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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 March 31, 2002
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 May 10,
2002 was 21,050,846 shares.
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MTS SYSTEMS CORPORATION
REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2002
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
as of March 31, 2002 and September 30, 2001 2
Consolidated Statements of Income
For the Three and Six Months Ended March 31, 2002 and 2001 3
Consolidated Statements of Cash Flows
For the Six Months Ended March 31, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 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 14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Report on Form 8-K 15
Signatures 16
Exhibit 17
1
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited - in thousands of dollars, except share data)
March 31 September 30
ASSETS 2002 2001
------------ ------------
Current Assets:
Cash and cash equivalents $ 54,137 $ 17,515
Accounts receivable, net 75,836 97,661
Unbilled contracts and retainage receivable 33,920 45,287
Inventories 45,679 63,381
Prepaid expenses 8,346 6,405
------------ ------------
Total current assets 217,917 230,249
------------ ------------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 46,523 45,785
Machinery and equipment 91,716 110,419
Accumulated depreciation (80,121) (90,558)
------------ ------------
Total property and equipment, net 61,365 68,893
Other Assets 30,080 32,617
------------ ------------
$ 309,362 $ 331,759
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 380 $ 428
Current maturities of long-term debt 5,299 5,260
Accounts payable 16,418 16,672
Accrued compensation and benefits 23,479 33,661
Advance billings to customers 25,650 26,572
Other accrued liabilities 15,791 22,480
------------ ------------
Total current liabilities 87,019 105,073
Deferred Income Taxes 5,846 5,947
Long-Term Debt, net of current maturities 52,978 53,617
------------ ------------
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 21,061,719 and 21,031,467 shares issued
and outstanding 5,265 5,258
Additional paid-in capital 8,762 8,946
Retained earnings 152,955 154,159
Accumulated other comprehensive loss (3,463) (1,241)
------------ ------------
Total shareholders' investment 163,519 167,122
------------ ------------
$ 309,362 $ 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 earnings per share data)
For The Three Months Ended For The Six Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
Net revenue $ 92,030 $ 98,272 $ 176,798 $ 189,835
Cost of revenue 70,211 62,672 124,658 122,283
------------ ------------ ------------ ------------
Gross profit 21,819 35,600 52,140 67,552
------------ ------------ ------------ ------------
Operating expenses:
Selling 13,532 14,223 27,558 28,303
General and administrative 5,949 8,255 12,655 16,699
Research and development 5,504 5,776 10,607 10,864
------------ ------------ ------------ ------------
Total operating expenses 24,985 28,254 50,820 55,865
------------ ------------ ------------ ------------
Income (loss) from operations (3,166) 7,345 1,320 11,687
Interest expense 1,043 1,544 2,196 3,033
Interest income (168) (145) (305) (251)
Other income, net (2,134) (461) (2,197) (268)
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,907) 6,407 1,626 9,173
Provision (benefit) for income taxes (729) 2,554 622 3,622
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change (1,178) 3,853 1,004 5,551
Cumulative effect of accounting change,
net of taxes -- -- -- (2,263)
------------ ------------ ------------ ------------
Net income (loss) ($ 1,178) $ 3,853 $ 1,004 $ 3,288
============ ============ ============ ============
Earnings per share:
Basic -
Before cumulative effect of accounting change ($ 0.06) $ 0.19 $ 0.05 $ 0.27
Cumulative effect of accounting change, net -- -- -- ($ 0.11)
------------ ------------ ------------ ------------
Net income ($ 0.06) $ 0.19 $ 0.05 $ 0.16
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic 21,069 20,661 21,050 20,691
============ ============ ============ ============
Diluted -
Before cumulative effect of accounting change ($ 0.06) $ 0.18 $ 0.05 $ 0.27
Cumulative effect of accounting change, net -- -- -- ($ 0.11)
------------ ------------ ------------ ------------
Net income ($ 0.06) $ 0.18 $ 0.05 $ 0.16
============ ============ ============ ============
Weighted average number of common shares
