- --------------------------------------------------------------------------------
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly period ended March 29, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________________
to __________________
Commission File Number 0-2382
MTS SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0908057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14000 Technology Drive, Eden Prairie, MN 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (952) 937-4000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
_X_ Yes ___ No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
_X_ Yes ___ No
The number of shares outstanding of the Registrant's common stock as of May 8,
2003 was 20,950,274 shares.
MTS SYSTEMS CORPORATION
REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED MARCH 29, 2003
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
As of March 29, 2003 and September 28, 2002 2
Consolidated Statements of Income
For the Three and Six Months Ended
March 29, 2003 and March 31, 2002 3
Consolidated Statements of Cash Flows
For the Six Months Ended March 29, 2003 and
March 31, 2002 4
Condensed Notes to Consolidated Financial Statements 5 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 20 - 21
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited - in thousands of dollars, except share data)
March 29, September 28,
ASSETS 2003 2002
--------- ---------
Current Assets:
Cash and cash equivalents $ 59,228 $ 62,456
Short-term investments 53,997 35,094
Accounts receivable, net of allowance for doubtful accounts 55,844 59,943
Unbilled contracts and retainage receivable 29,813 32,276
Inventories 29,978 34,773
Prepaid expense 5,280 5,380
Current deferred tax asset 8,739 8,739
Other current assets 1,147 19
Assets of discontinued operations 13,458 15,311
--------- ---------
Total current assets 257,484 253,991
--------- ---------
Property and Equipment:
Land 3,247 3,247
Buildings and improvements 46,009 44,723
Machinery and equipment 83,298 79,679
Accumulated depreciation (75,657) (70,765)
--------- ---------
Total property and equipment, net 56,897 56,884
--------- ---------
Goodwill 4,329 4,268
Other assets 2,729 3,363
Non-current deferred tax asset 1,593 1,593
--------- ---------
$ 323,032 $ 320,099
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Notes payable to banks $ 198 $ 598
Current maturities of long-term debt 6,828 8,605
Accounts payable 12,051 13,137
Accrued payroll-related costs 27,445 26,112
Advance payments from customers 43,376 37,209
Accrued warranty costs 5,035 4,482
Accrued income taxes 6,135 11,120
Other accrued liabilities 10,029 9,917
Liabilities of discontinued operations 3,789 1,795
--------- ---------
Total current liabilities 114,886 112,975
--------- ---------
Deferred income taxes 1,740 1,519
Long-term debt, less current maturities 36,325 42,790
Other long-term liabilities 584 550
--------- ---------
Total liabilities 153,535 157,834
--------- ---------
Shareholders' Investment:
Common stock, $.25 par; 64,000,000 shares authorized:
21,072,000 and 21,208,000 shares issued and outstanding 5,268 5,302
Additional paid-in capital 8,101 9,770
Retained earnings 153,780 146,857
Accumulated other comprehensive income 2,348 336
--------- ---------
Total shareholders' investment 169,497 162,265
--------- ---------
$ 323,032 $ 320,099
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
For The Three Months Ended For The Six Months Ended
March 29, March 31, March 29, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue $ 93,236 $ 84,665 $ 177,675 $ 164,263
Cost of sales 59,916 52,215 113,049 101,197
--------- --------- --------- ---------
Gross profit 33,320 32,450 64,626 63,066
--------- --------- --------- ---------
Operating expenses:
Selling 13,817 12,694 26,352 25,873
General and administrative 7,290 5,874 13,441 12,202
Research and development 4,044 4,435 7,623 8,573
--------- --------- --------- ---------
Total operating expenses 25,151 23,003 47,416 46,648
--------- --------- --------- ---------
Income from continuing operations 8,169 9,447 17,210 16,418
Interest expense 949 995 1,993 2,102
Interest income (617) (168) (1,104) (305)
Gain on sale of investments -- (2,630) -- (2,630)
Other income, net (1,729) (435) (1,712) (1,698)
--------- --------- --------- ---------
Income before income taxes, discontinued operations,
and cumulative effect of accounting change 9,566 11,685 18,033 18,949
Provision for income taxes 3,184 3,914 5,951 6,292
--------- --------- --------- ---------
Income before discontinued operations and cumulative
effect of accounting change 6,382 7,771 12,082 12,657
--------- --------- --------- ---------
Discontinued operations:
Loss from discontinued operations, net of tax (17) (2,608) (220) (3,781)
Impairment on discontinued operations, net of tax (2,402) -- (2,402) --
Cumulative effect of accounting change, net of tax -- -- -- (9,198)
--------- --------- --------- ---------
Loss from discontinued operations, net of tax (2,419) (2,608) (2,622) (12,979)
--------- --------- --------- ---------
Income (loss) before cumulative effect of accounting
change on continuing operations 3,963 5,163 9,460 (322)
Cumulative effect of accounting change on continuing
operations, net of tax -- -- -- (4,523)
--------- --------- --------- ---------
Net income (loss) $ 3,963 $ 5,163 $ 9,460 $ (4,845)
========= ========= ========= =========
Earnings per share:
Basic -
Income before discontinued operations and
cumulative effect of accounting change $ 0.30 $ 0.37 $ 0.57 $ 0.60
Discontinued operations:
Loss from discontinued operations, net of tax 0.00 (0.12) (0.01) (0.18)
Impairment on discontinued operations, net of tax (0.11) -- (0.11) --
Cumulative effect of accounting change, net of tax -- -- -- (0.44)
--------- --------- --------- ---------
Loss from discontinued operations, net of tax (0.11) (0.12) (0.12) (0.62)
--------- --------- --------- ---------
Income (loss) before cumulative effect of accounting
change on continuing operations 0.19 0.25 0.45 (0.02)
Cumulative effect of accounting change, net of tax -- -- -- (0.21)
--------- --------- --------- ---------
Earnings (loss) per share $ 0.19 $ 0.25 $ 0.45 $ (0.23)
========= ========= ========= =========
Weighted average number of common shares outstanding - basic 21,112 21,057 21,122 21,042
========= ========= ========= =========
Diluted -
Income before discontinued operations and cumulative
effect of accounting change $ 0.30 $ 0.36 $ 0.56 $ 0.59
Discontinued operations:
Loss from discontinued operations, net of tax 0.00 (0.12) (0.01) (0.18)
Impairment on discontinued operations, net of tax (0.11) -- (0.11) --
Cumulative effect of accounting change, net of tax -- -- -- (0.43)
--------- --------- --------- ---------
Loss from discontinued operations, net of tax (0.11) (0.12) (0.12) (0.61)
