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, 1998
Commission File Number 0-2382
MTS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of
incorporation or organization)
612-937-4000
(Telephone number of registrant
including area code)
41-0908057
(I.R.S. Employer
Identification No.)
14000 Technology Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
__X__ Yes No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.25 par value; 18,414,257 shares outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND SEPTEMBER 30, 1997
March 31 September 30
1998 1997
ASSETS UNAUDITED AUDITED
(expressed in $ 000's)
Cash and cash equivalents $ 17,461 $ 10,285
Accounts receivable 67,257 62,023
Unbilled contracts and retainage receivable 35,275 32,653
Inventories-
Customer jobs-in-process 12,710 5,559
Components, assemblies and parts 40,720 38,032
Prepaid expenses 4,689 4,253
--------- ---------
Total current assets 178,112 152,805
--------- ---------
Land 2,437 2,453
Buildings and improvements 39,668 37,779
Machinery and equipment 75,282 68,071
Accumulated depreciation (61,055) (57,884)
--------- ---------
Total property and equipment 56,332 50,419
--------- ---------
Other assets 11,878 12,908
--------- ---------
$ 246,322 $ 216,132
========= =========
LABILITIES AND SHAREHOLDERS' INVESTMENT
Notes payable to banks $ 31,535 $ 4,356
Current maturities of long-term debt 693 920
Accounts payable 14,641 17,771
Accrued compensation and benefits 22,175 25,487
Advance billings to customers 24,184 21,065
Other accrued liabilities 9,964 9,880
---------
Total current liabilities 103,192 79,479
Deferred income taxes 4,351 4,445
Long-term debt, less current maturities 8,400 7,589
--------- ---------
Common stock, $.25 par; 64,000,000 shares
authorized: 18,414,257and 18,157,080
shares issued and outstanding 4,604 2,284
Additional paid-in capital 1,688 1,438
Retained earnings 123,841 119,167
Cumulative translation adjustment 246 1,730
--------- ---------
Total shareholders' investment 130,379 124,619
--------- ---------
$ 246,322 $ 216,132
========= =========
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
FOR THE 3 MONTHS ENDED
March 31
1998 1997
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 81,685 $ 73,880
COST OF REVENUES 50,073 43,521
--------- ---------
Gross profit 31,612 30,359
OPERATING EXPENSES:
Selling 12,757 11,899
General and administrative 5,772 5,353
Research and development 5,447 4,380
--------- ---------
INCOME FROM OPERATIONS 7,636 8,727
Interest expense 449 447
Interest income (69) (13)
Other (income) and expense, net (267) 1,233
--------- ---------
INCOME BEFORE INCOME TAXES 7,523 7,060
PROVISION FOR INCOME TAXES 2,657 2,418
--------- ---------
NET INCOME $ 4,866 $ 4,642
========= =========
BASIC EARNINGS PER SHARE $ 0.27 $ 0.25
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,384 18,229
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.25
WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION 18,934 18,795
DIVIDENDS PER SHARE $ 0.06 $ 0.05
BACKLOG $ 164,109 $ 132,689
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
FOR THE 6 MONTHS ENDED
March 31
1998 1997
--------- ---------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 155,623 $ 140,721
COST OF REVENUES 93,771 83,270
--------- ---------
Gross profit 61,852 57,451
OPERATING EXPENSES:
Selling 25,103 24,602
General and administrative 10,973 9,876
Research and development 10,016 8,765
--------- ---------
INCOME FROM OPERATIONS 15,760 14,208
Interest expense 675 770
Interest income (176) (118)
Other (income) and expense, net 1,026 1,813
--------- ---------
INCOME BEFORE INCOME TAXES 14,235 11,743
PROVISION FOR INCOME TAXES 5,057 3,880
--------- ---------
NET INCOME $ 9,178 $ 7,863
========= =========
BASIC EARNINGS PER SHARE $ 0.50 $ 0.43
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,337 18,254
DILUTED EARNINGS PER SHARE $ 0.48 $ 0.42
WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION 19,097 18,784
DIVIDENDS PER SHARE $ 0.06 $ 0.05
BACKLOG $ 164,109 $ 132,689
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE 6 MONTHS ENDED
March 31
1998 1997
-------- --------
(expressed in $000's)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,178 $ 7,863
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,459 4,188
Deferred income taxes 6 --
Changes in operating assets and liabilities that provide or (use) cash:
Receivables, including accounts, unbilled
contracts and retainages (10,009) (20,580)
Inventories (10,241) (12,437)
Prepaid expenses (530) 613
Advance billings to customers 3,389 3,122
Other, net (5,133) 4,974
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (8,881) (12,257)
-------- --------
INVESTING ACTIVITIES
Property and equipment, net (10,468) (4,769)
Purchase of Bregenhorn-Butow & Co., net of cash acquired -- (6,174)
Other assets 71 1,408
======== ========
NET CASH (USED) IN INVESTING ACTIVITIES (10,397) (9,535)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable 27,284 21,314
Proceeds from issuance of long-term debt 1,146 --
Payments on long-term borrowings (165) (295)
Cash dividends (2,202) (1,828)
Proceeds from employee stock option
and stock purchase plans 1,417 1,341
Payments to purchase and retire common stock (1,149) (4,325)
-------- --------
NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES 26,331 16,207
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 123 (715)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,176 (6,300)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,285 19,231
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,461 $ 12,931
======== ========
</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 denominated currency
transactions and from foreign exchange hedge contracts 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 twelve 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 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, 1998 are
expected to be invoiced within twelve months.