outstanding - diluted 21,069 20,866 21,375 20,817
============ ============ ============ ============
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
-----------------------------
2002 2001
------------ ------------
Operating Activities:
Net income $ 1,004 $ 3,288
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,734 7,559
Deferred income taxes (12) 97
Bad debt provision 483 226
Inventory provision 12,428 2,591
Changes in operating assets and liabilities:
Accounts, unbilled contracts and retainage receivables 28,814 19,916
Inventories 4,047 (19,390)
Prepaid expenses (1,749) (268)
Accounts payable (49) (4,680)
Accrued compensation and benefits (7,563) (843)
Advance billings to customers (77) 15,444
Accrued warranty costs 123 (1,871)
Other current liabilities (7,641) (3,031)
------------ ------------
Net cash provided by operating activities 37,540 19,038
------------ ------------
Investing Activities:
Property and equipment additions, net (257) (3,310)
Other assets 1,878 (1,901)
Net cash provided by (used in) investing activities 1,621 (5,211)
------------ ------------
Financing Activities:
Net repayments under notes payable to banks -- (9,741)
Payments of long-term debt (216) 55
Cash dividends (2,530) (2,480)
Proceeds from exercise of stock options 639 41
Payments to purchase and retire common stock (816) (1,172)
------------ ------------
Net cash used in financing activities (2,923) (13,297)
------------ ------------
Effect of exchange rate changes on cash 384 110
------------ ------------
Net increase in cash and cash equivalents 36,621 640
Cash and cash equivalents, at beginning of period 17,515 8,211
------------ ------------
Cash and cash equivalents, at end of period $ 54,137 $ 8,851
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest expense $ 1,615 $ 2,327
Income taxes $ 2,897 $ 5,175
============ ============
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 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 March 31, 2001 was to
increase net revenue by $337 thousand and increase income before cumulative
effect of the accounting change, net of taxes, by $334 thousand, or $0.02 per
diluted share. For the six months ending March 31, 2002, the effect of SAB 101
was an increase of net revenue and net income by $6.9 million and $1.8 million,
respectively, or $0.09 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, Statement of Financial Accounting Standard ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." 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 $2.2
million, which ceased effective October 1, 2001 upon adoption of the new rules.
In compliance with the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," the Company has completed the first of two required
impairment tests, and management expects the adoption of SFAS No. 142 will
result in a write-down ranging from $11-18 million of goodwill, $11 million of
which is attributable to the Automation business unit. The Company will be
quantifying impairment impacts over the balance of fiscal 2002. The goodwill
write-down will be reflected in this year's financial statements as a cumulative
change in accounting principle.
5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following tables set forth pro forma net income and earnings per share
(in thousands except per share amounts):
Three Months Ended Six Months Ended
March 31 March 31
2002 2001 2002 2001
---------- ---------- ---------- ----------
(in thousands of dollars) (in thousands of dollars)
Net income (loss) as reported ($ 1,178) $ 3,853 $ 1,004 $ 3,288
Add back: Goodwill amortization, net of tax -- 341 -- 670
---------- ---------- ---------- ----------
Adjusted net income (loss) ($ 1,178) $ 4,194 $ 1,004 $ 3,958
========== ========== ========== ==========
Basic earnings (loss) per share as reported ($ 0.06) $ 0.19 $ 0.05 $ 0.27
Goodwill amortization -- 0.02 -- 0.03
---------- ---------- ---------- ----------
Basic adjusted earnings (loss) per share ($ 0.06) $ 0.21 $ 0.05 $ 0.30
========== ========== ========== ==========
Diluted earnings (loss) per share as reported ($ 0.06) $ 0.18 $ 0.05 $ 0.27
Goodwill amortization -- 0.02 -- 0.03
---------- ---------- ---------- ----------
Diluted adjusted earnings (loss) per share ($ 0.06) $ 0.20 $ 0.05 $ 0.30
========== ========== ========== ==========
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 Six Months Ended
March 31 March 31 March 31 March 31
