MTS SYSTEMS CORPORATION
1996 ANNUAL REPORT TO SHAREHOLDERS
[PHOTO]
ADDING VALUE
IN ALL WE DO
OUR VISION
To add significant value to the operations of our customers by providing them
with products and services they can use to make their products better, faster,
cheaper, and safer.
In a very real sense, the employees of MTS contribute to the advancement of the
living standards of the world's people.
CONTENTS
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1996 Highlights 1
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Letter To Shareholders 2
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Snapshot Of MTS 4
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Market Niche Update 6
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Six-year Financial Summary 16
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Management's Discussion
And Analysis 17
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Financial Statements 22
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Shareholder Survey 33
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Corporate Information 33
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[BAR CHART]
Net Revenue $ Million
$161 $189 $201 $234 $261
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92 93 94 95 96
[BAR CHART]
Net Income $ Million
$4.9 $10.4 $8.7 $10.5 $14.1
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92 93 94 95 96
[BAR CHART]
Net Income Per Share $ Million
$.54 $1.14 $.92 $1.15 $1.48
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92 93 94 95 96
[BAR CHART]
Return on Beginning Equity Per Share
5.9% 11.9% 9.0% 10.5% 12.8%
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92 93 94 95 96
Backlog of Orders $ Million
$99 $89 $85 $99 $120
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92 93 94 95 96
1996 HIGHLIGHTS
1996 1995 Change
(expressed in thousands except per share data)
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Net revenue $ 261,029 $ 234,131 11.5%
Net income $ 14,109 $ 10,461 34.9%
Net income per share $ 1.48 $ 1.15 28.7%
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Return on sales 5.4% 4.5%
Return on beginning
equity per share 12.8% 10.5%
Return on average net assets 17.2% 12.9%
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Dividends per share $ .32 $ .28 14.3%
Stockholders' equity per share $ 12.30 $ 11.60 6.0%
Long-term capitalization ratio 9.5% 10.5%
Weighted average shares
outstanding (000's) 9,553 9,090 5.1%
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New orders $ 282,753 $ 245,919 15.0%
Backlog of orders at year end $ 120,481 $ 98,757 22.0%
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1996 NEW ORDERS
[GRAPHIC OMITTED]
* North America
* Europe/Africa/Middle East
* Asia Pacific
* Latin America/Rest of World
* Earnings per share grow 28.7% on 11.5% revenue growth; both earnings and
revenues are records.
* Company declares a quarterly dividend increase of 14% in November 1995 and a
two-for-one stock split on April 1, 1996.
* MTS names three new divisional vice presidents in its Mechanical Testing and
Simulation sector: Daniel T. Sparks, Ph.D., for the Materials Testing
Division, Steven M. Cohoon for the Vehicle Dynamics Division, and James M.
Egerdal for North American Sales.
* Joachim Hellwig is named vice president, Europe, for the company's
Industrial Measurement and Automation Sector.
* MTS's Advanced System Division to provide $10.8 million motion system for
the National Advanced Driving Simulator, a major research program of the
U.S. Department of Transportation.
* MTS receives a $23.3 million order for an earthquake simulator from the
Japanese government, the company's largest order ever.
* Electronic products manufacturing moves to a new facility in Chaska,
Minnesota, operating on a two-shift basis.
* 32% of the year's revenues come from products or technologies first shipped
in 1994-1996 -- an all-time "entrepreneuring and market creation" record.
* In December 1996, MTS's Custom Servo Motors subsidiary acquires a majority
interest with an option to purchase the balance of Bregenhorn-Butow & Co. of
Freiberg, Germany, a growing supplier of low-power servo motors and drives
to European machinery manufacturers.
TO OUR SHAREHOLDERS
December 1996
I am pleased to report fiscal 1996 was a record year for orders, revenue, net
income and earnings per share.
Just as important as the absolute numbers, fiscal 1996 showed the first
back-to-back increase in net income and earnings per share in seven years. We
think your company has now broken out of the earnings doldrums which our
employees and shareholders have endured over those years.
There are five principal reasons for this breakout. The first four are
actions taken and well executed by our employees:
* First, an increasing stream of new products and services coming to market
with higher margins
* Second, effective cost control in administrative areas
* Third, pay-off from our investments in customer support, worldwide
* Fourth, improved asset utilization and cash generation--sharply reducing the
need for borrowing.
The fifth reason, not under our control, is the slow and erratic, yet consistent
growth of the world economies in which most of our customers operate.
A BRIEF REVIEW OF THE YEAR
The year proceeded according to plan, with some market niches above plan and
some below.
Our Industrial Measurement and Automation sector, primarily serving
manufacturing industries in North America and Europe, saw a slowdown in their
demand starting in January. This persisted through out the year. As a result,
revenue and profit growth dropped well below the rate of the past several years,
but they still grew.
Conversely, our Mechanical Testing and Simulation sector results were above
plan with an accelerating profit rate. This sector's business in Asia Pacific
was particularly strong, with new orders up about 70 percent fueled by the $23
million seismic order in Japan (we recognized $4.5 million of revenue from that
project in 1996). New orders in the Mechanical Testing and Simulation sector's
worldwide ground vehicles (auto/truck) market niche were ahead of plan with
exceptional growth coming in our ride and handling simulation testing product
line. Our material testing business grew nicely. Our aerospace business was
weak, but we think it will now turn up, as discussed elsewhere in this report.
I mentioned better asset utilization and cash generation. A look at our
balance sheet on page 22 will show we virtually eliminated the $10 million of
short term debt we had one year ago and built our cash balance by another $10
million. Our debt to total ratio was under 10 percent at the end of the year. We
have plenty of borrowing power when the time comes to use it.
THE GROWTH QUESTION
In this year's letter I want to focus on the question I am most frequently asked
by investors, present and potential. Simply put, that question is, "Given that
MTS presently serves (mostly) mature, slower growth markets, can you get your
revenue growth rate up to a level which would sustain above average earnings
growth?"
First, I want to note again that our earnings in 1995 and 1996 were
recovering from the quite low levels of the early 90's. Over that two year
period our revenue grew 17 percent and 11 percent, respectively. The best
starting point for this discussion is this year's revenue of $261 million and
EPS of $1.48.
Returning to the question, surely it's easier to grow fast if your customers
are growing fast. But we challenge the implication behind the question that
because some of our customers' markets are mature, MTS's business is also
mature. Whereas it is true that, on average, our customers' businesses are not
growing at Internet driven rates, there is great flux in the business processes
and technologies within the customers in most of our market niches. That flux
can drive the demand for our products and services at higher growth rates than
the customer's output.
The challenge we face is to find where in the customer's changing business
processes or technology base we might add value, and then to provide those
high-value products and services at a cost which gives us a high return. When
asked where we look, I sum it up by saying, "Wherever the customer wants to make
things better, faster, cheaper or safer." Although that's a short answer, it
captures the essence of what drives MTS's business.
As an example, much of our growth historically has come from creating a new
demand and not from capturing market share from competition. Our tire testing
system business is a case in point. It is growing because our customers can use
the systems to obtain information which simply was not available before the
advent of our Flat-Trac(TM) tire testing technology. The ability to get this
information is driving demand for the systems in what is surely a mature
industry.
A further consideration is that, whereas our customers' markets may be
mature in North America, Europe or Japan, they seldom are mature in the
developing countries. Our growth in orders this year from customers in the
developing countries was, again, well above growth in the developed ones, and
there are still developing countries in Latin America and South Asia whose
markets are just beginning to warrant our investment.
Finally, over the last two years we've increased our investment for top-line
revenue growth in new product development, selling/marketing and customer
support by over 10 percent per year. These areas are definitely not being
starved for the sake of short term earnings growth.
To summarize, our current Business Plan shows revenue growth beyond 1996 at
10 percent per year or more. The Plan includes smaller acquisitions within our
two market sectors but does not include major acquisitions nor entry into a new
sector. We believe that, short of a major recession in North America or in the
worldwide auto/truck industry, that revenue growth can be realized.
With at least a 10 percent revenue growth, we should be able to continue to
improve our after tax profit margins due to a combination of scale economies and
the product cost reductions and moderate price increases we've implemented the
last two years. Those efforts have resulted in our profit margin rising to 5.4
percent of revenue this year. We think that is still low and intend to get it
over 6 percent.
Putting this revenue growth and margin improvement together should deliver
above average earnings growth.
But certainly MTS has the financial, managerial and technical resources
which can be leveraged to build a bigger business faster. We're adding staff to
do more new business venturing and to do bigger acquisitions. Some of those
could lead us into a new market sector within our broadly defined field of
interest of industrial and scientific equipment, software and services. We
expect to have more to report on these efforts during the year.
A WORD OF CAUTION
In this letter, and elsewhere throughout this report, we are making forward
looking statements which reflect management's current expectations or beliefs.
We caution our shareholders and other readers of this report that actual future
results could differ materially from those in the forward looking statements
depending on many factors, some beyond our control, including factors related to
company competitive performance, industry conditions and international economic
trends.
STOCK SPLIT AND DIVIDEND INCREASE
The Board of Directors declared a 100 percent stock dividend at its January 1996
meeting effective April 1, 1996. This was the first split since 1987 as the
Board reaffirmed our past practice of splitting when the price of the stock
holds near $30 per share.
At its November 1996 meeting, the Board authorized a 25 percent increase in
the quarterly cash dividend to 10 cents per share, payable to holders of record
on December 9, 1996. This is consistent with our practice of paying out about
one-third of the average earnings of the trailing two years. Since 1991,
dividends per share have grown 15 percent per year.
On behalf of our officers, I want to thank MTS's employees for their
successful efforts and our shareholders for their commitment.
/s/ Donald M. Sullivan
Donald M. Sullivan
CHAIRMAN, CHIEF EXECUTIVE OFFICER
[PHOTO]
Shown left to right
William G. Beduhn
VICE PRESIDENT
Keith D. Zell
EXECUTIVE VICE PRESIDENT
Donald M. Sullivan
CHAIRMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT
Marshall L. Carpenter
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Mauro Togneri
VICE PRESIDENT
J. Howell Owens
VICE PRESIDENT
SNAPSHOT
OF MTS SYSTEMS CORPORATION
For more than three decades MTS Systems has provided industrial and scientific
laboratories with state-of-the-art mechanical testing and simulation systems, a
market in which we are a recognized world leader. More recently, we entered the
industrial measurement and auto mation market with products based on innovative
technologies in which we also are recognized leaders. Our products and services
are used around the world in basic research, product development, manufacturing,
and quality control--adding value at each step. This snapshot gives a quick look
at each of our market niches.
