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United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Period ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________
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Commission File Number 0-2382
MTS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0908057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14000 Technology Drive, Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip Code)
Registrants telephone number: (612)-937-4000
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
August 11, 1999 was 20,864,310 shares.
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<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
THIRD QUARTER REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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PART I - FINANCIAL INFORMATION
<S> <C> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999 and September 30, 1998 2
Consolidated Statements of Income
Three and nine months ended June 30, 1999
and 1998 3
Consolidated Statements of Cash Flows
Nine months ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-12
Item 3. Qualitative and Quantitative Disclosures About
Market Risks 12
PART II - OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
1
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(expressed in thousands, except per share data)
June 30 September 30
ASSETS 1999 1998
--------- ---------
Current Assets:
Cash and cash equivalents $ 17,152 $ 12,589
Accounts receivable 87,575 93,313
Unbilled contracts and retainage receivable 32,058 35,891
Inventories-
Customer jobs-in-process 8,654 15,057
Components, assemblies and parts 55,767 42,925
Prepaid expenses 7,401 4,536
--------- ---------
Total current assets 208,607 204,311
--------- ---------
Property and Equipment:
Land 2,437 2,437
Buildings and improvements 39,673 40,432
Machinery and equipment 102,416 94,761
Accumulated depreciation (71,203) (67,688)
--------- ---------
Total property and equipment, net 73,323 69,942
--------- ---------
Other assets 34,981 38,769
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Total assets $ 316,911 $ 313,022
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 10,387 $ 28,243
Current maturities of long-term debt 797 1,180
Accounts payable 24,337 20,274
Accrued compensation and benefits 23,039 26,919
Advance billings to customers 15,861 17,360
Other accrued liabilities 15,896 16,247
--------- ---------
Total current liabilities 90,317 110,223
Deferred income taxes 4,437 4,851
Long-term debt, less current maturities 60,064 45,259
--------- ---------
Commitments and contingencies
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 20,856,298 and 20,656,394
shares issued and outstanding 5,214 5,164
Additional paid-in capital 7,880 5,818
Retained earnings 148,589 139,782
Accumulated other comprehensive income 410 1,925
--------- ---------
Total shareholders' investment 162,093 152,689
--------- ---------
Total liabilites and shareholders' investement $ 316,911 $ 313,022
========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements
2
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(expressed in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUE $ 95,363 $ 91,899 $ 284,767 $ 259,398
COST OF REVENUE 57,545 56,208 172,110 155,393
--------- --------- --------- ---------
Gross profit 37,818 35,691 112,657 104,005
OPERATING EXPENSES:
Selling 15,324 14,318 46,006 41,697
General and administrative 7,149 6,300 20,390 18,848
Research and development 7,035 6,324 20,612 17,451
Restructuring expense -- -- 2,596 --
Acquisition expense 1,391 -- 1,391 --
--------- --------- --------- ---------
Total operating expenses 30,899 26,942 90,995 77,996
INCOME FROM OPERATIONS 6,919 8,749 21,662 26,009
Interest expense 1,032 570 3,429 1,246
Interest income (74) (75) (246) (251)
Other (income) and expense, net (2,308) (267) (178) 547
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 8,269 8,521 18,657 24,467
PROVISION FOR INCOME TAXES 2,976 2,854 6,492 8,687
--------- --------- --------- ---------
NET INCOME $ 5,293 $ 5,667 $ 12,165 $ 15,780
========= ========= ========= =========
BASIC EARNINGS PER SHARE $ 0.25 $ 0.28 $ 0.59 $ 0.77
DILUTED EARNINGS PER SHARE $ 0.25 $ 0.27 $ 0.57 $ 0.74
DIVIDENDS PER SHARE $ 0.06 $ 0.06 $ 0.18 $ 0.18
BACKLOG $ 154,422 $ 172,590 $ 154,422 $ 172,590
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements
3
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(expressed in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JUNE 30
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 12,165 $ 15,780
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,189 7,852
Deferred income taxes (118) (197)
Changes in operating assets and liabilities:
Receivables, including accounts, unbilled
contracts and retainages 7,463 (4,327)
