-----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, VTPTCUyqRREpLKyVjds5cBVQNxAMLVAHwdI+Qr6NNbPhMLWJ20ZkF3+gxV9CTw64 VqGKj5gspo1J/rHyIc3ciQ== 0000897101-03-000953.txt : 20030811 0000897101-03-000953.hdr.sgml : 20030811 20030811102203 ACCESSION NUMBER: 0000897101-03-000953 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030628 FILED AS OF DATE: 20030811 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: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-02382 FILM NUMBER: 03833415 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 mts0333391_10q.txt MTS SYSTEMS 10-Q 6-28-2003 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 June 28, 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 August 5, 2003 was 21,407,795 shares. MTS SYSTEMS CORPORATION REPORT ON FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED JUNE 28, 2003 INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets As of June 28, 2003 and September 28, 2002 2 Consolidated Statements of Income For the Three and Nine Months Ended June 28, 2003 and June 30, 2002 3 Consolidated Statements of Cash Flows For the Nine Months Ended June 28, 2003 and June 30, 2002 4 Condensed Notes to Consolidated Financial Statements 5 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 17 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 1 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MTS SYSTEMS CORPORATION Consolidated Balance Sheets (unaudited - in thousands, except per share data)
June 28, September 28, 2003 2002 --------- --------- ASSETS Current Assets: Cash and cash equivalents $ 99,034 $ 62,456 Short-term investments 46,696 35,094 Accounts receivable, net of allowances for doubtful accounts 50,613 59,943 Unbilled contracts and retainage receivable 27,215 32,276 Inventories 31,503 34,773 Prepaid expense 4,658 5,380 Current deferred tax asset 8,739 8,739 Other current assets 940 19 Assets of discontinued operations -- 15,311 --------- --------- Total current assets 269,398 253,991 --------- --------- Property and Equipment: Land 3,247 3,247 Buildings and improvements 47,276 44,723 Machinery and equipment 84,219 79,679 Accumulated depreciation (77,773) (70,765) --------- --------- Total property and equipment, net 56,969 56,884 --------- --------- Goodwill 4,388 4,268 Other assets 2,477 3,363 Non-current deferred tax asset 1,593 1,593 --------- --------- Total Assets $ 334,825 $ 320,099 ========= ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Notes payable $ 400 $ 598 Current maturities of long-term debt 6,831 8,605 Accounts payable 13,562 13,137 Accrued payroll-related costs 31,365 26,112 Advance payments from customers 43,962 37,209 Accrued warranty costs 5,036 4,482 Accrued income taxes 5,807 11,120 Other accrued liabilities 10,299 9,917 Liabilities of discontinued operations -- 1,795 --------- --------- Total current liabilities 117,262 112,975 --------- --------- Deferred income taxes 1,881 1,519 Long-term debt, less current maturities 36,044 42,790 Other long-term liabilities 926 550 --------- --------- Total Liabilities 156,113 157,834 --------- --------- Shareholders' Investment: Common stock, $.25 par; 64,000 shares authorized: 21,172 and 21,208 shares issued and outstanding 5,293 5,302 Additional paid-in capital 8,589 9,770 Retained earnings 158,245 146,857 Accumulated other comprehensive income 6,585 336 --------- --------- Total shareholders' investment 178,712 162,265 --------- --------- Total Liabilities and Shareholders' Investment $ 334,825 $ 320,099 ========= =========
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 Nine Months Ended ---------------------- ---------------------- June 28, June 30, June 28, June 30, 2003 2002 2003 2002 --------- --------- --------- --------- Revenue $ 79,312 $ 79,695 $ 256,987 $ 243,958 Cost of sales 48,573 48,872 161,622 150,069 --------- --------- --------- --------- Gross profit 30,739 30,823 95,365 93,889 --------- --------- --------- --------- Operating expenses: Selling 12,951 12,611 39,303 38,779 General and administrative 6,637 7,988 20,078 19,895 Research and development 3,986 3,540 11,609 12,113 --------- --------- --------- --------- Total operating expenses 23,574 24,139 70,990 70,787 --------- --------- --------- --------- Income from operations 7,165 6,684 24,375 23,102 --------- --------- --------- --------- Interest expense 811 969 2,804 3,071 Interest income (660) (224) (1,764) (529) Gain on sale of investments -- -- -- (2,630) Other expense (income), net 917 898 (795) (800) --------- --------- --------- --------- Income before income taxes, discontinued operations, and cumulative effect of accounting change 6,097 5,041 24,130 23,990 Provision for income tax 2,012 1,577 7,963 7,869 --------- --------- --------- --------- Income before discontinued operations and cumulative effect of accounting change 4,085 3,464 16,167 16,121 --------- --------- --------- --------- Discontinued operations: Income (loss) from discontinued operations, net of tax 419 (205) 199 (3,986) Gain (loss) on sale of discontinued businesses, net of tax 1,225 -- (1,177) -- Cumulative effect of accounting change, net of tax -- -- -- (9,198) --------- --------- --------- --------- Income (loss) from discontinued operations, net of tax 1,644 (205) (978) (13,184) --------- --------- --------- --------- Income before cumulative effect of accounting change on continuing operations 5,729 3,259 15,189 2,937 Cumulative effect of accounting change on continuing operations, net of tax -- -- -- (4,523) --------- --------- --------- --------- Net income (loss) $ 5,729 $ 3,259 $ 15,189 $ (1,586) ========= ========= ========= ========= Earnings (loss) per share: Basic- Income before discontinued operations and cumulative effect of accounting change $ 0.19 $ 0.16 $ 0.77 $ 0.76 Discontinued operations: Income (loss) from discontinued operations, net of tax 0.02 (0.01) 0.01 (0.19) Gain (loss) on sale of discontinued businesses, net of tax 0.06 0.00 (0.06) 0.00 Cumulative effect of accounting change, net of tax 0.00 0.00 0.00 (0.44) --------- --------- --------- --------- Income (loss) from discontinued operations, net of tax 0.08 (0.01) (0.05) (0.63) --------- --------- --------- --------- Income before cumulative effect of accounting change on continuing operations 0.27 0.15 0.72 0.13 Cumulative effect of accounting change, net of tax 0.00 0.00 0.00 (0.21) --------- --------- --------- --------- Earnings (loss) per share $ 0.27 $ 0.15 $ 0.72 $ (0.08) ========= ========= ========= ========= Weighted average number of common shares outstanding - basic 21,049 21,123 21,098 21,069 ========= ========= ========= ========= Diluted- Income before discontinued operations and cumulative effect of accounting change $ 0.19 $ 0.16 $ 0.76 $ 0.75 Discontinued operations: Income (loss) from discontinued operations, net of tax 0.02 (0.01) 0.01 (0.18) Gain (loss) on sale of discontinued businesses, net of tax 0.06 0.00 (0.06) 0.00 Cumulative effect of accounting change, net of taxes 0.00 0.00 0.00 (0.43) --------- --------- --------- --------- Income (loss) from discontinued operations, net of tax 0.08 (0.01) (0.05) (0.61) --------- --------- --------- --------- Income before cumulative effect of accounting change on continuing operations 0.27 0.15 0.71 0.14 Cumulative effect of accounting change, net of tax 0.00 0.00 0.00 (0.21) --------- --------- --------- --------- Earnings (loss) per share $ 0.27 $ 0.15 $ 0.71 $ (0.07) ========= ========= ========= ========= Weighted average number of common shares outstanding - diluted 21,433 21,411 21,397 21,381 ========= ========= ========= =========
