-----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, MzJJvX0fY1jUtU6svb8iOot1K/RwRM5wKMYcMJNjWJcP7ZIvjsn1TUv0HYrhKFqx 8GIANCT8W7U3MKjex2AXjw== 0000897101-95-000482.txt : 19951222 0000897101-95-000482.hdr.sgml : 19951222 ACCESSION NUMBER: 0000897101-95-000482 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MTS SYSTEMS CORP CENTRAL INDEX KEY: 0000068709 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 410908057 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-02382 FILM NUMBER: 95603523 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-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMMISSION FILE NUMBER 0-2382 ----------------------------------- MTS SYSTEMS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 612-937-4000 41-0908057 (STATE OR OTHER JURISDICTION OF (TELEPHONE NUMBER OF REGISTRANT (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION INCLUDING AREA CODE) IDENTIFICATION NO.) 14000 TECHNOLOGY DRIVE, EDEN PRAIRIE, MINNESOTA 55344-9763 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ----------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (PAR VALUE OF 25 CENTS PER SHARE) INDICATE BY CHECK MARK WHETHER 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 IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THE FORM 10-K. [X] AS OF DECEMBER 1, 1995, 4,678,644 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING AND THE AGGREGATE MARKET VALUE OF SUCH COMMON STOCK (BASED UPON THE AVERAGE OF THE HIGH AND LOW PRICES) HELD BY NON-AFFILIATES WAS $140,110,919. ----------------------------------- DOCUMENTS INCORPORATED BY REFERENCE ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED SEPTEMBER 30, 1995 - PARTS I, II AND IV. PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS, STATEMENT DATED PRIOR TO JANUARY 30, 1996 - PART III. MTS SYSTEMS CORPORATION ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I ITEM 1. BUSINESS MTS Systems Corporation (hereafter called "MTS" or "the Company" or "the Registrant") designs, manufactures, markets and services computer-based testing and simulation systems for determining the mechanical behavior of materials, products and structures (the Mechanical Testing and Simulation sector), and measurement and control products for measuring process variables and automating manufacturing processes (the Measurement and Automation sector). MTS's customers use these systems and products to improve product quality, accelerate product development, increase machine and worker productivity and protect the environment. The Company's systems and products share common technologies: sensors for measuring machine and process parameters, control technologies for test and process automation, hydraulic and electric servodrives for precise actuation, and application software to tailor the test or automation system to the customer's needs and to analyze results. These technologies offer the customer solutions to problems in a variety of markets. CUSTOMERS AND PRODUCTS BY MARKET SECTOR The Company's operations are organized into two business sectors: 1) Mechanical Testing and Simulation, and 2) Measurement and Automation. The operational alignment of the sectors allows the Company to maintain a strategic focus on markets with different applications of the Company's technologies and with different competitors. Mechanical Testing and Simulation Sector: Customers in this sector use MTS's systems and software for research, product development and quality control in the design and manufacture of materials, products and structures. Customer industries (markets, market niches or niches) in this sector include: Aircraft and aerospace vehicle manufacturers and their suppliers: These customers use the Company's systems and software for full scale structural tests on complete vehicles and principle subsystems such as landing gear. In the aircraft industry, the Company's customers include manufacturers of commercial, military and general aviation planes and their suppliers such as engine manufacturers. The space vehicle industry also utilizes the Company's systems and software for such applications as solid fuel development and heat shield studies. Both aircraft and space vehicle manufacturers and their suppliers use the Company's systems and software to perform research on new materials and control quality in the manufacturing of materials. Biomechanics: This market is comprised of university and government research laboratories and manufacturers of implants, prostheses and other medical and dental devices and materials. These organizations use the Company's systems and software to determine the durability and performance of such products in use, which frequently requires the Company's systems to replicate conditions within and forces withstood by the human body. Civil Engineering: This market is comprised of university and government laboratories and construction and mineral/petroleum production companies. Systems sold in this market include seismic (earthquake) simulators, civil construction component (e.g., beam) testing systems, pavement material testing systems, and specialized systems for rock and soil studies in construction and mineral/petroleum production. Consumer Products/Material Producers: These organizations are grouped together because they primarily purchase the Company's electromechanical and servohydraulic material testing systems which are used in research, product development and extensively for quality control during production. Typical consumer products are made of textiles, paper products and plastic films of many types. Material producers include metal, ceramic, composite, paper and plastic manufacturers. Ground Vehicle Industry: This market consists of automobile, truck, and off-road vehicle manufacturers and their suppliers. This market niche is the largest within