SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 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 NO. 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, INCLUDING AREA CODE: (952) 937-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.25
PAR VALUE PER SHARE
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. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): N/A
As of December 19, 2002, the aggregate market value of shares held by
nonaffiliates was approximately $215,562,255.
As of December 19, 2002, the registrant had outstanding 21,188,452 shares of
Common Stock.
Documents Incorporated by Reference: PORTIONS OF THE PROXY STATEMENT FOR THE
REGISTRANT'S ANNUAL MEETING OF SHAREHOLDERS TO BE HELD February 12, 2003 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K, TO THE EXTENT
DESCRIBED IN SUCH PART.
PART I
ITEM 1. BUSINESS
MTS Systems Corporation (hereafter called "MTS", or "the Company" or "the
Registrant") is a technology-based, market-driven company providing hardware,
software and engineering services to researchers, designers and manufacturers.
The Company's mission is to help its customers design, develop, and produce
faster, with higher quality, and at a lower cost. The Company was incorporated
on September 12, 1967.
MTS's business approach is based on a set of building-block technologies and
business processes. Technologies include sensors for measuring machine and
process parameters, control technologies for test and process automation,
hydraulic and electric servodrives for precise actuation, and application
software to tailor a test or automation system to a specific customer's needs
and to analyze results. In combination, these technologies and manufacturing
processes provide solutions to customers in a variety of markets. The Company's
manufacturing capability includes the production of low to medium volume
standard and custom products and systems.
RESTATEMENT INFORMATION
In consultation with its independent auditors, MTS restated its audited
financial statements for the years ended September 30, 2001 and 2000, and its
unaudited financial statements for each of the quarters in the nine months ended
June 30, 2002 and the fiscal year ended September 30, 2001. The Company also
restated its selected financial data for 1999 and 1998.
Background: In June 2002, the Company engaged KPMG LLP ("KPMG") as its
independent auditors, replacing Arthur Andersen LLP. During the course of KPMG's
review of the financial results for the three and nine-month periods ended June
30, 2002, KPMG requested additional analysis from the Company on the timing of a
number of adjustments related to corrections of bookkeeping errors and
misapplications of generally accepted accounting principles, which, on a net
basis, negatively impacted earnings during all quarters of fiscal 2002. As a
result, KPMG was not able to complete its review of the three-month and
nine-month periods ended June 30, 2002, and on August 19, 2002, the Company
filed its Form 10-Q for the third quarter without KPMG's review. In connection
with the filing of the third quarter Form 10-Q, the Company also disclosed that
it was reviewing the adjustments and that as a result of the review, the Form
10-Q and the Company's previously filed periodic reports for fiscal 2002 and
2001 may require revision.
Since that time, the Company's management, together with the Company's Audit
Committee and KPMG, have worked to complete the review of the adjustments. On
October 28, 2002, the Company announced preliminary results for the fourth
quarter and for the restatement of the nine-month period ended June 30, 2002.
The audited consolidated financial statements included under item 8 of this Form
10-K include the restated statements of income, shareholders' investment and
cash flows for each of the two years ended September 30, 2001 and 2000 and the
restated balance sheet as of September 30, 2001.
The adjustments made to the Company's financial statements primarily reflect:
(1) Correction of revenue recognition practices related to service
contracts and to the deferral of installation revenue, impacting
revenue recognition and deferred revenue and deferred tax balances;
(2) Correction of cut-off errors in recognition of revenue and
elimination of intercompany profit in inventory, impacting related
revenue, cost of sales, deferred revenue, and inventory balances;
(3) Correction to a number of previously unreconciled inventory and
related reserves and the correction of errors related to the timing
of recognition of surplus and obsolete inventory reserves, which
collectively impacted cost of sales and inventory balances;
(4) Correction of an error in calculating SFAS 133 currency hedge gains,
impacting currency gains, retained earnings, prepaid expenses, and
unrealized loss on investments accounts;
(5) Correction of the timing of recognizing restructuring reserves,
impacting cost of sales, general and administrative expenses, and
other accrued liabilities;
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(6) Correction of the accounting for residual values of certain fixed
assets and asset retirements that should have occurred in prior
periods, impacting various income statement expense categories and
fixed asset balances;
(7) Correction of bookkeeping and account reconciliation errors,
affecting numerous balance sheet and statement of income accounts,
including income taxes and long-lived assets; and
(8) Correction of the Company's effective tax rate, primarily due to
incorrect recognition of tax credits, affecting income tax expense
and accrued income taxes.
Additional information regarding the effects of the restatement is included in
Note 2 to the Company's audited consolidated financial statements included under
Item 8 of this Form 10-K. All comparisons and references in this Form 10-K to
results for fiscal years 2001 and 2000 are to the restated results.
CUSTOMERS AND PRODUCTS BY BUSINESS SEGMENT
The Company's operations are organized into two business segments: the
Mechanical Testing and Simulation ("MT&S") Segment and the Factory Automation
("FA") Segment. The operational alignment of these segments allows the Company
to maintain a strategic focus on markets having different product and market
applications for the Company's technologies.
MT&S Segment: Customers of this segment use the Company's products, systems,
software, and services for research, product development, and quality control to
determine the mechanical properties and performance of materials, products, and
structures. Many of the Company's products and services support its customers'
mechanical design automation processes. The MT&S segment serves customers in the
following industries:
AIRCRAFT AND AEROSPACE VEHICLE MANUFACTURERS AND THEIR SUPPLIERS: These
customers use the Company's products, systems and software for full-scale
structural tests on aircraft and aerospace vehicles and the principal subsystems
and structures such as landing gear and wings. Aircraft manufacturers of
commercial, military and general aviation airplanes and their suppliers,
including engine manufacturers are included in the MT&S customer base.
The space vehicle industry utilizes the Company's systems and software for such
applications as satellite structural evaluation and heat shield studies. In
addition, both the aircraft and the space vehicle manufacturers and their
suppliers use the Company's products, systems, and software to perform research
on new materials and to control quality in the manufacturing of materials.
CIVIL ENGINEERING: Customers in this market segment include construction and
mineral/petroleum production companies and test laboratories owned and/or
operated by universities or governmental entities. Systems sold to this market
segment include seismic (earthquake) simulators, civil construction component
(e.g., beam) testing systems, pavement material testing systems, and specialized
systems for rock and soil studies in construction and mineral/petroleum
production.
CONSUMER AND BIOMECHANICAL PRODUCTS/MATERIAL PRODUCERS: These customers use the
Company's electromechanical, nanomechanical and servohydraulic material testing
products and systems in research and product development where a high degree of
precision quality control is required during research and production. The
Nanomechanical test products meet the needs of the ultra-precise semi-conductor
industry. Typical consumer products are made of textiles, paper products and
plastic films of many types. Biomechanical products include implants, prostheses
and other medical and dental devices and materials. Material producers include
metal, ceramic, composite, paper and plastic manufacturers. The MT&S customers
use the Company's systems and products to test large structures such as
prostheses, as well as very small specimens, thin coatings and surfaces.
GROUND VEHICLE INDUSTRY: This market consists of automobile, truck, motorcycle,
construction, agricultural equipment, and off-road vehicle manufacturers and
their suppliers. This represents the largest market segment within the MT&S
Segment.
Applications of the Company's products, systems and software include the design
and production testing of engines and drivetrains, suspension and steering
components, body and chassis, tires and wheels,
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and fuel storage and exhaust components. Vehicle manufacturers use the Company's
market offerings to improve the performance, durability and safety while
eliminating noise and vibration from their vehicles. Customers also acquire the
Company's modeling software and physical testing systems solutions as a means of
accelerating the prototype design and decreasing the product development and/or
manufacturing costs of their products and components.
ADVANCED SYSTEMS: The Company offers highly customized systems for simulation
and testing. These systems frequently contain highly technical, or "first of its
kind" advances that are new to a specific application. Advanced systems serves
customers in the same markets that are served by the other business units
comprising the MT&S Segment - aerospace and advanced materials, civil
engineering, and ground vehicles. Products include rolling road simulators,
friction stir welding machines and earthquake simulation systems.
The MT&S Segment typically represents approximately 80% of the Company's total
net revenue and provides the principal markets for the Company's technology.
FA Segment: Customers of the FA Segment use the Company's measurement and
control instrumentation products to measure process variables and to automate
production processes. These customers are generally in the medical,
semi-conductor, mobile equipment and injection molding process manufacturing.
Products in the FA Segment include:
DISPLACEMENT POSITION AND LIQUID-LEVEL SENSORS BASED ON MAGNETOSTRICTIVE
TECHNOLOGY: Displacement sensors accurately measure position and are often used
where accurate positioning and continuous control are critical, such as in
discrete (piece part) manufacturing machinery, mobile equipment, process control
elements and continuous measurement devices. Major applications include
injection molding machines, servo-hydraulic cylinders, equipment presses and
sawmills.
Displacement sensors are also used in high-volume applications requiring low
cost position feedback. MTS has the capabilities of manufacturing low cost
products in various lengths and configurations, while maintaining an extremely
high degree of accuracy.
Liquid level sensors accurately measure the level of liquids in tanks and other
vessels. These sensors are marketed to control continuous processes in chemical,
pharmaceutical, biotechnology and other related markets. The need for highly
reliable, accurate measurement of one or more fluid levels is common in most of
these applications. These types of products are marketed to the ultimate end
users, such as chemical-producing companies, and to original equipment
manufacturers that design level measurement or leak detection into their control
systems or accessories for remote indication.
SERVO MOTORS, AMPLIFIERS AND CONTROLLERS: Customers use high-performance,
brushless servomotors and amplifiers for factory automation applications in a
wide range of industries including machine tools, fabrication and packaging.
Specialized plug-in amplifiers are used in light duty applications such as the
semiconductor and textile industries. The Company's controllers are used for
precise control of a wide variety of applications ranging from simple
applications requiring multiple axis of control to high-speed, complex
operations requiring multiple axes of control. These product lines address many
of the needs of high-performance systems and are used primarily by original
equipment manufacturers and end users.
TITANIUM AND OTHER PRODUCTS: The Company, through its wholly owned subsidiary,
AeroMet Corporation, has developed an innovative laser-directed metal deposition
process for manufacturing parts made out of titanium and other metals. This
computer-driven process uses a laser to fuse titanium powder, or powder of other
metals, layer-by-layer, into solid structures. The process significantly reduces
the time and cost required to produce complex parts used in the aircraft and
aerospace industries.
The FA segment typically represents approximately 20% of the Company's total net
revenue.
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COMMON TECHNOLOGIES
MTS produces systems and products by combining thirty years of application
engineering knowledge with common technology building block components that
consist, generally, of measuring and actuation devices, electronic controls and
application software. The components are designed and configured into products
and systems to meet the customer's application specifications. Frequently,
special-purpose software is developed to meet a customer's unique requirements.
Such software often represents a significant part of the value added by the
Company.
Services offered to customers include on-site installation, training of customer
personnel, technical manuals and after-market support and maintenance.
Proprietary products, include sensors, process controls, motors, actuators,
process software and hardware. Although MTS typically sells its products and
systems on fixed-price contracts, certain complex systems development and
applied research studies are undertaken on a "cost-plus-fixed-fee" contract
basis.
PRODUCT DEVELOPMENT HIGHLIGHTS FOR 2002
MTS invests in product, system and application development. A combination of
internal and customer funding enables MTS to advance the application of its
existing technology and develop new capabilities. Additional product
development-related information is included in the Research and Development
Section of the report. Selected highlights of product developments that were in
progress or completed during 2002 include the following:
o Several new software product upgrades were released by the Company.
RPC Pro Release 3.0 was a major release of the data acquisition and
physical simulation software for the automotive testing market. eTim
Release 2.0 incorporated significant new functionality that supports
test information management systems for the automotive and aerospace
testing markets. IDEAS Pro Releases 9mx added new features for noise
and vibration in the automotive, aerospace, defense and consumer
electronics markets.
o Aero ST is the newest member of the MTS family of control system
products for aerospace component and full-scale structural testing
applications. The system provides up to 32 channels of control for
up to four completely independent tests in a package that is
optimized to improve integration, performance and reliability.
Combined with the AeroPro software suite for aerospace control and
data acquisitions applications, Aero ST provides a new standard in
component and full scale aerospace structural testing.
o Bionex is a testing instrument that was introduced for the
biomaterials / biomechanics and polymers markets. The system is a
universal testing instrument performing tensile, compression and
bend tests. It is also able to perform dynamic testing which yields
more information than standard tensile testing machines. This
dynamic testing capability is currently being employed for
measurement of dynamic properties of polymers, elastomers, etc., and
in future versions of the system the dynamics will be used for
fatigue and fracture studies as well.
o The Company introduced nanopositioning as an added capability to the
Nano Indenter system. Nanopositioning allows the user to very
precisely position (laterally) the indenter tip on the test
specimen. The system scans the surface of the material with the
indenter tip, making a three dimensional map of the surface. The map
is then used to identify indentation locations. This capability is
of great interest in the general materials research community as
well as the semiconductor industry.
o Atlas is a new software product for application in the ground
vehicle industry. The product uses desktop simulation models to
predict the powertrain calibration testing requirements. It bridges
the gap between desktop simulation / optimization tools and physical
testing. Atlas reduces the customer's vehicle development cycle time
by automating the physical test and the delivery of the test data to
the desktop simulation for model validation and refinement.
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o The Company introduced several new systems in the motorsports market
for vehicle test and development applications. For powertrain
testing, the high performance dynamometer was developed which
features testing capability for extremely high horsepower, high
dynamic range, and very low inertia. In addition, MTS developed two
new products for aerodynamic testing of race vehicles. Quasi-static
and dynamic versions of a model-motion system (MMS) and a model
wheel motion system (WMS) were added to the product portfolios to
complement the rolling road system.
o The Dynamic Kinematics and Compliance (K&C) System was introduced to
the ground vehicle industry. The system measures a vehicle's
suspension characteristics for use in handling and performance
measurement testing.
o Also for application in the ground vehicle industry, the Company
developed a new, high frequency Multi-axial Simulation Table (MAST).
The table enables vertical, longitudinal, lateral, pitch, roll and
yaw motion testing at frequencies up to 500 hz.
o MTS introduced the Flex Test SE Controller for use in the ground
vehicle industry. The testing product is a full digital hydraulic
servo controller.
o The MH series displacement sensor was developed to serve the mobile
hydraulic industry. The MH sensor is a new product that can be
applied to on-road and off-road vehicles to measure linear
displacement in suspensions, steering, etc. Additionally, this
sensor is used for custom applications in the medical appliances
industry.
o The MG/MU series liquid level sensor was developed to replace
several existing liquid level and temperature measuring products
with a higher performance, lower cost, modular design that can be
packaged to serve the pharmaceutical/biochemical, chemical,
petroleum and fuel distribution industries. The product is certified
to meet applicable regulations for each industry.
CHARACTERISTICS OF SALES
The Company's systems and products are sold and delivered throughout the world
to customers in a large number of different industries, government agencies,
academic and other institutions. As such, MTS is generally not dependent on any
single customer for a significant portion of its business. However,
approximately fifty percent of the net revenue is associated with the ground
vehicle/automotive industry.
The MT&S products and systems range in price from less than $20,000 to over $20
million. The majority of the MT&S revenue is generated by contracts valued at
less than $10 million. The timing and volume of contracts valued at $10 million
or greater may produce volatility in orders, backlog and quarterly operating
results. The majority of the customer orders received are based on fixed-price
quotations and typically have an average sales cycle of six to nine months, due
to the technical nature of the products and systems. The production cycle for a
typical system ranges from one to twelve months, depending on the complexity of
the system and the availability of components. The production cycle for larger,
more complex systems may be up to three years.
Factory Automation (FA) products are sold in quantity at unit prices ranging
from $500 to $10,000. Production cycles generally vary from several days to
several months, depending on the degree of product customization and
manufacturing capacity.
During 2002, the Company's products have been shipped to North America, Europe,
Asia and Latin America. As such, the Company's foreign operations and revenue
derived from customers in foreign countries may be affected by local political
conditions, export licensing issues and restrictions and/or foreign currency
exchange rates and volatility.
5
Sales Channels: MTS markets its products using a number of sales channels. The
Company sells its products, systems, and services through a direct sales force,
independent sales representatives and, to a lesser extent, direct mail or
catalog. The sales channels for the MT&S and FA Segments are separate from each
other. The direct sales force is generally staffed by engineers or highly
skilled technicians who are trained to sell MTS systems, products and services.
The direct sales force is compensated through salary and sales incentives
programs while independent sales representatives are paid on a commission basis.
A list of major domestic and international sales offices for the Company is as
follows:
Domestic Sales Offices:
Akron, Ohio Dayton, Ohio
Pittsburgh, Pennsylvania Austin, Texas
Denver, Colorado Raleigh, North Carolina
Baltimore, Maryland Detroit, Michigan
Rockford, Illinois Boston, Massachusetts
Los Angeles, California San Francisco, California
Charlotte, North Carolina Minneapolis, Minnesota
Seattle, Washington Chicago, Illinois
Milwaukee, Wisconsin Washington, D.C
Cincinnati, Ohio Newark, New Jersey
Dallas, Texas Philadelphia, Pennsylvania
International Sales Offices:
Beijing, Hong Kong and Shanghai Gothenburg, Sweden
People's Republic of China Paris, France
Berlin and other cities, Germany Seoul, South Korea
Gloucester, United Kingdom Tokyo and other Cities, Japan
Turin, Italy
The Company also has sales and service representative organizations in nearly
all industrialized countries of the world and in many of the developing
countries of Latin America, Asia, Africa and the Middle East. The Company offers
a mail-order catalog of standard material testing components, accessories and
products.
International Operations and Export Sales: For additional information regarding
the Company's operations by geographic area, see Note 4 to Consolidated
Financial Statements, "Business Segment Information," appearing under Item 8 of
this Form 10-K.
Export Licensing: During the fiscal year ended September 28, 2002 and in prior
years, MTS made various shipments to Asia-Pacific, Europe and other regional
areas throughout the world that required the Company to obtain export approval
from the United States government. Although the Company does not undertake
manufacturing on custom systems or projects until it is assured that the
appropriate governmental units will grant export approval, initial design and
development work may be performed on certain systems concurrent with the license
approval process. Changes in political relations between the United States and
foreign countries and/or specific potential customers for which export licenses
may be required, as well as various other factors, can adversely affect the
Company's ability to complete a shipment should a previously issued license be
unexpectedly withdrawn. Political activities in various regions of the world may
result in dramatic changes in the export control regulations and restrictions
within a relatively short period of time. In addition, the United States
government maintains multilateral controls in its agreements with allies and
unilateral controls based on U.S. initiatives and foreign policy that may, in
certain situations, cause delays or cancellations of the Company's planned
orders or shipments.
