-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPJOQiOkPUPy2QKmEt51j8wDIL+9/vpF5ebfKQXuyHfLAeqA1psl15f5uq7nDWNa O8rKEQ+UZPaCGYMYUVMFnA== 0000897101-02-000105.txt : 20020414 0000897101-02-000105.hdr.sgml : 20020414 ACCESSION NUMBER: 0000897101-02-000105 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MTS SYSTEMS CORP CENTRAL INDEX KEY: 0000068709 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 410908057 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-02382 FILM NUMBER: 02549951 BUSINESS ADDRESS: STREET 1: 14000 TECHNOLOGY DR CITY: EDEN PRAIRIE STATE: MN ZIP: 55344-2290 BUSINESS PHONE: 6129374000 MAIL ADDRESS: STREET 1: 14000 TECHNOLOGY DR CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: RESEARCH INC DATE OF NAME CHANGE: 19670216 10-Q 1 mts020781_10q.txt MTS SYSTEMS CORPORATION FORM 10Q - -------------------------------------------------------------------------------- United States SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter ended December 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ ------------------ Commission File Number 0-2382 MTS SYSTEMS CORPORATION (Exact name of Registrant as specified in its charter) MINNESOTA 41-0908057 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14000 Technology Drive, Eden Prairie, MN 55344 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (952) 937-4000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. _X_ Yes ___ No The number of shares outstanding of the Registrant's common stock as of January 30, 2002 was 21,085,600 shares. - -------------------------------------------------------------------------------- MTS SYSTEMS CORPORATION REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets as of December 31, 2001 and September 30, 2001 2 Consolidated Statements of Income for the Three Months Ended December 31, 2001 and 2000 3 Consolidated Statements of Cash Flows For the Three Months Ended December 31, 2001 and 2000 4 Notes to Condensed Consolidated Financial Statements 5-8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9-12 Item 3. Qualitative and Quantitative Disclosures About Market Risks 12 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 1 MTS SYSTEMS CORPORATION Consolidated Balance Sheets (unaudited - in thousands of dollars, except share data)
December 31 September 30 ASSETS 2001 2001 --------- --------- Current Assets: Cash and cash equivalents $ 33,611 $ 17,515 Accounts receivable, net 84,739 97,661 Unbilled contracts and retainage receivable 45,039 45,287 Inventories 62,447 63,381 Prepaid expenses 7,364 6,405 --------- --------- Total current assets 233,200 230,249 --------- --------- Property and Equipment: Land 3,247 3,247 Buildings and improvements 46,095 45,785 Machinery and equipment 107,457 110,419 Accumulated depreciation (90,301) (90,558) --------- --------- Total property and equipment, net 66,498 68,893 Other Assets 32,561 32,617 --------- --------- $ 332,259 $ 331,759 ========= ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Notes payable to banks $ 384 $ 428 Current maturities of long-term debt 5,361 5,260 Accounts payable 13,122 16,672 Accrued compensation and benefits 27,802 33,661 Advance billings to customers 35,613 26,572 Other accrued liabilities 24,444 22,480 --------- --------- Total current liabilities 106,726 105,073 Deferred Income Taxes 5,843 5,947 Long-Term Debt, net of current maturities 53,143 53,617 --------- --------- Shareholders' Investment: Common stock, $.25 par; 64,000,000 shares authorized: 21,043,971 and 21,031,467shares issued and outstanding 5,261 5,258 Additional paid-in capital 9,031 8,946 Retained earnings 155,411 154,159 Accumulated other comprehensive loss (3,156) (1,241) --------- --------- Total shareholders' investment 166,547 167,122 --------- --------- $ 332,259 $ 331,759 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements 2 MTS SYSTEMS CORPORATION Consolidated Statements of Income (unaudited - in thousands of dollars, except per share data) Three Months Ended December 31 -------------------- 2001 2000 -------- -------- Net revenue $ 84,768 $ 91,563 Cost of revenue 54,447 59,612 -------- -------- Gross profit 30,321 31,951 -------- -------- Operating expenses: Selling 14,026 14,080 General and administrative 6,707 8,444 Research and development 5,102 5,088 -------- -------- Total operating expenses 25,835 27,612 -------- -------- Income from operations 4,486 4,339 Interest expense 1,153 1,489 Interest income (137) (106) Other (income) expense, net (62) 190 -------- -------- Income before income taxes 3,532 2,766 Provision for income taxes 1,351 1,068 -------- -------- Income before cumulative effect of accounting change 2,181 1,698 Cumulative effect of accounting change, net of taxes -- (2,263) -------- -------- Net income (loss) $ 2,181 $ (565) ===================== Earnings per share: Basic- Before cumulative effect of accounting change $ 0.10 $ 0.08 Cumulative effect of accounting change, net -- (0.11) -------- -------- Net income (loss) $ 0.10 $ (0.03) ======== ======== Weighted average number of common shares outstanding - basic 21,031 20,721 ===================== Earnings per share: Diluted- Before cumulative effect of accounting change $ 0.10 $ 0.08 Cumulative effect of accounting change, net -- (0.11) -------- -------- Net income (loss) $ 0.10 $ (0.03) ======== ======== Weighted average number of common shares outstanding - diluted 21,402 20,768 ===================== The accompanying notes to consolidated financial statements are an integral part of these statements. 3 Consolidated Statements of Cash Flows (unaudited - in thousands of dollars)
