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United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarter ended March 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________
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Commission File Number 0-2382
MTS SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0908057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14000 Technology Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (952) 937-4000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
_X_ Yes ___ No
The number of shares outstanding of the Registrant's common stock as of
May 10, 2001 was 20,575,887 shares.
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MTS SYSTEMS CORPORATION
SECOND QUARTER REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001
INDEX
Page No.
--------
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
as of March 31, 2001 and September 30, 2000
(Unaudited) 2
Consolidated Statements of Income
For the Three and Six Months
Ended March 31, 2001 and 2000 (Unaudited) 3
Consolidated Statements of Cash Flows
For the Six Months Ended March 31, 2001
and 2000 (Unaudited) 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9-13
Item 3. Qualitative and Quantitative Disclosures
About Market Risks 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
1
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited - in thousands of dollars, except share data)
March 31 September 30
ASSETS 2001 2000
--------- ---------
Current Assets:
Cash and cash equivalents $ 8,852 $ 8,211
Accounts receivable, net 90,030 117,866
Unbilled contracts and retainage receivable 36,016 26,765
Inventories-
Customer jobs-in-process 10,211 2,704
Components, assemblies and parts 64,946 59,816
Prepaid expenses 11,912 9,911
--------- ---------
Total current assets 221,967 225,273
--------- ---------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 45,249 44,733
Machinery and equipment 109,975 107,325
Accumulated depreciation (88,891) (83,224)
--------- ---------
Total property and equipment, net 69,580 72,081
Other Assets 33,291 32,880
--------- ---------
$ 324,838 $ 330,234
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 2,113 $ 11,945
Current maturities of long-term debt 5,597 5,663
Accounts payable 17,942 22,755
Accrued compensation and benefits 25,740 29,285
Advance billings to customers 33,236 18,673
Other accrued liabilities 17,999 20,327
--------- ---------
Total current liabilities 102,627 108,648
Deferred Income Taxes 5,728 5,628
Long-Term Debt, net of current maturities 58,195 58,104
--------- ---------
Commitments and Contingencies
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 20,610,495 and 20,748,288
shares issued and outstanding 5,153 5,187
Additional paid-in capital 5,975 7,072
Retained earnings 149,502 146,228
Accumulated other comprehensive loss (2,342) (633)
--------- ---------
Total shareholders' investment 158,288 157,854
--------- ---------
$ 324,838 $ 330,234
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements
2
MTS SYSTEMS CORPORATION
Consolidated Statements of Income
(unaudited - in thousands of dollars, except per share data)
Three Months Ended Six Months Ended
March 31 March 31
----------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenue $ 97,935 $ 95,291 $ 182,924 $ 182,505
Cost of revenue 62,876 60,821 118,246 125,249
--------- --------- --------- ---------
Gross profit 35,059 34,470 64,678 57,256
--------- --------- --------- ---------
Operating expenses:
Selling 14,223 14,611 28,228 29,004
General and administrative 8,255 9,145 16,766 16,818
Research and development 5,776 6,684 10,864 13,363
--------- --------- --------- ---------
Total operating expenses 28,254 30,440 55,858 59,185
--------- --------- --------- ---------
Income (loss) from operations 6,805 4,030 8,820 (1,929)
Interest expense 1,544 1,648 3,033 3,004
Interest income (145) (161) (251) (279)
Other (income) expense, net (461) 331 (268) 2,354
--------- --------- --------- ---------
Income (loss) before income taxes 5,867 2,212 6,306 (7,008)
Provision (benefit) for income taxes 2,347 841 2,522 (2,340)
--------- --------- --------- ---------
Net income (loss) $ 3,520 $ 1,371 $ 3,784 ($ 4,668)
========= ========= ========= =========
Basic net income (loss) per share $ 0.17 $ 0.07 $ 0.18 ($ 0.22)
Diluted net income (loss) per share $ 0.17 $ 0.07 $ 0.18 ($ 0.22)
========= ========= ========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements
3
MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(unaudited - in thousands of dollars)
Six Months Ended
March 31
---------------------
2001 2000
-------- --------
Operating Activities:
Net income (loss) $ 3,784 ($ 4,668)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,560 7,549
