMON SHARES DURING EACH YEAR AFTER RETROACTIVE ADJUSTMENTS FOR
ISSUED SHARES, FOR STOCK SPLITS AND FOR REDUCTION OF SHARES FROM TREASURY STOCK
PURCHASES (IN THOUSANDS OF SHARES).
(3) ON DECEMBER 4, 2000, THERE WERE 2,229 COMMON SHAREHOLDERS OF RECORD, WITH
ANOTHER ESTIMATED 3,000 BENEFICIAL SHAREHOLDERS WHOSE STOCK IS HELD BY NOMINEES
OR BROKER DEALERS.
(4) (INCOME BEFORE INCOME TAXES PLUS NET INTEREST EXPENSE) DIVIDED BY (AVERAGE
QUARTERLY ASSETS MINUS NON-INTEREST BEARING LIABILITIES).
(5) ALL AMOUNTS HAVE BEEN RESTATED TO REFLECT THE 1999 ACQUISITION OF DSP
TECHNOLOGY, INC., ACCOUNTED FOR UNDER THE POOLING-OF-INTEREST METHOD.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All amounts have been restated to reflect the 1999 acquisition of DSP
Technology, Inc., accounted for under pooling-of-interest method.
BACKLOG/NEW ORDERS
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
New Orders:
North America* $ 233,679 $ 196,367 $ 195,206
International 182,200 153,823 157,076
--------------------------------------------------------------
Total $ 415,879 $ 350,190 $ 352,282
--------------------------------------------------------------
Backlog $ 162,955 $ 146,833 $ 187,185
--------------------------------------------------------------
*INCLUDES U.S. AND CANADA
Orders in 2000 of $415.9 million increased $65.7 million or 18.8% from 1999.
This is compared to orders for 1999 of $350.2 million which represents a
decrease of $2.1 million or .6% from the previous year. Orders in 2000 included
an $18.6 million contract with one customer within the MT&S sector. There were
no orders over $10 million in 1999 or 1998.
In 2000, new orders for the Mechanical Test and Simulation sector
(MT&S) were $314.9 million representing an increase of $37.5 million or 13.5%.
This is compared to orders for 1999 of $277.4 million which represents an
increase of $3.6 million or 1.3% from the previous year. Orders from the ground
vehicle industry and for aerospace applications were particularly strong in
2000. Orders from the Asian/Pacific region, especially Japan, were very strong
compared to 1999 for Vehicle Testing Systems and Aerospace applications. Orders
in 2000 from Europe were consistent with levels in 1999.
New orders in the Factory Automation sector (FA) in 2000 of $101.0
million increased $28.2 million or 38.7% from 1999. This is compared to orders
for 1999 of $72.8 million which represents a decrease of $5.7 million or 7.3%
from the previous year. The European and Japanese markets for FA products
continued solid growth in 2000. Orders for industrial automation applications
(servo motors, amplifiers and motion controllers) and industrial sensors were
strong, reversing the 1999 and 1998 soft North American market.
North American orders for 2000 of $233.7 increased $37.3 million or
19.0% from 1999. This is compared to orders for 1999 of $196.4 which represents
an increase of $1.2 million or .6% from the previous year. International orders
for 2000 of $182.2 million increased $28.4 million or 18.5% from 1999. This is
compared to orders for 1999 of $153.8 million which represents a decrease of
$3.3 million or 2.1% from the previous year. The increase in international
orders was due to the strong MT&S activity in Asia. See Geographic Analysis of
New Orders (below) for the percentage breakdown by geographic area.
The backlog of undelivered orders at September 30, 2000 amounted to
$163.0 million, representing an increase of $16.1 million or a 11.0% from 1999.
The order backlog for 1999 of $146.8 million decreased $40.4 million or 21.6%
from the previous year.
NET REVENUE
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
United States $ 194,056 $ 200,556 $ 200,490
International 197,797 189,986 161,673
--------------------------------------------------------------
Total $ 391,853 $ 390,542 $ 362,163
--------------------------------------------------------------
Record 2000 net revenue of $391.9 million increased $1.3 million or .3% from
1999.This is compared to net revenue for 1999 of $390.5 which represents an
increase of $28.4 million or 7.8% from the previous year. For 2000, MT&S revenue
of $302.4 million decreased $11.3 million or 3.6% from 1999. This is compared to
net revenue for 1999 of $313.7 which represents an increase of $25.9 million or
9.0% from the previous year. FA net revenue for 2000 of $89.5 million increased
$12.6 million or 16.5% from the previous year. This is compared to net revenue
for 1999 of $76.9 million which represents an increase of $2.5 million or 3.3%
from the previous year. For industry sector and geographic information, see
Note 2 of "Notes to Consolidated Financial Statements."
Net revenue in the United States for 2000 of $194.1 million decreased
$6.5 million or 3.2% from 1999. This is compared to net revenue for 1999 of
$200.6 which remained relatively flat with the previous year's net revenue.
International net revenue for 2000 of $197.8 increased $7.8 million or 4.1% from
1999. This is compared to net revenue for 1999 of $190.0 million which
represents an increase of $28.3 million or 17.5% from the previous year.
International revenue grew at a faster rate from 1998 to 1999 and 2000
reflective of improved economic conditions, a broader product offering, and
stronger vehicle dynamics and aerospace activity.
The MT&S sector revenue decrease from 1999 to 2000 is attributable to a
reduction in demand for our electromechanical test products and powertrain
systems sold by the recently acquired DSPT business to the vehicle markets. The
MT&S sector revenue increase of $25.9 million from 1999 to 1998 reflected
positive worldwide demand from our ground vehicle customers and solid growth in
entertainment projects.
The FA sector revenue increase of $12.6 million over the previous year
was a result of strong European demand for sensors and an expansion of our
product line offerings for amplifiers, servo-electric motors and motion control
products. Strong order demand and associated revenues were the result of sales
to microchip, pick-in-place and injection molding machine manufacturers.
Selective price changes were implemented in all three years. However,
the overall impact of pricing changes did not have a material effect on reported
revenue volume.
GEOGRAPHIC ANALYSIS OF NEW ORDERS
2000 1999 1998
-------------------------------------------------------------
North America 56% 56% 55%
-------------------------------------------------------------
Europe/Africa/Middle East 26 30 29
-------------------------------------------------------------
Asia Pacific/Japan 18 13 14
-------------------------------------------------------------
Latin America/Rest of the World 0 1 2
-------------------------------------------------------------
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GROSS PROFIT
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Gross Profit $ 134,000 $ 151,171 $ 142,227
--------------------------------------------------------------
% of Net Revenue 34.2% 38.7% 39.3%
--------------------------------------------------------------
The gross profit percentage for 2000 decreased to 34.2% from 38.7% in 1999 and
39.3% in 1998. This decline in gross profit percentage was caused by higher than
expected costs to complete certain custom entertainment and large complex
custom projects. The decrease in gross profit margins in 1999 to 1998 was
attributable to differing margins on the mix of products sold.
