- --------------------------------------------------------------------------------
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly period 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
_________
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
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act): N/A
The number of shares outstanding of the Registrant's common stock as of January
30, 2002 was 21,085,600 shares.
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
The Company is filing this amendment to Form 10-Q to adjust its consolidated
financial statements (as more fully discussed in Note 8 of the Condensed Notes
to Consolidated Financial Statements) for the three months ended December 31,
2001 and 2000 to restate the Company's first quarter 2002 and comparative first
quarter 2001 financial statements to correct various bookkeeping errors and
misapplications of generally accepted accounting principles. These adjustments
reflect:
(1) Correction of revenue recognition practices related to service
contracts and to the deferral of installation revenue, impacting
revenue recognition and deferred revenue and deferred tax balances;
(2) Correction of cut-off errors in recognition of revenue and
elimination of intercompany profit in inventory, impacting related
revenue, cost of sales, deferred revenue, and inventory balances;
(3) Correction to a number of previously unreconciled inventory and
related reserves and the correction of errors related to the timing
of recognition of surplus and obsolete inventory reserves, which
collectively impacted cost of sales and inventory balances;
(4) Correction of an error in calculating SFAS 133 currency hedge gains,
impacting currency gains, retained earnings, prepaid expenses, and
unrealized loss on investments accounts;
(5) Correction of the timing of recognizing restructuring reserves,
impacting cost of sales, general and administrative expenses, and
other accrued liabilities;
(6) Correction of the accounting for residual values of certain fixed
assets and asset retirements that should have occurred in prior
periods, impacting various income statement expense categories and
fixed asset balances;
(7) Correction of bookkeeping and account reconciliation errors,
affecting numerous balance sheet and statement of income accounts,
including income taxes and long-lived assets; and
(8) Correction of the Company's effective tax rate, primarily due to
incorrect recognition of tax credits, affecting income tax expense
and accrued income taxes.
The Company is concurrently filing a Form 10-K which includes audited financial
statements for the fiscal year ended September 28, 2002 and restated audited
financial statements for the fiscal years ended September 30, 2001 and 2000.
Further information regarding the background of the restatement is contained
therein.
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, the Company has amended and
restated in its entirety each item of the Company's Form 10-Q for the quarterly
period ended December 31, 2001 which have been affected by this restatement.
This Form 10-Q/A does not reflect events occurring after the filing of the
original Form 10-Q or modify or update those disclosures in any way, except as
required to reflect the effects of this restatement and the cumulative effects
of changes in accounting principles adopted in fiscal years 2002 and 2001.
1
MTS SYSTEMS CORPORATION
REPORT ON FORM 10-Q/A
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 (restated) 3
Consolidated Statements of Income for the
Three Months Ended December 31, 2001 and 2000 (restated) 4
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 2001 and 2000 (restated) 5
Condensed Notes to Consolidated Financial Statements 6 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 21
Item 3. Qualitative and Quantitative Disclosures About
Market Risks 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
CERTIFICATIONS 23 - 24
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited - in thousands of dollars, except share data)
December 31 September 30
ASSETS 2001 2001
----------- ------------
(Restated) (Restated)
Current Assets:
Cash and cash equivalents $ 33,611 $ 17,515
Accounts receivable, net 84,809 97,731
Unbilled contracts and retainage receivable 45,039 40,700
Inventories 55,632 64,308
Prepaid expenses 7,042 5,975
Current deferred tax asset 7,894 7,894
--------- ---------
Total current assets 234,027 234,123
--------- ---------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 46,095 45,785
Machinery and equipment 88,202 91,203
Accumulated depreciation (74,553) (74,827)
--------- ---------
Total property and equipment, net 62,991 65,408
Goodwill 4,158 22,545
Other Assets 11,933 9,867
--------- ---------
$ 313,109 $ 331,943
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 384 $ 428
Current maturities of long-term debt 5,361 5,260
Accounts payable 14,528 15,685
Accrued compensation and benefits 27,962 33,358
Advance billings to customers 37,501 32,884
Accrued warranty 4,868 4,481
Other accrued liabilities 18,016 22,799
--------- ---------
Total current liabilities 108,620 114,895
Deferred Income Taxes 2,693 2,693
Long-Term Debt, net of current maturities 53,143 53,617
--------- ---------
Total liabilities 164,456 171,205
--------- ---------
Shareholders' investment
Common stock, $.25 par; 64,000,000 shares
authorized: 21,056,000 and 21,044,000 shares issued
and outstanding 5,264 5,261
Additional paid-in capital 9,125 9,040
Retained earnings 136,364 147,635
Accumulated other comprehensive loss (2,100) (1,198)
--------- ---------
Total shareholders' investment 148,653 160,738
--------- ---------
$ 313,109 $ 331,943
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
MTS SYSTEMS CORPORATION
Consolidated Statements of Income
(unaudited - in thousands of dollars, except per share data)
Three Months Ended
December 31
-----------------------
2001 2000
(Restated) (Restated)
Net revenue $ 87,164 $ 94,655
Cost of revenue 56,090 61,737
-------- --------
Gross profit 31,074 32,918
-------- --------
Operating expenses:
Selling 13,772 14,080
General and administrative 7,137 10,368
Research and development 5,102 5,088
-------- --------
Total operating expenses 26,011 29,536
-------- --------
Income from operations 5,063 3,382
Interest expense 1,153 1,489
Interest income (137) (106)
Other (income) expense, net (1,299) 340
-------- --------
Income before income taxes and cumulative effect of
accounting changes 5,346 1,659