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Income (loss) before cumulative effect (1,178) 3,853 1,004 5,551
of accouting change
Cumulative effect of accounting change -- -- -- (2,263)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) available
to common shareholders $ (1,178) $ 3,853 $ 1,004 $ 3,288
========== ========== ========== ==========
Weighted average
common shares outstanding 21,069 20,661 21,050 20,691
Dilutive potential
common shares -- 205 325 126
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Total diluted common shares 21,069 20,866 21,375 20,817
- ---------------------------------------------------------------------------------------------------------
Basic net income (loss)
per share $ (0.06) $ 0.19 $ 0.05 $ 0.16
Diluted net income (loss)
per share $ (0.06) $ 0.18 $ 0.05 $ 0.16
=========================================================================================================
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 ($1.3) million and $2.8 million for
the three months ended March 31, 2002 and 2001, respectively, and ($0.9) million
and $4.0 million for the six months ended March 31, 2002 and 2001, 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 Sensors 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 assets 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 Six Months Ended
March-31 March-31
2002 2001 2002 2001
---------- ---------- ---------- ----------
(in thousands of dollars) (in thousands of dollars)
NET REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 74,651 $ 76,585 $ 142,538 $ 147,432
Factory Automation 17,379 21,687 34,260 42,403
---------- ---------- ---------- ----------
Total net revenue $ 92,030 $ 98,272 $ 176,798 $ 189,835
========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation $ 6,366 $ 6,436 $ 12,783 $ 8,694
Factory Automatiom (9,532) 909 (11,463) 2,993
---------- ---------- ---------- ----------
Total income (loss) from operations $ (3,166) $ 7,345 $ 1,320 $ 11,687
========== ========== ========== ==========
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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, "Accounting for Derivative Instruments
and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133." 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. 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, 2002, the net accumulated derivative gain included in
Accumulated Other Comprehensive Income was $0.3 million. The maximum maturity
date of any cash flow hedge was 1.1 years. Based on the status of the cash flow
hedges as of March 31, 2002, net gains of approximately $0.2 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, 2002, gains or losses associated with
ineffective hedges were $0.4 million.
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, 2002 ("SECOND QUARTER OF FISCAL 2002") COMPARED TO
THREE MONTHS ENDED MARCH 31, 2001 ("SECOND QUARTER OF FISCAL 2001")
New orders from customers during Second Quarter of Fiscal 2002 aggregated $87.3
million, compared to customer orders of $87.6 million booked during Second
Quarter of Fiscal 2001.
Orders for the Mechanical Testing and Simulation ("MT&S") segment totaled $72.3
million, an increase of 6.0% compared to customer orders of $68.2 million for
Second Quarter of Fiscal 2001. Orders for custom projects in the quarter offset
general weakness in standard short-cycle products, particularly in North
America. Significant bookings included durability testing equipment for several
German automotive OEMs, extensive performance evaluation equipment in the
Formula 1 racing market, and testing equipment for geological and civil
structures worldwide. The MT&S segment accounted for 82.8% of total Company
orders, compared to 77.9% for the Second Quarter of Fiscal 2001.
Orders for the Factory Automation ("FA") segment decreased to $15.0 million for
Second Quarter of Fiscal 2002 from $19.4 million for Second Quarter of Fiscal
2001, down 22.7%. The decline in orders was the result of continued general
worldwide weakness in the automotive, semiconductor, and industrial markets. The
FA segment accounted for 17.2% of total Company orders during Second Quarter of
Fiscal 2002, compared to 22.1% in Second Quarter of Fiscal 2001.
SIX MONTHS ENDED MARCH 31, 2002 ("FIRST HALF OF FISCAL 2002") COMPARED TO SIX
MONTHS ENDED MARCH 31, 2001 ("FIRST HALF OF FISCAL 2001")
New orders for the First Half of Fiscal 2002 aggregated $184.1 million, a
decrease of 4.0%, compared to $191.8 million for the First Half of Fiscal 2001.