the Mechanical Testing and Simulation sector. Applications of the Company's systems and software include the design and production testing of engines and drivetrains, suspension and steering components, body and chassis, tires and wheels, and fuel storage and exhaust components. Vehicle manufacturers strive to improve performance and durability, accelerate design development work and decrease the cost to manufacture their products and components. Occupant safety is another reason customers use the Company's systems and software to test vehicle designs and prototypes. Advanced Systems: Although not an industry niche itself, the Company offers highly customized systems for simulation and testing through its Advanced Systems Division. These systems are designed "starting with a clean sheet of paper" specifically for the given application and frequently embody technology which is new to the application. Customers of the Advanced Systems Division come from all industries served by the Mechanical Testing and Simulation sector - aerospace and defense, biomechanics, civil engineering, material suppliers, and ground vehicles. The Advanced Systems Division also works with these customers in the development of new manufacturing technologies and systems such as welding and material processing. Mechanical Testing and Simulation accounted for 81.3% of revenue in 1995, 81.5% of revenue in 1994 and 84.5% of revenue in 1993. It represents the oldest and is the principal market for the Company's technology. This sector is responsible for the Company's traditional corporate image: "a leading supplier of test equipment to laboratories." Measurement and Automation Products: Measurement and Automation customers use MTS products in discrete part and fluid process manufacturing. Product niches in this sector include: Displacement Position and liquid-level sensors based on magnetostrictive technology. Displacement sensors accurately measure position from 3 inches to 50 feet. They are used in discrete (piece part) manufacturing where accurate positioning is critical. Major applications include injection molding and die casting machines, printing and packaging machines and presses of all types. Liquid level sensors accurately measure levels of liquids in containers. These sensors are sold in three markets: the underground storage tank market (UST), the process storage tank market (PST) and the large, above-ground inventory storage tank market (AST). The UST market consists primarily of retail gas stations. It is served by original equipment manufacturers (OEMs) who purchase MTS sensing probes and incorporate them with their proprietary electronic unit to monitor fuel inventory and detect leaks. The PST market includes a wide variety of applications in the chemical, petroleum refining, pharmaceutical, and food industries. This market generally requires sensors less than 25 feet in length. The AST market of above ground liquid storage tanks and tank farms is the newest application for these sensors. This market requires sensors up to 100 feet in length. MTS also sells controlling and indicating instruments to this market for use on installations of up to several hundred tanks. Servo motors and controllers. Customers use high-performance, permanent magnet brushless servo motors and amplifiers to automate discrete-part manufacturing machines and systems such as machine tools and converting and packaging machines. Customers also use the Company's control products for accurate control of complex, multi-axis, rotary and linear machine motions. These motors, amplifiers and motion control products create systems that are applied to a wide variety of automation tasks by both end-users and original equipment manufacturers. The MTS Measurement and Automation Sector accounted for 18.7% of revenue in 1995, 18.5% of revenue in 1994 and 15.5% of revenue in 1993. COMMON TECHNOLOGIES MTS' systems and products in both sectors are constructed using employees' application engineering know-how with common technology building block components generally composed of measuring and actuation devices, electronic controls and application software. Many of these components are proprietary and are developed and manufactured within the Company. MTS employees engineer or configure the components into products and systems to match the application called for in the customer's order. Frequently, special-purpose software is developed to meet a customer's unique requirements. Such software often represents a significant part of the value added by the Company. Services offered to system customers include on-site installation, training of customer personnel, technical manuals and continuing maintenance. Such services are often included in the contract amount charged for completed systems, but these services may be purchased separately, during and after the system warranty period. Certain proprietary products, such as sensors, process controls, motors, actuators, and process software and firmware are sold as products to end users and to other companies for incorporation into their systems, machines, or processes. All products and most systems are sold on fixed-price contracts. Complex systems and applied research in the Mechanical Testing and Simulation sector are in some cases undertaken on "cost-plus-fixed-fee" contract basis. 