--------- --------- --------- ---------
Income (loss) before cumulative effect of
accounting change on continuing operations 0.19 0.24 0.44 (0.02)
Cumulative effect of accounting change, net of tax -- -- -- (0.21)
--------- --------- --------- ---------
Earnings (loss) per share $ 0.19 $ 0.24 $ 0.44 $ (0.23)
========= ========= ========= =========
Weighted average number of common shares outstanding - diluted 21,404 21,336 21,379 21,367
========= ========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(unaudited - in thousands of dollars)
Six Months Ended
---------------------
March 29, March 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ 9,460 $ (4,845)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Non-cash cumulative effect of accounting change
on continuing operations -- 4,523
Non-cash cumulative effect of accounting change
on discontinued operations -- 9,198
Loss on discontinued operations 220 3,781
Impairment on discontinued operations 2,402 --
Gain on sale of investment -- (2,630)
Depreciation and amortization 4,736 5,318
Deferred income taxes 70 134
Bad debt provision 151 290
Inventory provision 783 1,318
Changes in operating assets and liabilities,
net of effects of businesses divested:
Accounts, unbilled contracts and retainage receivables 8,758 22,498
Inventories 5,706 7,899
Prepaid expenses (236) (2,316)
Other assets (1,187) (983)
Accounts payable (1,276) 963
Accrued compensation and benefits 3,025 (9,370)
Advance billings to customers 4,996 (4,181)
Accrued warranty costs 448 277
Other liabilities (8,515) 1,614
-------- --------
Net cash provided by continuing operating activities 29,541 33,488
-------- --------
Cash flows from investing activities:
Additions to property and equipment (3,425) (1,475)
Proceeds from maturity of short-term investments 20,594 --
Proceeds from sale of short-term investments -- 4,920
Proceeds from sale of businesses 550 --
Purchases of short-term investments (39,497) --
-------- --------
Net cash (used in) provided by investing activities (21,778) 3,445
-------- --------
Cash flows from financing activities:
Net repayments under notes payable to banks (418) --
Payments of long-term debt (8,774) (217)
Cash dividends (2,540) (2,530)
Proceeds from exercise of stock options 822 639
Payment to purchase and retire common stock (2,523) (816)
-------- --------
Net cash used in financing activities (13,433) (2,924)
-------- --------
Net cash provided by discontinued operations 1,008 3,045
Effect of exchange rate on changes in cash 1,434 (463)
-------- --------
Net (decrease) increase in cash and cash equivalents (3,228) 36,591
Cash and cash equivalent, at beginning of period 62,456 17,336
-------- --------
Cash and cash equivalent, at end of period $ 59,228 $ 53,927
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for -
Interest expense $ 1,914 $ 1,615
Income taxes $ 10,576 $ 2,897
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
MTS SYSTEMS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
- ------------------------
Accounting Policies
- -------------------
The consolidated financial statements include the accounts of MTS SYSTEMS
CORPORATION and its wholly and majority owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
The interim consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The information furnished in these
financial statements includes normal recurring adjustments and reflects all
adjustments that are, in the opinion of management, necessary for a fair
presentation of such financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
accompanying financial statements of the Company should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's 2002 Annual Report on Form 10-K filed with the SEC. Interim
results of operations for the six-month period ended March 29, 2003 may not
necessarily be indicative of the results to be expected for the full year.
Certain prior year amounts included in the accompanying financial statements,
including the impact of the Company's discontinued operations, have been
reclassified to conform to the current year's presentation. Such
reclassifications had no effect on the Company's previously reported financial
position, net income or cash flows.
The Company believes that of its significant accounting policies, the following
are particularly important to the portrayal of the Company's results of
operations and financial position and may require the application of a higher
level of judgment by the Company's management, and as a result are subject to an
inherent degree of uncertainty.
Revenue Recognition
- -------------------
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 are 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.
Short-Term Investments
- ----------------------
Short-term investments at March 29, 2003 consisted of highly liquid United
States government obligations, certificates of deposit, and highly rated
corporate bonds maturing in four to twelve months from the date of purchase. The
Company classifies its debt securities as held-to-maturity. Held-to-maturity
securities are carried at amortized cost, which approximates market value. There
were no substantive unrealized gains or losses from the investment in
held-to-maturity securities as of the quarter ended March 29, 2003. All
investments in equity securities are classified as available-for-sale
5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
and are carried at fair value. Unrealized gains and losses are reported as a
component of other comprehensive income. At March 29, 2003 the Company had no
investments in equity securities.
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. Inventories as of March 29, 2003 and September 28, 2002, respectively,
were as follows:
March 29, 2003 September 28, 2002
-------------- ------------------
(in thousands of dollars)
Customer projects in various
stages of completion $ 6,229 $ 8,679
Components,
assemblies and parts 23,749 26,094
------- -------
Total $29,978 $34,773
======= =======
2. RECENTLY ISSUED ACCOUNTING STANDARDS
- ---------------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") 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.
In April 2003, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging," which amends and clarifies financial accounting and reporting for
derivative instruments. The Company is required to adopt this statement for
transactions occurring after June 2003 and is currently analyzing the impact of
its adoption on the Company's financial statements.
3. DISCONTINUED OPERATIONS
- --------------------------
During the second quarter of fiscal year 2003, the Company decided to sell its
Automation division, which was based in New Ulm, Minnesota and also maintained
operations in Montgomeryville, Pennsylvania and Freiburg and Straslund, Germany.