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BACKLOG
The Company's revenue backlog, defined as firm orders from customers that
remains unfilled, totaled approximately $177 million, $158 million and $166
million as of September 28, 2002, and September 30 of 2001 and 2000,
respectively. Based on anticipated production schedules and other factors, the
Company believes that approximately $170 million of the backlog as of September
28, 2002 will become revenue during fiscal 2003. Delays may occur as a result
of, among other matters, technical difficulties, export licensing or other
approvals, changes in scope, manufacturing capacity, or the availability of the
customers' installation site. Such delays may affect the period in which the
backlog is recognized as revenue. The Company's backlog is subject to order
cancellations.
COMPETITION
MT&S Segment:
Products and systems manufactured by this segment are produced by several other
companies throughout the world. The product availability and the intensity of
competition varies by product line and by geographic area. The Company's major
competitors include, among others, Instron, FCS Test Systems BV, Saganomia,
Schenck, and AVL. Customers will consider such factors, among others, as
engineering excellence and capabilities, the quality and technical features of
the equipment, overall responsiveness to customer needs, quality of service, and
price as they evaluate their supplier options.
Alternatively, in lieu of purchasing product, systems or services from MTS or
its competitors, companies may elect to contract with testing laboratories,
including those operated by certain universities and/or governmental units or
they may choose to construct their own testing equipment from commercially
available components.
FA Segment:
The Company competes directly with small- to medium-sized specialty suppliers
and also with divisions of large companies specializing in control systems.
Competitors include Balluff Inc., Ametek Inc., Danaheur, Emerson, and GE.
MANUFACTURING AND ENGINEERING
The Company conducts a significant portion of its manufacturing and engineering
activities for the MT&S Segment from its corporate headquarters in the
Minneapolis, Minnesota metropolitan area. MT&S also has a manufacturing plant in
Ann Arbor, Michigan. In addition, engineering, project management, final system
assembly and service may be performed in Berlin, Germany; Tokyo, Japan; Paris,
France; Turin, Italy; Gloucester, United Kingdom; and Gothenberg, Sweden.
Manufacturing and engineering in the FA Segment are located in Raleigh, North
Carolina; New Ulm, Minnesota; Montgomeryville, Pennsylvania; and in Ludenscheid,
Freiburg and Stralsund, Germany.
PATENTS AND TRADEMARKS
Although the Company's overall business is not dependent on any single patent,
license, trademark or copyright, it holds a number of patents, patent
applications, licenses, trademarks and copyrights that the Company considers, in
the aggregate, to constitute a valuable asset. In addition to these intellectual
properties, the Company relies on its engineering and technological capabilities
to maintain its overall position in the marketplace.
RESEARCH AND DEVELOPMENT
MTS generally does not perform basic research, but it does invest in significant
product, system and software application developments. Costs associated with
these development programs are expensed as incurred, and aggregated $19.0
million, $22.5 million and $24.6 million for the years ended September 28, 2002
and September 30 for both 2001 and 2000, respectively. From time to time, the
Company also contracts with its customers to advance the state of the technology
and increase product functionality.
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EXECUTIVE OFFICERS
The Executive Officers of the Registrant on the date of this report are:
OFFICER
NAME OFFICE SINCE AGE
- ---- ------ ----- ---
Sidney W. Emery, Jr. Chairman, President and Chief Executive Officer 1998 56
Susan E. Knight Vice President and Chief Financial Officer 2001 48
James M. Egerdal Vice President Service and Support 1996 51
Laura B. Hamilton Vice President Material Testing, Aerospace and
Manufacturing Operations 2000 41
Donald G. Krantz Vice President Advanced Systems 2000 47
Douglas E. Marinaro Vice President Software and Consulting 2002 41
Larry D. Moulton Vice President Vehicle Dynamics and Powertrain Technology 2002 57
Kathie M. Staby Vice President Human Resources 2000 56
Mauro G. Togneri Vice President Sensors 1991 65
M. Perry Walraven Vice President Automation 2002 53
Executive Officers serve at the discretion of and are elected annually by the
Company's Board of Directors. Business experience of the Executive Officers
(consisting of positions with the Company, unless otherwise indicated) for the
last five years, at a minimum, is as follows:
OFFICER BUSINESS EXPERIENCE
- ------- -------------------
S. W. Emery, Jr. Chairman since January 1999. President and
Chief Executive Officer since March , 1998. Various
management and executive positions with Honeywell
International from 1985 to 1997 (Area Vice President,
Western and Southern Europe from 1994 to 1997; Group
Vice President, Military Avionics Systems from 1989 to
1994; Vice President and General Manager, Space Systems
Division from 1988 to 1989; Vice President Operations,
Process Controls Division from 1985 to 1988).
S. E. Knight Vice President and Chief Financial Officer
since October 2001. Prior thereto, various management
and executive positions with Honeywell International
from 1977 to 2001 (Chief Financial Officer of the Home
and Building Control global business unit from 2000 to
2001; Chief Financial Officer of the North American Home
and Building Control business unit from 1995 to 2000 and
prior to 1995, held various other management positions
including corporate director of Financial Planning and
Analysis).
J. M. Egerdal Vice President, MTS Services and Support
Division since 1998. Vice President, North American
Sales from 1996 to 1997. Regional Sales and Service
Management from 1988 to 1996.
L. B. Hamilton Vice President, Material Testing, Aerospace
and Manufacturing Operations since November 2001. Vice
President, Material Testing and Aerospace Divisions from
2000 to 2001. Director of Re-engineering from 1999 to
2000. Prior thereto, Vice President of Anatomic
Pathology Business for Quest Diagnostics (a division of
Corning, Inc.) from 1997 to 1999. Executive Director
Revenue Services, Quest Diagnostics from 1995 to 1997.
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D. G. Krantz Vice President of Advanced Systems Division
since 2000. Program Manager, Advanced Systems from 1995
to 2000.
D. E. Marinaro Vice President of Software and Consulting
since November 2002. Prior thereto, Vice President
Marketing of Toolwire, Inc. from 2000 to 2002. Various
management positions at MSC Software from 1990 to 1999
(Director Sales/Marketing and Business Development for
Engineering-e.COM in 1999, Director CAE Data Management
from 1996 to 1998 and Manager MVISION Business Unit/PDA
Engineering from 1990 to 1996).
L. D. Moulton Vice President of Vehicle Dynamics and
Powertrain Technology Divisions since May 2002. Vice
President of Powertrain Technology Division from
December 2001 to May 2002. General Manager, Powertrain
Technology Division from 1997 to 2001.
K. M. Staby Vice President of Human Resources since 2000.
Prior thereto, various management positions at
Medtronic, Inc. from 1974 to 1999 (Vice President, Human
Resources for Cardiac Rhythm Management from 1991 to
1999 and for Worldwide Distribution from 1989 to 1991).
M.G. Togneri Vice President of Sensors Division since 1998.
Vice President of Sensors and Automation Divisions from
November 2001 to May 2002. Vice President of Factory
Automation Segment from 1991 to 1997. Prior thereto,
Vice President at Square D Corporation and General
Manager of Crisp Automation.
M. P. Walraven Vice President of Automation Division since
May 2002. Vice President of Electro Mechanical Testing
Division from July 2000 to May 2002. General Manager of
Electro Mechanical Testing Division from January 2000 to
July 2000. Sales Manager from 1998 to 2000.
EMPLOYEES
MTS had 1,900 employees as of September 28, 2002, including approximately 550
employees located outside the United States. None of the Company's employees in
the United States are currently covered by collective bargaining agreements. In
the past, the Company has not experienced any work stoppages at any of its U. S.
locations.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS
A major portion of products and systems delivered to customers may consist of
equipment and component parts purchased from third-party vendors. The Company
promotes a partnership-type relationship with its vendors with an emphasis on
continuous improvement in a number of critical areas including, but not limited
to, quality, performance and technological advances. The Company is dependent,
in certain situations, on a limited number of vendors to provide computing
hardware and software devices and raw materials. However, during the recent
past, MTS has not experienced significant problems or issues in procuring any
essential materials, parts or components needed in its production process.
Since the Company generally sells its products based on fixed price contracts,
fluctuations, either positive or negative, in the cost of materials or
components between the date of order and the delivery date, may impact the
expected profitability of any project. Except for the effect of changes in
foreign currency rates, the Company believes that such fluctuations in the cost
of raw materials and components have not had a material effect on reported
operating results.
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ENVIRONMENTAL MATTERS
Management believes that the Company's operations are in compliance with
federal, state and local provisions relating to the protection of the
environment.
ITEM 2. PROPERTIES
Properties Located in the United States:
The Company's corporate headquarters and major MT&S manufacturing, assembly and
research facility, occupying 420,000 square feet, is located on 56 acres of land
in the City of Eden Prairie, Minnesota, a suburb of Minneapolis, Minnesota.
Since the original plant was placed into service in 1967, six additions of
various sizes, with the most recent addition being completed in 1997, have
occurred. At the current time, approximately one-half of this facility is used
for manufacturing and assembly, while the remainder is used as general office
space.
During fiscal 2001, the Company's FA segment entered into an operating lease for
a newly constructed, 75,000 square foot office, light manufacturing and
warehousing facility in New Ulm, Minnesota. The city is located approximately 65
miles southwest of Minneapolis, Minnesota. The lease expires in 2010. In
addition, the segment entered into a 5-year lease agreement for a 90,000 square
foot office, light manufacturing and warehousing facility in Montgomeryville,
Pennsylvania, a suburb of Philadelphia. The Company is currently subleasing a
portion of this facility to a third party.
The FA segment also has a Company-owned 65,000 square foot combination office
and light manufacturing facility in Cary, North Carolina, a suburb of Raleigh,
North Carolina. This facility was originally constructed in 1988 and expanded in
1992.
In addition to the Eden Prairie facility, the MT&S Segment has three other
domestic locations. The Company leases 29,000 square feet in two facilities
located in Madison Heights, Michigan and Milford, Ohio. The lease agreements for
these facilities terminate in 2003 and 2004, respectively. The Company owns a
57,200 square foot facility in Ann Arbor, Michigan, and has an additional 13,000
square feet in Ann Arbor under lease through 2004.
MTS also leases space in various other cities in the United States that serve
primarily as sales and service offices. Neither the amount of leased space nor
the rental obligations are significant individually or in the aggregate. The
agreements pertaining to each of its leased facilities in the United States
contain conventional operating lease terms.
International Facilities:
MTS has manufacturing, assembly, warehousing and/or office facilities in several
European countries to support its international operations:
Berlin, Germany - an 80,000 square foot Company-owned MT&S Segment
facility, of which a portion is leased to non-MTS entities. This facility
is situated on land leased from the city government. The lease expires in
2052.
Paris, France - a 22,000 square foot leased MT&S Segment facility used for
warehousing, servicing and administrative functions. The lease expires in
2009.
Ludenschied, Germany - a 35,000 square foot leased FA Segment facility
located on six acres of land and used for light manufacturing and
administrative functions. The lease expires in 2009.
Freiburg, Germany - a 7,000 square foot office building under lease
through 2006 for the FA Segment.
10
Stralsund, Germany - a 7,000 square foot office and assembly facility
under lease through 2006 for the FA Segment.
The Company also leases small office and general-purpose space for its
sales and service subsidiaries in Gloucester, United Kingdom; Gothenburg,
Sweden; Turin, Italy; Seoul, South Korea; Tokyo and other cities in Japan;
and Beijing and other cities in the People's Republic of China. No
manufacturing is conducted at these locations.
The Company considers its current facilities adequate to support its operations
during fiscal 2003.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to various claims, legal actions and
complaints arising in the ordinary course of business. Management believes that
the final resolution of these matters will not have a material adverse effect on
the consolidated financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of stockholders during the fourth quarter
of the fiscal year ended September 28, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's common stock are traded on The Nasdaq Stock Market's
National Market ("Nasdaq") under the symbol "MTSC". On September 25, 2002, the
Company's stock began trading pursuant to an exception from the Nasdaq's listing
requirements due to the filing of the Form 10-Q for the third quarter ended June
30, 2002, without the required auditor review, and the Company's stock began
trading under the symbol "MTSCE." Soon following the filing of this Form 10-K
and the concurrent filing of amended quarterly reports on Form 10-Q/A, the
Company expects to fully comply with all Nasdaq's listing requirements and
return to trading under the symbol "MTSC."
The following table sets forth the high and low sales prices for the periods
indicated:
Quarter Ended Low * High *
------------- ----- ------
December 31, 2000 $ 5.50 $ 7.88
March 31, 2001 $ 6.75 $ 9.19
June 30, 2001 $ 7.88 $14.60
September 30, 2001 $10.00 $15.60
December 31, 2001 $ 9.10 $12.35
March 31, 2002 $ 8.90 $11.50
June 30, 2002 $ 9.50 $13.17
September 28, 2002 $ 9.60 $13.20
* Source: The Nasdaq Stock Market, Inc. Summary of Activity Report
As of December 19, 2002, there were 2015 holders of record of the Company's
common stock. However, this number does not reflect stockholders who hold their
shares in the name of broker dealers or other nominees.
The Company has historically paid quarterly cash dividends and expects to
continue such dividends in the future. During each of the past three years, the
Company has paid quarterly cash dividends of $.06 per share to holders of its
common stock. Under its current credit agreements, the Company has the
flexibility to declare and pay cash dividends, in similar amounts, during future
periods.
Under the terms of the Company's revolving credit agreement, certain covenants
require net worth, as defined, to exceed a defined minimum amount. As of
September 28, 2002, net worth, as defined, exceeded the minimum requirement by
$28.2 million.
11
ITEM 6. SELECTED FINANCIAL DATA
The table below provides selected historical financial data of the Company,
which should be read in conjunction with the financial statements and the notes
to the financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere in
this report. The statement of income data for each of the three years ended
September 28, 2002 and September 30, 2001 and 2000 and the balance sheet data as
of September 28, 2002 and September 30, 2001, are derived from, and are
qualified by reference to the audited consolidated financial statements included
elsewhere in this report. The statement of income data for the years ended
September 30, 1999 and 1998 and balance sheet data as of September 30, 2000,
1999 and 1998 are derived from the Company's audited financial statements after
the effect of the restatement adjustments discussed in note 1 below, and are not
included in this report.
Five Year Financial Summary
(September 28, 2002, September 30, 2001 and prior)
2002 2001 2000
(expressed in thousands except per share data and numbers of shareholders and
employees)
OPERATIONS As Reported Restated(1) As Reported Restated(1)
- ---------- ----------- ----------- ----------- -----------
Net revenue $355,871 $396,641 $397,359 $391,853 $389,380
Gross profit 129,015 141,408 139,687 132,940 128,383
Gross profit as a % of net revenue 36.3% 35.7% 35.2% 33.9% 33.0%
Research and development costs $ 18,990 $ 22,485 $ 22,485 $ 24,619 $ 24,619
Research and development as a %
Net revenue 5.3% 5.7% 5.7% 6.3% 6.3%
Income before income taxes $ 25,922 $ 24,578 $ 19,831 $ 6,095 $ 4,937
Income before income taxes as a % of
Net revenue 7.3% 6.2% 5.0% 1.6% 1.3%
Effective income tax rate 31% 38% 34% 41% 36%
Income before cumulative effect of accounting $ 18,003 $ 15,176 $ 13,106 $ 3,624 $ 3,170
changes
Income before cumulative effect of accounting
changes as a % of net revenue 5.1% 3.8% 3.3% 0.9% 0.8%
Net income $ 4,282(2) $ 12,913(3) $ 10,614(3) 3,624 $ 3,170
Net income as a % of net revenue 1.2%(2) 3.3%(3) 2.7%(3) 0.9% 0.8%
Net income per dilutive share of common stock $ 0.20(2) $ 0.61(3) $ 0.50(3) $ 0.17 $ 0.15
Weighted average dilutive shares
outstanding during the year(4) 21,433 21,074 21,070 20,935 20,935
Net interest expense $ 3,198 $ 4,837 $ 4,837 $ 4,892 $ 4,892
Depreciation and amortization 11,092 14,477 14,492 15,294 15,512
FINANCIAL POSITION
Current assets $250,555 $230,249 $234,123 $225,273 $226,867
Current liabilities 112,867 105,073 114,895 108,648 113,916
Current ratio 2.2:1 2.2:1 2.0:1 2.1:1 2.0:1
Net working capital $137,688 $125,176 $119,228 $116,625 $112,951
Property and equipment, net 59,612 68,893 65,408 72,081 68,406
Total assets 320,099 331,759 331,943 330,234 328,153
Interest bearing debt 52,543 59,305 59,305 75,712 75,712
Total Shareholders' investment 162,265 167,122 160,738 157,854 153,629
Shareholders' investment per share 7.57 7.93 7.63 7.54 7.34
Interest bearing debt as a % of
Shareholders' investment 32.4% 35.5% 36.9% 48.0% 49.3%
Return on beginning shareholders' investment,
before cumulative effect of accounting changes 11.2% 9.6% 8.5% 2.2% 2.0%
Return on beginning shareholders' investment 2.7% 8.2% 6.9% 2.2% 2.0%
Return on average net assets(5) 13.7% 13.4% 11.4% 4.9% 4.5%
OTHER STATISTICS
Number of common shareholders of
record at year end(6) 2,058 2,086 2,086 2,229 2,229
Number of employees at year end 1,893 2,224 2,224 2,350 2,350
New orders received $376,800 $384,900 $380,300 $415,900 $416,100
Backlog of orders at year end $177,300 $156,300 $158,100 $163,000 $165,500
Cash dividends paid per share $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24
(1) Fiscal years 2001, 2000, 1999 and 1998 have been restated from previously
reported results. The restatement reflects corrections in revenue
recognition practices, cut-off in recognition of revenue, a correction to
a number of previously unreconciled inventory and related reserves, the
timing of recognizing restructuring reserves, the correction of
bookkeeping and account reconciliation errors, and a correction of the
Company's effective tax rate.
