United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
or the Securities Exchange Act of 1934
For quarterly period ended March 31, 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 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
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; 9,078,540 shares outstanding.
PART I. FINANCIAL INFORMATION
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND SEPTEMBER 30, 1996
March 31 September 30
1997 1996
ASSETS UNAUDITED AUDITED
(expressed in $ 000's)
Cash and cash equivalents $ 12,931 $ 19,231
Accounts receivable 70,549 53,717
Unbilled contracts and retainage receivable 16,196 16,418
Inventories-
Customer jobs-in-process 11,447 12,832
Components, assemblies and parts 35,441 23,444
Prepaid expenses 3,789 4,740
--------- ---------
Total current assets 150,353 130,382
--------- ---------
Land 3,448 3,459
Buildings and improvements 36,695 38,644
Machinery and equipment 62,512 59,060
Accumulated depreciation (55,070) (53,073)
--------- ---------
Total property and equipment 47,585 48,090
--------- ---------
Other assets 13,608 8,924
--------- ---------
$ 211,546 $ 187,396
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Notes payable to banks $ 20,788 $ 56
Current maturities of long-term debt 2,701 3,030
Accounts payable 12,701 11,604
Accrued compensation and benefits 20,080 23,664
Advance billings to customers 15,961 13,807
Other accrued liabilities 15,703 9,835
Accrued income taxes (2,603) (1,162)
--------- ---------
Total current liabilities 85,331 60,834
Deferred income taxes 4,758 4,998
Long-term debt, less current maturities 7,656 8,750
--------- ---------
Common stock, $.25 par; 32,000,000 shares
authorized: 9,078,540 and 9,173,518
shares issued and outstanding 2,270 2,293
Additional paid-in capital 41 --
Retained earnings 107,875 106,485
Cumulative translation adjustment 3,615 4,036
--------- ---------
Total shareholders' investment 113,801 112,814
--------- ---------
$ 211,546 $ 187,396
========= =========
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
FOR THE 3 MONTHS ENDED
MARCH 31
1997 1996
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 73,880 $ 67,082
COST OF REVENUES 43,521 39,016
--------- ---------
Gross profit 30,359 28,066
OPERATING EXPENSES:
Selling 11,899 11,656
General and administrative 5,353 4,357
Research and development 4,380 4,676
Interest expense 447 447
Interest income (13) (40)
Other (income) and expense, net 1,233 1,607
--------- ---------
Total operating expense 23,299 22,703
--------- ---------
INCOME BEFORE INCOME TAXES 7,060 5,363
PROVISION FOR INCOME TAXES 2,418 1,731
--------- ---------
NET INCOME $ 4,642 $ 3,632
========= =========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.50 $ 0.38
DIVIDENDS PER SHARE $ 0.10 $ 0.08
BACKLOG $ 132,689 $ 127,684
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,376 9,534
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
FOR THE 6 MONTHS ENDED
March 31
1997 1996
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 140,721 $ 123,217
COST OF REVENUES 83,270 71,284
--------- ---------
Gross profit 57,451 51,933
OPERATING EXPENSES:
Selling 24,602 22,990
General and administrative 9,876 8,061
Research and development 8,765 8,444
Interest expense 770 902
Interest income (118) (67)
Other (income) and expense, net 1,813 2,670
--------- ---------
Total operating expense 45,708 43,000
--------- ---------
INCOME BEFORE INCOME TAXES 11,743 8,933
PROVISION FOR INCOME TAXES 3,880 2,871
--------- ---------
NET INCOME $ 7,863 $ 6,062
========= =========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.84 $ 0.64
DIVIDENDS PER SHARE $ 0.20 $ 0.16
BACKLOG $ 132,687 $ 127,684
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,392 9,495
<TABLE>
<CAPTION>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
FOR THE 6 MONTHS ENDED
March 31
1997 1996
-------- --------
(expressed in $000's)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,863 $ 6,062
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,188 3,678
Deferred income taxes -- --
Changes in operating assets and liabilities that provide or (use) cash:
Receivables, including accounts, unbilled
contracts and retainages (20,580) 14,190
Inventories (12,437) (1,449)
Prepaid expenses 613 (728)
Accrued income taxes (792) (1,121)
Advance billings to customers 3,122 (2,371)
Other, net 5,766 (578)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES (12,257) 17,683
-------- --------
INVESTING ACTIVITIES
Property and equipment, net (4,769) (2,986)
Purchase of Bregenhorn-Butow & Co., net of cash acquired (6,174) --
Other assets 1,408 (28)
-------- --------
NET CASH (USED) IN INVESTING ACTIVITIES (9,535) (3,014)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable 21,314 (10,332)
Proceeds from issuance of long-term debt -- --
Payments on long-term borrowings (295) (285)
Cash dividends (1,828) (1,501)
Proceeds from employee stock option
and stock purchase plans 1,341 2,039
Payments to purchase and retire common stock (4,325) (758)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 16,207 (10,837)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (715) 18
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (6,300) 3,850
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,231 8,736
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,931 $ 12,586
======== ========
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND TRANSLATION. The consolidated financial statements
include the accounts of MTS SYSTEMS CORPORATION (the Company) and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated.