On March 31, 2003, the Company sold substantially all of the net assets
associated with the Automation division's gradient amplifier product line to
Performance Controls, Inc., an affiliate of Hitachi Medical Corporation, with
certain of the intellectual property assets being sold to Hitachi Medical
Corporation. On April 11, 2003, the Company sold all the remaining net assets of
the North American Automation division, based in New Ulm, Minnesota, to Parker
Hannifin Corporation ("Parker-Hannifin"). On April 30, 2003, the Company sold
100% of its stock in the Automation division's German operations also to Parker
Hannifin, which completed the sale of the Company's entire Automation division
and marked the Company's exit from the motor and amplifier business.
As a result of the Company's decision to sell the Automation division, the
characterization of the related assets changed from "held-for-use" to
"held-for-sale" at March 29, 2003. In accordance with the requirements of SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company was required to perform a valuation of the held-for-sale assets to
determine whether these assets were impaired at March 29, 2003. Per SFAS 144,
the anticipated selling price of the business was used as the basis for this
valuation. As a result of the valuation, the Company recorded an impairment
charge on discontinued operations of $2.4 million, net of taxes of $0.8 million,
for the quarter ended March 29, 2003. This included a charge of $1.5 million
related to impairment of the New Ulm and German assets and $0.9 million of
closing-related expenses, net of taxes. The Automation division has historically
been included in the Company's Factory Automation segment for financial
reporting. Per SFAS 144, the Company has reported the results of the operations
of the Automation division as discontinued operations at March 29, 2003.
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following are the operating results of the discontinued operations:
Three Months Ended Six Months Ended
March 29, 2003 March 31, 2002 March 29, 2003 March 31, 2002
-------------- -------------- -------------- --------------
(in thousands of dollars) (in thousands of dollars)
Revenue $ 7,353 $ 7,410 $ 14,175 $ 14,976
Loss on discontinued operations before taxes,
impairment charge, and cumulative effect of
accounting change $ (15) $ (4,251) $ (344) $ (6,169)
The assets and liabilities of the Automation division at March 29, 2003 were as
follows:
Cash and cash equivalents $ 1,116
Accounts receivable, net of allowances for doubtful accounts 4,520
Inventories 4,848
Other current assets 126
--------
Current assets of discontinued operations 10,610
Buildings and improvements 1,569
Machinery and equipment 7,115
Accumulated depreciation (6,014)
Other assets 2,580
Impairment charge (2,402)
--------
Long-lived assets of discontinued operations 2,848
--------
Total assets of discontinued operations $ 13,458
========
Accounts payable $ 1,363
Accrued payroll-related costs 608
Accrued warranty costs 675
Other accrued liabilities 1,025
--------
Current liabilities of discontinued operations 3,671
Other liabilities 118
--------
Total liabilities of discontinued operations $ 3,789
========
4. EARNINGS (LOSS) PER COMMON SHARE
- -----------------------------------
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the applicable
periods. Diluted net income (loss) per share is computed under the treasury
stock method and is calculated to reflect the potentially dilutive effect of
common shares issued in connection with outstanding stock options. A
reconciliation of these amounts is as follows:
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Three Months Ended Six Months Ended
March 29, March 31, March 29, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share data)
Income (loss) before cumulative effect of accounting
change on continuing operations $ 3,963 $ 5,163 $ 9,460 $ (322)
Cumulative effect of accounting change on continuing
operations, net of tax -- -- -- (4,523)
-------- -------- -------- --------
Net income (loss) $ 3,963 $ 5,163 $ 9,460 $ (4,845)
======== ======== ======== ========
Weighted average common shares outstanding 21,112 21,057 21,122 21,042
Diluted potential common shares 292 279 257 325
-------- -------- -------- --------
Total diluted common shares 21,404 21,336 21,379 21,367
Basic earnings (loss) per share $ 0.19 $ 0.25 $ 0.45 $ (0.23)
Diluted earnings (loss) per share $ 0.19 $ 0.24 $ 0.44 $ (0.23)
======== ======== ======== ========
5. COMPREHENSIVE INCOME (LOSS)
- ------------------------------
Comprehensive income (loss) represents net earnings (loss) adjusted for foreign
currency translation adjustments, the unrealized gain or loss on
available-for-sale investments, and the net effect of accumulated hedging
activity.
Three Months Ended Six Months Ended
March 29, March 31, March 29, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands of dollars) (in thousands of dollars)
Net income (loss) $ 3,963 $ 5,163 $ 9,460 $ (4,845)
Change in cumulative translation adjustment 944 (303) 2,631 (2,435)
Unrealized loss on derivative instruments (645) (1,190) (619) (361)
Unrealized (loss)/gain on investments -- (255) -- 146
-------- -------- -------- --------
Comprehensive income (loss) $ 4,262 $ 3,415 $ 11,472 $ (7,495)
======== ======== ======== ========
6. BUSINESS SEGMENT INFORMATION
- -------------------------------
The Company's Chief Executive Officer regularly reviews the available financial
information for five discrete business units: Vehicle Testing Systems, Material
Testing Systems, Advanced Systems, Automation, and Sensors. The Vehicle Testing
Systems unit manufactures and markets systems for vehicle and component
manufacturers to aid in the acceleration of design development work and to
decrease the cost of product manufacturing. The Material Testing Systems unit
manufactures and markets systems to aid customers in product development and
quality control toward an effort of design improvement. The Advanced Systems
unit offers highly customized systems primarily for simulation and
manufacturing. The Automation unit manufactures and markets products for high
performance industrial machine applications in a wide range of industries. The
Automation unit also includes the Company's AeroMet subsidiary, which develops a
laser-additive manufacturing process for aerospace applications. The Sensors
unit manufactures and markets displacement and liquid level sensors used in
various applications to monitor and automate industrial processes. The economic
characteristics, nature of products and services, production processes, type or
class of customer served, method of distribution and regulatory environments are
similar for the Vehicle Testing Systems, Material Testing Systems and Advanced
Systems business units. As a result of these similarities, these units have been
aggregated for financial statement purposes into one reportable segment called
Mechanical Testing and Simulation ("MT&S"). In addition, the economic
characteristics, nature of products and services, production processes, type or
class of customer served, method of distribution and regulatory environments are
similar for the Automation and Sensors business units. As a result, these units
have been aggregated into one reportable segment called Factory Automation
("FA").
