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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter ended June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
--------------------------
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, MN 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 July 30,
2001 was 20,856,180 shares.
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MTS SYSTEMS CORPORATION
REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2001
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
as of June 30, 2001 and September 30, 2000 2
Consolidated Statements of Income for the
Three and Nine Months Ended June 30, 2001 and 2000 3
Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2001 and 2000 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9-14
Item 3. Qualitative and Quantitative Disclosures About
Market Risks 14
PART II - OTHER INFORMATION
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)
June 30 September 30
ASSETS 2001 2000
---------------- ----------------
Current Assets:
Cash and cash equivalents $ 23,544 $ 8,211
Accounts receivable, net 77,004 117,866
Unbilled contracts and retainage receivable 40,672 26,765
Inventories-
Customer jobs-in-process 7,175 2,704
Components, assemblies and parts 62,552 59,816
Prepaid expenses 11,140 9,911
---------------- ----------------
Total current assets 222,087 225,273
---------------- ----------------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 44,991 44,733
Machinery and equipment 108,563 107,325
Accumulated depreciation (88,646) (83,224)
---------------- ----------------
Total property and equipment, net 68,155 72,081
Other Assets 33,401 32,880
---------------- ----------------
$ 323,643 $ 330,234
================ ================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 563 $ 11,945
Current maturities of long-term debt 5,560 5,663
Accounts payable 14,863 22,755
Accrued compensation and benefits 29,102 29,285
Advance billings to customers 29,300 18,673
Other accrued liabilities 18,732 20,327
---------------- ----------------
Total current liabilities 98,120 108,648
Deferred Income Taxes 5,667 5,628
Long-Term Debt, net of current maturities 57,435 58,104
---------------- ----------------
Commitments and Contingencies
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 20,833,977 and 20,748,288
shares issued and outstanding 5,208 5,187
Additional paid-in capital 7,238 7,072
Retained earnings 153,042 146,228
Accumulated other comprehensive loss (3,067) (633)
---------------- ----------------
Total shareholders' investment 162,421 157,854
---------------- ----------------
$ 323,643 $ 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 Nine Months Ended
June 30 June 30
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net revenue $ 98,586 $ 94,989 $ 281,510 $ 277,494
Cost of revenue 61,023 60,192 179,270 185,441
-------------- -------------- -------------- --------------
Gross profit 37,563 34,797 102,240 92,053
-------------- -------------- -------------- --------------
Operating expenses:
Selling 14,480 14,273 42,707 43,277
General and administrative 8,530 8,090 25,296 24,908
Research and development 5,528 5,901 16,392 19,264
-------------- -------------- -------------- --------------
Total operating expenses 28,538 28,264 84,395 87,449
-------------- -------------- -------------- --------------
Income from operations 9,025 6,533 17,845 4,604
Interest expense 1,175 1,739 4,207 4,744
Interest income (111) (851) (361) (1,130)
Other (income) expense, net 673 (186) 405 2,168
-------------- -------------- -------------- --------------
Income (loss) before income taxes 7,288 5,831 13,594 (1,178)
Provision (benefit) for income taxes 2,842 2,134 5,365 (206)
-------------- -------------- -------------- --------------
Net income (loss) $ 4,446 $ 3,697 $ 8,229 $ (972)
============== ============== ============== ==============
Basic net income (loss) per share $ 0.21 $ 0.18 $ 0.40 $ (0.05)
Diluted net income (loss) per share $ 0.21 $ 0.18 $ 0.39 $ (0.05)
============== ============== ============== ==============
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)
Nine Months Ended
June 30
----------------------------------
2001 2000
---------------- ----------------
Operating Activities:
Net income (loss) $ 8,229 $ (972)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,974 11,137
Deferred income taxes 94 21
Restructuring payments (1,210) (3,101)
Bad debt provision 253 378
Inventory provision 1,208 1,550
Changes in operating assets and liabilities:
Accounts, unbilled contracts and retainage receivables 23,319 9,885
Inventories (9,974) (10,535)
Prepaid expenses (1,467) (2,802)
Accounts payable (7,679) (4,376)
Accrued compensation and benefits 2,502 3,391
Advance billings to customers 11,787 (1,886)
Accrued warranty costs (1,937) (1,214)
Other current liabilities (157) 2,186
---------- ----------
Net cash provided by operating activities 35,942 3,662
---------- ----------
Investing Activities:
Property and equipment additions, net (4,827) (9,825)
Other assets (699) 1,025
---------- ----------
Net cash used in investing activities (5,526) (8,800)
---------- ----------
Financing Activities:
Net repayments under notes payable to banks (11,280) (2,349)
Proceeds from issuance of long-term debt 419 2,358
Payments of long-term debt (986) (598)
Cash dividends (3,729) (3,758)
Proceeds from exercise of stock options 1,752 1,066
Payments to purchase and retire common stock (1,564) (1,503)
---------- ----------
Net cash used in financing activities (15,388) (4,784)
---------- ----------
Effect of exchange rate changes on cash 305 955
---------- ----------
Net increase (decrease) in cash and cash equivalents 15,333 (8,967)