1995 PRODUCT DEVELOPMENT HIGHLIGHTS The Company funds new application and product development within its market sectors. Highlights of product development undertaken or completed in 1995 are: Mechanical Testing and Simulation Sector * The Company introduced the Flextest(TM) II control/software product line - which is being used across most of the application niches in the Mechanical Testing and Simulation sector - featuring improved user programmability. * The Company completed the first installation of its new kinematic and compliance test system used by auto/truck manufacturers to design and evaluate suspension and steering components and systems. * The Company introduced a new control/software product for engine and driveline dynamometry applications using the VXI "plug and play" architecture which is being widely adopted in the field due to its ability to perform high speed data acquisition and provide customer configuration flexibility. Measurement and Automation Sector * The Company introduced digital signal processor (DSP) based "smart" amplifiers for its MaxPlus(TM) servo motor products providing an economically attractive package for applications where the size of the amplifier/controller package needs to be minimized. * The Company introduced a new flexible liquid level sensor design for storage tanks up to 100 feet. The flexible design enables the sensor to be shipped, handled and installed much more easily - reducing cost and potential damage. CHARACTERISTICS OF SALES The Company's systems are sold and delivered throughout the world and its customer orders cover a broad spectrum of industries, government agencies, institutions, applications, and geographic locations. As such, MTS is not heavily dependent upon any single customer for its business. Mechanical Testing and Simulation systems range in price from less than $20,000 to as much as $10 million. Large, individual, fixed-price orders, although important to the Company's image and technical advancement, tend to produce volatility in both backlog and quarterly operating results. The majority of the orders received in any one year are based on fixed-price quotations and require extensive technical communication with potential customers prior to receipt of an order. The current typical delivery time for a system ranges from one to twelve months, depending upon the complexity of the system and the availability of components in the Company's or suppliers' inventories. Larger system contracts can run as long as three years and cost-plus-fixed-fee contracts have run longer. Measurement and Automation products are sold in quantity at unit prices ranging from $500 to $10,000. Delivery varies from several days to several months. Approximately 53.7% of revenue in fiscal 1995, 50.7% of revenue in 1994, and 48.6% of revenue in 1993 was from domestic customers. The balance of the revenue, some of which was sold in currencies other than the U.S. dollar, was to customers located outside the United States--mainly in Europe, Asia-Pacific, Latin America, and Canada. The Company's foreign operations and foreign revenues may be affected by local political conditions, export licensing problems, and/or currency restrictions. Sales Channels: MTS approaches its market sectors through a number of sales channels. The Company sells its Mechanical Testing and Simulation equipment through an employee sales network, independent sales representatives, and a direct mail (catalog) operation. Sales personnel are generally graduate engineers or highly skilled technicians and are specially trained to sell MTS products and services. Employee salespersons are compensated with salary and sales incentives, and independent representatives are paid commissions only. A list of domestic and international offices for the Company's Mechanical Testing and Simulation Sector follows: Domestic offices: Akron Dayton Philadelphia Austin Denver Raleigh Baltimore Detroit Pittsburgh Boston Huntsville San Diego Chicago Los Angeles San Jose Dallas Minneapolis Seattle Washington, D.C. International offices: Beijing and other cities, Paris, France Peoples Republic of China Sao Paulo, Brazil Berlin and other cities, Seoul, Korea Germany Torino, Italy Gothenburg, Sweden Stroud, United Kingdom Hong Kong Nagoya and Tokyo, Japan In addition, MTS works with sales and service representative organizations in nearly all industrialized countries of the world and in the developing countries of Latin America, Asia, Africa and the Mid-East. The Company offers a comprehensive mail-order catalog of MTS components, accessories, and products. The catalog includes products of complementary vendors and aims to reach a broad range of customers involved in Mechanical Testing and Simulation. The Measurement and Automation sector sells its products through sales channels separate from the Mechanical Testing and Simulation sector. A network of employees, direct sales, external domestic distributors, representatives, and system houses market the products of these divisions. International revenue currently accounts for 28% of this sector's volume. Efforts to expand sales channels in international markets continue. International Operations and Export Sales: The sections entitled Geographic Analysis of New Orders and Geographic Segment Information on pages 12 and 23 of the Company's 1995 Annual Report to Shareholders, which sections are incorporated by reference herein, contain information regarding the Company's operations by geographic area. Export Licensing: The Company's foreign shipments in fiscal 1995, 1994 and 1993 included sales to Asia-Pacific, European, and other regions that require the Company to obtain export licenses from the U.S. Department of Commerce, the granting of which are subject to governmental approval. The Company does not undertake manufacturing on custom systems or projects until it is assured that a license will be granted. However, due to the extended time to process and receive a license, design work is performed on some systems during the licensing period. Changes in political relations between the U.S. and countries requiring import licenses, as well as other factors, can adversely affect the Company's ability to complete a sale should a previously issued license be withdrawn. While political reform occurring internationally