(2) Includes the cumulative effect from the adoption of SFAS 142 of $13,721
($0.64 per dilutive share) in fiscal 2002.
(3) Includes the cumulative effect from the adoption of Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" as of
October 1, 2000. The cumulative effect resulted in a reduction in net
income of $2,492 ($0.12 per dilutive share) in fiscal 2001.
(4) Assumes the conversion of potential common shares using the treasury stock
method.
(5) Income before income taxes and net interest expense divided by average net
assets employed (exclusive of non-interest bearing liabilities).
(6) Does not include shareholders whose stock is held in the name of broker
dealers or other nominees.
12
Five Year Financial Summary
(September 28, 2002, September 30, 2001 and prior)
1999 1998
OPERATIONS As Reported Restated(1) As Reported Restated(1)
----------- ----------- ----------- -----------
Net revenue $390,542 $389,555 $362,163 $362,163
Gross profit 151,171 149,696 142,227 141,955
Gross profit as a % of net revenue 38.7% 38.4% 39.3% 39.2%
Research and development costs $ 26,966 $ 26,966 $ 24,348 $ 24,348
Research and development as a %
Net revenue 6.9% 6.9% 6.7% 6.7%
Income before income taxes $ 18,770 $ 16,676 $ 33,448 $ 33,176
Income before income taxes as a % of
Net revenue 4.8% 4.3% 9.2% 9.2%
Effective income tax rate 34% 33% 36% 36%
Income before cumulative effect of accounting $ 12,445 $ 11,132 $ 21,539 $ 21,369
changes
Income before cumulative effect of accounting
changes as a % of net revenue 3.2% 2.9% 5.9% 5.9%
Net income 12,445 $ 11,132 21,539 $ 21,369
Net income as a % of net revenue 3.2% 2.9% 5.9% 5.9%
Net income per dilutive share of common stock $ 0.59 $ 0.53 $ 1.01 $ 1.00
Weighted average dilutive shares
outstanding during the year(4) 21,184 21,183 21,330 21,329
Net interest expense $ 4,597 $ 4,597 $ 1,948 $ 1,948
Depreciation and amortization 14,424 14,424 10,880 10,880
FINANCIAL POSITION
Current assets $223,651 $226,468 $204,311 $204,060
Current liabilities 104,713 111,408 110,223 116,090
Current ratio 2.1:1 2.0:1 1.9:1 1.8:1
Net working capital $118,938 $115,060 $ 94,088 $ 87,970
Property and equipment, net 73,633 70,798 69,942 67,451
Total assets 333,347 333,329 313,022 315,502
Interest bearing debt 71,637 71,637 74,682 74,682
Total Shareholders' investment 162,859 159,088 152,689 150,231
Shareholders' investment per share 7.80 7.51 7.16 7.04
Interest bearing debt as a % of
shareholders' investment 44.0% 45.0% 48.9 % 49.7%
Return on beginning shareholders' investment,
before cumulative effect of accounting changes 8.0% 7.4% 15.4 % 17.1%
Return on beginning shareholders' investment 8.0% 7.4% 15.4 % 17.1%
Return on average net assets(5) 10.7% 10.1% 20.9 % 20.9%
OTHER STATISTICS
Number of common shareholders of
record at year end(6) 2,055 2,055 1,760 1,760
Number of employees at year end 2,436 2,436 2,424 2,424
New orders received $350,200 $349,600 $352,300 $353,200
Backlog of orders at year end $146,800 $148,500 $187,200 $189,200
Cash dividends paid per share $ 0.24 $ 0.24 $ 0.24 $ 0.24
(1) Fiscal years 2001, 2000, 1999 and 1998 have been restated from previously
reported results. The restatement reflects corrections in revenue
recognition practices, cut-off in recognition of revenue, a correction to
a number of previously unreconciled inventory and related reserves, the
timing of recognizing restructuring reserves, the correction of
bookkeeping and account reconciliation errors, and a correction of the
Company's effective tax rate.
(2) Includes the cumulative effect from the adoption of SFAS 142 of $13,721
($0.64 per dilutive share) in fiscal 2002.
(3) Includes the cumulative effect from the adoption of Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" as of
October 1, 2000. The cumulative effect resulted in a reduction in net
income of $2,492 ($0.12 per dilutive share) in fiscal 2001.
(4) Assumes the conversion of potential common shares using the treasury stock
method.
(5) Income before income taxes and net interest expense divided by average net
assets employed (exclusive of non-interest bearing liabilities).
(6) Does not include shareholders whose stock is held in the name of broker
dealers or other nominees.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects the impacts of restatements to the Company's
previously reported consolidated financial statements for the fiscal years ended
September 30, 2001 and 2000.
FISCAL YEAR
Effective with fiscal year 2002, the Company changed its fiscal year end to the
Saturday closest to September 30. For the year ended September 28, 2002, the
Company's fiscal year consisted of 52 weeks. Effective for fiscal year 2003, the
Company changed its fiscal quarter ends to the Saturday closest to December 31,
March 31, and June 30.
RESTATEMENTS
The Company is amending its consolidated financial statements for the years
ended September 30, 2001 and 2000 to restate its financial statements to correct
various bookkeeping errors and misapplications of generally accepted accounting
principles. These adjustments reflect:
(1) Correction of revenue recognition practices related to service
contracts and to the deferral of installation revenue, impacting
revenue recognition and deferred revenue and deferred tax balances;
(2) Correction of cut-off errors in recognition of revenue and
elimination of intercompany profit in inventory, impacting related
revenue, cost of sales, deferred revenue, and inventory balances;
(3) Correction to a number of previously unreconciled inventory and
related reserves and the correction of errors related to the timing
of recognition of surplus and obsolete inventory reserves, which
collectively impacted cost of sales and inventory balances;
(4) Correction of an error in calculating SFAS 133 currency hedge gains,
impacting currency gains, retained earnings, prepaid expenses, and
unrealized loss on investment accounts;
(5) Correction of the timing of recognizing restructuring reserves,
impacting cost of sales, general and administrative expenses, and
other accrued liabilities;
(6) Correction of the accounting for residual values of certain fixed
assets and asset retirements that should have occurred in prior
periods, impacting various income statement expense categories and
fixed asset balances;
(7) Correction of bookkeeping and account reconciliation errors,
affecting numerous balance sheet and statement of income accounts,
including income taxes and long-lived assets; and
(8) Correction of the Company's effective tax rate, primarily due to
incorrect recognition of tax credits, affecting income tax expense
and accrued income taxes.
Effects of Restatement: In consultation with its independent auditors, the
Company restated its audited financial statements for years ended September 30,
2001 and 2000 and its unaudited financial statements for each of the quarters in
the nine months ended June 30, 2002 and the fiscal year ended September 30,
2001. The aggregate restatement impacted net income before cumulative effect of
accounting changes in fiscal 2002 positively by $8.2 million, in fiscal 2001
negatively by $2.1 million, and in fiscal 2000 negatively by $0.5 million.
14
For the previously reported nine months ended June 30, 2002, these restatement
adjustments reflect:
1. The correction of revenue recognition practices and cut-off errors,
which resulted in a $2.4 million increase to previously reported
revenues for fiscal year 2002 and a related increase in cost of
sales of $1.4 million;
2. Correction of the accounting for residual values of certain fixed
assets and asset retirements that should have occurred in prior
periods, which resulted in a $1.9 million decrease to previously
reported cost of sales and a $1.0 million decrease to other
expense for fiscal year 2002;
3. The correction of errors related to the timing of recognition of
surplus and obsolete inventory reserves, which resulted in the
reduction to cost of sales by $5.6 million; and
4. The correction of errors related to the provision recorded for
restructuring reserves, which resulted in a $1.1 million decrease to
previously reported other income.
For the year ended September 30, 2001, these restatement adjustments reflect:
1. The correction of revenue recognition practices and cut-off errors,
which resulted in a $0.7 million increase to previously reported
revenues for fiscal year 2001, and a related correction to cost of
sales, which resulted in a decrease of $1.6 million;
2. Correction in the timing of recognizing restructuring reserves,
which resulted in a $1.8 million increase to cost of sales, a $2.4
million increase in selling, general and administrative expenses and
a reduction of other expense of $0.2 million;
3. The correction of errors related to the timing of recognition of
surplus and obsolete inventory reserves, which resulted in the
increase to cost of sales by $2.8 million; and
4. The correction of the Company's tax rate for the period and the tax
impact of the aforementioned adjustments to pretax income, which
resulted in a 5-point reduction in the effective tax rate and a $2.7
million reduction in tax expenses.
For the year ended September 30, 2000, these restatement adjustments reflect:
1. The correction of revenue recognition practices and cut-off errors,
which resulted in a $2.5 million decrease to previously reported
revenues for fiscal year 2000 and a related correction to cost of
sales, which resulted in an increase of $0.5 million;
2. Correction in the timing of recognizing restructuring reserves,
which resulted in a $1.6 million decrease to cost of sales, a $2.5
million decrease in selling, general and administrative expenses,
and a reduction of restructuring expenses of $1.2 million;
3. The correction of errors related to the timing of recognition of
surplus and obsolete inventory reserves, which resulted in an
increase to cost of sales by $2.8 million; and
4. The correction of the Company's tax rate for the period and the tax
impact of the aforementioned adjustments to pretax income, which
resulted in a 4-point reduction in the effective tax rate and a $0.7
million reduction in tax expenses.
Correction of other bookkeeping errors in fiscal year 2002, 2001 and 2000
resulted in additional impacts to various income statement and balance sheet
amounts.
15
The effects of the restatement are as follows:
For the year ended For the year ended
September 30, 2001 September 30, 2000
------------------------ ------------------------
As reported Restated As reported Restated
----------- -------- ----------- --------
STATEMENT OF INCOME DATA:
Net revenue $ 396,641 $ 397,359 $ 391,853 $ 389,380
Cost of revenue 255,233 257,672 258,913 260,997
Gross profit 141,408 139,687 132,940 128,383
Operating expenses 111,868 117,482 121,107 118,223
Income from operations 29,540 22,205 11,833 10,160
Other expense (income), net 125 (2,463) 846 331
Income before income taxes 24,578 19,831 6,095 4,937
Cumulative effect (1) (2,263) (2,492) -- --
Net income 12,913 10,614 3,624 3,170
Basic earnings per share 0.62 0.51 0.17 0.15
Diluted earnings per share $ 0.61 $ 0.50 $ 0.17 $ 0.15
BALANCE SHEET DATA:
Accounts receivable, net $ 97,661 $ 97,731 $ 117,866 $ 117,936
Inventories 63,381 64,308 62,520 58,601
Prepaid expenses 6,405 5,975 9,911 9,911
Deferred tax asset -- 7,894 -- 5,443
Total current assets 230,249 234,123 225,273 226,867
Machinery and equipment 110,419 91,203 107,325 88,696
Goodwill 22,545 22,545 24,558 24,558
Other assets 10,072 9,867 8,322 8,322
Accounts payable 16,672 15,685 22,755 22,048
Accrued compensation and benefits 33,661 33,358 29,285 26,843
Advanced billings to customers 26,572 32,884 18,673 23,299
Other accrued liabilities 16,395 15,891 13,680 13,847
Total current liabilities 105,073 114,895 108,648 113,916
Total shareholders' investment $ 167,122 $ 160,738 $ 157,854 $ 153,629
CASH FLOW DATA:
Net cash from operating activities $ 39,116 $ 36,974 $ 3,027 $ 3,925
Net cash from investing activities (10,514) (8,055) (13,240) (12,107)
Net cash from financing activities (19,616) (19,519) (963) (965)
Net change in cash 9,304 9,304 (9,872) (9,872)
1) The ($2,263) cumulative effect of change in accounting principle related to
the Company's adoption of SAB 101 and was first reported in the fourth quarter
of the fiscal year ended September 30, 2001.
CRITICAL ACCOUNTING POLICIES:
REVENUE RECOGNITION
The Company implemented the revenue recognition principles of Staff Accounting
Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements" in fiscal
2001. The cumulative effect adjustment of the change in accounting for all
periods through September 30, 2000 was a reduction in net income of $2.5 million
(net of income taxes of $1.6 million), or $0.12 per diluted share, which has
been accounted for as a change to the financial results for the first quarter of
fiscal 2001. During the fiscal years ended September 28, 2002 and September 30,
2001 the Company recognized $0.4 million and $10.0 million, respectively, of
revenues, which were previously recognized prior to the Company's adoption of
SAB 101.
For orders that are manufactured and delivered in less than twelve months with
routine installations and no "special" acceptance protocol, revenue is
recognized when systems are shipped and title has passed to the customer, less
the portion of related revenues associated with installation, which is deferred
until customer acceptance. The remaining revenue on these contracts is
recognized upon installation and customer acceptance. In cases where "special"
acceptance protocols exist, the Company recognizes revenue upon the completion
of installation and fulfillment of obligations specific to the terms of the
customer's contract. Revenue on contracts requiring longer delivery periods
(long-term contracts) is recognized using the percentage-of-completion method
based on the cost incurred to date relative to estimated total cost of the
contract. In most cases, orders with complex installations and/or unusual
acceptance protocols involve long-term contracts for custom systems that follow
the percentage-of-completion method of revenue recognition through customer
acceptance.
16
The Company enters into long-term contracts for customized equipment sold to its
customers. Under the terms of such contracts, revenue recognized using the
percentage-of-completion method may not be invoiced until completion of
contractual milestones, upon shipment of the equipment, or upon installation and
acceptance by the customer. Unbilled amounts for these contracts appear in the
Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.
Revenue for services is recognized as the service is performed and ratably over
a defined contractual period for service maintenance contracts.
INVENTORIES
Inventories as of September 28, 2002 and September 30, 2001
respectively, were as follows:
2002 2001
- -----------------------------------------------------
(expressed in thousands)
(restated)
----------
Customer projects in
various stages of
completion $ 8,679 $ 11,716
Components,
assemblies and parts 32,678 52,592
- -----------------------------------------------------
Total $ 41,357 $ 64,308
- -----------------------------------------------------
Inventories consist of material, labor and overhead costs and are stated at the
lower of cost or market, determined under the first-in, first-out accounting
method.
CUSTOMER ORDERS AND BACKLOG
2002 2001 2000
- -------------------------------------------------------------------
(expressed in thousands)
(--------restated---------)
--------------------------
Total Customer Orders $376,800 $380,300 $416,100
- -------------------------------------------------------------------
Backlog of
Undelivered Orders $177,300 $158,100 $165,500
- -------------------------------------------------------------------
New orders from customers during fiscal year 2002 totaled $376.8 million, a
decrease of $3.5 million or 0.9% compared to customer orders of $380.3 million
booked in 2001. In 2000, customer orders totaled $416.1 million. The negative
trend over the last two years is the result of continued weakness in the North
American economy and a more recent softening in Japan. At this time, the Company
does not anticipate a significant change in these economies in the near term. In
2002 the Company received three orders from customers that were in excess of $10
million compared to one $10.8 million order in 2001 and one $18.6 million order
in 2000, all of which were customers of the Mechanical Testing and Simulation
("MT&S") Segment.
Orders for the MT&S Segment totaled $308.2 million in 2002, an increase of $4.6
million or 1.5%, compared to customer orders of $303.6 million for 2001. The
MT&S Segment booked 81.8% of total Company orders in 2002, compared to 79.8% for
2001 and 75.7% in 2000. During 2002, the Company continued to experience strong
order demand worldwide for motor-sports and geological and civil structure
products within the Advanced Systems business unit and within the Material
Testing business unit, partially offset by the continuing slowdown in the global
automotive markets. The automotive market was particularly weak in Japan and the
rest of the Asia/Pacific region, which was partially offset by a modest increase
in Europe. The other MT&S businesses experienced a similar geographic impact
with soft North American demand and growth in Europe that was offset by a
decline in Asia/Pacific. The growth in Europe is primarily due to continued
demand for motor sports products. Generally, orders from customers in all
geographies during 2001 were down slightly for each of the business units
comprising the MT&S Segment when compared to 2000.
New orders for the Factory Automation ("FA") Segment totaled $68.6 million for
2002, a decrease of $8.1 million, or 10.6%, compared to new orders during 2001
of $76.7 million. Customer orders in this segment were particularly weak during
fiscal 2002, driven by aggressive cut backs in capital spending and
manufacturing output in the North American automotive market and a significant
drop in North American and
17
European demand for the Company's automation components in the semiconductor,
electronic assembly and industrial markets. This was the second year of
depressed orders in the FA segment. This segment accounted for 18.2% of total
Company orders during fiscal 2002, compared to 20.2% and 24.3% in 2001 and 2000,
respectively. During fiscal 2001, the FA Segment experienced a decline in orders
growth worldwide for industrial automation applications (servo motors,
amplifiers and motion controllers), and industrial sensors and automation
components. New orders in 2000 reflected strong industrial segment growth with a
significant influence from the telecom market in Europe.
On a geographic basis, orders from customers located in North America totaled
$196.3 million during 2002, down $10.8 million or 5.2% compared to orders
received of $207.1 million in 2001. North American orders received during fiscal
2000 totaled $233.9 million. International orders received during 2002 of $180.5
million increased by $7.3 million, or 4.2%, compared to orders received during
2001 of $173.2 million. International orders in fiscal 2000 totaled $182.2
million. The backlog of undelivered orders at September 28, 2002 totaled $177.3
million, an increase of approximately $19.2 million, or 12.1%, compared to
backlog of $158.1 million at September 30, 2001. The increase in backlog is
attributable to a change in business mix that resulted from an increase in long
cycle versus short cycle orders in 2002. The strong order trend in the Advanced
Systems and the Material Testing business units account for the majority of the
increase in backlog. Backlog at the end of fiscal 2000 totaled $165.5 million.
We believe that backlog is not an absolute indicator of our future sales because
a substantial portion of the orders constituting this backlog could be cancelled
at the customers' discretion.
