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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 December 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, 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 January
30, 2002 was 21,085,600 shares.
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MTS SYSTEMS CORPORATION
REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
as of December 31, 2001 and September 30, 2001 2
Consolidated Statements of Income for the
Three Months Ended December 31, 2001 and 2000 3
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 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 9-12
Item 3. Qualitative and Quantitative Disclosures About
Market Risks 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
1
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited - in thousands of dollars, except share data)
December 31 September 30
ASSETS 2001 2001
--------- ---------
Current Assets:
Cash and cash equivalents $ 33,611 $ 17,515
Accounts receivable, net 84,739 97,661
Unbilled contracts and retainage receivable 45,039 45,287
Inventories 62,447 63,381
Prepaid expenses 7,364 6,405
--------- ---------
Total current assets 233,200 230,249
--------- ---------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 46,095 45,785
Machinery and equipment 107,457 110,419
Accumulated depreciation (90,301) (90,558)
--------- ---------
Total property and equipment, net 66,498 68,893
Other Assets 32,561 32,617
--------- ---------
$ 332,259 $ 331,759
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 384 $ 428
Current maturities of long-term debt 5,361 5,260
Accounts payable 13,122 16,672
Accrued compensation and benefits 27,802 33,661
Advance billings to customers 35,613 26,572
Other accrued liabilities 24,444 22,480
--------- ---------
Total current liabilities 106,726 105,073
Deferred Income Taxes 5,843 5,947
Long-Term Debt, net of current maturities 53,143 53,617
--------- ---------
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 21,043,971 and 21,031,467shares issued
and outstanding 5,261 5,258
Additional paid-in capital 9,031 8,946
Retained earnings 155,411 154,159
Accumulated other comprehensive loss (3,156) (1,241)
--------- ---------
Total shareholders' investment 166,547 167,122
--------- ---------
$ 332,259 $ 331,759
========= =========
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
December 31
--------------------
2001 2000
-------- --------
Net revenue $ 84,768 $ 91,563
Cost of revenue 54,447 59,612
-------- --------
Gross profit 30,321 31,951
-------- --------
Operating expenses:
Selling 14,026 14,080
General and administrative 6,707 8,444
Research and development 5,102 5,088
-------- --------
Total operating expenses 25,835 27,612
-------- --------
Income from operations 4,486 4,339
Interest expense 1,153 1,489
Interest income (137) (106)
Other (income) expense, net (62) 190
-------- --------
Income before income taxes 3,532 2,766
Provision for income taxes 1,351 1,068
-------- --------
Income before cumulative effect of
accounting change 2,181 1,698
Cumulative effect of accounting change,
net of taxes -- (2,263)
-------- --------
Net income (loss) $ 2,181 $ (565)
=====================
Earnings per share:
Basic-
Before cumulative effect of accounting change $ 0.10 $ 0.08
Cumulative effect of accounting change, net -- (0.11)
-------- --------
Net income (loss) $ 0.10 $ (0.03)
======== ========
Weighted average number of common shares
outstanding - basic 21,031 20,721
=====================
Earnings per share:
Diluted-
Before cumulative effect of accounting change $ 0.10 $ 0.08
Cumulative effect of accounting change, net -- (0.11)
-------- --------
Net income (loss) $ 0.10 $ (0.03)
======== ========
Weighted average number of common shares
outstanding - diluted 21,402 20,768
=====================
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
Consolidated Statements of Cash Flows
(unaudited - in thousands of dollars)
Three Months Ended
December 31
-------------------------------
2001 2000
-------------- --------------
Operating Activities:
Net income (loss) $ 2,181 $ (565)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,867 3,990
Deferred income taxes (37) --
Bad debt provision 260 154
Inventory provision 2,208 2,364
Changes in operating assets and liabilities:
Accounts, unbilled contracts and retainage receivables 9,639 20,817
Inventories (2,301) (15,464)
Prepaid expenses (1,115) (1,207)
Accounts payable (3,379) (5,383)
Accrued compensation and benefits (7,145) 22
Advance billings to customers 9,774 5,548
Accrued warranty costs 181 (26)
Other current liabilities 4,550 (2,186)
-------- --------
Net cash provided by operating activities 17,683 8,064
-------- --------
Investing Activities:
Additions to property and equipment (1,107) (1,810)
Other assets 582 (375)
-------- --------
Net cash used in investing activities (525) (2,185)
-------- --------
Financing Activities:
Net borrowings (repayments) under notes payable to banks -- 2,400
Proceeds from issuance of long-term debt -- 423
Repayments of long-term debt (71) (159)
Dividends paid (1,263) (1,239)
Proceeds from issuance of stock under employee stock
option and stock purchase plans 108 7
Repurchases of common stock (20) (359)
-------- --------
Net cash (used) provided by financing activities (1,246) 1,073
-------- --------
Effect of exchange rate changes on cash 184 (107)
-------- --------
Net increase in cash and cash equivalents 16,096 6,845
Cash and cash equivalents, at beginning of period 17,515 8,211
-------- --------
Cash and cash equivalents, at end of period $ 33,611 $ 15,056
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 782 $ 854
Income taxes $ 2,399 $ 3,638
======== ========
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 it's 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 2001 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.