may relax export controls, U.S. government initiatives on weapons proliferation and foreign policy in other parts of the world may cause delays for certain shipments or the rejection of orders by the Company. BACKLOG The Company's backlog, which it defines as firm orders remaining unfilled, totaled $98,757,000 at September 30, 1995; $84,591,000 at September 30, 1994; and $88,731,000 at September 30, 1993. The Company believes that all of the backlog at September 30, 1995 will become revenue during fiscal 1996. Delays may occur due to technical difficulties, export licensing approval or the customer's preparation of the installation site. Any such delay can affect the period when backlog is recognized as revenue. COMPETITION In the Mechanical Testing and Simulation Sector, customers may choose to buy equipment from the Company or from major competitors: Instron (U.S. based), Interlachen (U.S.), SATEC (U.S.), AVL (Austria), Carl Schenck (Germany), Zwick (Germany), Saganomiya and Shimadzu (Japan). There are also smaller local competitors in most major countries. In lieu of buying equipment from the Company or its competitors, customers may contract with testing laboratories such as EG&G, Peabody, Wyle, or with universities. Government laboratories also market testing services to the public. Finally, customers may choose to construct their own testing equipment from commercially available components. Customers in the aerospace and automotive industries and universities sometimes choose this approach, purchasing equipment from companies such as Parker Hannifin, Moog, and Mannesman (Germany). In the Measurement and Automation Sector, the Company competes directly with small to medium-sized specialty suppliers and also with divisions of the large control system companies such as Rockwell, Emerson Electric, Siemens (Germany) and Fanuc (Japan). MANUFACTURING AND ENGINEERING The Company conducted a significant portion of its fiscal 1995 Mechanical Testing and Simulation manufacturing and engineering activities in Minneapolis. Certain engineering, project management, final system assembly and quality testing may be done in Berlin, Germany and Tokyo, Japan. Electromechanical material testing systems are assembled in the Raleigh, NC, facility and in the Paris, France (Adamel Lhomargy) facility. The Company's MTS-PowerTek subsidiary engineers and assembles dynamometer control systems and provides related services from Detroit. Manufacturing and engineering activities for the Automation and Measurement sector occur in Raleigh, NC, in Ludenscheid, Germany, in New Ulm, MN, and at the Company's majority-owned subsidiary in Nagoya, Japan. Worldwide expenditures for manufacturing equipment were approximately $6,351,000 in 1995, $5,427,000 in 1994, and $2,723,000 in 1993. PATENTS AND TRADEMARKS The Company holds a number of patents, patent applications, licenses, trademarks, and copyrights which it considers, in the aggregate, to constitute a valuable asset. The Company's system business is not dependent upon any single patent, license, trademark, or copyright. RESEARCH AND DEVELOPMENT The Company does not do basic research, but does fund significant product, system and application developments. Costs of these development programs are expensed as incurred, and amounted to $13,733,000, $12,645,000 and $13,697,000 for fiscal years 1995, 1994 and 1993, respectively. Additionally, the Company also undertakes "first of their kind" high-technology, customer-funded contracts which contain considerable technical pioneering. The combination of internally sponsored product development and system or application innovation on customer contracts approximates 10% of annual sales volume. EXECUTIVE OFFICERS OF THE COMPANY The Corporate Executive Officers of the Registrant on September 30, 1995 were:
Name and Age Position Officer Since - ------------ -------- ------------- D. M. Sullivan (60) Chairman, President and 1976 Chief Executive Officer K. D. Zell (53) Executive Vice President 1979 W. G. Beduhn (54) Vice President 1983 M. L. Carpenter (58) Vice President 1973 and Chief Financial Officer R. W. Clarke (65) Vice President 1973 K. E. Floren (59) Vice President 1990 W. Ongyert (57) Vice President 1985 J. H. Owens (55) Vice President 1984 M. G. Togneri (58) Vice President 1991
Officers serve at the discretion of the board, are elected annually by the directors, and serve until their successors are elected. EMPLOYEES MTS employed 1,612 persons as of September 30, 1995, including 293 employees located in Europe, 47 in Japan, 15 in China, 3 in Canada, 12 in Korea and 4 in Hong Kong. None of the Company's U.S. employees are covered by a collective bargaining agreement, and MTS has experienced no work stoppages at any location. SOURCES AND AVAILABILITY OF RAW MATERIALS AND COMPONENTS A major portion of products and systems delivered to a customer may consist of equipment purchased from vendors. The relationship which the Company promotes with its vendors is one of close cooperation. The Company is dependent upon certain computing hardware and software devices and certain raw materials which have limited sources. However, the Company has not experienced significant problems in procurement or delivery of any essential materials, parts, or components in the last several years. Due to the manner in which the Company sells the majority of its products, on a fixed-price contract agreed upon at the time the order is obtained, wide fluctuations up or down in cost of materials and components from order date to delivery date, if not accurately forecast by the Company at the earlier date, can change the profitability of any sale. The Company believes that such fluctuations have not had a material effect on reported earnings, except as affected by changes in foreign currency rates, which have been