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Selling Expense $ 61,654 $ 61,490 $ 56,479
General &
Administrative Expense 34,684 32,276 27,833
--------------------------------------------------------------
Total $ 96,338 $ 93,766 $ 84,312
--------------------------------------------------------------
% of Net Revenue 24.6% 24.0% 23.3%
--------------------------------------------------------------
Selling and general & administrative (SG&A) expenses for 2000 as a percentage of
net revenue was .6% higher than 1999 and 1.3% higher than 1998. Full year
spending for 2000 totaled $96.3 million, which represented an increase of $2.6
million or 2.7% over 1999 and an increase of $9.5 million or 11.2% over 1998.
All three years were similar in that cost control and alignment of
existing resources with markets having the greatest potential were heavily
emphasized. Increases in administrative expense and selling expenses in 2000
from 1999 were realized in the FA segment, and reduced in the MT&S segment. The
administrative expenses for 2000 also include a provision of $1.8 million
associated with the closure of the laboratory instrument business.
RESEARCH AND DEVELOPMENT EXPENSE
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
R & D Expense $ 24,619 $ 26,966 $ 24,348
--------------------------------------------------------------
% of Net Revenue 6.3% 6.9% 6.7%
--------------------------------------------------------------
The Company provides funds for product, system and application developments
(R&D) in both the MT&S and FA sectors. The majority of the R&D expenditures in
all three years were for new systems and system components such as software,
controls and mechanical products; new measurement products; servo motors and
amplifiers; and accessories.
The R&D as a percentage of net revenue reflected above are
representative of the range the Company normally commits to in its annual
planning process. The decline in expenditures in 2000 from 1999 is due to
specific decisions to curtail certain R&D programs that did not have adequate
return on investment. These programs were generally reduced in the MT&S segment.
INCOME
2000 1999 1998
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Income Before
Income Taxes $ 6,095 $18,770 $ 33,448
--------------------------------------------------------------
% of Net Revenue 1.6% 4.8% 9.2%
--------------------------------------------------------------
Net Income $ 3,624 $12,445 $ 21,539
--------------------------------------------------------------
% of Net Revenue .9% 3.2% 5.9%
--------------------------------------------------------------
Effective Tax Rate 41% 33.7% 35.6%
--------------------------------------------------------------
Return On Beginning
Shareholder's Investment
Per Share 2.2% 8.0% 15.4%
--------------------------------------------------------------
Basic Earnings Per Share $ .17 $ .60 $ 1.05
--------------------------------------------------------------
Diluted Earnings Per Share $ .17 $ .59 $ 1.01
--------------------------------------------------------------
Income before income taxes (pre-tax income) in 2000 of $6.1 million decreased
$12.7 million or 67.5% from 1999. This is compared to a pre-tax for 1999 of
$18.8 million which represents a decrease of $14.7 million or 43.9% from the
previous year. 2000 pre-tax income included a $1.2 million provision for closure
of the laboratory business classified as restructuring, and an additional $1.8
million for the same action included in administrative expenses.
1999 pre-tax income included $5.7 million for restructuring (see note 8
of "Notes to Consolidated Financial Statements") and $1.4 million for
acquisition expenses (see Note 7 of "Notes to Consolidated Financial
Statements"). Also, leading to a decline in the 2000 pre-tax income was higher
interest expense due to higher interest rates in 2000. Interest income of $1.5
million was $1.0 million higher than 1999 and was a direct result of a $.7
million receipt of interest from a prior period tax overpayment.
16
The MT&S 2000 income from operations, before one-time restructuring
charge of $1.2 million and $1.8 million related general and administrative
expense was $6.3 million. This is a decrease of $17.6 million or 73.5% from
1999. The decrease in income from operations reflects the leveraged effect of a
5.5% decline in gross mar gin percent resulting from cost overruns and a 3.6%
decrease in sector revenue, both discussed previously. FA 2000 income from
operations of $8.6 million increased $2.2 million or 34.4% from 1999 reflecting
strong revenue growth.
Net income in 2000 decreased $8.8 million or 70.9% from 1999 to $3.6
million or $.17 per diluted share (includes $.09 for restructuring and related
general and administrative expenses). Net income in 1999 decreased $9.1 million
or 42.2% from 1998.
The effective tax rate is influenced by the level of tax credits
available from the Company's Foreign Sales Corporation and qualified R&D
expense; and on the level of foreign-sourced income which is taxed at a higher
rate than domestic-sourced income. 2000 had a higher level of foreign-sourced
income than 1999 or 1998 contributing to the higher tax rate.
FOREIGN CURRENCIES EFFECTS
The Company is exposed to market risk from changes in foreign currency exchange
rates which can affect its results from operations and financial condition. To
minimize that risk, the Company manages exposure to changes in foreign currency
rates through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments, principally
forward exchange contracts. Foreign exchange contracts are used to hedge the
Company's overall exposure to exchange rate fluctuations, since the gains and
losses on these contracts offset gains and losses on the assets, liabilities,
and transactions being hedged.
Approximately 50% of the Company's revenue occurs outside of the
United States and about 65% (approximately 30% of the Company's net revenue) of
these revenues are denominated in currencies other than the U.S. dollar. As a
result, a strengthening of the U.S. dollar decreases translated foreign currency
denominated revenues and earnings. Conversely, weakening of the U.S. dollar has
the reverse impact on revenues and earnings. During 2000, 1999 and 1998, the
U.S. dollar was generally stronger against other major currencies. Gains and
losses attributed to translating the financial statements for all non-U.S.
subsidiaries are included in the currency translation adjustments. The gains and
losses on forward exchange contracts used to hedge these exposures, are included
in other expense (income).
LIQUIDITY AND CAPITAL RESOURCES
2000 1999 1998
---------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Total Interest
Bearing Debt $ 75,712 $ 71,637 $ 74,682
% of Total
Capitalization 32.4% 30.5% 32.8%
---------------------------------------------------------------
Shareholders'
Investment $ 157,854 $162,859 $ 152,689
---------------------------------------------------------------
Per Share $ 7.61 $ 7.80 $ 7.39
---------------------------------------------------------------
At September 30, 2000, the Company's capital structure was comprised of $17.6
million of current debt, $58.1 million of long-term debt and $157.8 million of
shareholders' investment. The ratio of total debt to total capitalization was
32.4% compared to 30.5% at September 30, 1999.
Total debt increased $4.1 million during 2000 to $75.7 million. This
resulted from an increase of $6.2 million in notes payable and the current
portion of long term debt offset by a $2.1 million payment of long term debt.
Shareholders' investment decreased $5.0 million in 2000 to $157.9
million. The decrease was a result of a $5.0 million dividend payment, a $2.2
million treasury stock purchase, and a $2.5 million reduction in accumulated
other comprehensive income. These decreases were offset by a $3.6 million
increase in retained earnings from the current years net earnings and $1.0
million from the Company's employee stock option and purchase plan.
The Company believes that the combination of present capital resources,
internally generated funds, and unused financing sources will be adequate to
finance on-going operations, allow for reinvestment in the business and
strategic acquisitions.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CASH FLOWS
During 2000, $3.0 million of cash was generated from operating activities,
compared with $26.7 million generated in 1999 and $3.1 million used in 1998. The
decrease in 2000 was primarily due to an increase in inventory of $6.8 million,
an increase in accounts receivable of $9.6 million, and likewise a decrease in
customer advanced billings of $5.9 million from the prior year.