Deferred income taxes 97 20
Restructuring payments (1,010) (3,101)
Changes in operating assets and liabilities:
Accounts, unbilled contracts and retainage receivables 16,667 7,163
Inventories (14,102) (6,146)
Prepaid expenses (2,120) (1,895)
Accounts payable (4,680) (5,228)
Accrued compensation and benefits (2,376) (4,098)
Advance billings to customers 15,444 (1,548)
Accrued warranty costs (1,905) (773)
Other current liabilities (177) (169)
-------- --------
Net cash provided by (used in) operating activities 17,182 (12,894)
-------- --------
Investing Activities:
Property and equipment additions, net (3,310) (7,764)
Other assets (49) 1,200
-------- --------
Net cash used in investing activities (3,359) (6,564)
-------- --------
Financing Activities:
Net borrowings (repayments) under notes payable to banks (9,741) 14,198
Proceeds from issuance of long-term debt 409 2,330
Payments of long-term debt (354) (449)
Cash dividends (2,480) (2,505)
Proceeds from exercise of stock options 41 10
Payments to purchase and retire common stock (1,172) (751)
-------- --------
Net cash provided by (used in) financing activities (13,297) 12,833
-------- --------
Effect of exchange rate changes on cash 115 966
-------- --------
Net increase (decrease) in cash and cash equivalents 641 (5,659)
Cash and cash equivalents, at beginning of period 8,211 18,083
-------- --------
Cash and cash equivalents, at end of period $ 8,852 $ 12,424
======== ========
Supplemental Disclosures of Cash Flows Information:
Cash paid during the periods for:
Interest expense $ 2,327 $ 2,519
Income taxes 5,175 2,553
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these statements
4
MTS SYSTEMS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Consolidation
The consolidated financial statements include the accounts of MTS SYSTEMS
CORPORATION and its wholly and majority owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
The interim consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The information furnished in these
financial statements includes normal recurring adjustments and reflects all
adjustments, which are in the opinion of management, necessary for a fair
presentation of such financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The accompanying financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 2000 Annual
Report on Form 10-K filed with the SEC.
Certain prior year amounts included in the accompanying financial statements
have been reclassified to conform to the current year's presentation. Such
reclassifications had no effect on the Company's previously reported financial
position, net income or cash flows.
New Accounting Pronouncement
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides
further guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 impacts the timing of
revenue recognition for the Company, as it requires customer acceptance as a
condition for revenue recognition. While 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, it expects
certain revenues and related net income will shift across quarters when SAB No.
101 is implemented. The Company currently plans to adopt SAB No. 101 in the
fourth quarter of fiscal year 2001.
5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. EARNINGS PER COMMON SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the applicable
periods. Diluted net income (loss) per share is computed under the treasury
stock method and is calculated to reflect the potentially dilutive effect of
common shares issued in connection with outstanding stock options. A
reconciliation of these amounts is as follows:
Three Months Ended Six Months Ended
March 31 March 31 March 31 March 31
2001 2000 2001 2000
- ------------------------------------------------------------ --------------------
(in thousands, except per share data)
Net income (loss) available
to common shareholders $ 3,520 $ 1,371 $ 3,784 ($ 4,668)
======== ======== ======== ========
Weighted average
common shares outstanding 20,661 20,836 20,691 20,858
Dilutive potential
common shares 205 92 126 --
- ------------------------------------------------------------------------------------
Diluted common shares 20,866 20,928 20,817 20,858
- ------------------------------------------------------------ --------------------
Basic net income (loss)
per share $ 0.17 $ 0.07 $ 0.18 ($ 0.22)
Diluted net income (loss)
per share $ 0.17 $ 0.07 $ 0.18 ($ 0.22)
- -------------------------------------------------------------------------------------
Potential common shares of 35,000 related to the Company's outstanding stock
options were excluded from the computation of dilutive loss per share for the
six months ended March 31, 2000, as inclusion of these shares would have been
antidilutive.