Provision for income taxes 1,633 562
-------- --------
Income before cumulative effect of
accounting changes 3,713 1,097
Cumulative effect of accounting changes,
net of taxes of $4,317 in 2002, and $1,564 in 2001 (13,721) (2,492)
-------- --------
Net loss $(10,008) $ (1,395)
======== ========
Earnings (loss) per share:
Basic-
Before cumulative effect of accounting changes $ 0.17 $ 0.05
Cumulative effect of accounting changes, net (0.65) (0.12)
-------- --------
Net loss $ (0.48) $ (0.07)
======== ========
Weighted average number of common shares
outstanding - basic 21,027 20,721
======== ========
Earnings (loss) per share:
Diluted-
Before cumulative effect of accounting changes $ 0.17 $ 0.05
Cumulative effect of accounting changes, net (0.64) (0.12)
-------- --------
Net loss $ (0.47) $ (0.07)
======== ========
Weighted average number of common shares
outstanding - diluted 21,398 20,721
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(unaudited - in thousands of dollars)
Three Months Ended December 31,
-------------------------------
2001 2000
-------- --------
Restated Restated
Cash Flows from Operating Activities:
Net loss $(10,008) $ (1,395)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,906 3,973
Non-cash cumulative effect of accounting change 13,721 2,492
Deferred income taxes 67 (103)
Bad debt allowance provision 260 154
Inventory reserve provision 1,808 3,068
Changes in operating assets and liabilities:
Accounts, unbilled contracts and retainage receivables 5,051 10,437
Inventories 5,835 (8,584)
Prepaid expenses 8 (1,217)
Other assets (1,766) (1,001)
Accounts payable (986) (5,624)
Accrued compensation and benefits (5,259) 3,096
Advance billings to customers 5,349 2,603
Accrued warranty costs 419 50
Other current liabilities 1,432 (379)
-------- --------
Net cash provided by operating activities 18,837 7,570
-------- --------
Cash Flows from Investing Activities:
Additions to property plant and equipment (1,107) (1,815)
-------- --------
Net cash used in investing activities (1,107) (1,815)
-------- --------
Cash Flows from Financing Activities:
Net borrowings under notes payable to banks -- 2,400
Proceeds from issuance of long-term debt -- 423
Payments of long-term debt (71) (159)
Cash dividends (1,263) (1,239)
Proceeds from exercise of stock options 108 7
Payments to purchase and retire common stock (20) (359)
-------- --------
Net cash (used in) provided by financing activities (1,246) 1,073
-------- --------
Effect of exchange rate changes on cash (388) 17
-------- --------
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 expense $ 782 $ 854
Income taxes $ 2,399 $ 3,638
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
MTS SYSTEMS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Restatement
As discussed in Note 8, the accompanying consolidated financial statements have
been restated.
Fiscal Year
Effective with fiscal year 2002, the Company changed its fiscal year end to the
Saturday closest to September 30. For the year ended September 28, 2002, the
Company's fiscal year consisted of 52 weeks. Effective for fiscal year 2003, the
Company changed its fiscal quarter ends to the Saturday closest to December 31,
March 31, and June 30.
Accounting Policies
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 accounting principles generally accepted in the United States of America
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 2002 Form 10-K filed with the SEC, which includes audited
financial statements for the fiscal year ended September 28, 2002 and restated
audited financial statements for the fiscal years ended September 30, 2001 and
2000. Interim results of operations for the three-month period ended December
31, 2001 may not necessarily be indicative of the results to be expected for the
full year.
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.
The Company believes that of its significant accounting policies, the following
are particularly important to the portrayal of the Company's results of
operations and financial position and may require the application of a higher
level of judgment by the Company's management, and as a result are subject to an
inherent degree of uncertainty.
Revenue Recognition
The Company implemented the revenue recognition principles of Staff Accounting
Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" in 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 $2.5 million
(net of income taxes of $1.6 million), or $0.12 per diluted share, which has
been accounted for as a change to the financial results for the first quarter of
fiscal 2001. During the quarters ended December 31, 2001 and 2000, the Company
recognized $0.4 million and $6.5 million, respectively, of revenues which were
previously recognized prior to the Company's adoption of SAB 101.
For orders that are manufactured and delivered in less than twelve months with
routine installations and no "special" acceptance protocol, revenue is
recognized when systems are shipped and title has passed to the customer, less
the portion of related revenues associated with installation, which are deferred
until customer acceptance. The remaining revenue on these contracts is
recognized upon installation and customer acceptance. In cases where "special"
acceptance protocols exist, the Company recognizes revenue upon the completion
of installation and fulfillment of obligations specific to the terms of the
customer's contract. Revenue on contracts requiring longer delivery periods
(long-term contracts) is recognized using the percentage-of-completion method
based on the cost incurred to date relative to estimated total cost of the
contract. In most cases, orders with complex installations and/or unusual
acceptance protocols
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
involve long-term contracts for custom systems that follow the
percentage-of-completion method of revenue recognition through customer
acceptance.
The Company enters into long-term contracts for customized equipment sold to its
customers. Under the terms of such contracts, revenue recognized using the
percentage-of-completion method may not be invoiced until completion of
contractual milestones, upon shipment of the equipment, or upon installation and
acceptance by the customer. Unbilled amounts for these contracts appear in the
Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.
Revenue for services is recognized as the service is performed and ratably over
a defined contractual period for service maintenance contracts.