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The accounting policies of the reportable segments are the same as those
described in Note 1 to the Consolidated Financial Statements found in the
Company's 2002 Form 10-K. In evaluating each segment's performance, management
focuses on income from operations. This measurement excludes interest income and
expense, income taxes and other non-operating items. Corporate expenses,
including costs associated with various support functions such as human
resources, information technology, finance and accounting, and general and
administrative costs, are allocated to the reportable segments primarily on the
basis of revenue.
In accordance with the classification of the Automation division as a
discontinued operation at March 29, 2003, financial information for the Factory
Automation segment has been restated for fiscal years 2003 and 2002 to conform
to the remaining businesses that represent the continuing operations of that
segment. As a result, the Factory Automation segment data below includes the
results of the Company's Sensors business unit and its AeroMet subsidiary.
Financial information by reportable segment is as follows:
Three Months Ended Six Months Ended
March 29, March 31, March 29, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands of dollars)
REVENUE BY SEGMENT:
Mechanical Testing and Simulation $ 80,804 $ 74,696 $154,757 $144,979
Factory Automation 12,432 9,969 22,918 19,284
-------- -------- -------- --------
Total revenue $ 93,236 $ 84,665 $177,675 $164,263
======== ======== ======== ========
INCOME FROM CONTINUING OPERATIONS BY SEGMENT:
Mechanical Testing and Simulation $ 7,310 $ 8,919 $ 15,710 $ 15,491
Factory Automation 859 528 1,500 927
-------- -------- -------- --------
Total income from continuing operations $ 8,169 $ 9,447 $ 17,210 $ 16,418
======== ======== ======== ========
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ------------------------------------------------
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 a 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; or (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 (income) expense, net" on the income statement. Results of these
contracts offset in full or in part the gains and losses stemming from the
normal mark-to-market of the underlying balance sheet exposures. The Company
does not use derivative financial instruments for speculative or trading
purposes.
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
At March 29, 2003 and March 31, 2002, the Company had outstanding foreign
currency forward contracts with U.S. dollar notional equivalent amounts of $32.8
million and $39.4 million respectively. At March 29, 2003 and March 31, 2002,
the fair value of the foreign currency forward contracts was ($0.9) million and
$2.2 million, respectively. The amount recognized in earnings as a result of the
ineffectiveness of cash flow hedges was $0.1 million for the period ended March
29, 2003 and was negligible for the period ended March 31, 2002. At March 29,
2003, approximately ($0.7) million was projected to be reclassified from other
comprehensive income into earnings in the next 12 months. At March 31, 2002,
approximately $0.2 million was projected to be reclassified from other
comprehensive income into earnings in the next 12 months. The maximum maturity
of any derivative was 0.8 years at March 29, 2003 and 1.1 years at March 31,
2002.
8. DEFERRED TAX ASSET
- ---------------------
At March 29, 2003, the Company had an aggregate deferred tax asset of $10.3
million in connection with accrued compensation and benefits, inventory
reserves, and allowances for doubtful accounts and other assets.
Management routinely performs an analysis of the realization of the deferred tax
asset each fiscal year end. This analysis largely relies on continued long-term
profitability. Unanticipated negative changes in future operations of the
Company would adversely affect the realization of the Company's deferred tax
asset. Such negative changes would result in the establishment of a valuation
reserve for the deferred tax asset.
9. WARRANTY GUARANTEES
- ----------------------
Sales of the Company's products and systems are subject to limited warranty
guarantees. For sales that include installation services, system guarantees
typically extend for a period of twelve months from the date of either shipment
or system acceptance. Product guarantees typically extend for a period of
twenty-four months from the date of purchase. Standard warranty terms are
included in customer contracts. Under the terms of these warranties, the Company
is obligated to repair or replace any components or assemblies it deems
defective due to workmanship or materials. The Company reserves the right to
reject warranty claims where it determines that failure is due to normal wear,
customer modifications, improper maintenance, or misuse. The Company records
warranty provisions monthly based on an estimated warranty expense percentage
applied to current period revenue. The percentage applied reflects historical
warranty incidence over the preceding twelve-month period. Both the experience
percentage and the warranty liability are evaluated on an ongoing basis for
adequacy. Warranty provisions and claims for the periods ended March 29, 2003
and March 31, 2002 were as follows:
Three Months Ended Six Months Ended
March 29, March 31, March 29, March 31,
2003 2002 2003 2002
------- ------- ------- -------
(in thousands of dollars)
Beginning Balance $ 5,071 $ 4,668 $ 4,482 $ 4,324
Warranty Provisions 1,527 1,162 3,011 2,478
Warranty Claims (1,642) (1,274) (2,595) (2,013)
Translation 79 3 137 (230)
------- ------- ------- -------
Ending Balance $ 5,035 $ 4,559 $ 5,035 $ 4,559
======= ======= ======= =======
10. STOCK OPTIONS
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to adopt the guidance of Accounting Principles
Board ("APB") Opinion No. 25 for measurement and recognition of stock-based
transactions with employees. No compensation expense has therefore been
recognized in the financial statements for stock options granted to employees
under the Company's stock option plans as the exercise price of all options
granted is at least equal to the fair value of the underlying common stock at
the dates of grant. Alternatively, if compensation expense for employee options
granted under the plans had been determined based on the fair value at the grant
dates, consistent with the methods provided in SFAS No. 123, the Company's net
earnings and earnings per share would have been as follows:
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Three Months Ended Six Months Ended
March 29, March 31, March 29, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands of dollars)
Net income (loss) as reported $ 3,963 $ 5,163 $ 9,460 $ (4,845)
Less employee stock-based
compensation (637) (667) (1,298) (1,343)
--------- --------- --------- ---------
Pro forma net income (loss) $ 3,326 $ 4,496 $ 8,162 $ (6,188)
========= ========= ========= =========
Earnings (loss) per share - Basic:
As reported $ 0.19 $ 0.25 $ 0.45 $ (0.23)
Less employee stock-based
compensation (0.03) (0.03) (0.06) (0.06)
--------- --------- --------- ---------
Pro forma earnings (loss) per share $ 0.16 $ 0.22 $ 0.39 $ (0.29)
--------- --------- --------- ---------
Earnings (loss) per share - Diluted:
As reported $ 0.19 $ 0.24 $ 0.44 $ (0.23)
Less employee stock-based
compensation (0.03) (0.03) (0.06) (0.06)
--------- --------- --------- ---------
Pro forma earnings (loss) per share $ 0.16 $ 0.21 $ 0.38 $ (0.29)
========= ========= ========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
Company to make estimates and assumptions in certain circumstances that affect
amounts reported. In preparing these financial statements, management has made
its best estimates and judgments of certain amounts, giving due consideration to
materiality. The Company believes that of its significant accounting policies,
the following are particularly important to the portrayal of the Company's
results of operations and financial position and may require the application of
a higher level of judgment by the Company's management, and as a result are
subject to an inherent degree of uncertainty.