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)
Nine Months Ended -------------------- June 28, June 30, 2003 2002 -------- -------- Cash flows from operating activities: Net income (loss) $ 15,189 $ (1,586) Adjustments to reconcile net income (loss) to net cash provided by continuing 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 (Income) loss from discontinued operations (199) 3,986 Loss on sale of discontinued businesses 1,177 -- Gain on sale of investment -- (2,630) Depreciation and amortization 7,104 7,721 Deferred income taxes 69 (73) Bad debt provision 225 430 Inventory provision 1,629 3,771 Changes in operating assets and liabilities, net of effects of businesses divested: Accounts, unbilled contracts and retainage receivables 18,750 31,836 Inventories 4,964 11,821 Prepaid expenses 769 414 Other assets (947) (963) Accounts payable 43 (391) Accrued compensation and benefits 5,261 (4,461) Advance billings to customers 4,448 7,196 Accrued warranty costs 350 271 Other liabilities (6,458) (2,095) -------- -------- Net cash provided by continuing operating activities 52,374 68,968 -------- -------- Cash flows from investing activities: Additions to property and equipment (4,931) (2,066) Proceeds from maturity of short-term investments 42,594 -- Proceeds from sale of short-term investments -- 4,920 Purchases of short-term investments (54,196) -- Net proceeds from sale of businesses 12,356 -- -------- -------- Net cash (used in) provided by investing activities (4,177) 2,854 -------- -------- Cash flows from financing activities: Net repayments under notes payable to banks (230) -- Payments of long-term debt (9,557) (1,326) Cash dividends (3,806) (3,794) Proceeds from exercise of stock options 4,698 1,445 Payments to purchase and retire common stock (5,888) (836) -------- -------- Net cash used in financing activities (14,783) (4,511) -------- -------- Net cash provided by discontinued operations 182 4,248 Effect of exchange rate on changes in cash 2,982 311 -------- -------- Net increase in cash and cash equivalents 36,578 71,870 Cash and cash equivalent, at beginning of period 62,456 17,336 -------- -------- Cash and cash equivalent, at end of period $ 99,034 $ 89,206 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for - Interest expense $ 1,959 $ 3,117 Income taxes $ 12,468 $ 4,230
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 nine-month period ended June 28, 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. 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 June 28, 2003 and September 28, 2002, respectively, were as follows: 5 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 28, 2003 September 28, 2002 ------------- ------------------ (in thousands of dollars) Customer projects in various stages of completion $ 7,512 $ 8,679 Components, assemblies and parts 23,991 26,094 ------------ ------------ Total $ 31,503 $ 34,773 ============ ============ Short-Term Investments - ---------------------- Short-term investments at June 28, 2003 consist of highly liquid United States government and Agency obligations, bank certificates of deposit, and highly rated corporate obligations maturing in four to twelve months from the date of purchase, with balances of $21.7 million, $3.0 million, and $22.0 million, respectively. The Company classifies its investment 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 at June 28, 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 June 28, 2003 the Company had no investments in equity securities. 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 does not expect the adoption to have a material impact on the Company's consolidated 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. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company has concluded there will be no material impact of its adoption. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not have any activities that are subject to the requirements of SFAS No. 150. 3. DISCONTINUED OPERATIONS - -------------------------- During the second quarter of fiscal year 2003, the Company's board of directors approved the sale of the 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 also sold to Parker-Hannifin 100% of its stock in the Automation division's German operations, which completed the sale of the Company's entire Automation division and its exit from the motor and amplifier business. In March 2003, the Company discontinued the custom military business of its Automation division. As a result of the Company's second quarter 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 6 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 prices of the various asset groups comprising the Automation business were used as the basis for the valuation. As a result of this valuation, the Company recorded an impairment charge on discontinued operations in the second quarter of fiscal year 2003 of $2.4 million, net of taxes. After the final sale transactions were completed, the Company recorded a gain on the sale of the Automation division of $1.2 million, net of taxes, for third quarter of fiscal 2003. The Automation division was historically included in the Company's Industrial segment (formerly named "Factory Automation") for financial reporting. Per SFAS 144, the Company reported the results of the operations of the Automation division as discontinued operations effective March 29, 2003. Following are the operating results of the discontinued operations included in the Company's results for the respective periods:
Three Months Ended Nine Months Ended June 28, 2003 June 30, 2002 June 28, 2003 June 30, 2002 --------------- --------------- ---------------- --------------- (in thousands of dollars) (in thousands of dollars) Revenue $ 1,581 $ 7,010 $ 15,756 $ 21,986 Income (loss) on discontinued operations before taxes, gain (loss) on sale, and cumulative effect of accounting change $ 697 $ (349) $ 353 $ (6,518)
4. EARNINGS (LOSS) PER COMMON SHARE - ----------------------------------- Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the applicable periods. Diluted earnings (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 Nine Months Ended June 28, June 30, June 28, June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (in thousands, except per share data) Income before cumulative effect of accounting change on continuing operations $ 5,729 $ 3,259 $ 15,189 $ 2,937 Cumulative effect of accounting change on continuing operations, net of tax -- -- -- (4,523) ---------- ---------- ---------- ---------- Net income (loss) $ 5,729 $ 3,259 $ 15,189 $ (1,586) ========== ========== ========== ========== Weighted average common shares outstanding 21,049 21,123 21,098 21,069 Diluted potential common shares 384 288 299 312 ---------- ---------- ---------- ---------- Total diluted common shares 21,433 21,411 21,397 21,381 ========== ========== ========== ========== Basic earnings (loss) per share $ 0.27 $ 0.15 $ 0.72 $ (0.08) ========== ========== ========== ========== Diluted earnings (loss) per share $ 0.27 $ 0.15 $ 0.71 $ (0.07) ========== ========== ========== ==========