Inventories (7,590) (13,277)
Prepaid expenses (2,939) (581)
Advance billings to customers (1,236) (3,550)
Accounts payable and accrued liabilities 3,325 (5,538)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 21,259 (3,838)
-------- --------
INVESTING ACTIVITIES
Property and equipment, net (12,716) (16,098)
Acquisitions, net of cash acquired -- (18,976)
Other assets 675 293
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (12,041) (34,781)
-------- --------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable (19,585) 42,340
Proceeds from issuance of long-term debt 16,115 3,017
Payments on long-term borrowings (648) (300)
Cash dividends (3,360) (3,317)
Proceeds from exercise of stock options 2,198 2,717
Payments to purchase and retire common stock (85) (1,149)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,365) 43,308
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 710 (491)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,563 4,198
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,589 12,558
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,152 $ 16,756
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements
4
<PAGE>
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. EARNINGS PER COMMON SHARE
Basic earnings per share is 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
JUNE 30 June 30 JUNE 30 June 30
1999 1998 1999 1998
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(expressed in thousands, except per share data)
<S> <C> <C> <C> <C>
Weighted average
common shares
outstanding 20,813 20,597 20,728 20,509
Dilutive potential
common shares 396 814 448 744
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Total dilutive
common shares 21,209 21,411 21,176 21,253
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Basic net income
per share $0.25 $0.28 $0.59 $0.77
Diluted net income
per share $0.25 $0.27 $0.57 $0.74
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
3. RESTRUCTURING CHARGES
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 $2.1 million ($1.5 million after tax, or $.08 per share).
This charge relates principally to a workforce reduction and $0.3 million for
other costs. Annualized pretax cost savings from reducing the number of
employees and contractors are estimated to be $5.0 million. In the first quarter
of fiscal year 1999, DSP Technology, Inc. (see note 4) announced its strategic
decision to relocate its corporate headquarters and consolidate its
Transportation Group operations in Ann Arbor, Michigan from Freemont,
California. This decision resulted in a restructuring charge of $0.5 million
($0.3
5
<PAGE>
million after tax or $.02 cents per share). This charge relates to employee
severance cost of $0.3 million and $0.2 million in idle facility and winding
down costs. Of the total restructuring charges mentioned above, $0.8 million
remains to be paid for severance related costs.
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement established standards for reporting and
display of comprehensive income and its components. Comprehensive income
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income represents net income adjusted for foreign
currency translation adjustments. Comprehensive income was $4.6 million and $6.0
million for the three months ended June 30, 1999 and 1998, respectively and
$10.7 million and $14.7 million for each of the nine month periods ended June
30, 1999 and 1998.
5. POOLING-OF-INTERESTS
On May 28, 1999 the Company completed a merger with DSP Technology, Inc. (DSP),
a company that is active in engine development market segments where MTS
currently does not have a presence. Under the terms of the agreement, the
Company issued 2,076,913 shares of common stock in exchange for all of the
outstanding shares and vested stock options of DSPs' common stock. The
acquisition was accounted for as a pooling-of-interests and, accordingly, all
periods included in these consolidated financial statements have been restated
to give effect to the merger. The following are the results of operations for
the separate companies for all periods currently and previously reported on.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Revenue:
MTS $ 89,222 $85,826 $263,904 $241,450
DSP 6,141 6,073 20,863 17,948
-------- ------- -------- --------
Combined Revenue 95,363 91,899 284,767 259,398
Income (Loss) Before Income Taxes (Note A):
MTS 9,380 7,751 18,112 21,986
DSP (1,111) 770 545 2,481
-------- ------- -------- --------
Combined Income Before Income Taxes $ 8,269 $ 8,521 $ 18,657 $ 24,467
======== ======= ======== ========
</TABLE>
Note A: 1999 amounts include $0.3 million and $1.1 million in acquisition
related cost for the Company and DSP respectively.
No significant adjustments were made to the prior years financial statements of
either the Company or DSP.