Inventories
Inventories are stated at the lower of cost or market and include materials,
labor and overhead costs. The first-in, first-out accounting method is used in
valuing inventories. Inventory consists of the following:
December 31, 2001 September 30, 2001
----------------- ------------------
(Restated) (Restated)
(in thousands of dollars)
Customer projects in various
stages of completion $ 8,777 $11,716
Components, assemblies and parts 46,855 52,592
------- -------
Total $55,632 $64,308
======= =======
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued 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. Upon the Company's
adoption of the new accounting standards in the first quarter of its fiscal year
ended September 28, 2002, annual goodwill amortization of $2.2 million ceased
effective October 1, 2001. Fair value was determined using a discounted cash
flow methodology. An evaluation of the Automation and Vehicle Testing Systems
reporting units indicated that $10.8 million and $7.3 million of goodwill,
respectively, was impaired. The performance in these acquired businesses has not
met management's original expectations due to ongoing weakness in the worldwide
automotive marketplace. Adoption of SFAS No. 142 resulted in a non-cash
transition charge to earnings, reported as a cumulative effect of accounting
change, in the first quarter of fiscal year 2002 of $13.7 million, or $0.64 per
diluted share, for impairment of goodwill, net of tax. Earnings for the
three-month period ended December 31, 2001 were positively impacted by $0.02 per
diluted share from the exclusion of goodwill amortization. Goodwill amortization
for the last three years was:
Goodwill
----------------------------------------------------------
Beginning Ending
Year Balance Amortization Write-off Balance
---- ------- ------------ --------- -------
(in thousands of dollars)
2000 $27,489 ($2,931) $ -- $24,558
2001 24,558 (2,013) -- 22,545
2002 22,545 -- (18,387) 4,158
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Annual amortization of other intangible assets of $1.1 million in fiscal year
2002 was not impacted by the new standards and will continue. The anticipated
amortization expense related to other intangible assets for the next five fiscal
years is as follows:
Fiscal Year
---------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
(in thousands of dollars)
Amortization Expense $1,073 $1,022 $567 $517 $287
The following tables set forth pro forma net income (loss) and earnings (loss)
per share (in thousands except per share amounts):
Three Months Ended
December 31
---------------------------
2001 2000
---------- ----------
(in thousands of dollars)
Income before cumulative effect of accounting changes (restated) $ 3,713 $ 1,097
Add back: Goodwill amortization, net of tax -- 329
---------- ----------
Adjusted net income before cumulative effect of accounting changes $ 3,713 $ 1,426
Cumulative effect of accounting changes, net of tax (13,721) (2,492)
---------- ----------
Adjusted net loss ($10,008) ($1,066)
========== ==========
Basic earnings per share before cumulative effect of accounting changes (restated) $ 0.17 $ 0.05
Add back: Goodwill amortization, net of tax -- 0.02
---------- ----------
Basic adjusted earnings per share before cumulative effect of accounting changes $ 0.17 $ 0.07
Cumulative effect of accounting changes, net of tax (0.65) (0.12)
---------- ----------
Adjusted net loss ($0.48) ($0.05)
========== ==========
Diluted earnings per share before cumulative effect of accounting changes (restated) $ 0.17 $ 0.05
Add back: Goodwill amortization, net of tax -- 0.02
---------- ----------
Diluted adjusted earnings per share before cumulative effect of accounting changes $ 0.17 $ 0.07
Cumulative effect of accounting changes, net of tax (0.64) (0.12)
---------- ----------
Adjusted net loss ($0.47) ($0.05)
========== ==========
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8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
For the three years ended September 30, 2001, 2000, and 1999, the goodwill
amortization, adjusted net income and basic and diluted earnings (loss) per
share are as follows:
September 30,
------------------------------------------
2001 2000 1999
---------- ---------- ----------
(in thousands of dollars)
Income before cumulative effect of accounting change (restated) $ 13,106 $ 3,170 $ 11,132
Add back: Goodwill amortization, net of tax 1,489 1,535 1,569
---------- ---------- ----------
Adjusted net income before cumulative effect of accounting change $ 14,595 $ 4,705 $ 12,701
Cumulative effect of accounting change, net of tax (2,492) -- --
---------- ---------- ----------
Adjusted net income $ 12,103 $ 4,705 $ 12,701
========== ========== ==========
Basic earnings per share before cumulative effect of accounting change (restated) $ 0.63 $ 0.15 $ 0.54
Add back: Goodwill amortization, net of tax 0.07 0.08 0.07
---------- ---------- ----------
Basic adjusted earnings per share before cumulative effect of accounting change $ 0.70 $ 0.23 $ 0.61
Cumulative effect of accounting change, net of tax (0.12) -- --
---------- ---------- ----------
Adjusted net income (loss) $ 0.58 $ 0.23 $ 0.61
========== ========== ==========
Diluted earnings per share before cumulative effect of accounting change (restated) $ 0.62 $ 0.15 $ 0.53
Add back: Goodwill amortization, net of tax 0.07 0.07 0.07
---------- ---------- ----------
Diluted adjusted earnings per share before cumulative effect of accounting change $ 0.69 $ 0.22 $ 0.60
Cumulative effect of accounting change, net of tax (0.12) -- --
---------- ---------- ----------
Adjusted net income (loss) $ 0.57 $ 0.22 $ 0.60
========== ========== ==========
- --------------------------------------------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company is
required to adopt this statement in its fiscal year 2003. The Company has
concluded that there will be no impact of the adoption of SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which amends existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company is required to adopt this statement in its financial
statements issued after May 15, 2002. The Company does not have any activities
that fall under the scope of SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. The Company
will adopt this statement for exit or disposal activities initiated after
December 31, 2002, as required.
In November 2002, the Emerging Issues Task Force finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables," which provides guidance on the timing of revenue recognition for
sales undertakings to deliver more than one product or service. The Company is
required to adopt EITF 00-21 on transactions occurring after June 2003 and is
currently analyzing the impact of its adoption on the Company's financial
statements
3. EARNINGS (LOSS) PER COMMON SHARE
Basic net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding during the
applicable periods. Diluted net earnings (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. The
dilutive effect of common shares issued in connection with outstanding stock
options is determined on net income (loss) before cumulative change in
accounting method. A reconciliation of these amounts is as follows:
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Three Months Ended
December 31, December 31,
2001 2000
------------------------------------------------------------------------
(in thousands, except per share data) (Restated) (Restated)
Income (loss) before cumulative effect of
accounting changes $ 3,713 $ 1,097
Cumulative effect of accounting changes (13,721) (2,492)
-------- --------
Net Income (loss) $(10,008) $ (1,395)
======== ========
Weighted average common shares outstanding 21,027 20,721
Diluted potential common shares 371 47
------------------------------------------------------------------------
Total diluted common shares 21,398 20,721
------------------------------------------------------------------------
Basic net loss per share $ (0.48) $ (0.07)
Diluted net loss per share $ (0.47) $ (0.07)
=======================================================================-
4. COMPREHENSIVE INCOME (LOSS)
For the Company, comprehensive income represents net earnings (loss) adjusted
for foreign currency translation adjustments, the unrealized gain or loss on
available-for-sale investments, and the net effect of accumulated hedging
activity. Comprehensive loss was $0.9 million and comprehensive income was $1.0
million for the three months ended December 31, 2001 and 2000, respectively.