7 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. COMPREHENSIVE INCOME - ----------------------- Comprehensive income represents net earnings 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 Nine Months Ended June 28, 2003 June 30, 2002 June 28, 2003 June 30, 2002 ---------- ---------- ---------- ---------- (in thousands of dollars) (in thousands of dollars) Net income (loss) $ 5,729 $ 3,259 $ 15,189 $ (1,586) Change in cumulative translation adjustment 4,137 4,423 6,768 1,988 Unrealized gain (loss) on derivative instruments 100 (15) (519) (376) Unrealized gain on investments -- -- -- 146 ---------- ---------- ---------- ---------- Comprehensive income $ 9,966 $ 7,667 $ 21,438 $ 172 ========== ========== ========== ==========
6. BUSINESS SEGMENT INFORMATION - ------------------------------- The Company's Chief Executive Officer and its management regularly reviews the available financial information for the Company's discrete business units. Based on similarities in the economic characteristics, nature of products and services, production processes, type or class of customer served, method of distribution and regulatory environments, the operating units have been aggregated for financial statement purposes into two reportable segments called Test (formerly "MT&S") and Industrial (formerly "Factory Automation"). The Test segment manufactures test equipment used in both mechanical and virtual simulation and testing in ground vehicles, aerospace, and infrastructure markets. The Industrial segment manufactures component parts for end products in industrial markets. 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. Financial information by reportable segment is as follows:
Three Months Ended Nine Months Ended June 28, June 30, June 28, June 30, 2003 2002 2003 2002 -------- -------- -------- -------- (in thousands of dollars) REVENUE BY SEGMENT: Test $ 66,675 $ 69,343 $221,431 $214,322 Industrial 12,637 10,352 35,556 29,636 -------- -------- -------- -------- Total revenue $ 79,312 $ 79,695 $256,987 $243,958 ======== ======== ======== ======== INCOME FROM OPERATIONS BY SEGMENT: Test $ 6,051 $ 6,070 $ 21,761 $ 21,560 Industrial 1,114 614 2,614 1,542 -------- -------- -------- -------- Total income from operations $ 7,165 $ 6,684 $ 24,375 $ 23,102 ======== ======== ======== ========
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - ------------------------------------------------ The Company utilizes forward exchange contracts to protect the U.S. dollar value of estimated foreign currency denominated cash flows (primarily the Euro, British Pound, Swedish Krona, and the Japanese Yen). These contracts are recognized on the balance sheet at fair value, which reflects the estimated amount at which they could be settled based on forward market exchange rates. These contracts generally mature within one year. 8 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy. The Company formally assesses, both at the contract'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. 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 contracts that are highly effective and qualify as foreign currency cash flow hedges under the Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivatives Instruments and Hedging Activities," are recorded in other comprehensive income until they are recognized in earnings at the time the forecasted transaction occurs. When it is determined that a derivative is not highly effective as a hedge or has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. Hedge accounting is discontinued 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 also 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. At June 28, 2003 and June 30, 2002, the Company had outstanding foreign currency forward contracts with U.S. dollar notional equivalent amounts of $24.5 million and $25.0 million, respectively. At June 28, 2003 and June 30, 2002, the fair value of the foreign currency forward contracts was ($0.5) million and $0.8 million, respectively. The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was negligible for the three-month periods ended June 28, 2003 and June 30, 2002. At June 28, 2003, approximately ($0.6) million was projected to be reclassified from other comprehensive income into earnings in the next 12 months. At June 30, 2002, approximately $0.3 million was projected to be reclassified from other comprehensive income into earnings in the next 12 months. The maximum maturity of any derivative was 0.9 years at June 28, 2003 and 1.6 years at June 30, 2002. 8. DEFERRED TAX ASSET - --------------------- At June 28, 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 June 28, 2003 and June 30, 2002 were as follows: 9 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended Nine Months Ended June 28, June 30, June 28, June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (in thousands of dollars) Beginning Balance $ 5,035 $ 4,559 $ 4,482 $ 4,324 Warranty Provisions 1,386 926 4,396 3,404 Warranty Claims (1,572) (948) (4,167) (3,182) Translation 187 107 325 98 ---------- ---------- ---------- ---------- Ending Balance $ 5,036 $ 4,644 $ 5,036 $ 4,644 ========== ========== ========== ==========
10. STOCK OPTIONS - ----------------- As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to continue to follow 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 for the awards under these plans, consistent with the methods provided in SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been as follows:
Three Months Ended Nine Months Ended June 28, June 30, June 28, June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (in thousands of dollars) Net income (loss) as reported $ 5,729 $ 3,259 $ 15,189 $ (1,586) Less employee stock-based compensation (690) (502) (1,877) (1,734) ---------- ---------- ---------- ---------- Pro forma net income (loss) $ 5,039 $ 2,757 $ 13,312 $ (3,320) ========== ========== ========== ========== Earnings (loss) per share - Basic: As reported $ 0.27 $ 0.15 $ 0.72 $ (0.08) Less employee stock-based compensation (0.03) (0.02) (0.09) (0.08) ---------- ---------- ---------- ---------- Pro forma earnings (loss) per share $ 0.24 $ 0.13 $ 0.63 $ (0.16) ---------- ---------- ---------- ---------- Earnings (loss) per share - Diluted: As reported $ 0.27 $ 0.15 $ 0.71 $ (0.07) Less employee stock-based compensation (0.03) (0.02) (0.09) (0.09) ---------- ---------- ---------- ---------- Pro forma earnings (loss) per share $ 0.24 $ 0.13 $ 0.62 $ (0.16) ========== ========== ========== ==========