Revenue Recognition:
The Company implemented Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements", in the fourth quarter of fiscal 2001 and
applied it retroactively to the beginning of fiscal 2001. The cumulative effect
adjustment of the change in accounting for all periods through September 30,
2000 was a reduction in net income of $2.3 million (net of income taxes of $1.4
million), or $0.11 per diluted share, which has been accounted for as a charge
to the financial results for the first quarter of fiscal 2001. The effect of the
change as compared to the revenue recognition policy previously followed in
accounting for revenue recognition on the quarter ended December 31, 2000, was
to increase net revenue by $6.6 million and increase income before cumulative
effect of the accounting change, net of taxes, by $1.4 million, or $0.07 per
diluted share. The effect of the change for the total fiscal year of 2001 was to
increase revenue by $4.9 million and to increase income before cumulative effect
of the accounting change, net of taxes, by $0.9 million, or $0.04 per diluted
share.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
On June 29, 2001, the Financial Accounting Standards Board approved two new
statements, SFAS No. 141, Business Combinations," ("SFAS No. 141") and SFAS No.
142 "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS No. 141, all
business combinations will be accounted for under the purchase method beginning
June 30, 2001. SFAS No. 142 includes requirements to test goodwill for
impairment using a fair value approach, rather than amortizing the cost of
goodwill over future periods. As a result, the Company's amortization of
goodwill, including goodwill recorded in past business combinations, ceased upon
adoption of the new accounting standards. The Company adopted SFAS No. 142 in
the first quarter of its fiscal year ending September 30, 2002. The Company's
annual goodwill amortization was approximately $3.0 million, which ceased
effective October 1, 2001 upon adoption of the new rules. The Company is
currently evaluating the impairment testing provisions of SFAS No. 142 and has
not yet determined the effect of SFAS No. 142 on its consolidated financial
position and results of operations. Should impairment be determined to exist,
the Company will record that impairment as a change of accounting principle and
restate its first quarter and year-to-date results.
5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following tables set forth proforma net income and earnings per share
(in thousands except per share amounts):
Three Months Ended
December-31
2001 2000
---------------------
(in thousands of dollars)
Net income (loss) as reported $ 2,181 $ (565)
Add back: Goodwill amortization, net of tax -- 329
--------- ---------
Adjusted net income (loss) $ 2,181 $ (236)
========= =========
Earnings (loss) per share as reported (Basic and Diluted) $ 0.10 $ (0.03)
Goodwill amortization -- 0.02
--------- ---------
Adjusted earnings (loss) per share (Basic and Diluted) $ 0.10 $ (.01)
========= =========
3. EARNINGS (LOSS) 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
December 31 December 31
2001 2000
- ---------------------------------------------------------------------
(in thousands, except per share data)
Income before cumulative effect 2,181 1,698
of accouting change
Cumulative effect of accounting change -- (2,263)
Net income (loss) available
to common shareholders $ 2,181 $ (565)
======== ========
Weighted average
common shares outstanding 21,031 20,721
Dilutive potential
common shares 371 47
- ------------------------------------------------------------------
Total diluted common shares 21,402 20,768
- ------------------------------------------------------------------
Basic net income (loss)
per share $ 0.10 $ (0.03)
Diluted net income (loss)
per share $ 0.10 $ (0.03)
=====================================================================
4. 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 $1.6 million and ($1.3) million for
the three months ended December 31, 2001 and 2000, respectively.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. 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
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 2001 Annual Report on Form 10-K. In evaluating each segment's
performance, management focuses primarily on income from operations and return
on asset employed. 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
December-31
2001 2000
------------- -------------
(in thousands of dollars)
NET REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 67,887 $ 70,847
Factory Automation 16,881 20,716
------------- -------------
Total net revenue $ 84,768 $ 91,563
============= =============
INCOME (LOSS) FROM OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation $ 6,417 $ 2,264
Factory Automatiom (1,931) 2,075
------------- -------------
Total income from operations $ 4,486 $ 4,339
============= =============
6. 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.