OTHER FINANCIAL STATEMENT DISCLOSURES. The Notes to Consolidated
Financial Statements appearing in the Company's September 30, 1997 Annual Report
to Shareholders on pages 26 through 34 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.
EARNINGS PER SHARE DATA. Statement of Financial Accounting Standards
No. 128, "Earnings per Share" requires all companies whose capital structure
includes convertible securities and options to provide dual presentation of
basic and diluted earnings per share. The standard becomes effective with the
quarter ended December 31, 1997. Prior year earnings per share have been
restated to conform with the new standard.
SUBSEQUENT EVENT. On December 3, 1997 the Company's Board of
Directors declared a two-for-one stock split to be effected in the form of a one
hundred percent stock dividend to shareholders of record on January 15, 1998.
The distribution of stock occurred on February 2, 1998. Earnings per share and
share data in the financial statements for the periods ended March 31, 1997 and
1996 have been restated to reflect the split.
ACQUISITION. In December, 1996 the Company acquired a majority of
the stock of Bregenhorn-Butow & Co. of Freiburg, Germany (name subsequently
changed to Custom Servo Motors Antriebstechnik GmbH & Co. KG), a privately held
supplier of low power, electric servo motors and drives. The transaction
involved cash and debt and has been accounted for by the purchase method of
accounting.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
New Orders and Backlog
New orders for the second quarter of fiscal 1998, ended March 31,
1998, were $75 million compared to $81 million one year ago. International
orders were 48% compared to 55% for the prior year's quarter. Order activity
from Asia-Pacific remains weak . The Company expects that Asian order volumes
for the remainder of the fiscal year will continue lower than in prior years.
Order activity in the Mechanical Testing and Simulation (MT&S)
sector was 78% of total orders compared to 80% a year ago. Material testing
order levels have increased fueled by new products and with renewed interest in
bio-materials research from medical device and prosthesis customers. The
Measurement and Automation (M&A) sector's order volume increased 2% to 22% of
total orders compared to the same quarter in fiscal 1997.
New orders for the six months ended March 31, 1998 were $144 million
compared to $150 million for the same period one year ago. The MT&S sector was
77% of total orders compared to 79% for the same period one year ago. The M&A
sector grew 3% to 23% of total orders compared to the same period one year ago.
International orders were 46% of the 1998 year-to-date orders compared to 49%
for 1997.
Backlog of undelivered orders at March 31, 1998 was $164 million, a
23% increase compared to backlog at March 31, 1997 and a 7% decrease from
September 30, 1997.
Results of Operations
SECOND QUARTER
Revenues for the second quarter were $82 million, an 11% increase
from the same quarter one year ago. International content of revenue was 50% for
second quarter 1998 and 54% for the quarter ended March 31, 1997. Revenues for
the six months increased 10% and 11% for the MT&S and M&A sectors, respectively.
Income before income taxes increased 7% to $7.5 million compared to
$7.1 million for the second quarter ended a year ago. Gross margin increased as
a result of the 11% increase in revenues. Consolidated gross margin percents
were 39% and 41% for the quarters ended March 31, 1998 and 1997, respectively.
The quarter ended in 1998 included a higher content of custom projects with
lower margins than those of more standard MT&S business. The decline in margin
as a percent of revenue for 1998 was expected and was due to a change in the mix
of products sold. Margins in the MT&S sector's current backlog and the mix of
projected orders suggest that gross margins percents will improve during the
third and fourth quarters.
Operating expenses for selling, administrative and development
increased 11% over amounts reported for the same period one year ago. However,
these expenses as a percent of revenue were consistent at 29% for the quarters
ended in March this year and last. "Other income and expense" decreased
primarily from a reduced negative impact in translating international subsidiary
account balances, offset by favorable settlement of specific transactions
denominated in foreign currencies.
Net income for the quarter increased 5% to $4.9 million compared to
$4.6 million for the same quarter one year ago. The effective tax rate for the
quarter ended March 31, 1998 was 35%
<PAGE>
compared to 34% for the quarter ended in March, 1997 and 36% for the year ended
September 30, 1997. The current quarter's provision for income taxes reflects
increasing amounts of business being sourced in international locations where
income is taxed at higher rates than the U.S. statutory rate.
