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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 Quarter ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
-----------------------
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, MN 55344
(Address of principal executive offices) (Zip Code)
Registrant's 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 August
12, 2002 was 21,196,047 shares.
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MTS SYSTEMS CORPORATION
REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2002
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
as of June 30, 2002 and September 30, 2001 2
Consolidated Statements of Income
For the Three and Nine Months Ended June 30, 2002
and 2001 3
Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 18
PART II - OTHER INFORMATION 19-21
Signatures 22
1
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited - in thousands of dollars, except share data)
SEE NOTE 2
ASSETS June 30, 2002 September 30, 2001
----------------- ------------------
Current Assets:
Cash and cash equivalents $ 89,508 $ 17,515
Accounts receivable, net 69,828 97,661
Unbilled contracts and retainage receivable 35,040 45,287
Inventories 42,228 63,381
Prepaid expenses 5,856 6,405
----------------- -----------------
Total current assets 242,460 230,249
----------------- -----------------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 46,680 45,785
Machinery and equipment 87,746 110,419
Accumulated depreciation (76,949) (90,558)
----------------- -----------------
Total property and equipment, net 60,724 68,893
Goodwill (see note 3) 4,272 22,529
Other Assets 8,045 10,088
----------------- -----------------
$ 315,501 $ 331,759
================= =================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 421 $ 428
Current maturities of long-term debt 5,309 5,260
Accounts payable 15,384 16,672
Accrued compensation and benefits 29,183 33,661
Advance billings to customers 38,154 26,572
Other accrued liabilities 12,413 22,480
----------------- -----------------
Total current liabilities 100,864 105,073
Deferred Income Taxes 6,035 5,947
Long-Term Debt, net of current maturities 52,605 53,617
----------------- -----------------
Total liabilities 159,504 164,637
----------------- -----------------
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares
authorized: 21,154,612 and 21,031,467shares issued
and outstanding 5,293 5,258
Additional paid-in capital 9,520 8,946
Retained earnings 140,624 154,159
Accumulated comprehensive income (loss) 560 (1,241)
----------------- -----------------
Total shareholders' investment 155,997 167,122
----------------- -----------------
$ 315,501 $ 331,759
================= =================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2
MTS SYSTEMS CORPORATION
Consolidated Statements of Income
(unaudited - in thousands of dollars,
except per share data)
SEE NOTE 2
For The Three Months Ended For The Nine Months Ended
June 30 June 30
----------------------------- -----------------------------
2002 2001* 2002 2001*
---- ---- ---- ----
Net revenue $ 86,745 $ 99,031 $ 263,543 $ 288,866
Cost of revenue 52,320 61,821 176,978 184,105
------------ ------------ ------------ ------------
Gross profit 34,425 37,210 86,565 104,761
------------ ------------ ------------ ------------
Operating expenses:
Selling 13,431 14,480 40,988 42,782
General and administrative 9,807 8,530 22,464 25,229
Research and development 4,693 5,528 15,299 16,392
------------ ------------ ------------ ------------
Total operating expenses 27,931 28,538 78,751 84,403
------------ ------------ ------------ ------------
Income from operations 6,494 8,672 7,814 20,358
Interest expense 1,016 1,175 3,212 4,207
Interest income (225) (111) (531) (361)
Other expense (income), net 885 673 (1,312) 405
------------ ------------ ------------ ------------
Income before income taxes 4,818 6,935 6,445 16,107
Provision for income taxes 1,843 2,702 2,466 6,323
------------ ------------ ------------ ------------
Income before cumulative effect of
accounting changes 2,975 4,233 3,979 9,784
Cumulative effect of accounting changes,
net of income taxes -- -- (13,721) (2,263)
------------ ------------ ------------ ------------
Net income (loss) $ 2,975 $ 4,233 ($ 9,742) $ 7,521
============ ============ ============ ============
Earnings (loss) per share:
Basic -
Before cumulative effect of accounting changes $ 0.14 $ 0.20 $ 0.19 $ 0.47
Cumulative effect of accounting changes, net -- -- (0.65) ($ 0.11)
------------ ------------ ------------ ------------
Net income (loss) $ 0.14 $ 0.20 ($ 0.46) $ 0.36
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic 21,135 20,683 21,078 20,688
============ ============ ============ ============
Diluted -
Before cumulative effect of accounting changes $ 0.14 $ 0.20 $ 0.19 $ 0.47
Cumulative effect of accounting changes, net -- -- (0.65) ($ 0.11)
------------ ------------ ------------ ------------
Net income (loss) $ 0.14 $ 0.20 ($ 0.46) $ 0.36
============ ============ ============ ============
Weighted average number of common shares
outstanding - diluted 21,423 21,100 21,391 20,912
============ ============ ============ ============
* Restated for SAB 101
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(unaudited - in thousands of dollars)
SEE NOTE 2
Nine Months Ended
June 30
-----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (9,742) $ 7,521
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash cumulative effect of accounting change (see note 3) 18,342 --
Depreciation and amortization 10,400 10,974
Deferred income taxes (17) 94
Bad debt provision 760 304
Inventory provisions 13,771 4,863
Changes in operating assets and liabilities:
Accounts, unbilled contracts and retainage receivables 39,385 26,295
Inventories 7,912 (15,528)
Prepaid expenses 780 (1,467)
Accounts payable (1,409) (7,679)
Accrued compensation and benefits (4,587) 1,502
Advance billings to customers 11,260 11,788
Accrued warranty costs 342 (1,896)
Other current liabilities (11,358) (819)
------------ ------------
Net cash provided by operating activities 75,839 35,952
------------ ------------
Cash flows from investing activities:
Property and equipment, net (771) (4,827)
Other assets 1,358 (3,012)
Unrealized gain/(loss) on investments (187) 2,313
------------ ------------
Net cash provided by (used in) investing activities 400 (5,526)
------------ ------------
Cash flows from financing activities:
Net repayments under notes payable to banks -- (11,280)
Payments of long-term debt (1,325) (566)
Cash dividends (3,794) (3,729)
Proceeds from exercise of stock options 1,445 1,752
Payments to purchase and retire common stock (836) (1,564)
------------ ------------
Net cash used in financing activities (4,510) (15,387)
------------ ------------
Effect of exchange rate changes on cash 265 294
------------ ------------
Net increase in cash and cash equivalents 71,994 15,333
Cash and cash equivalents, at beginning of period 17,515 8,211
------------ ------------
Cash and cash equivalents, at end of period $ 89,509 $ 23,544
============ ============
Cash paid during the periods for:
Interest expense $ 3,117 $ 2,992
Income taxes $ 4,230 $ 5,261
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
MTS SYSTEMS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Consolidation
The consolidated financial statements include the accounts of MTS SYSTEMS
CORPORATION and its wholly and majority 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 ("SEC"). The information furnished in these
financial statements includes normal recurring adjustments and reflects all
adjustments, which are, in the opinion of management, necessary for a fair
presentation of such financial statements. The Company requires the use of
estimates and assumptions in certain circumstances that affect amounts reported.