3. COMPREHENSIVE INCOME
Comprehensive income reflects the change in equity of a business enterprise
during the applicable periods resulting from transactions and other events and
circumstances from non-owner sources. For the Company, comprehensive income
represents net income adjusted for foreign currency translation adjustments and
the unrealized gain or loss on investment. Comprehensive income (loss) was $2.8
million and $1.3 million for the three months ended March 31, 2001 and 2000,
respectively, and $4.0 million and ($5.5) million for the six months ended March
31, 2001 and 2000, respectively.
4. BUSINESS SEGMENT INFORMATION
The Company periodically evaluates its business activities that are regularly
reviewed by its Chief Executive Officer for which discrete financial information
is available. In connection therewith, the Company has determined that it has
five business units: Vehicle Testing Systems, Material Testing Systems, Advanced
Systems, Automation and Sensors. The Vehicle Testing Systems unit 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 Systems unit manufactures and markets
systems to aid customers in product development and quality control toward an
effort of design improvement. The Advanced Systems unit offers highly customized
systems primarily for simulation and manufacturing. The Automation unit
manufactures and markets products for high performance industrial machine
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
applications in a wide range of industries. The Sensors unit 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
served, method of distribution and regulatory environments are similar for the
Vehicle Testing Systems, Material Testing Systems and Advanced Systems business
units. As a result of these similarities, these units have been aggregated for
financial statement purposes into one reportable segment called Mechanical
Testing and Simulation ("MT&S"). In addition, the economic characteristics,
nature of products and services, production processes, type or class of customer
served, method of distribution and regulatory environments are similar for the
Automation and Sensor business units. As a result, these units have been
aggregated into one reportable segment called Factory Automation ("FA").
The accounting policies of the reportable segments are the same as those
described in Note 1 to the Consolidated Financial Statements found in the
Company's 2000 Form 10-K. In evaluating each segment's performance, management
focuses on income from operations. This measurement excludes special charges
(e.g. restructuring charges, acquisition expenses, etc.), interest income and
expense, income taxes and other non-operating-type items. Corporate expenses,
including costs associated with various support functions such as human
resources, information technology, finance and accounting and general
administrative costs, are allocated to the reportable segments primarily on the
basis of revenue.
Financial information by reportable segment is as follows:
Three Months Ended Six Months Ended
March 31 March 31
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands of dollars)
NET REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 76,248 $ 71,294 $ 140,521 $ 140,404
Factory Automation 21,687 23,997 42,403 42,101
--------- --------- --------- ---------
Total Net Revenue $ 97,935 $ 95,291 $ 182,924 $ 182,505
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation $ 5,896 $ 836 $ 5,827 ($ 6,670)
Factory Automatiom 909 3,194 2,993 4,741
--------- --------- --------- ---------
Total Income (Loss) from Operations $ 6,805 $ 4,030 $ 8,820 ($ 1,929)
========= ========= ========= =========
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On October 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137 and SFAS No. 138. The transition
adjustment recorded upon adoption of SFAS No. 133 was not material to the
Company's overall financial position and results of operations.
The Company uses forward exchange contracts to reduce the effect of fluctuating
currencies on foreign currency-denominated intercompany transactions and third
party sourcing transactions. The gains and losses on these forward contracts are
intended to offset gains and losses on the hedged transaction in an effort to
reduce the earnings volatility resulting from fluctuating foreign currency
exchange rates. The principal currencies hedged by the Company are the European
Euro and the Japanese Yen. On the date a forward exchange contract is entered
into, the Company will designate the contract as a cash flow hedge -- a hedge of
a forecasted transaction or a hedge of the variability of cash flows to be
received or paid related to a recognized asset or liability commitment.
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
The effective portion of the change in the fair value of a cash flow hedge is
reported as part of Accumulated Other Comprehensive Income (Loss) within
shareholders' investment. When the hedged item is realized, the gain or loss
included in Accumulated Other Comprehensive Income (Loss) is reclassified into
Other (Income) Expense in the Consolidated Statements of Income.