In addition to cash generated from operating activities, the Company
obtained an additional $1.9 million in short-term debt and $3.3 million in net
long-term debt. These cash flows were primarily used to support $13.2 million
for capital expenditures and other assets, $2.2 million for stock repurchases,
and $5.0 million for dividend payments. Cash and cash equivalents decreased $9.9
million during 2000.
Capital expenditures for property, plant, and equipment totaled $12.4
million in 2000, compared to $16 million in 1999 and $25.5 million in 1998.
Capital spending in 2001 is planned to be about $8.3 million. Planned
expenditures include investments in facilities and manufacturing equipment. It
is anticipated that 2001 capital expenditures will be financed primarily with
funds from operations.
DIVIDENDS
The Company's dividend policy is to maintain a payout ratio, which allows
dividends to increase with the long-term growth of earnings per share, while
sustaining dividends in down years. The Company's dividend payout ratio target
is about 25 percent of earnings per share over the long term. The current
quarterly dividend of 6 cents per share equates to 40.7% of the 1998 through
2000 average net earnings per share.
SHARE REPURCHASE PLAN
In 2000, the Company repurchased 299,000 shares of common stock on the open
market for $2.2 million, at an aver age cost of $7.28 per share. In 1999, the
Company repurchased 8,292 shares of common stock on the open market for $.1
million, at an average cost of $11.36 per share. The Company's purpose for share
repurchases is to offset the dilutive effect of shares of common stock issued
from the Company's stock option and stock purchase plans, and for other
corporate stock-based programs. During the past two years, the Company issued
398,000 shares of its common stock from these stock option and stock purchase
plans.
In November 1996, the Company's Board of Directors authorized the
repurchase of 1,000,000 shares of common stock in the open market within the
Securities and Exchange Commission guidelines. At September 30, 2000, the number
of shares which remained under this authorization were 232,488.
QUARTERLY STOCK ACTIVITY(1)
The Company's common shares trade on The Nasdaq Stock Market's National Market
under the symbol MTSC. The following table sets forth the high, low and volume
of shares traded (expressed in thousands) for the periods indicated:
2000 1999
----------------------------------------------------------------------
Shares Shares
High Low Traded High Low Traded
----------------------------------------------------------------------
1st Quarter 10 5/8 7 1/2 3,526 15 7/16 10 7/8 2,631
2nd Quarter 9 19/32 5 3/8 4,318 14 3/8 9 5/8 2,486
3rd Quarter 7 7/8 6 3/16 4,648 13 1/4 9 13/16 2,379
4th Quarter 7 1/2 6 3,385 14 5/8 10 3,259
----------------------------------------------------------------------
(1) SOURCE: THE NASDAQ STOCK MARKET
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter-to-quarter revenue and earnings comparisons do not necessarily reflect
changes in the demand for the Company's products or its operating efficiency.
Revenues and earnings in any quarter can be significantly affected by delivery
delays or acceleration of one or more high-value systems, not accounted for
using the percentage-of-completion accounting method. The use of the
percentage-of-completion revenue recognition method for large long-term projects
helps alleviate those fluctuations. (See Note 1 of "Notes to Consolidated
Financial Statements"). High-value, state-of-the-art custom orders can also
contain leading-edge applications of the Company's technology, which in some
cases have resulted in lower gross profit margins, albeit not necessarily low
marginal profit contribution. Product development in these state-of-the-art
custom orders is as essential to the Company's long term growth as is Company
funded research and development.
Quarterly earnings also vary based on the use of estimated, effective
income tax rates for providing federal, state, and foreign income taxes. See
Note 4 of "Notes to Consolidated Financial Statements" for more information on
the Company's income taxes.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Economic and
Monetary Union (EMU) adopted the "Euro" as a form of common currency. For a
three-year transition period, both the Euro and individual participants'
currencies will remain in use. The Company is upgrading systems, where
necessary, to properly handle the Euro. The Company's European operations will
begin reporting in Euro currency in October, 2001. Effective January 1, 1999,
the Company began processing Euro transactions with its customers. The cost of
addressing the Euro conversion did not have a material impact on the Company's
financial condition or operating results.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selected quarterly financial information, for the three fiscal years ended
September 30, 2000, is presented below.
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------
2000
Net revenue $ 87,214 $ 95,291 $ 94,988 $114,360 $391,853
Gross profit 22,786 34,470 34,797 41,947 134,000
Income (loss) before income taxes (9,221) 2,213 5,831 7,272 6,095
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (6,040) $ 1,371 $ 3,697 $ 4,596 $ 3,624
- ----------------------------------------------------------------------------------------------
Net income (loss) per share
Basic $ (.29) $ .07 $ .18 $ .18 $ .17
Diluted (.29) .07 .18 .18 .17
- ----------------------------------------------------------------------------------------------
1999
Net revenue $ 96,142 $ 93,262 $ 95,363 $105,775 $390,542
Gross profit 38,064 36,775 37,818 38,514 151,171
Income before income taxes 5,722 4,666 8,269 113 18,770
- ----------------------------------------------------------------------------------------------
Net income $ 3,726 $ 3,146 $ 5,293 $ 280 $ 12,445
- ----------------------------------------------------------------------------------------------
Net income per share
Basic $ .18 $ .15 $ .25 $ .01 $ .60
Diluted .18 .15 .25 .01 .59
- ----------------------------------------------------------------------------------------------
1998
Net revenue $ 80,338 $ 87,160 $ 91,899 $102,766 $362,163
Gross profit 33,753 34,560 35,691 38,223 142,227
Income before income taxes 7,937 8,009 8,521 8,981 33,448
- ----------------------------------------------------------------------------------------------
Net income $ 5,192 $ 4,921 $ 5,667 $ 5,759 $ 21,539
- ----------------------------------------------------------------------------------------------
Net income per share(1)
Basic $ .25 $ .24 $ .28 $ .28 $ 1.05
Diluted .24 .23 .27 .27 1.01
- ----------------------------------------------------------------------------------------------
(1) Net income per share has been restated retroactively for the two-for-one
stock split effective February 2, 1998.