reported. ENVIRONMENTAL MATTERS Management believes the Company's operations are in compliance with federal, state, and local provisions relating to the protection of the environment. ITEM 2. PROPERTIES Domestic Facilities: The Company's main plant and corporate headquarters, occupying 380,000 square feet, is located in Eden Prairie, Minnesota, a suburb of Minneapolis. The original plant was completed in 1967. Five additions, the most recent of which was in 1990, have expanded the plant to its present size. Approximately 45% of the Minneapolis facility is used for manufacturing while the balance of the facility is used for office space. The plant site is located on 54 acres of land on Minnesota State Highway 5, approximately one mile west of Interstate Highway 494. Custom Servo Motors, Inc. occupies a 30,000 square foot plant in New Ulm, Minnesota (65 miles southwest of Minneapolis). The plant provides light assembly operations and office space. The facility was constructed in 1993 by the New Ulm Economic Development Corporation and added onto in 1995. MTS has a five year operating lease for the facility with provisions to extend the lease, purchase the property, or terminate the lease. The terms of the lease agreement do not require capitalization of the asset and the related obligation. Sensors Division is located near the Research Triangle Park in Cary, North Carolina, a suburb of Raleigh. A 40,000 square foot plant, constructed in 1988, provides manufacturing and office space. In 1992, 25,000 square feet was added to the plant. SINTECH Division is located adjacent to the Sensors Division site in Cary, North Carolina. A 25,000 square foot plant, constructed in 1991, provides manufacturing and office space. MTS-PowerTek, Inc. occupies 20,000 square feet in Farmington Hills, Michigan, a suburb of Detroit. Plant and office space in two buildings is rented under conventional operating lease terms. Capitalization of the asset and the related obligation is not required. The Company leases space in other U.S. cities for sales and service offices. Neither the space nor the rental obligations is significant. International Facilities: MTS Systems GmbH (Berlin) is located in a 80,000 square foot facility. As of September 30, 1995 3,000 square feet has been leased to another company. The building is situated on land leased by MTS from the city government. The lease expires in 2069. Adamel Lhomargy S.A., operates a leased facility in Paris, France, of approximately 38,000 square feet in size. Approximately 40% of this space is used for manufacturing with the remainder used as offices. The current lease expires at the end of the 1998 fiscal year. MTS Sensors Technologie operates a leased facility in Ludenscheid, Germany on approximately six acres of land. The manufacturing and office facilities occupy 18,000 square feet at this location. The Company also leases office and general purpose space for its sales and service subsidiaries in Stroud, United Kingdom; Paris, France; Torino, Italy; Seoul, South Korea; Tokyo and Nagoya, Japan; Toronto, Canada; Sao Paulo, Brazil; Gothenburg, Sweden; Beijing and Shanghai, Peoples Republic of China; and Hong Kong. No manufacturing is done at these locations. Expansion Opportunities: The Company owns approximately 85 acres of land adjacent to its Minneapolis facility. This site could house expanded manufacturing operations. Also, the site in Raleigh allows for expansion. Other suitable commercial real property is available for purchase or lease in metropolitan areas where the Company is presently located. The Company considers its current facilities adequate to support anticipated revenues in 1996. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings were pending or threatened against the Company or its subsidiaries as of September 30, 1995. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended September 30, 1995, for a vote by the shareholders. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's stock is traded on The Nasdaq Stock Market's National Market under the symbol MTSC. The following table shows the Company's low and high closing sale transactions as reported by The Nasdaq. Quarter Ended Low * High* December 31, 1993 $27.75 $32.00 March 31, 1994 $28.50 $32.50 June 30, 1994 $25.00 $29.50 September 30, 1994 $22.00 $28.50 December 31, 1994 $20.25 $24.75 March 31, 1995 $22.00 $25.75 June 30, 1995 $23.50 $27.75 September 30, 1995 $26.75 $29.00
*Source: The Nasdaq Stock Market, Inc. Summary of Activity Report As of December 1, 1995 there were 1,395 holders of record of the Company's $.25 par value common stock. The Company estimates another 1,500 shareholders, whose stock is held by nominees or broker dealers, are included in the holders of record. The Company has a history of paying quarterly dividends and expects to continue such payments in the future. During 1995, 1994, and 1993, the Company paid dividends totaling $.56, $.56, and $.48 per share, per year, respectively, to holders of its common stock. Under the terms of the Company's credit agreements, certain covenants require that tangible net worth, as defined, must exceed a defined minimum amount and limit repurchases of its common stock to a defined maximum amount. As of September 30, 1995, tangible net worth exceeded the minimum by $17,772,000 and the Company had $7,404,000 available for repurchases of its common stock. Thus, the Company may declare and pay future dividends similar to recent dividends without restriction. ITEM 6. SELECTED FINANCIAL DATA A comprehensive summary of selected financial information is presented in the "Six Year Financial Summary" on page 1 of the Company's 1995 Annual Report to Shareholders. Data included in the summary is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 12 through 16 of