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 2002 Form 10-K (same as in 2001 Form 10-K as initially filed). In
evaluating each segment's performance, management focuses on income from
operations. This measurement excludes interest income and expense, income taxes
and other non-operating 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.
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Financial information by reportable segment is as follows:
Three Months Ended
December 31,
2001 2000
-------- -------
(Restated) (Restated)
(in thousands of dollars)
NET REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 70,283 $73,939
Factory Automation 16,881 20,716
-------- -------
Total net revenue $ 87,164 $94,655
======== =======
INCOME (LOSS) FROM OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation $ 6,569 $ 1,906
Factory Automation (1,506) 1,476
-------- -------
Total income from operations $ 5,063 $ 3,382
======== =======
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS No. 133"), as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amendment of
SFAS Statement No. 133" ("SFAS No. 138"), which requires the Company to
recognize all derivative financial instruments on the balance sheet at fair
value. Derivatives that are not classified as a hedge are required under SFAS
133 to be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the hedged
assets, liabilities, or firm commitments are recognized through earnings or in
other comprehensive income (loss) until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has determined that the impact
of the adoption of SFAS 133 was not material to the earnings or financial
position of the Company.
The Company periodically enters into forward exchange contracts principally to
hedge the estimated cash flow of foreign currency denominated transactions
(primarily the EURO, British Pound, Swedish Krona, and the Japanese Yen). These
contracts are recognized on the balance sheet at fair value, which is the
estimated amount at which they could be settled based on forward market exchange
rates. The contracts generally mature within one year and are designed to limit
exposure to exchange rate fluctuations. On the date the forward exchange
contract is entered into, it is designated as a foreign currency cash flow
hedge. Subsequent changes in the fair value of contracts that are highly
effective and qualify as foreign currency cash flow hedges are recorded in other
comprehensive income until they are recognized in earnings at the time the
forecasted transaction occurs. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge transactions. This process
includes linking all derivatives that are designated as foreign currency hedges
to specific forecasted transactions. The Company formally assesses, both at a
hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when the derivative is
(1) determined to be no longer effective in offsetting the fair value of the
cash flows of a hedged item; (2) sold, terminated, or exercised; or (3)
de-designated as a hedge instrument because it is unlikely that a forecasted
transaction will occur. When hedge accounting is discontinued, the derivative
will be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current period earnings. Any related gains or losses that
were accumulated in other comprehensive income will be recognized immediately in
earnings.
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company uses forward exchange contracts to hedge specific foreign currency
denominated assets or liabilities on the balance sheet. These are recorded at
their fair value with the related gains and losses included in "Other (income)
expense, net" on the income statement. Results of these contracts offset in full
or in part the gains and losses stemming from the normal mark-to-market of the
underlying balance sheet exposures. The Company does not use derivative
financial instruments for speculative or trading purposes.
At December 31, 2001 and 2000, the Company had outstanding foreign currency
forward contracts with U.S. dollar notional equivalent amounts of $39.2 million
and $32.4 million, respectively. At December 31, 2001 and 2000, the fair value
of the foreign currency forward contracts was $2.6 million and $0.8 million,
respectively. The amounts recognized in earnings as a result of the
ineffectiveness of cash flow hedges were not material for the periods ended
December 31, 2001 and 2000. At December 31, 2001, approximately $0.1 million was
projected to be reclassified from other comprehensive income into earnings in
the next 12 months. At December 31, 2000, approximately $0.6 million was
projected to be reclassified from other comprehensive income into earnings in
the next 12 months. The maximum maturity of any derivative was 1.1 years at
December 31, 2001, and 1.7 years at December 31, 2000.
7. DEFERRED TAX ASSET
At December 31, 2001, the Company has an aggregate deferred tax asset of $7.9
million in connection with accrued compensation and benefits, inventory
reserves, and allowances for doubtful accounts and other assets.
Management routinely performs an analysis of the realization of the deferred tax
asset each fiscal year end. This analysis largely relies on continued long-term
profitability. Unanticipated negative changes in future operations of the
Company would adversely affect the realization of the Company's deferred tax
asset. Such negative changes would result in the establishment of a valuation
reserve for the deferred tax asset.
8. RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
In consultation with its independent auditors, the Company restated its audited
financial statements for years ended September 30, 2001 and 2000 and its
unaudited financial statements for each of the quarters in the nine-month period
ended June 30, 2002 and the fiscal year ended September 30, 2001. See
Explanatory Note to this Form 10-Q/A. The aggregate restatement impacted net
earnings before cumulative effect of accounting changes in first quarter 2002
positively by $1.5 million and in first quarter 2001 negatively by $0.6 million.
For the quarter ended December 31, 2001, the following restatement items
resulted in the most significant adjustments to the period:
1. The correction of revenue recognition practices and cut-off errors,
which resulted in a $2.4 million increase to previously reported
revenues and a related increase in cost of sales of $1.6 million;
2. Reconciliation of inventories and related reserve accounts, which
resulted in a decrease in previously reported cost of sales of $.4
million;
3. The correction of an error in the calculation of the SFAS 133
currency hedge gains, which increased previously reported earnings
by $1.1 million on a pre-tax basis; and
4. The correction of errors in the Company's recognition of income tax
credits, which resulted in an 8 percentage-point reduction in the
effective tax rate.