The Company formally documents its hedge relationships, including identification
of the hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedged transaction. Forward
contracts are recorded in the Consolidated Balance Sheets at fair value. The
Company assesses at inception of the hedge and, at a minimum, quarterly
thereafter, whether the forward contracts currently in place and being used in
hedging transactions are highly effective in offsetting changes in the cash
flows of the hedged item. When it is determined that a specific derivative
ceases to be a highly effective hedge, the Company discontinues hedge accounting
for that individual derivative.
As of March 31, 2001, the net accumulated derivative gain included in
Accumulated Other Comprehensive Income was $2.0 million. The maximum maturity
date of any cash flow hedge was 1.5 years. Based on the status of the cash flow
hedges as of March 31, 2001, net gains of approximately $1.8 million that are
currently reflected in Accumulated Other Comprehensive Income would be available
for reclassification into Other (Income) Expense during the next twelve months.
During the quarter ended March 31, 2001, gains or losses associated with
ineffective hedges were immaterial.
6. RESTRUCTURING CHARGES
During the quarter ended September 30, 2000, the Company announced a
restructuring charge related to the discontinuation of a line of data
acquisition products acquired as part of its acquisition of DSP Technology, Inc.
in 1999. The restructuring charge of $1.2 million included a provision for
severance costs of $0.7 million, the write-off of leasehold improvements and
production and other equipment no longer needed of $0.3 million and other costs
of $0.2 million associated with the closedown of the facility and the wind-down
of the related product line. During the six months ended March 31, 2001, the
restructuring reserve was reduced by severance costs of $0.8 million, the write
off of leasehold improvements, equipment and other assets aggregating $0.2
million and costs associated with the closing of the facility and the wind-down
of the product line of $0.2 million. As the activity for which the restructuring
charge was created is essentially complete as of March 31, 2001, the Company
does not expect any significant additional charges to be incurred in future
periods.
During 1999, the Company recorded a restructuring charge of $5.7 million as a
result of the closure of its manufacturing operations in France and the transfer
of this product line to its electromechanical division in North Carolina. In
connection therewith, cash outlays of $2.6 million were made during fiscal 1999
and $3.1 million were made during fiscal 2000. Such costs were financed
primarily with funds from continuing operations and borrowings under its bank
line of credit. While certain of the effects from such restructuring were
expected to be realized during fiscal 2000, other costs associated with the
integration of the product line into the North Carolina facility offset much of
the benefit expected from such restructuring. As a result, the Company has yet
to realize substantial improvement in operating results from this restructuring.
8
MTS SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NEW CUSTOMER ORDERS AND BACKLOG
THREE MONTHS ENDED MARCH 31, 2001 ("SECOND QUARTER OF FISCAL 2001") COMPARED TO
THREE MONTHS ENDED MARCH 31, 2000 ("SECOND QUARTER OF FISCAL 2000")
New orders from customers for Second Quarter of Fiscal 2001 aggregated $87.6
million, a decrease of 13.4% compared to customer orders of $101.2 million
booked during Second Quarter of Fiscal 2000.
Orders for the Mechanical Testing and Simulation ("MT&S") segment totaled $68.2
million, a decrease of 9.7% compared to customer orders of $75.5 million for
Second Quarter of Fiscal 2000. The MT&S segment accounted for 77.9% of total
Company orders, compared to 74.6% for the Second Quarter of Fiscal 2000. Orders
from customers in the Second Quarter of Fiscal 2001 included an increased demand
for our rolling track systems for the tire, passenger car and specialty vehicle
markets, as well as strength across the globe in aircraft structural testing.
The Company experienced a slow down in North American business levels especially
as a result of cut backs in capital spending in the North American automotive
market. Generally, orders from customers outside the United States (especially
Japan, Korea, Brazil and in Europe) remained robust throughout the Second
Quarter of Fiscal 2001.