Cash and cash equivalents, at beginning of period 8,211 18,083
---------- ----------
Cash and cash equivalents, at end of period $ 23,544 $ 9,116
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest expense $ 2,992 $ 4,724
Income taxes $ 5,261 $ 3,829
========== ==========
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. Currently, the Company enters into certain
contracts that have specific acceptance criteria while others have general terms
of acceptance. The Company is amending revenue recognition criteria only for
those contracts with specific acceptance criteria, as general criteria are
relatively routine. 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.
With the introduction of the concepts of SAB 101, (including a presumption that
customer acceptance is a significant milestone) of more specific customer
acceptance criteria, we believe it is appropriate for the Company to modify
revenue recognition to more closely comply with the overall spirit of SAB 101.
The Company currently plans to adopt SAB No. 101 in the fourth quarter of fiscal
year 2001.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and
No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Intangible assets
that have finite useful lives will continue to be amortized over their useful
lives but with no maximum life. The amortization provisions of FAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to June 30, 2001, the Company is
required to adopt FAS 142 effective October 1, 2002 with early adoption
permitted. The Company is currently evaluating the effect that adoption of the
provisions of FAS 142, that are effective October 1, 2002, will have on its
results of operations and financial position.
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 Nine Months Ended
June 30 June 30 June 30 June 30
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net income (loss) available
to common shareholders $ 4,446 $ 3,697 $ 8,229 $ (972)
=============== =============== =============== ===============
Weighted average
common shares outstanding 20,683 20,855 20,688 20,857
Dilutive potential
common shares 417 73 224 -
- ----------------------------------------------------------------------------------------------------------------
Total diluted common shares 21,100 20,928 20,912 20,857
- ----------------------------------------------------------------------------------------------------------------
Basic net income (loss)
per share $ 0.21 $ 0.18 $ 0.40 $ (0.05)
Diluted net income (loss)
per share $ 0.21 $ 0.18 $ 0.39 $ (0.05)
- ----------------------------------------------------------------------------------------------------------------
Potential common shares of 73,000 related to the Company's outstanding stock
options were excluded from the computation of dilutive loss per share for the
nine months ended June 30, 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, the
unrealized gain or loss on investment and the net effect of accumulated hedging
activity. Comprehensive income (loss) was $4.1 million and $3.3 million for the
three months ended June 30, 2001 and 2000, respectively, and $8.1 million and
($2.2) million for the nine months ended June 30, 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
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. BUSINESS SEGMENT INFORMATION (CONTINUED)
manufacturing. The Automation unit manufactures and markets products for high
performance industrial machine 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 Annual Report on 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 Nine Months Ended
June-30 June-30
2001 2000 2001 2000
------------- ------------- ------------- -------------
(in thousands of dollars)
NET REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 78,931 $ 71,486 $ 219,452 $ 211,890
Factory Automation 19,655 23,503 62,058 65,604
------------- ------------- ------------- -------------
Total net revenue $ 98,586 $ 94,989 $ 281,510 $ 277,494
============= ============= ============= =============
INCOME (LOSS) FROM OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation $ 8,790 $ 3,348 $ 14,618 $ (3,321)
Factory Automatiom 235 3,185 3,227 7,925
------------- ------------- ------------- -------------
Total income (loss) from operations $ 9,025 $ 6,533 $ 17,845 $ 4,604
============= ============= ============= =============
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
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
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. 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 June 30 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 1.25 years. Based on the status of the cash flow hedges as
of June 30, 2001, net gains of approximately $2.0 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 June 30, 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 nine months ended June 30, 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. Additionally, in light of the
discontinuation of the line of data acquisition products, a further $1.1 million
charge related to the book value of inventory which was written off and disposed
of and $0.7 million was established to cover uncollectible receivables and to
write off the remaining book value of fixed assets no longer needed. As the
activity for which the restructuring charge was created was essentially complete
as of June 30, 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 JUNE 30, 2001 ("THIRD QUARTER OF FISCAL 2001") COMPARED TO
THREE MONTHS ENDED JUNE 30, 2000 ("THIRD QUARTER OF FISCAL 2000")
New orders from customers during Third Quarter of Fiscal 2001 aggregated $104.0
million, an increase of 3.6% compared to customer orders of $100.3 million
booked during Third Quarter of Fiscal 2000.
