United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
or the Securities Exchange Act of 1934
For quarterly period ended March 31, 1996
Commission File Number 0-2382
MTS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 612-937-4000 41-0908057
(State or other jurisdiction of (Telephone number of registrant (I.R.S. Employer
incorporation or organization) including area code) Identification No.)
14000 Technology Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.25 par value; 9,382,714 shares outstanding.
PART I. FINANCIAL INFORMATION
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND SEPTEMBER 30, 1995
March 31 September 30
1996 1995
ASSETS UNAUDITED AUDITED
--------- ---------
(expressed in $ 000's)
Cash and cash equivalents $ 12,586 $ 8,736
Accounts receivable 53,337 65,106
Unbilled contracts and retainage receivable 16,447 19,668
Inventories-
Customer jobs-in-process 13,583 13,304
Components, assemblies and parts 23,285 22,365
Prepaid expenses 3,108 2,410
--------- ---------
Total current assets 122,346 131,589
Land 3,461 3,461
Buildings and improvements 38,318 38,574
Machinery and equipment 56,716 55,826
Accumulated depreciation (50,853) (49,371)
--------- ---------
Total property and equipment 47,642 48,490
Other assets 8,995 9,421
--------- ---------
$ 178,983 $ 189,500
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Notes payable to banks $ 126 $ 10,475
Current maturities of long-term debt 778 1,043
Accounts payable 10,564 11,768
Accrued compensation and benefits 18,413 20,194
Advance billings to customers 12,119 14,784
Other accrued liabilities 10,436 8,475
Accrued income taxes (821) 275
--------- ---------
Total current liabilities 51,615 67,014
--------- ---------
Deferred income taxes 4,308 4,362
Long-term debt, less current maturities 11,042 11,447
--------- ---------
Common stock, $.25 par; 32,000,000 shares
authorized: 9,382,714 and 4,598,311
shares issued and outstanding 2,346 1,150
Additional paid-in capital 1,513 255
Retained earnings 103,830 100,443
Cumulative translation adjustment 4,329 4,829
--------- ---------
Total shareholders' investment 112,018 106,677
--------- ---------
$ 178,983 $ 189,500
========= =========
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
FOR THE 3 MONTHS ENDED
MARCH 31
1996 1995
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 67,082 $ 58,949
COST OF REVENUES 39,016 37,888
--------- ---------
Gross profit 28,066 21,061
--------- ---------
OPERATING EXPENSES:
Selling 11,656 11,163
General and administrative 4,357 4,282
Research and development 4,676 3,367
Interest expense 447 831
Interest income (40) (6)
Other (income) and expense, net 1,607 (598)
--------- ---------
Total operating expense 22,703 19,039
--------- ---------
INCOME BEFORE INCOME TAXES 5,363 2,022
PROVISION FOR INCOME TAXES 1,731 511
--------- ---------
NET INCOME $ 3,632 $ 1,511
========= =========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.38 $ 0.17
========= =========
DIVIDENDS PER SHARE $ 0.08 $ 0.07
========= =========
BACKLOG $ 127,684 $ 95,738
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,534 8,925
========= =========
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
FOR THE 6 MONTHS ENDED
MARCH 31
1996 1995
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 123,217 $ 108,416
COST OF REVENUES 71,284 69,160
--------- ---------
Gross profit 51,933 39,256
--------- ---------
OPERATING EXPENSES:
Selling 22,990 21,309
General and administrative 8,061 7,427
Research and development 8,444 6,346
Interest expense 902 1248
Interest income (67) (31)
Other (income) and expense, net 2,670 (717)
--------- ---------
Total operating expense 43,000 35,582
--------- ---------
INCOME BEFORE INCOME TAXES 8,933 3,674
PROVISION FOR INCOME TAXES 2,871 924
--------- ---------
NET INCOME $ 6,062 $ 2,750
========= =========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.64 $ 0.31
========= =========
DIVIDENDS PER SHARE $ 0.16 $ 0.14
========= =========
BACKLOG $ 127,684 $ 95,738
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,495 9,014
========= =========
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
FOR THE 6 MONTHS ENDED
March 31
1996 1995
-------- --------
(expressed in $000's)
OPERATING ACTIVITIES
Net income $ 6,062 $ 2,750
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 3,678 3,540
Deferred income taxes -- 168
Changes in operating assets and liabilities that
provide or (use) cash:
Receivables, including accounts, unbilled
contracts and retainages 14,190 (1,642)
Inventories (1,449) (1,335)
Prepaid expenses (728) (1,119)
Accrued income taxes (1,121) (2,262)
Advance billings to customers (2,371) 3,357
Other, net (578) (1,405)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,683 2,052
-------- --------
INVESTING ACTIVITIES
Property and equipment, net (2,986) (3,850)
Purchase of PowerTek, Inc. (4,687)
Other assets (28) 81
-------- --------
NET CASH (USED) IN INVESTING ACTIVITIES (3,014) (8,456)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable (10,332) 8,365
Proceeds from issuance of long-term debt -- 8,510
Payments on long-term borrowings (285) (1,622)
Cash dividends (1,501) (1,250)
Proceeds from employee stock option
and stock purchase plans 2,039 113
Payments to purchase and retire common stock (758) (3,454)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (10,837) 10,662
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 18 1,500
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,850 5,758
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,736 4,919
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,586 $ 10,677
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND TRANSLATION. The consolidated financial statements
include the accounts of MTS SYSTEMS CORPORATION (the Company) and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated.
