- --------------------------------------------------------------------------------
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarterly period ended June 30, 1998
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 registrant (IRS Employer
incorporation or organization) including area code) 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; 18,566,339 shares outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND SEPTEMBER 30, 1997
June 30 September 30
1998 1997
ASSETS UNAUDITED AUDITED
(expressed in $ 000's)
Cash and cash equivalents $ 13,988 $ 10,285
Accounts receivable 65,430 62,023
Unbilled contracts and retainage receivable 33,547 32,653
Inventories-
Customer jobs-in-process 14,982 5,559
Components, assemblies and parts 44,081 38,032
Prepaid expenses 5,508 4,253
--------- ---------
Total current assets 177,536 152,805
--------- ---------
Land 2,437 2,453
Buildings and improvements 40,623 37,779
Machinery and equipment 80,103 68,071
Accumulated depreciation (62,589) (57,884)
--------- ---------
Total property and equipment 60,574 50,419
--------- ---------
Other assets 26,747 12,908
--------- ---------
$ 264,857 $ 216,132
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Notes payable to banks $ 46,637 $ 4,356
Current maturities of long-term debt 801 920
Accounts payable 14,544 17,771
Accrued compensation and benefits 23,410 25,487
Advance billings to customers 17,310 21,065
Other accrued liabilities 11,538 9,880
--------- ---------
Total current liabilities 114,240 79,479
Deferred income taxes 4,452 4,445
Long-term debt, less current maturities 10,200 7,589
--------- ---------
Common stock, $.25 par; 64,000,000 shares
authorized: 18,414,257and 18,157,080
shares issued and outstanding 4,643 2,284
Additional paid-in capital 2,921 1,438
Retained earnings 127,815 119,167
Cumulative translation adjustment 586 1,730
--------- ---------
Total shareholders' investment 135,965 124,619
--------- ---------
$ 264,857 $ 216,132
========= =========
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
FOR THE 3 MONTHS ENDED
June 30
1998 1997
-------- --------
(expressed in 000's except
for per share amounts)
NET REVENUES $ 85,826 $ 74,153
COST OF SALES 53,548 44,672
-------- --------
Gross profit 32,278 29,481
OPERATING EXPENSES:
Selling 13,170 13,305
General and administrative 5,515 5,114
Research and development 5,655 4,025
-------- --------
INCOME FROM OPERATIONS 7,938 7,037
Interest expense 570 509
Interest income (75) (176)
Other (income) expense, net (308) (4,243)
-------- --------
INCOME BEFORE INCOME TAXES 7,751 10,947
PROVISION FOR INCOME TAXES 2,664 4,206
-------- --------
NET INCOME $ 5,087 $ 6,741
======== ========
BASIC EARNINGS PER SHARE $ 0.27 $ 0.37
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,520 18,124
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.36
WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION 19,334 19,040
DIVIDENDS PER SHARE $ 0.06 $ 0.05
BACKLOG $161,940 $136,472
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED
FOR THE 9 MONTHS ENDED
June 30
1998 1997
-------- --------
(expressed in 000's except
for per share amounts)
NET REVENUES $241,450 $214,874
COST OF SALES 147,320 127,942
-------- --------
Gross profit 94,130 86,932
OPERATING EXPENSES
Selling 38,272 37,907
General and administrative 16,488 14,990
Research and development 15,670 12,790
-------- --------
INCOME FROM OPERATIONS 23,700 21,245
Interest expense 1,246 1,279
Interest income (251) (294
Other (income) expense, net 719 (2,430
-------- --------
INCOME BEFORE INCOME TAXES 21,986 22,690
PROVISION FOR INCOME TAXES 7,721 8,086
-------- --------
NET INCOME $ 14,265 $ 14,604
======== ========
BASIC EARNINGS PER SHARE $0.77 $0.80
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,398 18,211
DILUTED EARNINGS PER SHARE $0.74 $0.78
WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION 19,176 18,870
DIVIDENDS PER SHARE $0.18 $0.15
BACKLOG $161,940 $136,472
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE 9 MONTHS ENDED
June 30
1998 1997
-------- --------
(expressed in $000's)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 14,265 $ 14,604
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 7,039 6,285
Changes in operating assets and liabilities that provide or (use) cash:
Receivables, including accounts, unbilled
contracts and retainages (3,708) (13,391)
Inventories (12,429) (9,359)
Prepaid expenses (741) 595
Advance billings to customers (3,550) 3,805
Other, net (5,975) 4,222
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (5,099) 6,761
-------- --------
INVESTING ACTIVITIES
Property and equipment, net (15,706) (4,949)
Acquisitions, net of cash acquired (18,976) (5,980)
Other assets 696 (211)
-------- --------
NET CASH (USED) IN INVESTING ACTIVITIES (33,986) (11,140)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable 42,340 9,679
Proceeds from issuance of long-term debt 3,113 --
Payments on long-term borrowings (396) (2,497)
Cash dividends (3,317) (2,733)
Proceeds from employee stock option
and stock purchase plans 2,690 2,921
Payments to purchase and retire common stock (1,149) (7,205)
-------- --------
NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES 43,281 165
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (493) (1,003)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,703 (5,217)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,285 19,231
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,988 $ 14,014
======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL 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 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) 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 June 30, 1998 are expected to be invoiced within twelve months.