6
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NEW ORDERS AND BACKLOG
THREE MONTHS ENDED 6/30/99 COMPARED TO THREE MONTHS ENDED 6/30/98
New orders for the third quarter of fiscal 1999 decreased to $77.3 million
compared to $78.8 million a 2.0% decrease when compared to the same period one
year ago. International orders decreased to 48.5% of total orders from 62.9%
when compared to the same period one year ago. Delays in placing orders by
customers due to the introduction of a new product line for material testing
load frames are partially responsible for the decline in orders. In addition,
heavy price competition and weak economic conditions in the Japanese markets and
a general softness in the North American markets have also added to this
decline.
Orders for the Mechanical Testing and Simulation (MT&S) sector decreased 9.2% to
$55.6 million from $61.2 million for the prior year. The decrease in the MT&S
sector is due generally to the same reasons mentioned above. The MT&S sector
accounted for 71.9% of total orders compared to 77.6% one year ago. Orders for
the Factory Automation sector (FA) increased 23.3% to $21.7 million from $17.6
million for the prior year. The FA sector accounted for 28.1% of total orders
compared to 22.4% one year ago.
NINE MONTHS ENDED 6/30/99 COMPARED TO NINE MONTHS ENDED 6/30/98
New orders for the first nine months of fiscal 1999 increased to $251.9 million
compared to $231.1 million a 9.0% increase when compared to the same period one
year ago. International orders increased to 46.0% compared to 43.3% of total
orders for the first three quarters of fiscal 1999 and 1998 respectively.
International orders increased due to a strong European market and a slight
recovery in the Asian markets.
Orders for the Mechanical Testing and Simulation (MT&S) sector increased 8.5% to
$196.5 million from $181.1 million for the prior year. The MT&S sector accounted
for 78.0% of total orders compared to 78.4% one year ago. Orders for the Factory
Automation sector (FA) increased 10.8% to $55.4 million from $50.0 million for
the prior year. The FA sector accounted for 22.0% of total orders compared to
21.6% one year ago.
Backlog of undelivered orders at June 30, 1999 was $154.4 million, a decrease of
10.5% from the backlog at June 30, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED 6/30/99 COMPARED TO THREE MONTHS ENDED 6/30/98
Because the company operates in many different countries around the world it is
exposed to currency fluctuations. These fluctuations can cause either a gain or
a loss due to the translation of the foreign currencies to U.S. dollars. For the
three months ended June 30, 1999 the net impact on income of currency
transaction gains offset in part by a translation loss was approximately $1.5
million.
NET REVENUE for the third quarter of fiscal 1999 was $95.4 million, an increase
of $3.5 million or 3.8% over the same three months of fiscal 1998. International
content of revenue was 47.3% of total revenues compared to 41.7% for the third
quarter ended June 30, 1999 and 1998 respectively. Europe is showing strong
double digit revenue growth while the domestic markets as well as price
competition and weak economic conditions in Asia have slowed growth in these
markets.
7
<PAGE>
GROSS PROFIT for the third quarter of fiscal 1999 increased 6.0% to $37.8
million compared to $35.7 million for the same period one year ago. Gross profit
as a percentage of net revenue increased to 39.7% from 38.8% for the three-month
periods ended June 30, 1999 and 1998 respectively.
SELLING EXPENSES increased by 7.0% to $15.3 million compared to $14.3 million
for the three months ended June 30, 1999 and 1998 respectively. Selling expense
as a percentage of net revenue increased to 16.1% compared to 15.6% from the
same period one year ago. See nine month analysis for information related to
acquisitions.
GENERAL AND ADMINISTRATIVE EXPENSES increased by 13.5% to $7.1 million compared
to $6.3 million for the three months ended June 30, 1999 and 1998 respectively.
General and administrative expense as a percentage of net revenue increased to
7.5% compared to 6.9% from the same period one year ago. See nine month analysis
for information related to acquisitions.
RESEARCH AND DEVELOPMENT EXPENSES increased by 11.2% to $7.0 million compared to
$6.3 million for the three months ended June 30, 1999 and 1998 respectively.
Research and development expense as a percentage of net revenue increased to
7.4% compared to 6.9% from the same period one year ago. See nine month analysis
for information related to acquisitions.