In preparing these financial statements, management has made its best estimates
and judgments of certain amounts, giving due consideration to materiality. As
further described in footnote 2, the Company is currently reviewing the impact
of certain reconciliation adjustments recorded during fiscal 2002 on previously
filed periodic reports. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The year-end
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. The unaudited financial statements of the Company
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's 2001 Annual Report on Form 10-K
filed with the SEC. Interim results of operations for the nine-month period
ended June 30, 2002 may not necessarily be indicative of the results to be
expected for the full year.
Certain prior year amounts included in the accompanying financial statements
have been reclassified to conform to the current year's presentation. Such
reclassifications had no effect on the Company's previously reported financial
position, net income, or cash flows.
The Company believes that of its significant accounting policies, the following
are particularly important to the portrayal of the Company's results of
operations' and financial position and may require the application of a higher
level of judgment by the Company's management, and as a result are subject to an
inherent degree of uncertainty.
Revenue Recognition
The Company implemented Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements," in the fourth quarter of fiscal 2001 and
retroactively applied such change to transactions that occurred prior to and
during fiscal 2001. Under the guidelines of SAB 101, the Company recognizes
revenue on short-duration projects at the latter of shipment or obtaining
customer acceptance. Revenue on projects requiring longer delivery periods
(longer-term contracts) and other customized orders that allow for progress
billings to the customer are recognized using the percentage-of-completion
method based on the cost incurred to date as compared to the total estimated
cost of the contract (cost to cost method). The effect of any revision to the
total estimated cost, on an individual contract basis, and its impact on revenue
is recorded in the period in which the revision becomes known. When a loss is
anticipated on a contract, the anticipated loss is provided in the period the
loss is identified.
The cumulative effect adjustment of the change in accounting for all periods
through September 30, 2000 was a reduction in net income of $2.3 million (net of
income taxes of $1.4 million), or $0.11 per diluted share, which has been
accounted for as a charge to the financial results for the first quarter of
fiscal 2001. The effect of the change as compared to the revenue recognition
policy previously followed in accounting for revenue recognition on the quarter
ended June 30, 2001 was to increase net revenue by $445 thousand and increase
income before cumulative effect of the accounting change, net of taxes, by $213
thousand, or $0.01 per diluted share. For the nine months ending June 30, 2001,
the effect of SAB 101 was an increase of net revenue and net income by $7.4
million and $1.6 million, respectively, or $0.08 per diluted share. The effect
of the change for the total fiscal year of 2001 was to increase revenue by $4.9
million and to increase income before cumulative effect of the accounting
change, net of taxes, by $0.9 million, or $0.04 per diluted share.
5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Inventories
Inventories are stated at the lower of cost or market and include materials,
labor and overhead costs. The first-in, first-out accounting method is used in
valuing inventories Inventory consists of the following:
June 30, 2002 September 30, 2001
----------------- ------------------
(in thousands of dollars)
Customer projects in various
stages of completion $ 7,171 $ 4,709
Components,
assemblies and parts 35,057 58,672
----------------- -----------------
Total $ 42,228 $ 63,381
================= =================
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency. The
financial statements of the Company's foreign subsidiaries are translated in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 52. Accordingly, assets and liabilities are translated using
period-end exchange rates and statements of operations are translated using
average exchange rates for the year, with the resulting translation adjustments
recorded as a separate component of shareholders' equity. On June 30, 2002, the
Company has a gain on foreign currency translation of $0.8 million, as compared
to a gain of $0.2 million through June 30, 2001.
2. TRANSITIONAL AUDITOR REVIEW
In June 2002, the Company engaged KPMG LLP ("KPMG") as its independent auditors,
replacing Arthur Andersen. During the course of KPMG's review of the financial
results for the three and nine-months ended June 30, 2002, KPMG requested
additional analysis from the Company on the timing of a number of adjustments
related to changes in accounting estimates and corrections of bookkeeping errors
which, on a net basis, negatively impacted earnings during all quarters of
fiscal 2002. The Company is reviewing these adjustments. As a result of this
review, it may be determined that this and previously filed periodic reports for
fiscal 2002 and 2001 require revision. An accurate assessment of the timing of
these adjustments, if any, cannot be determined as of the filing of this report.
The Company expects to complete its review during the quarter ended September
30, 2002.
As a result of the Company's review referred to above, KPMG has not completed
its review of the three-month and nine-month period ended June 30, 2002. Given
the Company's need to conduct the adjustment review referred to above and KPMG's
inability to complete their review of the June 30, 2002 interim financial
statements until the additional analysis is complete, the Company's Chief
Executive Officer and Chief Financial Officer have been advised by legal counsel
to withhold certifying the Company's third quarter Form 10-Q pursuant to the
Sarbanes-Oxley Act of 2002 pending completion of such analysis and review.
Consequently, such certificates are not filed with this report.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
On June 29, 2001, the Financial Accounting Standards Board approved two new
statements, Statement of Financial Accounting Standard ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 141, all business combinations will be accounted for
under the purchase method beginning June 30, 2001. SFAS No. 142 includes
requirements to test goodwill for impairment using a fair value approach, rather
than amortizing the cost of goodwill over future periods. As a result, the
Company's amortization of goodwill, including goodwill recorded in past business
combinations, ceased upon the Company's adoption of the new accounting
standards, in the first quarter of its fiscal year ending September 30, 2002.