Orders for the Factory Automation ("FA") segment decreased from $25.7 million
for Second Quarter of Fiscal 2000, or 24.5%, to $19.4 million for Second Quarter
of Fiscal 2001. Customer orders in this segment were particularly weak during
the quarter as the result of aggressive cut backs in capital spending in the
North American automotive market and a drop in North American demand for the
Company's automation components in semiconductor, electronic assembly and
industrial markets. The decrease in demand in North America was offset somewhat
by better than expected orders from European and Asian customers. As a result,
FA accounted for 22.1% of total Company orders during Second Quarter of Fiscal
2001, compared to 25.4% in Second Quarter of Fiscal 2000.
SIX MONTHS ENDED MARCH 31, 2001 ("FIRST HALF OF FISCAL 2001") COMPARED TO SIX
MONTHS ENDED MARCH 31, 2000 ("FIRST HALF OF FISCAL 2000")
New orders for the First Half of Fiscal 2001 aggregated $191.7 million, a
decrease of 6.3%, compared to $204.5 million for the First Half of Fiscal 2000.
Orders for the MT&S segment of $150.5 million in First Half of Fiscal 2001 were
down approximately $3.0 million compared to First Half of Fiscal 2000. This
segment accounted for 78.6% of total new orders in First Half of Fiscal 2001,
compared to 75.1% for First Half of Fiscal 2000. Significant new orders from
Asian and European customers in the aerospace business were offset by weaker
than expected orders from customers in the North American automotive business,
especially during the Second Quarter of Fiscal 2001. Orders for the FA segment
of $41.2 million in First Half of Fiscal 2001 decreased 19.2% from the orders
booked in First Half of Fiscal 2000 of $51.0 million. As discussed above, new
customer orders in the FA segment were especially weak during the Second Quarter
of Fiscal 2001. The FA segment accounted for 21.4% of total orders during First
Half of Fiscal 2001, compared to 24.9% in First Half of Fiscal 2000.
Backlog of undelivered orders at March 31, 2001 was $178 million, an increase of
9.2% from the backlog of $163 million as of September 30, 2000 and an increase
of 5.3% from the backlog at March 31, 2000 of $169 million.
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL 2001 COMPARED TO SECOND QUARTER OF FISCAL 2000
NET REVENUE for Second Quarter of Fiscal 2001 was $97.9 million, an increase of
$2.6 million, or 2.8%, compared to Second Quarter of Fiscal 2000. Revenue from
foreign customers for Second Quarter of Fiscal 2001 represented 49.1% of total
revenues, compared to 52.4% for Second Quarter of Fiscal 2000. The increase in
net revenues was largely due to the increased shipments to customers in the
automotive and aerospace businesses, offset by weaker than expected shipments to
FA customers.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
SECOND QUARTER OF FISCAL 2001 COMPARED TO SECOND QUARTER OF FISCAL 2000
(CONTINUED)
GROSS PROFIT for Second Quarter of Fiscal 2001 increased to $35.1 million, an
increase of 1.7%, compared to gross profit of $34.5 million for Second Quarter
of Fiscal 2000. Gross profit, as a percentage of revenue, was 35.8% for Second
Quarter of Fiscal 2001, down from the 36.2% reported for Second Quarter of
Fiscal 2000. The decrease in gross profit percentage was primarily the result of
the premium paid on certain inventory parts purchased in previous periods that
were needed to maintain delivery schedules. Additionally, the Company
experienced a change in product mix from higher revenues in the product oriented
businesses in the FA segment to a higher content of generally lower margin
project activity during the Second Quarter of Fiscal 2001.
SELLING EXPENSES decreased from $14.6 million for Second Quarter of Fiscal 2000,
or 2.7%, to $14.2 million for Second Quarter of Fiscal 2001. Selling expense as
a percentage of revenue decreased to 14.5% for Second Quarter of Fiscal 2001,
compared to 15.3% for Second Quarter of Fiscal 2000. The decrease in overall
spending is the result of the Company's program of overall cost control and more
focused spending.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $8.3 million for Second Quarter of
Fiscal 2001, a decrease of 9.7%, compared to $9.1 million for Second Quarter of
Fiscal 2000. As a percentage of revenue, general and administrative expenses
were 8.4% for Second Quarter of Fiscal 2001, compared to 9.6% for Second Quarter
of Fiscal 2000. The decrease in overall spending is the result of the Company's
program of overall cost control and more focused spending.
