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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarterly Period ended March 31, 2000
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: (952)-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
May 1, 2000 was 20,787,938 shares.
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<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SECOND QUARTER REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000
TABLE OF CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 and September 30, 1999 2
Consolidated Statements of Income
Three and six months ended March 31, 2000
and 1999 3
Consolidated Statements of Cash Flows
Six months ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
1
<PAGE>
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(expressed in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31 SEPTEMBER 30
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 12,424 $ 18,083
Accounts receivable 101,904 98,307
Unbilled contracts and retainage receivable 29,097 42,332
Inventories-
Customer jobs-in-process 8,013 3,625
Components, assemblies and parts 54,441 53,323
Prepaid expenses 9,654 7,981
------------ ------------
Total current assets 215,533 223,651
------------ ------------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 44,409 42,332
Machinery and equipment 105,227 101,140
Accumulated depreciation (78,311) (73,086)
------------ ------------
Total property and equipment, net 74,572 73,633
------------ ------------
Other assets 32,869 36,063
------------ ------------
Total assets $ 322,974 $ 333,347
============ ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 24,304 $ 10,071
Current maturities of long-term debt 839 1,308
Accounts payable 15,698 21,062
Accrued compensation and benefits 20,730 28,662
Advance billings to customers 23,807 25,943
Other accrued liabilities 16,051 17,667
------------ ------------
Total current liabilities 101,429 104,713
Deferred income taxes 5,358 5,517
Long-term debt, less current maturities 62,048 60,258
------------ ------------
Commitments and contingencies
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 20,786,767 and 20,883,639
shares issued and outstanding 5,197 5,221
Additional paid-in capital 7,405 8,122
Retained earnings 140,442 147,615
Accumulated other comprehensive income 1,095 1,901
------------ ------------
Total shareholders' investment 154,139 162,859
------------ ------------
Total liabilities and shareholders' investment $ 322,974 $ 333,347
============ ============
</TABLE>
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 SIX MONTHS ENDED
MARCH 31 MARCH 31
-------------------------- -------------------------
2000 1999 2000 1999
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUE $ 95,291 $ 93,262 $ 182,505 $ 189,404
COST OF REVENUE 60,821 56,837 125,249 115,265
---------- ---------- ---------- ----------
Gross profit 34,470 36,425 57,256 74,139
OPERATING EXPENSES:
Selling 15,372 15,127 30,494 30,731
General and administrative 8,384 8,053 15,328 14,802
Research and development 6,684 6,910 13,363 13,625
Restructuring -- -- -- 2,596
---------- ---------- ---------- ----------
Total operating expenses 30,440 30,090 59,185 61,754
INCOME (LOSS) FROM OPERATIONS 4,030 6,335 (1,929) 12,385
Interest expense 1,648 1,145 3,004 2,397
Interest income (161) (121) (279) (172)
Other (income) and expense, net 331 645 2,354 (228)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 2,212 4,666 (7,008) 10,388
PROVISION (BENEFIT) FOR INCOME TAXES 841 1,520 (2,340) 3,516
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,371 $ 3,146 $ (4,668) $ 6,872
========== ========== ========== ==========
BASIC NET INCOME (LOSS) PER SHARE $ 0.07 $ 0.15 $ (0.22) $ 0.33
BASIC - COMMON SHARES OUTSTANDING 20,836 20,701 20,858 20,687
DILUTED NET INCOME (LOSS) PER SHARE $ 0.07 $ 0.15 $ (0.22) $ 0.33
DILUTED - COMMON SHARES OUTSTANDING 20,928 21,148 20,858 21,160
</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 SIX MONTHS ENDED
MARCH 31
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss) $ (4,668) $ 6,872
Adjustments to reconcile net income(loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,549 6,697
Deferred income taxes 20 (117)
Changes in operating assets and liabilities:
Receivables, including accounts, unbilled
contracts and retainages 7,163 17,047
Inventories (6,146) (3,551)
Prepaid expenses (1,895) (2,278)
Advance billings to customers (1,548) 4,383
Accounts payable and accrued liabilities (13,369) (11,230)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (12,894) 17,823
---------- ----------
INVESTING ACTIVITIES
Property and equipment, net (7,764) (8,436)
Other assets 1,200 (377)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (6,564) (8,813)
---------- ----------
FINANCING ACTIVITIES
Net borrowings (payments) on notes payable 14,198 1,826
Proceeds from issuance of long-term debt 2,330 --
Payments on long-term borrowings (449) (421)
Cash dividends (2,505) (2,233)
Payments to purchase and retire common stock (751) (85)
Proceeds from exercise of stock options 10 368
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,833 (545)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 966 456
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,659) 8,921
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,083 12,589
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,424 $ 21,510
========== ==========
</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.