Adoption of SFAS No. 142 resulted in a non-cash transition charge to earnings in
the first quarter of its fiscal year 2002 ending September 30, 2002 of $13.7
million, or ($.65) per diluted share, for impairment of goodwill, net of tax.
Annual goodwill amortization of $2.2 million ceased effective October 1, 2001
upon adoption of the new accounting standard. Earnings per share for the three
and nine-month periods ended June 30, 2002 were positively impacted by $0.02 and
$0.05, per diluted share respectively, from the exclusion of goodwill
amortization. Annual amortization of other assets of $1.0 million was not
impacted by the new rule and will continue.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following tables set forth pro forma net income, (loss) and earnings, (loss)
per share (in thousands except per share amounts):
Three Months Ended Nine Months Ended
June 30 June 30
------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands of (in thousands of
dollars) dollars)
Income before cumulative effect of accounting changes $ 2,975 $ 4,233 $ 3,979 $ 9,784
Add back: Goodwill amortization, net of tax -- 469 -- 1,139
-------- -------- -------- --------
Adjusted net income before cumulative effect of accounting changes $ 2,975 $ 4,702 $ 3,979 $ 10,923
Cumulative effect of accounting changes, net of tax -- -- (13,721) (2,263)
-------- -------- -------- --------
Adjusted net income (loss) $ 2,975 $ 4,702 ($ 9,742) $ 8,660
======== ======== ======== ========
Basic earnings per share before cumlative effect of accounting changes $ 0.14 $ 0.20 $ 0.19 $ 0.47
Add back: Goodwill amortization, net of tax -- 0.02 -- 0.06
-------- -------- -------- --------
Basic adjusted earnings per share before cumulative effect of accounting changes $ 0.14 $ 0.22 $ 0.19 $ 0.53
Cumulative effect of accounting changes, net of tax -- -- (0.65) (0.11)
-------- -------- -------- --------
Adjusted net income (loss) $ 0.14 $ 0.22 ($ 0.46) $ 0.42
======== ======== ======== ========
Diluted earnings per share before cumlative effect of accounting changes $ 0.14 $ 0.20 $ 0.19 $ 0.47
Add back: Goodwill amortization, net of tax -- 0.02 -- 0.05
-------- -------- -------- --------
Diluted adjusted earnings per share before cumulative effect of accounting changes $ 0.14 $ 0.22 $ 0.19 $ 0.52
Cumulative effect of accounting changes, net of tax -- -- (0.65) (0.11)
-------- -------- -------- --------
Adjusted net income (loss) $ 0.14 $ 0.22 ($ 0.46) $ 0.41
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company is
required to adopt this statement in its fiscal year 2003. The Company has not
yet quantified the potential effect of adoption of SFAS No. 144.
In June 2002, the FASB issued SFAS No. 146, " Accounting for Costs Associated
with Exit or Disposal Activities," which nullifies EITF 94-3 and requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. The Company plans to adopt the SFAS No. 146 in
October 2002. Management believes that the adoption of this statement will not
have a material effect on the Company's future results of operations.
4. EARNINGS (LOSS) PER COMMON 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 applicable
periods. Diluted net income (loss) per share is computed under the treasury
stock method and is calculated to reflect the potentially dilutive effect of
common shares issued in connection with outstanding stock options. A
reconciliation of these amounts is as follows:
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Three Months Ended Nine Months Ended
-----------------------------------------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Income (loss) before cumulative effect $ 2,975 $ 4,233 $ 3,979 $ 9,784
of accouting changes
Cumulative effect of accounting changes -- -- (13,721) (2,263)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) available
to common shareholders $ 2,975 $ 4,233 $ (9,742) $ 7,521
============= ============= ============= =============
Weighted average
common shares outstanding 21,135 20,683 21,078 20,688
Dilutive potential
common shares 288 417 313 224
- ------------------------------------------------------------------------------------------------------------
Total diluted common shares 21,423 21,100 21,391 20,912
- ------------------------------------------------------------------------------------------------------------
Basic net income (loss)
per share $ 0.14 $ 0.20 $ (0.46) $ 0.36
Diluted net income (loss)
per share $ 0.14 $ 0.20 $ (0.46) $ 0.36
- ------------------------------------------------------------------------------------------------------------
5. COMPREHENSIVE INCOME
Comprehensive income reflects the change in equity of a business enterprise
during the applicable periods resulting 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, the
unrealized gain or loss on investment and the net effect of accumulated hedging
activity. Comprehensive income was $4.0 million and $4.1 million for the three
months ended June 30, 2002 and 2001, respectively, and $1.8 million and $8.1
million for the nine months ended June 30, 2002 and 2001, respectively.
6. BUSINESS SEGMENT INFORMATION
The Company periodically evaluates its business activities that are regularly
reviewed by its Chief Executive Officer for which discrete financial information
is available. In connection therewith, the Company has determined that it has
five business units: Vehicle Testing Systems, Material Testing Systems, Advanced
Systems, Automation and Sensors. The Vehicle Testing Systems unit manufactures
and markets systems for vehicle and component manufacturers to aid in the
acceleration of design development work and to decrease the cost of product
manufacturing. The Material Testing Systems unit manufactures and markets
systems to aid customers in product development and quality control toward an
effort of design improvement. The Advanced Systems unit offers highly customized
systems primarily for simulation and manufacturing. The Automation unit
manufactures and markets products for high performance industrial machine
applications in a wide range of industries. The Sensors unit 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
served, method of distribution and regulatory environments are similar for the
Vehicle Testing Systems, Material Testing Systems and Advanced Systems business
units. As a result of these similarities, these units have been aggregated for
financial statement purposes into one reportable segment called Mechanical
Testing and Simulation ("MT&S"). In addition, the economic characteristics,
nature of products and services, production processes, type or class of customer
served, method of distribution and regulatory environments are similar for the
Automation and Sensors business units. As a result, these units have been
aggregated into one reportable segment called Factory Automation ("FA").