SIX MONTHS
Revenues for the six months ended in March, 1998 were $ 156 million,
an 11% increase over the same period a year ago. The MT&S sector reflects a 12%
increase over 1997 revenues, and the M&A sector increased 7% over 1997.
International revenues were 48% of total revenues as compared to 52% for the six
month periods ended in March, 1998 and 1997, respectively.
Income before income taxes for the first six months of 1998
increased 21% to $14.2 million from $11.7 million reported in 1997. Gross margin
increased from 1997 to 1998 due to increased revenue volume in both the MT&S and
M&A sectors. Gross margins as a percent of sales were 40% in 1998 compared to
41% in 1997. The decline in margin percentage is discussed, above.
Increases in gross margin were offset, in part, by a 6.5% increase
in operating expenses for development, selling, and administration. As a percent
of revenues, these expenses were 30% compared to 31% for the six months ended
March 1998 and 1997, respectively.
Net income for the first six months of 1998 was $9.2 million
compared to $7.9 million reported one year ago, a 17% increase. The effective
income tax rates were 36% and 33% for the six months ended in 1998 and 1997,
respectively. As discussed above, the current year's provision for income taxes
reflects increasing amounts of taxable income from international locations where
tax rates are higher than the statutory tax rate in the U. S.
Financial Condition and Liquidity
The ratio of current assets to current liabilities at March 31, 1998
was 1.7 compared to 1.9 at September 30, 1997. Cash and cash equivalents
increased 70% to $17.5 million at March 31, 1998 compared to $10.3 million at
September 30, 1997. The Company's borrowing under its $60 million lines of
credit was $32 million at March 31, 1998 compared to $4 million at September 30,
1997. The increase in borrowing results from working capital needs and
investments in property and equipment.
Capital expenditures, net of retirements for the six months totalled
$10.5 million. The Company's total debt to equity ratio increased to 31% at
March 31, 1998 from 10% at September 30, 1997 evidencing increased borrowing on
short-term notes. As discussed above, working capital needs and property and
equipment spending 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.
<PAGE>
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 27, 1998.
(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 8,352,190 26,005
Charles A. Brickman 8,361,136 17,059
Bobby I. Griffin 8,361,136 17,059
Russell A. Gullotti 8,361,136 17,059
Thomas E. Holloran 8,360,836 17,359
Thomas E. Stelson 8,360,836 17,359
Donald M. Sullivan 8,360,132 18,063
Linda Hall Whitman 8,361,086 17,109
No voters abstained or were broker/bank non-votes for
any of the directors.
(c) Shareholders approved amending the Articles of
Incorporation to increase the number of authorized
shares of Common Stock from 32,000,000 to 64,000,000
shares with 8,201,848 votes for; 146,935 votes against;
20,623 abstained; and 8,588 non-votes by broker/banks.
(d) Arthur Andersen LLP was ratified to serve as the
Company's independent auditor for fiscal 1998 with
8,352,965 votes for; 5,921 votes against; and 17,051
votes abstained.
ITEM 5. Other Information.
NEW PRESIDENT AND CEO. On March 11 the Board of Directors announced
that Sidney W. (Chip) Emery had been appointed president and chief executive
officer, succeeding Donald M. Sullivan who will continue as chairman of the
board. Emery has served 12 years with Honeywell, Inc. in executive division and
group level positions in Honeywell's Industrial Controls and Avionics
businesses. Most recently, he was Honeywell's area vice president of Western and
Southern Europe. His previous employment includes engineering and manufacturing
positions with Bendix Corporation and military service in the Office of the
Secretary of the Navy.
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.
<PAGE>
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, 1998.
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
/s/ M.L. Carpenter
M.L. Carpenter
Vice President
Chief Financial Officer
Dated: May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 17,461
<SECURITIES> 0
<RECEIVABLES> 102,532
<ALLOWANCES> 1,855
<INVENTORY> 53,430
<CURRENT-ASSETS> 178,112
<PP&E> 117,387
<DEPRECIATION> 61,055
<TOTAL-ASSETS> 246,322
<CURRENT-LIABILITIES> 103,192
<BONDS> 9,093
0
0
<COMMON> 4,604
<OTHER-SE> 125,775
<TOTAL-LIABILITY-AND-EQUITY> 130,379
<SALES> 81,685
<TOTAL-REVENUES> 81,685
<CGS> 50,073
<TOTAL-COSTS> 23,976
<OTHER-EXPENSES> (267)
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 449
<INCOME-PRETAX> 7,523
<INCOME-TAX> 2,657
<INCOME-CONTINUING> 7,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,866
<EPS-PRIMARY> .27
<EPS-DILUTED> .26
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