Reclassifications
Certain amounts included in the consolidated financial statements have been
reclassified in prior years to conform with the second quarter of fiscal 2000
financial statement presentation. These amounts had no effect on the previously
reported shareholders' investment or net income.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. The Company anticipates that the effect of
adopting SFAS No. 133 will not have a material impact on the Company's financial
statements.
5
<PAGE>
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the year.
Diluted net income (loss) per share includes the dilutive effect of potential
common shares. All stock options outstanding during the six month period ended
March 31, 2000 were anti-dilutive due to the year-to-date net loss. A
reconciliation of the weighted average common shares used in the computation of
basic and diluted net income (loss) per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
MARCH 31 March 31 MARCH 31 March 31
- --------------------------------------------------------------------------------------
2000 1999 2000 1999
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic - common shares
outstanding 20,836 20,701 20,858 20,687
Dilutive potential
common shares 92 447 -- 473
- --------------------------------------------------------------------------------------
Diluted - common shares
outstanding 20,928 21,148 20,858 21,160
- --------------------------------------------------------------------------------------
Basic net income (loss)
per share $0.07 $0.15 $(0.22) $0.33
Diluted net income (loss)
per share $0.07 $0.15 $(0.22) $0.33
======================================================================================
</TABLE>
3. RESTRUCTURING CHARGES
In the first quarter of fiscal 1999, the Company took a series of actions to
better align its organizational structure with market elements, improve
operational performance and reduce costs. These actions resulted in a
restructuring charge during the first quarter of fiscal year 1999 of $2.1
million ($1.5 million after tax, or $.07 per share). This charge relates
principally to a workforce reduction and $0.3 million for other costs. Also in
the first quarter of fiscal 1999, DSP Technology, Inc. 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 million after tax or $.01 per share). This charge relates to employee
severance cost of $0.3 million and $0.2 million in idle facility and winding
down costs. All of the restructuring charges taken in the first quarter of
fiscal 1999 have been paid.
In the fourth quarter of fiscal 1999, the Company identified actions necessary
to rationalize certain of its business capacity. These actions resulted in a
restructuring charge during the fourth quarter of fiscal 1999 of $3.1 million
($2.1 million after tax, or $.10 per share). This charge relates to employee
severance costs of $2.8 million and $0.3 million of other costs. Of the total
restructuring charges taken in the fourth quarter of fiscal 1999, $0.3 million
has been paid for severance related costs.
4. COMPREHENSIVE INCOME
For the Company, comprehensive income represents net income adjusted for foreign
currency translation adjustments and unrealized loss on investment.
Comprehensive income (loss) was $1.3 million and $1.1 million for the three
months ended March 31, 2000 and 1999, respectively and ($5.5) million and $6.1
million for the six-month period ended March 31, 2000 and 1999.
6
<PAGE>
5. BUSINESS SEGMENT INFORMATION
The Company evaluated its business activities that are regularly reviewed by the
Chief Executive Officer for which discrete financial information is available.
As a result of this evaluation, the Company has determined that it has five
operating segments: Vehicle Testing Systems, Material Testing Systems, Advanced
Systems, Automation and Sensors. The Vehicle Testing Systems business
manufactures and markets systems for vehicle and component manufacturers to aid
in the acceleration of design development work and decrease the cost to
manufacture their products. The Material Testing Systems business manufacturers
and markets systems to aid their customers in product development and quality
control to improve the design and manufacture of materials and products. The
Advanced Systems business offers highly customized systems for simulation and
testing. The Automation business manufactures and markets high performance
products for challenging factory automation applications in a wide range of
industries. The Sensors business manufactures and markets displacement and
liquid level sensors used in various applications to monitor and automate
industrial processes. The economic characteristics, nature of products and
services, production processes, type or class of customer, method of
distribution and regulatory environments are similar for the Vehicle Testing
Systems, Material Testing Systems and Advanced Systems business segments. As a
result of these similarities, these segments have been aggregated into one
reportable segment called Mechanical Testing and Simulation (MT&S) for financial
statement purposes. Also, the economic characteristics, nature of products and
services, production processes, type or class of customer, method of
distribution and regulatory environments are similar for the Automation and
Sensors business segments. As a result, these segments have been aggregated into
one reportable segment called Factory Automation (FA).