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The accounting policies of the reportable segments are the same as those
described in Note 1 to the Consolidated Financial Statements found in the
Company's 2001 Annual Report on Form 10-K. In evaluating each segment's
performance, management focuses primarily on income from operations and return
on assets employed. This measurement excludes special charges (e.g.,
restructuring charges, acquisition expenses, etc.), interest income and expense,
income taxes, and other non-operating-type items. Corporate expenses, including
costs associated with various support functions such as human resources,
information technology, finance and accounting and general administrative costs,
are allocated to the reportable segments primarily on the basis of revenue.
Financial information by reportable segment is as follows:
Three Months Ended Nine Months Ended
June 30 June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands of dollars) (in thousands of dollars)
NET REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 69,383 $ 79,376 $ 211,921 $ 226,808
Factory Automation 17,362 19,655 51,622 62,058
------------ ------------ ------------ ------------
Total net revenue $ 86,745 $ 99,031 $ 263,543 $ 288,866
============ ============ ============ ============
INCOME (LOSS) FROM OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation $ 6,304 $ 8,437 $ 19,088 $ 17,131
Factory Automatiom 190 235 (11,274) 3,227
------------ ------------ ------------ ------------
Total income from operations $ 6,494 $ 8,672 $ 7,814 $ 20,358
============ ============ ============ ============
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On October 1, 2000 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No.137, "Accounting for Derivative Instruments
and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133." The transition adjustment recorded upon adoption of SFAS No. 133 was not
material to the Company's overall financial position and results of operations.
The Company uses forward exchange contracts to reduce the effect of fluctuating
currencies on foreign currency-denominated intercompany transactions and third
party sourcing transactions. The gains and losses on these forward contracts are
intended to offset gains and losses on the hedged transaction in an effort to
reduce the earnings volatility resulting from fluctuating foreign currency
exchange rates. The principal currencies hedged by the Company are the European
Euro and the Japanese Yen. On the date a forward exchange contract is entered
into, the Company will designate the contract as a cash flow hedge -- a hedge of
a forecasted transaction or a hedge of the variability of cash flows to be
received or paid related to a recognized asset or liability commitment. The
effective portion of the change in the fair value of a cash flow hedge is
reported as part of Accumulated Other Comprehensive Income (Loss) within
shareholders' investment. When the hedged item is realized, the gain or loss
included in Accumulated Other Comprehensive Income (Loss) is reclassified into
Other (Income) Expense in the Consolidated Statements of Income.
The Company formally documents its hedge relationships, including identification
of the hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedged transaction. Forward
contracts are recorded in the Consolidated Balance Sheets at fair value. The
Company assesses at inception of the hedge and, at a minimum, quarterly
thereafter, whether the forward contracts currently in place and being used in
hedging transactions are highly effective in offsetting changes in the cash
flows of the hedged item. When it is determined that a specific derivative
ceases to be a highly effective hedge, the Company discontinues hedge accounting
for that individual derivative.
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As of June 30, 2002, the net accumulated derivative loss included in Accumulated
Other Comprehensive Income (loss) was $0.4 million. The maximum maturity date of
any cash flow hedge was 1.6 years. Based on the status of the cash flow hedges
as of June 30, 2002, net gains of approximately $0.3 million that are currently
reflected in Accumulated Other Comprehensive Income (loss) would be available
for reclassification into Other (Income) Expense during the next twelve months.
During the quarter ended June 30, 2002, losses associated with ineffective
hedges were $0.2 million.
8. DEFERRED TAX ASSET
At June 30, 2002, the Company has an aggregate deferred tax asset of $4,399 in
connection with accrued compensation and benefits, inventory reserves, allowance
for doubtful accounts and other assets.
Management routinely performs an analysis of the realization of the deferred tax
asset each fiscal year end and has concluded it is more likely than not that the
Company will realize the aggregate deferred tax asset of $4,399 at June 30,
2002. This analysis largely relies on continued long-term profitability.
Unanticipated negative changes in future operations of the Company would
adversely effect the realization of the Company's deferred tax asset. Such
negative changes would result in the establishment of a valuation reserve for
the deferred tax asset.
9. CONSOLIDATION OF OPERATIONS
The Company consolidated the Electromechanical Testing Division into Eden
Prairie, MN from Raleigh NC. The physical move of the business and the facility
closure were completed in the third quarter. As a result of the move the Company
recorded $0.4 million charge for severance related costs and $0.6 million charge
to write down inventory. Substantially all of the severance costs will be paid
during fiscal 2002. The closure is expected to result in approximately $1.0
million of savings annually beginning in fiscal 2003.
10
MTS SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COMPANY UPDATE
The Company has been focused on actions to reduce structural cost including the
consolidation of the Electromechanical Testing Division into Eden Prairie, MN
from Raleigh NC. The physical move of the business and the facility closure were
completed in the third quarter and resulted in a severance charge of $0.4
million and an inventory charge of $0.6 million. Headcount reductions were also
made in Factory Automation to improve operating results in light of continued
general market weakness.
In addition to cost reduction activities the Company has implemented specific
initiatives to improve liquidity. Cash flow in the third quarter was $35
million, driven primarily by reductions in working capital and tight control of
capital spending. Year-to-date, cash flow of $72 million has been generated.
In June 2002, the Company engaged KPMG LLP ("KPMG") as its independent auditors,
replacing Arthur Andersen. During the course of KPMG's review of the financial
results for the three and nine-months ended June 30, 2002, KPMG requested
additional analysis from the Company on the timing of a number of adjustments
related to changes in accounting estimates and corrections of bookkeeping errors
which, on a net basis negatively impacted earnings during all quarters of fiscal
2002. The Company is reviewing these adjustments. As a result of this review, it
may be determined that previously filed periodic reports for fiscal 2002 and
2001 require revision. An accurate assessment of the timing of these
adjustments, if any, cannot be determined as of the filing of this report. The
Company expects to complete its review during the quarter ended September 30,
2002.