All balance sheet accounts of foreign subsidiaries are translated at
the current exchange rate as of the end of the accounting period. Income
statement items are translated at average currency exchange rates. The resulting
translation adjustment is recorded as a separate component of shareholders'
investment. Gains and losses resulting from foreign currency transactions are
included in "Other (income) and expense, net" in the Consolidated Statements of
Income.
REVENUE RECOGNITION. Revenue is recognized upon shipment of equipment
when the customer's order can be manufactured, delivered and installed in less
than nine months. Revenue on contracts requiring longer delivery periods
(long-term contracts) and other customized orders which permit progress billings
is recognized using the percentage-of-completion method based on the cost
incurred to date relative to estimated total cost of the contract (cost-to-cost
method). The cumulative effects of revisions of estimated total contract costs
and revenues are recorded in the period in which the facts become known. When a
loss is anticipated on a contract, the amount thereof is provided currently.
LONG-TERM CONTRACTS. The Company enters into long-term contracts for
customized equipment sold to its customers. Under terms of certain contracts,
revenue recognized using the percent-of-completion method may not be invoiced
until completion of contractual milestones, upon shipment of the equipment, or
upon installation and acceptance by the customer. Unbilled amounts for such
contracts appear in the consolidated balance sheets as unbilled contracts and
retainage receivable. Amounts unbilled or retained at March 31, 1997 are
expected to be invoiced in 1997.
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.
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. MTS has an
option to purchase the remaining interest in BB & Co. at a later date. 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.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
New Orders and Backlog
New orders for the second quarter of fiscal 1997, ended March 31, 1997,
were very strong at $81 million compared to $87 million one year ago. In 1996
the Company received a $23 million order from an agency of the Japanese
goverment for earthquake research. Orders for the second quarter of 1997 were
within 7% of the 1996 total while none of the second quarter 1997 orders
exceeded $10 million. Order activity in the Mechanical Testing and Simulation
(MT&S) sector was 14% behind the prior year due to the large earthquake order in
last years order total. Order activity in the Measurement and Automation (M&A)
sector increased 37% from the same quarter in fiscal 1996. The increase reflects
both the BB& Co. acquisition and growth in the Company's motor and sensors
businesses. Customers in Europe have responded favorably to the BB & Co.
acquisition evidenced by 36% of MAG orders coming from international customers
compared to 22% in 1996.
New orders for the six months ended March 31, 1997 were $150 million
compared to $152 million for the same period one year ago. Orders for 1997 were
net of a $6 million reduction in backlog due to the weakening of the Japanese
and European currencies. Orders in the Mechanical Testing and Simulation sector
decreased 8% because of currency adjustments, referred to above, and the effect
of the very large earthquake research order received in 1996. The Measurement
and Automation sector increased 35% over the orders reported for the same period
one year ago due to the acquisition of BB& Co. and growth in existing product
lines. International orders were 49% of the 1997 year-to-date orders compared to
51% for 1996. Backlog of undelivered orders at March 31, 1997 was a record $133
million compared to $128 million at March 31, 1996 and $120 million at September
30, 1996.
Results of Operations
SECOND QUARTER
Revenues for the second quarter were $74 million, a 10% increase from
the same quarter one year ago. International content of revenue was 50% for
second quarter 1997 and 53% for the quarter ended March 31, 1996. Revenues
increased 6% and 28% for the MT&S and M&A sectors, respectively. The BB& Co.
acquisition accounts for much of the M&A sector's increase.
Income before income taxes increased 32% to $7.1 million compared to
$5.4 million for the second quarter ended a year ago. The increase in pretax
earnings results primarily from increased revenue volume. Consolidated gross
margin percents were 41.1% and 41.8% for the quarters ended March 31, 1997 and
1996, respectively. While the quarter showed a slight decline in margin as a
percent of revenue, the 1997 gross margin percent was expected, and the decline
from the prior year was due to a change in the mix of products sold. The
quarters's margin percent for 1997 is 5% higher than the gross margin reported
for the quarter ended during 1995. Margins in the MT&S sector's current backlog
and the mix of projected orders suggest that gross margins percents will
continue in the range recorded for the quarters ended in 1997 and 1996.
The gross margin increase was offset slightly by an increase in
operating expenses of less than 3%. Selling and administrative expenses
increased as a result of the Company's recent acquisition while development and
"Other" expense decreased. The decrease in "Other" expense results primarily
from the impact of translating international subsidiary account balances and
favorable settlement of specific transactions denominated in foreign currencies.
Net income for the quarter increased 28% to $4.6 million compared to
$3.6 million for the same quarter one year ago. The effective tax rate for the
quarter ended March 31, 1997 was 34% compared to 32% for the quarter ended in
March, 1996. The current quarter's provision for income taxes reflects the
geographic sourcing of international income that is taxed at higher rates than
the U.S. statuatory rate.