MECHANICAL TESTING AND SIMULATION
[PHOTO]
Biomaterials And Biomechanics
Our systems are used in the bio materials and biomechanics market to test
biological and biocompatible materials, such as bone, collagen, cartilage, skin,
polyethylene, and titanium. MTS equipment also enables engineers to test the
dura bility of a broad range of medical and dental implants and prostheses. By
simulating motions and stresses from physical activities such as chewing,
walking, and running, our systems provide valuable information to academic and
industrial researchers and product developers, including manufacturers of sports
equipment.
[PHOTO]
Ground Vehicles
Our ground vehicle customers include automobile, truck, motorcycle, and
off-road vehicle manufacturers and their suppliers. We offer five types of
system solutions to these customers: dynamometer systems to test engines and
drive trains, durability systems that produce wear and failure data under
accelerated service conditions, vehicle and occupant impact simulators for crash
and safety testing, performance systems to determine ride and handling
characteristics, and noise, vibration, and harshness testing systems to help
evaluate ride quality.
[PHOTO]
Civil Engineering
Designing bridges, dams, roads and other infrastructure requires a thorough
understanding of the mechanical properties of substructures and diverse
materials, including rock, soil, concrete, and other cement-based materials. We
provide a comprehensive range of solutions for civil engineering needs, from
low-force and high-force geomaterial testing systems to fully integrated
structural testing laboratories including large-scale seismic (earthquake)
simulation tables.
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Advanced Systems
Because our systems engineering expertise has applications beyond our
established niches, we are continually looking for new application
opportunities. Maintaining and exploiting these opportunities is the thrust of
our advanced systems effort. Applications can be found in mechanical testing and
simulation research, manufacturing, and elsewhere. Examples of recent custom
projects include ocean wave simulators, laser-based material processing systems,
and major amusement park rides.
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Aerospace
Using MTS testing equipment, aerospace engineers evaluate the strength of
lightweight advanced materials, the durability of landing gear, the structural
integrity of wings and other large structures and the performance of propulsion
systems and other flight vehicle components. Such testing helps the industry
produce aircraft that meet safety certification standards and performance
requirements and are more economical to operate.
[PHOTO]
Material And Product Testing
Material and product testing laboratories in diverse industries need to
perform tests on many types of materials, including metals, plastics,
composites, and textiles, as well as industrial and consumer products. Our full
line of testing products helps these customers perform tests required to gain
critical information about how materials perform and to develop higher quality
products for their specific markets.
INDUSTRIAL MEASUREMENT
AND AUTOMATION
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Measurement
For precise measurement of produc tion variables, we offer two lines of
sensors--both based on our core technology of magnetostriction. Our linear
displacement sensors measure physical displacement over lengths up to fifty
feet. They are used by manufacturers of injection molding and die casting
machines, printing and packaging machines, and many other types of equipment.
Our liquid-level sensors and instrumentation are used to sense liquid levels up
to one hundred feet. Customers include fluid processing companies, such as
refineries and chemical plants, as well as retail gas stations.
[PHOTO]
Automation
Our servo motors, amplifiers, and controllers help manufacturing industries
automate their production machinery. Our products are applicable to machine
tools, packaging machines, and other production equipment where control of
motion is critical to production speed and quality. Using advanced magnetic
technology in a unique scalable design, we provide custom servo motor solutions
that meet demanding speed, torque, and size requirements. Machine designers use
our products to replace complex assemblies of gears, pulleys, cranks, and
transmissions to improve production efficiency and reliability.
MARKET
NICHE UPDATE
Our strategic investments in new product development, worldwide customer
support, and leveragable acquisitions over the past several years began to pay
off in the form of improved profitability in 1996. Here is a news update from
each of our market niches.
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MECHANICAL TESTING AND SIMULATION
Adding value by providing critical information on the mechanical behavior of
materials, products, and structures
BIOMECHANICS AND BIOMATERIALS
New material and component test systems continue to expand our biomechanics and
biomaterials business. We expect the market for these products to continue to
grow well into the twenty-first century as aging populations in developed
countries drive demand for prostheses of all types. The market also is being
driven by government safety certification requirements for implantable medical
devices and prostheses. To meet the demands of this market niche, we provide
engineers with the ability to program and run complex tests that simulate
precisely the forces applied to joints, bones, and muscles during normal and
strenuous activity. The information generated by such tests is invaluable to
researchers working to perfect artificial knees, hips, teeth, and other
implantable and external prostheses. With the Bionix(R) testing product line, WE
OFFER UNIQUE MULTIAXIAL TESTING CAPABILITIES UNMATCHED IN THE INDUSTRY. In 1996
we introduced the Bionix 100/200/400 systems, a line of electromechanical
systems designed to perform low-force static tests. Such tests are used to
evaluate catheters, sutures, medical stents, and other devices. We also
introduced a number of new specialized fixtures that allow our Mini Bionix
product line to simulate exact hip, knee, and spinal motions. In addition, our
new twelve-station hip simulator provides quality-assurance and research
engineers with added capacity at a price comparable to our previous
eight-station hip simulator.
By reproducing the motions and loads that affect the hip joint during walking
and running, our new twelve-station hip simulator helps researchers evaluate the
dura bility of materials and prosthetic designs.
[PHOTO]
[PHOTO]
Demographic trends drive the growth in demand for prosthetics.
GROUND VEHICLES
Our ground vehicle market continues to benefit from solid consumer demand for
safer and more pleasing cars and trucks. Tire engineers have responded to this
demand by researching areas such as tread wear and rolling resistance to develop
longer lasting, safer tires that also improve gas mileage. This type of research
has created a record backlog of orders for our new Flat-Trac(R) III tire test
system. At the same time, suspension engineers are using more of our kinematics
and compliance test systems to improve vehicle ride and handling.
Our safety testing systems enable manufacturers to respond not only to
consumer demands for safety but also to the growing body of government safety
regulations in North America, Europe, and Asia Pacific. Our testing and
simulation systems and software ENABLE MANUFACTURERS TO CONDUCT TESTS THAT MEET
SPECIFIC REGULATORY REQUIREMENTS for crush, intrusion, and impact.
[PHOTO]
Component testing is a growing market for our ground vehicles business.
By introducing the new FlexTest(TM) II test controllers based on the Windows
NT operating system, MTS is laying the groundwork for a totally integrated flow
of test methodology and data within manufacturing organizations and with their
suppliers. This will make it easier for our customers and their suppliers to
share test data, a capability we are leveraging as we market systems to
component manufacturers.
[PHOTO]
Our seat and headrest testing systems are used worldwide by automakers to ensure
com pliance with safety standards.
The year's noteworthy orders included a $4.7 million order from the Michelin
Tire Company and orders totaling $8.8 million from two Korean automakers. In
addition, we ended the year with a significant uptick in activity for our
MTS-PowerTek subsidiary, acquired in 1994, which produces dynamometer controls
and systems.
[PHOTO]
We ended the year with a record backlog of orders for our new Flat-Trac III
system, an advanced tire performance testing system.
We expect this niche to continue to grow because we believe the auto
industry will continue its growth worldwide, particularly in Asia Pacific. We
have responded with additional customer support to take advantage of
accelerating production of vehicles and components in that region. The off-road
and agricultural equipment industries also appear very healthy, and we
anticipate renewed growth in orders from these customers in North America,
Europe, and Asia Pacific.
[PHOTO]
ADDING VALUE THROUGH APPLICATION SOFTWARE
Software continues to be a key differentiator in
delivering value to testing and simulation markets, and we expect our software
to fuel growth as customers increasingly look for flexibility and ease of use in
their testing solutions.
Our internal software development efforts focus on applications which
include standard packages for specific tests as well as "middleware" with which
customers can create their own test programs. Our application products include
tests used in materials engineering, such as fatigue and fracture tests; civil
engineering, such as static deflection and fracture toughness tests; and
automotive engineering, such as suspension deflection and occupant impact tests;
along with applications in many other niches. Many of our application software
packages include predefined templates for common industry test standards.
Our easy-to-use, feature-rich software is designed to increase the
productivity of our customers' researchers and laboratory operators, enhancing
the value they add to their organizations.
To help integrate our application software into customers' computer networks
while reducing our cost of software development and support, we are continuing
to move our applications to the Microsoft Windows environment. Customers benefit
from the performance, ease of use, and data sharing capabilities that Windows
provides. Moving toward a widely accepted environment allows us to better focus
our software development resources. At the end of 1996, all of our digital
systems ran in either the Windows NT or Windows 95 environments. We also
continue to support other operating systems where desired by our customer base.
CIVIL ENGINEERING
When large forces are required to test geological and building materials and
components, our civil engineering test systems PROVIDE THE NEEDED POWER AND
CONTROL. We see opportunities to grow our civil engineering business as many
parts of the world urbanize at an increasing rate. These growing economies
demand new infrastructure in the form of roads, bridges, tunnels, and power
generation plants. Many developing countries also are committed to establishing
their own state-of-the-art civil engineering research centers. Benefiting from
this trend, our civil engineering business in FY 1996 included delivery of two
multi million-dollar orders to outfit advanced civil engineering laboratories in
Asia.
Late in the year we introduced a new low-cost, multipurpose geomaterials
test system, the Model 816. This system provides an economical solution for
tests that do not require extremely high compressive forces, and it allows
customers to expand their testing capabilities incrementally as their needs
change. We expect this new system to gain wide acceptance for advanced
construction materials evaluation.
[PHOTO]
Civil engineers use our high-accuracy strain transducers to determine the
deformation characteristics of concrete and other building materials.
AEROSPACE
[PHOTO]
The Aero-90 LT controller extends our aerospace controller product line to serve
a broader range of customers.
Our aerospace business has been affected by a sharp downturn in defense
spending worldwide and a cyclic downturn in large commercial aircraft
development in Europe and North America. In response, we've focused on two
initiatives. First, better project management and manufacturing cost reduction
have enabled us to improve gross manufacturing profit in the face of decreasing
revenue.
Second, scaling our Aero-90(TM) test control and data acquisition system
down to A SMALLER SIZE, WITHOUT REDUCING ITS CAPABILITY, allows us to compete
for general aviation and commuter airplane projects at a new price point. In mid
1996 we completed software developments that allow our new Aero-90 LT system to
run in the Windows NT environment, and by year end had booked several orders for
the system. Both of these initiatives will continue in 1997. Beyond that, we see
promising signs that our traditional aerospace business is poised for an
upswing. Major development projects are coming on-line in the defense and
commercial aircraft and aerospace sectors in North America, Europe, and Asia.