19
CONSOLIDATED BALANCE SHEETS
(SEPTEMBER 30)
ASSETS 2000 1999
- -------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
CURRENT ASSETS:
Cash and cash equivalents $ 8,211 $ 18,083
Accounts receivable, net of allowance for doubtful
accounts of $2,255 and $2,232 117,866 102,011
Unbilled contracts and retainage receivable 26,765 38,628
Inventories 62,520 56,948
Prepaid expenses 9,911 7,981
- -------------------------------------------------------------------------------------
Total current assets 225,273 223,651
- -------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Land 3,247 3,247
Buildings and improvements 44,733 42,332
Machinery and equipment 107,325 101,140
Accumulated depreciation (83,224) (73,086)
- -------------------------------------------------------------------------------------
Total property and equipment, net 72,081 73,633
- -------------------------------------------------------------------------------------
OTHER ASSETS 32,880 36,063
- -------------------------------------------------------------------------------------
Total Assets $ 330,234 $ 333,347
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT 2000 1999
- -------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 11,945 $ 10,071
Current maturities of long-term debt 5,663 1,308
Accounts payable 22,755 21,062
Accrued compensation and benefits 29,285 28,662
Dividends Payable 1,251 --
Advance billings to customers 18,673 25,943
Accrued warranty 6,487 5,089
Other accrued liabilities 12,589 12,578
- -------------------------------------------------------------------------------------
Total current liabilities 108,648 104,713
- -------------------------------------------------------------------------------------
Deferred income taxes 5,628 5,517
Long-term debt, less current maturities 58,104 60,258
- -------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' INVESTMENT:
Common stock, 25(cent) par; 64,000,000 shares authorized:
20,748,288 and 20,883,639 shares issued and outstanding 5,187 5,221
Additional paid-in capital 7,072 8,122
Retained earnings 146,228 147,555
Accumulated other comprehensive income (loss) (633) 1,961
- -------------------------------------------------------------------------------------
Total shareholders' investment 157,854 162,859
- -------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Investment $ 330,234 $ 333,347
- -------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
20
CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT
(FOR THE YEARS ENDED SEPTEMBER 30)
INCOME 2000 1999 1998
- --------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
NET REVENUE $ 391,853 $ 390,542 $ 362,163
COST OF REVENUE 257,853 239,371 219,936
- --------------------------------------------------------------------
GROSS PROFIT 134,000 151,171 142,227
- --------------------------------------------------------------------
OPERATING EXPENSES:
Selling 61,654 61,490 56,479
General and administrative 34,684 32,276 27,833
Research and development 24,619 26,966 24,348
Restructuring 1,210 5,711 --
Acquisition -- 1,391 --
- --------------------------------------------------------------------
INCOME FROM OPERATIONS 11,833 23,337 33,567
- --------------------------------------------------------------------
Interest expense 6,371 5,067 2,327
Interest income (1,479) (470) (379)
Other expense (income), net 846 (30) (1,829)
- --------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,095 18,770 33,448
PROVISION FOR INCOME TAXES 2,471 6,325 11,909
- --------------------------------------------------------------------
NET INCOME $ 3,624 $ 12,445 $ 21,539
- --------------------------------------------------------------------
NET INCOME PER SHARE
Basic $ .17 $ .60 $ 1.05
Diluted .17 .59 1.01
- --------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock Accumulated
---------------------- Additional Other Total
Shares Paid-In Retained Comprehensive Shareholders'
Issued Amount Capital Earnings Income (Loss) Investment
- ---------------------------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
BALANCE, SEPTEMBER 30, 1997 11,213,471 $ 2,803 $ 4,012 $ 124,973 $ 1,736 $ 133,524
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 21,539
Foreign currency translation 189
Total Comprehensive income 21,728
Stock split 2 for 1 9,204,424 2,301 (2,301)
Exercise of stock options 300,091 75 3,405 3,480
Common stock purchased and retired (60,800) (15) (1,599) (1,614)
Cash dividends, 24(cent) per share (4,429) (4,429)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 20,657,186 $ 5,164 $ 5,818 $ 139,782 $ 1,925 $ 152,689
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 12,445
Foreign currency translation 36
Unrealized loss on investment, net of tax (60)
Total Comprehensive income 12,421
Exercise of stock options 234,745 59 2,396 2,455
Common stock purchased and retired (8,292) (2) (92) (94)
Cash dividends, 24(cent) per share (4,612) (4,612)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 20,883,639 $ 5,221 $ 8,122 $ 147,555 $ 1,961 $ 162,859
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 3,624
Foreign currency translation (2,594)
Unrealized loss on investment, net of tax 54
Total Comprehensive income 1,084
Exercise of stock options 163,649 41 1,048 1,089
Common stock purchased and retired (299,000) (75) (2,098) (2,173)
Cash dividends, 24(cent) per share (5,005) (5,005)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 20,748,288 $ 5,187 $ 7,072 $ 146,228 $ (633) $ 157,854
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
(FOR THE YEARS ENDED SEPTEMBER 30)
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 3,624 $ 12,445 $ 21,539
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 15,294 14,424 10,880
Deferred income taxes 455 889 127
Changes in operating assets and liabilities, exclusive of acquisitions:
Accounts receivable, unbilled contracts and retainage receivable (9,559) (11,285) (27,765)
Inventories (6,759) 373 (7,644)
Prepaid expenses (2,395) (3,493) 647
Advance billings to customers (5,919) 8,711 (2,874)
Other liabilities, net 8,286 4,676 2,015
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,027 26,740 (3,075)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property and equipment additions (12,399) (15,990) (25,545)
Acquisition of businesses, net of cash received -- (1,036) (29,012)
Other assets (841) (132) (1,026)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,240) (17,158) (55,583)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings under notes payable to banks 1,853 (18,168) 23,770
Proceeds from issuance of long-term debt 4,271 16,837 38,637
Repayments of long-term debt (998) (924) (1,152)
Cash dividends (5,005) (4,612) (4,429)
Proceeds from employee stock option and stock purchase plans 1,089 2,455 3,480
Payments to purchase and retire common stock (2,173) (94) (1,614)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (963) (4,506) (58,692)
- ---------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,304 418 (3)
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,872) 5,494 31
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18,083 12,589 12,558
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,211 $ 18,083 $ 12,589
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 6,298 $ 4,291 $ 1,881
Income taxes 5,105 6,731 8,756
- ---------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION AND TRANSLATION
The consolidated financial statements include the accounts of MTS Systems
Corporation (the Company) and its wholly and majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
All balance sheet accounts of foreign subsidiaries are translated to
U.S. dollars at the current exchange rates as of the end of the fiscal year.
Income statement items are translated at average exchange rates during the year.
The resulting translation adjustment is recorded as a separate component of
shareholders' investment. Gains and losses from translation of foreign currency
denominated trans actions and from foreign exchange hedge contracts are included
in "Other expense (income) net" in the Consolidated Statements of Income and
amounted to a loss of $538,000 in 2000, loss of $375,000 in 1999, a gain of
$2,340,000 in 1998.
REVENUE RECOGNITION
Revenue is recognized upon shipment of equipment when the customer's order can
be manufactured and delivered generally in less than twelve months. Revenue on
contracts requiring longer delivery periods (long-term contracts) and other
customized orders that permit progress billings is recognized using the
percentage-of-completion method based on the cost incurred to date relative to
estimated total cost of the contract (cost-to-cost method). The cumulative
effects of revisions of estimated total contract costs and impact on revenues
are recorded in the period in which the facts become known. When a loss is
anticipated on a contract, the amount is provided currently.
LONG-TERM CONTRACTS
The Company enters into long-term contracts for customized equipment sold to its
customers. Under terms of such contracts, revenue recognized using the
percentage of completion method may not 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 Contracts and Retainage Receivable.
Amounts unbilled or retained at September 30, 2000 are expected to be invoiced
during fiscal 2001.
WARRANTY OBLIGATIONS
The Company warrants its products against defects in materials and workmanship
under normal use and service, generally for one year. The Company maintains
reserves for warranty costs based upon its past experience with warranty claims.