For the quarter ended December 31, 2000, the following restatement items
resulted in the most significant adjustments to the period::
1. The correction of revenue recognition practices and cut-off errors,
which resulted in a $3.1 million increase to previously reported
revenues and a related decrease in cost of sales of $0.3 million;
2. Reconciliation of inventories and related reserve accounts, which
resulted in an increase in previously reported cost of sales of $0.7
million;
3. Correction of the timing of recognizing restructuring reserves,
which resulted in a $1.8 million increases in previously reported
cost of sales and a $2.4 million increase in previously reported
general and administrative expenses; and
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. The correction of errors in the Company's recognition of income tax
credits, which resulted in a 5 percentage-point reduction in the
effective tax rate.
Correction of other bookkeeping errors in both the current and prior year
quarters resulted in additional impacts to various income statement and balance
sheet amounts.
The restated first quarter 2002 results also reflect the impact of the
cumulative effect of a change in accounting principle of $13.7 million related
to adoption of SFAS 142, which was originally recorded in the third quarter
ended June 30, 2002 with a retroactive charge to the first quarter ended
December 31, 2001. Similarly, the restated first quarter 2001 results reflect
the impact of the cumulative effect of a change in accounting principle of $2.5
million related to the adoption of SAB 101, which was originally recorded in the
fourth quarter ended September 30, 2001 with a retroactive charge to the first
quarter ended December 31, 2000. In this Form 10-Q/A, references or comparisons
to results in the quarters ended December 31, 2000 and December 31, 2001 are to
the restated results.
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The effects of the restatements are as follows:
For the quarter ended For the quarter ended
December 31, 2001 December 31, 2000
------------------------- --------------------------
As reported Restated As reported Restated
----------- -------- ----------- --------
STATEMENT OF INCOME DATA:
Net revenue $ 84,768 $ 87,164 $ 91,563 $ 94,655
Cost of revenue 54,447 56,090 59,612 61,737
Gross profit 30,321 31,074 31,951 32,918
Operating expenses 25,835 26,011 27,612 29,536
Income from operations 4,486 5,063 4,339 3,382
Other (income) expense, net (62) (1,299) 190 340
Income before income taxes 3,532 5,346 2,766 1,659
Income before cumulative effect 2,181 3,713 1,698 1,097
Cumulative effect (1) -- (13,721) (2,263) (2,492)
Net income (loss) 2,181 (10,008) (565) (1,395)
Basic earnings (loss) per share 0.10 (0.48) (0.03) (0.07)
Diluted earnings (loss) per share $ 0.10 $ (0.47) $ (0.03) $ (0.07)
BALANCE SHEET DATA:
Accounts receivable, net $ 84,739 $ 84,809 $ 98,966 $ 99,036
Inventories 62,447 55,632 74,626 69,788
Prepaid expenses 7,364 7,042 11,239 11,239
Deferred tax asset -- 7,894 -- 5,443
Total current assets 233,200 234,027 225,800 226,475
Machinery and equipment 107,457 88,202 109,228 90,599
Goodwill -- 4,158 -- 24,226
Other assets 32,561 11,933 33,542 8,961
Accounts payable 13,122 14,528 17,417 16,473
Accrued compensation and benefits 27,802 27,962 30,392 29,909
Advanced billings to customers 35,613 37,501 24,081 25,991
Other accrued liabilities 24,444 22,884 17,791 22,457
Total current liabilities 106,726 108,620 109,634 114,783
Total shareholders' investment $ 166,547 $ 148,653 $ 156,672 $ 151,617
CASH FLOW DATA:
Net cash from operating activities $ 17,683 $ 18,837 $ 8,064 $ 7,570
Net cash from investing activities (525) (1,107) (2,185) (1,815)
Net cash from financing activities (1,246) (1,246) 1,073 1,073
Net change in cash 16,096 16,096 6,845 6,845
(1) The ($13,721) cumulative effect of change in accounting principle related to
the Company's adoption of SFAS 142 was first reported in the quarter ended June
30, 2002, and the ($2,263) cumulative effect of change in accounting principle
related to the Company's adoption of SAB 101 was first reported in the quarter
ended September 30, 2001.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects the impacts of restatements to the Company's
previously reported consolidated financial statements for the first quarter of
fiscal 2002 and the first quarter of fiscal 2001.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
Company to make estimates and assumptions in certain circumstances that affect
amounts reported. In preparing these financial statements, management has made
its best estimates and judgments of certain amounts, giving due consideration to
materiality. The Company believes that of its significant accounting policies,
the following are particularly important to the portrayal of the Company's
results of operations and financial position and may require the application of
a higher level of judgment by the Company's management, and as a result are
subject to an inherent degree of uncertainty.
Revenue Recognition. The Company implemented the revenue recognition principles
of Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements" in 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 $2.5 million (net of income taxes of $1.6 million), or $0.12 per
diluted share, which has been accounted for as a change to the financial results
for the first quarter of fiscal 2001. During the quarters ended December 31,
2001 and 2000, the Company recognized $0.4 million and $6.5 million,
respectively, of revenues which were previously recognized prior to the
Company's adoption of SAB 101.
For orders that are manufactured and delivered in less than twelve months with
routine installations and no "special" acceptance protocol, revenue is
recognized when systems are shipped and title has passed to the customer, less
the portion of related revenues associated with installation, which are deferred
until customer acceptance. The remaining revenue on these contracts is
recognized upon installation and customer acceptance. In cases where "special"
acceptance protocols exist, the Company recognizes revenue upon the completion
of installation and fulfillment of obligations specific to the terms of the
customer's contract. Revenue on contracts requiring longer delivery periods
(long-term contracts) is recognized using the percentage-of-completion method
based on the cost incurred to date relative to estimated total cost of the
contract. In most cases, orders with complex installations and/or unusual
acceptance protocols involve long-term contracts for custom systems that follow
the percentage-of-completion method of revenue recognition through customer
acceptance.