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. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 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. Short-term investments at June 28, 2003 consist of highly liquid United States government and Agency obligations, bank certificates of deposit, and highly rated corporate obligations maturing in four to twelve months from the date of purchase, with balances of $21.7 million, $3.0 million, and $22.0 million, respectively. The Company classifies its investment 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 at June 28, 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 June 28, 2003 the Company had no investments in equity securities. 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 does not expect the adoption to have a material impact on the Company's consolidated 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. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company has concluded there will be no material impact of its adoption. In May 2003, the FASB issued No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not have any activities that are subject to the requirements of SFAS No. 150. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS NEW CUSTOMER ORDERS AND BACKLOG - ------------------------------- THREE MONTHS ENDED JUNE 28, 2003 ("THIRD QUARTER OF FISCAL 2003") COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 ("THIRD QUARTER OF FISCAL 2002") New orders from customers during Third Quarter of Fiscal 2003 aggregated $97.8 million, an increase of 4.9% compared to customer orders of $93.2 million booked during Third Quarter of Fiscal 2002. Orders for the Test segment (formerly named "Mechanical Testing and Simulation") rose 3.5% to $85.7 million, compared to customer orders of $82.8 million for Third Quarter of Fiscal 2002, primarily due to strength in the international motorsports and aerospace markets. The automotive and infrastructure markets continue to experience weak demand. The Test segment accounted for 87.6% of total Company orders for Third Quarter of Fiscal 2003, compared to 88.8% for the Third Quarter of Fiscal 2002. Orders for the Industrial segment (formerly named "Factory Automation") increased 16.3% to $12.1 million for Third Quarter of Fiscal 2003, from $10.4 million for Third Quarter of Fiscal 2002. Orders for the Sensors business increased in both North America and Europe due to customer inventory replenishment and sales into new markets. The Industrial segment accounted for 12.4% of total Company orders during Third Quarter of Fiscal 2003, compared to 11.2% in Third Quarter of Fiscal 2002. NINE MONTHS ENDED JUNE 28, 2003 ("FIRST NINE MONTHS OF FISCAL 2003") COMPARED TO NINE MONTHS ENDED JUNE 30, 2002 ("FIRST NINE MONTHS OF FISCAL 2002") New orders for the First Nine Months of Fiscal 2003 aggregated $252.1 million, a decrease of 5.5% compared to orders of $266.7 million for the First Nine Months of Fiscal 2002. Orders for the Test segment of $216.7 million in the First Nine Months of Fiscal 2003 decreased 8.5% compared to $236.9 million in the First Nine Months of Fiscal 2002. The decrease was primarily due to the impact of a $13 million aerospace order booked in the First Nine Months of Fiscal 2002. This segment accounted for 86.0% of total new orders in the First Nine Months of Fiscal 2003, compared to 88.8% for the First Nine Months of Fiscal 2002. Orders for the Industrial segment of $35.4 million in the First Nine Months of Fiscal 2003 increased 18.8% from orders of $29.8 million booked in the First Nine Months 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 Industrial segment accounted for 14.0% of total orders during the First Nine Months of 2003 compared to 11.2% during the First Nine Months of Fiscal 2002. Backlog of undelivered orders at June 28, 2003 was $169.1 million, relatively flat from backlog of $170.0 million at September 28, 2002 and an increase of 1.7% from backlog of $166.3 million at June 30, 2002. The Company's backlog is subject to order cancellations. RESULTS OF OPERATIONS - --------------------- THIRD QUARTER OF FISCAL 2003 COMPARED TO THIRD QUARTER OF FISCAL 2002 REVENUE for Third Quarter of Fiscal 2003 was $79.3 million, relatively flat compared to revenue of $79.7 million for the Third Quarter of Fiscal 2002. Revenue from international customers for Third Quarter of Fiscal 2003 represented 56.2% of total revenues, compared to 43.6% for Third Quarter of Fiscal 2002. Growth in the European market of 43.4% was offset by a decline in North America of 22.4%. Revenue in the current period was favorably impacted by the effect of exchange rate changes. GROSS PROFIT for Third Quarter of Fiscal 2003 was $30.7 million, flat compared to gross profit of $30.8 million for Third Quarter of Fiscal 2002. Gross profit as a percentage of revenue was 38.7% for Third Quarter of Fiscal 2003, relatively flat from 38.6% reported for Third Quarter of Fiscal 2002. Gross profit as a percentage of revenue for the Test segment was 36.6% for Third Quarter of Fiscal 2003, down 0.5 percentage points compared to Third Quarter of Fiscal 2002, due 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS (CONTINUED) - --------------------- to product mix. Gross profit as a percentage of revenue for the Industrial segment was 50.1% for Third Quarter of Fiscal 2003, unchanged from the Third Quarter of Fiscal 2002. SELLING EXPENSES were $13.0 million for Third Quarter of Fiscal 2003, an increase of 3.2% from $12.6 million for Third Quarter of Fiscal 2002, primarily due to the launch of a new product line. Selling expense as a percentage of revenue increased slightly from 15.8% for the Third Quarter of Fiscal 2002 to 16.4% for Third Quarter of Fiscal 2003. GENERAL AND ADMINISTRATIVE EXPENSES totaled $6.6 million for Third Quarter of Fiscal 2003, a decrease of 17.5% compared to $8.0 million for Third Quarter of Fiscal 2002. General and administrative expenses as a percentage of revenue decreased by 1.7 percentage points from 10.0% for Third Quarter of Fiscal 2002 to 8.3% for Third Quarter of Fiscal 2003. The decrease is largely due to non-recurring consulting and legal expenses of $0.4 million and $0.4 million, respectively, recorded in the Third Quarter of Fiscal 2002. RESEARCH AND DEVELOPMENT EXPENSES totaled $4.0 million for the Third Quarter of 2003, an increase of 14.3% compared to $3.5 million for the Third Quarter of Fiscal 2002. Research and development expenses as a percentage of revenue were 5.0% for Third Quarter of Fiscal 2003 compared to 4.4% for Third Quarter of Fiscal 2002. The increase was primarily due to expense associated with a new product line and expenditures for a new testing system. INCOME FROM OPERATIONS increased 7.5%, from $6.7 million in Third Quarter of Fiscal 2002 to $7.2 million in Third Quarter of Fiscal 2003. Income from operations in the Test segment remained flat at approximately $6.1 million. Industrial segment income from operations increased 83.3% from $0.6 million to $1.1 million, driven by improved volume in the Industrial segment. INTEREST EXPENSE decreased to $0.8 million for Third Quarter of Fiscal 2003 compared to $1.0 million for Third Quarter of Fiscal 2002. This decrease was the result of a reduction in long-term debt. Interest expense as a percentage of revenue decreased to 1.0% for Third Quarter of Fiscal 2003, compared to 1.3% for Third Quarter of Fiscal 2002. INTEREST INCOME increased to $0.7 million for Third Quarter of Fiscal 2003 compared to $0.2 million for Third Quarter of Fiscal 2002, primarily due to an increase in the Company's holdings of short-term investments. OTHER INCOME AND EXPENSE for Third Quarter of Fiscal 2003 was $0.9 million, flat compared to Third Quarter of Fiscal 2002. INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE increased to $4.1 million for Third Quarter of Fiscal 2003 compared to $3.5 million for Third Quarter of Fiscal 2002, primarily driven by reduced general and administrative expenses and increased interest income. Income before discontinued operations as a percentage of revenue increased to 5.2% for Third Quarter of Fiscal 2003, compared to 4.4% for Third