Three Months Ended December 31 ------------------------------- 2001 2000 -------------- -------------- Operating Activities: Net income (loss) $ 2,181 $ (565) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,867 3,990 Deferred income taxes (37) -- Bad debt provision 260 154 Inventory provision 2,208 2,364 Changes in operating assets and liabilities: Accounts, unbilled contracts and retainage receivables 9,639 20,817 Inventories (2,301) (15,464) Prepaid expenses (1,115) (1,207) Accounts payable (3,379) (5,383) Accrued compensation and benefits (7,145) 22 Advance billings to customers 9,774 5,548 Accrued warranty costs 181 (26) Other current liabilities 4,550 (2,186) -------- -------- Net cash provided by operating activities 17,683 8,064 -------- -------- Investing Activities: Additions to property and equipment (1,107) (1,810) Other assets 582 (375) -------- -------- Net cash used in investing activities (525) (2,185) -------- -------- Financing Activities: Net borrowings (repayments) under notes payable to banks -- 2,400 Proceeds from issuance of long-term debt -- 423 Repayments of long-term debt (71) (159) Dividends paid (1,263) (1,239) Proceeds from issuance of stock under employee stock option and stock purchase plans 108 7 Repurchases of common stock (20) (359) -------- -------- Net cash (used) provided by financing activities (1,246) 1,073 -------- -------- Effect of exchange rate changes on cash 184 (107) -------- -------- Net increase in cash and cash equivalents 16,096 6,845 Cash and cash equivalents, at beginning of period 17,515 8,211 -------- -------- Cash and cash equivalents, at end of period $ 33,611 $ 15,056 ======== ======== Supplemental Disclosure of Cash Flow Information: Cash paid during the periods for: Interest $ 782 $ 854 Income taxes $ 2,399 $ 3,638 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements 4 MTS SYSTEMS CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION Consolidation The consolidated financial statements include the accounts of MTS SYSTEMS CORPORATION and it's wholly and majority owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated. The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The information furnished in these financial statements includes normal recurring adjustments and reflects all adjustments, which are in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles 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 2001 Annual Report on Form 10-K filed with the SEC. 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. Revenue Recognition: The Company implemented Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", in the fourth quarter of fiscal 2001 and applied it retroactively to the beginning of 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 $2.3 million (net of income taxes of $1.4 million), or $0.11 per diluted share, which has been accounted for as a charge to the financial results for the first quarter of fiscal 2001. The effect of the change as compared to the revenue recognition policy previously followed in accounting for revenue recognition on the quarter ended December 31, 2000, was to increase net revenue by $6.6 million and increase income before cumulative effect of the accounting change, net of taxes, by $1.4 million, or $0.07 per diluted share. The effect of the change for the total fiscal year of 2001 was to increase revenue by $4.9 million and to increase income before cumulative effect of the accounting change, net of taxes, by $0.9 million, or $0.04 per diluted share. 2. RECENTLY ISSUED ACCOUNTING STANDARDS On June 29, 2001, the Financial Accounting Standards Board approved two new statements, SFAS No. 141, Business Combinations," ("SFAS No. 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS No. 141, all business combinations will be accounted for under the purchase method beginning June 30, 2001. SFAS No. 142 includes requirements to test goodwill for impairment using a fair value approach, rather than amortizing the cost of goodwill over future periods. As a result, the Company's amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of the new accounting standards. The Company adopted SFAS No. 142 in the first quarter of its fiscal year ending September 30, 2002. The Company's annual goodwill amortization was approximately $3.0 million, which ceased effective October 1, 2001 upon adoption of the new rules. The Company is currently evaluating the impairment testing provisions of SFAS No. 142 and has not yet determined the effect of SFAS No. 142 on its consolidated financial position and results of operations. Should impairment be determined to exist, the Company will record that impairment as a change of accounting principle and restate its first quarter and year-to-date results. 5 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following tables set forth proforma net income and earnings per share (in thousands except per share amounts):