<PAGE>
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 became effective with the quarter ended December 31, 1997.
Prior year earnings per share have been restated to conform with the new
standard.
2. SUBSEQUENT EVENTS
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 June 30, 1998 and 1997 have been restated to
reflect the split.
3. ACQUISITIONS
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.
In April, 1998 the Company acquired all of the stock of Nano Instruments Inc. of
Oak Ridge Tennessee, a privately held manufacturer of instrumented indentation
systems for ultra-low-force nanoindentation testing of surfaces and thin films.
The transaction involved cash and debt and is expected to have a negligible
effect on earnings for the fiscal year ending September 30, 1998. The
acquisition has been accounted for by the purchase method of accounting.
<PAGE>
In April, 1998 the Company acquired all of the stock of Performance Controls,
Inc. of Horsham, Pennsylvania, a privately held manufacturer of high performance
power amplifiers for factory automation and magnetic resonance machine
applications. The transaction involved cash and is expected to have a positive
effect on earnings for the fiscal year ending September 30, 1998. The
acquisition 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 third quarter of fiscal 1998, ended June 30, 1998, were $77.4
million compared to $77.9 million one year ago. International orders were 39.4%
compared to 35.7% 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 fourth quarter of fiscal 1998 will continue to be lower than in prior years.
Order activity in the Mechanical Testing and Simulation (MT&S) sector was 73.3%
of total orders compared to 81.8% a year ago. The Measurement and Automation
(M&A) sector's order volume increased 8.5% to 26.7% of total orders compared to
the same quarter in fiscal 1997.
New orders for the nine months ended June 30, 1998 were $221.3 million compared
to $228.1 million for the same period one year ago. International orders were
43.6% of the 1998 year-to-date orders compared to 44.5% for 1997.
Order activity in the Mechanical Testing and Simulation (MT&S) sector was 75.9%
of total orders compared to 79.8% for the same period one year ago. The M&A
sector grew 3.9% to 24.0% of total orders compared to the same period one year
ago.
Backlog of undelivered orders at June 30, 1998 was $162 million, an 18.7%
increase compared to backlog at June 30, 1997 and a 7.9% decrease from September
30, 1997.
Results of Operations
THREE MONTHS
Revenues for the third quarter were $85.8 million, a 15.7% increase from the
same quarter one year ago. Domestic revenues increased to 55.0% from 46.0% for
the quarters ended June 30, 1998 and 1997, respectively.
Gross margin increased 9.5% due to increased revenue volume in both the MT&S and
M&A sectors. Consolidated gross margin as a percentage of revenue decreased to
37.6% from 39.7% for the quarters ended June 30, 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
fourth quarter.
<PAGE>
Operating expenses for selling, administrative and development increased 8.4%
over amounts reported for the same period one year ago. As a percent of revenue
these expenses were 28.4% compared to 30.3% for the quarters ended June 30, 1998
and 1997, respectively. "Other income and expense" decreased primarily due to a
$4.3 million pretax gain from the sale of land, which occurred during the third
quarter of fiscal 1997. Other factors affecting "Other income and expense were a
reduced negative impact in translating international subsidiary account
balances, offset by favorable settlements of specific transactions denominated
in foreign currencies.
Income before income taxes decreased to $7.8 million compared to $10.9 million
for the same quarter one year ago. Excluding the $4.3 million pretax gain from
the sale of land during the third quarter of fiscal 1997, income before income
taxes increased 18.2%.
Net income for the quarter decreased to $5.1 million compared to $6.7 million
for the same quarter one year ago. Excluding the $2.7 million after tax gain
from the sale of land during the third quarter of fiscal 1997 net income
increased 24.5%. The effective tax rate for the quarter ended June 30, 1998 was
34.4% compared to 38.4 for the quarter ended June 30, 1997. The current
quarter's provision for income taxes reflects increasing amounts of business
being sourced in the U.S. where the statutory rate is lower than that of
international tax rates.