The accounting policies of the business segments are the same as those described
in Note 1. In evaluating the segment performance, management focuses on income
(loss) from operations. This measurement excludes special charges (e.g.
restructuring charges, acquisition expenses, etc.), interest expense, interest
income, income tax expense and other non-operating income or expense. Corporate
expenses are allocated to segments primarily on the basis of revenue. This
allocation includes expenses for various support functions such as human
resources, information technology and finance. Financial information by
reportable segment follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
2000 1999 2000 1999
---------- ---------- ---------- ----------
(expressed in thousands)
<S> <C> <C> <C> <C>
NET REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 71,294 $ 73,597 $ 140,404 $ 150,441
Factory Automation 23,997 19,665 42,101 38,963
---------- ---------- ---------- ----------
Total Net Revenue 95,291 93,262 182,505 189,404
INCOME (LOSS) FROM OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation:
Before Restructuring 836 4,554 (6,670) 11,320
Restructuring -- -- -- (2,395)
---------- ---------- ---------- ----------
Total Mechanical Testing and Simulation 836 4,554 (6,670) 8,925
Factory Automation:
Before Restructuring 3,194 1,781 4,741 3,661
Restructuring -- -- -- (201)
---------- ---------- ---------- ----------
Total Factory Automation 3,194 1,781 4,741 3,460
Total Income (Loss) from Operations $ 4,030 $ 6,335 $ (1,929) $ 12,385
========== ========== ========== ==========
</TABLE>
7
<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 3/31/00 COMPARED TO THREE MONTHS ENDED 3/31/99
New orders for the second quarter of fiscal 2000 increased to $101.2 million
compared to $83.3 million, a 21.5% increase, when compared to the same period
one year ago.
Orders for the Mechanical Testing and Simulation (MT&S) segment increased 12.7%
to $75.5 million from $67.0 million for the prior year. The MT&S segment
accounted for 74.6% of total orders compared to 80.4% one year ago. Orders for
the Factory Automation segment (FA) increased 57.7% to $25.7 million from $16.3
million one year ago. The FA segment accounted for 25.4% of total orders
compared to 19.6% one year ago.
SIX MONTHS ENDED 3/31/00 COMPARED TO SIX MONTHS ENDED 3/31/99
New orders for the first half of fiscal 2000 increased to $204.5 million
compared to $174.6 million, a 17.1% increase, when compared to the same period
one year ago.
Orders for the Mechanical Testing and Simulation (MT&S) segment increased 8.9%
to $153.5 million from $140.9 million for the prior year. The MT&S segment
accounted for 75.1% of total orders compared to 80.7% one year ago. Orders for
the Factory Automation segment (FA) increased 51.3% to $51.0 million from $33.7
million one year ago. The FA segment accounted for 24.9% of total orders
compared to 19.3% one year ago.
Backlog of undelivered orders at March 31, 2000 was $168.8 million, an increase
of 15.0% from September 30, 1999, but a decrease of 2.0% from the backlog at
March 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED 3/31/00 COMPARED TO THREE MONTHS ENDED 3/31/99
NET REVENUE for the second quarter of fiscal 2000 was $95.3 million, an increase
of $2.0 million or 2.2% over the same three months of fiscal 1999. International
revenue represented 52.4% of total revenues compared to 49.8% for the second
quarter ended March 31, 1999. The increase in net revenues was largely due to
the increased business activity in the factory automation segment offset by
lower activity in our DSP Technology division.
GROSS PROFIT for the second quarter of fiscal 2000 decreased 5.4% to $34.5
million compared to $36.4 million for the same period one year ago. Gross profit
as a percentage of revenue decreased to 36.2% from 39.1% for the three-month
periods ending March 31, 2000 and 1999, respectively. The decrease in margin
percentage was a result of changes in mix from higher revenues in product
oriented businesses and our DSP Technology division in 1999 to a higher content
of lower margin project activity in fiscal 2000.