NET REVENUE
2002 2001 2000
- ------------------------------------------------------------
(expressed in thousands)
(--------restated-----------)
----------------------------
Total $355,871 $ 397,359 $389,380
- ------------------------------------------------------------
Net revenue of $355.9 million for fiscal 2002 decreased $41.5 million or 10.4%,
compared to $397.4 million for fiscal 2001. Net revenue for fiscal 2000 totaled
$389.4 million. On a segment basis, net revenue for the MT&S Segment in 2002
totaled $287.0 million, comparing unfavorably to revenue of $316.1 million in
fiscal 2001 and $299.9 million in fiscal 2000. The decrease in revenue for
fiscal 2002 was principally driven by the decline in capital spending worldwide
which was partially offset by the growth in the Advanced Systems and Materials
Testing businesses. The shorter cycle business units, particularly those related
to the automotive industry, experienced the largest decline in revenue. Net
revenue in the FA Segment totaled $68.9 million in fiscal 2002, compared to
$81.2 million in fiscal 2001 and $89.5 million in fiscal 2000. Net revenue in
the FA Segment during 2002 was negatively impacted by world-wide economic
factors which resulted in a significant drop in demand. Similar factors in 2001
impacted the FA segment in the semiconductor, electronic assembly and industrial
markets. See Note 4 to Consolidated Financial Statements for additional
information on industry segment and geographic information.
Net revenue of $166.1 million for 2002 in North America decreased $23.5 million
or 12.4%, compared to $189.6 million in 2001. Net revenue for 2000 totaled
$203.7 million. Net revenue of $102.1 million for 2002 in Europe decreased $7.5
million or 6.8% compared to net revenue of $109.6 million in 2001 and $112.3
million for 2000. Net revenue of $75.9 million for 2002 in Asia decreased $15.0
million or 16.5% compared to net revenue of $90.9 million in 2001 and $69.0
million in 2000. Other miscellaneous international net revenue totaled $13.2
million, $9.2 million and $4.3 million, respectively, for 2002, 2001 and 2000.
Unlike the previous year when the Company benefited from improving international
markets, 2002 saw revenue decline as a result of the slow order pattern and a
reduction in backlog in the international business environments in addition to
that seen in North America.
Although selective price changes were implemented during each of the three
years, the overall impact of pricing changes did not have a material effect on
reported revenue.
18
GROSS PROFIT
2002 2001 2000
- --------------------------------------------------------------
(expressed in thousands)
(--------restated----------)
---------------------------
Gross Profit $129,015 $ 139,687 $128,383
- --------------------------------------------------------------
% of Net Revenue 36.3% 35.2% 33.0%
- --------------------------------------------------------------
Gross profit, as a percentage of net revenue, increased to 36.3% in 2002,
compared to 35.2% in 2001 and 33.0% in 2000. Gross profit for the MT&S Segment
was 37.2% in fiscal 2002, up substantially from 35.5% in 2001 and 31.6% in 2000,
while the gross profit of the FA Segment declined to 32.5%, compared to 33.8% in
2001 and 37.4% in 2000. Gross profit in the MT&S Segment increased during 2002
despite continued competitive pricing pressures and was the result of a number
of factors, including a favorable mix of aerospace and material testing business
shipped during the year, better overall project management and the positive
impact of headcount reductions. Cost containment and productivity initiatives
have led to two successive years of gross profit improvement in the MT&S
Segment.
The reduction in the FA Segment's manufacturing and shipping volumes during
fiscal 2002 negatively impacted the gross profit rate by 1.3 percentage points.
The decline in business volume during 2001 drove a similar reduction in the FA
Segment when compared to 2000.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
2002 2001 2000
- -------------------------------------------------------------
(expressed in thousands)
(--------restated---------)
--------------------------
Selling $ 53,096 $ 58,056 $ 58,747
General &
Administrative 32,098 36,941 34,857
- -------------------------------------------------------------
Total $ 85,194 $ 94,997 $ 93,604
- -------------------------------------------------------------
% of Net Revenue 23.9% 23.9% 24.0%
- -------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses, as a percentage of net
revenue, have been relatively flat for the past three years. In 2002, the
Company reduced expenses by $9.8 million, or 10.3% in line with the decline in
net revenue. Over the past two years, the Company has focused several
initiatives on overall cost control and the alignment of resources with current
and anticipated economic conditions and with markets having the greatest
potential. Initiatives have included focused efforts on overall spending levels
in each of the MT&S and FA Segments during 2002. These efforts have met the
Company's expectations.
Spending in the MT&S Segment was reduced to $64.9 million in 2002 from $72.7
million and $73.6 million respectively, in 2001 and 2000. In 2002, the Company
incurred $1.0 million of restructuring and severance related costs for the
closure of the Electromechanical Testing facility in Raleigh, North Carolina.
Additional restructuring was completed within the business units and
infrastructure groups that were significantly impacted by the reduction in
customer requirements tied to the automotive industry. General and
administrative expenses of the MT&S Segment included a provision of $1.8 million
in 2001 related to the restructuring of the Company's manufacturing facility
located in France as discussed further in Note 9 to the Consolidated Financial
Statements. In addition to the activity associated with operations in France,
the Company recorded $0.6 million of expenses associated with the closure of its
laboratory instrument business that was acquired as part of its acquisition of
DSP Technology, Inc. ("DSP") as discussed further in Note 9 to the Consolidated
Financial Statements.
Spending in the FA Segment in 2002 was reduced to $20.3 million from $22.3
million in 2001 and was relatively flat compared to the 2000 spending level of
$20.0 million. During 2002 the segment focused on cost control activities which
balanced discretionary spending against market opportunities which had the
greatest possibility for profitable return. The segment has also completed
several initiatives begun during the past three fiscal years associated with
site reductions and the centralization of core administrative functions.
19
RESEARCH AND DEVELOPMENT COSTS
2002 2001 2000
- ------------------------------------------------------------------
(expressed in thousands)
(--------restated--------)
-------------------------
Research & Development $ 18,990 $ 22,485 $ 24,619
- ------------------------------------------------------------------
% of Net Revenue 5.3% 5.7% 6.3%
- ------------------------------------------------------------------
The Company provides research and development (R&D) funds for product, systems
and software application developments in the MT&S and FA Segments. During 2002,
approximately 66.7% of R&D spending was in the MT&S Segment, compared to 70.0%
and 73.2%, respectively, in fiscal 2001 and 2000.
The overall decrease in R&D spending, as a percentage of net revenue over the
three-year period, is primarily due to management initiatives to focus its
spending on developments that have the greatest market potential and the highest
return opportunity. As a result of these initiatives and management's planned
cutback in spending due to the decline in net revenue, R&D spending, as a
percentage of net revenue, decreased to 5.3% in fiscal 2002, compared to 5.7% in
2001 and 6.3% in 2000.
INTEREST (INCOME) EXPENSE
2002 2001 2000
- --------------------------------------------------------
(expressed in thousands)
Interest Expense $ 4,343 $ 5,209 $ 6,371
Interest Income $ (1,145) $ (372) $ (1,479)
- --------------------------------------------------------
Interest expense of $4.3 million in 2002, a decrease of $0.9 million compared to
fiscal 2001, primarily resulted from lower average borrowings during 2002 and
generally lower interest rates on its short-term borrowings under its bank line
of credit. The $1.1 million of interest income in 2002, an increase of $0.7
million compared to 2001, primarily resulted from interest earned on the
increased balance of short term investments in 2002. Interest income in 2000
included interest earned of $0.7 million related to the overpayment of income
taxes during a prior period and benefited from significantly higher interest
rates when compared to both 2001 and 2002.
GAIN ON INVESTMENT
During 2002 the Company liquidated its investment in Mechanical Dynamics Inc.
The Company sold securities and recorded proceeds from the sale of $4.9 million,
which produced a gain on sale of $2.6 million. This transaction represented the
entire amount of the holdings.
OPERATING RESULTS
2002 2001 2000
- -----------------------------------------------------------------------------------------
(--------restated-----------)
----------------------------
Income
Before Income Taxes* $ 25,922 $ 19,831 $ 4,937
% of Net Revenue 7.3% 5.0% 1.3%
- -----------------------------------------------------------------------------------------
Income Before Cumulative
Effect of Accounting Changes,
Net of Taxes $ 18,003 $ 13,106 $ 3,170
% of Net Revenue 5.1% 3.3% 0.8%
- -----------------------------------------------------------------------------------------
Effective Income Tax Rate 31% 34% 36%
- -----------------------------------------------------------------------------------------
Return On Beginning
Shareholders' Investment* 11.2% 8.5% 2.0%
- -----------------------------------------------------------------------------------------
Earnings Per Share - Diluted* $ 0.84 $ 0.62 $ 0.15
- -----------------------------------------------------------------------------------------
*excludes the cumulative effect of the accounting change for SAB 101 in 2001.
*excludes the cumulative effect of the accounting change for SFAS 142 in 2002.
20
Income before income taxes totaled $25.9 million in 2002, compared with $19.8
million in 2001, primarily as the result of overall improved product margins and
the continuing improvement from the Company's cost containment and strategically
balanced R&D programs. During 2002 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 during
fiscal year 2002. 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. Income before income taxes for 2001 included a charge of $1.9 million
(of which $1.3 million is reflected as an increase to cost of revenue and $0.6
million as an increase to administrative expenses) related to the closure of its
laboratory instrument business acquired as part of its acquisition of DSP
Technology, Inc. ("DSP"). In addition during 2001, the Company recorded a charge
of $2.3 million as a result of its decision to restructure operations in France.
For further information, see Note 9 to Consolidated Financial Statements.
Income from operations of the MT&S Segment increased to $29.0 million in 2002,
compared to $23.8 million in 2001. This increase was primarily the result of an
improved gross profit rate of 1.7 percentage points and management's cost
containment initiatives. Income from operations of the MT&S Segment totaled $5.1
million in 2000. The increase in operating income in 2002 was the result of
improvements in the project management of large, complex custom projects,
favorable mix in the Advanced Systems business unit, and the benefit of cost
productivity initiatives. The significant increase in operating income from 2000
to 2001 was due to issues experienced in 2000 that did not reoccur in 2001.
These included technical difficulties in several large, complex custom projects
and contract losses in the entertainment market, which resulted in a 3.9 point
increase in gross margin as a percent of net revenue. Loss from operations of
the FA Segment increased to a loss of $4.2 million in 2002, compared to a loss
of $1.6 million in 2001 primarily due to the impact of a decline in volume on
the factory and fixed overhead cost absorption. Income from operations of the FA
Segment totaled $5.1 million in 2000. The $6.7 million decline from 2000 to 2001
was primarily due to a $4.3 million write-down of slow moving and obsolete
inventory. The decrease in income from operations from 2001 to 2000 was also
driven by a reduction in gross margin associated with volume which was partially
offset by an investment in SG&A expenses during 2001 which were made in an
anticipation of accelerated revenue growth.
The effective tax rate for each of the years presented is impacted by the
geographic mix of income with foreign sourced income generally being taxed at
higher rates than domestically sourced income, the amount of tax benefit
available from the Company's Foreign Sales Corporation, extraterritorial income
exclusion and qualified R&D costs. A greater percentage of the Company's income
was derived from foreign sources in fiscal 2000 when compared to both 2001 and
2002. For further information, see Note 6 to consolidated financial statements.
In 2002, income before cumulative effect of accounting change for the adoption
of SFAS No. 142 "Goodwill and Other Intangible Assets" increased to $18.0
million ($0.84 per diluted share), from $13.1 million ($0.62 per diluted share)
in 2001 and $3.2 million ($0.15 per diluted share) in 2000.
CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
The Company conducts business in countries outside the United States and is
exposed to market risk from changes in foreign currency exchange rates that can
affect its operating results and financial condition. To minimize the risk, the
Company manages exposure to changes in foreign currency rates, 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.
Historically, approximately 50%-55% of the Company's net revenue occurs from
shipments to customers outside of the United States and about 65% of this
revenue (approximately 30% of the Company's total net revenue) is denominated in
currencies other than the U.S. dollar. As a result, a strengthening of the U.S.
dollar relative to foreign currencies decreases the foreign currency denominated
revenue and earnings when they are translated into U.S. dollars. Conversely,
weakening of the U.S. dollar has the reverse impact on revenue and earnings.
During the past three years, the U.S. dollar was generally stronger against
other major currencies. During this period the dollar gained approximately 15%
against the Yen and 9% against the Euro. Gains and losses attributed to
translating the financial statements for all non-U.S. subsidiaries are included
in the currency translation adjustments. The gains and losses on forward
exchange contracts used to hedge
21
these exposures are included as part of "Other (income) expense, net" in the
accompanying consolidated statements of income.
LIQUIDITY AND CAPITAL RESOURCES
2002 2001 2000
- --------------------------------------------------------------------------------
(expressed in thousands except per share data)
Total Interest
Bearing Debt $ 52,543 $ 59,305 $ 75,712
% of Total
Capitalization 24.5% 27.0% 33.0%
- --------------------------------------------------------------------------------
Total Shareholders'
Investment $ 162,265 $ 160,738 $ 153,629
- --------------------------------------------------------------------------------
Shareholders' Investment
Per Share $ 7.65 $ 7.64 $ 7.40
- --------------------------------------------------------------------------------
Aggregate annual maturities of long-term debt for the next five fiscal years
are: 2003--$8.6 million; 2004--$8.1 million; 2005--$7.0 million; 2006--$6.9
million; 2007--$6.9 million and $14.4 million thereafter. The carrying value of
the Company's long-term debt at September 28, 2002 is approximately $0.7 million
higher than the estimated fair value as determined using current interest rates
available to the Company for debt having similar characteristics and remaining
maturities.
On December 16, 2002, the Company amended its $50 million revolving credit
agreement with a domestic bank group that allows the Company to borrow funds at
various interest rates. The revolving credit agreement limit was reduced to $25
million and its expiration was extended to January 2005 based on the expected
needs of the Company. Under the provisions of its revolving credit agreement,
the Company is required, among other matters, to maintain certain financial
ratios and to meet certain indebtedness and restricted payments tests. At
September 28, 2002, the Company had $28.5 million available for restricted
payments, as defined. No borrowings were outstanding under this credit agreement
at September 28, 2002. The Company was in compliance with its financial
covenants for the 2002 and 2001 fiscal years, but was, as a result of the
restatement for fiscal 2000 financial statements, in default on its fixed charge
coverage ratio for the year ended September 30, 2000. The Company has obtained
waivers of this covenant violation from its lenders, which supply both revolving
credit and term debt where appropriate.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
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 $51,945 $8,605 $15,100 $13,840 $14,400
Capital Lease Obligations 311 128 131 51 1
Operating Leases 20,569 5,536 7,742 4,623 2,668
Other Long-Term Obligations 2,000 186 359 550 905
Amount of Commitment Expiration Per Period (in thousands of dollars)
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 $10,747 $ 5,169 $ 4,478 $1,100 $ --
Guarantees 28,552 16,943 11,591 18 --
Other Commercial Commitments 15,924 3,176 11,712 793 243
22
Shareholders' investment increased by $1.6 million during fiscal 2002 to $162.3
million. The change in shareholders' investment during 2002 was primarily the
result of profitable operating results, funds received of $2.0 million from the
exercise of employee stock options and employee purchases of the Company's stock
under its stock purchase plan. This increase was offset, in part, by the payment
of cash dividends of $5.1 million and repurchases of the Company's stock
totaling $1.2 million.
CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $91.9 million during 2002,
compared to $37.0 million generated in 2001 and $3.9 million generated in 2000.
The increase in cash during 2002 resulted primarily from the impact of a 10%
decline in net revenue, which tends to reduce investment in operating
activities, and a Company focus on working capital. The impact of these actions
resulted in accounts receivables and inventory balances, in the aggregate, being
reduced by $56.7 million compared to 2001.
CASH FLOWS FROM INVESTING ACTIVITIES consumed cash of $35.3 million during 2002,
compared to a cash usage of $8.1 million in 2001 and a cash usage of $12.1
million in 2000. During 2002, the Company invested $35.1 million cash in
short-term investments and realized proceeds of $4.9 million from the sale of
Mechanical Dynamics Inc. stock. During 2001 and 2000 cash generally was used for
additions to property and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash of $11.3 million
during 2002 primarily as a result of the net repayment of interest-bearing debt
of $7.0 million, the payment of cash dividends of $5.1 million and repurchases
of its common stock of $1.2 million, partially offset by funds received in
connection with employees' exercise of stock options and purchases under the
Company's stock purchase plan. During 2001, the Company used cash of $19.5
million in its financing activities primarily as the result of the net repayment
of interest-bearing debt of $11.0 million, increased borrowings of $5.5 million,
cash dividends of $5.0 million, and repurchasing $1.6 million of its common
stock. This was partially offset by funds received in connection with employees'
exercise of stock options and stock purchases. During 2000, the Company used
cash flow of $1.0 million on its financing activities, which reflected the
payment of dividends of $5.0 million and the repurchase of stock of $2.2
million. This use of funds in 2000 was nearly offset by the increase in both
notes payable of $1.9 million and net long-term debt of $3.3 million and $1.1
million of proceeds from the exercise of stock options.
Overall cash flow has significantly improved from 2000 due to the Company's
focus on working capital and other elements of cash consumed in operating
activities. During 2002, cash and cash equivalents increased by $45.4 million.
The Company believes that the current capital resources, internally generated
funds, funds available from short term investments and unused financing sources
will be adequate to finance on-going operations, anticipated capital
expenditures, allow for investment in opportunities to internally grow its
business and to make selected strategic acquisitions.
RESTRUCTURING AND OTHER CHARGES
During 2002, 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 during fiscal year 2002. As a result of the
move, the Company recorded a $0.4 million charge for severance related costs and
$0.6 million charge to write down inventory. Substantially all of the severance
costs were paid during fiscal 2002. The closure is expected to result in
approximately $1.0 million of savings annually beginning in fiscal 2003.
During 2001, the Company recorded a restructuring charge of $2.3 million as a
result of the closure of its manufacturing operations in France and the transfer
of this product line to its electromechanical division in North Carolina.
Substantially all of the necessary cash outlays were completed during 2001. Such
costs were financed primarily with funds from continuing operations and
borrowings under its bank line of credit.