As a result of the Company's review referred to above, KPMG has not completed
its review of the three-month and nine-month period ended June 30, 2002. Given
the Company's need to conduct the adjustment review referred to above and KPMG's
inability to complete their review of the June 30, 2002 interim financial
statements until the additional analysis is complete, the Company's Chief
Executive Officer and Chief Financial Officer have been advised by legal counsel
to withhold certifying the Company's third quarter Form 10-Q pursuant to the
Sarbanes-Oxley Act of 2002 pending completion of such analysis and review.
Consequently, such certificates are not filed with this report.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S., which require the Company to make
estimates and assumptions in certain circumstances that affect amounts reported.
In preparing these financial statements, management has made its best estimates
and judgments of certain amounts, giving due consideration to materiality. The
Company believes that of its significant accounting policies, the following are
particularly important to the portrayal of the Company's results of operations
and financial position and may require the application of a higher level of
judgment by the Company's management, and as a result are subject to an inherent
degree of uncertainty.
Revenue Recognition. Under the guidelines of SAB 101, the Company recognizes
revenue on short-duration projects at the latter of shipment or obtaining
customer acceptance. Revenue on projects requiring longer delivery periods
(longer-term contracts) and other customized orders that allow for progress
billings to the customer are recognized using the percentage-of-completion
method based on the cost incurred to date as compared to the total estimated
cost of the contract (cost to cost method). The effect of any revision to the
total estimated cost, on an individual contract basis, and its impact on revenue
is recorded in the period in which the revision becomes known. When a loss is
anticipated on a contract, the anticipated loss is provided in the period the
loss is identified.
Inventories. Inventories are stated at the lower of cost or market using the
first-in, first-out method. Reserves for slow moving and obsolete inventories
are provided based upon current and expected future product sales and the
expected impact of product transitions or modifications. While the Company
expects its sales to grow, a reduction in its sales could reduce the demand for
the Company's products, and additional inventory reserves may be required.
Foreign Currency Translation. The financial position and results of operations
of the Company's foreign subsidiaries are measured using local currency as the
functional currency. The financial statements of the Company's foreign
subsidiaries are translated in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 52. Accordingly, assets and
liabilities are translated using period-end exchange rates and statements of
operations are translated using average exchange rates for the year, with the
resulting translation adjustments recorded as a separate component of
shareholders' investment.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
NEW CUSTOMER ORDERS AND BACKLOG
THREE MONTHS ENDED JUNE 30, 2002 ("THIRD QUARTER OF FISCAL 2002") COMPARED TO
THREE MONTHS ENDED JUNE 30, 2001 ("THIRD QUARTER OF FISCAL 2001")
New orders from customers during Third Quarter of Fiscal 2002 aggregated $100.8
million, compared to customer orders of $103.9 million booked during Third
Quarter of Fiscal 2001.
Orders for the Mechanical Testing and Simulation ("MT&S") segment totaled $82.7
million, a decrease of 3.9% compared to customer orders of $86.1 million for
Third Quarter of Fiscal 2001. Orders for custom projects in the quarter offset
general weakness in standard short-cycle products, particularly in North
America. Significant bookings included durability testing equipment for several
German automotive OEMs, extensive performance evaluation equipment in the
Formula 1 racing market, and testing equipment for geological and civil
structures worldwide. The MT&S segment accounted for 82.0% of total Company
orders, compared to 82.9% for the Third Quarter of Fiscal 2001.
Orders for the Factory Automation ("FA") segment increased to $18.1 million for
Third Quarter of Fiscal 2002 from $17.8 million for Third Quarter of Fiscal
2001, up 1.7%. The increase in orders was expected due to a weak third quarter
in 2001. General worldwide weakness in the automotive, semiconductor, and
industrial markets continues to exist. The FA segment accounted for 18.0% of
total Company orders during Third Quarter of Fiscal 2002, compared to 17.1% in
Third Quarter of Fiscal 2001.
NINE MONTHS ENDED JUNE 30, 2002 ("FIRST NINE MONTHS OF FISCAL 2002") COMPARED TO
NINE MONTHS ENDED JUNE 30, 2001 ("FIRST NINE MONTHS OF FISCAL 2001")
New orders for the First Nine Months of Fiscal 2002 aggregated $284.9 million, a
decrease of 3.7%, compared to $295.7 million for the First Nine Months of Fiscal
2001.
Orders for the MT&S segment of $236.8 million in First Nine Months of Fiscal
2002 remained consistent compared to First Nine Months of Fiscal 2001. This
segment accounted for 83.1% of total new orders in First Nine Months of Fiscal
2002, compared to 80.0% for First Nine Months of Fiscal 2001. Orders for the FA
segment of $48.1 million in First Nine Months of Fiscal 2002 decreased 18.3%
from the orders booked in First Nine Months of Fiscal 2001 of $58.9 million. The
FA segment accounted for 16.9% of total orders during First Nine Months of 2002,
compared to 19.9% in First Nine Months of Fiscal 2001.
Backlog of undelivered orders at June 30, 2002 was $172 million, an increase of
10.3% from the backlog of $156 million at September 30, 2001 and a decrease of
5.5% from the backlog of $182 million at June 30, 2001. The Company has
experienced general weakness in the automotive and industrial markets for the
first nine months of 2002, which has been partially offset by growth in the
custom project business. This shift in the product mix results in a higher
percentage of the backlog attributable to longer cycle business. Thus, while
backlog has increased by approximately $16 million to $172 million, it will turn
more slowly than the prior year.
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001
NET REVENUE for Third Quarter of Fiscal 2002 was $86.7 million, a decrease of
$12.3 million, or 12.4%, compared to Third Quarter of Fiscal 2001. An increase
in North America of 10.7% was offset by a decline in Europe and Asia of 15.3%
and 47.4%, respectively. Revenue from European and Asian markets for Third
Quarter of Fiscal 2002 represented 44.8% of total net revenues, compared to
55.9% for Third Quarter of Fiscal 2001.
GROSS PROFIT for Third Quarter of Fiscal 2002 decreased to $34.4 million, down
7.5% compared to gross profit of $37.2 million for Third Quarter of Fiscal 2001.