SELLING EXPENSES increased by 1.6% to $15.4 million compared to $15.1 million
for the three months ending March 31, 2000 and 1999 respectively. Selling
expense as a percentage of revenue decreased to 16.1% compared to 16.2% for the
same period one year ago.
8
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES increased by 4.1% to $8.4 million compared
to $8.1 million for the three months ending March 31, 2000 and 1999
respectively. General and administrative expense as a percentage of revenue
increased to 8.8% compared to 8.6% for the same period one year ago. The
increase in total expense primarily relates to $0.3 million of severance related
payments made in the second quarter of fiscal 2000.
RESEARCH AND DEVELOPMENT EXPENSES decreased by 3.3% to $6.7 million compared to
$6.9 million for the three months ending March 31, 2000 and 1999 respectively.
Research and development expense as a percentage of revenue decreased to 7.0%
compared to 7.4% for the same period one year ago.
INTEREST (INCOME) AND EXPENSE increased to $1.5 million compared to $1.0 million
for the three months ending March 31, 2000 and 1999 respectively. Interest
expense increased mainly due to higher average short-term balances and slightly
higher interest rates during the second quarter of fiscal 2000 as compared to
the same period one year ago. Net interest expense as a percentage of revenue
increased to 1.6% from 1.1% for the same period one year ago.
OTHER (INCOME) AND EXPENSE, which includes gains and losses from foreign
currency translations, decreased to $0.3 million from $0.6 million for the three
months ending March 31, 2000 and 1999 respectively. The primary difference was
due to higher currency losses in the same period one year ago.
NET INCOME (LOSS) decreased 56.4% to $1.4 million compared to $3.1 million for
the three months ending March 31, 2000 and 1999 respectively. Net income as a
percentage of revenue decreased to 1.4% from 3.4% for the same period one year
ago. The effective tax rate for the second quarter of fiscal 2000 increased to
38.0% from 32.6% for the same period one year ago. The change in the effective
rate was due to a higher composition of income in foreign locations with higher
tax rates.
SIX MONTHS ENDED 3/31/00 COMPARED TO SIX MONTHS ENDED 3/31/99
NET REVENUE for the first six months of fiscal 2000 was $182.5 million, a
decrease of $6.9 million or 3.6% over the first six months of fiscal 1999.
International content of revenue was 47.6% of total revenues compared to 47.2%
for the six-month periods ended March 31, 2000 and 1999 respectively.
GROSS PROFIT for the first half of 2000 decreased 22.8% to $57.3 million
compared to $74.1 million for the same period one year ago. Gross profit as a
percentage of revenue was 31.4% compared to 39.1% for the six-month periods
ending March 31, 2000 and 1999 respectively. The significant decrease in margins
was result of technical and scheduling issues related to two large fixed-fee
custom projects and adverse changes in business mix.
SELLING EXPENSES decreased by 0.8% to $30.5 million compared to $30.7 million
for the six months ending March 31, 2000 and 1999 respectively. Selling expense
as a percentage of revenue increased to 16.7% compared to 16.2% for the same
period one year ago.
GENERAL AND ADMINISTRATIVE EXPENSES increased by 3.6% to $15.3 million compared
to $14.8 million for the six months ending March 31, 2000 and 1999 respectively.
General and administrative expense as a percentage of revenue increased to 8.4%
compared to 7.8% for the same period one year ago.
RESEARCH AND DEVELOPMENT EXPENSES decreased by 1.9% to $13.4 million compared to
$13.6 million for the six months ending March 31, 2000 and 1999 respectively.
Research and development expense as a percentage of revenue increased slightly
to 7.3% compared to 7.2% for the same period one year ago.
INTEREST (INCOME) AND EXPENSE increased to $2.7 million compared to $2.2 million
for the six months ending March 31, 2000 and 1999 respectively. Net interest
expense as a percentage of revenue increased to 1.5% from 1.2% for the same
period one year ago. Interest expense increased due to higher average short-term
balances outstanding and higher interest rates in the first half of fiscal 2000
as compared to the same period one year ago.
