UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
or the Securities Exchange Act of 1934
For quarterly period ended June 30, 1997
Commission File Number 0-2382
MTS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 612-937-4000 41-0908057
(State or other jurisdiction of (Telephone number of (I.R.S.Employer
incorporation or organization) registrant Identification No.)
including 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.25 par value; 9,067,049 shares outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND SEPTEMBER 30, 1996
June 30 September 30
1997 1996
ASSETS UNAUDITED AUDITED
(expressed in $ 000's)
Cash and cash equivalents $ 14,015 $ 19,231
Accounts receivable 62,498 53,717
Unbilled contracts and retainage receivable 20,167 16,418
Inventories-
Customer jobs-in-process 9,683 7,535
Components, assemblies and parts 36,428 28,741
Prepaid expenses 4,088 4,740
--------- ---------
Total current assets 146,879 130,382
--------- ---------
Land 2,453 3,459
Buildings and improvements 36,404 38,644
Machinery and equipment 64,106 59,060
Accumulated depreciation (56,696) (53,073)
--------- ---------
Total property and equipment 46,267 48,090
--------- ---------
Other assets 13,229 8,924
--------- ---------
$ 206,375 $ 187,396
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Notes payable to banks $ 10,296 $ 56
Current maturities of long-term debt 520 3,030
Accounts payable 12,860 11,604
Accrued compensation and benefits 21,972 23,664
Advance billings to customers 16,997 13,807
Other accrued liabilities 12,945 9,835
Accrued income taxes 411 (1,162)
--------- ---------
Total current liabilities 76,001 60,834
Deferred income taxes 4,684 4,998
Long-term debt, less current maturities 7,283 8,750
--------- ---------
Common stock, $.25 par; 32,000,000 shares
authorized: 9,067,049 and 9,173,518
shares issued and outstanding 2,267 2,293
Additional paid-in capital 196 --
Retained earnings 113,821 106,485
Cumulative translation adjustment 2,123 4,036
--------- ---------
Total shareholders' investment 118,407 112,814
--------- ---------
$ 206,375 $ 187,396
========= =========
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
FOR THE 3 MONTHS ENDED
JUNE 30
1997 1996
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 74,153 $ 60,630
COST OF REVENUES 44,672 36,256
--------- ---------
Gross profit 29,481 24,374
OPERATING EXPENSES:
Selling 13,305 11,666
General and administrative 5,114 4,109
Research and development 4,025 4,482
Interest expense 509 135
Interest income (176) (104)
Other (income) and expense, net (including gain
on land sale of $4.3 million in 1997) (4,243) (200)
--------- ---------
Total operating expense 18,534 20,088
--------- ---------
INCOME BEFORE INCOME TAXES 10,947 4,286
PROVISION FOR INCOME TAXES 4,206 1,372
--------- ---------
NET INCOME $ 6,741 $ 2,914
========= =========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.71 $ 0.30
DIVIDENDS PER SHARE $ 0.10 $ 0.08
BACKLOG $ 136,472 $ 126,053
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,520 9,703
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
FOR THE 9 MONTHS ENDED
June 30
1997 1996
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 214,874 $ 183,847
COST OF REVENUES 127,942 107,539
--------- ---------
Gross profit 86,932 76,308
OPERATING EXPENSES:
Selling 37,907 34,658
General and administrative 14,990 12,170
Research and development 12,790 12,926
Interest expense 1,279 1,037
Interest income (294) (171)
Other (income) and expense, net (including gain
on land sale of $4.3 million in 1997) (2,430) 2,469
--------- ---------
Total operating expense 64,242 63,089
--------- ---------
INCOME BEFORE INCOME TAXES 22,690 13,219
PROVISION FOR INCOME TAXES 8,086 4,243
--------- ---------
NET INCOME $ 14,604 $ 8,976
========= =========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 1.55 $ 0.94
DIVIDENDS PER SHARE $ 0.30 $ 0.24
BACKLOG $ 136,472 $ 126,053
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,435 9,564
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE 9 MONTHS ENDED
June 30
1997 1996
-------- --------
(expressed in $000's)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 14,604 $ 8,976
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 6,285 5,536
