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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1998
Commission File Number 0-2382
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MTS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 612-937-4000 41-0908057
(State or other jurisdiction of (Telephone number of (I.R.S. Employer
incorporation or organization) registrant including Identification No.)
area code)
14000 Technology Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
__X__ Yes _____ No
The number of shares outstanding of the Registrant's common stock as of
January 31, 1999 was 18,627,769 shares.
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MTS SYSTEMS CORPORATION
FIRST QUARTER REPORT ON FORM 10-Q
FOR THREE MONTHS ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets
December 31, 1998 and September 30, 1998 2
Consolidated Statements of Income
Three months ended December 31, 1998 and 1997 3
Consolidated Statements of Cash Flows
Three months ended December 31, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity
Three months ended December 31, 1998 and
years ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-10
PART II - OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
1
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(expressed in thousands, except per share data)
December 31 September 30
ASSETS 1998 1998
----------- ------------
Current assets:
Cash and cash equivalents $ 14,301 $ 10,512
Accounts receivable 90,699 89,278
Unbilled contracts and retainage receivable 31,234 35,891
Inventories-
Customer jobs-in-process 4,569 10,750
Components, assemblies and parts 48,242 42,925
Prepaid expenses 8,334 4,237
----------- -----------
Total current assets 197,379 193,593
----------- -----------
Property and Equipment:
Land 2,437 2,437
Buildings and improvements 40,863 40,432
Machinery and equipment 94,606 88,626
Accumulated depreciation (66,088) (63,758)
----------- -----------
Total property and equipment, net 71,818 67,737
----------- -----------
Other assets 34,639 37,118
----------- -----------
Total assets $ 303,836 $ 298,448
=========== ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 24,132 $ 28,243
Current maturities of long-term debt 1,083 1,180
Accounts payable 14,815 19,406
Accrued compensation and benefits 27,334 26,919
Advance billings to customers 28,404 17,360
Other accrued liabilities 11,560 12,106
----------- -----------
Total current liabilities 107,328 105,214
Deferred income taxes 5,007 4,939
Long-term debt, less current maturities 45,212 45,259
----------- -----------
Commitments and contingencies
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 18,615,329 and 18,579,481
shares issued and outstanding 4,654 4,645
Additional paid-in capital 3,557 3,322
Retained earnings 134,914 133,203
Accumulated other comprehensive income 3,164 1,866
----------- -----------
Total shareholders' investment 146,289 143,036
----------- -----------
Total liabilities and shareholders' investment $ 303,836 $ 298,448
=========== ===========
The accompanying notes are an integral part of these financial statements
2
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(expressed in thousands, except per share data)
FOR THE THREE MONTHS ENDED
DECEMBER 31
1998 1997
----------- -----------
NET REVENUE $ 87,733 $ 73,938
COST OF REVENUE 54,358 43,699
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Gross profit 33,375 30,239
OPERATING EXPENSES:
Selling 14,431 12,346
General and administrative 5,020 5,201
Research and development 5,909 4,568
Restructuring expense 2,100 --
----------- -----------
Total operating expenses 27,460 22,115
INCOME FROM OPERATIONS 5,915 8,124
Interest expense 1,252 226
Interest income (51) (108)
Other (income) and expense, net 381 1,294
----------- -----------
INCOME BEFORE INCOME TAXES 4,333 6,712
PROVISION FOR INCOME TAXES 1,506 2,400
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NET INCOME $ 2,827 $ 4,312
=========== ===========
BASIC EARNINGS PER SHARE $ 0.15 $ 0.24
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.22
DIVIDENDS PER SHARE $ 0.06 $ 0.06
BACKLOG $ 175,153 $ 166,900
The accompanying notes are an integral part of these financial statements
3
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(expressed in thousands)
FOR THE THREE MONTHS ENDED
DECEMBER 31
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income $ 2,827 $ 4,312
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,963 2,212
Deferred income taxes 37 5
Changes in operating assets and liabilities:
Receivables, including accounts, unbilled
contracts and retainages 5,149 (4,549)
Inventories 1,120 (4,046)
Prepaid expenses (4,060) (463)
Advance billings to customers 10,945 3,732
Other, net (5,530) (6,721)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,451 (5,518)
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INVESTING ACTIVITIES
Property and equipment, net (4,529) (4,834)
Other assets 368 (42)
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NET CASH USED IN INVESTING ACTIVITIES (4,161) (4,876)
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FINANCING ACTIVITIES
Net borrowings (payments) on notes payable (4,111) 10,226
Payments on long-term borrowings (249) (215)
Cash dividends (1,116) (1,099)
Proceeds from employee stock option