Orders for the Mechanical Testing and Simulation ("MT&S") segment totaled $86.2
million, an increase of 10.8% compared to customer orders of $77.8 million for
Third Quarter of Fiscal 2000. The MT&S segment accounted for 83.0% of total
Company orders, compared to 77.6% for the Third Quarter of Fiscal 2000. The
Company continues to experience strong order demand worldwide for its aircraft
structural testing equipment and in the custom project business of its Advanced
Systems unit, offset somewhat by the continuing slow down in North American
business levels especially as a result of cut backs in capital spending in the
North American automotive market. Despite the overall slowdown in the North
America automotive market place, the Company, along with its strategic alliance
partners, continue to see growing demand for software and analysis products
targeted principally at the automotive design validation marketplace. Generally,
orders from customers outside the United States (especially Japan, Korea and
Southeast Asia) remained at or ahead of planned orders throughout the Third
Quarter of Fiscal 2001.
Orders for the Factory Automation ("FA") segment decreased from $22.5 million
for Third Quarter of Fiscal 2000 to $17.8 million for Third Quarter of Fiscal
2001, down 20.9%. 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 precipitous drop in North American and
European demand for the Company's automation components in the semiconductor,
electronic assembly and industrial markets. The FA segment accounted for 17.1%
of total Company orders during Third Quarter of Fiscal 2001, compared to 22.4%
in Third Quarter of Fiscal 2000.
NINE MONTHS ENDED JUNE 30 2001 ("FIRST NINE MONTHS OF FISCAL 2001") COMPARED TO
NINE MONTHS ENDED JUNE 30, 2000 ("FIRST NINE MONTHS OF FISCAL 2000")
New orders for the First Nine Months of Fiscal 2001 aggregated $295.6 million, a
decrease of 3.0%, compared to $304.8 million for the First Nine Months of Fiscal
2000.
Orders from the MT&S segment of $236.7 million for the First Nine Months of
Fiscal 2001 increased by 2.3%, compared to $231.3 million for the First Nine
Months of Fiscal 2000. The MT&S segment accounted for 80.0% of total new orders
for the First Nine Months of Fiscal 2001, compared to 75.9% for the First Nine
Months of Fiscal 2000. Significant new material testing orders from Asian and
European customers in the aerospace business and strong order volume in the
Company's Advanced Systems unit were offset by weaker than expected orders from
customers in the North American automotive business, especially during the
second and third quarters of Fiscal 2001. Orders for the FA segment of $58.9
million for the First Nine Months of Fiscal 2001 decreased 19.9% from the orders
booked for the First Nine Months of Fiscal 2000 of $73.5 million. New customer
orders in the FA segment were especially weak during the second and third
quarters of Fiscal 2001 as the result of aggressive cut backs in capital
spending in the North American automotive market and a precipitous drop in North
American and European demand for the Company's automation components in the
semiconductor, electronic assembly and industrial markets. The FA segment
accounted for 19.9% of total orders during the First Nine Months of Fiscal 2001,
compared to 24.1% for the First Nine Months of Fiscal 2000.