Three Months Ended December-31 2001 2000 --------------------- (in thousands of dollars) Net income (loss) as reported $ 2,181 $ (565) Add back: Goodwill amortization, net of tax -- 329 --------- --------- Adjusted net income (loss) $ 2,181 $ (236) ========= ========= Earnings (loss) per share as reported (Basic and Diluted) $ 0.10 $ (0.03) Goodwill amortization -- 0.02 --------- --------- Adjusted earnings (loss) per share (Basic and Diluted) $ 0.10 $ (.01) ========= =========
3. 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: Three Months Ended December 31 December 31 2001 2000 - --------------------------------------------------------------------- (in thousands, except per share data) Income before cumulative effect 2,181 1,698 of accouting change Cumulative effect of accounting change -- (2,263) Net income (loss) available to common shareholders $ 2,181 $ (565) ======== ======== Weighted average common shares outstanding 21,031 20,721 Dilutive potential common shares 371 47 - ------------------------------------------------------------------ Total diluted common shares 21,402 20,768 - ------------------------------------------------------------------ Basic net income (loss) per share $ 0.10 $ (0.03) Diluted net income (loss) per share $ 0.10 $ (0.03) ===================================================================== 4. COMPREHENSIVE INCOME Comprehensive income reflects the change in equity of a business enterprise during the applicable periods resulting from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income represents net income adjusted for foreign currency translation adjustments, the unrealized gain or loss on investment and the net effect of accumulated hedging activity. Comprehensive income (loss) was $1.6 million and ($1.3) million for the three months ended December 31, 2001 and 2000, respectively. 6 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. BUSINESS SEGMENT INFORMATION The Company periodically evaluates its business activities that are regularly reviewed by its Chief Executive Officer for which discrete financial information is available. In connection therewith, the Company has determined that it has five business units: Vehicle Testing Systems, Material Testing Systems, Advanced Systems, Automation and Sensors. The Vehicle Testing Systems unit manufactures and markets systems for vehicle and component manufacturers to aid in the acceleration of design development work and to decrease the cost of product manufacturing. The Material Testing Systems unit manufactures and markets systems to aid customers in product development and quality control toward an effort of design improvement. The Advanced Systems unit offers highly customized systems primarily for simulation and manufacturing. The Automation unit manufactures and markets products for high performance industrial machine applications in a wide range of industries. The Sensors unit manufactures and markets displacement and liquid level sensors used in various applications to monitor and automate industrial processes. The economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments are similar for the Vehicle Testing Systems, Material Testing Systems and Advanced Systems business units. As a result of these similarities, these units have been aggregated for financial statement purposes into one reportable segment called Mechanical Testing and Simulation ("MT&S"). In addition, the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments are similar for the Automation and Sensor business units. As a result, these units have been aggregated into one reportable segment called Factory Automation ("FA"). The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements found in the Company's 2001 Annual Report on Form 10-K. In evaluating each segment's performance, management focuses primarily on income from operations and return on asset employed. This measurement excludes special charges (e.g. restructuring charges, acquisition expenses, etc.), interest income and expense, income taxes and other non-operating-type items. Corporate expenses, including costs associated with various support functions such as human resources, information technology, finance and accounting and general administrative costs, are allocated to the reportable segments primarily on the basis