Orders for the MT&S segment of $154.1 million in First Half of Fiscal 2002
increased approximately $3.5 million compared to First Half of Fiscal 2001. This
segment accounted for 83.7% of total new orders in First Half of Fiscal 2002,
compared to 78.5% for First Half of Fiscal 2001. Orders for the FA segment of
$30.0 million in First Half of Fiscal 2002 decreased 27.0% from the orders
booked in First Half of Fiscal 2001 of $41.1 million. The FA segment accounted
for 16.3% of total orders during First Half of 2002, compared to 21.5% in First
Half of Fiscal 2001.
Backlog of undelivered orders at March 31, 2002 was $158 million, an increase of
1.3% from the backlog of $156 million at September 30, 2001 and a decrease of
11.2% from the backlog of $178 million at March 31, 2001.
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL 2002 COMPARED TO SECOND QUARTER OF FISCAL 2001
NET REVENUE for Second Quarter of Fiscal 2002 was $92.0 million, a decrease of
$6.2 million, or 6.4%, compared to Second Quarter of Fiscal 2001. A decline in
North America of 16% was partially offset by growth in Europe and Asia of 2% and
9%, respectively. Revenue from European and Asian markets for Second Quarter of
Fiscal 2002 represented 52.4% of total revenues, compared to 46.6% for Second
Quarter of Fiscal 2001.
GROSS PROFIT for Second Quarter of Fiscal 2002 decreased to $21.8 million, down
38.8% compared to gross profit of $35.6 million for Second Quarter of Fiscal
2001. Gross profit as a percentage of revenue was 23.7% for Second Quarter of
Fiscal 2002, down from the 36.2% reported for Second Quarter of Fiscal 2001. The
gross margin for the MT&S
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
SECOND QUARTER OF FISCAL 2002 COMPARED TO SECOND QUARTER OF FISCAL 2001
(CONTINUED)
segment was 33.0% for Second Quarter of Fiscal 2002, down 1.8% compared to
Second Quarter of Fiscal 2001, primarily due to unfavorable product mix for the
quarter. Operating earnings remained constant at $6.4 million. Gross profit for
the FA segment was a loss of 16.1% for Second Quarter of Fiscal 2002, compared
to earnings of 41.3% for Second Quarter of Fiscal 2001. The decrease was
primarily the result of a reduction in sales volume and a $9.0 million one-time
charge for slow-moving inventory.
SELLING EXPENSES were $13.5 million for Second Quarter of Fiscal 2002, a
decrease of 5.0% from $14.2 million for Second Quarter of Fiscal 2001. Selling
expense as a percentage of revenue was 14.7% for Second Quarter of Fiscal 2002,
roughly flat with selling expense of 14.4% for Second Quarter of Fiscal 2001.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $5.9 million for Second Quarter of
Fiscal 2002, a decrease of 28.9% compared to $8.3 million for Second Quarter of
Fiscal 2001. The decrease in the overall expense was partially due to
implementation of SFAS 142, which eliminated goodwill amortization effective
October 1, 2001. See Note 2 to the Consolidated Financial Statements for
additional information. General and administrative expenses as a percentage of
revenue decreased by 2.0%, from 6.4% for Second Quarter of Fiscal 2002 to 8.4%
for Second Quarter of Fiscal 2001, reflecting continuing decreased spending as
the result of cost reduction and productivity initiatives that were implemented
last year.
RESEARCH AND DEVELOPMENT EXPENSES totaled $5.5 million, relatively unchanged
compared to the Second Quarter of Fiscal 2001. Research and development expenses
as a percentage of revenue were 6.0% for Second Quarter of Fiscal 2002, roughly
flat with research and development expenses of 5.9% for Second Quarter of Fiscal
2001.
INTEREST EXPENSE decreased to $1.0 million for Second Quarter of Fiscal 2002
compared to $1.5 million for Second Quarter of Fiscal 2001. This decrease was
primarily the result of lower average borrowings under the Company's bank line
of credit. Interest expense as a percentage of revenue decreased to 1.1% for
Second Quarter of Fiscal 2002, compared to 1.5% for Second Quarter of Fiscal
2001.
