United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
| x | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly period ended December 27, 2003 |
or
| o | 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 X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
X Yes X No
The number of shares outstanding of the Registrant’s common stock as of January 30, 2004 was 21,139,279 shares.
| Page No. | |||||
|---|---|---|---|---|---|
| PART I — FINANCIAL INFORMATION | |||||
| Item 1. | Financial Statements (unaudited) | ||||
Consolidated Balance Sheets as of | |||||
| December 27, 2003 and September 27, 2003 | 2 | ||||
Consolidated Statements of Income for the | |||||
| Three Months Ended December 27, 2003 and December 28, 2002 | 3 | ||||
Consolidated Statements of Cash Flows for the | |||||
| Three Months Ended December 27, 2003 and December 28, 2002 | 4 | ||||
Condensed Notes to Consolidated Financial Statements | 5 - 10 | ||||
Item 2. | Management’s Discussion and Analysis of Financial | ||||
| Condition and Results of Operations | 11 - 15 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risks | 15 | |||
Item 4. | Controls and Procedures | 15 | |||
PART II — OTHER INFORMATION | |||||
Item 6. | Exhibits and Reports on Form 8-K | 16 | |||
SIGNATURES |
17 | ||||
1
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited — in thousands, except per share data)
| December 27, 2003 | September 27, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 106,754 | $ | 74,183 | ||||
| Short-term investments | 35,700 | 58,560 | ||||||
| Accounts receivable, net of allowances for doubtful accounts | 68,303 | 59,637 | ||||||
| Unbilled contracts and retainage receivable | 24,790 | 21,939 | ||||||
| Inventories | 36,582 | 34,709 | ||||||
| Prepaid expense | 5,549 | 3,928 | ||||||
| Current deferred tax asset | 9,671 | 9,682 | ||||||
| Other current assets | 1,648 | 2,075 | ||||||
| Assets held for sale | 1,587 | — | ||||||
| Total current assets | 290,584 | 264,713 | ||||||
Property and Equipment: | ||||||||
| Land | 2,478 | 3,247 | ||||||
| Buildings and improvements | 46,965 | 47,031 | ||||||
| Machinery and equipment | 86,733 | 84,834 | ||||||
| Accumulated depreciation | (81,358 | ) | (78,908 | ) | ||||
| Total property and equipment, net | 54,818 | 56,204 | ||||||
Goodwill | 4,447 | 4,383 | ||||||
| Other assets | 2,462 | 2,562 | ||||||
| Non-current deferred tax asset | 2,525 | 2,516 | ||||||
| Total Assets | $ | 354,836 | $ | 330,378 | ||||
LIABILITIES AND SHAREHOLDERS’ INVESTMENT | ||||||||
Current Liabilities: | ||||||||
| Notes payable | $ | 89 | $ | 383 | ||||
| Current maturities of long-term debt | 6,845 | 6,839 | ||||||
| Accounts payable | 10,999 | 10,483 | ||||||
| Accrued payroll-related costs | 22,202 | 24,742 | ||||||
| Advance payments from customers | 50,196 | 40,456 | ||||||
| Accrued warranty costs | 4,884 | 4,862 | ||||||
| Accrued income taxes | 8,306 | 5,571 | ||||||
| Other accrued liabilities | 17,078 | 15,838 | ||||||
| Total current liabilities | 120,599 | 109,174 | ||||||
Deferred income taxes | 6,675 | 6,265 | ||||||
| Long-term debt, less current maturities | 30,431 | 30,487 | ||||||
| Other long-term liabilities | 9,301 | 8,346 | ||||||
| Total Liabilities | 167,006 | 154,272 | ||||||
Shareholders’ Investment: | ||||||||
| Common stock, $.25 par; 64,000 shares authorized: | ||||||||
| 20,884 and 20,720 shares issued and outstanding | 5,221 | 5,180 | ||||||
| Additional paid-in capital | 3,360 | 1,534 | ||||||
| Retained earnings | 168,395 | 162,076 | ||||||
| Accumulated other comprehensive income | 10,854 | 7,316 | ||||||
| Total shareholders’ investment | 187,830 | 176,106 | ||||||
| Total Liabilities and Shareholders’ Investment | $ | 354,836 | $ | 330,378 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
2
MTS SYSTEMS CORPORATION
Consolidated Statements of Income
(unaudited — in thousands, except per share data)
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 27, 2003 | December 28, 2002 | |||||||
| Revenue | $ | 84,631 | $ | 84,439 | ||||
| Cost of sales | 49,942 | 53,133 | ||||||
| Gross profit | 34,689 | 31,306 | ||||||
| Operating expenses: | ||||||||
| Selling | 13,549 | 12,862 | ||||||
| General and administrative | 6,375 | 5,824 | ||||||
| Research and development | 3,602 | 3,579 | ||||||
| Total operating expenses | 23,526 | 22,265 | ||||||
| Income from operations | 11,163 | 9,041 | ||||||
| Interest expense | (703 | ) | (1,044 | ) | ||||
| Interest income | 418 | 487 | ||||||
| Other income (expense), net | 655 | (17 | ) | |||||
| Income before income taxes and discontinued operations | 11,533 | 8,467 | ||||||
| Provision for income taxes | 3,956 | 2,893 | ||||||
| Income before discontinued operations | 7,577 | 5,574 | ||||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations, net of tax | — | (203 | ) | |||||
| Net income | $ | 7,577 | $ | 5,371 | ||||
| Earnings per share: | ||||||||
| Basic – | ||||||||
| Income before discontinued operations | $ | 0.37 | $ | 0.26 | ||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations, net of tax | — | (0.01 | ) | |||||
| Earnings per share | $ | 0.37 | $ | 0.25 | ||||
| Weighted average number of common shares | ||||||||
| outstanding – basic | 20,759 | 21,132 | ||||||
| Diluted – | ||||||||
| Income before discontinued operations | $ | 0.35 | $ | 0.26 | ||||
| Discontinued operations: | ||||||||
| Loss from discontinued operations, net of tax | — | (0.01 | ) | |||||