All balance sheet accounts of foreign subsidiaries are translated at
the current exchange rate as of the end of the accounting period. Income
statement items are translated at average currency exchange rates. The resulting
translation adjustment is recorded as a separate component of shareholders'
investment. Gains and losses resulting from foreign currency transactions are
included in "Other (income) and expense, net" in the consolidated Statements of
Income.
REVENUE RECOGNITION. Revenue is recognized upon shipment of equipment
when the customer's order can be manufactured, delivered and installed in less
than nine months. Revenue on contracts requiring longer delivery periods
(long-term contracts) and other customized orders which permit progress billings
is recognized using the percentage-of-completion method based on the cost
incurred to date relative to estimated total cost of the contract (cost-to-cost
method). The cumulative effects of revisions of estimated total contract costs
and revenues are recorded in the period in which the facts become known. When a
loss is anticipated on a contract, the amount thereof is provided currently.
LONG-TERM CONTRACTS. The Company enters into long-term contracts for
customized equipment sold to its customers. Under terms of certain contracts,
revenue recognized using the percent-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 such
contracts appear in the consolidated balance sheets as unbilled contracts and
retainage receivable. Amounts unbilled or retained at March 31, 1996 are
expected to be invoiced in 1996.
STOCK SPLIT. On January 30, 1996 the Company's Board of Directors
declared a two-for-one stock split in the form of a one hundred percent stock
dividend. The record date of the split was March 8, 1996 , and the payment date
was April 1, 1996. Earnings per share in this quarterly report have been
restated to give effect to the split as of March 31, 1996
OTHER FINANCIAL STATEMENT DISCLOSURE. The Notes to Consolidated
Financial Statements appearing in the Company's September 30, 1995 Annual Report
to Shareholders on pages 20 through 27 are incorporated herein by reference.
MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION. The unaudited
interim financial statements furnished herein reflect all adjustments which are,
in the opinion of management, necessary to fairly state the results of the
interim periods presented.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
New Orders and Backlog
New orders for the second quarter of fiscal 1996, ended March 31, 1996,
were $87 million, a 34% increase over the comparable quarter in fiscal 1995.
Order activity in the Mechanical Testing and Simulation (MT&S) sector was 44%
ahead of the prior year with the most significant increase in the Advanced
Systems market. This group received a $23 million order from an agency of the
Japanese goverment for earthquake research and $5 million order from the U.S.
Army for simulation research and development on military vehicles. Order
activity in the Measurement and Automation (M&A) sector was down 4% from the
same quarter in fiscal 1995. The decline reflects uncertainty in some of our
original equipment customer's markets (plastic processing and molding) in both
North America and Europe. Management believes this decline in orders is
temporary and that growth will resume in MTS' fourth fiscal quarter.
New orders for the six months ended March 31, 1996 were $152 million
compared to $117 million for the same period one year ago, a 30% increase.
Orders in all sectors increased over levels reported for the previous year.
Orders in the Mechanical Testing and Simulation sector increased 38% while the
Measurement and Automation sector increased 3% over the orders reported for the
same period one year ago. International orders were 51% of the 1996 year-to-date
orders compared to 45% for 1995. Backlog of undelivered orders at March 31, 1996
was a record $128 million compared to $96 million at March 31, 1995 and $99
million at September 30, 1995.
Results of Operations
SECOND QUARTER
Revenues for the second quarter were $67 million a 14% increase from
the same quarter one year ago. International content of revenue was 53% for the
quarters ended March 31, 1996 and 1995, respectively. Revenues in all sectors
increased over levels reported in 1995.
Income before income taxes increased 265% to $5.4 million compared to
$2.0 million for the second quarter ended a year ago. The increase in pretax
earnings results primarily from improved manufacturing margins in the MT&S
sector leveraged by increased revenue volume. Consolidated gross margin percents
were 42% and 36% for the periods ended March 31, 1996 and 1995, respectively.
The improvement reflects completion of pre-1995 MT&S business that contained (i)
lower margin system orders accepted during a period of weak demand in Europe and
Japan and (ii) other custom projects with significant technological challenges.