and stock purchase plans 244 294
Payments to purchase and retire common stock -- (186)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,232) 9,020
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (269) (3)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,789 (1,377)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,512 10,285
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,301 $ 8,908
========== ==========
The accompanying notes are an integral part of these financial statements
4
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(expressed in thousands)
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL INCOME EARNINGS INCOME(LOSS) INVESTMENT
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1996 $ 2,293 $ 0 $ 0 $ 106,485 $ 4,036 $ 112,814
Comprehensive income:
Net Income $ 20,863 20,863 20,863
-----------
Other comprehensive income (loss):
Foreign currency translation (2,306) (83) (2,306) (2,389)
-----------
Comprehensive income $ 18,557
-----------
Exercise of stock options 78 4,511 4,589
Common stock purchased and retired (87) (3,073) (4,453) (7,613)
Cash dividends (3,645) (3,645)
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1997 2,284 1,438 119,167 1,730 124,619
Comprehensive income:
Net Income $ 20,766 20,766 20,766
-----------
Other comprehensive income (loss):
Foreign currency translation 136 136 136
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Comprehensive income $ 20,902
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Stock Split 2 for 1 2,301 (2,301) --
Exercise of stock options 75 3,086 3,161
Common stock purchased and retired (15) (1,202) (1,217)
Cash dividends (4,429) (4,429)
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1998 4,645 3,322 133,203 1,866 143,036
Comprehensive income:
Net Income $ 2,827 2,827 2,827
-----------
Other comprehensive income (loss):
Foreign currency translation 1,298 1,298 1,298
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Comprehensive income $ 4,125
-----------
Exercise of stock options 9 235 244
Common stock purchased and retired -- -- --
Cash dividends (1,116) (1,116)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 $ 4,654 $ 3,557 $ 134,914 $ 3,164 $ 146,289
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
5
MTS SYSTEMS CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Consolidation
The consolidated financial statements include the accounts of MTS SYSTEMS
CORPORATION and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated.
The interim consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments necessary for the fair presentation of such consolidated financial
statements have been reflected in the interim periods presented. The significant
accounting policies and certain financial information which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles, but which are not required for interim reporting
purposes, have been condensed or omitted. The accompanying consolidated
financial statements of the Company should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K.
2. COMPREHENSIVE INCOME
The Company adopted the new standard, Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes requirements for disclosure of comprehensive income. The standard
becomes effective with the quarter ended December 31, 1998. Prior year amounts
have been restated and presented to conform with the new standard.
3. EARNINGS PER COMMON SHARE
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share include the dilutive effect of potential common shares. Weighted
average common shares and per share computations have been restated for the
two-for-one stock split effective February 2, 1998
QUARTER ENDED Quarter Ended
DECEMBER 31 December 31
1998 1997
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(expressed in thousands, except per share data)
Weighted average
common shares
outstanding 18,594 18,290
Diluted potential
common shares 501 970
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Total dilutive
common shares 19,095 19,260
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Basic net income
per share $0.15 $0.24
Diluted net income
per share $0.15 $0.22
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6
4. RESTRUCTURING CHARGE
The Company has taken a series of actions to better align its organizational
structure with market elements, improve operational performance, and reduce
costs. These actions resulted in a one-time charge during the first quarter of
fiscal year 1999 of approximately $2.1 million ($1.3 million after tax, or $.07
per share). This charge relates principally to a workforce reduction and $0.3
million for operational consolidations. Annualized pretax cost savings from
reducing the number of employees and contractors is estimated to be $5.0
million.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
New Orders and Backlog
New orders for the first quarter of fiscal 1999, ended December 31, 1998, were
$87.2 million compared to $69.2 million for the same period last year. The gain
resulted from increased orders from international customers, primarily in Europe
and Asia. Orders from international customers were 56.3% of the total for the
first quarter compared to 43.5% in the prior year. The overall increase includes
$6.5 million of orders from acquisitions made during fiscal 1998.