| Earnings per share | $ | 0.35 | $ | 0.25 | ||||
| Weighted average number of common shares | ||||||||
| outstanding – diluted | 21,483 | 21,355 | ||||||
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)
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 27, 2003 | December 28, 2002 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 7,577 | $ | 5,371 | ||||
| Adjustments to reconcile net income to net cash provided by | ||||||||
| operating activities: | ||||||||
| Loss from discontinued operations | — | 203 | ||||||
| Depreciation and amortization | 2,203 | 2,329 | ||||||
| Deferred income taxes | (71 | ) | (353 | ) | ||||
| Bad debt provision | 52 | 72 | ||||||
| Changes in operating assets and liabilities, net of effects | ||||||||
| of businesses divested: | ||||||||
| Accounts, unbilled contracts and retainage receivables | (8,329 | ) | (2,922 | ) | ||||
| Inventories | (563 | ) | 1,426 | |||||
| Prepaid expenses | (1,433 | ) | (959 | ) | ||||
| Other assets | 547 | (158 | ) | |||||
| Accounts payable | 298 | (2,340 | ) | |||||
| Accrued payroll-related costs | (3,436 | ) | 1,113 | |||||
| Advance payments from customers | 7,896 | (2,363 | ) | |||||
| Accrued warranty costs | (70 | ) | 529 | |||||
| Other current liabilities | 4,756 | 378 | ||||||
| Net cash provided by operating activities | 9,427 | 2,326 | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to property and equipment | (1,423 | ) | (1,274 | ) | ||||
| Proceeds from maturity of short-term investments | 24,115 | — | ||||||
| Purchases of short-term investments | (1,269 | ) | (7,300 | ) | ||||
| Net cash provided by (used in) investing activities | 21,423 | (8,574 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Net (repayments) borrowings under notes payable to banks | (305 | ) | 7 | |||||
| Payments of long-term debt | (65 | ) | (2,656 | ) | ||||
| Proceeds from issuance of long-term debt | — | 13 | ||||||
| Cash dividends | (1,272 | ) | (1,273 | ) | ||||
| Proceeds from exercise of stock options | 3,113 | 43 | ||||||
| Payments to purchase and retire common stock | (1,859 | ) | (758 | ) | ||||
| Net cash used in financing activities | (388 | ) | (4,624 | ) | ||||
Net cash provided by discontinued operations | — | 155 | ||||||
Effect of exchange rate on changes in cash | 2,109 | 836 | ||||||
| Net increase (decrease) in cash and cash equivalents | 32,571 | (9,881 | ) | |||||
Cash and cash equivalents, at beginning of period | 74,183 | 62,456 | ||||||
| Cash and cash equivalents, at end of period | $ | 106,754 | $ | 52,575 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for – | ||||||||
| Interest expense | $ | 647 | $ | 892 | ||||
| Income taxes | $ | 1,308 | $ | 4,198 | ||||
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)
The consolidated financial statements include the accounts of MTS SYSTEMS CORPORATION and its wholly owned subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated.
The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in these financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. 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 2003 Form 10-K filed with the SEC. Interim results of operations for the three-month period ended December 27, 2003 are not necessarily indicative of the results to be expected for the full year.
Certain prior year amounts included in the accompanying financial statements have been reclassified to conform to the current year’s presentation. Such reclassifications had no effect on the Company’s previously reported financial position, net income or cash flows.
Critical Accounting Policies
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. Orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocol are considered to involve separable elements for revenue recognition purposes. Sufficient evidence of fair value of these elements exists to allow revenue recognition for these systems upon shipment, less the greater of the fair value associated with installation and training (if applicable) or the amount of revenue that is deemed contingent upon these elements, which is deferred until customer acceptance. In cases where special acceptance protocols exist, installation and training are not considered to be separable from the other elements of the arrangement. Accordingly, revenue for these systems is recognized upon the completion of installation and fulfillment of obligations specific to the terms of the arrangement.
Revenue on contracts requiring longer delivery periods, generally longer than six months (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. However, when elements that would not separately fall within the scope of accounting literature prescribing percentage-of-completion accounting are included in an arrangement, the fair value of these elements is separated from the arrangement and accounted for as such services are provided.
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. Inventories as of December 27, 2003 and September 27, 2003, respectively, were as follows:
5
CONDENSED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(continued)
| December 27, 2003 |
September 27, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands of dollars) | ||||||||
| Customer projects in various | ||||||||
| stages of completion | $ | 8,342 | $ | 12,260 | ||||
| Components, | ||||||||
| assemblies and parts | 28,240 | 22,449 | ||||||