Backlog of undelivered orders at June 30, 2001 was $182 million, an increase of
11.7% from the backlog of $163 million as of September 30, 2000 and an increase
of 7.1% from the backlog of $170 million at June 30, 2000.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL 2001 COMPARED TO THIRD QUARTER OF FISCAL 2000
NET REVENUE for Third Quarter of Fiscal 2001 was $98.6 million, an increase of
$3.6 million, or 3.8%, compared to Third Quarter of Fiscal 2000. The increase in
net revenue was principally due to the increased shipments to customers in the
automotive and aerospace businesses, offset by weaker than expected shipments to
FA customers. Despite the overall slow down in capital spending in the North
American automotive market during Fiscal 2001, revenue backlog and new orders
from customers in the automotive product development market remained at adequate
levels to allow the Company to meet its revenue plan. Revenue from foreign
customers for Third Quarter of Fiscal 2001 represented 59.7% of total revenues,
compared to 50.5% for Third Quarter of Fiscal 2000.
GROSS PROFIT for Third Quarter of Fiscal 2001 increased to $37.6 million, up
8.0%, compared to gross profit of $34.8 million for Third Quarter of Fiscal
2000. Gross profit, as a percentage of revenue, was 38.1% for Third Quarter of
Fiscal 2001, up from the 36.6% reported for Third Quarter of Fiscal 2000. The
gross margin for the MT&S sector was 38.5% for Third Quarter of Fiscal 2001, up
3.9 basis points, compared to Third Quarter of Fiscal 2000 while the gross
margin for the FA sector declined to 36.5% primarily as the result of the
significantly lower manufacturing and shipping volumes. The increased gross
profit percentage in the MT&S sector was the result of a number of factors,
including a favorable mix of aerospace and custom projects shipped in the
quarter, more aggressive negotiation strategies, better overall project
planning, staffing and management and the positive impact of the Company's
re-engineering and front-end project assessment activities initiated in the
prior year. These activities allow the Company to assess and minimize certain
overall project risks prior to its acceptance of the customer order
SELLING EXPENSES increased from $14.3 million for Third Quarter of Fiscal 2000,
or 1.4%, to $14.5 million for Third Quarter of Fiscal 2001. Selling expense, as
a percentage of revenue, decreased to 14.7% for Third Quarter of Fiscal 2001,
compared to 15.0% for Third Quarter of Fiscal 2000, primarily as the result of
the Company's continuing program of overall cost control and more focused
spending.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $8.5 million for Third Quarter of
Fiscal 2001, an increase of 5.4%, compared to $8.1 million for Third Quarter of
Fiscal 2000. While general and administrative expenses, as a percentage of
revenue, remained relatively unchanged during the comparable periods ( 8.6% for
Third Quarter of Fiscal 2001, compared to 8.5% for Third Quarter of Fiscal
2000), spending in this area increased as a result of providing for anticipated
additional compensation-related costs associated with Fiscal 2001.
RESEARCH AND DEVELOPMENT EXPENSES aggregated $5.5 million, down 6.3%, compared
to $5.9 million for Third Quarter of Fiscal 2000. Research and development
expenses, as a percentage of revenue, decreased to 5.6% for Third Quarter of
Fiscal 2001, compared to 6.2% for Third Quarter of Fiscal 2000. The overall
reduction in R&D expense resulted from management's planned cutback of spending
in underperforming product lines and/or business units and management's efforts
to better focus spending in areas of greatest opportunity and highest return.
INTEREST EXPENSE decreased to $1.2 million for Third Quarter of Fiscal 2001,
compared to $1.7 million for Third Quarter of Fiscal 2000. This decrease was
primarily the result of lower average borrowings under its bank line of credit.
Interest expense, as a percentage of revenue, decreased to 1.2% for Third
Quarter of Fiscal 2001, compared to 1.8% for Third Quarter of Fiscal 2000.
INTEREST INCOME decreased to $0.1 million for Third Quarter of Fiscal 2001,
compared to $0.9 million for Third Quarter of Fiscal 2000. Interest income for
Third Quarter of Fiscal 2001 consisted principally of earnings on short-term
investments of excess cash funds. Interest income for Third Quarter of Fiscal
2000 included interest received as part of certain refunds of prior years'
federal income taxes.