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
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. 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 December 31, 2001, the net accumulated derivative gain included in
Accumulated Other Comprehensive Income was $0.1 million. The maximum maturity
date of any cash flow hedge was 1.3 years. Based on the status of the cash flow
hedges as of December 31, 2001, net gains of approximately $0.1 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 December 31, 2001, gains or losses associated with
ineffective hedges were immaterial.
8
MTS SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NEW CUSTOMER ORDERS AND BACKLOG
THREE MONTHS ENDED DECEMBER 31, 2001 ("FIRST QUARTER OF FISCAL 2002") COMPARED
TO THREE MONTHS ENDED DECEMBER 31, 2000 ("FIRST QUARTER OF FISCAL 2001")
New orders from customers during First Quarter of Fiscal 2002 aggregated $96.9
million, a decrease of 6.9% compared to customer orders of $104.1 million booked
during First Quarter of Fiscal 2001.
Orders for the Mechanical Testing and Simulation ("MT&S") segment totaled $81.8
million, a decrease of 0.7% compared to customer orders of $82.4 million for
First Quarter of Fiscal 2001. The MT&S segment accounted for 84.4% of total
Company orders, compared to 79.2% for the First Quarter of Fiscal 2001. The
company experienced softness in the automotive business offset by positive
growth in the aerospace and custom project businesses. Significant bookings
included full--scale structural testing equipment for the Japanese US-1A search
and rescue aircraft, validation equipment for the Formula 1 automotive racing
market, and multiple orders for seismic equipment for U.S. research
institutions.
Orders for the Factory Automation ("FA") segment decreased to $15.1 million for
First Quarter of Fiscal 2002 from $21.7 million for First Quarter of Fiscal
2001, down 30.7%. The decline in orders was the result of general worldwide
weakness in the automotive, semiconductor and industrial markets. The FA segment
accounted for 15.6% of total Company orders during First Quarter of Fiscal 2002,
compared to 20.8% in First Quarter of Fiscal 2001.
Backlog of undelivered orders at December 31, 2001 was $168 million, an increase
of 7.7% from the backlog of $156 million as of September 30, 2001 and a decrease
of 10.6% from the backlog of $188 million at December 31, 2000.
RESULTS OF OPERATIONS
FIRST QUARTER OF FISCAL 2002 COMPARED TO FIRST QUARTER OF FISCAL 2001
NET REVENUE for First Quarter of Fiscal 2002 was $84.8 million, a decrease of
$6.8 million, or 7.4%, compared to First Quarter of Fiscal 2001. The decrease in
net revenue was principally due to the slowdown in automotive-related business.
The continued weakness in the North American automotive business had a negative
effect for both the MT&S and the FA sectors. Part of the weakness in the
automotive market was offset by the strength in the aerospace and
academia/government markets. Revenue from foreign customers for First Quarter of
Fiscal 2002 represented 52.9% of total revenues, compared to 49.8% for First
Quarter of Fiscal 2001. Growth in the European and Japanese markets of 25
percent and 11 percent, respectively, partially offset the decline in North
American revenue of 13 percent.
GROSS PROFIT for First Quarter of Fiscal 2002 decreased to $30.3 million, down
5.3%, compared to gross profit of $32.0 million for First Quarter of Fiscal
2001. Gross profit, as a percentage of revenue, was 35.8% for First Quarter of
Fiscal 2002, up from the 34.9% reported for First Quarter of Fiscal 2001. The
gross margin for the MT&S sector was 37.7% for First Quarter of Fiscal 2002, up
4.2%, compared to First Quarter of Fiscal 2001. The increase was primarily the
result of internal operating improvements. Operating earnings increased
significantly from $2.3 million to $6.4 million. The FA sector declined to 27.9%
for First Quarter of Fiscal 2002, as compared to 39.7% for First Quarter of
Fiscal 2001. The decrease was primarily the result of a reduction in sales
volume and a $1.65 million charge for slow moving inventory write-downs.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
FIRST QUARTER OF FISCAL 2002 COMPARED TO FIRST QUARTER OF FISCAL 2001
(CONTINUED)
SELLING EXPENSES decreased to $14.0 million for First Quarter of Fiscal 2002, or
0.7%, from $14.1 million for First Quarter of Fiscal 2001. Selling expense, as a
percentage of revenue, increased to 16.5% for First Quarter of Fiscal 2002,
compared to 15.4% for First Quarter of Fiscal 2001.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $6.7 million for First Quarter of
Fiscal 2002, a decrease of 20.2%, compared to $8.4 million for First Quarter of
Fiscal 2001. The decrease in the overall expense was partially due to
implementation of FASB 142, which eliminated goodwill amortization starting
October 1, 2001. See Note 2 to Consolidated Financial Statements for additional
information. While general and administrative expenses, as a percentage of
revenue, decreased by 1.3 % (7.9% for First Quarter of Fiscal 2002, compared to
9.2% for First Quarter of Fiscal 2001), spending in this area decreased
primarily as the result of the Company's cost reduction and productivity
initiatives that were implemented last year.