Gross profit as a percentage of revenue was 39.7% for Third Quarter of Fiscal
2002, up from the 37.6% reported for Third Quarter of Fiscal 2001. During the
Third Quarter of Fiscal 2002, gross profit was negatively impacted as the
Company recorded additional inventory reserves of $1.6 million to adjust current
inventory level to market value.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
RESULTS OF OPERATIONS (CONTINUED)
THIRD QUARTER OF FISCAL 2002 COMPARED TO THIRD QUARTER OF FISCAL 2001
(CONTINUED)
The gross margin for the MT&S segment was 39.1% for Third Quarter of Fiscal
2002, up 1.3% compared to Third Quarter of Fiscal 2001, primarily due to
favorable product mix for the quarter. Gross margin rates will vary based on the
business revenue mix in any given quarter. Operating earnings decreased by $2.1
million to $6.3 million for Third Quarter of Fiscal 2002. Gross profit for the
FA segment was 42.0% for Third Quarter of Fiscal 2002, compared to 36.5% for
Third Quarter of Fiscal 2001. The increase in gross profit was expected due to
cost reduction actions in fiscal 2001 and 2002 that have been implemented, and a
favorable product line mix which was partially offset by an additional $1.6
million in inventory reserves recorded in the Third Quarter of fiscal 2002.
SELLING EXPENSES were $13.4 million for Third Quarter of Fiscal 2002, a decrease
of 7.6% from $14.5 million for Third Quarter of Fiscal 2001. Selling expense as
a percentage of net revenue was 15.5% for Third Quarter of Fiscal 2002, up 0.9%
compared to selling expense of 14.6% for Third Quarter of Fiscal 2001. The rate
increase is attributable to the decline in sales volume in the quarter.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $9.8 million for Third Quarter of
Fiscal 2002, an increase of 15.3% compared to $8.5 million for Third Quarter of
Fiscal 2001. The increase is primarily due to the $0.9 million charge relating
to recording of additional accruals for profit sharing and variable
compensation. General and administrative expenses as a percentage of revenue
increased by 2.7%, from 8.6% for Third Quarter of Fiscal 2001 to 11.3% for Third
Quarter of Fiscal 2002.
RESEARCH AND DEVELOPMENT EXPENSES totaled $4.7 million, down 14.5% compared to
$5.5 million for the Third Quarter of Fiscal 2001. Research and development
expenses as a percentage of revenue were 5.4% for Third Quarter of Fiscal 2002,
roughly flat with research and development expenses of 5.6% for Third Quarter of
Fiscal 2001.
INTEREST EXPENSE decreased to $1.0 million for Third Quarter of Fiscal 2002
compared to $1.2 million for Third Quarter of Fiscal 2001. This decrease was
primarily the result of lower average borrowings under the Company's bank line
of credit. Interest expense as a percentage of net revenue was 1.2% for Third
Quarter of Fiscal 2002, flat compared to Third Quarter of Fiscal 2001.
INTEREST INCOME increased to $0.2 million for Third Quarter of Fiscal 2002
compared to $0.1 million for Third Quarter of Fiscal 2001. Interest income for
Third Quarter of Fiscal 2002 consisted principally of earnings on short-term
investments of excess cash funds. Interest income for Third Quarter of Fiscal
2001 included interest received as part of certain refunds of prior years'
federal income taxes.
OTHER INCOME AND EXPENSE for Third Quarter of Fiscal 2002 primarily reflected
$1.1 million favorable charge from a reduction in restructuring reserves, and a
$0.8 million gain on foreign currency transactions. Other income and expense for
Third Quarter of Fiscal 2001 consisted primarily of a gain on foreign currency
translation of $0.7 million.
NET INCOME decreased to $3.0 million for Third Quarter of Fiscal 2002 compared
to income of $4.2 million for Third Quarter of Fiscal 2001. Net income as a
percentage of revenue decreased to 3.5% for Third Quarter of Fiscal 2002,
compared to 4.2% for Third Quarter of Fiscal 2001. The effective tax rate for
Third Quarter of Fiscal 2002 was 38.2% compared to 39.0% for Third Quarter of
Fiscal 2001. The decrease in the overall effective tax rate reflects expected
benefits from tax savings initiatives in Fiscal 2002. The decrease in the
overall effective tax rate is primarily the result of a different geographic
income mix than the prior year.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
FIRST NINE MONTHS OF FISCAL 2002 COMPARED TO FIRST NINE MONTHS OF FISCAL 2001
NET REVENUE for First Nine Months of Fiscal 2002 was $263.5 million, a decrease
of $25.4 million, or 8.8%, compared to First Nine Months of Fiscal 2001. Revenue
from European and Asian markets for First Nine Months of Fiscal 2002 represented
50.0% of revenues, compared to 48.4% of revenues for First Nine Months of Fiscal
2001. Revenue generated by the MT&S segment was $211.9 million during the First
Nine Months of 2002, a decrease of $14.9 million compared to First Nine Months
of Fiscal 2001. The FA segment revenue declined to $51.6 million for the First
Nine Months of Fiscal 2002, compared to $62.1 million for First Nine Months of
Fiscal 2001.
GROSS PROFIT for First Nine Months of Fiscal 2002 decreased to $86.6 million,
down 17.4% compared to gross profit of $104.8 million for First Nine Months of
Fiscal 2001. Gross profit as a percentage of net revenue was 32.9% for First
Nine Months of Fiscal 2002, down from 36.3% reported in First Nine Months of
Fiscal 2001. The decline in gross margin for First Nine Months of Fiscal 2002
was primarily the result of the one-time inventory charge of $10.6 million made
by the FA segment in the First Half of Fiscal 2002, an additional $1.6 million
in inventory reserves, and $0.8 million write-off of fixed assets recorded in
the Second Quarter of fiscal 2002.
SELLING EXPENSES decreased to $41.0 million in First Nine Months of Fiscal 2002,
or 4.2%, from $42.8 million for First Nine Months of Fiscal 2001. Selling
expense as a percentage of revenue increased to 15.6% in First Nine Months of
Fiscal 2002, compared to 14.8% for First Nine Months of Fiscal 2001.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $22.5 million for First Nine Months
of Fiscal 2002, a decrease of 10.7% compared to $25.2 million for First Nine
Months of Fiscal 2001. The decrease in the overall expense was partially due to
cost reduction initiatives and to implementation of SFAS 142, which eliminated
goodwill amortization effective October 1, 2001. See Note 3 to the Consolidated
Financial Statements for additional information. General and administrative
expenses as a percentage of revenue decreased slightly, from 8.7% in First Nine
Months of Fiscal 2001 to 8.5% in First Nine Months of Fiscal 2002, primarily as
the result of continued cost savings initiatives partially offset by a $1.3
million write off of fixed assets.