ACQUISITION EXPENSES were $1.4 million for the three month period ended June 30,
1999. The expenses consist of such items as professional fees, filing fees, and
other transaction related charges for the acquisition of DSP Technology, Inc..
INTEREST (INCOME) AND EXPENSE increased to $1.0 million compared to $0.5 million
for the three months ended June 30, 1999 and 1998 respectively. Interest expense
increased in part due to new borrowings, which have been used to fund new
acquisitions as well as working capital needs. Net interest expense as a
percentage of revenue increased to 1.0% from 0.5% for the same period one year
ago.
OTHER (INCOME) AND EXPENSE was ($2.3) million compared to ($0.3) million for the
three months ended June 30, 1999 and 1998 respectively. Other income and expense
increased mainly due to currency gains of $1.5 million and net life insurance
proceeds of $1.4 million.
NET INCOME decreased 6.6% to $5.3 million compared to $5.7 million for the three
months ended June 30, 1999 and 1998 respectively. Net income as a percentage of
revenue decreased to 5.6% from 6.2% for the same period one year ago. The
effective tax rate for the third quarter of fiscal 1999 increased to 36.0% as
compared to 33.5% for the same period one year ago. The increase in the
effective tax rate is due primarily to the addition of DSP Technology, Inc in
the Company's restated financial statements.
NINE MONTHS ENDED 6/30/99 COMPARED TO NINE MONTHS ENDED 6/30/99
During the first three quarters of fiscal 1999, revenues increased 9.8% to
$284.8 million. The 1998 acquisitions of Performance Controls, Inc., Nano
Instruments, Inc. and SDRC's Noise and Vibration Division, which occurred during
the second half of 1998, account for $19.1 million and $4.8 million of the
revenues for the periods ending June 30, 1999 and 1998 respectively. The 1998
acquisitions are on target with the Company's expectations.
For the nine month period ended June 30, 1999 the net impact on income of
currency transaction gains offset in part by a translation loss was
approximately $1.5 million.
Operating expenses for the first three quarters of fiscal 1999 increased 16.7%
to $91.0 million compared to $78.0 million for the same nine months of fiscal
1998. Included in the 1999 numbers are a $2.1 million restructuring charge
related to a previously announced workforce reduction which occurred during the
first quarter of fiscal 1999, restructuring charges of $0.5 million related to
DSP (see footnote 3 in notes to consolidated financial statements) and $1.4
million in acquisition related expenses. In addition, Included in the 1999 and
1998 numbers are incremental operating costs relating to 1998 acquisitions. The
incremental costs are $6.1 million and $1.1 million for the periods ended June
30, 1999 and 1998 respectively. Excluding these amounts, operating costs would
have been $80.8 million and $76.9 million for the nine month periods ended June
30, 1999 and 1998 respectively.
8
<PAGE>
NET REVENUE for the first nine months of fiscal 1999 was $284.8 million, an
increase of $25.4 million or 9.8% over the first nine months of fiscal 1998. The
timing issues related to the acquisitions noted above account for $19.1 million
and $4.8 million for the nine months ended June, 30 1999 and 1998 respectively.
Excluding the $19.1 million and $4.8 million, revenue would have been $265.7
million compared to $254.6 million for the same period a year ago.
International content of revenue increased to 46.2% of total revenues compared
to 43.8% for the nine month periods ended June 30, 1999 and 1998 respectively.
GROSS PROFIT for the first nine months of 1999 increased 8.3% to $112.7 million
compared to $104.0 million for the same period one year ago. Gross profit as a
percentage of net revenue decreased slightly to 39.6% compared to 40.1% for the
nine-month periods ended June 30, 1999 and 1998 respectively.
SELLING EXPENSES increased by 10.3% to $46.0 million compared to $41.7 million
for the nine months ended June 30, 1999 and 1998 respectively. Selling expense
as a percentage of net revenue increased slightly to 16.2% compared to 16.1% for
the same period one year ago. Excluding incremental operating costs for fiscal
1998 acquisitions of $2.5 million and $0.2 million for the nine month periods
ended June 30, 1999 and 1998 respectively, selling expenses would have been
$43.5 million, a 4.8% increase over the $41.5 million reported for the first
nine months of fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSES increased by 8.2% to $20.4 million compared
to $18.9 million for the nine months ended June 30, 1999 and 1998 respectively.