The Company enters into long-term contracts for customized equipment sold to its
customers. Under the terms of such contracts, revenue recognized using the
percentage-of-completion method may not be invoiced until completion of
contractual milestones, upon shipment of the equipment, or upon installation and
acceptance by the customer. Unbilled amounts for these contracts appear in the
Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.
Revenue for services is recognized as the service is performed and ratably over
a defined contractual period for service maintenance contracts.
Inventories. Inventories are stated at the lower of cost or market which
approximates the first-in, first-out method. Reserves for slow-moving and
obsolete inventories are provided based upon current and expected future product
sales and the expected impact of product transitions or modifications. While the
Company expects its sales to grow, a reduction in its sales could reduce the
demand for the Company's products, and additional inventory reserves may be
required.
NEW ACCOUNTING PRINCIPLES
In July 2001, the FASB issued two new statements, 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. Upon the Company's adoption of the new
accounting standards in the first quarter of its fiscal year ended September 28,
2002, annual goodwill amortization of $2.2 million ceased effective October 1,
2001. Fair value was determined using a discounted cash flow methodology. An
evaluation of the Automation and Vehicle Testing Systems reporting units
indicated that $10.8 million and $7.3 million of goodwill, respectively, was
impaired. The performance in these acquired businesses has not met management's
original expectations due to ongoing weakness in the worldwide automotive
marketplace. Adoption of SFAS No. 142 resulted in a non-cash transition charge
to earnings in the first quarter of its fiscal year 2002 ended September 28,
2002 of $13.7 million, or $0.64 per diluted share, for impairment of goodwill,
net of tax. Earnings for the three-month period ended December 31, 2001 were
positively impacted by $0.02 per diluted share, net of tax, from the exclusion
of goodwill amortization.
Goodwill amortization for the last three years was:
Goodwill
----------------------------------------------------------
(in thousands of dollars)
----------------------------------------------------------
Beginning Ending
Year Balance Amortization Write-off Balance
---- ------- ------------ --------- -------
2000 $27,489 ($2,931) $ -- $24,558
2001 24,558 (2,013) -- 22,545
2002 22,545 -- (18,387) 4,158
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Annual amortization of other intangible assets of $1.1 million in fiscal year
2002 was not impacted by the new standards and will continue. The anticipated
amortization expense (in thousands) related to other intangible assets for the
next five fiscal years is as follows:
Fiscal Year
---------------------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
(in thousands of dollars)
Amortization Expense $1,073 $1.022 $567 $517 $287
The following tables set forth pro forma net earnings (loss) and earnings (loss)
per share (in thousands except per share amounts):
Three Months Ended
December 31
---------------------------
2001 2000
---------- ----------
(in thousands of dollars)
Income before cumulative effect of accounting changes (restated) $ 3,713 $ 1,097
Add back: Goodwill amortization, net of tax -- 329
---------- ----------
Adjusted net income before cumulative effect of accounting changes $ 3,713 $ 1,426
Cumulative effect of accounting changes, net of tax (13,721) (2,492)
---------- ----------
Adjusted net loss ($10,008) ($1,066)
========== ==========
Basic earnings per share before cumulative effect of accounting changes (restated) $ 0.17 $ 0.05
Add back: Goodwill amortization, net of tax -- 0.02
---------- ----------
Basic adjusted earnings per share before cumulative effect of accounting changes $ 0.17 $ 0.07
Cumulative effect of accounting changes, net of tax (0.65) (0.12)
---------- ----------
Adjusted net loss ($0.48) ($0.05)
========== ==========
Diluted earnings per share before cumulative effect of accounting changes (restated) $ 0.17 $ 0.05
Add back: Goodwill amortization, net of tax -- 0.02
---------- ----------
Diluted adjusted earnings per share before cumulative effect of accounting changes $ 0.17 $ 0.07
Cumulative effect of accounting changes, net of tax (0.64) (0.12)
---------- ----------
Adjusted net loss ($0.47) ($0.05)
========== ==========
- --------------------------------------------------------------------------------
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
For the three years ended September 30, 2001, 2000, and 1999, the goodwill
amortization, adjusted net loss, and basic and diluted earnings (loss) per share
are as follows:
September 30,
-------------------------------------
2001 2000 1999
---------- ---------- ----------
(in thousands of dollars)
Income before cumulative effect of accounting change (restated) $ 13,106 $ 3,170 $ 11,132
Add back: Goodwill amortization, net of tax 1,489 1,535 1,569
---------- ---------- ----------
Adjusted net income before cumulative effect of accounting change $ 14,595 $ 4,705 $ 12,701
Cumulative effect of accounting changes, net of tax (2,492) -- --
---------- ---------- ----------
Adjusted net income $ 12,103 $ 4,705 $ 12,701
========== ========== ==========
Basic earnings per share before cumulative effect of accounting change (restated) $ 0.63 $ 0.15 $ 0.54
Add back: Goodwill amortization, net of tax 0.07 0.08 0.07
---------- ---------- ----------
Basic adjusted earnings per share before cumulative effect of accounting change $ 0.70 $ 0.23 $ 0.61
Cumulative effect of accounting change, net of tax (0.12) -- --
---------- ---------- ----------
Adjusted net income $ 0.58 $ 0.23 $ 0.61
========== ========== ==========
Diluted earnings per share before cumulative effect of accounting change (restated) $ 0.62 $ 0.15 $ 0.53
Add back: Goodwill amortization, net of tax 0.07 0.07 0.07
---------- ---------- ----------
Diluted adjusted earnings per share before cumulative effect of accounting change $ 0.69 $ 0.22 $ 0.60
Cumulative effect of accounting change, net of tax (0.12) -- --
---------- ---------- ----------
Adjusted net income $ 0.57 $ 0.22 $ 0.60
========== ========== ==========
- --------------------------------------------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company is
required to adopt this statement in its fiscal year 2003. The Company has
concluded that there will be no impact of the adoption of SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which amends existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company is required to adopt this statement in its financial
statements issued after May 15, 2002. The Company does not have any activities
that will fall under the scope of SFAS 145 so no financial impact needs to be
recognized.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. The Company
will adopt this statement for exit or disposal activities initiated after
December 31, 2002, as required.