Revenue Recognition. 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 are 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 the 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.
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. Reserves for slow-moving and obsolete inventories are
provided based upon current and expected future product sales and the expected
impact of product transitions or
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
modifications. While the Company expects its sales to grow, a reduction in its
sales could reduce the demand for the Company's products, and additional
inventory reserves may be required.
Short-term investments at March 29, 2003 consisted of highly liquid United
States government obligations, certificates of deposit, and highly rated
corporate bonds maturing in four to twelve months from the date of purchase. The
Company classifies its debt securities as held-to-maturity. Held-to-maturity
securities are carried at amortized cost, which approximates market value. There
were no substantive unrealized gains or losses from the investment in
held-to-maturity securities as of the quarter ended March 29, 2003. 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. At March 29, 2003 the Company had no investments
in equity securities.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging," which amends and clarifies financial
accounting and reporting for derivative instruments. The Company is required to
adopt this statement for transactions occurring after June 2003 and is currently
analyzing the impact of its adoption on the Company's financial statements.
RESULTS OF DISCONTINUED OPERATIONS
During the second quarter of fiscal year 2003, the Company decided to sell its
Automation division, which was based in New Ulm, Minnesota and also maintained
operations in Montgomeryville, Pennsylvania and Freiburg and Straslund, Germany.
On March 31, 2003, the Company sold substantially all of the net assets
associated with the Automation division's gradient amplifier product line to
Performance Controls, Inc., an affiliate of Hitachi Medical Corporation, with
certain of the intellectual property assets being sold to Hitachi Medical
Corporation. On April 11, 2003, the Company sold all the remaining net assets of
the North American Automation division, based in New Ulm, Minnesota, to Parker
Hannifin Corporation ("Parker-Hannifin"). On April 30, 2003, the Company sold
100% of its stock in the Automation division's German operations also to Parker
Hannifin, which completed the sale of the Company's entire Automation division
and marked the Company's exit from the motor and amplifier business.
As a result of the Company's decision to sell the Automation division, the
characterization of the related assets changed from "held-for-use" to
"held-for-sale" at March 29, 2003. In accordance with the requirements of SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company was required to perform a valuation of the held-for-sale assets to
determine whether these assets were impaired at March 29, 2003. Per SFAS 144,
the anticipated selling price of the business was used as the basis for this
valuation. As a result of the valuation, the Company recorded an impairment
charge on discontinued operations of $2.4 million, net of taxes of $0.8 million,
for the quarter ended March 29, 2003. This included a charge of $1.5 million
related to impairment of the New Ulm and German assets and $0.9 million of
closing-related expenses, net of taxes. The Automation division has historically
been included in the Company's Factory Automation segment for financial
reporting. Per SFAS 144, the Company has reported the results of the operations
of the Automation division as discontinued operations at March 29, 2003.
The discontinued operations of the Automation division reported essentially
break-even results, before impairment charge, for the quarter ended March 29,
2003, compared to a loss of $2.6 million for the same period in the prior year.
This improvement is primarily the result of charges for obsolete and surplus
inventory of approximately $1.9 million, net of taxes, recorded during the three
months ended March 31, 2002. Net loss before impairment charges and the
cumulative effect of accounting change for the discontinued operation for the
six months ended March 29, 2003 was $0.2 million, compared to a net loss of $3.8
million for the same period in the prior year. The decrease in net loss was
primarily the result of obsolete and surplus inventory charges of approximately
$2.7 million, net of taxes, recorded during the prior year period. Also during
the prior year period the Company recorded a non-cash transition charge to
income of $9.2 million, net of taxes, related to the adoption of SFAS 142,
"Goodwill and Other Intangible Assets."
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RESULTS OF CONTINUING OPERATIONS
NEW CUSTOMER ORDERS AND BACKLOG
- -------------------------------
THREE MONTHS ENDED MARCH 29, 2003 ("SECOND QUARTER OF FISCAL 2003") COMPARED TO
THREE MONTHS ENDED MARCH 31, 2002 ("SECOND QUARTER OF FISCAL 2002")
New orders from customers during Second Quarter of Fiscal 2003 aggregated $78.8
million, a decrease of 3.8% compared to customer orders of $81.9 million booked
during Second Quarter of Fiscal 2002.
Orders for the Mechanical Testing and Simulation ("MT&S") segment decreased 9.4%
to $65.7 million, compared to customer orders of $72.5 million for Second
Quarter of Fiscal 2002, primarily due to continued weakness in global automotive
and industrial markets. The MT&S segment accounted for 83.4% of total Company
orders for Second Quarter of Fiscal 2003, compared to 88.5% for the Second
Quarter of Fiscal 2002.