These projects include new commercial transport and civilian passenger planes,
military fighters, launch vehicles, and the international space station being
coordinated by the U.S. National Aeronautics and Space Administration.
[PHOTO]
Our aerospace customers include manufacturers of all types of aircraft,
including airplanes, helicopters, and launch vehicles.
ADDING VALUE THROUGH CUSTOMER SUPPORT
[PHOTO]
Beyond providing testing and simulation software and systems, we provide
a range of engineering services to help our customers meet their objectives. Our
consulting services help customers develop test methodologies for their unique
needs. We also will supplement their staff when their capacity is overloaded,
such as during the start-up of new labs and during peak workload periods prior
to new product releases. In some cases we design and equip entire laboratories
for our customers. The worldwide trend toward focusing on core competencies and
outsourcing non-core functions means that many companies are looking to outside
firms for tech nical expertise. Being able to provide these services provides us
with growth oppor tunities across a number of industries.
Once a customer's MTS equipment is up and running, we continue to provide
support through our aftermarket operations, which handles product upgrades,
accessories, and additional services, such as maintenance, calibration, and
training. Software upgrades provide us with an opportunity to realize return on
our R&D investment while enabling our customers to quickly increase the value of
their installed systems.
We consider our competitors' installed base as part of our served market
because our aftermarket products and services can provide great value to these
users. Serving them through our aftermarket business helps open doors that can
lead to new MTS testing and simulation system sales in the future.
We continue to invest heavily in engineering service and aftermarket support
capabilities worldwide. This business now represents more than 15 percent of our
mechanical testing and simulation sector and is making an increasing
contribution to the bottom line.
ADVANCED SYSTEMS
[PHOTO]
Our first underwater seismic simulation table is installed at Kyoto University
in Japan.
Recent advanced-system projects include a multimillion-dollar order for a
complete ride system to be installed at a major amusement park, a $5 million
order from the U.S. Army's Tank Automotive Command for upgrades to a tank motion
simulation system, a $10 million incrementally funded subcontract to provide the
motion system for the U.S. Department of Transportation's National Advanced
Driving Simulator, and an intelligent material processing system for the forming
of titanium near-net shapes. Although projects of this type are engineering
intensive and contain considerable cost risk, our staff has CONSISTENTLY BROUGHT
PROJECTS TO COMPLETION AT OR UNDER BUDGET WHILE SATISFYING STRINGENT CUSTOMER
REQUIREMENTS. This is a profitable and growing niche where we have few
competitors once given the opportunity to present our capabilities. Our
challenge is to find or create more of those opportunities.
MATERIAL AND PRODUCT TESTING
This niche comprises a broad range of customers with diverse testing
requirements. Our advanced testing products provide solutions to fulfill these
requirements at universities and government laboratories and for material,
component, and finished goods suppliers. We currently are among the top three or
four suppliers to this niche, but we are not the market share leader. Our
strategy is to develop or acquire best-of-class products and services and market
them selectively where we can gain market share. We have been successful in
implementing this strategy. In 1996 orders grew over 10 percent in this niche
which we believe grew in total less than 5 percent.
[PHOTO]
Many consumer materials and products are tested with MTS equipment to ensure
their quality and manufacturability.
We believe that the electronics industry presents us with growth
opportunities within this niche. To meet some of the mechanical testing needs of
this industry, we introduced the Tytron(TM) microforce test system, our first
system designed specifi cally for very low-force testing and which can
accommodate extremely small specimens. In the electronics industry it can be
used to address reliability issues arising from the thermal stresses placed on
electronic components and assemblies. Although industry standards are not yet in
place for the mechanical testing of electronic components, we are working with
industry organizations to help formulate such standards.
[PHOTO]
The growth of the electronics industry provides us with opportunities to grow
our business with products such as the Tytron micro-force testing system.
We also continued the integration of recent acquisitions and have begun to
realize improved margins from synergies between our electromechanical
operations. In 1994 we acquired Adamel-Lhomargy, the premier French manufacturer
of electromechanical (static) testing equipment. The acquisition expanded our
presence in Europe and provided us with an established line of accessories for
use with our existing product line worldwide. TestWorks(R) for Windows, our
industry-leading software for static applications, has been adapted for the
Adamel product line, enhancing the productivity, flexibility, and ease of use of
these systems. This two-way synergy is reducing the overall costs of product
development and will provide opportunities to expand the market for this
important product line.
We still have many opportunities to grow our market share in this niche.
[PHOTO]
Our Synergie(TM) testing systems provide a full range of low-force material
testing capabilities in a convenient, portable unit.
INDUSTRIAL MEASUREMENT AND AUTOMATION
Adding value by providing precise monitoring and control of industrial machines
and processes
MEASUREMENT
[PHOTO]
The Level Plus long gauge is easy to install and provides the unique ability to
cost-effectively measure three variables--two levels and temperature--with a
single gauge.
With manufacturing plants in Cary, North Carolina and Ludenscheid, Germany, and
a new joint venture in Yokohama, Japan, our sensors operations serve a worldwide
market.
In late 1996 we completely redesigned the basic elements of our
Temposonics(R) linear displacement sensors, the market-share leaders. The new
patented design features modular construction for unprecedented precision and
improved configurability and ruggedness. The new design is CE certified for
worldwide markets. New markets targeted by this innovation include metalforming,
auto motive, and mobile hydraulics. The full benefit of our new sensors will
begin to appear on our top and bottom lines by mid-1997.
[PHOTO]
Patented and CE-certified Temposonics linear displacement sensors have a modular
design that improves their performance and reduces manufacturing costs.
We currently command a small share of the liquid-level sensor market, but we
bring to the market a higher degree of perfor mance and reliability, and we
continue to acquire market share from older technologies. In late FY 1996, we
were selected as the primary supplier for the U.S. Navy's fuel depot
modernization project. Our sensors, chosen for their accurate measurement and
ease of installation, were installed on several tanks to provide inventory and
custody-transfer data. If successful in this initial project, we will be in a
position to supply Level Plus(R) gauges for the entire fuel modernization
project at Navy depots throughout the world.
AUTOMATION
Our Custom Servo Motors subsidiary provides high-performance, permanent magnet
brushless servo motors, amplifiers, and motion controllers to original equipment
manufacturers and end users to improve quality and reduce production costs.
Major markets for these products include the packaging, machine tool, and
factory automation industries. We expanded our product line in 1996 with several
product introductions.
[PHOTO]
Our servo motors, amplifiers, and controllers bring efficient new technologies
to the auto mation of industrial processes.
Our new MaxPlus(TM) 12-inch servo motor delivers up to 90 horsepower of
continuous torque. Operating at full torque at low speeds, the new 12-inch motor
performs extremely well on very large machines which were usually driven by less
efficient hydraulics. This larger motor opens new markets to us through new
applications. JM Systems Corporation, for example, uses two 12-inch motors as
the prime motors in the largest spring coiling machine ever to use electric
motors.
Our new line of 2- and 3-inch ServoFlex(TM) motors and amplifiers provides a
powerful, economical alternative to stepper motors and brush servo motors in
light duty applications. The ServoFlex motors yield higher performance than
stepper motors and require less maintenance than brush servo motors.
In 1996 we also announced a powerful new multi-axis controller, the XDC 720,
which can control up to 28 independent axis, making it ideal for complex
packaging operations. This controller has received CE certification, which
allows us to sell the product worldwide.
Just as this report was going to press, we completed the acquisition of a
majority interest in Bregenhorn-Butow, & Co., a German supplier of lower-power
motors and amplifiers. The acquired product lines complement our
high-performance motors manufactured in New Ulm, Minnesota. Through the combined
product line we will be able to rapidly launch our high-performance servo motor
products in Europe and distribute the lower-power motor products throughout our
established channels in North America.
[PHOTO]
By using 12-inch servo motors from our Custom Servo Motors subsidiary, JM
Systems Corporation eliminated less efficient hydraulic pumps and actuators.
SIX YEAR FINANCIAL SUMMARY
(SEPTEMBER 30)
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands, except per share data and number of employees)
OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Net revenue $ 261,029 $ 234,131 $200,550 $ 189,499 $161,013 $ 157,865
United States revenue 128,593 125,659 101,747 92,153 68,931 72,538
International revenue 132,436 108,472 98,803 97,346 92,082 85,327
Gross profit 106,104 91,638 79,840 78,882 61,919 69,902
Income before income taxes 20,006 14,031 12,629 14,937 6,452 14,350
Net income 14,109 10,461 8,659 10,382 4,915 10,080
Net income per share, fully diluted basis 1.48 1.15 .92 1.14 .54 1.12
Research and development costs 17,696 13,733 12,645 13,697 9,999 9,271
Net interest expense 1,123 2,424 1,860 1,207 704 1,061
Depreciation and amortization 7,820 7,217 6,214 5,648 5,789 5,755
FINANCIAL POSITION
- ----------------------------------------------------------------------------------------------------------------------------------
Current assets $ 130,382 $ 131,589 $123,206 $ 123,445 $100,929 $ 91,240
Current liabilities 60,834 67,014 66,361 66,961 50,717 44,183
Current ratio 2.1:1 2.0:1 1.9:1 1.8:1 2.0:1 2.1:1
Net working capital 69,548 64,575 56,845 56,484 50,212 47,057
Property and equipment, net 48,090 48,490 47,368 37,254 38,079 35,995
Total assets 187,396 189,500 175,708 165,716 144,650 135,627
Interest bearing debt 11,836 22,965 23,851 33,299 19,335 20,565
Shareholders' investment 112,814 106,677 100,046 93,011 84,992 80,739
Shareholders' investment per share 12.30 11.60 10.95 10.24 9.52 9.08
OTHER STATISTICS AND RATIOS
- ----------------------------------------------------------------------------------------------------------------------------------
Fully diluted shares outstanding(1) 9,553 9,090 9,336 9,144 9,190 8,954
Number of shareholders 1,523(2) 1,395 1,394 1,400 1,413 1,838
Number of employees 1,725 1,612 1,557 1,447 1,404 1,372
New orders $ 282,753 $ 245,919 $195,260 $ 178,786 $178,178 $ 169,237
Backlog of orders $ 120,481 $ 98,757 $ 84,591 $ 88,731 $ 99,221 $ 82,404
Gross profit percent 40.6% 39.1% 39.8 41.6% 38.5% 44.3%
Research and development costs
as a percent of net revenue 6.8% 5.9% 6.3% 7.2% 6.2% 5.9%
Net income as a percent of net revenue 5.4% 4.5% 4.3% 5.5% 3.1% 6.4%
Effective tax rate 29% 25% 31% 30% 24% 30%
Interest bearing debt to equity ratio 10% 22% 24% 36% 23% 25%
Return on average net assets(3) 17.2% 12.9% 11.6% 16.3% 7.6% 17.4%
Return on beginning
shareholders' investment per share 12.8% 10.5% 9.0% 11.9% 5.9% 13.7%
Cash dividends paid per share $ .32 $ .28 $ .28 $ .24 $ .24 $ .20
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Presented on a weighted average basis of common shares assuming conversion
of common stock equivalents during each year after retroactive adjustments
for issued shares, for stock splits and reduction of shares from treasury
stock purchases (in thousands of shares).