Quarter of Fiscal 2002. The effective tax rate for Third Quarter of Fiscal 2003 was 33.0% compared with a tax rate of 31.3% for Third Quarter of Fiscal 2002. The increase in the overall effective tax rate was primarily the result of an increase in the proportion of foreign income to domestic income, resulting in the offset of lower federal and state rates in the U.S. with higher foreign tax rates. FIRST NINE MONTHS OF FISCAL 2003 COMPARED TO FIRST NINE MONTHS OF FISCAL 2002 REVENUE for the First Nine Months of Fiscal 2003 was $257.0 million, an increase of $13.0 million, or 5.3%, compared to $244.0 million in the First Nine Months of Fiscal 2002. The increase was primarily due to a higher backlog position at the beginning of fiscal year 2003 than at the beginning of fiscal year 2002 as well as current year replenishment of customer inventory levels. Revenue for the First Nine Months of Fiscal 2003 was favorably impacted by the effect of exchange rate changes. Revenue generated by the Test segment was $221.4 million during the First Nine Months of Fiscal 2003, an increase of $7.1 million compared to the First Nine Months of Fiscal 2002. Industrial segment revenue increased to $35.6 million for the First Nine Months of Fiscal 2003, compared to $29.6 million for the First Nine Months of Fiscal 2002. GROSS PROFIT for the First Nine Months of Fiscal 2003 increased to $95.4 million, up 1.6% compared to gross profit of $93.9 million for the First Nine Months of Fiscal 2002. The increase in gross profit was primarily due to higher revenue 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS (CONTINUED) - --------------------- volume. Gross profit as a percentage of revenue was 37.1% for the First Nine Months of Fiscal 2003 compared to 38.5% for the First Nine Months of Fiscal 2002. The decrease is primarily the result of favorable product mix in the prior year. SELLING EXPENSES increased 1.3% to $39.3 million for the First Nine Months of Fiscal 2003 compared to $38.8 million for the First Nine Months of Fiscal 2002, principally related to higher revenue volume. Selling expense as a percentage of revenue decreased to 15.3% for the First Nine Months of Fiscal 2003 compared to 15.9% for the First Nine Months of Fiscal 2002, primarily due to cost reduction initiatives that were implemented throughout fiscal year 2002. GENERAL AND ADMINISTRATIVE EXPENSES totaled $20.1 million for the First Nine Months of Fiscal 2003, an increase of 1.0% compared to $19.9 million for the First Nine Months of Fiscal 2002. General and administrative expenses as a percentage of revenue declined to 7.8% for the First Nine Months of Fiscal 2003 from 8.2% for the First Nine Months of Fiscal 2002. The decrease is largely due to non-recurring consulting and legal expenses of $0.7 million and $0.4 million, respectively, recorded in the First Nine Months of Fiscal 2002. RESEARCH AND DEVELOPMENT EXPENSES decreased 4.1% to $11.6 million for the First Nine Months of Fiscal 2003 compared to $12.1 million for the First Nine Months of Fiscal 2002. Research and development expense as a percentage of revenue declined to 4.5% for the First Nine Months of Fiscal 2003 compared to 5.0% for the First Nine Months of Fiscal 2002, primarily due to product rationalization efforts implemented by the Company during the First Nine Months of Fiscal 2003, partially offset by expense associated with a new product line. INCOME FROM OPERATIONS increased by 5.6%, from $23.1 million for the First Nine Months of Fiscal 2002 to $24.4 million for the First Nine Months of Fiscal 2003. Income from operations increased slightly in the Test segment, from $21.6 million for the First Nine Months of Fiscal 2002 to $21.8 million for the First Nine Months of Fiscal 2003. Income from operations in the Industrial segment increased $1.1 million, from $1.5 million for the First Nine Months of Fiscal 2002 to $2.6 million for the First Nine Months of Fiscal 2003. INTEREST EXPENSE declined to $2.8 million for the First Nine Months of Fiscal 2003 compared to $3.1 million for the First Nine Months of Fiscal 2002. Interest expense as a percentage of revenue decreased by 0.2 percentage points, from 1.3% for the First Nine Months of Fiscal 2002 to 1.1% for the First Nine Months of Fiscal 2003. This decrease is primarily the result of a reduction in long-term debt. INTEREST INCOME increased $1.3 million, from $0.5 million for the First Nine Months of Fiscal 2002 to $1.8 million for the First Nine Months of Fiscal 2003, primarily due to an increase in short-term investments. Interest income as a percentage of revenue increased from 0.2% to 0.7%. GAIN ON SALE OF INVESTMENTS during the First Nine Months 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 equity investment holdings. OTHER INCOME AND EXPENSE was $0.8 million for the First Nine Months of Fiscal 2003, flat with other income of $0.8 million for the First Nine Months of Fiscal 2002. Other income for the First Nine Months of Fiscal 2003 primarily reflects a one-time gain of $1.3 million from proceeds from penalties associated with a cancelled customer contract, partially offset by $0.8 million of losses on foreign currency transactions. Other income for the First Nine Months of Fiscal 2002 consisted primarily of a gain on foreign currency transactions of $0.9 million. INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE was $16.2 million for the First Nine Months of Fiscal 2003 flat compared to $16.1 million for the First Nine Months of Fiscal 2002. The effective tax rate for the First Nine Months of Fiscal 2003 was 33.0%, compared to 32.8% for the First Nine Months of Fiscal 2002. CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES for the First Nine Months of Fiscal 2002 reflects a non-cash transition charge to income related to the adoption of SFAS 142, "Goodwill and Other Intangible Assets." 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 also sold to Parker-Hannifin 100% of its stock in the Automation division's German operations, which completed the sale of the Company's entire Automation division and marked the Company's exit from the motor and amplifier business. In March 2003, the Company discontinued the custom military business of its Automation division. As a result of the Company's second quarter 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 prices of the various asset groups comprising the Automation business were used as the basis for the valuation. As a result of this valuation, the Company recorded an impairment charge on discontinued operations in the second quarter of fiscal year 2003 of $2.4 million, net of taxes. After the final sale transactions were completed, the Company recorded a gain on the sale of the Automation division of $1.2 million, net of taxes, for third quarter of fiscal 2003. The Automation division was historically included in the Company's Industrial segment (formerly named "Factory Automation") for financial reporting. Per SFAS 144, the Company reported the results of the operations of the Automation division as discontinued operations effective March 29, 2003. The discontinued operations of the Automation division reported income from operations of $0.4 million, net of taxes, for the quarter ended June 28, 2003, compared to a loss of $0.2 million, net of taxes, for the same period in the prior year. This improvement