General and administrative expense as a percentage of net revenue decreased
slightly to 7.2% compared to 7.3% for the same period one year ago. Excluding
incremental operating costs for fiscal 1998 acquisitions of $1.0 million and
$0.4 million for the nine month periods ended June 30, 1999 and 1998
respectively, general and administrative expenses would have been $19.4 million,
a 5.4% increase from the $18.5 million reported for the first nine months of
fiscal 1998.
RESEARCH AND DEVELOPMENT increased by 18.1% to $20.6 million compared to $17.5
million for the nine months ended June 30, 1999 and 1998 respectively. Research
and development expense as a percentage of net revenue increased to 7.2%
compared to 6.7% for the same period one year ago. Excluding incremental
operating costs for fiscal 1998 acquisitions of $2.6 million and $0.4 million
for the nine month periods ended June, 30 1999 and 1998 respectively, research
and development expenses would have been $18.0 million, a 5.7% increase over the
$17.1 million reported for the first nine months of fiscal 1998.
INTEREST (INCOME) AND EXPENSE increased to $3.2 million compared to $1.0 million
for the nine months ended June 30, 1999 and 1998 respectively. Net interest
expense as a percentage of revenue increased to 1.1% from 0.4% for the same
period one year ago. Interest expense increased for generally the same reasons
as mentioned above in the quarterly discussion.
OTHER (INCOME) AND EXPENSE was ($178,000) compared to $547,000 for the nine
months ended June 30, 1999 and 1998 respectively. Other income increased for
generally the same reasons as mentioned above in the quarterly discussion.
NET INCOME decreased 22.9% to $12.2 million compared to $15.8 million for the
nine months ended June 30, 1999 and 1998 respectively. Net income as a
percentage of revenue decreased to 4.3% from 6.1% for the same period one year
ago. Excluding the previously mentioned $2.1 million ($1.5 million after tax or
$0.08 per share) restructuring charge, the $0.5 million ($0.3 million after tax
or $0.2 cents per share) restructuring charge related to DSP, the $1.4 million
($0.9 million after tax or $.05 cents per share) in software implementation
related charges and costs, and $1.4 million ($0.9 million after tax or $0.5
cents per share) in acquisition expenses, net income would have remained stable
at $15.8 million when compared to net income reported one year ago. The
effective tax rate for the first nine months of fiscal 1999 was 34.8% compared
to 35.5% for nine months of fiscal 1998.
9
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided $21.3 million during the first
nine months of 1999 and required $3.8 million for the same period in 1998. The
increase in cash from operating activities was a direct result of $12.2 million
of net income offset in part by ($1.0) million used by working capital items,
such as accounts payable, accounts receivable and unearned revenue. In addition,
there was $10.1 million of cash flows provided during the first nine months of
1999 from depreciation and amortization expense and other non-cash items.
CASH FLOWS FROM INVESTING ACTIVITIES required cash totaling $12.0 million in the
first nine months of 1999 compared to $34.8 million in 1998. The majority of the
cash outflows during the first nine months of 1999 and 1998 related to net
additions to property, plant and equipment. The Company expects that future
expenditures for property, plant and equipment will be met with internally
generated funds.
CASH FLOWS FROM FINANCING ACTIVITIES required $5.4 million during the first nine
months of 1999 compared to cash provided of $43.3 million in 1998. Cash flows
from financing activities primarily related to cash disbursements for dividends
of $3.4 million and cash payments on short-term borrowings of $19.5 million. The
Company issued new long-term debt of approximately $16.1 million for the first
nine months of 1999 and payments on its long-term debt of $0.7. The new
long-term debt was used primarily to pay down short-term notes receivable which
were at less favorable rates.
Under the terms of its credit agreements, the Company has agreed to certain
financial covenants. At June 30, 1999, the Company was in compliance with the
terms and covenants of its credit agreements. The Company believes that the
combination of present capital resources, internally generated funds, and unused
financing sources 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. The vast majority of these systems were
tested and found to be compliant. Each site developed a plan for completion of
testing and remediation of critical systems.