RESEARCH AND DEVELOPMENT EXPENSES decreased 6.7% to $15.3 million in First Nine
Months of Fiscal 2002 compared to $16.4 million in First Nine Months of 2001.
Research and development expense as a percentage of revenue increased slightly
to 5.8% in First Nine Months of Fiscal 2002, compared to 5.7% in First Nine
Months of Fiscal 2001.
INTEREST EXPENSE decreased to $3.2 million in First Nine Months of Fiscal 2002
compared to $4.2 million in First Nine Months of Fiscal 2001. Interest expense
as a percentage of net revenue decreased by 0.3% to 1.2% for First Nine Months
of Fiscal 2002 due to a reduction in short-term borrowing.
INTEREST INCOME increased slightly at $0.5 million for First Nine Months of
Fiscal 2002. Interest income as a percentage of net revenue remained relatively
unchanged at 0.2%.
OTHER INCOME AND EXPENSE reflects income of $1.3 million in First Nine Months of
Fiscal 2002, compared to expense of $0.4 million in First Nine Months of Fiscal
2001. One-time investment gains of $2.6 million and a $1.1 million favorable
charge from a reduction in restructuring reserves, offset by fixed asset
write-offs of $1.0 million are reflected in Other Income for First Nine Months
of Fiscal 2002.
CUMULATIVE IMPACT OF ACCOUNTING CHANGE reflects an unfavorable charge of $13.7
million in the First Nine Months of Fiscal 2002, net of tax, upon adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets."
NET INCOME (LOSS) decreased to a loss of $9.7 million for First Nine Months of
Fiscal 2002, compared to income of $7.5 million for First Nine Months of Fiscal
2001. Net income as a percentage of revenue decreased to a loss of 3.7% for
First Nine Months of Fiscal 2002, compared to income of 2.6% for First Nine
Months of Fiscal 2001. The effective tax rate for First Nine Months of Fiscal
2002 was 38.3%, compared to 39.3% for First Nine Months of Fiscal 2001. The
decrease in the overall effective tax rate reflects expected benefits from tax
savings initiatives in Fiscal 2002.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $75.8 million during the
First Nine Months of Fiscal 2002, compared to cash provided of $36.0 million
during the First Nine Months of Fiscal 2001. The increase in cash provided by
operating activities during the First Nine Months of Fiscal 2002 was primarily
the result of reductions in accounts receivable of $39.4 million and inventories
of $7.9 million, as well as an increase in advance billings to customers of
$11.3 million. These increases in available cash were partially offset during
the First Nine Months of Fiscal 2002 by a decrease in other current liabilities
of $11.4 million and accrued compensation and benefits of $4.6 million.
CASH FLOWS FROM INVESTING ACTIVITIES provided cash of $0.4 million during the
First Nine Months of Fiscal 2002, compared with cash usage of $5.5 million in
the First Nine Months of Fiscal 2001. Cash was principally provided through the
sale of an investment during the second quarter.
CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $4.5
million during the First Nine Months of Fiscal 2002, compared to usage of $15.4
million for the First Nine Months of Fiscal 2001, primarily due to the $11.3
million repayment of short-term debt in Third Quarter of Fiscal 2001. During the
First Nine Months of Fiscal 2002, the Company's increased cash flows from
operating activities allowed it to internally fund its capital expenditures,
dividend payments, and purchases of treasury stock.
Under the terms of its credit agreements, the Company has agreed to certain
financial covenants. At June 30, 2002, the Company was in compliance with the
terms and covenants of its credit agreements. We believe that our existing cash
and cash equivalents, current lending capacity and cash generated from
operations will provide sufficient cash flow for us to meet our short and
long-term debt obligations and operating requirements for at least the next
twelve months. If we fail to meet our bank covenants and are not able to obtain
a waiver, we may be required to immediately repay our outstanding balances and
find a new lender, which may cause us to incur additional costs, including
higher interest costs, in connection with establishing a new lending
relationship.
The majority of the Company's long-term debt is subject to certain restrictive
financial covenants, including but not limited to, a minimum net worth, a fixed
charge coverage, cash flow leverage, and debt to total capital. As of the
quarter ending June 30, 2002 we were in compliance with these covenants and
expect to maintain compliance for the foreseeable future.
Payments Due by Period (in thousands of dollars)
Less than 1
Contractual Obligations Total year 1 - 3 years 4-5 years After 5 years
----------------------- -------------------------------------------------------------------------------
Long-Term Debt $57,882 5,191 16,670 14,788 21,233
Capital Lease Obligations 31 20 11 -- --
Operating Leases 21,170 4,517 8,808 3,763 4,082
-------------------------------------------------------------------------------
$79,083 $9,728 $25,489 $18,551 $25,315
===============================================================================
Amount of Commitment Expiration Per Period (in thousands of dollars)
Total Amounts Less than 1
Other Commercial Commitments Committed year 1 - 3 years 4-5 years After 5 years
---------------------------- -------------------------------------------------------------------------------
Standby Letters of Credit $32,908 14,808 18,100 -- --
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
OTHER MATTERS
The Company is exposed to market risk from changes in foreign currency exchange
rates that may affect its results from operations and financial condition. To
minimize that risk, the Company manages exposure to changes in foreign currency
rates through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments, principally
forward exchange contracts. Foreign exchange contracts are used to hedge the
Company's overall exposure to exchange rate fluctuations, since the gains and
losses on these contracts offset gains and losses on the assets, liabilities,
and transactions being hedged.
The Company's dividend policy is to maintain a payout ratio that allows
dividends to increase with the long-term growth of earnings per share, while
sustaining dividends in down years. The Company's dividend payout ratio target
is approximately 25% of earnings per share over the long term.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(continued)
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 unknown 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 in
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 revenue.