is primarily the result of increased demand in the European market. Income, after tax, from the operation of discontinued operations for the nine months ended June 28, 2003 was $0.2 million, compared to a net loss of $4.0 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." CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES provided cash of $52.4 million during the First Nine Months of Fiscal 2003, compared to cash provided of $69.0 million during the First Nine Months of Fiscal 2002. The decrease in cash provided by continuing operating activities during the First Nine Months of Fiscal 2003 is primarily due to significant improvements in accounts receivable and inventory made in the First Nine Months of Fiscal 2002. CASH FLOWS FROM INVESTING ACTIVITIES required the use of cash totaling $4.2 million during the First Nine Months of Fiscal 2003, compared with cash provided of $2.9 million for the First Nine Months of Fiscal 2002. Cash was used in the First Nine Months of Fiscal 2003 for the purchase of short-term investments of $54.2 million and additions to property, plant and equipment of $4.9 million, partially offset by proceeds from the sale of short-term investments of $42.6 million and net proceeds from the sale of discontinued operations of $12.4 million. For the First Nine Months of Fiscal 2002, cash was primarily provided by the $4.9 million gross proceeds from the sale of an equity investment. CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash totaling $14.8 million during the First Nine Months of Fiscal 2003, compared to usage of $4.5 million for the First Nine Months of Fiscal 2002. The increase in cash used for financing activities was principally due to a $9.6 million reduction of long-term debt and $5.9 million of payments to purchase or retire common stock in the First Nine Months of Fiscal 2003. The Company's Board of Directors has authorized The Company to repurchase 2.0 million shares of its common stock, of which The Company had repurchased 0.4 million shares as of June 28, 2003. CASH FLOWS FROM DISCONTINUED OPERATIONS provided cash of $0.2 million during the First Nine Months of Fiscal 2003, compared to cash provided of $4.2 million for the First Nine Months of Fiscal 2002. The decrease in cash provided by 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) CAPITAL RESOURCES AND LIQUIDITY (CONTINUED) - ------------------------------- discontinued operations was primarily due to significant improvements in working capital made in the First Nine Months of Fiscal 2002. Under the terms of its credit agreements, the Company has certain financial covenants. At June 28, 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 that allows dividends to increase with the long-term growth of earnings per share, while sustaining dividends in down years. The Company's dividend payout ratio target is approximately 25% of earnings per share over the long term. 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: (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 Test 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. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (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 June 28, 2003, the Company had an investment portfolio that included some investments maturing in less than 90 days, accounted for as cash equivalents, and some investments maturing within 91 to 365 days, accounted for as short-term investments. The short-term investments of $46.7 million at June 28, 2003 consisted of fixed income securities subject to interest rate risk, which would decline in market value if market interest rates increase. However, because the Company has the ability and intent to hold these securities to maturity, the Company does not expect any change in market rates to have an adverse impact on income or cash flows. The Company operates internationally and thus is subject to 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 June 28, 2003, the Company's long-term debt consisted primarily of 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. 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. Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company's periodic reports. 17 PART II ------ OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION 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 November 26, 2002 (filed herewith). 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18U.S.C. 1350) (filed herewith). 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (filed herewith). 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (filed herewith). 32.2 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 April 28, 2003, the Company filed a Current Report on Form 8-K under Item 5 to announce the sale of the U.S. and German operations of its Automation Division to Parker Hannifin Corporation and the sale of all of the assets of the gradient amplifier business of the Automation Division to Performance Controls, Inc., an affiliate of Hitachi Medical Corporation. On May 9, 2003, the Company filed a Current Report on Form 8-K under Item 2 to provide the pro forma financial statements of the disposed businesses. On April 25, 2003, the Company filed a Current Report on Form 8-K to furnish to the SEC the Company's Second Quarter Fiscal 2003 earnings release under Regulation FD. 18 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: August 11, 2003 /s/ Sidney W. Emery, Jr. ----------------------------------------------- Sidney W. Emery, Jr. Chairman, President and Chief Executive Officer Dated: August 11, 2003 /s/ Susan E. Knight ----------------------------------------------- Susan E. Knight Vice President and Chief Financial Officer 19 EXHIBIT INDEX TO FORM 10-Q 3.b Restated Bylaws, reflecting amendments through November 26, 2002. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). EX-3.B 3 mts0333391_ex3-b.txt AMENDED BYLAWS EXHIBIT 3.b BYLAWS OF MTS SYSTEMS CORPORATION (Reflecting Amendments through November 26, 2002) ----------------------------------------------------- ARTICLE I --------- Shareholders ------------ Section 1. The annual meeting of the shareholders of this corporation shall be held on such date in January of each year and at such place as may be designated by the Board of Directors. A notice setting out the time and place of the annual meeting shall be mailed, postage prepaid, to each shareholder of record at his address as it appears on the records of the corporation, or if no such address appears, at his last known address, at least ten days prior to the annual meeting, but any shareholder may waive such notice either before, at, or after such meeting by a signed waiver in writing. Section 2. At the annual meeting, the shareholders shall elect directors of the corporation and shall transact such other business as may properly come before them. To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation, not less than 45 days nor more than 75 days prior to a meeting date corresponding to the previous year's annual meeting. Each such notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address of record of the shareholder proposing such business, (c) the class or series (if any) and number of shares of the corporation which are owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Article; provided, however, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these