Orders for the Factory Automation ("FA") segment increased 39.4% to $13.1
million for Second Quarter of Fiscal 2003, from $9.4 million for Second Quarter
of Fiscal 2002. The Company's AeroMet business was awarded a $1.5 million
development contract from the U.S. government, and orders in the Sensors
business improved due to increased demand in Europe and Japan. The FA segment
accounted for 16.6% of total Company orders during Second Quarter of Fiscal
2003, compared to 11.5% in Second Quarter of Fiscal 2002.
SIX MONTHS ENDED MARCH 29, 2003 ("FIRST HALF OF FISCAL 2003") COMPARED TO SIX
MONTHS ENDED MARCH 31, 2002 ("FIRST HALF OF FISCAL 2002")
New orders for the First Half of Fiscal 2003 aggregated $154.3 million, a
decrease of 11.1% compared to orders of $173.5 million for the First Half of
Fiscal 2002.
Orders for the MT&S segment of $131.0 million in First Half of Fiscal 2003
decreased approximately 15.0% compared to $154.2 million in the First Half of
Fiscal 2002. The decrease was primarily due to the impact of a $13 million
aerospace order booked in the First Half of Fiscal 2002 and continuing weakness
in the global automotive and industrial markets.
This segment accounted for 84.9% of total new orders in First Half of Fiscal
2003, compared to 88.9% for First Half of Fiscal 2002. Orders for the FA segment
of $23.3 million in First Half of Fiscal 2003 increased 20.7% from orders of
$19.3 million booked in First Half of Fiscal 2002. This increase was largely due
to a $1.5 million U.S. government contract awarded to the AeroMet business and
strong demand in Europe and Japan related to the Sensors business. The FA
segment accounted for 15.1% of total orders during First Half of 2003 compared
to 11.1% in First Half of Fiscal 2002.
Backlog of undelivered orders at March 29, 2003 was $148.2 million, a decrease
of 12.8% from backlog of $170.0 million at September 28, 2002 and a decrease of
3.4% from backlog of $153.4 million at March 31, 2002. The Company's backlog is
subject to order cancellations.
RESULTS OF CONTINUING OPERATIONS
- --------------------------------
SECOND QUARTER OF FISCAL 2003 COMPARED TO SECOND QUARTER OF FISCAL 2002
REVENUE for Second Quarter of Fiscal 2003 was $93.2 million, an increase of $8.5
million, or 10.0%, compared to revenue of $84.7 million for the Second Quarter
of Fiscal 2002. The increase was primarily due to a higher backlog position at
the end of fiscal year 2002 and an increase in booking and shipment of
short-cycle orders. Revenue from European and Asian markets for Second Quarter
of Fiscal 2003 represented 56.4% of total revenues, compared to 54.2% for Second
Quarter of Fiscal 2002.
GROSS PROFIT for Second Quarter of Fiscal 2003 increased to $33.3 million, up
2.5% compared to gross profit of $32.5 million for Second Quarter of Fiscal
2002. Gross profit as a percentage of revenue was 35.7% for Second Quarter of
Fiscal 2003, down from 38.4% reported for Second Quarter of Fiscal 2002. The
gross margin rate for the MT&S segment was 34.4% for Second Quarter of Fiscal
2003, down 2.6 percentage points compared to Second Quarter of
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RESULTS OF CONTINUING OPERATIONS (CONTINUED)
- --------------------------------------------
Fiscal 2002, primarily due to unfavorable product mix in the quarter. Gross
profit as a percentage of revenue for the FA segment was 44.3% for Second
Quarter of Fiscal 2003, compared to 47.7% for the Second Quarter of Fiscal 2002.
The decrease was primarily the result of favorable product mix in the prior year
period and one-time costs associated with a canceled contract in Second Quarter
of Fiscal 2003.
SELLING EXPENSES were $13.8 million for Second Quarter of Fiscal 2003, an
increase of 8.7% from $12.7 million for Second Quarter of Fiscal 2002, primarily
due to an increase in sales volume for the quarter. Selling expense as a
percentage of revenue was relatively flat at 14.8% for Second Quarter of Fiscal
2003 compared to selling expense of 15.0% for Second Quarter of Fiscal 2002.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $7.3 million for Second Quarter of
Fiscal 2003, an increase of 23.7% compared to $5.9 million for Second Quarter of
Fiscal 2002. General and administrative expenses as a percentage of net revenue
increased by 0.8 percentage points from 7.0% for Second Quarter of Fiscal 2002
to 7.8% for Second Quarter of Fiscal 2003. The increase is largely due to higher
projected incentive compensation payments in fiscal year 2003 compared to fiscal
year 2002.
RESEARCH AND DEVELOPMENT EXPENSES totaled $4.0 million for the Second Quarter of
2003, a decrease of 9.1% compared to $4.4 million for the Second Quarter of
Fiscal 2002. Research and development expenses as a percentage of net revenue
were 4.3% for Second Quarter of Fiscal 2003 compared to 5.2% for the Second
Quarter of Fiscal 2002. The decrease was primarily due to product
rationalization efforts implemented by the Company during fiscal year 2003.
INCOME FROM CONTINUING OPERATIONS decreased 12.8%, from $9.4 million in Second
Quarter of Fiscal 2002 to $8.2 million in the Second Quarter of Fiscal 2003.
Operating earnings in the MT&S segment decreased from $8.9 million to $7.2
million. This decrease was offset by a $0.3 million improvement in the operating
earnings of the FA segment.
INTEREST EXPENSE decreased to $0.9 million for Second Quarter of Fiscal 2003
compared to $1.0 million for the Second Quarter of Fiscal 2002. This decrease
was the result of a reduction in long-term debt. Interest expense as a
percentage of net revenue decreased to 1.0% for Second Quarter of Fiscal 2003,
compared to 1.2% for Second Quarter of Fiscal 2002.