RESEARCH AND DEVELOPMENT
Research and product development costs associated with new products are charged
to operations as incurred.
CASH EQUIVALENTS
Cash equivalents represent short-term liquid investments, which have original
maturities of three months or less and approximate fair value.
ACCOUNTS RECEIVABLE
The Company grants credit to customers, but generally does not require
collateral or other security from domestic customers. International receivables,
where deemed necessary, are supported by letters of credit from banking
institutions.
INVENTORIES
Inventories consist of material, labor and overhead and are stated at the lower
of cost or market, determined by the first-in, first-out method. Inventory
components as of September 30, were as follows:
2000 1999
--------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Customer projects in
various stages of
completion $ 2,704 $ 3,625
Components,
assemblies and parts 59,816 53,323
--------------------------------------------------------------
Total $ 62,520 $ 56,948
--------------------------------------------------------------
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 provided over the following estimated
useful lives of the property:
Buildings and improvements: 10 to 40 years.
Machinery and equipment: 3 to 15 years.
Most major building and equipment purchases are depreciated on a
straight-line basis for financial reporting purposes and on an accelerated basis
for income tax purposes.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company periodically enters into forward exchange contracts principally to
hedge the eventual dollar cash flow of foreign currency denominated transactions
(primarily the EURO, British Pound, Swedish Krona, and Japanese Yen). Gains and
losses on forward exchange contracts entered into to hedge foreign currency
denominated undelivered orders and net exposed assets are included in "Other
expense (income) net" in the Consolidated Statements of Income. The Company's
accounting policy for these contracts is based on the Company's designation of
foreign currency contracts as hedging transactions. The Company does not use
derivative financial instruments for speculative or trading purposes. The
criteria the Company uses for designating a contract as a hedge include the
contract's effectiveness in risk reduction and matching of contracts to
underlying transactions. On September 30, 2000, there were open hedge contracts
totaling $40,500,000 with an unrealized gain of $389,000. On September 30, 1999,
there were open hedge contracts totaling $7,300,000 with an unrealized loss of
$202,000.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER ASSETS
Other assets consist principally of patents and excess cost over net assets
acquired (goodwill), net of accumulated amortization. The carrying value of
goodwill less accumulated amortization was $24.2 million and $31.6 million in
2000 and 1999, respectively. These assets are being amortized over various
periods ranging from 7 to 40 years. Amortization expense was $3.2 million in
2000, $3.3 million in 1999 and $1.5 million in 1998.
The Company periodically evaluates whether events and circumstances
have occurred that may affect the estimated useful life of its goodwill and
other long-lived assets. If such events or circumstances were to indicate that
the carrying amount of these assets would not be recoverable, an impairment
loss would be recognized. No such impairment has been recognized for the year
ended September 30, 2000.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is computed under the treasury stock method and is calculated to
compute the dilutive effect of potential common shares related to outstanding
stock options. Weighted average common shares and per share computations have
been restated retroactively for the two-for-one stock split effective February
2, 1998.
2000 1999 1998
----------------------------------------------------------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA)
Net income available
to common shareholders 3,624 12,445 21,539
Weighted average
common shares
outstanding 20,842 20,763 20,519
Dilutive potential
common shares 93 421 811
----------------------------------------------------------------
Total dilutive
common shares 20,935 21,184 21,330
----------------------------------------------------------------
Basic net income
per share $ .17 $ .60 $ 1.05
Diluted net income
per share .17 .59 1.01
----------------------------------------------------------------
COMPREHENSIVE INCOME
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statement of Shareholders'
Investment.
RECLASSIFICATIONS
Certain amounts included in the consolidated financial statements have been
reclassified in prior years to conform with the 2000 financial statement
presentation. These amounts had no effect on previously reported shareholder's
investment or net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
The Company undertakes significant technological innovation on some of
its long-term contracts. These contracts involve performance risk which may
result in delayed delivery of product and/or in revenue and gross profit
variation from difficulties in estimating the ultimate cost of such contracts.
NEW ACCOUNTING STANDARDS
The Company will adopt Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No.138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133," which becomes
effective for fiscal years beginning after June 15, 2000. Effective October 1,
2000, the Company will adopt SFAS No. 133 which requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the hedged assets, liabilities or firm commitments are recognized through
earnings or in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. The Company has determined that the
effect of adopting SFAS 133 and SFAS 138 is immaterial to the earnings and the
financial position of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101 "Revenue Recognition in Financial Statements." SAB No. 101 provides further
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 is required for fiscal years
beginning after December 15, 1999. SAB No. 101 impacts the timing of revenue
recognition for the Company as it requires customer acceptance as a condition
for revenue recognition. The Company is in the process of fully evaluating the
effect that the adoption of SAB No. 101 will have on the Company's consolidated
financial position and results of operations. The Company expects certain
revenues will shift across quarters when SAB No. 101 is implemented. The Company
plans to adopt SAB No. 101 in the fourth quarter of fiscal year 2001.
24
2. BUSINESS SEGMENT INFORMATION:
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 131,"Disclosures about Segments on an Enterprise and
Related Information." The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial condition but did affect the disclosure of segment
information.
The Company is organized into five operating business units: Vehicle
Testing Systems, Material Testing Systems, Advanced Systems, Automation and
Sensors. The Vehicle Testing business manufactures and markets systems for
vehicle and component manufacturers to aid in the acceleration of design
development work and to decrease the cost of product manufacturing. The Material
Testing business manufactures and markets systems to aid customers in product
development and quality control toward an effort of design improvement. The
Advanced Systems business offers highly customized systems primarily for
simulation and manufacturing. The Automation business manufactures and markets
products for high performance industrial machine applications in a wide range of
industries. The Sensor business manufactures and markets displacement and liquid
level sensors used in various applications to monitor and automate industrial
processes. The economic characteristics, nature of products and services,
production processes, type or class of customer, method of distribution and
regulatory environments are similar for the Vehicle Testing Systems, Material
Testing Systems and Advanced Systems operating units. As a result of these
similarities, these units have been aggregated into one reportable segment
called Mechanical Testing and Simulation (MT&S) for financial statement
purposes. Also, the economic characteristics, nature of products and services,
production processes, type or class of customer, method of distribution and
regulatory environments are similar for the Automation and Sensor business
divisions. As a result, these divisions have been aggregated into one reportable
segment called Factory Automation (FA).