The improvement in gross margins began during the fourth quarter of fiscal 1995
and the first quarter of fiscal 1996. Second quarter's results reflect
continuation of this trend. Margins in the MT&S sector's current backlog and the
mix of projected orders suggest that this quarter's gross margins will continue.
The gross margin increase was partially offset by increased operating
expenses for development, selling and administrative areas. Research and
development expenses increased 39% as development programs were accelerated in
both business sectors. "Other" expense increased from the impact of translating
international subsidiary account balances and the settlement of specific
transactions denominated in foreign currencies.
Net income for the quarter increased 240% to $3.6 million compared to
$1.5 million for the same quarter one year ago. The effective tax rate for the
quarter ended March 31, 1996 was 32% compared to 25% for the quarter ended in
March, 1995. The current quarter's provision for income taxes excludes any
benefit from the Research and Development Tax Credit, which expired in June
1995.
SIX MONTHS
Revenues for the six months ended in March, 1996 were $123 million, a
14% increase over the same period a year ago. The MT&S sector reflects a 14%
increase over 1995 revenues, and the M&A sector increased 12% over 1995.
International revenues were 53% of total revenues as compared to 48% for the six
month periods ended in March, 1996 and 1995, respectively.
Income before income taxes for the first six months of 1996, increased
to $8.9 million from $3.7 reported in 1995. Gross margin increased from 1995 to
1996 due to improved manufacturing margins in the MT&S sector leveraged by
increased revenue volume. Gross margins as a percent of sales were 42% in 1996
compared to 36% in 1995. The improvement in margin percentage is discussed,
above.
Increases in gross margin were offset, in part, by increased operating
expenses for development, selling, general and administrative areas. Significant
development efforts are underway to convert the company's electronic control
systems to a common platform. This undertaking will reduce costs on future
deliveries and will simplify the writing of application software. The Company
continues investing in Asian markets to expand the international presence of the
M&A sector's product lines. "Other" expense increased from the impact of
translating international subsidiary account balances and the settlement of
specific transactions denominated in foreign currencies. Total operating
expenses were 35% compared to 33% for the six months ended in March, 1996 and
1995, respectively.
Net income for the first six months of 1996 was $6.1 million compared
to $2.8 million reported one year ago, a 220% increase. The effective income tax
rates were 32% and 25% for the six months ended in 1996 and 1995, respectively.
As discussed above, the current year's provision for income taxes excludes any
benefit from the Research and Development Tax Credit, which expired in June,
1995.
Financial Condition and Liquidity
The ratio of current assets to current liabilities at March 31, 1996
was 2.4 compared to 2.0 at September 30, 1995. Cash and cash equivalents
increased 44% to $12.6 million at March 31, 1996 compared to $8.7 million at
September 30, 1995. The Company's borrowing under its $55 million lines of
credit was less than $.2 million at March 31, 1996 compared to $10.5 million at
September 30, 1995. Committed credit lines have been reduced from $70 million
reflecting the Company's reduced need for borrowing in the near future.
Capital expenditures, net of retirements for the six months totalled
$3.4 million. The Company's total debt to equity ratio decreased to 11% at March
31, 1996 from 22% at September 30, 1995 evidencing substantial reduction of
short-term notes. The Company's increasing profitability and conversion of
receivables provided the cash to repay the short-term debt.
The Company's past financial performance, the availability of credit
under its borrowing facilities, available cash and cash equivalents provide
sufficient resources for growth, expansion and diversification.
PART II-------OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was held January
30, 1996.
(b) The following persons were nominated and elected to continue
as directors of the Company until the next Annual Meeting of
Shareholders.
Votes For Votes Against
E. Thomas Binger 4,085,531 183,948
Charles A. Brickman 4,087,973 181,506
Bobby I. Griffin 4,088,837 180,642
Russell A. Gullotti 4,087,620 181,859
Thomas E. Holloran 4,088,239 181,240
Thomas E. Stelson 4,086,009 183,470
Donald M. Sullivan 4,088,414 181,065
Linda Hall Whitman 4,087,562 181,917
No voters abstained or were broker/bank non-votes for any of
the directors.
(c) Shareholders approved amendment of the Company's Articles of
Incorporation to increase the number of authorized shares of
Common Stock from 16,000,000 to 32,000,000 with 3,774,664
votes for; 419,539 votes against; 8,816 abstained; and 68,762
non-votes by broker/banks.
(d) Arthur Andersen & Co. was ratified as the Company's
independent auditor by 4,258,620 votes for; 5,505 votes
against; 5,278 votes abstained; and zero non-votes by
broker/banks.
ITEM 6. Exhibits and Reports on Form 8-K.
The following are submitted as part of this report.
(a) Exhibit
27. Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended March 31, 1996.
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/ D.M. Sullivan
D.M. Sullivan
Chairman, President and
Chief Executive Officer
/s/ M.L. Carpenter
M.L. Carpenter
Vice President
Chief Financial Officer
Dated: May 15, 1996