the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Report of Independent Public Accountants, Quarterly Financial Information (unaudited), and Six Year Financial Summary (unaudited) included in the Company's 1995 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT (a) Information concerning the Company's directors may be found in the Company's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission prior to January 30, 1996, and is incorporated herein by reference. (b) See Item 1. Business, on page 9 for information on the Company's Executive Officers. (c) The Company has no other significant employees requiring disclosure in this Form 10-K. (d) There are no family relationships between and among directors or officers. (e) Business experience of Directors may be found in the Company's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission prior to January 30, 1996, and is incorporated herein by reference. Business experience of the Executive Officers for at least the last 5 years (consisting of positions with the Company unless otherwise indicated) is as follows: Officer Business Experience D. M. Sullivan Chairman in 1994. Chief Executive Officer since 1987. President and Chief Operating Officer since 1982. Vice President from 1976 to 1982. Has extensive prior experience in the management of technology intensive businesses. K. D. Zell Executive Vice President of Mechanical Testing and Simulation sector in 1993. Vice President of Materials Testing Division from 1988 to 1993. Vice President, Sales and Service from 1984 to 1988. Vice President, Product Group from 1979 to 1984. Division manager, Hydro-mechanical Products from 1978 to 1979. W. G. Beduhn Vice President of Advanced Systems Division since 1991. Vice President of Technology Development from 1983 to 1991. Division manager of various marketing and operating divisions from 1977 to 1983. M. L. Carpenter Vice President and Chief Financial Officer since 1991. Vice President and Treasurer since 1973. R. W. Clarke Vice President of Simulation Group since 1984. Previous responsibilities include Vice President of Sales and Service and various market divisions from 1973 to 1984. Retired on September 30, 1995. K. E. Floren Vice President of Aerospace and Engineering Mechanics Division, North American Sales and Service since 1993. Vice President of Vehicle Dynamics Division from 1990 to 1993. Manager of various marketing and sales units from 1975 to 1990. W. Ongyert Vice President of European Sales and Service since 1985. General manager of European operations from 1977 to 1985. J. H. Owens Vice President, Minneapolis Operations since 1988. Vice President, Product Group from 1986 to 1988. Vice President of Manufacturing Operations Division from 1984 to 1986. Division manager of various product manufacturing units from 1976 to 1984. M.G. Togneri Vice President of Measurement and Automation sector since 1991. Prior to his employment at MTS was V.P. at Square D Corporation and General Manager of Crisp Automation. Has extensive experience in the industrial instrumentation and control business in the U.S. and internationally. (f) Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference from the Company's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission prior to January 30, 1996, pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 11. EXECUTIVE COMPENSATION See Item 12. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Items 11 and 12 is incorporated herein by reference from the Company's Proxy Statement, a definitive copy of which will be filed with the Securities and Exchange Commission prior to January 30, 1996, pursuant to Regulation 14A under the Securities Exchange Act of 1934. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (a) Financial Statements: See accompanying Index to Financial Statements on Page F-1. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of fiscal 1995. (c) Exhibits: 3.a Restated Articles of Incorporation, adopted January 31, 1994, incorporated by reference from exhibit 3.a to Form 10-Q for the quarter ended March 31, 1994. 3.b Restated Bylaws, reflecting amendments through May 15, 1995. 10.a Management Variable Compensation Plan-Fiscal 1995, dated November 29, 1994. 10.b 1985 Employee Stock Option Incentive Plan, incorporated by reference to exhibit 4(a) from Form S-8, File No. 2-99389. 10.c 1987 Stock Option Plan incorporated by reference to exhibit A from Form S-8, File No. 33-21699. 10.d 1990 Stock Option Plan, incorporated by reference to exhibit A from Form S-8, File No. 33-35288. 10.e 1994 Stock Plan incorporated by reference to exhibit 4(a) from Form S-8, File No. 33-73880. 10.f Severance Agreement, dated May 1, 1990 between the registrant and William G. Beduhn, incorporated by reference to exhibit 10.g of Form 10-K for the fiscal year ended September 30, 1990. 10.g Severance Agreement, dated May 1, 1990 between the registrant and Marshall L. Carpenter, incorporated by reference to exhibit 10.i of Form 10-K for the fiscal year ended September 30, 1990. 10.h Severance Agreement, dated May 1, 1990 between the registrant and Richard W. Clarke, incorporated by reference to exhibit 10.j of Form 10-K for the fiscal year ended September 30, 1990. 10.i Severance Agreement, dated December 3, 1990 between the registrant and Kenneth E. Floren, incorporated by reference to exhibit 10.k of Form 10-K for the fiscal year ended September 30, 1990. 10.j Severance Agreement, dated May 1, 1990 between the registrant and Werner Ongyert, incorporated by reference to exhibit 10.m of Form 10-K for the fiscal year ended September 30, 1990. 10.k Severance Agreement, dated May 1, 1990 between the registrant and J. Howell Owens, incorporated by reference to exhibit 10.n of Form 10-K for the fiscal year ended September 30, 1990. 