RESEARCH AND DEVELOPMENT EXPENSES aggregated $5.8 million, down 13.6%, compared
to $6.7 million for Second Quarter of Fiscal 2000. Research and development
expenses, as a percentage of revenue, decreased to 5.9% for Second Quarter of
Fiscal 2001, compared to 7.0% for Second Quarter of Fiscal 2000. The overall
reduction in R&D expense resulted from the planned cutback of spending in
underperforming units and management's efforts to better focus spending in this
area.
INTEREST EXPENSE, NET OF INTEREST INCOME decreased to $1.4 million for Second
Quarter of Fiscal 2001, compared to $1.5 million for Second Quarter of Fiscal
2000. The decrease in interest expense for Second Quarter of Fiscal 2001 was
primarily the result of overall lower average borrowings and a generally lower
interest rate on its borrowings under its bank line of credit. Net interest
expense, as a percentage of revenue, decreased to 1.4% for Second Quarter of
Fiscal 2001, compared to 1.6% for Second Quarter of Fiscal 2000.
OTHER (INCOME) AND EXPENSE, which includes gains and losses from foreign
currency translations, reflects a gain of $0.5 million for Second Quarter of
Fiscal 2001 primarily as a result of currency gains of approximately $0.2
million. For Second Quarter of Fiscal 2000, expense of $0.3 million was
primarily the result of a loss on foreign currency translations recorded in the
quarter.
NET INCOME increased to $3.5 million for Second Quarter of Fiscal 2001, compared
to $1.4 million for Second Quarter of Fiscal 2000. Net income as a percentage of
revenue increased to 3.6% for Second Quarter of Fiscal 2001, compared to 1.4%
for Second Quarter of Fiscal 2000. The effective tax rate for Second Quarter of
Fiscal 2001 was 40.0%, compared to 38.0% for Second Quarter of Fiscal 2000. The
change in the effective rate was due to a higher composition of income in
foreign locations with higher tax rates.
FIRST HALF OF FISCAL 2001 COMPARED TO FIRST HALF OF FISCAL 2000
NET REVENUE for First Half of Fiscal 2001 was $182.9 million, an increase of
$0.4 million or 0.2%, compared to First Half of Fiscal 2000. Revenue from
foreign customers for First Half of Fiscal 2001 represented 48.8% of total
revenues, compared to 47.6% for First Half of Fiscal 2000. Revenue generated by
each of the MT&S and FA sectors during the First Half of Fiscal 2001
approximated the revenue generated by the individual segments for First Half of
Fiscal 2000.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
FIRST HALF OF FISCAL 2001 COMPARED TO FIRST HALF OF FISCAL 2000 (CONTINUED)
GROSS PROFIT for First Half of Fiscal 2001 increased to $64.7 million, up 12.9%,
compared to $57.3 million for First Half of Fiscal 2000. Gross profit, as a
percentage of revenue, was 35.4% for First Half of Fiscal 2001, compared to
31.4% for First Half of Fiscal 2000. The improvement in gross margin for First
Half of Fiscal 2001 was primarily the result of management initiatives on
improved project management during the past several quarters.
SELLING EXPENSES decreased to $28.2 million, or 2.7%, for First Half of Fiscal
2001, compared to $29.0 million for First Half of Fiscal 2000. Selling expense,
as a percentage of revenue, decreased to 15.4% for First Half of Fiscal 2001,
compared to 15.9% First Half of Fiscal 2000. This decrease in selling expenses
is primarily the result of management initiatives on cost control and more
focused spending in this area.
GENERAL AND ADMINISTRATIVE EXPENSES were relatively flat at $16.8 million for
First Half of Fiscal 2001 and Fiscal 2000. General and administrative expense,
as a percentage of revenue, remained unchanged at 9.2%.