(2) On November 29, 1996, there were 1,523 common shareholders of record, with
another estimated 1,900 shareholders whose stock is held by nominees or
broker dealers.
(3) (Income before income taxes plus net interest expense) divided by (average
quarterly assets minus non-interest bearing liabilities).
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKLOG/NEW ORDERS
1996 1995 1994
- --------------------------------------------------------------
(expressed in thousands)
New Orders:
North America* $ 139,725 $ 137,775 $ 101,498
International 143,028 108,144 93,762
- --------------------------------------------------------------
Total $ 282,753 $ 245,919 $ 195,260
- --------------------------------------------------------------
Backlog $ 120,481 $ 98,757 $ 84,591
- --------------------------------------------------------------
*Includes U.S. and Canada
Record 1996 new orders of $282.8 million were up 15% from the prior year and
represented a 45% increase over 1994. New orders in 1996 included 56 orders with
unit values exceeding $500,000 compared to 67 orders in 1995 and 30 orders in
1994 in this category. These orders represented 39%, 31% and 26% of the new
order total for these three years.
In 1996, the Mechanical Test and Simulation sector (MT&S) new orders of
$234.6 million increased 17% from 1995 and represented a 48% increase over 1994.
The Industrial Measurement and Automation sector (M&A) new orders in 1996 of
$48.2 million increased 5% over the prior year and represented a 30% increase
over 1994.
North American new orders increased 1% in 1996, 36% in 1995 and 4% in 1994.
The M&A sector was strong in 1995 and 1994 but experienced a soft domestic
market for most of 1996. The ground vehicle niche of the MT&S sector
strengthened considerably in both 1996 and 1995 compared to order levels
achieved in 1994. The small but emerging biomechanics systems niche also
experienced strong growth in 1996.
International orders increased 32% in 1996, 15% in 1995 and 16% in 1994. The
1996 new order increase occurred in all three international areas (see table
below), whereas in 1995 the increase came principally from Europe. 1996 Asia
Pacific orders content included a $23.3 million earthquake simulator in Japan
which represented the largest single order received by the Company. Most of the
1994 increase occurred in Asia Pacific. See Geographic Analysis of New Orders
for the percentage breakdown by geographic area.
The backlog of undelivered orders at September 30, 1996, increased 22% from
1995, the result of record new orders received in 1996.
REVENUES
1996 1995 1994
- --------------------------------------------------------------
(expressed in thousands)
United States $ 128,593 $ 125,659 $ 101,747
International 132,436 108,472 98,803
- --------------------------------------------------------------
Total $ 261,029 $ 234,131 $ 200,550
- --------------------------------------------------------------
Record 1996 revenues of $261.0 million were up 11% from the prior year and
represented a 30% increase over 1994. For 1996, the Mechanical Test and
Simulation sector (MT&S) revenues of $212.8 million increased 12% from 1995 and
represented a 30% increase compared to 1994. The Industrial Measurement and
Automation sector (M&A) revenues in 1996 of $48.3 million increased 11% over the
prior year and represented a 31% increase compared to 1994. For geographic and
sector revenues and income information, see Note 2 of "Notes to Consoli dated
Financial Statements."
Revenues in the United States increased over the prior years: 2% in 1996,
24% in 1995 and 10% in 1994, reflecting strengthening markets for most of the
Company's business segments during 1995 and 1994 and a softer market in 1996.
The M&A sector revenue growth reflected rising demand from our European original
equipment manufacturers and a faster delivery response on new orders. The MT&S
sector revenue increase in 1996 reflected a continued strong automotive market,
strong aftermarket sales for accessories and services, and revenue recognized on
a portion of the large Japanese earthquake simulator in the fourth quarter.
International revenues increased 22% in 1996, 10% in 1995, and 2% in 1994.
The 1995 and 1994 growth rates were lower than those in the U.S. which reflected
the recessionary economies of Europe and Japan during these periods.
International revenues grew at a faster rate in 1996 reflecting a turnaround in
these economics in late 1995 which continued in 1996.
A significant portion of the Company's inter national revenues are
contracted for in foreign currencies. In both 1995 and 1994, the value of the
dollar weakened, particularly against European currencies, increasing dollar
values on foreign currency revenue in those years by $3.9 million and $3.7
million. The value of the dollar began strengthening in 1996, reducing dollar
values on translated foreign currency revenues by $5.5 million.
Selective price increases and decreases were implemented in all three years.
However, the overall impact of pricing changes did not have a material effect on
reported revenue volume.
GEOGRAPHIC ANALYSIS OF NEW ORDERS
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
North America 49% 57% 52% 55% 49% 46%
- ----------------------------------------------------------------------------------------------------------------
Europe/Africa/Middle East 22 25 21 20 25 35
- ----------------------------------------------------------------------------------------------------------------
Asia Pacific 26 17 26 23 25 18
- ----------------------------------------------------------------------------------------------------------------
Latin America/Rest of the World 3 1 1 2 1 1
- ----------------------------------------------------------------------------------------------------------------
GROSS PROFIT
1996 1995 1994
- -------------------------------------------------------------
(expressed in thousands)
Gross Profit $ 106,104 $ 91,638 $ 79,840
- -------------------------------------------------------------
% of Revenues 40.6% 39.1% 39.8%
- -------------------------------------------------------------
The gross profit percentage for 1996 increased to 40.6% from 39.1% in 1995, a
continuation of the improved gross profit margin which began in fourth quarter
of 1995. The lower gross profit percentage in 1995 was caused primarily by the
effect of a weak dollar on foreign currency denominated revenues of low-margin
projects in our Mechanical Testing and Simulation sector. The majority of these
low margin projects were shipped during the first half of 1995 after which point
our gross profit margin began to show improvement from revenues with higher
margin, operating efficiencies, and a more favorable business mix.
The 1994 gross profit percentage declined 1.8 percentage points from 1993,
principally caused by a higher-than-normal content of development costs in some
large custom projects resulting in much lower than expected gross profit
margins. Some of these projects also contributed to the 1995 decrease in the
gross profit percentage.
RESEARCH AND DEVELOPMENT
1996 1995 1994
- --------------------------------------------------------------
(expressed in thousands)
R & D Expense $ 17,696 $ 13,733 $ 12,645
- --------------------------------------------------------------
% of Revenues 6.8% 5.9% 6.3%
- --------------------------------------------------------------
The Company does not do basic research, but does fund product, system and
application developments (R&D) in both the Mechanical Testing and Simulation
(MT&S) and Industrial Measurement and Automation (M&A) sectors. The majority of
the development expenditures in all three years was for systems, software,
control products, new measurement products, servo motors and amplifiers,
electromechanical load frames and accessories.
The product development spending percentages reflected above are
representative of the ratio range the Company normally commits to in its annual
planning process with the 1996 percentage at the higher end of the range.
Accelerated development programs in both the MT&S and M&A sectors and a shift
from customer funded development caused the higher 1996 percentage.
The Company also undertakes "first of their kind" system level development
effort as part of custom projects sold to customers. The cost of these efforts
is reported as cost of sales. The combination of internally funded R&D and these
customer funded system innovations typically approximates 10% of revenues.
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES
1996 1995 1994
- --------------------------------------------------------------
(expressed in thousands)
Selling/Marketing $ 48,260 $ 45,088 $ 40,351
General &
Administrative 17,260 16,053 12,682
- --------------------------------------------------------------
Total $ 65,520 $ 61,141 $ 53,033
- --------------------------------------------------------------
% of Revenues 25.1% 26.1% 26.4%
- --------------------------------------------------------------
Selling/Marketing and General & Administrative (SG&A) expenses for 1996 as a
percentage of revenues were reduced 1.0 percentage point from 1995 and 1.3
percentage points from 1994. Full year spending for 1996 totaled $65.5 million
which represented a $4.4 million (7%) increase over 1995 and a $12.5 million
(24%) increase over 1994.
All three years were similar in that cost reduction was at the forefront of
the planning process as well as aligning existing resources or making new
investments in markets with the greatest potential. Operating expenses of newly
acquired companies represented $2.2 million of the expense increase in 1995 with
the majority of the remaining increase being attributable to investments by our
Industrial Measurement and Automation sector to support its strong growth rate,
higher translated European expenses caused by the weak dollar, and inflation.
The $4.4 million (7%) increase in SG&A expense in 1996 reflects the results of
cost reduction initiatives over the last two years which have resulted in a
lower SG&A cost as a percentage of revenues. The $5.2 million (11%) increase in
SG&A expense in 1994 from 1993 was principally related to the acquisition of
Adamel Lhomargy (France).
INCOME
1996 1995 1994
- --------------------------------------------------------------
(expressed in thousands except per share data)
Income Before
Income Taxes $ 20,006 $ 14,031 $ 12,629
- --------------------------------------------------------------
% of Revenues 7.7% 6.0% 6.3%
- --------------------------------------------------------------
Net Income $ 14,109 $ 10,461 $ 8,659
- --------------------------------------------------------------
% of Revenues 5.4% 4.5% 4.3%
- --------------------------------------------------------------
Effective Tax Rate 29.5% 25.4% 31.4%
- --------------------------------------------------------------
Return On Beginning
Equity Per Share 12.8% 10.5% 9.0%
- --------------------------------------------------------------
Net Income Per Share $ 1.48 $ 1.15 $ .92
- --------------------------------------------------------------
Income before income taxes (pretax income) in 1996 increased $6.0 million (43%)
from 1995 and reflected an improved return on revenue resulting from a 11%
increase in revenues, a 1.5% improvement in the gross profit percentage, and a
1.0% decrease in the Selling/Marketing and General & Administrative (SG&A)
percentage. For 1996, the Mechanical Testing and Simulation sector (MT&S) pretax
income of $15.3 million increased 59% compared to 1995 and was up 78% compared
to 1994. The Industrial Measurement and Automation sector (M&A) pretax income in
1996 of $4.7 million increased 5% over the prior year and was up 18% from 1994.
Pretax income in 1995 increased $1.4 million (11%) from 1994 principally
from higher revenues and improved gross profit margins in the fourth quarter.