INTEREST INCOME increased to $0.6 million for Second Quarter of Fiscal 2003
compared to $0.2 million for Second Quarter of Fiscal 2002, primarily due to an
increase in the Company's holdings of short-term investments.
GAIN ON SALE OF INVESTMENTS during the second quarter of Fiscal 2002 resulted
from the Company's sale of an equity 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. The investment sold represented
the entire amount of the Company's holdings.
OTHER INCOME AND EXPENSE for Second Quarter of Fiscal 2003 primarily reflects a
non-recurring gain of $1.3 million due to proceeds from penalties associated
with a canceled customer contract.
NET INCOME decreased to $6.4 million for Second Quarter of Fiscal 2003 compared
to net income of $7.8 million for Second Quarter of Fiscal 2002. Net income as a
percentage of revenue decreased to 6.8% for Second Quarter of Fiscal 2003,
compared to 9.2% for Second Quarter of Fiscal 2002. The effective tax rate for
Second Quarter of Fiscal 2003 was 33.3%; approximately flat with a tax rate of
33.5% for Second Quarter of Fiscal 2002.
FIRST HALF OF FISCAL 2003 COMPARED TO FIRST HALF OF FISCAL 2002
- ---------------------------------------------------------------
REVENUE for First Half of Fiscal 2003 was $177.7 million, an increase of $13.4
million, or 8.2%, compared to $164.3 million in the First Half of Fiscal 2002.
The increase was primarily due to a higher backlog position at the end of Fiscal
2002 than fiscal 2001 and an increase in booking and shipment of short-cycle
orders. Revenue from European and Asian markets for First Half of Fiscal 2003
represented 51.9% of revenues, compared to 54.5% of revenues for First Half of
Fiscal 2002. Revenue generated by the MT&S segment was $154.8 million during the
First Half of 2003, an increase of $9.8 million compared to First Half of Fiscal
2002. The FA segment revenue increased to $22.9 million for the First Half of
Fiscal 2003, compared to $19.3 million for First Half of Fiscal 2002.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RESULTS OF CONTINUING OPERATIONS (CONTINUED)
- --------------------------------
GROSS PROFIT for First Half of Fiscal 2003 increased to $64.6 million, up 2.4%
compared to gross profit of $63.1 million for First Half of Fiscal 2002. The
fluctuation in margin was primarily due to higher revenue volume. Gross profit
as a percentage of net revenue was 36.4% for First Half of Fiscal 2003 compared
to 38.4% reported for First Half of Fiscal 2002. The decrease is primarily the
result of favorable product mix in the prior year.
SELLING EXPENSES increased to $26.4 million in First Half of Fiscal 2003
compared to $25.9 million for First Half of Fiscal 2002, due to higher revenue
volume. Selling expense as a percentage of net revenue decreased to 14.9% in
First Half of Fiscal 2003 compared to 15.8% for First Half of Fiscal 2002,
primarily due to cost reduction initiatives that were implemented throughout
fiscal year 2002.
GENERAL AND ADMINISTRATIVE EXPENSES totaled $13.4 million for First Half of
Fiscal 2003, an increase of 9.8% compared to $12.2 million for First Half of
Fiscal 2002. General and administrative expenses as a percentage of revenue
increased only slightly from 7.4% in First Half of Fiscal 2002 to 7.5% in First
Half of Fiscal 2003.
RESEARCH AND DEVELOPMENT EXPENSES decreased to $7.6 million in First Half of
Fiscal 2003 compared to $8.6 million in First Half of Fiscal 2002. Research and
development expense as a percentage of revenue declined to 4.3% in First Half of
Fiscal 2003 compared to 5.2% in First Half of Fiscal 2002, primarily due to
product rationalization efforts implemented by the Company during the First Half
of Fiscal 2003.
INCOME FROM CONTINUING OPERATIONS increased by 4.9%, from $16.4 million in First
Half of Fiscal 2002 to $17.2 million in First Half of Fiscal 2003. Operating
earnings increased slightly in the MT&S segment, from $15.5 million to $15.7
million, and operating earnings of the FA segment increased $0.6 million from
First Half of Fiscal 2003.
INTEREST EXPENSE remained roughly flat at $2.0 million in First Half of Fiscal
2003 compared to $2.1 million in First Half of Fiscal 2002. Interest expense as
a percentage of revenue decreased by 0.2 percentage points, to 1.1% for First
Half of Fiscal 2003.
INTEREST INCOME increased $0.8 million to $1.1 million for First Half of Fiscal
2003, primarily due to an increase in short-term investments. Interest income as
a percentage of revenue increased from 0.4% to 0.6%.
GAIN ON SALE OF INVESTMENTS during the First Half of Fiscal 2002 resulted from
the Company's sale of an equity 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. The investment sold represented
the entire amount of the Company's holdings.
OTHER INCOME AND EXPENSE was $1.7 million in First Half of Fiscal 2003, flat
with other income of $1.7 million in First Half of Fiscal 2002. Other income in
First Half of Fiscal 2003 primarily reflects a one-time gain of $1.3 million
from proceeds from penalties associated with a cancelled customer contract.
Other income in First Half of Fiscal 2002 consisted primarily of a gain on
foreign currency transactions of $1.6 million.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES for First Half of Fiscal
2002 reflects a non-cash transition charge to income related to the adoption of
SFAS 142, "Goodwill and Other Intangible Assets."
NET INCOME BEFORE DISCONTINUED OPERATIONS INCLUDING CUMULATIVE EFFECT OF
ACCOUNTING CHANGE was $12.1 million for First Half of Fiscal 2003 compared to
net income of $8.1 million for First Half of Fiscal 2002. This increase is
primarily the result of adoption of SFAS 142 in fiscal year 2002 and the related
cumulative effect, which resulted in a $4.5 million charge, net of taxes. Before
the cumulative effect of accounting change, net income decreased $0.6 million.