RESEARCH AND DEVELOPMENT EXPENSES totaled $10.9 million for First Half of Fiscal
2001, a decrease of 18.7%, compared to $13.4 million for First Half of Fiscal
2000. Research and development expense, as a percentage of revenue, decreased to
5.9% First Half of Fiscal 2001, compared to 7.3% First Half of Fiscal 2000. The
overall reduction in R&D expenses resulted from the planned cutback of spending
in underperforming units and management's efforts to better focus its spending
in this area. The Company expects annual R&D expenditures for Fiscal 2001 to be
slightly less than overall spending levels in Fiscal 2000.
INTEREST EXPENSE, NET OF INTEREST INCOME totaled $2.8 million for First Half of
Fiscal 2001, compared to $2.7 million for First Half of Fiscal 2000. Net
interest expense as a percentage of revenue remained unchanged at 1.5%.
OTHER (INCOME) AND EXPENSE reflects income of $0.3 million for First Half of
Fiscal 2001, compared to expense of $2.4 million for First Half of Fiscal 2000.
Foreign currency gains of $0.3 million are reflected in Other Income for First
Half of Fiscal 2001, compared to currency losses of $1.5 million recorded during
the First Half of Fiscal 2000.
NET INCOME was $3.8 million for First Half of Fiscal 2001, compared to a net
loss of $4.7 million for First Half of Fiscal 2000. Net income, as a percentage
of revenue, increased to 2.1%. The effective tax rate for First Half of Fiscal
2001 was 40.0%, compared to 33.4% for First Half of Fiscal 2000. The change in
the effective rate was due to a higher composition of income in foreign
locations with higher tax rates.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $17.2 million during the
First Half of Fiscal 2001, compared with using cash of $12.9 million during the
First Half of Fiscal 2000. The increase in cash from operating activities during
the First Half of Fiscal 2001 resulted primarily from improved operating
results, plus a reduction in accounts receivables of $16.7 million and an
increase in advance billings to customers of $15.4 million, as compared to the
First Half of Fiscal 2000. These increases in available cash were partially
offset during the First Half of Fiscal 2001 by an increase in inventory of $14.1
million and an overall reduction of trade accounts payable and accrued
liabilities.
CASH FLOWS FROM INVESTING ACTIVITIES used cash totaling $3.4 million in the
First Half of Fiscal 2001, compared with $6.6 million in the First Half of
Fiscal 2000. The principal use of cash was for net additions to property and
equipment. Capital expenditures for Fiscal 2001 are expected to aggregate
approximately $8 million. The Company expects these expenditures to be funded
primarily through borrowings under its bank lines of credit and with internally
generated funds.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
CASH FLOWS FROM FINANCING ACTIVITIES used $13.3 million during the First Half of
Fiscal 2001, compared to cash provided of $12.8 million in First Half of Fiscal
2000. During the First Half of Fiscal 2000, short-term borrowings of $14.2
million were required to finance working capital needs and capital expenditures.
During the First Half of Fiscal 2001, the increased level of cash flow from
operating activities, among other matters, allowed the Company to internally
fund its capital expenditures, dividend payments, purchases of treasury stock
and reduce its short term borrowings by $9.7 million.
Under the terms of its credit agreements, the Company has agreed to certain
financial covenants. At March 31, 2001, the Company was in compliance with the
terms and covenants of its credit agreements. 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.
OTHER MATTERS
During the quarter ended September 30, 2000, the Company announced a
restructuring charge related to the discontinuation of a line of data
acquisition products acquired as part of its acquisition of DSP Technology, Inc.
in 1999. The restructuring charge of $1.2 million included a provision for
estimated severance costs of $0.7 million, the write-off of leasehold
improvements and production and other equipment no longer needed of $0.3 million
and other costs of $0.2 million associated with the closedown of the facility
and the wind-down of the related product line. During the six months ended March
31, 2001, the restructuring reserve was reduced by severance costs of $0.7
million, the write off of leasehold improvements, equipment and other assets
aggregating $0.2 million and costs associated with the closing of the facility
and the wind-down of the product line of $0.2 million. As the activity for which
the restructuring charge was created is essentially complete as of March 31,
2001, the Company does not expect any significant additional charges to be
incurred in future periods.