of revenue. Financial information by reportable segment is as follows: Three Months Ended December-31 2001 2000 ------------- ------------- (in thousands of dollars) NET REVENUE BY SEGMENT: Mechanical Testing and Simulation $ 67,887 $ 70,847 Factory Automation 16,881 20,716 ------------- ------------- Total net revenue $ 84,768 $ 91,563 ============= ============= INCOME (LOSS) FROM OPERATIONS BY SEGMENT: Mechanical Testing and Simulation $ 6,417 $ 2,264 Factory Automatiom (1,931) 2,075 ------------- ------------- Total income from operations $ 4,486 $ 4,339 ============= ============= 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On October 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. The transition adjustment recorded upon adoption of SFAS No. 133 was not material to the Company's overall financial position and results of operations. 7 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED) The Company uses forward exchange contracts to reduce the effect of fluctuating currencies on foreign currency-denominated intercompany transactions and third party sourcing transactions. The gains and losses on these forward contracts are intended to offset gains and losses on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. The principal currencies hedged by the Company are the European Euro and the Japanese Yen. On the date a forward exchange contract is entered into, the Company will designate the contract as a cash flow hedge -- a hedge of a forecasted transaction or a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability commitment. The effective portion of the change in the fair value of a cash flow hedge is reported as part of Accumulated Other Comprehensive Income (Loss) within shareholders' investment. When the hedged item is realized, the gain or loss included in Accumulated Other Comprehensive Income (Loss) is reclassified into Other (Income) Expense in the Consolidated Statements of Income. The Company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedged transaction. Forward contracts are recorded in the Consolidated Balance Sheets at fair value. The Company assesses at inception of the hedge and, at a minimum, quarterly thereafter, whether the forward contracts currently in place and being used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged item. When it is determined that a specific derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting for that individual derivative. As of December 31, 2001, the net accumulated derivative gain included in Accumulated Other Comprehensive Income was $0.1 million. The maximum maturity date of any cash flow hedge was 1.3 years. Based on the status of the cash flow hedges as of December 31, 2001, net gains of approximately $0.1 million that are currently reflected in Accumulated Other Comprehensive Income would be available for reclassification into Other (Income) Expense during the next twelve months. During the quarter ended December 31, 2001, gains or losses associated with ineffective hedges were immaterial. 8 MTS SYSTEMS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION NEW CUSTOMER ORDERS AND BACKLOG THREE MONTHS ENDED DECEMBER 31, 2001 ("FIRST QUARTER OF FISCAL 2002") COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2000 ("FIRST QUARTER OF FISCAL 2001") New orders from customers during First Quarter of Fiscal 2002 aggregated $96.9 million, a decrease of 6.9% compared to customer orders of $104.1 million booked during First Quarter of Fiscal 2001. Orders for the Mechanical Testing and Simulation ("MT&S") segment totaled $81.8 million, a decrease of 0.7% compared to customer orders of $82.4 million for First Quarter of Fiscal 2001. The MT&S segment accounted for 84.4% of total Company orders, compared to 79.2% for the First Quarter of Fiscal 2001. The company experienced softness in the automotive business offset by positive growth in the aerospace and custom project businesses. Significant bookings included full--scale structural testing equipment for the Japanese US-1A search and rescue aircraft, validation equipment for the Formula 1 automotive racing market, and multiple orders for seismic equipment for U.S. research institutions. Orders for the Factory Automation ("FA") segment decreased to $15.1 million for First Quarter of Fiscal 2002 from $21.7 million for First Quarter of Fiscal 2001, down 30.7%. The decline in orders was the result of general worldwide weakness in the automotive, semiconductor and industrial markets. The FA segment accounted for 15.6% of total Company orders during First Quarter of Fiscal 2002, compared to 20.8% in First Quarter of Fiscal 2001. Backlog of undelivered orders at December 31, 2001 was $168 million, an increase of 7.7% from the backlog of $156 million as of September 30, 2001 and a decrease of 10.6% from the backlog of $188 million at December 31, 2000. RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL 2002 COMPARED TO FIRST QUARTER OF FISCAL 