Bylaws. Section 3. A special meeting of the shareholders may be called at any time by the Chairman of the Board of Directors of the corporation and shall be called by the Secretary upon the request in writing by two or more members of the Board of Directors, upon the vote of the Directors, or upon the request in writing of shareholders holding not less than one-tenth of the outstanding shares of voting stock. Such meeting shall be called by mailing a notice thereof as above provided. Such notice shall state the time, place, and object of the meeting. Section 4. At any shareholders' meeting, each shareholder shall be entitled to one vote for each share of stock standing in his name on the books of the corporation as of the date of the meeting. Any shareholder may vote either in person or by proxy. The presence in person or by proxy of the holders of a majority of the shares of stock entitled to vote at any shareholders' meeting shall constitute a quorum for the transaction of business. If no quorum be present at any meeting, the shareholders present in person or by proxy may adjourn the meeting to such future time as they shall agree upon without further notice other than by announcement at the meeting at which such adjournment is taken. ARTICLE II ---------- Directors --------- Section 1. The Board of Directors shall have the general management and control of all business and affairs of the corporation and shall exercise all the powers that may be exercised or performed by the corporation under the statutes, its Articles of Incorporation, and its Bylaws. Section 2. The Board of Directors of this corporation shall consist of up to ten Directors, and majority of the Directors then holding office shall constitute a quorum. Section 3. Each director shall be elected for a term of one year, and shall hold office for that term and until his successor is elected and qualified. If a vacancy in the Board occurs by reason of death, resignation, or otherwise, the vacancy may be filled for the unexpired portion of the term in which it occurs by a majority vote of the remaining Directors. Section 4. The Board of Directors may meet regularly at such time and place as it shall fix by resolution, and no notice of regular meetings shall be required. Special meetings of the Board of Directors may be called by the President or any two Directors by giving at least three days' notice to each of the other Directors by mail, telephone, telegraph, or in person, provided that such notice may be waived either before, at, or after a meeting by any Director by a signed waiver in writing. Section 5. Any action which might have been taken at a meeting of the Board of Directors may be taken without a meeting if done in writing, signed by all of the Directors, and any such action shall be as valid and effective in all respects as if taken by the Board at a regular meeting. Section 6. The Board of Directors shall fix and change as it may from time to time determine by a majority vote, the compensation to be paid the officers of the corporation, and, if deemed appropriate, the members of the Board of Directors. Section 7. Subject to the provisions of applicable laws and its Articles of Incorporation, the Board of Directors shall have full power to determine whether any, and if any, what part of 2 any, funds legally available for the payment of the dividends shall be declared in dividends and paid to the shareholders; the division of the whole or any part of such funds of this corporation shall rest wholly within the discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise. Section 8. Except as otherwise provided in Article III of these Bylaws, the Board of Directors may, in its discretion, by the affirmative vote of a majority of the Directors, appoint committees which shall have and may exercise such powers as shall be conferred or authorized by the resolutions appointing them. A majority of any such committee, if the committee be composed of more than two members, may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to discharge any such committee. ARTICLE III ----------- Executive Committee ------------------- The Board of Directors may by unanimous affirmative action of the entire Board designate two or more of their number to constitute an Executive Committee which, to the extent determined by unanimous affirmative action of the Board, shall have and exercise the authority of the Board in the management of the business of the corporation. Such Executive Committee shall act only in the interval between meetings of the Board and shall be subject at all times to the control and direction of the Board. ARTICLE IV ---------- Officers -------- Section 1. The officers of this corporation shall be a Chairman of the Board of Directors, a President (one of which may be designated Chief Executive Officer in the discretion of the Directors), one or more Vice Presidents (any one of which may be designated as Executive Vice President in the discretion of the Directors), a Treasurer, a Secretary, and such other and further officers, including any number of Assistant Secretaries and Assistant Treasurers as may be deemed necessary from time to time by the Board of Directors, each of whom shall be elected by the Board of Directors except that the Board of Directors may delegate to the President or Chief Executive Officer authority to appoint certain Vice Presidents. One person may hold any two offices other than those of President and Vice President. No more than two offices shall be held by any one person. Each officer shall serve at the pleasure of the Board of Directors until the next annual meeting of Directors and until his successor is duly elected and qualifies. Notwithstanding the foregoing, the Board of Directors shall have the power and authority to cause the corporation to enter into Employment Agreements or Contracts with any of the officers of the corporation for periods exceeding one year. 3 Section 2. The Chairman of the Board of Directors shall preside at meetings of shareholders and Directors. Section 3. The Chief Executive Officer shall have general and active management of the business under the supervision and direction of the Board of Directors and he shall be responsible for carrying into effect all orders and resolutions of the Board of Directors. He shall also have such other powers and perform such other duties as the Board of Directors may from time to time prescribe. The position of Chief Executive Officer shall be filled, at the Board of Directors' discretion, either by the Chairman or the President. Section 4. The Board of Directors may also appoint a Chief Operating Officer with duties to be determined by the Chief Executive Officer. Unless he is also serving as the Chief Executive Officer, the President would be appointed as Chief Operating Officer. If the President is also serving as Chief Executive Officer, the President shall nominate an Executive Vice President to be appointed by the Board as Chief Operating Officer. Section 5. The Vice Presidents of the corporation shall each have such powers and duties as generally pertain to their respective offices as well as such powers and duties as from time to time may be conferred by the Board of Directors. Section 6. The Secretary shall keep a record of the meetings and proceedings