23
During 2000, the Company determined it would announce the discontinuation of a
line of data acquisition products acquired as part of its 1999 acquisition of
DSP Technology, Inc. ("DSP"). A restructuring charge was recorded in 2001 for
$1.9 million. This included a provision for severance costs of $0.8 million, the
write-off of leasehold improvements and production and other equipment of $0.3
million and other costs of $0.8 million associated with closure of the facility,
the wind-down of the related product line, excess and obsolete inventory,
uncollectible receivables and the write off of fixed assets. Of the total $1.9
million, $1.3 million was charged to cost of revenue and $0.6 million was
charged to general and administrative expenses. The activity related to the
provision was materially complete as of September 30, 2001, and no additional
charges were incurred during fiscal 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued 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 accounting 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. Upon
the Company's adoption of the new accounting standards in the first quarter of
its fiscal year ending September 28, 2002, annual goodwill amortization of $2.2
million ceased, effective October 1, 2001. Fair value was determined using a
discounted cash flow methodology. An evaluation of the Automation and Vehicle
Testing Systems reporting units indicated that $10.8 million and $7.3 million of
goodwill, respectively, was impaired. The performance in these acquired
businesses has not met management's original expectations due to ongoing
weakness in the worldwide automotive and industrial manufacturing marketplace.
Adoption of SFAS No. 142 resulted in a non-cash transition charge to income in
the first quarter of its fiscal year 2002 ending September 28, 2002 of $13.7
million, or ($.64) per diluted share, for impairment of goodwill, net of tax.
Earnings per share for the fiscal year ended September 28, 2002 was positively
impacted by $0.06, per diluted share, from the exclusion of goodwill
amortization. Goodwill for the last three fiscal years was:
Goodwill
-----------------------------------------------------------
(in thousands of dollars)
Beginning Ending
Year Balance Amortization Write-off Balance
---- ------- ------------ --------- -------
2000 $27,489 ($2,931) $ -- $24,558
2001 24,558 (2,013) -- 22,545
2002 22,545 -- (18,277) 4,268
Annual amortization of other intangible assets of $1.1 million in fiscal 2002
was not impacted by the new standards and will continue. The anticipated
amortization expense related to other intangible assets for the next five fiscal
years are as follows:
Fiscal Year
-----------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
(in thousands of dollars)
Amortization of intangible assets $ 1,022 $ 567 $ 517 $ 287 $ 3
24
For the two years ended September 30, 2001 and 2000, goodwill amortization,
adjusted net income (loss), and basic and diluted income (loss) per share are as
follows:
September 30
----------------------------------
2001 2000
----------------------------------
(in thousands of dollars)
(------------restated-------------)
-----------------------------------
Income before cumulative effect of accounting change $13,106 $3,170
Add back: Goodwill amortization, net of tax 1,489 1,535
------- ------
Adjusted net income before cumulative effect of accounting
change 14,595 4,705
Cumulative effect of accounting change, net of tax (2,492) --
------- ------
Adjusted net income $12,103 $4,705
======= ======
Basic earnings per share before cumulative effect of accounting
change $ 0.63 $ 0.15
Add back: Goodwill amortization, net of tax 0.07 0.07
------- ------
Basic adjusted earnings per share before cumulative effect of
accounting change 0.70 0.22
Cumulative effect of accounting change, net of tax (0.12) --
------- ------
Adjusted net income $ 0.58 $ 0.22
======= ======
Diluted earnings per share before cumulative effect of accounting
change $ 0.62 $ 0.15
Add back: Goodwill amortization, net of tax 0.07 0.07
------- ------
Diluted adjusted earnings per share before cumulative effect of
accounting change 0.69 0.22
Cumulative effect of accounting change, net of tax (0.12) --
------- ------
Adjusted net income $ 0.57 $ 0.22
======= ======
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
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
concluded that there will be no material impact of the adoption of SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which amends existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company was required to adopt this statement in its financial
statements issued after May 15, 2002. The Company does not have any activities
that fall under the scope of SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. The Company
will adopt this statement for exit or disposal activities initiated after
December 31, 2002, as required.
In November 2002, the Emerging Issues Task Force finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables," which provides guidance on the timing of revenue recognition for
sales undertakings to deliver more than one product or service. The Company is
required to adopt EITF 00-21 on transactions occurring after June 2003 and is
currently analyzing the impact of its adoption on the Company's financial
statements.
DIVIDENDS AND OTHER STOCK MATTERS
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 years that experience a decline in earnings per share.
The Company's dividend payout ratio target is approximately 25% of earnings per
share over the long term. The Company paid a quarterly dividend of 6 cents per
share during 2002, 2001 and 2000. During 2002, the Company repurchased 0.1
million shares of its common stock at an average cost of $10.23 per share.
Pursuant to the plan adopted by its Board of Directors during May 2001 and 2002,
the Company has authorized the repurchase of an additional 1.9 million shares of
its common stock. The Company also repurchased 0.2 million shares of its common
stock at an average cost of $8.19 per share in 2001 and 0.3 million shares in
2000 at an average cost of $7.28 per share. The Company's primary long term
objective relative to its share repurchase program is to offset the dilutive
effect of shares of common stock issued in connection with its employee stock
option and stock purchase programs. During the three years ended September 28,
2002, the Company has issued approximately 927,000 shares of its common stock
under the stock option and stock purchase programs.
25
QUARTERLY FINANCIAL INFORMATION
Revenue and operating results, as reflected on a quarterly basis, do not
necessarily reflect changes in the demand for the Company's products or its
operating efficiency. Revenue and operating results in any quarter can be
significantly affected by customer shipment and/or installation timing or the
timing of the completion of one or more high-value systems where revenue is
recognized upon shipment or customer acceptance rather than on the percentage-
of-completion accounting method. The Company's use of the
percentage-of-completion revenue recognition method for large, longer-term
projects generally has the effect of smoothing out significant fluctuations from
quarter to quarter. See Note 1 to Consolidated Financial Statements for
additional information on the Company's revenue recognition policy. Quarterly
earnings also vary as the result of the use of estimations including, but not
limited to, the rates used in recording federal, state and foreign income tax
expense. See Notes 1 and 6 to Consolidated Financial Statements for additional
information on the Company's use of estimates and income tax related matters.
Selected quarterly financial information for the fiscal years ended September
28, 2002 and September 30, 2001:
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------
(expressed in thousands except per share data)
(-------------restated------------)
-----------------------------------------------------------------
2002
Net revenue $ 87,164 $ 92,075 $ 86,705 $ 89,927 $ 355,871
Gross profit 31,074 30,877 33,048 34,016 129,015
Income before income taxes 5,346 7,434 4,692 8,450 25,922
Income before cumulative effect of accounting
change, net of taxes 3,713 5,163 3,259 5,868 18,003
Cumulative effect of accounting change, net of taxes (13,721) -- -- -- (13,721)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (10,008) $ 5,163 $ 3,259 $ 5,868 $ 4,282
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share
Basic
Before cumulative effect of accounting change $ 0.17 $ 0.25 $ 0.15 $ 0.28 $ 0.85
Cumulative effect of accounting change, net (0.65) -- -- -- (0.65)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.48) $ 0.25 $ 0.15 $ 0.28 $ 0.20
- --------------------------------------------------------------------------------------------------------------------------
Diluted
Before cumulative effect of accounting change $ 0.17 $ 0.25 $ 0.15 $ 0.27 $ 0.84
Cumulative effect of accounting change, net (0.64) -- -- -- (0.64)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.47) $ 0.25 $ 0.15 $ 0.27 $ 0.20
- --------------------------------------------------------------------------------------------------------------------------
26
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------
(expressed in thousands except per share data)
(--------------------------restated------------------------------)
-----------------------------------------------------------------
2001
Net revenue $ 94,655 $ 98,091 $ 98,767 $ 105,846 $ 397,359
Gross profit 32,918 33,540 37,170 36,059 139,687
Income before income taxes 1,659 4,599 6,626 6,947 19,831
Income before cumulative effect of accounting
change, net of taxes 1,097 3,040 4,380 4,589 13,106
Cumulative effect of accounting change, net of taxes (2,492) -- -- -- (2,492)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,395) $ 3,040 $ 4,380 $ 4,589 $ 10,614
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share
Basic
Before cumulative effect of accounting change $ 0.05 $ 0.15 $ 0.21 $ 0.22 $ 0.63
Cumulative effect of accounting change, net (0.12) -- -- -- (0.12)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.07) $ 0.15 $ 0.21 $ 0.22 $ 0.51
- ---------------------------------------------------------------------------------------------------------------------------
Diluted
Before cumulative effect of accounting change $ 0.05 $ 0.15 $ 0.21 $ 0.21 $ 0.62
Cumulative effect of accounting change, net (0.12) -- -- -- (0.12)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.07) $ 0.15 $ 0.21 $ 0.21 $ 0.50
- ---------------------------------------------------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
Statements included or incorporated by reference in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, elsewhere in this
Form 10-K, in the Company's 2002 Annual Report to Shareholders, in the proxy
statement for the annual meeting to be held on February 12, 2003, and in the
Company's press releases and oral statements made with the approval of an
authorized executive officer, 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. In addition, the Company may not be aware of the
introduction of new products or product enhancements by its
competitors.
(ii) Possible significant volatility in both backlog and quarterly
operating results may result from individual large, fixed price
orders in connection with sales of MT&S systems.
(iii) Order volumes and other operating considerations may be directly or
indirectly impacted by economic conditions generally and/or in
various geographic areas in which the Company operates.
(iv) 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
operating results and could have a material adverse effect on
results of operations. Local political conditions and/or currency
restrictions may also affect foreign revenue.
27
(v) 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.
(vi) The Company experiences competition on a worldwide basis. Customers
may choose to purchase equipment from the Company or from its
competitors. For certain of the Company's products, customers may
also contract with testing laboratories or construct their own
testing equipment, purchasing commercially available components.
Factors that may influence a customer's decision include price,
service or required level of technology.
(vii) The Company is exposed to market risk from changes in foreign
currency exchange rates, which can affect its results from
operations and financial condition.
(viii) The Company's short-term borrowings carry interest rate risk that
is generally related to either LIBOR or the prime rate. The Company
has minimal earnings and cash flow exposure due to market risks on
its long-term debt obligations as a result of the primarily
fixed-rate nature of the debt.
The foregoing 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in foreign exchange and
interest rates. Additional information relative to these risks are included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 8 and in Note 1 to Consolidated Financial Statements included
in Item 8 of this Form 10-K.
FOREIGN CURRENCY EXCHANGE RATES
Market risks from changes in foreign currency exchange rates may cause
fluctuations on the translation of orders, revenue and operating results.
Currency gains and losses from the settlement of foreign currency denominated
transactions are reported as part of "Other (income) expense, net" in the
Consolidated Statements of Income included in Item 8 of this Form 10-K. The
following table illustrates the impact of such market risks on the above
financial items for the respective years:
(expressed in thousands)
2002 2001 2000
---- ---- ----
(Increase)Decrease from currency translation on -
New orders $ 1,213 $ (2,173) $(2,324)
Net revenue 765 (13,247) (3,924)
Net income 69 (930) (111)
Transaction gain (loss) included in
"Other (income)expense , net" $ 1,947 $ 1,073 $ (538)
The Company regularly assesses these risks and employs certain practices to
protect against possible adverse effects of these and other potential exposures.
To manage the risk arising from exposure to changes in foreign currency exchange
rates, the Company, when deemed appropriate, enters into forward contracts. The
Company is principally exposed to movements in the rates of foreign currencies
related to non-U.S. dollar denominated assets and uncertainty related to future
revenue that is denominated in foreign currencies. The Company's foreign
currency exposures include contracts currently in backlog and unbilled
receivables where the Company will ultimately be paid in, among other
currencies, the Euro, Japanese Yen, Swedish Krona or British Pound. A
hypothetical 10% appreciation in foreign
28
currency exchange rates against the U.S. dollar, assuming all other variables
are held constant, would result in an increase in future revenues and asset
balances of approximately $4.9 million. A hypothetical 10% depreciation in
foreign currency exchange rates against the U.S. dollar, assuming all other
variables are held constant, would result in a decrease to future revenues and
asset balances of approximately $4.9 million.
INTEREST RATES
The Company experiences interest rate risk on its fixed and variable rate
indebtedness and manages such risk, in part, by balancing the amount of variable
and fixed rate debt outstanding. For fixed rate debt, interest rate changes
affect the fair market value of such debt, but do not impact operating earnings.
In contrast, interest rate risk on variable rate debt generally does not affect
the fair market value of such debt but may impact future operating results and
cash flows.
At September 28, 2002, the Company had fixed rate debt of $49.3 million and
variable rate debt of $3.2 million. Assuming all other factors, including, but
not limited to, foreign exchange rates, remain constant, a hypothetical increase
in interest rates of 100 basis points would result in the unrealized fair market
value of the Company's fixed rate debt to decline by approximately $0.6 million
while the impact on the Company's variable rate debt would reduce operating
results before income taxes and increase cash requirements over the next twelve
months by approximately $32,000.
The foregoing list is not exhaustive, and the Company disclaims any obligation
subsequently 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements and notes thereto described in Item
15(a) of this report on Form 10-K and appearing on pages F-1 through F-22 of
this report are incorporated by reference herein. See also "Quarterly Financial
Data" appearing in the Management Discussion and Analysis under Item 7 of this
10-K, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On June 7, 2002, the Company filed a Current Report on Form 8-K reporting that
on May 31, 2002, the Company's Board of Directors dismissed Arthur Anderson LLP
and engaged KPMG LLP as the Company's independent public accountants for the
Company's fiscal year ended September 28, 2002.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The required information with respect to the directors of the Registrant and
information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 is incorporated herein by reference to the information set forth
under the headings "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Registrant's Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held on February 12, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information set forth under heading "Executive Compensation" in (except as
expressly set forth therein) the Registrant's Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on February 12, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the
information set forth under heading "Outstanding Securities and Voting Rights"
in the Registrant's Proxy Statement for the Annual Meeting of Shareholders
scheduled to be held on February 12, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the "1934
Act") within 90 days prior to the filing date of this annual report. Based on
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the Company
in the reports its files or submits under the 1934 Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
There have been no significant changes in internal controls, or in other factors
that could significantly affect internal controls, subsequent to the date the
Chief Executive Officer and Chief Financial Officer completed their evaluation.
30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - September 28, 2002
and September 30, 2001
Consolidated Statements of Income for the Years Ended
September 28, 2002 and September 30, 2001 and 2000
Shareholders' Investment for the Years Ended
September 28, 2002 and September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the
Years Ended September 28, 2002 and September 30, 2001
and 2000
Notes to Consolidated Financial Statements
Financial Statement Schedules
(b) Reports on Form 8-K:
None
(c) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------
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 2002
(Filed herewith).
31
10.b 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.c 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.d 2002 Employee Stock Purchase Plan, incorporated herein by
reference to Exhibit 99.1 of the Registrant's Form S-8, File
No. 333-82582.
10.e 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.
10.f 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.g 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.h 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.i Change in Control Agreement, dated April 17, 2002, between the
Registrant and Kathleen M. Staby, incorporated by reference to
Exhibit 10.i of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.j Change in Control Agreement, dated April 17, 2002, between the
Registrant and Mauro G. Togneri, incorporated by reference to
Exhibit 10.j of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.k Change in Control Agreement, dated April 18, 2002, between the
Registrant and Susan E. Knight, incorporated by reference to
Exhibit 10.k of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.l Change in Control Agreement, dated April 22, 2002, between the
Registrant and Sidney W. Emry, Jr. incorporated by reference
to Exhibit 10.l of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.m Change in Control Agreement, dated April 22, 2002, between the
Registrant and Laura B. Hamilton, incorporated by reference to
Exhibit 10.m of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.n Change in Control Agreement, dated April 23, 2002, between the
Registrant and Larry D. Moulton, incorporated by reference to
Exhibit 10.n of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.o Change in Control Agreement, dated April 25, 2002, between the
Registrant and M. Perry Walraven, incorporated by reference to
Exhibit 10.o of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.p Change in Control Agreement, dated June 1, 2002, between the
Registrant and Donald G. Krantz, incorporated by reference to
Exhibit 10.p of the Registrant's Form 10-Q/A for the fiscal
quarter ended June 30, 2002.
10.q Change in Control Agreement, dated April 18, 2002, between the
Registrant and James M. Egerdal, incorporated by reference to
Exhibit 10.q of the Registrant's Form 10-Q/A for the fiscal
year quarter ended June 30, 2002.
10.r Description of the terms of employment of Susan E. Knight,
pursuant to an offer letter, incorporated by reference to
Exhibit 10.r of the Registrant's Form 10-Q/A for the fiscal
quarter ended December 30, 2001.
10.s Description of the terms of employment of Sidney W. Emery,
pursuant to an offer letter dated March 3, 1998 (Filed
herewith).
32
21. Subsidiaries of the Registrant (Filed herewith).
23. Independent Auditors' Consent (Filed herewith).
99.1 Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
herewith).
99.2 Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
herewith).
(d) Financial Statement Schedules:
See accompanying Index to Financial Statements on page F-1.
33
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities 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
By: /s/ Sidney W. Emery, Jr.
---------------------------------
Sidney W. Emery Jr.
Chairman, President and Chief Executive Officer
Date: December 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated:
Signatures Title Date
---------- ----- ----
/s/ Sidney W. Emery, Jr. Chairman, December 27, 2002
- ------------------------- President and
Sidney W. Emery Jr. Chief Executive Officer
/s/ Susan E. Knight Vice President and December 27, 2002
- ------------------------- Chief Financial Officer
Susan E. Knight
/s/ Charles A. Brickman Director December 27, 2002
- -------------------------
Charles A. Brickman
/s/ Jean Lou Chameau Director December 27, 2002
- -------------------------
Jean Lou Chameau
/s/ Merlin E. Dewing Director December 27, 2002
- -------------------------
Merlin E. Dewing
/s/ Brendan Hegarty Director December 27, 2002
- -------------------------
Brendan Hegarty
/s/ Bruce Hertzke Director December 27, 2002
- -------------------------
Bruce Hertzke
/s/ Barb J. Samardzich Director December 27, 2002
- -------------------------
Barb J. Samardzich
/s/ Linda Hall Whitman Director December 27, 2002
- -------------------------
Linda Hall Whitman
34
CERTIFICATIONS
I, Sidney W. Emery, certify that:
1. I have reviewed this annual report on Form 10-K of MTS Systems Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 27, 2002
/s/ Sidney W. Emery
------------------------------------
Sidney W. Emery, Jr.,
President and Chief Executive Officer
35
I, Susan E. Knight, certify that:
1. I have reviewed this annual report on Form 10-K of MTS Systems Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 27, 2002
/s/ Susan E. Knight
-------------------------------------------
Susan E. Knight,
Vice President and Chief Financial Officer
36
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
A. CONSOLIDATED FINANCIAL STATEMENTS Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets - September 28, 2002
And September 30, 2001(restated) F-3
Consolidated Statements of Income for the Years Ended
September 28, 2002 and September 30, 2001 and 2000
(restated) F-4
Shareholders' Investment for the Years Ended
September 28, 2002 and September 30, 2001 and 2000 F-5
(restated)
Consolidated Statements of Cash Flows for the
Years Ended September 28, 2002 and September 30, 2001
and 2000 (restated) F-6
Notes to Consolidated Financial Statements F-7 through F-22
Financial Statement Schedules
Schedule Description
-------- -----------
II Summary of Consolidated Allowances
For Doubtful Accounts, Inventory and
Restructuring Reserves S-1
F-1
INDEPENDENT AUDITORS' REPORT
THE BOARD OR DIRECTORS AND SHAREHOLDERS
MTS SYSTEMS CORPORATION:
We have audited the accompanying consolidated balance sheets of MTS Systems
Corporation (a Minnesota corporation) and subsidiaries as of September 28, 2002
and September 30, 2001 and the related consolidated statements of income,
shareholders' investment and cash flows for each of the fiscal years in the
three-year period ended September 28, 2002. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MTS Systems
Corporation and subsidiaries as of September 28, 2002 and September 30, 2001 and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended September 28, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company has
restated its consolidated financial statements as of and for the fiscal years
ended September 30, 2001 and 2000, which consolidated financial statements were
previously audited by other independent auditors.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for derivative financial instruments and its
method of revenue recognition in fiscal year 2001. Also as discussed in Note 1
to the consolidated financial statements, the Company changed its method of
accounting for goodwill in fiscal year 2002.