10.l Severance Agreement, dated May 1, 1990 between the registrant and Donald M. Sullivan, incorporated by reference to exhibit 10.p of Form 10-K for the fiscal year ended September 30, 1990. 10.m Severance Agreement, dated May 1, 1990 between the registrant and Richard S. White, incorporated by reference to exhibit 10.q of Form 10-K for the fiscal year ended September 30, 1990. 10.n Severance Agreement, dated May 1, 1990 between the registrant and Keith D. Zell, incorporated by reference to exhibit 10.r of Form 10-K for the fiscal year ended September 30, 1990. 10.o Severance Agreement, dated April 1, 1991 between the registrant and Mauro G. Togneri, incorporated by reference to exhibit 10.s of Form 10-K for the fiscal year ended September 30, 1991. 10.p 1992 Employee Stock Purchase Plan, incorporated by reference to exhibit 4(a) from Form S-8, File No. 33-45386. 13. Annual Report to Shareholders for the fiscal year ended September 30, 1995. 21. Subsidiaries of the Company. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. (d) Financial Statement Schedules: See accompanying Index to Financial Statements on page F-1. SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MTS SYSTEMS CORPORATION By: /s/ Donald M. Sullivan Donald M. Sullivan Chairman, Chief Executive Officer, President and Director By: /s/ Marshall L. Carpenter Marshall L. Carpenter Vice President and Chief Financial Officer By: /s/ Marvin R. Eckerle Marvin R. Eckerle Controller Date: December 21, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: By: /s/ E. T. Binger E. T. Binger, December 21, 1995 Director By: /s/ Charles A. Brickman Charles A. Brickman, December 21, 1995 Director By: /s/ Bobby I. Griffin Bobby I. Griffin, December 21, 1995 Director By: /s/ Russell A. Gullotti Russell A. Gullotti, December 21, 1995 Director By: /s/ Thomas E. Holloran Thomas E. Holloran, December 21, 1995 Director By: /s/ Thomas E. Stelson Thomas E. Stelson, December 21, 1995 Director By: /s/ Linda Hall Whitman Linda Hall Whitman, December 21, 1995 Director MTS SYSTEMS CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS A. CONSOLIDATED FINANCIAL STATEMENTS Reference is made to the consolidated financial statements in the Company's 1995 Annual Report to Shareholders which are incorporated by reference in accordance with Rule 12b-23 under the Securities Exchange Act of 1934 and attached hereto. Annual Report 10-K Page Page Quarterly Financial Information (Unaudited) 16 -- Consolidated Balance Sheets - September 30, 1995 17 -- and 1994 Consolidated Statements of Income and Shareholders' Investment for the Years Ended September 30, 1995, 1994 and 1993 18 -- Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1994 and 1993 19 -- Notes to Consolidated Financial Statements 20 -- Report of Independent Public Accountants 28 -- B. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE --- F-3 C. CONSOLIDATED SCHEDULE Schedule Description II Summary of Consolidated Allowances for Doubtful Accounts --- F-4 All schedules except the one listed above have been omitted as not required, not applicable, or the information required therein is contained in the financial statements or the footnotes thereto. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To MTS Systems Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in MTS Systems Corporation's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated November 21, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed as a part of Item 14 (page F-4) in this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 21, 1995 MTS SYSTEMS CORPORATION AND SUBSIDIARIES SCHEDULE II - SUMMARY OF CONSOLIDATED ALLOWANCES FOR DOUBTFUL ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Balance Provision Amounts Balance Beginning Charged to Written End of of Year Operations Off Year (expressed in thousands) 1995 $1,439 $620 $(235) $1,824 1994 1,461 110 (132) 1,439 1993 608 981 (128) 1,461
EXHIBIT INDEX Exhibit No. Description 3.b Restated Bylaws 10.a Management Variable Compensation Plan-Fiscal 1995 13. Annual Report to Shareholders for the fiscal year ended September 30, 1995 21. Subsidiaries of the Company 23. Consent of Independent Public Accountants 27. Financial Data Schedule EX-3.B 2 EXHIBIT 3.b RESTATED BYLAWS OF MTS SYSTEMS CORPORATION (Reflecting amendments through May 15, 1995) 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 eight Directors, and five 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 any, funds legally available for the payment of 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. 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 dulyelected 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. 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 The fiscal year of the corporation shall be from the first day of October to the 30th day of September in the succeeding year. 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 or 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. Section 4. No certificate or shares of stock in this 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. EX-10.A 3 EXHIBIT 10.a REV B, 23 November 1994 Approved by the Board November 29, 1994 MANAGEMENT VARIABLE COMPENSATION PLAN FISCAL '95 1. PURPOSE OF PLAN To focus efforts on achievement of objectives which are critical to the success of the Company; to reward the accomplishment at a level above competition when performance is above that of comparable companies; to more closely couple total compensation costs (salary plus variable) to the financial results of the enterprise. 2. RELATIONSHIP TO OTHER COMPENSATION PLANS 2.A SALARY PLAN The Management Variable Compensation Plan covers objectives related to the financial and TQM operating objectives of the Company. The midpoint of a given Salary range will be suppressed by 1/5th of the average competitive payout potential of participants in that range to conform to the Company's fixed vs. variable compensation strategy (i.e., if the participants in a range have an average competitive payout potential of 20%, the midpoint of the range will be suppressed 4%). 