INTEREST INCOME increased $0.2 million for Second Quarter of Fiscal 2002
compared to $0.1 million for Second Quarter of Fiscal 2001. Interest income for
Second Quarter of Fiscal 2002 consisted principally of earnings on short-term
investments of excess cash funds. Interest income for Second Quarter of Fiscal
2001 included interest received as part of certain refunds of prior years'
federal income taxes.
OTHER INCOME AND EXPENSE for Second Quarter of Fiscal 2002 primarily reflected a
$2.6 million gain on the sale of an investment. Other income and expense for
Second Quarter of Fiscal 2001 consisted primarily of a gain on foreign currency
translation of $0.5 million.
NET INCOME (LOSS) decreased to a loss of $1.2 million for Second Quarter of
Fiscal 2002 compared to income of $3.9 million for Second Quarter of Fiscal
2001. Net income (loss) as a percentage of revenue decreased to a loss of 1.3%
for Second Quarter of Fiscal 2002, compared to income of 4.0% for Second Quarter
of Fiscal 2001. The effective tax rate for Second Quarter of Fiscal 2002 was
38.2% compared to 39.9% for Second Quarter of Fiscal 2001. The decrease in the
overall effective tax rate reflects expected benefits from tax savings
initiatives in Fiscal 2002.
FIRST HALF OF FISCAL 2002 COMPARED TO FIRST HALF OF FISCAL 2001
NET REVENUE for First Half of Fiscal 2002 was $176.8 million, a decrease of
$13.0 million, or 6.8%, compared to First Half of Fiscal 2001. Revenue from
European and Asian markets for First Half of Fiscal 2002 represented 52.7% of
revenues, compared to 44.7% of revenues for First Half of Fiscal 2001. Revenue
generated by the MT&S segment was $142.5 million during the First Half of 2002,
a decrease of $4.9 million compared to First Half of Fiscal 2001. The FA segment
revenue declined to $34.3 million for the First Half of Fiscal 2002, compared to
$42.4 million for First Half of Fiscal 2001.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
FIRST HALF OF FISCAL 2002 COMPARED TO FIRST HALF OF FISCAL 2001 (CONTINUED)
GROSS PROFIT for First Half of Fiscal 2002 decreased to $52.1 million, down
22.9% compared to gross profit of $67.6 million for First Half of Fiscal 2001.
Gross profit as a percentage of revenue was 29.5% for First Half of Fiscal 2002,
down from 35.6% reported in First Half of Fiscal 2001. The decline in gross
margin for First Half of Fiscal 2002 was primarily the result of the one-time
inventory charge of $9.0 million made by the FA segment in Second Quarter of
Fiscal 2002.
SELLING EXPENSES decreased to $27.6 million in First Half of Fiscal 2002, or
2.5%, from $28.3 million for First Half of Fiscal 2001. Selling expense as a
percentage of revenue increased to 15.6% in First Half of Fiscal 2002, compared
to 14.9% for First Half of Fiscal 2001.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $12.7 million for First Half of
Fiscal 2002, a decrease of 24.0% compared to $16.7 million for First Half of
Fiscal 2001. The decrease in the overall expense was partially due to
implementation of SFAS 142, which eliminated goodwill amortization effective
October 1, 2001. See Note 2 to the Consolidated Financial Statements for
additional information. General and administrative expenses as a percentage of
revenue decreased by 1.5%, from 8.7% in First Half of Fiscal 2001 to 7.2% in
First Half of Fiscal 2002, primarily as the result of continued cost savings
initiatives.
RESEARCH AND DEVELOPMENT EXPENSES decreased slightly to $10.6 million in First
Half of Fiscal 2001 compared to $10.9 million in First Half of 2001. Research
and development expense as a percentage of revenue increased slightly to 6.0% in
First Half of Fiscal 2002, compared to 5.7% in First Half of Fiscal 2001.