The effective tax rate for First Half of Fiscal 2003 was 33.0%, compared to
33.2% for First Half of Fiscal 2002.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES provided cash of $29.5 million
during the First Half of Fiscal 2003, compared to cash provided of $33.5 million
during the First Half of Fiscal 2002. The decrease in cash provided by
continuing operating activities during the First Half of Fiscal 2003 is
primarily due to significant improvements in accounts receivable and inventory
made in the First Half of Fiscal 2002.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RESULTS OF CONTINUING OPERATIONS (CONTINUED)
- --------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES required the use of cash totaling $21.8
million during the First Half of Fiscal 2003, compared with cash provided of
$3.4 million in the First Half of Fiscal 2002. Cash was used in the First Half
of Fiscal 2003 principally for the purchase of short-term investments of $39.5
million, partially offset by proceeds from the sale of short-term investments of
$20.6 million. In the First Half of Fiscal 2002, cash was primarily provided
through $4.9 million gross proceeds from the sale of an investment.
CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $13.4
million during the First Half of Fiscal 2003, compared to usage of $2.9 million
for the First Half of Fiscal 2002. The increase in cash used for financing
activities was principally due to a $9.2 million reduction of debt and $2.5
million of payments to purchase or retire common stock.
CASH FLOWS FROM DISCONTINUED OPERATIONS provided cash of $1.0 million during the
First Half of Fiscal 2003, compared to cash provided of $3.0 million for the
First Half of Fiscal 2002. The decrease in cash provided by discontinued
operations was primarily due to significant improvements in working capital made
in the First Half of Fiscal 2002.
Under the terms of its credit agreements, the Company has agreed to certain
financial covenants. At March 29, 2003, the Company was in compliance with the
terms and covenants of its credit agreements. The Company believes that the
combination of present capital resources, internally generated funds, and unused
financing sources will be adequate to finance ongoing operations, allow for
investment in opportunities to internally grow its business and make selected
strategic acquisitions.
OTHER MATTERS
- -------------
The Company is exposed to market risk from changes in foreign currency exchange
rates that can affect its results from operations and financial condition. To
minimize that risk, the Company manages exposure to changes in foreign currency
rates through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments, principally
forward exchange contracts. Foreign exchange contracts are used to hedge the
Company's overall exposure to exchange rate fluctuations, since the gains and
losses on these contracts offset gains and losses on the assets, liabilities,
and transactions being hedged.
The Company's dividend policy is to maintain a payout ratio, which allows
dividends to increase with the long-term growth of earnings per share, while
sustaining dividends in down years. The Company's dividend payout ratio target
is approximately 25% of earnings per share over the long term.
FORWARD-LOOKING STATEMENTS
- --------------------------
Statements included or incorporated by reference in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this Form 10-Q 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:
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
(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 in 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.
(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 its 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 29, 2003, the Company had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents, of $54.0
million. These securities, like all fixed income instruments, are subject to
interest rate risk and will decline in value if market interest rates increase.
However, the Company has the ability and intent to hold its fixed income
investments until maturity, and therefore the Company does not expect any such
increase in interest rates to have an adverse impact on income or cash flows.
The fair market value of these securities was $53.9 million at March 29, 2003.
The Company operates internationally and thus is subject to movements in foreign
currency rate changes. The Company enters into foreign exchange forward
contracts to reduce its exposure to foreign currency rate changes on
intercompany foreign currency denominated balance sheet positions. Additional
information is included in Note 7 in the Condensed Notes to Consolidated
Financial Statements.
As of March 29, 2003, the Company's long-term debt consisted of notes payable
with fixed interest rates ranging from 6.0% to 7.5%. As such, interest rate
fluctuations would not have an impact on interest expense or cash flows.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
ITEM 4. 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 quarterly 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 it 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.
18
PART II --- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on February 12,
2003.
(b) The following persons were nominated and elected to continue as
directors of the Company until the next Annual Meeting of
Shareholders.
Voted For Voted Against
--------- -------------
Jean-Lou Chameau 19,051,782 238,215
Merlin E. Dewing 19,075,410 214,587
Sidney W. Emery 19,067,918 222,079
Brendan C. Hegarty 18,280,864 1,009,133
Bruce D. Hertzke 18,831,603 458,394
Barb J. Samardzich 18,809,809 480,188
Linda Hall Whitman 19,083,133 206,864
There were no abstentions or broker non-votes for any of the directors.
(c) KPMG LLP was ratified to serve as the Company's independent auditors
for fiscal year 2003 with 18,999,547 votes in favor, 279,777 votes
against, and 15,059 votes abstained.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.a Restated and Amended Articles of Incorporation, adopted January
30, 1996, incorporated by reference from Exhibit 3.a. of Form
10-K for the year ended September 30, 1996.
3.b Restated Bylaws, reflecting amendments through May 26, 1998,
incorporated by reference from Exhibit 3.b. of Form 10-K for the
year ended September 30, 1998.
99.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18U.S.C. 1350) (filed
herewith).
99.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (filed
herewith)
(b) Reports on Form 8-K:
On January 14, 2003, the Company filed a Current Report on Form
8-K to furnish to the SEC its 2002 Annual Report to shareholders
under Regulation FD.
19
SIGNATURES
Pursuant to the requirements 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
Dated: May 13, 2003 /s/ Sidney W. Emery, Jr.
-----------------------------------------------
Sidney W. Emery, Jr.
Chairman, President and Chief Executive Officer
Dated: May 13, 2003 /s/ Susan E. Knight
-----------------------------------------------
Susan E. Knight
Vice President and Chief Financial Officer
CERTIFICATIONS
I, Sidney W. Emery, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MTS Systems
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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
20
6. The registrant's other certifying officers and I have indicated in this
quarterly 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: May 13, 2003
/s/ Sidney W. Emery
-----------------------------------------------
Sidney W. Emery, Jr.
Chairman, President and Chief Executive Officer
I, Susan E. Knight, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MTS Systems
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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
quarterly 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: May 13, 2003
/s/ Susan E. Knight
------------------------------------------
Susan E. Knight
Vice President and Chief Financial Officer
21
EXHIBIT INDEX TO FORM 10-Q
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).