The accounting policies of the business segments are the same as those
described in Note 1. In evaluating the segment performance, management focuses
on income from operations. This measurement excludes special charges (e.g.
restructuring charges, acquisition expenses, etc.), interest expense, interest
income, income tax expense and other non-operating income or expense. Corporate
expenses are allocated to segments primarily on the basis of revenue. This
allocation includes expenses for various support functions such as human
resource, information technology and finance. Financial information by
reportable segment follows:
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2000 1999 1998
==========================================================================================
(EXPRESSED IN THOUSANDS)
NET REVENUE BY SEGMENT
Mechanical Testing & Simulation $ 302,353 $ 313,685 $ 287,761
Factory Automation 89,500 76,857 74,402
- ------------------------------------------------------------------------------------------
Total $ 391,853 $ 390,542 $ 362,163
- ------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS BY SEGMENT
Mechanical Testing & Simulation
Before restructuring and acquisition $ 4,460 $ 23,809 $ 25,011
Restructuring (1,210) (5,510) --
Acquisition -- (1,391) --
- ------------------------------------------------------------------------------------------
Total $ 3,250 $ 16,908 $ 25,011
- ------------------------------------------------------------------------------------------
Factory Automation
Before restructuring and acquisition 8,583 6,630 8,556
Restructuring -- (201) --
- ------------------------------------------------------------------------------------------
Total $ 8,583 $ 6,429 $ 8,556
- ------------------------------------------------------------------------------------------
Total Income from Operations $ 11,833 $ 23,337 $ 33,567
- ------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS BY SEGMENT
Mechanical Testing & Simulation $ 267,666 $ 272,491 $ 255,816
Factory Automation 62,568 60,856 57,206
- ------------------------------------------------------------------------------------------
Total Assets $ 330,234 $ 333,347 $ 313,022
- ------------------------------------------------------------------------------------------
OTHER SEGMENT DATA
Mechanical Testing & Simulation:
Capital expenditures $ 10,057 $ 13,822 $ 21,251
Depreciation and Amortization 11,782 11,028 8,333
- ------------------------------------------------------------------------------------------
Factory Automation:
Capital expenditures $ 2,342 $ 2,168 $ 4,668
Depreciation and Amortization 3,512 3,396 2,547
- ------------------------------------------------------------------------------------------
A geographic summary of the Company's operations and related year-end asset
information for the three years ended September 30 follows:
2000 1999 1998
=========================================================================================
(EXPRESSED IN THOUSANDS)
TOTAL NET REVENUE
United States $ 194,056 $ 200,556 $ 200,490
Germany 49,771 47,172 37,643
Other Europe 60,494 69,185 51,495
Far East 69,444 56,897 53,652
Other 18,088 16,732 18,883
- ------------------------------------------------------------------------------------------
Total $ 391,853 $ 390,542 $ 362,163
- ------------------------------------------------------------------------------------------
TOTAL LONG-LIVED ASSETS
United States $ 235,710 $ 232,177 $ 227,816
Germany 40,979 42,913 39,882
Other Europe 34,325 38,799 30,626
Far East 18,474 18,882 14,242
Other 746 576 456
- ------------------------------------------------------------------------------------------
Total $ 330,234 $ 333,347 $ 313,022
- ------------------------------------------------------------------------------------------
Revenues by geographic location are based on revenues generated from each
country's operations. No individual country, other than the United States and
Germany, exceeded 10% of consolidated revenues on a recurrent annual basis. The
Company did not have sales to any individual customer greater than 10% of total
revenues in 2000, 1999 and 1998.
26
3. FINANCING:
Long-term debt as of September 30 was as follows:
2000 1999
- ------------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Variable Rate Note, due May 2015, collateralized by building $ 5,519 $ 1,837
6.6% Notes, unsecured, due in July 2008 35,000 35,000
5.4% Mortgage, due in October 2015, collateralized by building 4,829 5,742
5.3% Note, unsecured, due in March 2003 905 1,503
6.0% Note, unsecured, due in May 2008 1,943 1,943
7.5% Note, unsecured, due in July 2009 15,000 15,000
Other 571 541
- ------------------------------------------------------------------------------------------
TOTAL $ 63,767 $ 61,566
LESS CURRENT MATURITIES (5,663 (1,308)
- ------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 58,104 $ 60,258
- ------------------------------------------------------------------------------------------
Aggregate annual maturities of long-term debt for the next five fiscal years are
as follows: 2001--$5,663,000; 2002--$5,517,000; 2003--$7,082,000;
2004--$7,665,000; 2005--$7,690,000 and $30,150,000 thereafter. The carrying
value of the Company's long-term debt at September 30, 2000 is approximately
$1.6 million higher than the fair market value at current interest rates offered
to the Company for debt with the same remaining maturities.
The Company has a $35 million credit agreement with a domestic bank
that allows the Company to issue domestic and Euro-currency notes. As part of
the same credit agreement, the bank has agreed to issue term loans up to a
maximum of $10 million until March 30, 2002. This agreement provides for
repayment of these term loans through September 2005. The Company compensates
the bank with loan commitment fees for the unused portion of the credit line.
The Company also has a $15 million uncommitted line of credit with another bank.
In addition, the Company has standby letter-of-credit lines totaling $30
million. At September 30, 2000, standby letters of credit outstanding totaled
$10,566,000.
Under the terms of its credit agreement, the Company has agreed, among
other matters, that (a) its defined cash flow or fixed charge coverage will
exceed a defined minimum level; (b) its interest bearing debt will not exceed a
defined percentage of total capital; (c) repurchases of its common stock will
not exceed a maximum amount. At September 30, 2000, net worth exceeded the
defined minimum amount by $29,915,000 and the Company had $17,875,000 available
for repurchases of its common stock. Effective September 30, 2000, the Company
was in compliance with or had obtained waivers or amendments with respect to all
such covenants.
Information on short-term borrowings for the years ended September 30
were as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Balance outstanding at September 30 $ 11,945 $ 10,071 $ 28,243
Average balance outstanding 22,617 24,903 23,498
Maximum balance outstanding 37,500 34,700 51,216
Year-end interest rate 8.1% 6.0% 5.9%
Weighted-average interest rate 7.0% 5.7% 6.1%
- --------------------------------------------------------------------------------
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. INCOME TAXES:
The provision for income taxes for the years ended September 30 consisted of the
following:
2000 1999 1998
- -----------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Current provision (benefit):
Federal $ (3,469) $ 2,239 $ 6,911
State (413) 432 1,129
Foreign 5,974 2,773 4,104
Deferred 379 881 (235)
- -----------------------------------------------------------------------------------------
Total provision $ 2,471 $ 6,325 11,909
- -----------------------------------------------------------------------------------------
A reconciliation from the Federal statutory income tax rate to the Company's
effective rate for the years ended September 30 were as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
Tax benefit of Foreign Sales Corporation (9) (3) (2)
Foreign provision in excess of U.S. tax rate 32 4 3
State income taxes, net of Federal benefit (4) 2 2
Research and development tax credits (9) (5) (2)
Other, net (4) 1 --
- -----------------------------------------------------------------------------------------
Effective rate 41% 34% 36%
- -----------------------------------------------------------------------------------------
DEFERRED TAX ASSET:
2000 1999
- -----------------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Accrued compensation and benefits $ 1,073 $ 1,017
Inventory reserves 3,649 2,398
Allowance for doubtful accounts 242 194
Other assets (1,229) (1,276)
- -----------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSET $ 3,735 $ 2,333
- -----------------------------------------------------------------------------------------
DEFERRED TAX LIABILITY:
- -----------------------------------------------------------------------------------------
Property and equipment $ 5,628 $ 5,517
- -----------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 1,893 $ 3,184
- -----------------------------------------------------------------------------------------
28
5. STOCK OPTIONS:
The Company has made certain stock-based awards to its officers, non-employee
directors, and key employees under various stock plans. Awards under these plans
can include incentive stock options (qualified), non-qualified stock options,
stock appreciation rights, restricted stock, deferred stock, and other
stock-based and non stock-based awards.