10
<PAGE>
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 about their Year 2000 readiness. Where the Company does not have
sufficient comfort that a critical vendor will be ready, site management has
obtained more detailed information and during the first quarter of fiscal 1999
began 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 completed testing and where necessary remediation of the above items
by June 30, 1999 as scheduled. The Company will continue to monitor events and
information relevant to Year 2000 issues so that additional action can be taken
where necessary.
Products Manufactured at Site
The Company's Factory Automation sector products contain few date sensitive
computer and embedded processors. The Company has completed an evaluation of
these products. All of the products evaluated have been found to be year 2000
ready, in some cases with stipulations.
The Company's MT&S sector products are by their nature computer intensive. The
Company has evaluated these products and advised its customers as to their Year
2000 readiness via its web site and written communication. 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 $500,000 in fiscal 1999. Approximately
$400,000 was incurred durring the first three quarters 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.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY LANGUAGE
Statements included or incorporated by reference in this Management's Discussion
and Analysis of Financial Condition and Results of Operations which are not
historical or current facts are "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995, and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results and those presently anticipated or projected. The
following important facts, among others, could affect the Company's actual
results in the future and could cause the Company's actual financial performance
to differ materially from that expressed in any forward-looking statements:
(I) With regard to the Company's new product developments, there are no
uncertainties known to the Company concerning the expected results.
(II) Possible significant volatility in both backlog and quarterly operating
results may result from large, individual, fixed price orders, generally
over 10 million, in connection with sales of MT&S systems.
11
<PAGE>
(III) Export controls based on U.S. initiatives and foreign policy, as well as
import controls imposed by foreign governments, may cause delays for
certain shipments or the rejection of orders by the Company. Such delays
could create material fluctuations in quarterly results and could have a
material adverse effect on results of operations. Local political
conditions and/or currency restrictions may also affect foreign
revenues.
(IV) Delays in realization of backlog orders may occur due to technical
difficulties, export licensing approval or the customer's preparation of
the installation site, any of which can affect the quarterly or annual
period when backlog is recognized as revenue and could materially affect
the results of any such period.
(V) The Company experiences competition on a worldwide basis. Customers may
choose to purchase equipment from the Company or from its competitors.
(VI) The Company is exposed to market risk from changes in foreign currency
exchange rates, which can affect its results from operations and
financial condition.
(VII) Risks in connection with the Year 2000 issue, including risks of
anticipated Year 2000 compliance, greater-than-anticipated costs, or
risks of business interruptions due to inability of the Company's
vendors to comply.
The forgoing list is not exhaustive, and the Company disclaims any obligation to
or revise any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required disclosures are included in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Note 1 to the Consolidated
Financial Statements included in the Company's 1998 Annual Report to
Shareholders. This information is incorporated herein by reference.
12
<PAGE>
PART II-------OTHER INFORMATION
ITEM 5. Other Information.
Appointment of New CFO
On June 30, 1999 the Company announced that David E. Hoffman had been appointed
chief financial officer, succeeding Marshall L. Carpenter. Mr. Hoffman has
served as senior vice president, CFO and treasurer for MVE holdings, a
Minneapolis-based, privately held manufacturer of cryogenic vessels with
operations in the U.S., China, Australia and Europe. From 1994 to 1997 Mr.
Hoffman was CFO for the $400 million Harmon LTD Group of Apogee Enterprises of
Minneapolis. From 1983 to 1993 He served in progressively more responsible
financial and operating positions with ABB and predecessor companies in Atlanta,
Georgia, culminating as vice president of operations and finance of ABB's $600
million worldwide Automotive Systems Group.
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, 1999.
(C) 1998 Annual Report to Shareholders, incorporated by reference
from Exhibit 13 of Form 10-K for fiscal year ended September 30,
1998.
13
<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/ Sidney W. Emery, Jr.
-------------------------------------------
Sidney W. Emery, Jr.
President
Chief Executive Officer
/s/ David E. Hoffman
-------------------------------------------
David E. Hoffman
Vice President
Chief Financial Officer
Dated: August 14, 1999
14
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