During 1999, the Company recorded a restructuring charge of $5.7 million as a
result of the closure of its manufacturing operations in France and the transfer
of this product line to its electromechanical division in North Carolina. In
connection therewith, cash outlays of $2.6 million were made during fiscal 1999
and $3.1 million were made during fiscal 2000. Such costs were financed
primarily with funds from continuing operations and borrowings under its bank
line of credit. While certain of the effects from such restructuring were
expected to be realized during fiscal 2000, other costs associated with the
integration of the product line into the North Carolina facility offset much of
the benefit expected from such restructuring. As a result, the Company has yet
to realize substantial improvement in operating results from this restructuring.
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 its information and
reporting systems, where necessary, to properly handle the Euro. The Company's
European operations formally will begin reporting in Euro currency in October
2001. Beginning January 1, 1999, the Company began processing Euro transactions
with its customers. The cost of addressing the Euro conversion did not have a
material effect on the Company's financial condition or operating results.
The Company is exposed to market risk from changes in foreign currency exchange
rates that 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. During First
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
OTHER MATTERS (CONTINUED)
Half of Fiscal 2001 and during 2000, 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).
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 approximately 25% of earnings per share over the long term.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY LANGUAGE
Statements included or incorporated by reference in this Management's Discussion
and Analysis of Financial Condition and Results of Operations which are not
historical or current facts are "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995, and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results and those presently anticipated or projected. The
following important facts, among others, could affect the Company's actual
results in the future and could cause the Company's actual financial performance
to differ materially from that expressed in any forward-looking statements:
(I) With regard to the Company's new product developments, there may be
uncertainties currently unknown to the Company concerning the expected
results.
(II) Possible significant volatility in both backlog and quarterly operating
results may result from large, individual, fixed price orders in
connection with sales of MT&S systems.
(III) Export controls based on U.S. initiatives and foreign policy, as well
as import controls imposed by foreign governments, may cause delays for
certain shipments or the rejection of orders by the Company. Such
delays could create material fluctuations in quarterly results and
could have a material adverse effect on results of operations. Local
political conditions and/or currency restrictions may also affect
foreign revenue.
(IV) Delays in realization of backlog orders may occur due to technical
difficulties, export licensing approval or the customer's preparation
of the installation site, any of which can affect the quarterly or
annual period when backlog is recognized as revenue and could
materially affect the results of any such period.
(V) The Company experiences competition on a worldwide basis. Customers may
choose to purchase equipment from the Company or from its competitors.
(VI) The Company is exposed to market risk from changes in foreign currency
exchange rates, which can affect its results from operations and
financial condition.
The forgoing list is not exhaustive, and the Company disclaims any obligation to
revise any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required disclosures are included in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Note 1 to the Consolidated
Financial Statements included in the Company's 2000 Annual Report to
Shareholders and Form 10-K for Fiscal 2000 filed with the Securities and
Exchange Commission.. This information remains current and is incorporated
herein by reference.
13
PART II-------OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company's Annual Meeting of Shareholders was held January
30, 2001.
(b) The following persons were nominated and elected to continue
as directors of the Company until the next Annual Meeting of
Shareholders.
Votes For Votes Against
Jean-Lou Chameau 16,499,189 659,813
Charles A. Brickman 16,566,318 592,684
Bobby I. Griffin 16,539,958 619,044
Russell A. Gullotti 16,531,388 627,614
Brendan C. Hegarty 16,057,387 1,101,615
Sidney W. Emery 16,510,556 648,446
Linda Hall Whitman 16,530,188 628,814
No voters abstained or were broker/bank non-votes for any of
the directors.
(c) Arthur Andersen LLP was ratified to serve as the Company's
independent auditors for fiscal year 2001 with 17,215,179
votes in favor, 35,525 votes against and 256,055 votes
abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The following are submitted as part of this report.
(a) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended March 31, 2001.
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MTS SYSTEMS CORPORATION
/s/ Sidney W. Emery, Jr.
---------------------------
Sidney W. Emery, Jr.
Chairman
Chief Executive Officer
Principal Financial Officer
Dated: May 14, 2001
15