(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 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.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY LANGUAGE
(CONTINUED)
The forgoing list is not exhaustive, and the Company disclaims any obligation to
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.
17
MTS SYSTEMS CORPORATION
ITEM 3. 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 2001
Annual Report to Shareholders and Form 10-K for Fiscal 2001 filed with
the Securities and Exchange Commission. This information remains
current and is incorporated herein by reference. Note 7 to the
Consolidated Financial Statements included in this Form 10-Q also
contains important information regarding derivative instruments and
hedging activities.
18
PART II-------OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
See Note 2 to the Financial Statements
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.a Restated and Amended Articles of Incorporation, adopted
January 30, 1996, incorporated by reference from Exhibit
3.a. of Form 10-K for the year ended September 30, 1996.
3.b Restated Bylaws, reflecting amendments through May 26,
1998, incorporated by reference from Exhibit 3.b. of
Form 10-K for the year ended September 30, 1998.
10.a Management Variable Compensation Plan, dated October
2001.
10.c 1987 Stock Option Plan, as amended, incorporated herein
by reference to Exhibit 10.c. of the Registrant's Form
10-K filed for the year ended September 30, 1996.
10.d 1990 Stock Option Plan, as amended, incorporated herein
by reference to Exhibit 10.d. of the Registrant's Form
10-K filed for the year ended September 30, 1996.
10.e 1994 Stock Option Plan, as amended, incorporated herein
by reference to Exhibit 10.e. of the Registrant's Form
10-K filed for the year ended September 30, 1996.
10.f 1997 Stock Option Plan, as amended, incorporated herein
by reference to Exhibit 10.p. of the Registrant's Form
10-K filed for the year ended September 30, 1999.
10.h Severance Agreement, dated May 1, 1990, between the
Registrant and Werner Ongyert, incorporated herein by
reference to Exhibit 10.m. of the Registrant's Form 10-K
filed for the year ended September 30, 1990.
10.i Severance Agreement, dated March 27, 1998, between the
Registrant and Keith D. Zell, as amended, incorporated
herein by reference to Exhibit 10.m. of the Registrant's
Form 10-K filed for the year ended September 30, 1998.
10.j Severance Agreement, dated March 24, 1998, between the
Registrant and Mauro G. Togneri, as amended,
incorporated herein by reference to Exhibit 10.n. of the
Registrant's Form 10-K for the year ended September 30,
1998.
19
(a) Exhibits (continued):
10.k 1992 Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit 4(a) of the Registrant's Form
S-8, File No. 33-45386.
10.l Severance Agreement, dated March 18, 1998, between the
Registrant and Steven M. Cohoon, as amended,
incorporated herein by reference to Exhibit 10.q. of the
Registrant's Form 10-K filed for the year ended
September 30, 1998.
10.m Severance Agreement, dated March 16, 1998, between the
Registrant and Sidney W. Emery, Jr., incorporated herein
by reference to Exhibit 10.r. of the Registrant's Form
10-K filed for the year ended September 30, 1998.
10.n Change in Control Agreement, dated March 16, 1998,
between the Registrant and Sidney W. Emery, Jr.,
incorporated herein by reference to Exhibit 10.s. of the
Registrant's Form 10-K filed for the year ended
September 30, 1998.
10.o Change in Control Agreement, dated March 27, 1998,
between the Registrant and Keith D. Zell incorporated
herein by reference to Exhibit 10.t. of the Registrant's
Form 10-K filed for the year ended September 30, 1998.
10.p Change in Control Agreement, dated March 24, 1998,
between the Registrant and Mauro G. Togneri incorporated
herein by reference to Exhibit 10.v. of the Registrant's
Form 10-K filed for the year ended September 30, 1998.
10.q Change in Control Agreement, dated March 18, 1999,
between the Registrant and Steven M. Cohoon incorporated
herein by reference to Exhibit 10.z. of the Registrant's
Form 10-K for the fiscal year ended September 30, 1999.
10.r Severance Agreement, dated March 13, 1998, between the
Registrant and William G. Anderson incorporated herein
by reference to Exhibit 10.aa. of the Registrant's Form
10-K filed for the year ended September 30, 1998.
10.s Severance Agreement, dated March 14, 1998, between the
Registrant and James M. Egerdal incorporated herein by
reference to Exhibit 10.ab. of the Registrant's Form
10-K filed for the year ended September 30, 1998.
10.t Change in Control Agreement, dated March 14, 1998,
between the Registrant and James M. Egerdal incorporated
herein by reference to Exhibit 10.ad. of the
Registrant's Form 10-K filed for the year ended
September 30, 1998.
10.u Severance Agreement dated January 3, 2000, between the
Registrant and Kathleen M. Staby incorporated herein by
reference to Exhibit 10.x. of the Registrant's Form 10-K
filed for the year ended September 30, 2000.
10.v Change in Control Agreement, dated January 3, 2000,
between the Registrant and Kathleen M. Staby
incorporated herein by reference to Exhibit 10.y. of the
Registrant's Form 10-K filed for the year ended
September 30, 2000.
10.w Change in Control Agreement, dated June 1, 2001, between
the Registrant and Donald G. Krantz.
10.x Change in Control Agreement, dated June 18, 2001,
between the Registrant and Laura B. Hamilton.
10.y Change in Control Agreement, dated June 25, 2001,
between the Registrant and Kelly H. Donaldson.
10.z Change in Control Agreement, dated October 22, 2001,
between the Registrant and Susan E. Knight.
(b) Reports on Form 8-K:
During the three months ended June 30, 2002, Current Reports on
Form 8-K were filed on June 7, 2002, reporting the change in
registrant's certifying accountant from Arthur Andersen to KPMG
LLP effective May 31, 2002.
20
SIGNATURES
Pursuant to the requirements of the Section 13(a) and 15(d) of the Securities
and Exchange Act; the information contained in the report fairly presents, in
all material respects, the financial condition and results of operations of the
company. 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.
Chairman
Chief Executive Officer
/s/ Susan E. Knight
----------------------------------------------
Susan E. Knight
Vice President and Chief Financial Officer
Dated: August 19, 2002
21