Deferred income taxes -- --
Changes in operating assets and liabilities that provide or (use) cash:
Receivables, including accounts, unbilled
contracts and retainages (13,391) 21,014
Inventories (9,359) (6,403)
Prepaid expenses 595 (1,735)
Accrued income taxes 871 (2,018)
Advance billings to customers 3,805 4,077
Other, net 3,351 357
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,761 29,804
======== ========
INVESTING ACTIVITIES
Property and equipment, net (4,949) (4,819)
Purchase of Bregenhorn-Butow & Co., net of cash acquired (5,980) --
Other assets (211) (105)
======== ========
NET CASH (USED) IN INVESTING ACTIVITIES (11,140) (4,924)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable 9,679 (10,329)
Proceeds from issuance of long-term debt -- --
Payments on long-term borrowings (2,497) (396)
Cash dividends (2,733) (2,255)
Proceeds from employee stock option
and stock purchase plans 2,922 3,387
Payments to purchase and retire common stock (7,205) (3,495)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 166 (13,088)
======== ========
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,003) 42
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (5,216) 11,834
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,231 8,736
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,015 $ 20,570
======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND TRANSLATION. The consolidated financial statements
include the accounts of MTS SYSTEMS CORPORATION (the Company) and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated.
All balance sheet accounts of foreign subsidiaries are translated at
the current exchange rate as of the end of the accounting period. Income
statement items are translated at average currency exchange rates. The resulting
translation adjustment is recorded as a separate component of shareholders'
investment. Gains and losses resulting from foreign currency transactions are
included in "Other (income) and expense, net" in the Consolidated Statements of
Income.
REVENUE RECOGNITION. Revenue is recognized upon shipment of equipment
when the customer's order can be manufactured, delivered and installed in less
than nine months. Revenue on contracts requiring longer delivery periods
(long-term contracts) and other customized orders which permit progress billings
is recognized using the percentage-of-completion method based on the cost
incurred to date relative to estimated total cost of the contract (cost-to-cost
method). The cumulative effects of revisions of estimated total contract costs
and revenues are recorded in the period in which the facts become known. When a
loss is anticipated on a contract, the amount thereof is provided currently.
LONG-TERM CONTRACTS. The Company enters into long-term contracts for
customized equipment sold to its customers. Under terms of certain contracts,
revenue recognized using the percent-of-completion method may not be invoiced
until completion of contractual milestones, upon shipment of the equipment, or
upon installation and acceptance by the customer. Unbilled amounts for such
contracts appear in the consolidated balance sheets as unbilled contracts and
retainage receivable. Amounts unbilled or retained at June 30, 1997 are
expected to be invoiced within the next 12 months.
EARNINGS PER SHARE. During March, 1997 the Financial Accounting
Standards Board released its Statement of Financial Accounting Standards No. 128
(SFAS 128), entitled "Earnings per Share", which requires the disclosure of
basic earnings per share and diluted earnings per share. The Company expects to
adopt SFAS 128 in fiscal 1998 and anticipates it will not have a material impact
on previously reported earnings per share.
<PAGE>
RESTATEMENT OF EPS AND SHARE DATA. Earnings per share (EPS) and
weighted average common shares computations have been restated retroactively for
the two-for-one stock split declared by the Company's Board of Directors at
their January, 1996 board meeting.
ACQUISITION. In December, 1996 the Company acquired a majority of the
stock of Bregenhorn-Butow & Co. (BB & Co.) of Freiburg, Germany. The transaction
has been accounted for by the purchase method of accounting.