Pretax income in 1994 decreased $2.3 million (16%) from 1993 as a result of
significant development costs incurred on specific leading-edge technology
projects affecting gross profit margins, and a $2.1 million charge to operations
for a work-force reduction offset by a non-operating gain of $3.9 million
realized from the sale of our Berlin, Germany facility.
Net income in all three years benefited from an effective tax rate that was
lower than the federal statutory tax rate, primarily the result of the tax
benefit of the Company's Foreign Sales Corporation and the Research and
Development (R&D) tax credits. The 1996 effective tax rate increased over 1995
as a result of having the reinstated R&D tax credit available only for the
fourth quarter of 1996. See Note 4 of "Notes to Consolidated Financial
Statements" for the reconcilia tion between the federal statutory and effective
income tax rates and other related tax information.
FOREIGN CURRENCIES EFFECTS
In 1996 the U.S. dollar strengthened in relation to the European and Japan
currencies which decreased translated foreign currency denominated revenues by
$5.5 million. A weaker dollar generally has a positive effect on overseas
results because foreign exchange denominated revenues and earnings translate
into more U.S. dollars; a stronger dollar has a negative translation effect.
However, the cost of overseas operations and products sourced for domestic use,
which were not significant, are affected in the opposite direction.
In 1995, the U.S. dollar was generally weaker in relation to European
economies, specifically in relationship to the German Deutschemark, which
increased translated European foreign currency denominated revenues by $3.9
million. Over the year as a whole, there was little change in translated yen
denominated revenues.
Throughout 1994, the dollar weakened against all major foreign currencies,
which increased translated foreign currency denominated revenues by $3.7
million.
The Company recorded foreign currency transaction gains of $104 thousand,
$1.4 million and $1.1 million, for the years 1996, 1995, and 1994, respectively.
The Company's foreign currency risk-management program focuses on foreign
currencies of countries where the Company operates (German Deutschemark, French
Franc, English Pound, Swedish Kroner, Italian Lire and Japanese Yen). This
involves entering into forward foreign currency hedge contracts, options, and
foreign currency denominated loans. On September 30, 1996, there were open
currency hedge contracts, primarily denominated in Yen and Deutschemark, with
various settlement dates, totaling $28.4 million. Unrealized gains under these
contracts were $1.7 million as of September 30, 1996. These contracts are
targeted to limit transaction exposures where equipment and services costs are
incurred in U.S. dollars and the customer contracts are in a foreign currency.
LIQUIDITY AND CAPITAL RESOURCES
1996 1995 1994
- ---------------------------------------------------------------
(expressed in thousands except per share data)
Total Interest
Bearing Debt $ 11,836 $ 22,965 $ 23,851
% of Total
Capital 9.5% 17.7% 19.3%
- ---------------------------------------------------------------
Shareholders'
Investment $ 112,814 $ 106,677 $ 100,046
- ---------------------------------------------------------------
Per Share $ 12.30 $ 11.60 $ 10.95
- ---------------------------------------------------------------
FINANCIAL CONDITION
At September 30, 1996, the Company's capital structure was comprised of $3.1
million of current debt, $8.7 million long-term debt and $112.8 million
shareholders' equity. The ratio of total debt to total capital was 9.5%,
compared with 17.7% at September 30, 1995.
Total debt decreased $11.1 million during 1996 to $11.8 million. This
resulted from a $10.4 million reduction in notes payable to banks and a $2.7
million reduction in long-term debt offset by a $2.0 million increase in current
maturities of long-term debt.
Shareholders' equity increased $6.1 million in 1996 to $112.8 million.
Shareholders' investment per share in 1996 increased to $12.30 from $11.60 in
1995. The increase was primarily due to an increase in retained earnings of
$14.1 million from current year net earnings and $3.7 million from employee
stock option and purchase plans. These increases were offset by dividends of
$3.0 million, $7.9 million of treasury stock repurchases, and a $800 thousand
reduction in the cumulative translation adjustment.
CASH FLOWS
Operating activities generated cash of $36.1 million in 1996, $23.1 million in
1995 and $20.9 million in 1994. The cash generated in 1996 was largely from
earnings, depreciation and amortization, and a reduction in accounts receivable.
These funds supported $7.4 million of capital expenditures, $3.0 million of
dividend payments, $7.9 million of stock repurchases, and a repayment of $10.4
of notes payable to banks. Cash and cash equivalents increased $10.5
million during 1996.
Capital expenditures for property, plant and equipment totaled $7.4 million
in 1996, compared to $6.3 million in 1995, and $18.2 million in 1994. Capital
spending in 1994 included $11.3 million for a new facility for the Company's
Berlin, Germany operations. This amount was net of the sale of the existing
facility.
Capital spending in 1997 is planned to be about $8 million. The Company
anticipates that 1997 capital expenditures will be financed primarily with cash
balance and funds from operations.
DIVIDENDS
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 33% of the average earnings per share of the last two years. In November,
1996, the Company's Board of Directors increased the quarterly dividend to 10
cents per share from 8 cents per share. Annualized, this dividend pay out
equates to 31% of the 1996 and 1995 average earnings per share.
SHARE REPURCHASE PLAN
In 1996, the Company repurchased 415,307 shares of common stock on the open
market for $7.9 million, at an average cost of $19.00 per share. The Company
repurchased 317,680 shares in 1995 for $3.6 million, and 80,078 shares in 1994
for $900 thousand. The Company's practice for share repurchases is to offset the
dilutive impact of shares of common stock issued from the Company's stock option
and stock purchase plans, and for other corporate stock based programs. During
this three year period, the Company issued 773,904 shares of its common stock
from these stock option and stock purchase plans.
In January, 1995, the Company's Board of Directors authorized the repurchase
of 500,000 shares of common stock in the open market within the Securities and
Exchange Commission guidelines. At the end of 1996, 153,955 shares remained
available to be repurchased under this authorization. In November, 1996, the
Company's Board of Directors authorized the repurchase of an additional 500,000
shares of common stock in the open market within the Securities and Exchange
Commission guidelines.
The above share amounts have been adjusted for the Company's two-for-one
stock split in the form of a 100% stock dividend effective April 1, 1996.
The Company believes that its 1997 anticipated cash flows from operations, a
forecast decrease in unbilled contract and retainage receivables, and its lines
of credit will adequately finance ongoing operations, allow for further
common-stock repurchase programs and strategic acquisitions.
QUARTERLY STOCK ACTIVITY(1)
The Company's common shares trade on The Nasdaq Stock Market's National Market
under the symbol MTSC. The following table sets forth the high, low and volume
of shares traded (expressed in thousands) for the periods indicated:
1996 1995
- -----------------------------------------------------------------
Shares Shares
High Low Traded High Low Traded
- -----------------------------------------------------------------
1st Quarter 17 3/4 13 7/8 2796 12 3/8 10 1/8 1117
2nd Quarter 19 3/8 14 2635 12 7/8 11 1309
3rd Quarter 22 1/2 17 1/2 1471 13 7/8 11 3/4 806
4th Quarter 21 1/2 18 1/2 1937 14 5/8 13 3/8 769
- -----------------------------------------------------------------
(1) Source: The Nasdaq Stock Market
The above prices and share volumes have been adjusted for the Company's
two-for-one stock split in the form of a 100% stock dividend, effective April 1,
1996
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter-to-quarter revenue and earnings comparisons do not necessarily reflect
changes in the demand for the Company's products or its operating efficiency.
Revenues and earnings in any quarter can be significantly affected by delivery
delays or acceleration of one or more high-value systems, not accounted for
using the percentage-of-completion accounting method. The use of the
percentage-of-completion revenue recognition method for large long term projects
helps alleviate those fluctuations. (See Note 1 of "Notes to Consolidated
Financial Statements"). High value, state-of-the-art custom orders can also
contain leading-edge applications of the Company's technology which in some
cases have resulted in lower than expected gross profit margins. This "system
level" product development is as equally essential to the Company's long term
growth as is Company funded research and development. Manage ment believes these
orders have significant long-term benefits for the Company despite their
potential impact on earnings.
Quarterly earnings will also vary based on the use of estimated, effective
income tax rates for providing federal, state, and foreign income taxes. See
Note 4 of "Notes to Consolidated Financial Statements" for the reconciliation
between the statutory and effective income tax rates.
Selected quarterly financial information, for the three fiscal years ended
September 30, 1996, is presented below.