Orders for the Mechanical Testing and Simulation (MT&S) sector increased 33.1%
to $69.8 million from the prior year. A decline in domestic orders was more than
offset by the increase in international orders. New orders for the Factory
Automation (FA) sector rose 8.5% to $17.4 million from fiscal 1998.
The backlog of undelivered orders at December 31, 1998 was $175 million, a
slight decline from September 30, 1998, but a 4.9% increase from first quarter,
fiscal 1998.
Results of Operations
Revenue rose nearly $14 million to $87.7 million, an increase of 18.7% over the
first quarter of fiscal 1998. Domestic revenue accounted for 53.1% and 53.8% of
total revenue for the quarters ended December 31, 1998 and 1997, respectively.
MT&S revenue increased 17.4% from the prior year to $68.5 million, while FA
revenue increased 23.2% to $19.2 million. 1998 acquisitions accounted for $5.9
million of the revenue increase.
Gross margin increased to $33.4 million, up 10.4% or $3.1 million over the prior
year. Both the MT&S and FA sectors contributed to this increase. Consolidated
gross margin, as a percent of revenue, was 38.0% and 40.9% for the quarters
ended December 31, 1998 and 1997, respectively. The decrease in the gross margin
percentage was due to a change in business mix resulting in a higher content of
custom projects, continued price competition in the marketplace and several
operations operating at less than planned volume levels. Margins percents are
forecasted to improve in the last half of fiscal 1999.
First quarter, fiscal 1999 operating expenses totaled $27.5 million, an increase
of $5.3 million over 1998. The majority of the increase in operating expenses is
due to a $2.1 million restructuring charge related to a previously announced
workforce reduction and $2.5 million in incremental operating costs due to the
timing of 1998 acquisitions which occurred after the first quarter. Excluding
these amounts, on a year over year comparison, operating costs increased 3.4% in
the first quarter, fiscal 1999 over the prior year.
Other income and expense decreased from 1998 due to favorable foreign exchange
transactions including both the impact in translating international subsidiary
account balances and settlements of specific transactions denominated in foreign
currencies.
Income before income taxes for the first quarter, fiscal 1999 was $4.3 million,
down $2.4 million from the first quarter, 1998. Excluding the $2.1 million
restructuring charge taken in the first quarter, income before income taxes
declined slightly from the previous year.
The effective tax rate for the quarter ended December 31, 1998 was 34.7%
compared to 35.8% for the quarter ended December 31, 1997 and 34% for the year
ended September 30, 1998. First quarter, fiscal 1999 net income, including the
restructuring charge, was $2.8 million or $0.15 per share. The effect of the
first quarter restructuring charge was to reduce 1999 net income by $1.5 million
or $0.08 per share
8
Financial Condition and Liquidity
The ratio of current assets to current liabilities was unchanged at 1.8 at
December 31, 1998 and September 30, 1998. Working capital remained strong at $90
million. Cash and cash equivalents increased slightly to $14.3 million. At
December 31, 1998, the Company's capital structure was comprised of $25.2
million of current debt, $45.2 million of long-term debt and $146.3 million of
shareholders' investment. The ratio of total debt to total capitalization was
32.5%, down from 34.3% at September 30, 1998.
For the first quarter of fiscal year 1999, operating activities generated $13.4
million of cash, compared to cash used of $5.5 million in the first quarter of
the prior year. The increase in cash generated for the quarter was due to a
decrease in receivables and inventories while advanced billings to customers for
projects increased $10.9 million.
Cash used during the quarter included capital expenditures for property and
equipment additions of $4.5 million.
Cash used in financing activities was $5.2 million for the first quarter. This
included $4.1 million in payments on notes payable to banks and cash dividends
of $1.1 million.
The Company believes that the combination of present capital resources,
internally generated funds and available financing resources will be adequate to
finance on-going operations, allow for reinvestment in the business and
strategic acquisitions.
Year 2000
The following is a Year 2000 Readiness Disclosure pursuant to the Year 2000
Information and Readiness Disclosure Act. This disclosure should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in the Company's Annual Report on Form 10-K.