9
<PAGE>
OTHER (INCOME) AND EXPENSE increased to $2.4 million from ($0.2) million for the
six months ending March 31, 2000 and 1999 respectively. The increase was
primarily due to currency losses of $1.5 million recognized in the first half of
fiscal year 2000 as compared to a small gain in the same period one year ago.
NET INCOME (LOSS) was ($4.7) million compared to $6.9 million for the six months
ending March 31, 2000 and 1999 respectively. Net income as a percentage of
revenue decreased to (2.6%) from 3.6% for the same period one year ago. The
effective tax rate for the first half of fiscal 2000 was 33.4% compared to 33.8%
for first half of fiscal 1999. See also Note 3 of Notes to Consolidated
Financial Statements regarding discussion on restructuring charges.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES used $12.9 million in the first six months
of 2000 and provided $17.8 million for the same period in 1999. The decrease in
cash from operating activities was a direct result of a $4.7 million net loss
for the period coupled with $15.8 million used by working capital items, such as
payment of accounts payable and accrued liabilities and purchases of inventory
offset by the reduction of accounts receivable.
CASH FLOWS FROM INVESTING ACTIVITIES required cash totaling $6.6 million in the
first six months of 2000 compared to $8.8 million in 1999. The majority of the
cash outflows during the first six months of 2000 and 1999 related to net
additions to property, plant and equipment. The Company expects future
expenditures for property, plant and equipment to be funded with internally
generated funds. Capital expenditures budgeted for fiscal 2000 are approximately
$18.0 million.
CASH FLOWS FROM FINANCING ACTIVITIES provided $12.8 million in the first six
months of 2000 compared to cash used of $0.5 million in 1999. Cash flows from
financing activities primarily related to increases in short-term borrowings of
$14.2 million and an increase in long-term debt of $2.3 million. Offsetting the
increases was the payment of dividends of $2.5 million and the repurchase of
common stock of $0.8 million. The increase in short-term debt levels was used to
fund working capital needs generated during the first half of fiscal 2000.
Under the terms of its credit agreements, the Company has agreed to certain
financial covenants. At March 31, 2000, 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. However, the Company
may find it necessary to seek additional sources of financing to support its
capital needs, for additional working capital, potential investments or
acquisitions or otherwise.
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 evaluated 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 during the year 2000. The Company completed
testing and where necessary remediation of any issues by June 30, 1999. The
Company has not experienced any major issues related to the Year 2000 issue
since completion of its testing. The Company will continue to monitor events and
information relevant to Year 2000 issues so that additional action can be taken
where necessary.
The Company estimates that the costs directly related to its Year 2000 project
were $400,000 in fiscal 1999 and $300,000 in fiscal 1998. The Company does not
expect to incur any material costs in the future related to the Year 2000 issue.
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
10
<PAGE>
compliance, and loss of business related to the Year 2000 issue 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 may be
uncertainties currently 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 in
connection with sales of MT&S systems.
(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 1999 Annual Report to
Shareholders. This information remains current and is incorporated herein by
reference.
11
<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
25, 2000.
(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
Jean-Lou Chameau 17,762,757 1,773,351
Charles A. Brickman 17,765,886 1,770,222
Bobby I. Griffin 17,764,784 1,771,324
Russell A. Gullotti 17,763,307 1,772,801
Brendan C. Hegarty 17,775,839 1,760,269
Sidney W. Emery 17,469,992 2,066,116
Linda Hall Whitman 17,763,435 1,772,673
No voters abstained or were broker/bank non-votes for any of
the directors.
(c) Shareholders approved the proposal to amend the Company's 1997
Stock Option Plan to increase the total number of shares of
common stock available for issuance from 1,500,000 to
4,000,000 shares with 10,806,575 votes in favor of the
proposal, 5,864,451 votes against, 90,849 abstained, and
2,765,887 non-votes by broker/banks.
(d) Arthur Andersen LLP was ratified to serve as the Company's
independent auditors for fiscal year 2000 with 19,450,653
votes in favor, 37,307 votes against and 129,998 votes
abstained.
ITEM 5. Other Information
Thomas E. Holloran announced his retirement as a director of the
Company at the meeting of shareholders held on January 25, 2000.
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, 2000.
12
<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: May 11, 2000
13
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