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------
(expressed in thousands except per share data)
1996
Revenues $ 56,135 $ 67,082 $ 60,630 $ 77,182 $ 261,029
Gross margin 23,867 28,066 24,374 29,797 106,104
Pretax income 3,570 5,363 4,286 6,787 20,006
- -----------------------------------------------------------------------------------------------------
Net income $ 2,430 $ 3,632 $ 2,914 $ 5,133 $ 14,109
- -----------------------------------------------------------------------------------------------------
Income per share $ .26 $ .38 $ .30 $ .54 $ 1.48
- -----------------------------------------------------------------------------------------------------
1995
Revenues $ 49,468 $ 58,949 $ 55,709 $ 70,005 $ 234,131
Gross margin 18,195 21,061 21,327 31,055 91,638
Pretax income 1,652 2,022 1,961 8,396 14,031
- -----------------------------------------------------------------------------------------------------
Net income $ 1,239 $ 1,511 $ 1,488 $ 6,223 $ 10,461
- -----------------------------------------------------------------------------------------------------
Income per share $ .14 $ .17 $ .17 $ .67 $ 1.15
- -----------------------------------------------------------------------------------------------------
1994
Revenues $ 47,241 $ 46,357 $ 48,468 $ 58,484 $ 200,550
Gross margin 19,443 17,380 18,902 24,115 79,840
Pretax income 3,526 5,015 1,442 2,646 12,629
- -----------------------------------------------------------------------------------------------------
Net income $ 2,361 $ 3,181 $ 1,002 $ 2,115 $ 8,659
- -----------------------------------------------------------------------------------------------------
Income per share $ .26 $ .34 $ .10 $ .22 $ .92
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(SEPTEMBER 30)
ASSETS 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(expressed in thousands)
Current Assets:
Cash and cash equivalents $ 19,231 $ 8,736
Accounts receivable, net of allowance for doubtful accounts of $1,742 and $1,824 53,717 65,106
Unbilled contracts and retainage receivable 16,418 19,668
Inventories 36,276 35,669
Prepaid expenses 4,740 2,410
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 130,382 131,589
- ---------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Land 3,459 3,461
Buildings and improvements 38,644 38,574
Machinery and equipment 59,060 55,826
Accumulated depreciation (53,073) (49,371)
- ---------------------------------------------------------------------------------------------------------------------
Total property and equipment, net 48,090 48,490
- ---------------------------------------------------------------------------------------------------------------------
Other Assets 8,924 9,421
- ---------------------------------------------------------------------------------------------------------------------
$ 187,396 $ 189,500
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ---------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Notes payable to banks $ 56 $ 10,475
Current maturities of long-term debt 3,030 1,043
Accounts payable 11,604 11,768
Accrued compensation and benefits 23,664 20,194
Advance billings to customers 13,807 14,784
Other accrued liabilities 8,673 8,750
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 60,834 67,014
- ---------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes 4,998 4,362
Long-term Debt 8,750 11,447
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' Investment:
Common stock, 25 (cents) par; 32,000,000 shares authorized:
9,173,518 and 4,598,311 shares issued and outstanding 2,293 1,150
Additional paid-in capital -- 255
Retained earnings 106,485 100,443
Cumulative translation adjustment 4,036 4,829
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 112,814 106,677
- ---------------------------------------------------------------------------------------------------------------------
$ 187,396 $ 189,500
- ---------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
CONSOLIDATED STATEMENTS OF INCOME
AND SHAREHOLDERS' INVESTMENT
(FOR THE YEARS ENDED SEPTEMBER 30)
INCOME 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(expressed in thousands except for share data)
Net Revenue $ 261,029 $ 234,131 $ 200,550
Cost of Revenue 154,925 142,493 120,710
- --------------------------------------------------------------------------------------------------------------
Gross Profit 106,104 91,638 79,840
- --------------------------------------------------------------------------------------------------------------
Operating Expenses:
Selling 48,260 45,088 40,351
General and administrative 17,260 16,053 12,682
Research and development 17,696 13,733 12,645
Interest expense 1,524 2,670 2,150
Interest income (401) (246) (290)
Other expense (income), net 1,759 309 (327)
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 86,098 77,607 67,211
- --------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 20,006 14,031 12,629
Provision for Income Taxes 5,897 3,570 3,970
- --------------------------------------------------------------------------------------------------------------
Net Income $ 14,109 $ 10,461 $ 8,659
- --------------------------------------------------------------------------------------------------------------
Net Income Per Share $ 1.48 $ 1.15 $ .92
- --------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding 9,553 9,090 9,336
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------------- Additional Cumulative
Shares Paid-In Retained Translation
Issued Amount Capital Earnings Adjustment
- --------------------------------------------------------------------------------------------------------------------------------
(dollars expressed in thousands)
Balance, September 30, 1993 4,543,603 $1,136 $ 2,677 $ 85,661 $3,537
- -------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 64,810 16 1,187 -- --
Translation adjustment -- -- -- -- 677
Common stock purchased and retired (40,039) (10) (936) -- --
Net income -- -- -- 8,659 --
Cash dividends, 28 (cents) per share -- -- -- (2,558) --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 4,568,374 1,142 2,928 91,762 4,214
- -------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 44,277 11 899 -- --
Translation adjustment -- -- -- -- 615
Common stock purchased and retired (158,840) (39) (3,572) -- --
Acquisitions through pooling of interests 144,500 36 -- 743 --
Net income -- -- -- 10,461 --
Cash dividends, 28 (cents) per share -- -- -- (2,523) --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 4,598,311 1,150 255 100,443 4,829
- -------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 264,604 66 3,642 -- --
Translation adjustment -- -- -- -- (793)
Common stock purchased and retired (381,055) (95) (3,897) (3,904) --
Stock split, 2 for 1 4,691,658 1,172 -- (1,172) --
Net income -- -- -- 14,109 --
Cash dividends, 32 (cents) per share -- -- -- (2,991) --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 9,173,518 $2,293 $ -- $106,485 $4,036
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(FOR THE YEARS ENDED SEPTEMBER 30)
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(expressed in thousands)
Operating Activities:
Net income $ 14,109 $ 10,461 $ 8,659
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,820 7,217 6,214
Deferred income taxes 740 278 731
Gain from sale of land and building -- (418) (3,930)
Changes in operating assets and liabilities:
Accounts receivable, unbilled contracts, and retainage receivable 13,362 (2,625) 8,789
Inventories (1,071) 1,065 (10,143)
Prepaid expenses (2,380) 718 (1,085)
Advance billings to customers (455) 4,629 2,336
Other liabilities, net 3,969 1,749 9,339
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 36,094 23,074 20,910
- -----------------------------------------------------------------------------------------------------------------
Investing Activities:
Property and equipment additions, net (7,437) (6,310) (6,901)
Plant purchases and new construction, net -- -- (11,277)
Proceeds from sale of land and building -- 671 6,131
Purchase of PowerTek, Inc. -- (4,687) --
Other assets (649) (405) (469)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (8,086) (10,731) (12,516)
- -----------------------------------------------------------------------------------------------------------------
Financing Activities:
Net borrowings under notes payable to banks (10,386) (8,134) (11,595)
Proceeds from issuance of long-term debt 2,202 8,257 4,341
Repayments of long-term debt (2,169) (3,185) (2,194)
Cash dividends (2,991) (2,523) (2,558)
Proceeds from employee stock option and stock purchase plans 3,708 910 1,203
Payments to purchase and retire common stock (7,896) (3,611) (946)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (17,532) (8,286) (11,749)
- -----------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash 19 (240) 677
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 10,495 3,817 (2,678)
Cash and Cash Equivalents at Beginning of Year 8,736 4,919 7,597
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 19,231 $ 8,736 $ 4,919
- -----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flows Information:
Cash paid during the year for:
Interest $ 1,458 $ 2,615 $ 2,069
Income taxes 6,677 3,317 3,715
- ------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
1. 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 year. Income statement items are
translated at average exchange rates during the year. 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 expense (income), net" in the Consolidated Statements of Income. These
transac tions resulted in net exchange gains of $104,000 in 1996, $1,401,000 in
1995 and $1,058,000 in 1994.
The Company has a foreign currency risk management program which principally
involves entering into forward foreign currency hedge contracts, options, and
foreign currency denominated loans to address specific exposures related to
future foreign currency transactions. On September 30, 1996, there were open
hedge and options contracts, with various future settlement dates, totaling
$28,362,000. The net unrealized gain on such contracts was $1,707,000 at
September 30, 1996. Upon settlement, resultant gains or losses on such contracts
offset the impact of foreign currency rates on cash collected from accounts
receivable.
REVENUE RECOGNITION
Revenue is recognized upon shipment of equipment when the customer's order can
be manufactured, delivered and installed in less than twelve months. Revenue on
contracts requiring longer delivery periods (long-term contracts) and other
customized orders that 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 impact on revenues
are recorded in the period in which the facts become known. When a loss is
antici pated on a contract, the amount is provided currently.
LONG-TERM CONTRACTS
The Company enters into long-term contracts for customized equipment sold to its
customers. Under 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
Consoli dated Balance Sheets as Unbilled Contracts and Retainage Receivable.
Amounts unbilled or retained at September 30, 1996 are expected to be invoiced
during fiscal 1997.
Long-term contracts consider the duration of the manufacturing and
collection cycles at the time the contract is bid. Accordingly, Accounts
Receivable in the accompanying Consolidated Balance Sheets approximate fair
value.
WARRANTY OBLIGATIONS
The Company warrants its products against defects in materials and workmanship
under normal use and service, generally for one year. The Company maintains
reserves for warranty costs based upon its past experience with war ranty
claims.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make assumptions and estimates that
affect the reported amounts in the Consolidated Balance Sheets and Statements of
Income and the disclosures in the accompanying Notes to Consolidated Financial
Statements. Ultimate results could differ from reported amounts based upon those
assumptions and estimates.
The Company undertakes significant technological innovation on some of its
Long-term Contracts. These contracts involve performance risk which may result
in delayed delivery of product and/or in revenue and gross profit variation from
difficulties in estimating the ultimate cost of such contracts.
CASH EQUIVALENTS
Cash equivalents represent short-term investments which have an original
maturity of 90 days or less and approximate fair value.
ACCOUNTS RECEIVABLE
The Company grants credit to customers, but generally does not require
collateral or other security from domestic customers. International receivables,
where deemed necessary, are supported by letters of credit from banking
institutions.
INVENTORIES
Inventories consist of material, labor and overhead and are stated at the lower
of first-in, first-out cost or market. Inventory components as of September 30,
were as follows:
1996 1995
- --------------------------------------------------------------
(expressed in thousands)
Customer projects in
various stages of
completion $ 12,832 $ 13,304
Components,
assemblies and parts 23,444 22,365
- --------------------------------------------------------------
Total $ 36,276 $ 35,669
- --------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions, replacements and
improvements are capitalized at cost, while maintenance and repairs are charged
to operations as incurred. Depreciation is provided over the following estimated
useful lives of the property:
Buildings and improvements: 10 to 40 years.
Machinery and equipment: 3 to 10 years.
Most major building and equipment purchases are depreciated on a
straight-line basis for financial reporting purposes and on an accelerated basis
for income tax purposes.
OTHER ASSETS
Other assets consist principally of patents and excess cost over net assets
acquired, net of accumulated amortization. The carrying value of such assets
less accumulated amortization was $6,872,000 and $7,275,000 in 1996 and 1995,
respectively. These assets are being amortized over various periods from 8 to 40
years.
ADOPTION OF STATEMENT NO. 121
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(the Statement), is effective for the Company's fiscal year ending September 30,
1997. The Company chose to adopt this Statement in 1996. Adoption of the
Statement had no impact on the Company's Consolidated Statements of Income or
Balance Sheets.
RESEARCH AND DEVELOPMENT
Research and product development costs associated with new products are charged
to operations as incurred.
NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
each period. Fully diluted and primary net income per share amounts are
approximately equivalent for the years presented. Weighted average common shares
and per share computations have been restated retroactively for the 2 for 1
stock split effective April 1, 1996.