At September 30, 2000, the Company had awarded incentive stock options,
non-qualified stock options and restricted stock. These were granted at exercise
prices that are 100% of the fair-market value at the day of grant. Beginning one
year after grant, the options generally can be exercised proportionately each
year for periods of three, four, or six years, as defined in the respective
plans. Options currently expire no later than seven years from the grant date,
as defined.
Option holders may exercise options by delivering Company stock already
owned, cash, or a combination of stock and cash. The shares tendered in the
exchange are cancelled and, therefore, reduce shares issued. During 2000 and
1999, option holders exchanged 7,145 and 25,029 shares, respectively, of the
Company's stock in payment of options exercised.
A summary of the status of the Company's stock option plans as of September 30,
2000, 1999, and 1998, and changes during the years ended were as follows:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------
SHARES WAEP* SHARES WAEP* SHARES WAEP*
- ------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,816 $ 11.21 2,143 $ 10.30 1,920 $ 8.35
- ------------------------------------------------------------------------------------------------------
Granted 1,115 $ 7.17 880 $ 12.95 545 $ 15.79
- ------------------------------------------------------------------------------------------------------
Exercised (19) $ 6.44 (138) $ 7.25 (295) $ 6.51
- ------------------------------------------------------------------------------------------------------
Forfeited (287) $ 11.30 (69) $ 13.38 (27) $ 10.40
- ------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,625 $ 9.98 2,816 $ 11.21 2,143 $ 10.30
- ------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,891 $ 10.23 1,566 $ 9.46 1,156 $ 8.19
- ------------------------------------------------------------------------------------------------------
SHARES IN THOUSANDS
*WEIGHTED-AVERAGE EXERCISE PRICE
The following table summarizes information concerning outstanding and
exercisable options as of September 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE* EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------
$5.78-7.31 1,300 4.0 $ 6.87 284 $ 5.92
- ----------------------------------------------------------------------------------------------
$7.50-10.56 1,056 .8 $ 9.09 1,033 $ 9.08
- ----------------------------------------------------------------------------------------------
$11.12-14.63 916 3.9 $ 13.03 313 $ 12.93
- ----------------------------------------------------------------------------------------------
$15.38-19.37 353 2.3 $ 16.21 261 $ 16.21
- ----------------------------------------------------------------------------------------------
Total 3,625 2.9 $ 9.98 1,893 $ 10.23
- ----------------------------------------------------------------------------------------------
SHARES IN THOUSANDS
*IN YEARS
The following number of options will expire if not exercised at
specific dates for fiscal years as follows: 2001: 702,884, 2002: 742,891, 2003:
441,130, 2004: 321,525, 2005: 1,054,185, 2006: 362,817.
Prices for options exercised during the three-year period ended
September 30, 2000 ranged from $5.78 to $15.75. Total options available for
future grant as of September 30, 2000 were 2,006,728.
In January 1992 the Company's shareholders authorized an Employee Stock
Purchase Plan (the Purchase Plan), whereby 1,000,000 shares of the Company's
common stock were reserved for sale to employees until April 2002. Participants
in the 2000 and 1999 phases, all at dates specified in the Purchase Plan, were
issued 157,818 shares in 2000 and 121,810 shares in 1999. During 2000,
participants subscribed to purchase 179,184 shares at 85% of market price for
issuance in 2001.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PRO FORMA INFORMATION: The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting
for its employee stock options. Under this pronouncement, no compensation
expense is recognized in the Company's financial statements because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant. However, Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models to estimate compensation expense
from the granting of employee stock options and to present the pro forma effect
of such expense on reported net income and earnings per share.
SFAS No. 123 requires this information be determined as if the Company
had accounted for employee stock options granted in fiscal years beginning
subsequent to December 31, 1994 under the fair value method of that statement.
The fair value of options granted, as reported below, has been estimated at the
date of grant using the Black-Scholes option valuation model with the following
weighted average assumptions:
2000 1999 1998
-------------------------------------------------------------
Expected life (in years) 1.8 2.7 2.0
Risk-free interest rate 6.0% 5.8% 4.2%
Volatility .49 .49 .40
Dividend yield 3.4% 2.3% 1.6%
-------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models required the input of highly
subjective assumptions, including the expected stock price volatility. The
weighted average estimated fair value of employee stock options granted during
2000, 1999, and 1998 was $2.14, $4.47, and $4.39, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
net income, as reported, and pro forma net income per share are as follows (in
thousands, except per share amounts):
STOCK OPTION FOOTNOTE DISCLOSURE
YEARS ENDED SEPTEMBER 30TH
2000 1999 1998
- -------------------------------------------------------------
Net Income
As Reported - Basic $ 3,624 $12,445 $21,539
Pro forma $ 2,216 $10,553 $20,247
- -------------------------------------------------------------
Basic Earnings Per Share
As Reported $ .17 $ .60 $ 1.05
Pro forma $ .11 $ .51 $ .99
- -------------------------------------------------------------
Diluted Earnings Per Share
As Reported $ .17 $ .59 $ 1.01
Pro forma $ .11 $ .50 $ .95
- -------------------------------------------------------------
6. EMPLOYEE BENEFIT PLANS:
The Company offers a 401(k) Pay Conversion Plan for all of its U.S. employees.
Employees can supplement their retirement income by participating in this
voluntary pretax savings plan by designating a percentage of their gross income,
subject to limitations imposed by federal law. The Company will match $.50 per
each dollar of the first 3% that employees contribute capped at $500 per fiscal
year. Employees are automatically vested. The matching contributions under the
401(K) plan were $843,000 in 2000, $730,000 in 1999, and $557,000 in 1998.
The Company's profit sharing plan functions as a retirement program for
most U.S. and certain international employees. Employees who have completed
1,000 hours of service during the plan year are eligible to participate. The
formula for calculating the Company's contribution is approved annually by the
Board of Directors and is based primarily on operating results for the year,
before management variable compensation. The plan provides for a minimum
contribution of 4% of participant compensation, as defined, up to the social
security taxable wage base, and 8% of participant compensation in excess of the
taxable wage base up to the maximum profit sharing contribution allowed by
federal law, so long as the entire contribution calculation does not exceed
pretax income. The contributions were 4.4% of participant compensation in 2000,
4.3% in 1999 and 4.4% in 1998. The provisions for profit sharing were $4,396,000
in 2000, $3,883,000 in 1999 and $3,577,000 in 1998, and are distributed among
the various operating expenses shown in the accompanying Consolidated Statements
of Income.
Prior to 1998, two of the Company's international subsidiaries had
noncontributory, unfunded retirement plans for eligible employees. These plans
provide benefits based on the employee's years of service and compensation
during the years immediately preceding retirement, early retirement,
termination, disability, or death, as defined in the respective plans. In 1998,
one of the plans was modified to provide for contributions based solely on
annual compensation levels.