NINE MONTHS
Revenues for the nine month period ended June 30, 1998 were $241.5 million, a
12.4% increase over the same period one year ago. The MT&S sector reflects an
11.3% increase over 1997 revenues, and the M&A sector increased 16.0% over 1997.
Domestic revenues increased to 53.0% from 47.0% for the nine-month periods ended
June 30, 1998 and 1997, respectively.
Gross margin increased 8.3% due to increased revenue volume in both the MT&S and
M&A sectors. Consolidated gross margin as a percentage of revenue decreased to
39.0% from 40.5 for the nine-month periods ending June 30, 1998 and 1997. The
decline in margin percentage is discussed, above.
Operating expenses for selling, administrative and development increased 7.2%
over amounts reported for the same period one year ago. As a percent of
revenues, these expenses were 29.2% compared to 30.6% for the nine months ended
June 30, 1998 and 1997, respectively. "Other income and expense" decreased for
the same reasons discussed, above.
Income before income taxes for the first nine months of fiscal 1998 decreased
3.0% to $22.0 million compared to $22.7 million for the same period one year
ago. Excluding the $4.3 million gain from the sale of land during the same
period last year, income before
<PAGE>
income taxes increased 19.5%.
Net income for the first nine months of fiscal 1998 was $14.3 million compared
to $14.6 million reported one year ago, a 2.0% decrease. Excluding the $2.7
million after tax gain from the sale of land during the same period last year,
net income increased 20.1%. The effective income tax rates were 35.1% and 35.6%
for the nine months ended in 1998 and 1997, respectively. As discussed above,
the current quarter's provision for income taxes reflects increasing amounts of
business being sourced in the U.S. where the statutory rate is lower than that
of international tax rates.
Financial Condition and Liquidity
The ratio of current assets to current liabilities at June 30, 1998 was 1.5
compared to 1.9 at September 30, 1997. Cash and cash equivalents increased 36.0%
to $14.0 million at June 30, 1998 compared to $10.3 million at September 30,
1997. The Company's borrowing was $46.6 million at June 30, 1998 compared to
$4.4 million at September 30, 1997. The increase in borrowing results from
acquisitions, working capital needs and investments in property and equipment.
During July of this year the company signed a note with an outside lender for
$35 million. The proceeds were used to pay off short-term debt. The loan matures
on July 21, 2008.
Capital expenditures, net of retirements for the nine months totaled $15.7
million. The Company's total debt to equity ratio increased to 42.4% at June 30,
1998 from 10.3% at September 30, 1997 evidencing increased borrowing on
short-term notes. 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 5. Other Information.
Election of New Directors
In May 1998 MTS Systems Corporation elected Sidney W. Emery, Jr. and Brendan C.
Hegarty to the Board of Directors effective May 26, 1998, increasing the number
of directors to 10.
Mr. Emery joined MTS in March 1998 as president and chief executive officer,
succeeding Donald M. Sullivan who will continue as chairman of the board. Mr.
Emery had 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.
Mr. Hegarty, is executive vice president and chief operating officer of Seagate
Technology in charge of its worldwide recording heads operations. Mr. Hegarty
received a Ph.D in Solid State Physics from the University of Sussex in England.
He worked with IBM for 20 years in England, the Netherlands and the United
States in management positions for software and hardware development and
manufacturing. In 1988, he joined Control Data Corporation to run its thin film
head business, which was subsequently bought by Seagate in 1989.
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 June 30, 1998.
<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
/s/ M.L. Carpenter
-------------------------------
M.L. Carpenter
Vice President
Chief Financial Officer
Dated: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,988
<SECURITIES> 0
<RECEIVABLES> 98,977
<ALLOWANCES> 2,081
<INVENTORY> 59,063
<CURRENT-ASSETS> 177,536
<PP&E> 123,163
<DEPRECIATION> 62,589
<TOTAL-ASSETS> 264,857
<CURRENT-LIABILITIES> 115,989
<BONDS> 11,001
0
0
<COMMON> 4,643
<OTHER-SE> 131,322
<TOTAL-LIABILITY-AND-EQUITY> 135,965
<SALES> 85,826
<TOTAL-REVENUES> 85,826
<CGS> 53,548
<TOTAL-COSTS> 24,340
<OTHER-EXPENSES> (308)
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 570
<INCOME-PRETAX> 7,751
<INCOME-TAX> 2,664
<INCOME-CONTINUING> 7,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,087
<EPS-PRIMARY> .27
<EPS-DILUTED> .26
</TABLE>