BB & Co. was a privately owned supplier of low power, electronic servo
motors and drives to the European manufacturing market with annual revenues of
approximately $8 million. The Company expects BB & Co. to contribute positively
to fiscal 1997 earnings. After the acquisition Bregenhorn-Butow was renamed and
now conducts business as Custom Servo Motors Antriebstechnik GmbH & Co. KG (CSM-
Europe).
OTHER FINANCIAL STATEMENT DISCLOSURES. The Notes to Consolidated
Financial Statements appearing in the Company's September 30, 1996 Annual Report
to Shareholders on pages 25 through 31 are incorporated herein by reference.
MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION. The unaudited
interim financial statements furnished herein reflect all adjustments which are,
in the opinion of management, necessary to fairly state the results of the
interim periods presented.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
New Orders and Backlog
New orders for the third quarter of fiscal 1997, ended June 30, 1997,
were $78 million, a 32% increase over the comparable quarter in fiscal 1996.
Order activity in the Mechanical Testing and Simulation (MT&S) sector increased
35% over the prior year. MT&S orders were strongest in North America and in Asia
Pacific locations. Material Testing orders were particularly strong as recent
product introductions gained customer acceptance. Order activity in the
Measurement and Automation (M&A) sector increased 13% over the prior year. The
increase is due to the growth in the motor-amplifier business, primarily from
the acquisition of CSM-Europe.
New orders for the nine months ended June 30, 1997 were $228 million
compared to $211 million for the same period one year ago, an 8% increase. In
1996 new orders included the largest single order in the Company's history--a
$23 million order from an agency of the Japanese government for earthquake
research. In 1997 orders in both sectors increased over activity reported for
the previous year. Orders in the Mechanical Testing and Simulation sector have
increased 4% while the Measurement and Automation sector increased 27% over the
activity reported for the same period one year ago. International orders were
44% of the 1997 year-to-date orders compared to 49% for 1996. Backlog of
undelivered orders at June 30, 1997 was a record $136 million compared to $126
million at June 30, 1996 and $120 million at September 30, 1996.
Results of Operations
THIRD QUARTER
Revenues for the third quarter were $74 million a 22% increase from the
same quarter one year ago. International content of revenue was 54% and 46% for
the quarters ended June 30, 1997 and 1996, respectively. Revenues increased in
both sectors (19% for MT&S and 35% for MAG) over levels reported in 1996. The
CSM-Europe acquisition accounts for much of the M&A sector's increase.
Income before income taxes increased 155% to $10.9 million compared to
$4.3 million for the third quarter ended a year ago. The increase in pretax
earnings results from gross manufacturing margin percents similar to those of
the previous year leveraged on increased revenue volume and a $4.3 million gain
on the sale of land adjacent to the Company's Minneapolis headquarters site.
Consolidated gross margin percents were 40% for the periods ended June 30, 1997
and 1996, respectively. Margins in the MT&S sector's current backlog and the mix
of projected orders suggest that gross margins achieved in this quarter will
continue.
<PAGE>
The gross margin increase was partially offset by increased operating
expenses in selling and administrative areas. Much of the increase results from
selling and administrative expenses of the Company's recent acquisition which is
incremental when compared to 1996 operating expenses. Interest expense increased
as a result of changes in the Company's short-term debt and cash position.
"Other" (income), expense decreased reflecting the gain on the sale of land,
discussed above.
Net income for the quarter increased 131% (41% exclusive of the land
sale gain, net of tax) to $6.7 million compared to $2.9 million for the same
quarter one year ago. The effective tax rate for the quarter ended June 30,
1997 was 37% compared to 32% for the quarter ended in June 1996. The current
quarter's provision for income taxes reflects increased income from
international locations where income tax rates are higher than the United
States tax rate, and the impact that reduced tax incentives (Research and
Development Tax Credit and Foreign Sales Corporation dividend income) will have
on U. S. income as that income increases.
NINE MONTHS
Revenues for the nine months ended in June 1997 were $215 million, a
17% increase over the same period a year ago. The MT&S sector produced a 14%
increase over 1996 revenues, and the M&A sector increased 31% over 1996.