RESEARCH AND DEVELOPMENT EXPENSES aggregated $5.1 million, relatively unchanged,
compared to the First Quarter of Fiscal 2001. Research and development expenses,
as a percentage of revenue, increased to 6.0% for First Quarter of Fiscal 2002,
compared to 5.6% for First Quarter of Fiscal 2001.
INTEREST EXPENSE decreased to $1.2 million for First Quarter of Fiscal 2002,
compared to $1.5 million for First Quarter of Fiscal 2001. 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 1.4% for First
Quarter of Fiscal 2002, compared to 1.6% for First Quarter of Fiscal 2001.
INTEREST INCOME remained stable at $0.1 million for First Quarter of Fiscal
2002, compared to the same amount for First Quarter of Fiscal 2001. Interest
income for First Quarter of Fiscal 2002 consisted principally of earnings on
short-term investments of excess cash funds. Interest income for First Quarter
of Fiscal 2001 included interest received as part of certain refunds of prior
years' federal income taxes.
OTHER (INCOME) AND EXPENSE for First Quarter of Fiscal 2002 primarily reflect a
gain on foreign currency translation of $(0.1) million. Conversely, the other
(income) expense for First Quarter of Fiscal 2001 consisted primarily of a loss
on foreign currency translation of $0.2 million.
NET INCOME increased to $2.2 million for First Quarter of Fiscal 2002, compared
to a loss of $0.6 million for First Quarter of Fiscal 2001 primarily as the
result of the application of SAB 101, which affects the timing of revenue
recognition. See Note 1 to Consolidated Financial Statements for additional
information. Net income, as a percentage of revenue, increased to 2.6% for First
Quarter of Fiscal 2002, compared to (0.6%) for First Quarter of Fiscal 2001. The
effective tax rate for First Quarter of Fiscal 2002 was 38.2%, compared to 38.6%
for First Quarter of Fiscal 2001. The slight decrease in the overall effective
tax rate was due to a more balanced mix of operating earnings from domestic and
foreign locations as compared to First Quarter of Fiscal 2001, resulting in the
offset of higher foreign tax rates with federal and state tax rates in the
United States.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $17.7 million during the
First Quarter of Fiscal 2002, compared to cash provided of $8.1 million during
the First Quarter of Fiscal 2001. The increase in cash provided by operating
activities during the First Quarter of Fiscal 2002 resulted primarily from
improved operating results, the reduction in accounts receivables of $9.6
million and the increase in advance billings to customers of $9.8 million. These
increases in available cash were partially offset during the First Quarter of
Fiscal 2002 by an increase in inventory of $2.3 million and the decrease in
trade accounts payable of $3.4 million.
CASH FLOWS FROM INVESTING ACTIVITIES required cash usage of $0.5 million during
the First Quarter of Fiscal 2002, compared with $2.2 million in the First
Quarter of Fiscal 2001. Cash was principally used during each of the periods for
additions to property and equipment. Capital expenditures for Fiscal 2002 are
expected to aggregate approximately $8 million. The Company expects these
expenditures to be funded primarily from internally generated funds.
CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $1.3
million during the First Quarter of Fiscal 2002, compared to cash provided of
$1.1 million for the First Quarter of Fiscal 2001. During the First Three Months
of Fiscal 2002, the Company's increased cash flows from operating activities
allowed it to internally fund its capital expenditures, dividend payments, and
purchases of treasury stock.
Under the terms of its credit agreements, the Company has agreed to certain
financial covenants. At December 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 the
investment in opportunities to internally grow its business and to make selected
strategic acquisitions.
OTHER MATTERS
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.
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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
OTHER MATTERS(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 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 2001 Annual Report to
Shareholders and Form 10-K for Fiscal 2001 filed with the Securities and
Exchange Commission. This information remains current and is incorporated herein
by reference.
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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 December 31, 2001.
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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
---------------------------
Sidney W. Emery, Jr.
Chairman
Chief Executive Officer
Principal Financial Officer
Dated: February 14, 2002