of the Directors and shareholders, have custody of the corporate seal and of other corporate records specifically entrusted to him by these Bylaws or by direction of the Board of Directors, and shall give notice of such meetings as are required by these Bylaws or by the Directors. Section 7. The Treasurer shall keep accounts of all monies and assets of the corporation received or disbursed, shall deposit all funds in the name of and to the credit of the corporation in such banks or depositories or with such custodians as may be authorized to receive the same by these Bylaws or the Board of Directors, and shall render such accounts thereof as may be required by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, or the shareholders. ARTICLE V --------- Fiscal Year ----------- Each fiscal year of the corporation shall, commencing with fiscal year 2002, end on the Saturday closest to September 30 of such year and the succeeding fiscal year shall, commencing with fiscal year 2003, commence on the next day thereafter, and each fiscal quarter shall end on the Saturday closest to December 31, March 31 and June 30 of each year and the succeeding fiscal quarter shall commence on the respective next day thereafter. 4 ARTICLE VI ---------- Office ------ The principal office of this corporation shall be at such place as the Board of Directors shall fix from time to time. The corporation may also have an office or offices at such other places and in such other states or countries as the Board of Directors may from time to time authorize and establish. ARTICLE VII ----------- Seal ---- The corporation shall have a corporate seal which shall bear the name of the corporation and the name of the state of incorporation and the words "corporate seal." It shall be in such form and bear such other inscription as the Board of Directors may determine or approve. ARTICLE VIII ------------ General Provisions ------------------ Section 1. Shares of stock in this corporation not exceeding the authorized number thereof as specified in the Articles of Incorporation may be issued, and certificates therefore shall be authenticated by the Chairman of the Board of Directors, or the President or any Vice President and the Secretary or Treasurer upon authorization by the Board of Directors and receipt by the corporation of such consideration for such shares as shall be specified by the Board of Directors. In the event that a bank, trust company of other similarly qualified corporation is designated and agrees to act as the registrar and/or transfer agent for the corporation, then the signatures of the officers specified above and the seal of the corporation may be imprinted upon the stock certificates by facsimile and said certificates may be authenticated by signature of an authorized agent of the said registrar and/or transfer agent. The officers of the corporation may delegate to such transfer agent and/or registrar such of the duties relating to the recording and maintenance of records relating to shares of stock and shareholders of the corporation as may be deemed expedient and convenient and as are assumed by said registrar and/or transfer agent Section 2. The Board of Directors may establish reasonable regulations for recording of transfers of shares of stock in this corporation, and may establish a date, not earlier than 60 days prior to any shareholders' meeting, as of which the shareholders entitled to vote and participate in any shareholders' meeting shall be determined. Section 3. From time to time as it may deem appropriate and advantageous to the best interests of this corporation, the Board of Directors may establish such bonus, pension, profit sharing, stock bonus, stock purchase, stock option, or other employee incentive plans, as and for the benefit of such of the corporation's employees as it in its sole discretion shall determine. 5 Section 4. No certificate for shares of stock in the corporation, or any other security issued by this corporation, shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount (not exceeding twice the value of the shares represented by such certificate), upon such terms and secured by such surety as the Board of Directors may in its discretion require. Section 5. Any person who at any time shall serve or shall have served as a director, officer or employee of the corporation, or of any other enterprise at the request of the corporation, and the heirs, executors and administrators of such person, shall be indemnified by the corporation in accordance with, and to the fullest extent permitted by, the provisions of the Minnesota Business Corporation Act, as it may be amended from time to time. ARTICLE IX ---------- Adoption and Amendment ---------------------- Section 1. These Bylaws shall become and remain effective until amended or superseded as hereinafter provided when they shall have been adopted by the Board of Directors named in the Articles of Incorporation or in the absence of such adoption, by the shareholders. Section 2. The Board of Directors may alter or may amend these Bylaws and may make or adopt additional Bylaws, subject to the power of the shareholders to change or repeal the Bylaws; provided the Board of Directors shall not make or alter any Bylaw fixing their qualifications, classifications, term of office, or number, except the Board of Directors may make or alter any Bylaw to increase their number. Section 3. The shareholder may alter or amend these Bylaws and may make or adopt additional Bylaws by a majority vote at any annual meeting of the shareholders or at any special meeting called for that purpose. 6 EX-31.1 4 mts0333391_ex31-1.txt CERTIFICATION EXHIBIT 31.1 MTS SYSTEMS CORPORATION CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) 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 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: August 11, 2003 /s/ Sidney W. Emery ------------------- Sidney W. Emery, Jr. Chairman, President and Chief Executive Officer EX-31.2 5 mts0333391_ex31-2.txt CERTIFICATION EXHIBIT 31.2 MTS SYSTEMS CORPORATION CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) 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: August 11, 2003 /s/ Susan E. Knight ------------------- Susan E. Knight Vice President and Chief Financial Officer EX-32.1 6 mts0333391_ex32-1.txt CERTIFICATION EXHIBIT 32.1 MTS SYSTEMS CORPORATION CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) The undersigned, Sidney W. Emery Jr., the Chief Executive Officer of MTS Systems Corporation (the "Company"), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2003 (the "Report"). The undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request. Date: August 11, 2003 /S/ SIDNEY W. EMERY JR. - ------------------------------ SIDNEY W. EMERY JR. CHIEF EXECUTIVE OFFICER EX-32.2 7 mts0333391_ex32-2.txt CERTIFICATION EXHIBIT 32.2 MTS SYSTEMS CORPORATION CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) The undersigned, Susan E. Knight, the Chief Financial Officer of MTS Systems Corporation (the "Company"), has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 2003 (the "Report"). The undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request. Date: August 11, 2003 /S/ SUSAN E. KNIGHT - ------------------------------ SUSAN E. KNIGHT CHIEF FINANCIAL OFFICER -----END PRIVACY-ENHANCED MESSAGE-----