OTHER (INCOME) AND EXPENSE reflects a loss of $0.7 million for Third Quarter of
Fiscal 2001 primarily as a result of a loss from foreign currency translation.
Other (income) expense for Third Quarter of Fiscal 2000 consisted primarily of a
loss on foreign currency translation of $0.2 million.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
THIRD QUARTER OF FISCAL 2001 COMPARED TO THIRD QUARTER OF FISCAL 2000
(CONTINUED)
NET INCOME increased to $4.4 million for Third Quarter of Fiscal 2001, compared
to $3.7 million for Third Quarter of Fiscal 2000 primarily as the result of
overall improved product margins and the continuing effect from the Company's
cost control and more focused spending programs. Net income, as a percentage of
revenue, increased to 4.5% for Third Quarter of Fiscal 2001, compared to 3.9%
for Third Quarter of Fiscal 2000. The effective tax rate for Third Quarter of
Fiscal 2001 was 39.0%, compared to 36.6% for Third Quarter of Fiscal 2000. The
increased overall effective tax rate was due to the higher composition of
operating earnings in foreign locations having higher tax rates, compared to the
overall federal and state tax rates in the United States.
FIRST NINE MONTHS OF FISCAL 2001 COMPARED TO THE FIRST NINE MONTHS OF FISCAL
2000
NET REVENUE for the First Nine Months of Fiscal 2001 was $281.5 million, an
increase of $4.0 million or 1.4%, compared to the First Nine Months of Fiscal
2000. As explained further above, the increase in net revenue was principally
due to the increased shipments to customers in the automotive and aerospace
business units. Revenue generated by the FA segment decreased approximately $3.6
million during the First Nine Months of Fiscal 2001, compared to the comparable
period of Fiscal 2000. Revenue from foreign customers for First Nine Months of
Fiscal 2001 represented 52.6% of total revenues, compared to 48.6% for First
Nine Months of Fiscal 2000.
GROSS PROFIT for the First Nine Months of Fiscal 2001 increased to $102.2
million, up 11.0%, compared to $92.1 million for the First Nine Months of Fiscal
2000. Gross profit, as a percentage of revenue, was 36.3% for the First Nine
Months of Fiscal 2001, compared to 33.2% for the First Nine Months of Fiscal
2000. The gross margin for the MT&S sector was 35.5% for the First Nine Months
of Fiscal 2001, up 5.0 basis points, compared to the First Nine Months of Fiscal
2000 while the gross margin for the FA sector declined to 39.9% primarily as the
result of the significantly lower manufacturing and shipping volumes. As
explained further above, the increased gross profit percentage in the MT&S
sector was the result of a number of factors, including a favorable mix of
aerospace and custom projects shipped during the period, more aggressive
negotiation strategies, better overall project planning, staffing and management
and the positive impact of the Company's re-engineering and front-end project
assessment activities initiated in the prior year.
SELLING EXPENSES decreased from $43.3 million for the First Nine Months of
Fiscal 2000, down 1.4% to $42.7 million for the First Nine Months of Fiscal
2001. Selling expense, as a percentage of revenue, decreased from 16.0% for the
First Nine Months of Fiscal 2000 to 15.2% for the First Nine Months of Fiscal
2001. This decrease in selling expenses is primarily the result of management
initiatives on cost control and more focused spending.
GENERAL AND ADMINISTRATIVE EXPENSES aggregated $25.3 million for the First Nine
Months of Fiscal 2001, up 1.6%, compared to $24.9 million for the First Nine
Months of Fiscal 2000. General and administrative expenses remained unchanged at
9.0% of net revenue for the First Nine Months of Fiscal 2001 and 2000.
RESEARCH AND DEVELOPMENT EXPENSES totaled $16.4 million for the First Nine
Months of Fiscal 2001, down 14.9%, compared to $19.3 million for the First Nine
Months of Fiscal 2000. Research and development expense, as a percentage of
revenue, was 5.8% for the First Nine Months of Fiscal 2001, compared to 6.9% for
the First Nine Months of Fiscal 2000. As discussed previously, the overall
reduction in R&D expenses resulted from management's planned cutback of spending
in underperforming product lines and/or business units and its efforts to better
focus spending in areas of greatest opportunity and highest return. The Company
expects annual R&D expenditures for Fiscal 2001 to remain below the overall
spending level of Fiscal 2000.