/S/ KPMG LLP
Minneapolis, Minnesota,
December 20, 2002
F-2
CONSOLIDATED BALANCE SHEETS
(September 28 and September 30, respectively)
Assets 2002 2001
- ------------------------------------------------------------------------------------------
(expressed in thousands)
CURRENT ASSETS: (restated)
----------
Cash and cash equivalents $ 62,924 $ 17,515
Short-term investments 35,094 --
Accounts receivable, net of allowance for doubtful accounts 64,663 97,731
Unbilled contracts and retainage receivable 32,276 40,700
Inventories 41,357 64,308
Prepaid expenses 5,502 5,975
Current deferred tax asset 8,739 7,894
- ------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 250,555 234,123
==========================================================================================
PROPERTY AND EQUIPMENT:
Land 3,247 3,247
Buildings and improvements 46,253 45,785
Machinery and equipment 86,702 91,203
Accumulated depreciation (76,590) (74,827)
- ------------------------------------------------------------------------------------------
TOTAL PROPERTY AND EQUIPMENT, NET 59,612 65,408
- ------------------------------------------------------------------------------------------
Goodwill 4,268 22,545
- ------------------------------------------------------------------------------------------
Other Assets 4,071 9,867
- ------------------------------------------------------------------------------------------
Non-current deferred tax asset 1,593 --
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 320,099 $ 331,943
==========================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 598 $ 428
Current maturities of long-term debt 8,605 5,260
Accounts payable 14,621 15,685
Accrued payroll-related costs 27,409 33,358
Advance payments from customers 37,209 32,884
Accrued warranty costs 5,071 4,481
Other accrued liabilities 9,769 15,891
Accrued income taxes 9,585 6,908
- ------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 112,867 114,895
==========================================================================================
Deferred tax liability 1,627 2,693
Long-term debt, less current maturities 43,340 53,617
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT:
Common stock, 25(cent) par value; 64,000 shares authorized:
21,208 and 21,044 shares issued and outstanding 5,302 5,261
Additional paid-in capital 9,770 9,040
Retained earnings 146,857 147,635
Accumulated other comprehensive income (loss) 336 (1,198)
- ------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 162,265 160,738
==========================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 320,099 $ 331,943
==========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF INCOME
(For the Years Ended September 28, September 30, and September 30, respectively)
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
(expressed in thousands except per share data)
(------------restated------------)
REVENUES $ 355,871 $ 397,359 $ 389,380
COST OF REVENUE 226,856 257,672 260,997
- ----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 129,015 139,687 128,383
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 53,096 58,056 58,747
General and administrative 32,098 36,941 34,857
Research and development 18,990 22,485 24,619
- ----------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 24,831 22,205 10,160
- ----------------------------------------------------------------------------------------------------------------
Interest expense 4,343 5,209 6,371
Interest income (1,145) (372) (1,479)
Gain on sale of investment (2,630) -- --
Other (income) expense, net (1,659) (2,463) 331
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 25,922 19,831 4,937
Provision for Income Taxes 7,919 6,725 1,767
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 18,003 13,106 3,170
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET OF TAXES OF
$4.3 MILLION IN 2002 AND $1.6 MILLION IN 2001 (SEE NOTES 1 AND 3) (13,721) (2,492) --
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,282 $ 10,614 $ 3,170
- ----------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
Basic
Before Cumulative Effect of Accounting Changes $ 0.85 $ 0.63 $ 0.15
Cumulative Effect of Accounting Changes (.65) (0.12) --
- ----------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.20 $ 0.51 $ 0.15
- ----------------------------------------------------------------------------------------------------------------
Diluted
Before Cumulative Effect of Accounting Changes $ 0.84 $ 0.62 $ 0.15
Cumulative Effect of Accounting Changes (.64) (0.12) --
- ----------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.20 $ 0.50 $ 0.15
- ----------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
Accumulated
Common Stock Additional Other Total
Shares Paid-In Retained Comprehensive Shareholders'
Issued Amount Capital Earnings Income (Loss) Investment
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 (RESTATED) 20,884 $ 5,221 $ 8,122 $ 143,844 $ 1,901 $ 159,088
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (restated) -- -- -- 3,170 -- 3,170
Foreign currency translation -- -- -- -- (2,593) (2,593)
Unrealized gain on investment,
net of tax -- -- -- -- 53 53
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 3,170 (2,540) 630
Exercise of stock options 163 41 1,048 -- -- 1,089
Common stock repurchased and retired (299) (75) (2,098) -- -- (2,173)
Cash dividends, $0.24 per share -- -- -- (5,005) -- (5,005)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 (RESTATED) 20,748 5,187 7,072 142,009 (639) 153,629
- --------------------------------------------------------------------------------------------------------------------------------
Net Income (restated) -- -- -- 10,614 -- 10,614
Foreign currency translation -- -- -- -- (391) (391)
Derivative instruments -- -- -- -- 115 115
Unrealized loss on investment, net of tax -- -- -- -- (283) (283)
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 10,614 (559) 10,055
Exercise of stock options 487 122 3,484 -- -- 3,606
Common stock repurchased and retired (191) (48) (1,516) -- -- (1,564)
Cash dividends, $0.24 per share -- -- -- (4,988) -- (4,988)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 (RESTATED) 21,044 5,261 9,040 147,635 (1,198) 160,738
- --------------------------------------------------------------------------------------------------------------------------------
Net Income -- -- -- 4,282 -- 4,282
Foreign currency translation -- -- -- -- 1,419 1,419
Derivative instruments -- -- -- -- 22 22
Unrealized gain on investment,
net of tax -- -- -- -- 93 93
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 4,282 1,534 5,816
Exercise of stock options 284 71 1,928 -- -- 1,999
Common stock repurchased and retired (120) (30) (1,198) -- -- (1,228)
Cash dividends, $0.24 per share -- -- -- (5,060) -- (5,060)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 2002 21,208 $ 5,302 $ 9,770 $ 146,857 $ 336 $ 162,265
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the Years Ended September 28, September 30 and September 30, respectively)
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
(---------restated---------)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,282 $ 10,614 $ 3,170
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash cumulative effect of accounting changes 13,721 2,492 --
Gain on sale of investment (2,630) -- --
Depreciation and amortization 11,092 14,492 15,512
Deferred income taxes (3,596) (2,349) (1,526)
Provision for doubtful accounts 1,344 992 645
Provision for inventory obsolescence 8,124 7,585 4,413
Changes in operating assets and liabilities:
Accounts, unbilled contracts, and retainage receivables 41,525 (5,064) (10,204)
Inventories 15,199 (7,953) (8,150)
Prepaid expenses 788 3,832 (2,341)
Other assets 4,429 (2,166) (540)
Accounts payable (1,150) (6,312) 1,524
Accrued compensation benefits (6,155) 6,584 (1,380)
Advance billings to customers 4,170 9,774 (3,446)
Accrued warranty costs 545 (62) 534
Other current liabilities 166 4,515 5,714
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 91,854 36,974 3,925
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (5,148) (8,055) (12,107)
Additions to short-term investments (35,094) -- --
Proceeds from sale of investment 4,920 -- --
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (35,322) (8,055) (12,107)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under notes payable to banks 187 (11,452) 1,852
Payments of long-term debt (7,822) (5,544) (998)
Proceeds from issuance of long-term debt 589 423 4,270
Cash dividends (5,067) (4,988) (5,005)
Proceeds from exercise of stock options 1,995 3,606 1,089
Payments to purchase and retire common stock (1,224) (1,564) (2,173)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (11,342) (19,519) (965)
- --------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 219 (96) (725)
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Increase (decrease) during the year 45,409 9,304 (9,872)
Balance, beginning of year 17,515 8,211 18,083
- --------------------------------------------------------------------------------------------------------
Balance, end of year $ 62,924 $ 17,515 $ 8,211
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 4,089 $ 5,724 $ 6,298
Income taxes 5,681 6,516 5,105
- --------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR
Effective with fiscal year 2002, the Company changed its fiscal year end to the
Saturday closest to September 30. For the year ended September 28, 2002, the
Company's fiscal year consisted of 52 weeks. Effective for fiscal year 2003, the
Company changed its fiscal quarter ends to the Saturday closest to December 31,
March 31, and June 30.
CONSOLIDATION
The consolidated financial statements include the accounts of MTS Systems
Corporation and its wholly and majority owned subsidiaries (the "Company").
Significant intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company implemented the revenue recognition principles of Staff Accounting
Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements" in fiscal
2001. The cumulative effect adjustment of the change in accounting for all
periods through September 30, 2000 was a reduction in net income of $2.5 million
(net of income taxes of $1.6 million), or $0.12 per diluted share, which has
been accounted for as a change to the financial results for the first quarter of
fiscal 2001. During the fiscal years ended September 28, 2002 and September 30,
2001 the Company recognized $0.4 million and $10.0 million, respectively, of
revenues which were previously recognized prior to the Company's adoption of SAB
101.
For orders that are manufactured and delivered in less than twelve months with
routine installations and no "special" acceptance protocol, revenue is
recognized when systems are shipped and title has passed to the customer, less
the portion of related revenues associated with installation, which is deferred
until customer acceptance. The remaining revenue on these contracts is
recognized upon installation and customer acceptance. In cases where "special"
acceptance protocols exist, the Company recognizes revenue upon the completion
of installation and fulfillment of obligations specific to the terms of the
customer's contract. Revenue on contracts requiring longer delivery periods
(long-term contracts) is recognized using the percentage-of-completion method
based on the cost incurred to date relative to estimated total cost of the
contract. In most cases, orders with complex installations and/or unusual
acceptance protocols involve long-term contracts for custom systems that follow
the percentage-of-completion method of revenue recognition through customer
acceptance.
The Company enters into long-term contracts for customized equipment sold to its
customers. Under the terms of such contracts, revenue recognized using the
percentage-of-completion method may not be invoiced until completion of
contractual milestones, upon shipment of the equipment, or upon installation and
acceptance by the customer. Unbilled amounts for these contracts appear in the
Consolidated Balance Sheets as Unbilled Contracts and Retainage Receivable.
Revenue for services is recognized as the service is performed and ratably over
a defined contractual period for service maintenance contracts.
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 income are translated using average
exchange rates for the year, with the resulting translation adjustments recorded
as a separate component of shareholders' investment. The Company recorded in
Comprehensive income a gain on foreign currency translation of $1.4 million in
2002 and a loss on foreign currency translation of $0.4 million and $2.6 million
for 2001 and 2000, respectively.
CASH EQUIVALENTS
Cash equivalents represent short-term highly liquid investments maturing in
three months or less at the time of purchase and are recorded at cost, which
approximates fair value. Cash was invested in a short term money market fund,
highly rated tax exempt municipal securities, short term obligations of the
Unites States government and its agencies, and highly rated short term corporate
obligations with maturities three months or less.
F-7
SHORT TERM INVESTMENTS
Short-term investments as of September 28, 2002 consist of highly liquid United
States government obligations, certificates of deposits and highly rated
corporate bonds maturing in four to twelve months from the date of purchase with
a carrying value of $10.0 million, $2.0 million, and $23.1 million respectively.
The Company classifies its debt securities as held-to-maturity. Held-to-maturity
securities are carried at amortized cost, which approximates market. There
were no substantive unrealized gains or losses from the investment in
held-to-maturity securities as of the fiscal year ended September 28, 2002. All
investments in equity securities are classified as available-for-sale and are
carried at fair value. Unrealized gains and losses are reported as a component
of other comprehensive income. As of September 28, 2002 the Company had no
investments in equity securities.
ACCOUNTS RECEIVABLE AND LONG-TERM CONTRACTS
The Company grants credit to its customers, but generally does not require
collateral or other security from domestic customers. Receivables from customers
residing outside of the United States, where deemed appropriate, are supported
by letters of credit from financial institutions. The Company enters into
longer-term contracts for customized equipment sold to its customers. Under
terms of such contracts, revenue recognized using the percentage of completion
method might be invoiced upon completion of contractual milestones, upon
shipment to the customer or upon installation and acceptance by the customer.
Unbilled or retained amounts relating to these contracts are reflected as
Unbilled Contracts and Retainage Receivables in the accompanying Consolidated
Balance Sheets. Amounts unbilled or retained as of September 28, 2002 are
expected to be invoiced during fiscal 2003.
WARRANTY OBLIGATIONS
The Company warrants its products against defects in materials and workmanship
under normal use and service, generally for one year after installation. The
Company maintains reserves for estimated future warranty costs based on its past
experience, which are accrued at the time of sale.
RESEARCH AND DEVELOPMENT
Research and product development costs associated with new products are charged
to operations as incurred.
INVENTORIES
Inventories consist of material, labor and overhead costs and are stated at the
lower of cost or market, determined under the first-in, first-out accounting
method. Inventory as of September 28, 2002 and September 30, 2001 respectively,
were as follows:
2002 2001
- --------------------------------------------------------
(expressed in thousands)
Customer projects in (restated) (restated)
---------- ----------
various stages of
completion $ 8,679 $ 11,716
Components,
assemblies and parts 32,678 52,592
- --------------------------------------------------------
Total $ 41,357 $ 64,308
- --------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Additions, replacements and
improvements are capitalized at cost, while maintenance and repairs are charged
to income as incurred. Depreciation is provided over the following estimated
useful lives of the property:
Buildings and improvements: 10 to 40 years.
Machinery and equipment: 3 to 15 years.
Building and equipment additions are generally depreciated on a straight-line
basis for financial reporting purposes and on an accelerated basis for income
tax reporting purposes.
DERIVATIVE FINANCIAL INSTRUMENTS
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of SFAS Statement No.
F-8
133"("SFAS No. 133"), which requires the Company to recognize all derivative
financial instruments on the balance sheet at fair value. Derivatives that are
not classified as a hedge are required under SFAS 133 to be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the hedged assets, liabilities, or firm
commitments are recognized through earnings or in other comprehensive income
(loss) until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. The Company has determined that the impact of the adoption of SFAS 133
was not material to the earnings and financial position of the Company.
The Company periodically enters into forward exchange contracts principally to
hedge the estimated cash flow of foreign currency denominated transactions
(primarily the EURO, British Pound, Swedish Krona, and the Japanese Yen). These
contracts are recognized on the balance sheet at fair value, which is the
estimated amount at which they could be settled based on forward market exchange
rates. The contracts generally mature within one year and are designed to
limit exposure to exchange rate fluctuations. On the date the forward exchange
contract is entered into, it is designated as a foreign currency cash flow
hedge. Subsequent changes in the fair value of the contract that is highly
effective and qualifies as a foreign currency cash flow hedge are recorded in
other comprehensive income until they are recognized in earnings at the time the
forecasted transaction occurs. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge transactions. This process
includes linking all derivatives that are designated as foreign currency hedges
to specific forecasted transactions. The Company formally assesses, both at the
hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when the derivative is
(1) determined to be no longer effective in offsetting the fair value of the
cash flows of a hedged item; (2) sold, terminated, or exercised; (3)
de-designated as a hedge instrument because it is unlikely that a forecasted
transaction will occur. When hedge accounting is discontinued, the derivative
will be carried at its fair value on the balance sheet with changes in its fair
value recognized in current period earnings. Any related gains or losses that
were accumulated in other comprehensive income will be recognized immediately in
earnings.
The Company uses forward exchange contracts to hedge specific foreign exchange
currency denominated assets or liabilities on the balance sheet. These are
recorded at their fair value with the related gains and losses included in
"Other expense (income), net" on the income statement. Results of these
contracts offset in full or in part the natural gains and losses stemming from
the normal mark-to-market comparisons of the underlying balance sheet exposures.
The Company does not use derivative financial instruments for speculative or
trading purposes.
At September 28, 2002 and September 30, 2001 the Company had outstanding foreign
currency forward contracts with US dollar notional equivalent amounts of $36.5
million, and $39.4 million, respectively. At September 28, 2002 and September
30, 2001 the fair value of the foreign currency forward contracts was $(0.1)
million and $0.2 million, respectively. The amount recognized in earnings as a
result of the ineffectiveness of cash flow hedges was not material for fiscal
years 2002 and 2001. At September 28, 2002, approximately ($0.1) million was
projected to be reclassified from other comprehensive income into earnings in
the next 12 months. At September 30, 2001, approximately $0.1 million was
projected to be reclassified from other comprehensive income into earnings in
the next 12 months. The maximum maturity of any derivative was 1.3 years at
September 28, 2002, and 1.6 years at September 30, 2001.
GOODWILL
Goodwill represents the excess of acquisition costs over the fair value of the
net assets of businesses acquired and was amortized on a straight line basis
over appropriate periods up to 40 years. In July 2001, the Financial Accounting
Standards Board issued 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. See
note 3 to the Consolidated Financial Statements for additional information
regarding the impact of SFAS No. 141 and SFAS No. 142.