SIX MONTHS
Revenues for the six months ended in March, 1997 were $141 million, a
14% increase over the same period a year ago. The MT&S sector reflects a 11%
increase over 1996 revenues, and the M&A sector increased 29% over 1996.
International revenues were 49% of total revenues as compared to 51% for the six
month periods ended in March, 1997 and 1996, respectively. Weakening of Japanese
and European currencies against the U.S. dollar reduced translated revenues for
the six months by $3.4 million.
Income before income taxes for the first six months of 1997 increased
31% to $11.7 million from $8.9 million reported in 1996. Gross margin increased
from 1996 to 1997 due to increased revenue volume in both the MT&S and M&A
sectors. Gross margins as a percent of sales were 41% in 1997 compared to 42% in
1996. The decline in margin percentage is discussed, above.
Increases in gross margin were offset, in part, by increased operating
expenses for development, selling, general and administrative areas. The BB &
Co. acquisition represents much of the increase in selling, administrative and
development expense as the Company continues to invest in expansion of the
international presence of the M&A sector's product lines. "Other" expense
decreased from the impact of translating international subsidiary account
balances and the favorable settlement of specific transactions denominated in
foreign currencies. Total operating expenses as a percent of revenues were 32%
compared to 35% for the six months ended in March, 1997 and 1996, respectively.
Net income for the first six months of 1997 was $7.9 million compared
to $6.1 million reported one year ago, a 30% increase. The effective income tax
rates were 33% and 32% for the six months ended in 1997 and 1996, respectively.
As discussed above, the current year's provision for income taxes reflects
higher statuatory tax rates in the geographic areas where taxable income is
concentrated.
Financial Condition and Liquidity
The ratio of current assets to current liabilities at March 31, 1997
was 1.8 compared to 2.1 at September 30, 1996. Cash and cash equivalents
decreased 33% to $12.9 million at March 31, 1997 compared to $19.2 million at
September 30, 1996. The Company's borrowing under its $60 million lines of
credit was $21 million at March 31, 1997 compared to $.6 million at September
30, 1996. The increase in borrowing results from the acquisition of BB & Co.,
common stock repurchase activity and working capital needs.
Capital expenditures, net of retirements for the six months totalled
$4.8 million. The Company's total debt to equity ratio increased to 27% at March
31, 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 future quarters.
The Company's past financial performance, the availability of credit
under its borrowing facilities, available cash and cash equivalents provide
sufficient resources for growth, expansion and diversification.
PART II-------OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was held January
28, 1997.
(b) The following persons were nominated and elected to continue
as directors of the Company until the next Annual Meeting of
Shareholders.
Votes For Votes Against
E. Thomas Binger 8,788,736 41,898
Charles A. Brickman 8,799,670 30,964
Bobby I. Griffin 8,799,670 30,964
Russell A. Gullotti 8,799,498 31,064
Thomas E. Holloran 8,798,898 31,664
Thomas E. Stelson 8,798,298 32,264
Donald M. Sullivan 8,799,668 30,966
Linda Hall Whitman 8,798,340 32,294
No voters abstained or were broker/bank non-votes for any of
the directors.
(c) Shareholders approved adoption of the MTS Systems Corporation
1997 Stock Option Plan with 6,599,532 votes for; 1,602,515
votes against; 20,785 abstained; and 608,436 non-votes by
broker/banks.
(d) Arthur Andersen & Co. was ratified as the Company's
independent auditor by 8,801,825 votes for; 4,132 votes
against; 24,572 votes abstained; and zero non-votes by
broker/banks.
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 March 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MTS SYSTEMS CORPORATION
/s/ D.M. Sullivan
----------------------------------
D.M. Sullivan
Chairman, President and
Chief Executive Officer
/s/ M.L. Carpenter
----------------------------------
M.L. Carpenter
Vice President
Chief Financial Officer
Dated: May 15, 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> MAR-31-1997
<CASH> 12,931
<SECURITIES> 0
<RECEIVABLES> 88,580
<ALLOWANCES> 1,835
<INVENTORY> 46,888
<CURRENT-ASSETS> 150,353
<PP&E> 102,655
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<CURRENT-LIABILITIES> 85,331
<BONDS> 10,357
0
0
<COMMON> 2,270
<OTHER-SE> 111,531
<TOTAL-LIABILITY-AND-EQUITY> 211,546
<SALES> 140,721
<TOTAL-REVENUES> 140,721
<CGS> 83,270
<TOTAL-COSTS> 127,165
<OTHER-EXPENSES> 1,813
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<INTEREST-EXPENSE> 770
<INCOME-PRETAX> 11,743
<INCOME-TAX> 3,880
<INCOME-CONTINUING> 11,743
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 7,863
<EPS-PRIMARY> .84
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</TABLE>