In November 2002, the Emerging Issues Task Force finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables," which provides guidance on the timing of revenue recognition for
sales undertakings to deliver more than one product or service. The Company is
required to adopt EITF 00-21 on transactions occurring after June 2003 and is
currently analyzing the impact of its adoption on the Company's financial
statements.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 $96.7
million, a decrease of 7.3% compared to customer orders of $104.3 million booked
during First Quarter of Fiscal 2001.
Orders for the Mechanical Testing and Simulation ("MT&S") segment totaled $81.7
million, a decrease of 1.1% compared to customer orders of $82.6 million for
First Quarter of Fiscal 2001. The MT&S segment accounted for 84.5% of total
Company orders, compared to 79.2% for the First Quarter of Fiscal 2001. The
Company experienced softness in the automotive business due to reduced capital
spending in the automotive industry throughout this period, 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 30.9% to $15.0
million for First Quarter of Fiscal 2002 from $21.7 million for First Quarter of
Fiscal 2001. The decline in orders was the result of general worldwide weakness
in the automotive, semiconductor and industrial markets which has significantly
reduced demand for the FA segment's products. The FA segment accounted for 15.5%
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 $170.6 million, an
increase of 7.9% from the backlog of $158.1 million at September 30, 2001 and a
decrease of 7.3% from the backlog of $184.1 million at December 31, 2000. The
Company's backlog is subject to order cancellations.
RESULTS OF OPERATIONS
NET REVENUE for First Quarter of Fiscal 2002 was $87.2 million, a decrease of
$7.5 million, or 7.9%, compared to First Quarter of Fiscal 2001. The decrease in
net revenue was principally due to the slowdown in the automotive-related
businesses. The continued weakness in the North American automotive business had
a negative effect on both the Mechanical Testing and Simulation and the Factory
Automation segments. This weakness was partially offset by strength in the
aerospace and academic/government markets. Revenue from foreign customers for
First Quarter of Fiscal 2002 represented 50.1% of total revenues, compared to
46.4% for First Quarter of Fiscal 2001. Growth in the European and Asian markets
of 25% and 5%, respectively, was partially offset by a decline in North American
revenue of 14%.
GROSS PROFIT for First Quarter of Fiscal 2002 decreased 5.6%, to $31.1 million,
compared to gross profit of $32.9 million for First Quarter of Fiscal 2001.
Gross profit as a percentage of net revenue was 35.7% for First Quarter of
Fiscal 2002, up from 34.7% for First Quarter of Fiscal 2001. Gross margin for
the MT&S segment was 37.0% for First Quarter of Fiscal 2002, compared to 34.3%
for First Quarter of Fiscal 2001, primarily due to $1.8 million in restructuring
charges recorded in First Quarter of Fiscal 2001 . Gross margin for the FA
segment decreased to 30.2% for First Quarter of Fiscal 2002, compared to 36.4%
for First Quarter of Fiscal 2001, primarily due to $1.0 million in charges for
obsolete and surplus inventory recorded in First Quarter 2002.
SELLING EXPENSES decreased to $13.8 million, or 2.1%, for First Quarter of
Fiscal 2002, from $14.1 million for First Quarter of Fiscal 2001. Selling
expense as a percentage of net revenue increased to 15.8% for First Quarter of
Fiscal 2002, compared to 14.9% for First Quarter of Fiscal 2001 due to lower
volume in First Quarter Fiscal 2002.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $7.1 million for First Quarter of
Fiscal 2002, a decrease of 31.7% compared to $10.4 million for First Quarter of
Fiscal 2001. The decrease in the overall expense was partially due to
implementation of SFAS 142, which eliminated goodwill amortization beginning
October 1, 2001 and decreased general and administrative expenses by $0.6
million in the current quarter. General and administrative expenses as a
percentage of revenue decreased by 2.9%, to 8.1% for First Quarter of Fiscal
2002 compared to 11.0% for First Quarter of Fiscal 2001, primarily due to $2.4
million of restructuring charges recorded in First Quarter Fiscal 2001.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 net revenue, increased to 5.8% for First Quarter of Fiscal
2002, compared to 5.4% for First Quarter of Fiscal 2001.
INCOME FROM OPERATIONS increased 50.0%, from $3.4 million in First Quarter of
2001 to $5.1 million in First Quarter of 2002. Operating earnings increased
significantly in the MT&S segment, from $1.9 million to $6.6 million, reflecting
the $4.2 million of restructuring charges recorded in First Quarter Fiscal 2001.
This growth was partially offset by a $3.0 million decline in the operating
earnings of the FA segment, driven by lower volume and the recording of a $1.0
million charge for obsolete and surplus inventory in First Quarter Fiscal 2002.
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 the Company's bank line
of credit.
INTEREST INCOME remained flat 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.
OTHER (INCOME) EXPENSE for First Quarter of Fiscal 2002 primarily reflects a
gain on foreign currency transactions of $1.1 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.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES for First Quarter of Fiscal
2002 reflects a non-cash transition charge to earnings of $13.7 million related
to the adoption of SFAS 142. The $2.5 million charge for First Quarter of Fiscal
2001 was due to the adoption of SAB 101 as it related to revenue recognition.