INTEREST EXPENSE totaled $4.2 million for the First Nine Months of Fiscal 2001,
compared to $4.7 million for the First Nine Months of Fiscal 2000. The decrease
in interest expense for the First Nine Months of Fiscal 2001, compared to the
comparable period in Fiscal 2000, was primarily the result of 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 from
1.7% for the First Nine Months of Fiscal 2000 to 1.5% for the First Nine Months
of Fiscal 2001.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
FIRST NINE MONTHS OF FISCAL 2001 COMPARED TO THE FIRST NINE MONTHS OF FISCAL
2000 (CONTINUED)
INTEREST INCOME totaled $0.4 million for the First Nine Months of Fiscal 2001,
compared to $1.1 million for First Nine Months of Fiscal 2000. Interest income
for First Nine Months of Fiscal 2001 consisted principally of earnings on
short-term investments of excess cash funds while interest income for the First
Nine Months of Fiscal 2000 included interest received as part of certain refunds
of prior years' federal income taxes.
OTHER (INCOME) AND EXPENSE includes foreign currency gains of $0.1 million for
the First Nine Months of Fiscal 2001, compared to foreign currency losses of
$1.2 million for the First Nine Months of Fiscal 2000.
NET INCOME totaled $8.2 million for the First Nine Months of Fiscal 2001,
compared to a net loss of $1.0 million for the First Nine Months of Fiscal 2000,
primarily as the result of overall improved product margins and the continuing
effect from the Company's cost control and more focused spending programs. Net
income for the First Nine Months of Fiscal 2001, as a percentage of revenue,
increased to 2.9%. The effective tax rate for the First Nine Months of Fiscal
2001 was 39.5%, compared to the tax benefit of 17.5% recorded as the result of
the operating loss recognized during the First Nine Months of Fiscal 2000.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $35.9 million during the
First Nine Months of Fiscal 2001, compared to cash provided of $3.7 million
during the First Nine Months of Fiscal 2000. The increase in cash provided by
operating activities during the First Nine Months of Fiscal 2001 resulted
primarily from improved operating results, the reduction in accounts receivables
of $23.3 million and the increase in advance billings to customers of $11.8
million. These increases in available cash were partially offset during the
First Nine Months of Fiscal 2001 by an increase in inventory of $10.0 million
and the decrease in trade accounts payable and accrued liabilities of $7.3
million.
CASH FLOWS FROM INVESTING ACTIVITIES required cash usage of $5.5 million during
the First Nine Months of Fiscal 2001, compared with $8.8 million in the First
Nine Months of Fiscal 2000. Cash was principally used during each of the periods
for 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.
CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $15.4
million during the First Nine Months of Fiscal 2001, compared to $4.8 million
for the First Nine Months of Fiscal 2000. During the First Nine Months of Fiscal
2001, the Company's increased cash flows from operating activities allowed it to
internally fund its capital expenditures, dividend payments, purchases of
treasury stock and reduce its overall borrowings by $11.8 million.
Under the terms of its credit agreements, the Company has agreed to certain
financial covenants. At June 30, 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 the
investment in opportunities to internally grow its business and to make selected
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 nine
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
OTHER MATTERS (CONTINUED)
months ended June 30, 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 June 30, 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, in order to appropriately effect the
conversion to the Euro. The Company's European operations formally will begin
reporting in Euro currency beginning in Fiscal 2002. The Company began
processing Euro transactions with its customers on January 1, 1999. The cost of
addressing the Euro conversion did not have a material effect on the Company's
financial condition or operating results for any period presented.
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.
Historically, approximately 50% of the Company's revenue occurs from shipment to
customers outside of the United States and approximately 65% of this revenue
(approximately 30% of the Company's total net revenue) is 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 the First Nine Months 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
(income) expense.
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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
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.
PART II-------OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The following are submitted as part of this report.
Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended June 30, 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: August 14, 2001
15