2001 NET REVENUE for First Quarter of Fiscal 2002 was $84.8 million, a decrease of $6.8 million, or 7.4%, compared to First Quarter of Fiscal 2001. The decrease in net revenue was principally due to the slowdown in automotive-related business. The continued weakness in the North American automotive business had a negative effect for both the MT&S and the FA sectors. Part of the weakness in the automotive market was offset by the strength in the aerospace and academia/government markets. Revenue from foreign customers for First Quarter of Fiscal 2002 represented 52.9% of total revenues, compared to 49.8% for First Quarter of Fiscal 2001. Growth in the European and Japanese markets of 25 percent and 11 percent, respectively, partially offset the decline in North American revenue of 13 percent. GROSS PROFIT for First Quarter of Fiscal 2002 decreased to $30.3 million, down 5.3%, compared to gross profit of $32.0 million for First Quarter of Fiscal 2001. Gross profit, as a percentage of revenue, was 35.8% for First Quarter of Fiscal 2002, up from the 34.9% reported for First Quarter of Fiscal 2001. The gross margin for the MT&S sector was 37.7% for First Quarter of Fiscal 2002, up 4.2%, compared to First Quarter of Fiscal 2001. The increase was primarily the result of internal operating improvements. Operating earnings increased significantly from $2.3 million to $6.4 million. The FA sector declined to 27.9% for First Quarter of Fiscal 2002, as compared to 39.7% for First Quarter of Fiscal 2001. The decrease was primarily the result of a reduction in sales volume and a $1.65 million charge for slow moving inventory write-downs. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) RESULTS OF OPERATIONS (CONTINUED) FIRST QUARTER OF FISCAL 2002 COMPARED TO FIRST QUARTER OF FISCAL 2001 (CONTINUED) SELLING EXPENSES decreased to $14.0 million for First Quarter of Fiscal 2002, or 0.7%, from $14.1 million for First Quarter of Fiscal 2001. Selling expense, as a percentage of revenue, increased to 16.5% for First Quarter of Fiscal 2002, compared to 15.4% for First Quarter of Fiscal 2001. GENERAL AND ADMINISTRATIVE EXPENSES totaled $6.7 million for First Quarter of Fiscal 2002, a decrease of 20.2%, compared to $8.4 million for First Quarter of Fiscal 2001. The decrease in the overall expense was partially due to implementation of FASB 142, which eliminated goodwill amortization starting October 1, 2001. See Note 2 to Consolidated Financial Statements for additional information. While general and administrative expenses, as a percentage of revenue, decreased by 1.3 % (7.9% for First Quarter of Fiscal 2002, compared to 9.2% for First Quarter of Fiscal 2001), spending in this area decreased primarily as the result of the Company's cost reduction and productivity initiatives that were implemented last year. RESEARCH AND DEVELOPMENT EXPENSES aggregated $5.1 million, relatively unchanged, compared to the First Quarter of Fiscal 2001. Research and development expenses, as a percentage of revenue, increased to 6.0% for First Quarter of Fiscal 2002, compared to 5.6% for First Quarter of Fiscal 2001. INTEREST EXPENSE decreased to $1.2 million for First Quarter of Fiscal 2002, compared to $1.5 million for First Quarter of Fiscal 2001. This decrease was primarily the result of lower average borrowings under its bank line of credit. Interest expense, as a percentage of revenue, decreased to 1.4% for First Quarter of Fiscal 2002, compared to 1.6% for First Quarter of Fiscal 2001. INTEREST INCOME remained stable at $0.1 million for First Quarter of Fiscal 2002, compared to the same amount for First Quarter of Fiscal 2001. Interest income for First Quarter of Fiscal 2002 consisted principally of earnings on short-term investments of excess cash funds. Interest income for First Quarter of Fiscal 2001 included interest received as part of certain refunds of prior years' federal income taxes. OTHER (INCOME) AND EXPENSE for First Quarter of Fiscal 2002 primarily reflect a gain on foreign currency translation of $(0.1) million. Conversely, the other (income) expense for First Quarter of Fiscal 2001 consisted primarily of a loss on foreign currency translation of $0.2 million. NET INCOME increased to $2.2 million for First Quarter of Fiscal 2002, compared to a loss of $0.6 million for First Quarter of Fiscal 2001 primarily as the result of the application of SAB 101, which affects the timing of revenue recognition. See Note 1 to Consolidated Financial Statements for additional information. Net income, as a percentage of revenue, increased to 2.6% for First Quarter of Fiscal 2002, compared to (0.6%) for First Quarter of Fiscal 2001. The effective tax rate for First Quarter of Fiscal 2002 was 38.2%, compared to 38.6% for First Quarter of Fiscal 2001. The slight decrease in the overall effective tax rate was due to a more balanced mix of operating earnings from domestic and foreign locations as compared to First Quarter of Fiscal 2001, resulting in the offset of higher foreign tax rates with federal and state tax rates in the United States. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES AND LIQUIDITY CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $17.7 million during the First Quarter of Fiscal 2002, compared to cash provided of $8.1 million during the First Quarter of Fiscal 2001. The increase in cash provided by operating activities during the First Quarter of Fiscal 2002 resulted primarily from improved operating results, the reduction in accounts receivables of $9.6 million and the increase in advance billings to customers of $9.8 million. These increases in available cash were partially offset during the First Quarter of Fiscal 2002 by an increase in inventory of $2.3 million and the decrease in trade accounts payable of $3.4 million. CASH FLOWS FROM INVESTING ACTIVITIES required cash usage of $0.5 million during the First Quarter of Fiscal 2002, compared with $2.2 million in the First Quarter of Fiscal 2001. Cash was principally used during each of the periods for additions to property and equipment. Capital expenditures for Fiscal 2002 are expected to aggregate approximately $8 million. The Company expects these expenditures to be funded primarily from internally generated funds. CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $1.3 million during the First Quarter of Fiscal 2002, compared to cash provided of $1.1 million for the First Quarter of Fiscal 2001. During the First Three Months of Fiscal 2002, the Company's increased cash flows from operating activities allowed it to internally fund its capital expenditures, dividend payments, and purchases of treasury stock. Under the terms of its credit agreements, the Company has agreed to certain financial covenants. At December 31, 2001, the Company was in compliance with the terms and covenants of its credit agreements. The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources will be adequate to finance on-going operations, allow for the investment in opportunities to internally grow its business and to 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. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) OTHER MATTERS(CONTINUED) PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY LANGUAGE Statements included or incorporated by reference in this Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical or current facts are "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important facts, among others, could affect the Company's actual results in the future and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statements: (I) With regard to the Company's new product developments, there may be uncertainties currently unknown to the Company concerning the expected results. (II) Possible significant volatility in both backlog and quarterly operating results may result from large, individual, fixed price orders in connection with sales of MT&S systems. (III) Export controls based on U.S. initiatives and foreign policy, as well as import controls imposed by foreign governments, may cause delays for certain shipments or the rejection of orders by the Company. Such delays could create material fluctuations in quarterly results and could have a material adverse effect on results of operations. Local political conditions and/or currency restrictions may also affect foreign revenue. (IV) Delays in realization of backlog orders may occur due to technical difficulties, export licensing approval or the customer's preparation of the installation site, any of which can affect the quarterly or annual period when backlog is recognized as revenue and could materially affect the results of any such period. (V) The Company experiences competition on a worldwide basis. Customers may choose to purchase equipment from the Company or its competitors. (VI) The Company is exposed to market risk from changes in foreign currency exchange rates, which can affect its results from operations and financial condition. The forgoing list is not exhaustive, and the Company disclaims any obligation to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The required disclosures are included in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to the Consolidated Financial Statements included in the Company's 2001 Annual Report to Shareholders and Form 10-K for Fiscal 2001 filed with the Securities and Exchange Commission. This information remains current and is incorporated herein by reference. 12 PART II-------OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. The following are submitted as part of this report. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 2001. 13 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MTS SYSTEMS CORPORATION --------------------------- Sidney W. Emery, Jr. Chairman Chief Executive Officer Principal Financial Officer Dated: February 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----