INTEREST EXPENSE decreased to $2.2 million in First Half of Fiscal 2002 compared
to $3.0 million in First Half of Fiscal 2001. Interest expense as a percentage
of revenue decreased by 0.4% to 1.2% for First Half of Fiscal 2002.
INTEREST INCOME remained flat at $0.3 million for First Half of Fiscal 2002.
Interest income as a percentage of revenue remained relatively unchanged at
0.1%.
OTHER INCOME AND EXPENSE reflects income of $2.2 million in First Half of Fiscal
2002, compared to income of $0.3 million in First Half of Fiscal 2001. One-time
investment gains of $2.6 million are reflected in Other Income for First Half of
Fiscal 2002.
NET INCOME decreased to $1.0 million for First Half of Fiscal 2002, compared to
$3.3 million for First Half of Fiscal 2001. Net income as a percentage of
revenue decreased to 0.6% for First Half of Fiscal 2002, compared to 1.7% for
First Half of Fiscal 2001. The effective tax rate for First Half of Fiscal 2002
was 38.3%, compared to 39.5% for First Half of Fiscal 2001. The decrease in the
overall effective tax rate reflects expected benefits from tax savings
initiatives in Fiscal 2002.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $37.1 million during the
First Half of Fiscal 2002, compared to cash provided of $17.2 million during the
First Half of Fiscal 2001. The increase in cash provided by operating activities
during the First Half of Fiscal 2002 was the primarily the result of reductions
in accounts receivable of $28.8 million and inventories of $4.0 million. These
increases in available cash were partially offset during the First Half of
Fiscal 2002 by a decrease in accrued compensation and benefits of $7.6 million
and other current liabilities of $7.6 million.
CASH FLOWS FROM INVESTING ACTIVITIES provided cash of $2.0 million during the
First Half of Fiscal 2002, compared with cash usage of $3.3 million in the First
Half of Fiscal 2001. Cash was principally provided through the sale of an
investment during the second quarter.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $2.9
million during the First Half of Fiscal 2002, compared to usage of $13.3 million
for the First Half of Fiscal 2001, primarily due to the repayment of the short
term debt in Second Quarter of Fiscal 2001. During the First Six 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 March 31, 2002, 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 ongoing operations, allow for
investment in opportunities to internally grow its business, and make selected
strategic acquisitions.
OTHER MATTERS
The Company is exposed to market risk from changes in foreign currency exchange
rates that may 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 that 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 in
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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY LANGUAGE
(CONTINUED)
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.
13
MTS SYSTEMS CORPORATION
ITEM 3. 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. Note 6 to the
Consolidated Financial Statements included in this Form 10-Q also
contains important information regarding derivative instruments and
hedging activities.
14
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 on January 29,
2002.
(b) The following persons were nominated and elected to continue as
directors of the Company until the next Annual Meeting of
Shareholders.
Voted For Voted Against
--------- -------------
Charles A. Brickman 19,157,214 157,637
Jean-Lou Chameau 19,129,535 158,122
Sidney W. Emery 19,096,664 190,993
Bobby I. Griffin 19,131,108 156,549
Brendan C. Hegarty 19,122,474 165,183
Bruce D. Hertzke 19,130,020 157,637
Barb J. Samardzich 19,141,953 145,704
Linda Hall Whitman 19,130,372 157,285
No voters abstained or were broker/bank non-votes for any of the
directors.
(c) Shareholders approved adoption of the 2002 Employee Stock Purchase
Plan with 17,054,097 votes in favor, 1,411,357 votes against, and
67,300 votes abstained. There were 304,903 non-votes by brokers/banks.
(d) Arthur Andersen LLP was ratified to serve as the Company's independent
auditors for fiscal year 2002 with 18,772,656 votes in favor,
1,411,357 votes against, and 123,949 votes abstained.
ITEM 5. 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 March 31, 2002.
15
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
/s/ Susan E. Knight
------------------------------------------
Susan E. Knight
Vice President and Chief Financial Officer
Dated: May 15, 2002
16