30
The expenses for these plans consist of the following components:
2000 1999 1998
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Service cost-benefit earned during the period $188 $209 $178
Interest cost on projected benefit obligation 235 249 218
Net amortization and deferral 50 17 11
- --------------------------------------------------------------------------------
NET PERIODIC PENSION COST $473 $475 $407
- --------------------------------------------------------------------------------
The change in benefit obligation and plan assets consisted of the following for
the years ended September 30, 2000 and 1999:
2000 1999
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 5,877 $ 5,110
Service cost 177 173
Interest cost 211 212
Translation difference (156) 80
Actuarial (gain)loss 49 332
Benefits paid (38) (30)
- --------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION, END OF YEAR 6,120 $ 5,877
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 38 30
Benefits paid (38) (30)
- --------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS, END OF YEAR $ -- $ --
- --------------------------------------------------------------------------------
The funded status of the Company's benefit plans and the amounts recognized in
the consolidated financial statements are:
2000 1999
- --------------------------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Funded status (6,120) (5,877)
Unrecognized net gain (31) (88)
Unrecognized net liability being amortized 528 536
Adjustment required to recognize minimum liability (34) (33)
- --------------------------------------------------------------------------------
ACCRUED PENSION LIABILITY $(5,657) $(5,462)
- --------------------------------------------------------------------------------
Major assumptions at year-end are:
Discount rate 3.5 to 6.0% 3.5 to 6.0%
Rate of increase in future compensation levels 3% 3.0%
- --------------------------------------------------------------------------------
7. ACQUISITIONS:
On May 28, 1999, the Company completed a merger with DSP Technology, Inc. (DSP),
an enterprise that is active in automotive engine development market segments.
Under the terms of the agreement, the Company initially issued 2,076,913 shares
of common stock and subsequently issued an additional 792 shares of common stock
in exchange for all of the outstanding shares and vested stock options of DSPs'
common stock. In connection with the acquisition, the Company incurred
approximately $1.4 million of acquisition related costs which were charged to
operations in the third quarter of fiscal year 1999. The acquisition qualified
as a tax-free exchange and was accounted for as a pooling-of-interests.
Accordingly, all periods included in these historical consolidated financial
statements have been restated to give effect to the merger.
1999 1998
---------------------------------------------------------------
(EXPRESSED IN THOUSANDS)
Net Revenue:
MTS $ 362,708 $ 339,682
DSP 27,834 22,481
---------------------------------------------------------------
COMBINED NET REVENUE $ 390,542 $ 362,163
---------------------------------------------------------------
Income before income taxes (note A):
MTS $ 18,445 $ 31,473
DSP 325 1,975
---------------------------------------------------------------
COMBINED INCOME BEFORE
INCOME TAXES $ 18,770 $ 33,448
---------------------------------------------------------------
NOTE A: 1999 AMOUNTS INCLUDE $0.3 MILLION AND $1.1 MILLION IN ACQUISITION
RELATED COST FOR THE COMPANY AND DSP, RESPECTIVELY.
No significant adjustments were made to the prior years financial
statements of either the Company or DSP.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
On September 29, 1999 the Company acquired the exclusive license for
the PowerBlok product line technology, related inventory and fixed assets, and
trade names from Semipower, Inc. The transaction was accounted for by the
purchase method of accounting.
In fiscal 1998 the Company acquired three entities, all accounted for
by the purchase method of accounting, with an aggregate purchase price of
approximately $29 million, net of cash acquired. The Company acquired all the
outstanding stock of Performance Controls, Inc., a manufacturer of high
performance power amplifiers for factory automation and magnetic resonance
machine applications, in an all cash transaction. The Company acquired the stock
of Nano Instruments Inc., a manufacturer of instrumented indentation systems for
ultra-low force nanoindentation testing surfaces and thin films, for cash and
debt. In addition to the stock purchase of Nano Instruments Inc., the Company
purchased the rights to a patent from the two principal shareholders of Nano
Instruments, Inc. The Company also acquired the assets and technology of SDRC's
noise and vibration test software business along with a major portion of SDRC's
noise and vibration consulting engineering services, in an all cash transaction.
The total purchase price exceeded the fair value of the net assets
acquired by approximately $23.2 million. This amount was recorded as goodwill
and other intangibles with useful lives between 7 and 20 years. The results of
the operations of the acquired companies are included in the Company's financial
statements for the periods in which they were owned.
The pro forma results, exclusive of the DSP merger, for 1999 and 1998,
assuming these acquisitions had been made at the beginning of the year, would
not be materially different from reported results.
8. RESTRUCTURING AND OTHER CHARGES:
The Company has taken a series of actions to better align its organizational
structure with market elements, improve operational performance and reduce
costs. In 1999, the Company recorded a restructuring charge of $5.7 million. The
Company paid $3.1 million in 2000 and $2.6 million in 1999 related to such
charges. These charges were the result of the closure of our manufacturing
operations in France and the transfer of product to the electromechanical test
division in Raleigh, North Carolina.
In the fourth quarter of 2000, the Company announced a restructuring
charge related to the discontinuation of a line of data acquisition products
acquired as part of the DSPT transaction in 1999. A pre-tax provision of $3.0
million ($0.8 per share), of which $1.8 million was charged to general and
administrative expense, was established for the wind-down of this business.
While we expect no material impact to the Company going forward, this action
reflects our continuing efforts to focus our investments on those businesses
critical to our long-term strategic success.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION: The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business. It is the opinion of
management that the final resolution of these matters will not have a material
adverse effect on the financial position or results of operation of the Company.
LEASES: The Company has noncancelable operating lease commitments for equipment
and facilities that expire on various dates through 2006. Minimum annual rental
commitments at September 30,2000 for the fiscal years 2001 through 2005 and
thereafter are $4.9, $5.0, $4.4, $3.2, $2.4 and $2.9 million, respectively.
Total lease expense was $3.9 million in 2000, $4.2 million in 1999, and $3.1
million in 1998.
32
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO MTS SYSTEMS CORPORATION:
We have audited the accompanying consolidated balance sheets of MTS Systems
Corporation (a Minnesota corporation) and Subsidiaries as of September 30, 2000
and 1999, and the related consolidated statements of income, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
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 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 28, 2000
REPORT OF MANAGEMENT
The management of MTS Systems Corporation is responsible for the integrity and
objectivity of the financial information presented in this report. The financial
statements have been prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's best estimates and
judgment.
Management is also responsible for establishing and maintaining the
Company's accounting systems and related internal controls, which are designed
to provide reasonable assurance that assets are safeguarded, transactions are
properly recorded, and the policies and procedures are implemented by qualified
personnel.
The Audit Committee of the Board of Directors, which is comprised
solely of outside directors, meets regularly with management and its independent
auditors to review audit activities, internal controls, and other accounting,
reporting, and financial matters. This Committee also recommends independent
auditors for appointment by the full Board, subject to shareholder ratification.
The financial statements included in this annual report have been
audited by Arthur Andersen LLP, independent public accountants. We have been
advised that their audits were conducted in accordance with generally accepted
auditing standards and included such reviews of internal controls and tests of
transactions as they considered necessary in setting the scope of their audits.
Sidney W. Emery, Jr.
Chairman and Chief Executive Officer
/s/ Sidney W. Emery, Jr.
David E. Hoffman
Vice President and
Chief Financial Officer
/s/ David E. Hoffman
33