2. INDUSTRY SECTOR AND GEOGRAPHIC INFORMATION:
The Company provides customers with hardware and software products and services
they can use to improve product quality, stimulate innovation, and increase
machine and worker productivity. MTS markets these products and services in two
business sectors--Mechanical Testing and Simulation (MT&S) and Industrial
Measurement and Automation (M&A). MT&S customers use the Company's products and
services to determine how their products (materials, vehicles, components or
structures) will perform under actual service conditions. M&A customers use the
Company's instrumentation products to monitor and automate indus trial processes
and equipment. Financial information by sector follows:
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(expressed in thousands)
Net Revenue
Mechanical Testing & Simulation $ 212,763 $ 190,464 $ 163,502
Measurement & Automation 48,266 43,946 37,276
Transfers within and between sectors -- (279) (228)
- ---------------------------------------------------------------------------------------------------
Total $ 261,029 $ 234,131 $ 200,550
- ---------------------------------------------------------------------------------------------------
Income Before Income Taxes
Mechanical Testing & Simulation $ 15,299 $ 9,550 $ 8,606
Measurement & Automation 4,707 4,481 4,023
- ---------------------------------------------------------------------------------------------------
Total $ 20,006 $ 14,031 $ 12,629
- ---------------------------------------------------------------------------------------------------
Identifiable Assets
Mechanical Testing & Simulation $ 165,110 $ 161,678 $ 152,763
Measurement & Automation 38,670 36,048 29,558
Eliminations between sectors (16,384) (8,226) (6,613)
- ---------------------------------------------------------------------------------------------------
Total $ 187,396 $ 189,500 $ 175,708
- ---------------------------------------------------------------------------------------------------
Other Sector Data
Mechanical Testing & Simulation:
Capital expenditures $ 6,198 $ 6,319 $ 16,464
Depreciation 5,706 5,456 4,917
Amortization 380 417 108
- ---------------------------------------------------------------------------------------------------
Measurement & Automation:
Capital expenditures $ 1,803 $ 1,243 $ 1,396
Depreciation 1,216 1,086 945
Amortization 518 258 244
- ---------------------------------------------------------------------------------------------------
A geographic summary of the Company's operations and related year-end asset
information for each of the three years in the period ended September 30, 1996
follows:
International
-----------------------------------------------------
United Elimi- Consoli-
States Far East Europe Other nations dated
- -------------------------------------------------------------------------------------------------------------------------------
(expressed in thousands)
Operations for the Year
Ended September 30, 1996
Net revenue $128,593 $ 54,392 $63,023 $15,021 $ -- $ 261,029
Transfers between
geographic areas 2,513 18,411 21,499 3 (42,426) --
- -------------------------------------------------------------------------------------------------------------------------------
Total $131,106 $ 72,803 $84,522 $15,024 $ (42,426) $ 261,029
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 10,690 $ 2,208 $ 3,876 $ 3,232 $ -- $ 20,006
- -------------------------------------------------------------------------------------------------------------------------------
Operations for the Year
Ended September 30, 1995
Net revenue $125,659 $ 42,032 $54,634 $11,806 $ -- $ 234,131
Transfers between
geographic areas 1,256 16,620 9,998 585 (28,459) --
- -------------------------------------------------------------------------------------------------------------------------------
Total $126,915 $ 58,652 $64,632 $12,391 $ (28,459) $ 234,131
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 15,046 $ (192) $(1,955) $ 1,132 $ -- $ 14,031
- -------------------------------------------------------------------------------------------------------------------------------
Operations for the Year
Ended September 30, 1994
Net revenue $101,747 $ 45,541 $45,099 $ 8,163 $ -- $ 200,550
Transfers between
geographic areas -- 19,343 15,439 871 (35,653) --
- -------------------------------------------------------------------------------------------------------------------------------
Total $101,747 $ 64,884 $60,538 $ 9,034 $ (35,653) $ 200,550
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 7,736 $ 4,010 $ 1,242 $ (359) $ -- $ 12,629
- -------------------------------------------------------------------------------------------------------------------------------
Identifiable Assets
at September 30
1996 $174,507 $ 12,060 $42,098 $ 175 $ (41,444) $ 187,396
1995 164,341 12,895 51,708 311 (39,755) 189,500
1994 154,954 19,454 40,825 791 (40,316) 175,708
- -------------------------------------------------------------------------------------------------------------------------------
Transfers between geographic areas are made at prices which allow appropriate markup to the manufacturing or selling unit.
Individual countries, other than the United States, do not exceed 10% of consolidated revenues on a recurrent annual basis.
3. FINANCING:
Long-term debt as of September 30 follows:
1996 1995
- -------------------------------------------------------------------------------------------------------------
(expressed in thousands)
7.75% Mortgage, due in October 2015, collateralized by building $ 7,413 $ 8,085
6.69% Note, unsecured, due in April 1997 2,296 2,408
5.5% Note, unsecured, due in September 2000 2,064 --
9.5% Note, unsecured, due in August 1996 -- 1,611
8.3% Note, unsecured, due in September 1996 -- 313
Other 7 73
- -------------------------------------------------------------------------------------------------------------
Total 11,780 12,490
Less Current Maturities (3,030) (1,043)
- -------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $ 8,750 $ 11,447
- -------------------------------------------------------------------------------------------------------------
Aggregate annual maturities of long-term debt for the next five fiscal years are
as follows: 1997--$3,030,000; 1998--$741,000; 1999--$756,000; 2000--$635,000;
2001--$240,000 and $6,378,000 thereafter. The carrying value of the Company's
long-term debt at September 30, 1996, approximates the fair value at current
interest rates offered to the Company for debt of the same remaining maturities.
The Company has credit agreements with two domestic banks totaling
$20,000,000. One credit agreement, for $5,000,000, permits the Company to issue
domestic and Euro-currency notes. The other credit agreement, for $15,000,000,
permits the Company to issue domestic notes, Euro-currency notes, and banker's
acceptances. As part of the same credit agreement, the bank has agreed to issue
term loans up to a maximum of $15,000,000 until September 30, 1997. This
agreement provides for repayment of these term loans through September 1999. The
Company compensates both banks with loan commitment fees on the unused portion
of the credit lines. The Company also has four uncommitted lines of credit with
banks that total $40,000,000. In addition, the Company has standby
letter-of-credit lines totaling $15,000,000. At September 30, 1996, standby
letters of credit outstanding totaled $12,267,000.
Under the terms of its credit agreements, the Company has agreed, among
other matters, that (a) its defined cash flow or fixed charge coverage will
exceed a defined minimum level; (b) its interest bearing debt will not exceed a
defined percentage of total capital; (c) its tangible net worth will exceed a
defined minimum amount; and (d) repurchases of its common stock will not exceed
a maximum amount. At September 30, 1996, tangible net worth exceeded the defined
minimum amount by $17,352,000 and the Company had $3,439,000 available for
repurchases of its common stock. The Company was in compliance with the terms of
its credit agreements and its lines of credit at September 30, 1996.
Information on short-term borrowings for the years ended September 30
follows: 1996 1995 1994
1996 1995 1994
- --------------------------------------------------------------------------------------------
(expressed in thousands)
Balance outstanding at September 30 $ 56 $ 10,475 $ 17,007
Average balance outstanding 3,282 22,286 23,702
Maximum balance outstanding 11,223 26,642 30,302
Year-end interest rate 7.0% 7.0% 5.8%
Weighted-average interest rate 6.9% 6.5% 4.4%
- --------------------------------------------------------------------------------------------
4. INCOME TAXES:
The provision for income taxes for the years ended September 30 consisted of:
1996 1995 1994
- --------------------------------------------------------------------------------------------
(expressed in thousands)
Currently payable (receivable):
Federal $ 3,717 $ 3,211 $ 2,249
State 499 662 411
Foreign 1,830 (295) 1,203
Deferred (149) (8) 107
- --------------------------------------------------------------------------------------------
Total provision $ 5,897 $ 3,570 $3,970
- --------------------------------------------------------------------------------------------
A reconciliation from the Federal statutory income tax rate to the Company's
effective rate for the years ended September 30 follows:
1996 1995 1994
- -------------------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
Tax benefit of Foreign Sales Corporation (5) (7) (4)
Foreign provision in excess of U.S. tax rate 2 -- 5
State income taxes, net of Federal benefit 2 3 2
Research and development tax credits (3) (7) (4)
Other, net (2) 1 (3)
- -------------------------------------------------------------------------------------------
Effective rate 29% 25% 31%
- -------------------------------------------------------------------------------------------
Deferred tax assets and liabilities are recorded for the differences between the
amounts reported for financial reporting and income tax purposes. Components of
the net deferred tax liabilities as of September 30 were as follows:
Deferred Tax Assets:
1996 1995
- ---------------------------------------------------------------------------------------------
(expressed in thousands)
Accrued compensation and benefits $ 1,446 $1,444
Inventory reserves 1,586 860
Allowance for doubtful accounts 248 216
Other assets (20) 21
- ---------------------------------------------------------------------------------------------
Total deferred tax assets $ 3,260 $2,541
- ---------------------------------------------------------------------------------------------
Deferred Tax Liability:
1996 1995
- ---------------------------------------------------------------------------------------------
Property and equipment $ 4,998 $4,362
- ---------------------------------------------------------------------------------------------
Net deferred tax liability $ 1,738 $1,821
- ---------------------------------------------------------------------------------------------
5. STOCK OPTIONS:
The Company has made certain stock-based awards to its officers,
non-employee directors, and key employees under various stock plans. Awards
under these plans can include incentive stock options (qualified), non-qualified
stock options, stock appreciation rights, restricted stock, deferred stock, and
other stock-based and non stock-based awards. At September 30, 1996, the Company
had awarded only incentive stock options and non-qualified stock options. These
were granted at exercise prices that are 100% of the fair-market value at the
date of grant. Beginning one year after grant, the options generally can be
exercised proportion ately each year for periods of three, four, and six years,
as defined in the respective plans.
Option holders may exercise options by delivering Company stock already
owned, cash, or a combination of stock and cash. The shares tendered in the
exchange are cancelled and, therefore, reduce shares issued. During 1996 and
1995, option holders exchanged 52,189 and 30,546 shares, respectively, of the
Company's stock in payment of options exercised. (All share and share price data
herein have been restated retroactively for the 2 for 1 stock split effective
April 1, 1996.)
Under the Plans, options for 983,068 shares are outstanding at $11.56 to
$19.50 per share, of which options for 463,465 shares were exercisable at
September 30, 1996. Another 345,601 options remain available for granting beyond
September 30, 1996. During 1996 and 1995, options for 394,335 and 88,314 shares
were exercised at prices of $6.50 to $15.88 and $6.50 to $13.38 per share,
respectively.
In January 1992 the Company's shareholders authorized an Employee Stock
Purchase Plan (the Purchase Plan), whereby 500,000 shares of the Company's
common stock were reserved for sale to employees until April 2002. Participants
in the 1996 and 1995 phases, all at dates specified in the Purchase Plan, were
issued 49,539 shares in 1996, and 30,786 shares in 1995. During fiscal 1996,
participants subscribed to purchase 45,000 shares at 85% of market price for
issuance in fiscal 1997.