The Company continues to evaluate the potential impact of what is commonly
referred to as the Year 2000 issue, concerning the inability of certain
computer-based products and systems to operate correctly into and during the
year 2000. If not corrected, these products and systems could fail or create
erroneous results. Following preliminary work done in fiscal 1997, in early 1998
the Company established a full-time Year 2000 central project office led by a
senior technical manager reporting directly to an executive.
The central project office has been working with each of the Company's twelve
producing sites to evaluate the following areas:
1. Site Infrastructure, Equipment and Vendors
Business Information Systems
End User Computing Systems
Telecommunications Infrastructure
Service Providers
Material Suppliers
Manufacturing and Metrology Equipment and Facilities
2. Products Manufactured at Site
SITE INFRASTRUCTURE, EQUIPMENT AND VENDORS
The Company's major Business Information, End User Computing and Telecom Systems
have been identified at each site, and the vast majority of these systems that
have been tested are compliant. Each site has developed a plan for completion of
testing and remediation of critical systems.
9
The Company believes its greatest Year 2000 exposure lies with a limited number
of critical/sole source service providers and material suppliers. A failure of
these vendors to be able to operate up to and through the year 2000 could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company has sent surveys to such vendors and has received
responses from most of them about their Year 2000 readiness. Where the Company
does not have sufficient comfort that a critical vendor will be ready, site
management is obtaining more detailed information and during the first quarter
of fiscal 1999 has begun to develop contingency plans, where feasible, in those
cases where such interruption remains reasonably possible.
The Company's manufacturing and metrology equipment and facilities contain
embedded processors and code which have been inventoried and evaluated for Year
2000 readiness. A few instances require remediation.
The Company is on plan for the completion of testing and where necessary
remediation of the above items by June 30, 1999.
PRODUCTS MANUFACTURED AT SITE
The Company's FA sector products contain few date sensitive computer and
embedded processors. The Company has completed an evaluation of the vast
majority of these products and is currently working to complete the balance. All
of the products evaluated to date have been found to be year 2000 ready, in some
cases with stipulations, and the Company believes that will be the case with the
products yet to be evaluated.
The Company's MT&S sector products are by their nature computer intensive. The
Company has assessed the vast majority of these products and advised its
customers as to their Year 2000 readiness via its web site and written
communication. The balance of products will be assessed by March 31, 1999. In
those cases where MT&S's products were found to be non-compliant, less than 2%,
or in the case of discontinued products that were not evaluated, the Company is
working with its customers to provide upgrades that are year 2000 ready.
SUMMARY
The Company estimates that the costs directly related to its Year 2000 project
were $300,000 in fiscal 1998 and will be $800,000 in fiscal 1999. Approximately
$100,000 was incurred in the first quarter of fiscal 1999. Such costs are
expensed as incurred.
This Readiness Disclosure is a Forward Looking statement as defined by the
Securities and Exchange Commission and the Company recognizes that, although not
expected, there are risks of project delays, costs incurred, vendor compliance,
and loss of business which are outside the direct control of the Company and/or
could prove to be material.
10
PART II----OTHER INFORMATION
ITEM 5. Other Information.
Annual Shareholders Meeting
The Annual Meeting of Shareholders was held on January 26, 1999 at the Company's
headquarters in Eden Prairie, Minnesota. With shareholders voting 89.1% of the
outstanding shares, actions passed to re-elect the Board of Directors and ratify
the appointment of Arthur Andersen LLP as the Company's independent public
accountants. The motion to amend the Company's Amended and Restated Articles of
Incorporation to authorize the creation of 25,000,000 shares of Preferred Stock
and to authorize multiple classes of Common Stock, was not approved
Forward Looking Statements
In this report the Company makes 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 upon many factors, some
beyond our control, including factors related to Company competitive
performance, industry conditions and international economic trends
ITEM 6. Exhibits and Reports on Form 8-K.
The following are submitted as part of this report.
(a) Exhibit 27
Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended December 31, 1998.
(c) 1998 Annual Report to Shareholders, incorporated by reference
from exhibit 13 of Form 10-K for fiscal year ended September 30,
1998.
11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MTS SYSTEMS CORPORATION
/s/ Sidney W. Emery, Jr.
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Sidney W. Emery, Jr.
President
Chief Executive Officer
/s/ Marshall L. Carpenter
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Marshall L. Carpenter
Vice President
Chief Financial Officer
Dated: February 12, 1999
12