NET LOSS (AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE) increased to $10.0
million for First Quarter of Fiscal 2002, compared to a loss of $1.4 million for
First Quarter of Fiscal 2001 primarily as the result of the application of SFAS
142. The effective tax rate for First Quarter of Fiscal 2002 was 30.5%, compared
to 33.9% for First Quarter of Fiscal 2001. The decrease in the overall effective
tax rate was primarily the result of tax savings initiatives implemented in
fiscal 2002 and an increase in the proportion of domestic income to foreign
income as compared to fiscal 2001, resulting in the offset of higher foreign tax
rates with lower federal and state rates in the U.S.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $18.8 million during the
First Quarter of Fiscal 2002, compared to cash provided of $7.6 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. Additionally, the Company's working capital
initiatives in fiscal year 2002 resulted in a reduction in accounts receivable
and inventory of $5.1 million and $5.8 million, respectively, and an increase in
advance billings to customers of $5.3 million. These increases in available cash
were partially offset during the First Quarter of Fiscal 2002 by the decrease in
accrued compensation of $5.3 million due to the payment of fiscal year 2001
year-end incentive compensation.
CASH FLOWS FROM INVESTING ACTIVITIES required cash usage of $1.1 million during
the First Quarter of Fiscal 2002, compared with usage of $1.8 million in the
First Quarter of Fiscal 2001. Cash was used during each of the periods for
additions to property and equipment. Capital expenditures for fiscal 2002 are
expected to aggregate approximately $5.0 million. The Company expects these
expenditures to be funded primarily with internally generated funds.
CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $1.2
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 Quarter of
Fiscal 2002, the Company's increased cash flows from operating activities
allowed it to internally fund its 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 ongoing operations, allow for
investment in opportunities to internally grow its business and to make selected
strategic acquisitions.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Payments Due by Period (in thousands of dollars)
Contractual Obligations Total Less than 1 year 1 - 3 years 4-5 years After 5 years
----------------------- -----------------------------------------------------------------------------------
Long-Term Debt $ 58,504 $ 5,361 $16,059 $14,713 $22,371
Capital Lease Obligations 353 135 154 63 1
Operating Leases 12,873 3,415 4,840 1,685 2,933
Other Long-Term Obligations 1,785 166 320 491 808
----------------------------------------------------------------------------------
$ 73,515 $ 9,077 $21,373 $16,952 $26,113
==================================================================================
Amount of Commitment Expiration Per Period (in thousands of dollars)
Other Contractual Obligations Committed Less than 1 year 1 - 3 years 4-5 years After 5 years
----------------------------- -----------------------------------------------------------------------------------
Standby Letters of Credit $ 30,371 $16,666 $13,705 $ -- $ --
Guarantees 7,776 1,337 6,423 16 --
Other Commercial Commitments 12,945 2,520 9,557 651 217
----------------------------------------------------------------------------------
$ 51,092 $20,523 $29,685 $ 667 $ 217
==================================================================================
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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
FORWARD LOOKING STATEMENTS
Statements included or incorporated by reference in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this Form 10-Q/A 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. In addition, the Company may not be aware of the
introduction of new products or product enhancements by its
competitors.
(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) Order volumes and other operating considerations may be directly
or indirectly impacted by economic conditions generally and/or in
various geographic areas in which the Company operates.
(iv) 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 operating results and could have a material adverse
effect on results of operations. Local political conditions and/or
currency restrictions may also affect foreign revenue.
(v) 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.
(vi) The Company experiences competition on a worldwide basis.
Customers may choose to purchase equipment from the Company or
from its competitors. For certain of the Company's products,
customers may also contract with testing laboratories or construct
their own testing equipment, purchasing commercially available
components. Factors that may influence a customer's decision
include price, service or required level of technology.
(vii) The Company is exposed to market risk from changes in foreign
currency exchange rates, which can affect its results from
operations and financial condition.
(viii) The Company's short-term borrowings carry interest rate risk that
is generally related to either LIBOR or the prime rate. The
Company has minimal earnings and cash flow exposure due to market
risks on its long-term debt obligations as a result of the
primarily fixed-rate nature of the debt.
The foregoing 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required disclosures are included in Note 6 to the Condensed Notes to
Consolidated Financial Statements included in Item 1 of this Form 10-Q/A,
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 2002 Form 10-K for fiscal year 2002 filed with the SEC.
21
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.a Restated and Amended Articles of Incorporation, adopted
January 30, 1996, incorporated by reference from Exhibit
3.a. of Form 10-K for the year ended September 30, 1996.
3.b Restated Bylaws, reflecting amendments through May 26,
1998, incorporated by reference from Exhibit 3.b. of
Form 10-K for the year ended September 30, 1998.
10.r Description of the terms of employment of Susan E.
Knight (Filed herewith).
99.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18U.S.C.
1350) (Filed herewith).
99.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350) (filed herewith).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
2001.
22
SIGNATURES
Pursuant to the requirements of the Securities 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
Dated: December 27, 2002 /s/ Sidney W. Emery, Jr.
-----------------------------------------------
Sidney W. Emery, Jr.
Chairman, President and Chief Executive Officer
Dated: December 27, 2002 /s/ Susan E. Knight
-----------------------------------------------
Susan E. Knight
Vice President and Chief Financial Officer
CERTIFICATIONS
I, Sidney W. Emery, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of MTS Systems
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: December 27, 2002
/S/ SIDNEY W. EMERY, JR.
-----------------------------------
SIDNEY W. EMERY, JR.
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
23
CERTIFICATIONS
(continued)
I, Susan E. Knight, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of MTS Systems
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: December 27, 2002
/S/ SUSAN E. KNIGHT
-----------------------------------
SUSAN E. KNIGHT
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
24
EXHIBIT INDEX TO FORM 10-Q/A
10.r Description of the terms of employment of Susan E. Knight.
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
25