F-9
OTHER ASSETS
Other assets primarily consist of patents and other intellectual property. Other
intangible assets are amortized on a straight-line basis over the expected
period benefited by future cash inflows up to 25 years. The Company periodically
evaluates the recoverability of the carrying amount of other intangible assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. An impairment is assessed when the
undiscounted expected future cash flows derived from an asset are less than its
carrying amount. Impairment losses are measured as the amount by which the
carrying value of an asset exceeds its fair value and are recognized in
operating earnings. The Company also continually evaluates the estimated useful
lives of all intangible assets and periodically revises such estimates based on
current events.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse.
EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the applicable
periods. Diluted net earnings 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. The dilutive effect
of common shares issued in connection with outstanding stock options is
determined on net income before cumulative change in accounting method. The
dilutive effect of common shares issued in connection with outstanding stock
options is determined on net income before cumulative change in accounting
method. A reconciliation of these amounts is as follows:
2002 2001 2000
- ------------------------------------------------------------------------------------
(expressed in thousands except per share data)
Income before cumulative (-----------restated-----------)
effect of accounting changes $ 18,003 $ 13,106 $ 3,170
Cumulative effect of
accounting changes,
net of taxes (13,721) (2,492) --
- --------------------------------------------------------------------------------
Net income $ 4,282 $ 10,614 $ 3,170
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding 21,100 20,751 20,842
Dilutive potential
common shares 333 319 93
- --------------------------------------------------------------------------------
Total dilutive
common shares 21,433 21,070 20,935
- --------------------------------------------------------------------------------
Earnings per share:
Basic
Before cumulative effect
of accounting changes $ 0.85 $ 0.63 $ 0.15
Cumulative effect of
accounting changes,
net of taxes (0.65) (0.12) --
- --------------------------------------------------------------------------------
Net income per share $ 0.20 $ 0.51 $ 0.15
- --------------------------------------------------------------------------------
Dilutive
Before cumulative effect
of accounting changes $ 0.84 $ 0.62 $ 0.15
Cumulative effect of
accounting changes,
net of taxes (0.64) (0.12) --
- --------------------------------------------------------------------------------
Net income per share $ 0.20 $ 0.50 $ 0.15
- --------------------------------------------------------------------------------
F-10
COMPREHENSIVE INCOME (LOSS)
Comprehensive income consists of net income, unrealized gains or loss on
investments, derivative instruments gains or losses and foreign currency
translation adjustments and is presented as a component of Shareholders'
Investment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Ultimate results could differ from those estimates. The Company
frequently undertakes significant technological innovation on certain of its
long-term contracts. These contracts involve performance risk that may result in
delayed delivery of product and/or recognition of revenue and gross profit
variation resulting from difficulties in estimating the ultimate cost of such
contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
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
concluded that there will be no material impact of the adoption of SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which amends existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company was required to adopt this statement in its financial
statements issued after May 15, 2002. The Company does not have any activities
that fall under the scope of SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. The Company
will adopt this statement for exit or disposal activities initiated after
December 31, 2002, as required.
In November 2002, the Emerging Issues Task Force finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables," which provides guidance on the timing of revenue recognition for
sales undertakings to deliver more than one product or service. The Company is
required to adopt EITF 00-21 on transactions occurring after June 2003 and is
currently analyzing the impact of its adoption on the Company's financial
statements.
RECLASSIFICATIONS
Certain amounts included in the consolidated financial statements have been
reclassified in prior years to conform to the current year presentation. These
reclassifications had no effect on previously reported shareholders' investment
or net income.
2. RESTATEMENT OF FINANCIAL STATEMENTS:
The Company is amending its consolidated financial statements for the years
ended September 30, 2001 and 2000 to restate the financial statements to correct
bookkeeping errors and misapplications of generally accepted accounting
principles. These adjustments reflect:
(1) Correction of revenue recognition practices related to service
contracts and to the deferral of installation revenue, impacting
revenue recognition and deferred revenue and deferred tax balances;
(2) Correction of cut-off errors in recognition of revenue and
elimination of intercompany profit in inventory, impacting related
revenue, cost of sales, deferred revenue, and inventory balances;
(3) Correction to a number of previously unreconciled inventory and
related reserves and the correction of errors related to the timing
of recognition of surplus and obsolete inventory reserves, which
collectively impacted cost of sales and inventory balances;
F-11
(4) Correction of an error in calculating SFAS 133 currency hedge gains,
impacting currency gains, retained earnings, prepaid expenses, and
unrealized loss on investments accounts;
(5) Correction of the timing of recognizing restructuring reserves,
impacting cost of sales, general and administrative expenses, and
other accrued liabilities;
(6) Correction of the accounting for residual values of certain fixed
assets and asset retirements that should have occurred in prior
periods, impacting various income statement expense categories and
fixed asset balances;
(7) Correction of bookkeeping and account reconciliation errors,
affecting numerous balance sheet and statement of income accounts,
including income taxes and long-lived assets; and
(8) Correction of the Company's effective tax rate, primarily due to
incorrect recognition of tax credits, affecting income tax expense
and accrued income taxes.
Effects of Restatement: In consultation with its independent auditors, the
Company restated its audited financial statements for years ended September 30,
2001 and 2000 and its unaudited financial statements for each of the quarters in
the nine-month period June 30, 2002 and September 30, 2001. The aggregate
restatement impacted net income before cumulative effect of accounting changes
for the first three quaters of fiscal 2002 positively by $8.2 million, fiscal
2001 negatively by $2.1 million and fiscal 2000 negatively by $0.5 million.
For the previously reported nine months ended June 30, 2002, the most
significant of these restatement adjustments reflect:
1. Correction of revenue recognition practices and cut-off errors,
which resulted in a $2.4 million increase to previously reported
revenues for fiscal year 2002 and a related increase to cost of
sales of $1.4 million;
2. Correction of the accounting for residual values of certain fixed
assets and asset retirements that should have occurred in prior
periods, which resulted in a $1.9 million decrease to previously
reported cost of sales and a $1.0 million decrease to other expense
for fiscal year 2002;
3. Correction of errors related to the timing of recognition of surplus
and obsolete inventory reserves, which resulted in the reduction to
cost of sales by $5.6 million; and
4. Correction of errors related to the provision recorded for
restructuring reserves, which resulted in a $1.1 million decrease to
previously reported other income.
For the year ended September 30, 2001, the most significant of these restatement
adjustments reflect::
1. The correction of revenue recognition practices and cut-off errors,
which resulted in a $0.7 million increase to previously reported
revenues for fiscal year 2001, and a related correction to cost of
sales which resulted in a decrease of $1.6 million;
2. Correction in the timing of recognizing restructuring reserves,
which resulted in a $1.8 million increase to cost of sales, a
$2.4 million increase in selling, general and administrative
expenses and a reduction of other expense of $0.2 million;
3. The correction of errors related to the timing of recognition of
surplus and obsolete inventory reserves, which resulted in the
increase to cost of sales by $2.8 million; and
4. The correction of the Company's tax rate for the period and the tax
impact of the aforementioned adjustments to pretax income, which
resulted in a 4-point reduction in the effective tax rate and a $2.7
million reduction in tax expenses.
For the year ended September 30, 2000, the most significant of these restatement
adjustments reflect:
1. The correction of revenue recognition practices and cut-off errors,
which resulted in a $2.5 million decrease to previously reported
revenues for fiscal year 2000 and a related correction to cost of
sales which resulted in an increase of $0.5 million;
2. Correction in the timing of recognizing restructuring reserves,
which resulted in a $1.6 million decrease to cost of sales, a
$2.5 million decrease in selling, general and administrative
expenses and a reduction of restructuring expenses of $1.2 million;
3. The correction of errors related to the timing of recognition of
surplus and obsolete inventory reserves, which resulted in the
increase to cost of sales by $2.8 million; and
F-12
4. The correction of the Company's tax rate for the period and the tax
impact of the aforementioned adjustments to pretax income, which
resulted in a 4-point reduction in the effective tax rate and a $0.7
million reduction in tax expenses.
Correction of other bookkeeping errors in fiscal year 2002, 2001 and 2000
resulted in additional impacts to various income statement and balance sheet
amounts.
The effects of the restatement are as follows:
For the year ended For the year ended
September 30, 2001 September 30, 2000
------------------------ ------------------------
As reported Restated As reported Restated
----------- -------- ----------- --------
Statement of Income Data:
Net revenue $ 396,641 $ 397,359 $ 391,853 $ 389,380
Cost of revenue 255,233 257,672 258,913 260,997
Gross profit 141,408 139,687 132,940 128,383
Operating expenses 111,868 117,482 121,107 118,223
Income from operations 29,540 22,205 11,833 10,160
Other expense (income), net 125 (2,463) 846 331
Income before income taxes 24,578 19,831 6,095 4,937
Cumulative effect (1) (2,263) (2,492) -- --
Net income 12,913 10,614 3,624 3,170
Basic earnings per share 0.62 0.51 0.17 0.15
Diluted earnings per share $ 0.61 $ 0.50 $ 0.17 $ 0.15
Balance Sheet Data:
Accounts receivable, net $ 97,661 $ 97,731 $ 117,866 $ 117,936
Inventories 63,381 64,308 62,520 58,601
Prepaid expenses 6,405 5,975 9,911 9,911
Deferred tax asset -- 7,894 -- 5,443
Total current assets 230,249 234,123 225,273 226,867
Machinery and equipment 110,419 91,203 107,325 88,696
Goodwill 22,545 22,545 24,558 24,558
Other assets 10,072 9,867 8,322 8,322
Accounts payable 16,672 15,685 22,755 22,048
Accrued compensation and benefits 33,661 33,358 29,285 26,843
Advanced billings to customers 26,572 32,884 18,673 23,299
Other accrued liabilities 16,395 15,891 13,680 13,847
Total current liabilities 105,073 114,895 108,648 113,916
Total shareholders' investment $ 167,122 $ 160,738 $ 157,854 $ 153,629
Cash Flow Data:
Net cash from operating activities $ 39,116 $ 36,974 $ 3,624 $ 3,925
Net cash from investing activities (10,514) (8,055) (13,240) (12,107)
Net cash from financing activities (19,616) (19,519) (963) (965)
Net change in cash 9,304 9,304 (9,872) (9,872)
(1) The ($2,263) cumulative effect of change in accounting principle related to
the Company's adoption of SAB 101 and was first reported in the fourth quarter
of the fiscal year ended September 30, 2001.
3. GOODWILL AND OTHER INTANGIBLE ASSETS:
In July 2001, the Financial Accounting Standards Board issued 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 accounting
F-13
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. Upon the Company's adoption of the new
accounting standards in the first quarter of its fiscal year ending September
28, 2002, annual goodwill amortization of $2.2 million ceased, effective October
1, 2001. Fair value was determined using a discounted cash flow methodology. An
evaluation of the Automation and Vehicle Testing Systems reporting units
indicated that $10.8 million and $7.3 million of goodwill, respectively, was
impaired. The performance in these acquired businesses has not met management's
original expectations due to ongoing weakness in the worldwide automotive and
industrial manufacturing marketplace. Adoption of SFAS No. 142 resulted in a
non-cash transition charge to income in the first quarter of its fiscal year
2002 ending September 28, 2002 of $13.7 million, or ($.64) per diluted share,
for impairment of goodwill, net of tax. Earnings per share for the fiscal year
ended September 28, 2002 was positively impacted by $0.06, per diluted share,
from the exclusion of goodwill amortization. Goodwill activity for the last
three fiscal years was:
Goodwill
--------------------------------------------------------
(in thousands of dollars)
Beginning Ending
Year Balance Amortization Write-off Balance
---- ------- ------------ --------- -------
2000 $27,489 ($2,931) $ -- $24,558
2001 24,558 (2,013) -- 22,545
2002 22,545 -- (18,277) 4,268
Annual amortization of other intangible assets of $1.1 million in fiscal 2002
was not impacted by the new standards and will continue. The anticipated
amortization expense related to other intangible assets for the next five fiscal
years is as follows:
Fiscal Year
-----------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
(in thousands of dollars)
Amortization of intangible assets $1,022 $567 $517 $287 $3
For the two years ended September 30, 2001 and 2000, goodwill amortization,
adjusted net income, and basic and diluted income per share are as follows:
September 30,
---------------------------
2001 2000
---------------------------
(in thousands of dollars)
(----------restated---------)
Income before cumulative effect of accounting change $ 13,106 $ 3,170
Add back: Goodwill amortization, net of tax 1,489 1,535
---------- ----------
Adjusted net income before cumulative effect of
accounting change 14,595 4,705
Cumulative effect of accounting change, net of tax (2,492) --
---------- ----------
Adjusted net income $ 12,103 $ 4,705
========== ==========
Basic earnings per share before cumulative effect of accounting
change $ 0.63 $ 0.15
Add back: Goodwill amortization, net of tax 0.07 0.08
---------- ----------
Basic adjusted earnings per share before cumulative effect of
accounting change 0.70 0.23
Cumulative effect of accounting change, net of tax (0.12) --
---------- ----------
Adjusted net income $ 0.58 $ 0.23
========== ==========
Diluted earnings per share before cumulative effect of accounting
change $ 0.62 $ 0.15
Add back: Goodwill amortization, net of tax 0.07 0.07
---------- ----------
Diluted adjusted earnings per share before cumulative effect of
accounting change 0.69 0.22
Cumulative effect of accounting change, net of tax (0.12) --
---------- ----------
Adjusted net income $ 0.57 $ 0.22
========== ==========
F-14
4. BUSINESS SEGMENT INFORMATION:
The Company follows the provisions of Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments on an Enterprise
and Related Information." As such, the Company has determined that it has five
operating business units: Vehicle Testing Systems, Material Testing Systems,
Advanced Systems, Automation and Sensors. Vehicle Testing Systems 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. Material Testing Systems manufactures and markets systems to aid
customers in product development and quality control toward an effort of design
improvement. Advanced Systems offers highly customized systems primarily for
simulation and manufacturing purposes. The Automation business manufactures and
markets products for high performance industrial machine applications in a wide
range of industries. The Sensors business 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, 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"). 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 units. As a result, these business units have been aggregated
into a reportable segment called Factory Automation ("FA"). The Company's Chief
Executive Officer reviews operating results of its MT&S and FA segments on a
periodic basis. The accounting policies of the reportable segments are the same
in all material respects as those described in Note 1 to the Consolidated
Financial Statements. In evaluating the performance of each segment, management
focuses primarily on income from operations, return on assets employed and
working capital measurements. Working capital measurement excludes special
charges (such as restructuring charges and acquisition-related expenses),
interest income and expense, income taxes and other non-operating income or
expense. Corporate administrative expenses, including expenses related to
various support functions such as human resources, information technology and
finance, are allocated to the reportable segments primarily on the basis of
revenue.
2002 2001 2000
- -----------------------------------------------------------------------------------
(expressed in thousands)
NET REVENUE BY SEGMENT (-------restated-------)
Mechanical Testing & Simulation $ 286,979 $ 316,110 $299,880
Factory Automation 68,892 81,249 89,500
- -----------------------------------------------------------------------------------
Total $ 355,871 $ 397,359 $389,380
- -----------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS BY SEGMENT
Mechanical Testing & Simulation $ 29,033 $ 23,787 $ 5,024
Factory Automation (4,202) (1,582) 5,136
- -----------------------------------------------------------------------------------
Total Income from Operations $ 24,831 $ 22,205 $ 10,160
- -----------------------------------------------------------------------------------
IDENTIFIABLE ASSETS BY SEGMENT
Mechanical Testing & Simulation $ 287,886 $ 278,518 $269,273
Factory Automation 32,213 53,425 58,880
- -----------------------------------------------------------------------------------
Total Assets $ 320,099 $ 331,943 $328,153
- -----------------------------------------------------------------------------------
OTHER SEGMENT DATA
Mechanical Testing & Simulation:
Capital expenditures $ 3,279 $ 3,951 $ 9,580
Depreciation and amortization 8,664 10,685 12,021
- -----------------------------------------------------------------------------------
Factory Automation:
Capital expenditures $ 1,869 $ 4,104 $ 2,527
Depreciation and amortization 2,428 3,807 3,491
- -----------------------------------------------------------------------------------
F-15
Geographic segment information was as follows:
2002 2001 2000
- -----------------------------------------------------------------------------------
(expressed in thousands)
TOTAL NET REVENUE (------restated------)
United States $165,554 $175,052 $199,602
Europe 102,114 109,580 112,302
Asia 75,854 90,852 69,023
Other 12,349 21,875 8,453
- -----------------------------------------------------------------------------------
Total $355,871 $397,359 $389,380
- -----------------------------------------------------------------------------------
TOTAL PROPERTY AND EQUIPMENT, NET
United States $ 48,563 $ 54,523 $ 56,821
Europe 10,456 10,519 11,033
Asia 565 288 454
Other 28 78 98
- -----------------------------------------------------------------------------------
Total $ 59,612 $ 65,408 $ 68,406
- -----------------------------------------------------------------------------------
Revenue by geographic area is presented based on the customer's location. No
country other than the United States has revenue in excess of fifteen percent of
the Company's total revenue. No single customer accounted for 10% or more of
consolidated net revenue during any of the periods presented.
5. FINANCING:
2002 2001
- -----------------------------------------------------------------------------------------------------------------------
(expressed in thousands)
6.6% Notes, unsecured, due in annual installments of $4,375 beginning in July 2001 $ 26,250 $ 30,625
7.5% Note, unsecured, due in semi-annual installments of $1,153 beginning in July 2003 15,000 15,000
Variable Rate Note, due in varying installments through April 2007, collateralized by
building 2,575 5,005
5.4% Mortgage, due in quarterly installments of $39 through October 2015, collateralized by
building 4,948 4,843
6.0% Note, unsecured, due in 2008 1,500 1,943
Other 1,672 1,461
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INDEBTEDNESS $ 51,945 $ 58,877
LESS CURRENT MATURITIES (8,605) (5,260)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 43,340 $ 53,617
======================================================================================================================
Long-term debt as of September 28, 2002 and September 30, 2001 respectively, was
as follows:
Aggregate annual maturities of long-term debt for the next five fiscal years
are: 2003--$8.6 million; 2004--$8.1 million; 2005--$7.0 million; 2006--$6.9
million; 2007--$6.9 million and $14.4 million thereafter. The carrying value of
the Company's long-term debt at September 28, 2002 is approximately $0.7 million
higher than the estimated fair value as determined using current interest rates
available to the Company for debt having similar characteristics and remaining
maturities.