International revenues were 53% of total revenues compared to 50% for the nine
month periods ended in June, 1997 and 1996, respectively. The acquisition of
CSM-Europe contributed 17% of the increase in the M&A sector's revenues and 6%
of the increase in international revenues.
Income before income taxes for the first nine months of 1997, increased
to $14.6 million ($10.3 million excluding the land transaction, discussed
above) from $9.0 reported in 1996. Gross margin percents were 40% in 1997
compared to 41% in 1996. However, the increased revenue volume at 40% gross
margin resulted in increased gross margin dollars of $87 million in 1997
compared to $76 million in 1996.
Operating expenses for selling, general and administrative areas
increased 10% between 1996 and 1997. The CSM-Europe acquisition is responsible
for much of this increase. As a percent of revenue, development, selling and
administrative expenses are 30% in 1997 compared to 32% in 1996. "Other"
(income), expense in 1997 includes the $4.3 million gain from the sale of land.
<PAGE>
Net income for the first nine months of 1997 was $14.6 million ($12
million, excluding the land sale) compared to $9.0 million reported one year
ago, a 62% increase. The effective income tax rates were 34% and 32% for the
nine months ended in 1997 and 1996, respectively. The current year-to-date
provision for income taxes approximates the Company's expected annual effective
tax rate. As discussed above, the income tax rate has increased from
foreign-sourced income that is taxed at rates higher than those in the U.S. and
the declining impact of U.S. income tax incentives as U.S.-sourced income
increases.
Financial Condition and Liquidity
The ratio of current assets to current liabilities at June 30, 1997 was
1.9 compared to 2.1 at September 30, 1996. Cash and cash equivalents decreased
27% to $14 million at June 30, 1997 compared to $19 million at September 30,
1996. The Company's borrowing under its $60 million lines of credit was $10
million at June 30, 1997 compared to $.6 million at September 30, 1996. The
increase in borrowing results from the acquisition of CSM-Europe, common stock
repurchase activity and working capital needs.
Capital expenditures, net of retirements for the nine months totaled
$4.9 million. The Company's total debt to equity ratio increased to 15% at June
30, 1997 from 11% at September 30, 1996, evidencing increased borrowing on
short-term notes. As discussed above, the recent acquisition, stock repurchase
activity, and working capital needs resulted in temporary borrowing. The
Company's increasing profitability and conversion of receivables is expected to
reduce the short-term debt in the future.
The Company's past financial performance, the availability of credit
under its borrowing facilities, available cash and cash equivalents provide
sufficient resources for growth, expansion and diversification.
<PAGE>
PART II-------OTHER INFORMATION
ITEM 5. Other Information.
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 June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MTS SYSTEMS CORPORATION
/s/ D.M. Sullivan
---------------------------
D.M. Sullivan
Chairman, President and
Chief Executive Officer
/s/ M.L. Carpenter
---------------------------
M.L. Carpenter
Vice President
Chief Financial Officer
Dated: August 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 14,015
<SECURITIES> 0
<RECEIVABLES> 84,450
<ALLOWANCES> 1,784
<INVENTORY> 46,111
<CURRENT-ASSETS> 146,879
<PP&E> 102,963
<DEPRECIATION> 56,696
<TOTAL-ASSETS> 206,375
<CURRENT-LIABILITIES> 76,001
<BONDS> 7,803
0
0
<COMMON> 2,267
<OTHER-SE> 116,140
<TOTAL-LIABILITY-AND-EQUITY> 206,375
<SALES> 214,874
<TOTAL-REVENUES> 214,874
<CGS> 127,942
<TOTAL-COSTS> 193,629
<OTHER-EXPENSES> (2,430)
<LOSS-PROVISION> 54
<INTEREST-EXPENSE> 985
<INCOME-PRETAX> 22,690
<INCOME-TAX> 8,086
<INCOME-CONTINUING> 22,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,604
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
</TABLE>