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting
for Stock-Based Compensation" (the Statement) is effective for the Company's
fiscal year ending September 30, 1997. The Statement encourages, but does not
require, a fair value based method of accounting for employee stock options or
other similar equity instruments. The Company believes the effect of the
adoption of the new standard will have no impact on the Company's consolidated
results of operations or financial position as the Company intends to continue
to measure compensation costs under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and present pro forma disclosures of
net income and net income per share as if the fair value based method of
accounting had been applied.
6. EMPLOYEE BENEFIT PLANS:
The Company's profit sharing plan functions as a retirement program for most
U.S. and certain international employees. Employees who have completed 1,000
hours of service during the plan year are eligible to participate. The formula
for calculating the Company's contribution is approved annually by the Board of
Directors and is based primarily on operating results for the year, before
management variable compensation. The plan provides for a minimum contribution
of 4% of participant compensation, as defined, up to the social security taxable
wage base, and 8% of participant compensation in excess of the taxable wage base
up to the maximum profit sharing contribution allowed by federal law, so long as
the entire contribution calculation does not exceed pretax income. The
contributions for 1996, 1995, and 1994 were 4.3%, 4.3%, and 4.3% of participant
compensation, respectively. The provisions for profit sharing were $2,338,000 in
1996, $2,132,000 in 1995, and $2,281,000 in 1994, and are distributed among the
various operating expenses shown in the accompanying Consolidated Statements of
Income.
Two of the Company's international subsidiaries have noncontributory,
unfunded retirement plans for eligible employees. These plans provide benefits
based on the employee's years of service and compensation during the years
immediately preceding retirement, early retirement, termination, disability or
death, as defined in the respective plans.
The expenses for these plans consist of the following components:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
(expressed in thousands)
Service cost-benefit earned during the period $ 360 $ 395 $ 214
Interest cost on projected benefit obligation 261 278 195
Net amortization and deferral 5 40 (16)
- --------------------------------------------------------------------------------------------------------------
Net Periodic Pension Cost $ 626 $ 713 $ 393
- --------------------------------------------------------------------------------------------------------------
The status of the Company`s plans and the amounts recognized
in the consolidated financial statements are:
1996 1995
- --------------------------------------------------------------------------------------------------------------
(expressed in thousands)
Actuarial Present Value:
Accumulated benefit obligation:
Vested $3,135 $3,201
Nonvested 552 778
- --------------------------------------------------------------------------------------------------------------
Total 3,687 3,979
- --------------------------------------------------------------------------------------------------------------
Projected benefit obligation 4,532 4,968
Unrecognized net gain 822 409
Unrecognized net liability being amortized (631) (738)
Adjustment required to recognize minimum liability 86 118
- --------------------------------------------------------------------------------------------------------------
Accrued Pension Liability $4,809 $4,757
- --------------------------------------------------------------------------------------------------------------
Major assumptions at year-end are:
- --------------------------------------------------------------------------------------------------------------
Discount rate 3.5 to 7% 3.5 to 7%
Rate of increase in future compensation levels 3% 3%
- --------------------------------------------------------------------------------------------------------------
7. ACQUISITIONS:
In fiscal 1994 the Company purchased 100% of the stock of Adamel Lhomargy for
cash and assumption of debt. The transaction was accounted for by the purchase
method of accounting.
In fiscal 1995 the Company acquired three entities. The Company acquired the
stock of PowerTek, Inc. for an initial cash payment and a contingent future
payment. The transaction was accounted for by the purchase method of accounting.
PowerTek became a wholly owned subsidiary and conducts business as MTS-PowerTek,
Inc. The Company also completed transactions to exchange shares of its common
stock for all the outstanding shares of Gull Engineering, Inc. and Incon
Corporation. Both transactions were accounted for as poolings of interests.
These companies were absorbed into existing operating units of the Company.
Financial data for prior periods were not restated for the acquisitions by
pooling of interests as neither assets nor operations were material,
individually or in total, to the Company's Consolidated Financial Statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO MTS SYSTEMS CORPORATION:
We have audited the accompanying consolidated balance sheets of MTS Systems
Corporation (a Minnesota corporation) and Subsidiaries as of September 30, 1996
and 1995, and the related consolidated statements of income, shareholders'
investment, and cash flows for each of the three years in the period ended
September 30, 1996. These financial statements are the responsibility of the
Company's manage ment. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MTS Systems Corporation and
Subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 22, 1996
REPORT OF MANAGEMENT
The management of MTS Systems Corporation is responsible for the integrity and
objectivity of the financial information presented in this report. The financial
statements have been prepared in accor d ance with generally accepted accounting
principles and include certain amounts based on man age ment's best estimates
and judgment.
Management is also responsible for establishing and maintaining the
Company's accounting systems and related internal controls, which are designed
to provide reasonable assurance that assets are safeguarded, transactions are
properly recorded, and the policies and procedures are implemented by qualified
personnel.
The Audit Committee of the Board of Directors, which is comprised solely of
outside directors, meets regularly with management and its independent auditors
to review audit activities, internal controls, and other accounting, reporting,
and financial matters. This Committee also recommends inde pendent auditors for
appointment by the full Board, subject to shareholder ratification.
The financial statements included in this annual report have been audited by
Arthur Andersen LLP, independent public accountants. We have been advised that
their audits were conducted in accordance with generally accepted auditing
standards and included such reviews of internal controls and tests of
transactions as they considered necessary in setting the scope of their audits.
Donald M. Sullivan
Chairman and
Chief Executive Officer
/s/ Donald M. Sullivan
Marshall L. Carpenter
Vice President and
Chief Financial Officer
/s/ Marshall L. Carpenter
CORPORATE INFORMATION
BOARD OF DIRECTORS
E. Thomas Binger
General Partner,
Pittsburgh Pacific Co.
Charles A. Brickman
President,
Pinnacle Capital Corporation
Bobby I. Griffin
President,
Medtronic Pacing Business;
Executive Vice President,
Medtronic, Inc.
Russell A. Gullotti
Chairman, President,
Chief Executive Officer,
National Computer Systems
Thomas E. Holloran
Professor,
University of St. Thomas
Thomas E. Stelson, Ph.D
Independent Engineering
Consultant
Donald M. Sullivan
Chairman,
Chief Executive Officer,
President
MTS Systems Corporation
Linda Hall Whitman, Ph.D
President,
Chief Executive Officer,
Ceridian People Partners
CHAIRMAN EMERITUS
George N. Butzow
Founder
EXECUTIVE OFFICERS
Donald M. Sullivan
Chairman, Chief Executive
Officer, President
William G. Beduhn
Vice President
Marshall L. Carpenter
Vice President and
Chief Financial Officer
Mauro Togneri
Vice President
Keith D. Zell
Executive Vice President
CORPORATE OFFICERS
Barbara J. Carpenter
Assistant Corporate Secretary
Patrick Delaney
Secretary,
Partner, Lindquist & Vennum
Thomas J. Minneman
Treasurer
Werner Ongyert
Vice President/Europe
J. Howell Owens
Vice President
Richard S. White
Vice President/Asia Pacific
DIVISIONAL OFFICERS
William G. Anderson
Vice President
Steven M. Cohoon
Vice President
James M. Egerdal
Vice President
Kenneth E. Floren
Vice President
Joachim Hellwig
Vice President
Daniel T. Sparks
Vice President
REFERENCES
Bank Reference
First Bank National Association
Minneapolis, MN
Transfer Agent
Norwest Bank Minnesota, N.A.
South St. Paul, MN
Shareholder Assistance:
800-468-9716
General Counsel
Lindquist & Vennum PLLP
Minneapolis, MN
Patent Counsel
Westman, Champlin & Kelly
Minneapolis, MN
Auditors
Arthur Andersen LLP
Minneapolis, MN
NOTICE OF ANNUAL MEETING
The annual meeting of stockholders will be held at 4:00 p.m. (Central Standard
Time) on Tuesday, January 28, 1997 at the Company's Headquarters in Eden
Prairie, Minnesota
STOCKHOLDERS WHO CANNOT ATTEND THE MEETING ARE URGED TO EXERCISE THEIR RIGHT TO
VOTE BY PROXY. A PROXY CARD, A PROXY STATEMENT, AND A RETURN ENVELOPE ARE
ENCLOSED FOR THIS PURPOSE.
10-K REPORT
Copies of the Annual Report on Form 10-K, filed with the Securities and Exchange
Commission, are available on request without charge from Investor Relations,
MTSSystems Corporation, 14000 Technology Drive, Eden Prairie, Minnesota
55344-2290.
COMMON STOCK
MTS Systems Corporation's common stock publicly trades on The Nasdaq Stock
Market's National Market under the symbol "MTSC".
STOCK HELD IN
STREET NAME
The Company maintains a direct mailing list to insure that stockholders whose
stock is not held in their own names, and other interested persons, receive
annual reports and other information on a timely basis. If you would like your
name added to this list, please send your request to Barbara Carpenter,
Assistant Corporate Secretary, MTS Systems Corporation, 14000 Technology Drive,
Eden Prairie, Minnesota 55344-2290.
INVESTOR INQUIRIES
Security analysts, investment managers and others seeking information about
MTSSystems Corporation should contact Thomas J. Minneman, Treasurer, by mail at
the Company's headquarters or by telephone at 612-937-4647.
TRADEMARKS
MTS, Bionix, Level Plus, Temposonics, Flat-Trac, and TestWorks are registered
trademarks, and Aero-90, FlexTest, MaxPlus, ServoFlex, Synergie, and Tytron are
trademarks of MTS Systems Corporation. Microsoft and Windows are trademarks of
Microsoft Corporation.
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CORPORATE HEADQUARTERS
MTS Systems Corporation
14000 Technology Drive
Eden Prairie, Minnesota 55344-2290
Telephone: 612-937-4000
E-mail: info@mts.com
Internet Address: www.mts.com
ISO 9001 Certified
DOMESTIC SUBSIDIARIES
Custom Servo Motors, Inc.
MTS-PowerTek, Inc.
INTERNATIONAL SUBSIDIARIES
MTS International Ltd.
(Barbados, West Indies)
MTS (Japan) Ltd.
MTS Systems (China) Inc.
MTS Systems France
MTS Systems GmbH (Berlin)
MTS Systems (Hong Kong) Inc.
MTS Systems Limited (London)
MTS Systems Norden AB (Sweden)
MTS Systems SRL (Italy)
MTS Sensors Technologie
GmbH and Co. KG (Germany)
MTS Sensors Technology K.K. (Japan)
MTS Testing Systems (Canada) Ltd.
MTS Korea, Inc.
MTS Adamel Lhomargy S.A.
MTS Holdings France, SARL