F-16
On December 16, 2002, the Company amended its $50 million revolving credit
agreement with a domestic bank group that allows the Company to borrow funds at
various interest rates. The revolving credit agreement limit was amended to $25
million and its expiration was extended to January 2005. Under the provisions of
its revolving credit agreement, the Company is required, among other matters, to
maintain certain financial ratios and to meet certain indebtedness and
restricted payments tests. At September 28, 2002, the Company had $28.5 million
available for restricted payments, as defined. No borrowings were outstanding
under this credit agreement at September 28, 2002. The Company was in compliance
with its financial covenants for the 2002 and 2001 fiscal years, but was, as a
result of the restatement for fiscal 2000 financial statements, in default on
its fixed charge coverage ratio for the year ended September 30, 2000. The
Company has obtained waivers of this covenant violation from its lenders
supplying both revolving credit and term debt where appropriate.
In addition, the Company has standby letter-of-credit lines totaling $30
million. At September 28, 2002, standby letters of credit outstanding totaled
$10.7 million. The Company was in compliance with respect to all such covenants
and conditions of its revolving credit and other debt agreements as of September
28, 2002. Information on short-term borrowings for the year ended September 28,
2002 and the years ended September 30, 2001 and 2000 were as follows:
2002 2001 2000
- ------------------------------------------------------------------------------------
(expressed in thousands)
Balance outstanding at year end $ 598 $ 428 $11,945
Average balance outstanding during the year 1,121 8,553 22,617
Maximum balance outstanding during the year 10,021 24,000 37,500
Interest rate at year end 3.4% 3.4% 7.9%
Weighted-average interest rate during the year 1.6% 7.4% 7.0%
- ------------------------------------------------------------------------------------
6. INCOME TAXES:
The components of income before income taxes for the fiscal years ended
September 28, 2002 and September 30, 2001 and 2000, are as follows:
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
(expressed in thousands)
Income from continuing operations before cumulative effect of accounting change (------restated------)
and income taxes:
Domestic $19,640 $10,329 $ (8,447)
Foreign 6,282 9,502 13,384
- ----------------------------------------------------------------------------------------------------------------------------------
Total $25,922 $19,831 $ 4,937
- ----------------------------------------------------------------------------------------------------------------------------------
The provision for income taxes from continuing operations before cumulative
effect of accounting change for each of the fiscal years ended September 28,
2002 and September 30, 2001 and 2000 are as follows:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
(expressed in thousands)
Current provision (benefit): (------restated------)
Federal $ 4,454 $ 4,314 $(2,735)
State 630 700 (150)
Foreign 3,315 3,918 6,521
Deferred (480) (2,207) (1,869)
- ---------------------------------------------------------------------------------------------------------------------------------
Total provision $ 7,919 $ 6,725 $ 1,767
- ---------------------------------------------------------------------------------------------------------------------------------
A reconciliation from the Federal statutory income tax rate to the Company's
effective rate for continuing operations before cumulative effect of accounting
change for the fiscal years ended September 28, 2002 and September 30, 2001 and
2000, are as follows:
F-17
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(--------restated----------)
Statutory income tax rate 35% 35% 35%
Tax benefit of Foreign Sales Corporation/Extraterritorial Income Exclusion (6) (5) (22)
Foreign provision in excess of U.S. tax rate 4 4 40
State income taxes, net of federal benefit 2 1 (7)
Research and development tax credits (4) (4) (20)
Meals and Entertainment 1 1 6
Goodwill amortization -- 1 5
Other, net (1) 1 (1)
- ---------------------------------------------------------------------------------------------------------------
Effective income tax rate 31% 34% 36%
- ---------------------------------------------------------------------------------------------------------------
A summary of the deferred tax assets and liabilities for the fiscal years ended
September 28, 2002 and September 30, 2001 and 2000, are as follows:
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(expressed in thousands)
DEFERRED TAX ASSETS: (------restated------)
Accrued compensation and benefits $ 3,621 $ 2,918 $ 3,257
Inventory reserves 5,305 6,048 4,750
Allowance for doubtful accounts 371 347 242
Credit and net operating loss carryforwards 4,671 3,303 2,118
Other assets 3,205 897 1,673
- ----------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS $17,173 $13,513 $12,040
================================================================================================================
DEFERRED TAX LIABILITY:
- ----------------------------------------------------------------------------------------------------------------
Property and equipment $ 8,468 $ 8,312 $ 9,102
- ----------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ 8,705 $ 5,201 $ 2,938
================================================================================================================
At September 28, 2002, the Company has research credit carryovers for federal
and state tax purposes of approximately $4.0 million, which will expire between
the years 2014 and 2017. Foreign tax credit carryovers of $0.6 million also
exist which expire between the years 2005 and 2007. At September 30, 2001 and
2000 the amount of research credit carryover for federal and state tax purposes
was $2.8 million and $1.3 million, respectively, and the foreign tax credit
carryover was $0.1 million and $0.0 million, respectively. A net operating loss
carryover subject to an annual section 382 limitation attributable to an
acquired subsidiary also existed at September 30, 2001 and 2000 in the amount of
$1.1 million and $2.2 million, respectively, with expiration in 2014.
The Company has assessed its taxable earnings history and prospective future
taxable income. Based upon this assessment, management has determined that it is
more likely than not that its net deferred tax assets will be realized in future
periods. The Company may be required to provide a valuation allowance for this
asset in the future if it does not generate sufficient taxable income as
planned.
According to APB 23, U.S. income taxes are not provided on undistributed
earnings of international subsidiaries, which are permanently reinvested. As of
September 28, 2002, earnings permanently reinvested in international
subsidiaries not subject to a U.S. income tax provision were approximately $36
million.
In 2002, 2001, 2000 the Company recognized tax benefits of $0.2 million, $0.4
million, and $0.0 million, respectively, relating to the Company's stock option
plan, which benefits were directly allocated to shareholders' investment.
F-18
7. STOCK OPTIONS:
The Company has made certain stock-based awards to its officers, non-employee
directors and key employees under various stock plans. Awards permitted under
these plans include incentive (qualified) stock options, non-qualified stock
options, stock appreciation rights, restricted stock, deferred stock, and other
stock-based and non stock-based awards. During the year ended September 28,
2002, the Company awarded incentive stock options and non-qualified stock
options. These awards have been granted at exercise prices that are 100% of
market value at the day of grant. Beginning one year after grant, the options
generally can be exercised proportionately each year for periods of three years,
as defined in the respective plans. Options currently expire no later than five
years from the grant date, as defined. Option holders may exercise options by
delivering Company stock already owned for at least six months, cash or a
combination of stock and cash. During 2002 and 2001, option holders delivered
26,616 shares and 85,075 shares, respectively, of the Company's stock in full or
partial payment of options exercised.
A status of the Company's
stock option plans is
summarized below (in thousands
of shares): 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Shares WAEP* Shares WAEP* Shares WAEP*
- -------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 3,081 $11.12 3,625 $ 9.98 2,816 $11.21
Granted 728 $10.50 728 $12.30 1,115 $ 7.17
Exercised (214) $ 6.57 (410) $ 8.00 (19) $ 6.44
Forfeited (573) $11.26 (863) $ 8.81 (287) $11.30
Options outstanding at year-end 3,022 $11.27 3,081 $11.12 3,625 $ 9.98
Options exercisable at year-end 1,684 $11.90 1,418 $11.58 1,893 $10.23
- -------------------------------------------------------------------------------------------------------------------
*Weighted-Average Exercise Price
The following summarizes information concerning stock options outstanding as of
September 28, 2002 (in thousands of shares):
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
$6.375-$6.8125 289 2.43 $ 6.77 180 $ 6.78
- --------------------------------------------------------------------------------------------------------------------
$7.3125-$9.875 540 2.92 $ 7.56 345 $ 7.59
- --------------------------------------------------------------------------------------------------------------------
$10.25-$13.00 1,271 4.22 $11.64 247 $12.69
- --------------------------------------------------------------------------------------------------------------------
$13.125-$14.625 629 1.95 $13.45 619 $13.43
- --------------------------------------------------------------------------------------------------------------------
$15.75-$19.375 293 0.34 $16.24 293 $16.24
- --------------------------------------------------------------------------------------------------------------------
Total 3,022 2.97 $11.27 1,684 $11.90
- --------------------------------------------------------------------------------------------------------------------
The number of stock options scheduled to expire, if not exercised by specified
dates, in the following fiscal years are as follows: 2003: 423,000; 2004:
290,000; 2005: 717,000; 2006: 868,000; 2007: 718,000. Prices for options
exercised during the three-year period ended September 28, 2002 ranged from
$6.625 to $15.13. In January 2000, the Company's shareholders approved a
1,500,000 share increase in the Company's 1997 stock option plan. At September
28, 2002, a total of 1,823,410 options were available for future grant, 800,459
from the 1997 plan and 1,023,451 options from the 1994 plan.
In 1992, the Company's shareholders authorized an Employee Stock Purchase Plan,
whereby 1,000,000 shares of the Company's common stock were reserved for sale to
employees. Participants were issued 95,826 shares in 2002 and 149,748 shares in
2001. The 1992 Employee Stock Purchase Plan terminated with the 2002 share
distribution.
F-19
In 2002, the Company's shareholders authorized a new Employee Stock Purchase
Plan whereby 750,000 shares of the Company's common stock were reserved for
purchase by employees. In fiscal 2002, participants subscribed to purchase
68,382 shares at 85% of the market price for issuance in fiscal 2003.
Pro forma Information: The Company has elected to follow Accounting Principles
Board Opinion No. 25, ("APB No. 25") "Accounting for Stock Issued to Employees,"
in accounting for its employee stock options. Under APB No. 25, no compensation
cost for stock options is recognized for stock options granted at or above fair
value. However, Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation," requires the use of option
valuation models to estimate compensation cost from the granting of employee
stock options and to present the pro forma effect of such cost on reported net
income and earnings per share. SFAS No. 123 requires this information be
determined as if the Company had accounted for employee stock options granted in
fiscal years beginning subsequent to December 31, 1994 under the fair value
method of that Statement. The fair value of options granted, as reported below,
has been estimated at the date of grant using the Black-Scholes option valuation
model with the following weighted average assumptions:
2002 2001 2000
- --------------------------------------------------------------------------------
Expected life (in years) 2.4 3.5 2.8
Risk-free interest rate 2.9% 2.9% 6.0%
Expected volatility 0.65 0.54 0.49
Dividend yield 2.3% 2.1% 3.4%
- --------------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models required the input of highly
subjective assumptions, including the expected stock price volatility. The
weighted average estimated fair value of employee stock options granted during
2002, 2001, and 2000 was $3.69, $4.20 and $2.14, respectively. For purpose of
the pro forma disclosure, the estimated fair value of the options is amortized
to expense over the vesting period of the options. The Company's net income, as
reported, and pro forma earnings per share are as follows (in thousands, except
per share amounts):
2002 2001 2000
- --------------------------------------------------------------------------
Income Before Cumulative
Effect of Accounting Change,
Net of Taxes
As Reported $ 18,003 $ 13,106 $ 3,170
Pro forma 16,143 11,526 1,677
- -------------------------------------------------------------------------
Basic Earnings Per Share*
As Reported $ 0.85 $ 0.63 $ 0.15
Pro forma 0.76 0.56 0.08
- -------------------------------------------------------------------------
Diluted Earnings Per Share*
As Reported $ 0.84 $ 0.62 $ 0.15
Pro forma 0.75 0.55 0.08
- -------------------------------------------------------------------------
*excludes the cumulative effect of the accounting change for SAB 101 in 2001
*excludes the cumulative effect of the accounting change for SFAS 142 in 2002
8. EMPLOYEE BENEFIT PLANS:
The Company offers a 401(k) Pay Conversion Plan for eligible employees in the
United States. Employees are able to supplement their retirement income by
participating in this voluntary pretax savings plan by designating a percentage
of their gross income, subject to limitations imposed by federal law. Employees
are fully vested in their voluntary contributions. The Company matches a portion
of the employees' voluntary contributions. The Company's matching contribution
was $0.6 million in 2002, $0.6 million in 2001, and $0.8 million in 2000.
F-20
The Company also has a profit sharing plan that serves as a retirement program
for most U.S. and certain international employees. Employees, with the exception
of Aeromet Corporation employees, who have been paid for 1,000 hours or more of
service during a plan year are eligible for a profit sharing contribution.
The Company's Board of Directors approves the contribution to the profit sharing
plan annually. The plan provides for a minimum contribution of 4% of participant
compensation, as defined, up to the social security taxable wage base, and 8% of
participant compensation in excess of the social security taxable wage base up
to the maximum profit sharing contribution allowed by federal law, so long as
the entire contribution does not exceed pretax income. The Company's
contributions totaled $ 4.2 million in 2002, $4.2 million in 2001 and $4.4
million in 2000.
One of the Company's international subsidiaries had a noncontributory, unfunded
retirement plan for eligible employees. These plans provide benefits based on
the employee's years of service and compensation during the years immediately
preceding retirement, early retirement, termination, disability or death, as
defined in the respective plans.
The cost for these plans include the following components:
2002 2001 2000
- --------------------------------------------------------------------------
(expressed in thousands)
Service cost-benefit earned during the period $183 $195 $358
Interest cost on projected benefit obligation
278 243 428
Net amortization and deferral
15 15 29
- ------------------------------------------------------------------------
Net Periodic Retirement Cost $476 $453 $815
- ------------------------------------------------------------------------
The following summarizes the change in benefit obligation and the plan assets:
2002 2001
- ---------------------------------------------------------------------------
(expressed in thousands)
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 4,774 $ 4,343
Service cost 183 195
Interest cost 278 243
Translation change 44 26
Actuarial loss 257 15
Benefits paid (54) (48)
- ------------------------------------------------------------------------
Projected benefit obligation, end of year $ 5,482 $ 4,774
- ------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 54 48
Benefits paid (54) (48)
- ------------------------------------------------------------------------
Fair value of plan assets, end of year $ -- $ --
- ------------------------------------------------------------------------
The funded status of the Company`s pension retirement plans at September 28
2002, and September 30, 2001 respectively, is as follows:
2002 2001
- -----------------------------------------------------------------------------------
(expressed in thousands)
Funded status $(5,482) $(4,774)
Unrecognized net gain 271 16
Unrecognized net liability being amortized 72 82
Required adjustment to recognize minimum liability 11 3
- ----------------------------------------------------------------------------------
Accrued Pension Liability $(5,128) $(4,673)
- ----------------------------------------------------------------------------------
Major assumptions used in the above calculation include:
Discount rate 6.0% 6.3%
Expected rate of increase in future compensation
levels 3.1% 3.0%
- ----------------------------------------------------------------------------------
F-21
9. RESTRUCTURING AND OTHER CHARGES:
During 2002, 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 during fiscal year 2002. 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 were paid during fiscal 2002. The closure is expected to result in
approximately $1.0 million of savings annually beginning in fiscal 2003.
During 2001, the Company recorded a restructuring charge of $2.3 million as a
result of the closure of its manufacturing operations in France and the transfer
of this product line to its electromechanical division in North Carolina.
Substantially all of the necessary cash outlays were completed during 2001. Such
costs were financed primarily with funds from continuing operations and
borrowings under its bank line of credit.
During 2000, the Company announced the discontinuation of a line of data
acquisition products acquired as part of its 1999 acquisition of DSP Technology,
Inc. ("DSP") in 1999. A restructuring charge was recorded in 2001 for $1.9
million. This included a provision for severance costs of $0.8 million, the
write-off of leasehold improvements and production and other equipment of $0.3
million and other costs of $0.8 million associated with closure of the facility,
the wind-down of the related product line, excess and obsolete inventory,
uncollectible receivables and the write off of fixed assets. Of the total $1.9
million, $1.3 million was charged to cost of revenue and $0.6 million was
charged to general and administrative expenses. The activity related to the
provision was materially complete as of September 30, 2001, and no additional
charges were incurred during fiscal 2002.
For the three years ended September 28, 2002 and September 30, 2001 and 2000,
the reserve for restructuring was as follows:
RESTRUCTURING RESERVE
---------------------
Beginning Ending
Year Balance Provision Write-off Balance
---- ------- --------- --------- -------
2000 $ -- $1,344 $(1,344) $ --
2001 -- 4,193 (3,972) 221
2002 221 2,073 (2,273) 21
10. COMMITMENTS AND CONTINGENCIES:
Litigation: The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, final resolution of these matters will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
Leases: The Company has non-cancelable operating lease commitments for equipment
and facilities that expire on various dates through 2011. Minimum annual rental
commitments at September 28, 2002 for the fiscal years 2003 through 2007 and
thereafter are $5.5 million, $4.3 million, $3.4 million, $2.5 million and $4.8
million, respectively. Total lease expense was $6.6 million in 2002, $4.3
million in 2001 and $3.9 million in 2000.
F-22
MTS SYSTEMS CORPORATION AND SUBSIDIARIES
SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES
FOR DOUBTFUL ACCOUNTS, INVENTORY AND RESTRUCTURING RESERVES
FOR THE YEARS ENDED SEPTEMBER 28, 2002, AND SEPTEMBER 30, 2001 AND 2000
(In Thousands)
Balance Amounts Balance
Beginning Written-Off/ End of
of Year Provisions Payments Year
------- ---------- -------- ----
Allowance for Doubtful Accounts:
- -------------------------------
2002 $2,709 $1,344 $(1,363) $2,690
2001 2,255 992 (538) 2,709
2000 2,232 645 (622) 2,255
Inventory Reserves:
- ------------------
2002 $4,820 $8,124 $(3,034) $9,910
2001 (restated) 4,113 7,585 (6,878) 4,820
2000 (restated) 4,091 3,709 (3,687) 4,113
Restructuring Reserves:
- ----------------------
2002 $ 221 $2,073 $(2,273) $ 21
2001 (restated) -- 4,193 (3,972) 221
2000 (restated) -- 1,344 (1,344) --
S-1
EXHIBIT INDEX TO FORM 10-K
10.a Management Variable Compensation Plan, dated October 2002.
10.s Description of the terms of employment of Sidney W. Emery, pursuant
to an offer letter dated March 3, 1998.
21. Subsidiaries of the Registrant.
23. Consent of Independent Public Accountants.
99.1 Certification of the Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.