2.B RELATION TO U.S. EMPLOYEE PROFIT SHARING AND UNIT GAINSHARING PLAN The calculations for the Variable Compensation Plan are made after deductions for Profit Sharing and Gainsharing. Effective with fiscal 1989, payout to a participant in the Management Variable Compensation Plan is included in the calculation of the Company's contribution to that employee's profit sharing. 3. ELIGIBILITY AND PARTICIPATION * Corporate officers * Unit vice presidents * Market and functional unit managers * Managers, technical supervisors and key marketing or technical employees who meet certain minimum responsibilities for profitability, financial/human resource acquisition and allocation, balance sheet control, and/or market/technical direction - defined as beginning at SAM 15 and TE 5 or equivalent. An employee must be in such a position by the November/December Board of Directors meeting in order to be eligible for the fiscal year plan beginning the preceding 1 October, unless otherwise authorized by the CEO. Certain subsidiaries may have their own variable compensation plans approved by the cognizant corporate vice president and CEO. An officer may recommend that an employee, who is otherwise eligible, not participate but such a recommendation must be agreed to by the CEO. Participants are eligible for payout in proportion to the % of the fiscal year the participant is responsible for the qualifying position, unless otherwise authorized by the CEO. Employees who work less than full time during a year (e.g., due to a personal leave, but not due to illness) would earn a proportionately reduced payout. In no case will payout be made to employees who work less than 1,000 hours in the year. The participant must be on MTS' payroll at the end of the fiscal year for which the objective applies to qualify for a payout. Employees resigning or terminated before the end, regardless of cause, are not eligible unless otherwise authorized by the CEO. (An example of an exception could be early retirement or voluntary separation under a workforce reduction plan.) No employment contract is implied by participation in this Plan. 4. ESTABLISHMENT OF OBJECTIVES a. The Board of Directors sets the CEO's Corporate financial objective - EPS and Return on Average Net Asset (ROANA) and revenue growth at their November/December meeting. b. Financial objectives for other participants (typically pretax % and/or ROANA and revenue growth) and must be finalized by the November/December meeting unless otherwise authorized by the CEO. They are not renegotiable. All other objectives must be finalized by 30 December. The cognizant officers and CEO approve the objectives for all other participants. The purpose of this approval is to: * Integrate objectives into Company TQM operating plan * Guard against conflicting objectives * Help to assure consistency in degree of difficulty c. Each participant will have a mix of objectives per the attached Schedule. d. Payouts under this Plan are considered costs for the calculation of profit objectives (EPS/ROANA/Pretax %); so simultaneous equations are used for calculations. 5. CRITERIA FOR OBJECTIVES The Corporate Financial Objective are set by the Board based on the current intermediate term plan. Currently they are: EPS: 15% return on beginning equity/share, + or - 1/3 ROANA: 20% + 1/3 Revenue Growth 8-12%/year All objectives include all transactions, acquisitions, write-offs, sale of assets, etc. unless specifically excluded by the Board at the November/December meeting. Sector/Divisions/Subsidiary/niche financial growth and TQM objectives are set as appropriate for the intermediate term plan for the unit. Other objectives must be stated in equally measurable terms and must not be activities (i.e. number of sales calls or technical society presentations). 6. COMPETITIVE PAYOUT POTENTIAL The competitive payout potential, expressed as a % of the midpoint of the salary structure, or actual salary in the case of subsidiary management, is shown below:
POSITION COMPETITIVE PAYOUT POTENTIAL % CEO E5 70 Executive Vice President, MT&SE-4 55 Vice President E-3 25-50, depending on revenue level (profit potential) Vice President E-2 25-50, depending on revenue level (profit potential) Vice President (Unit) E-1 15-45, depending on revenue level (profit potential) Market Division Management SAM17-21 15-35, depending on revenue level (profit potential) All Other Management/ Leadership SAM18-21 10-35, depending on profit impact SAM15-17 6-25, depending on profit impact TE5/5S-9/9S 6-25, depending on profit impact
7. OVER-RANGING/MAXIMUM POTENTIAL PAYOUT The objectives are set at challenging but realistic levels which are used in the overall process of planning and resource allocation. This is not meant to be a limit to our aspirations, and performance in excess of those objectives should be rewarded as it is to the benefit of all stakeholders in the enterprise. Over-ranging of an objective can earn an additional equal payout if that objective is exceeded by an amount up to the lower limit span. Over-ranging is limited to objectives equaling 70% of the competitive full payout per the attached Schedule. Linear interpolation is used between the over-ranging amount and the objectives. The maximum payout potential for all positions, given full over-ranging, is 1.7 x the competitive payout potential. 8. PAYOUT Within 90 days of the end of the fiscal year. 9. APPROVAL OF PLAN The Plan, and participation therein, are subject to annual review and approval by the Board of Directors. Attachments: FY '95 MVC Plan Participation and Schedule of Objectives EX-13 4 MTS ANNUAL REPORT
SIX YEAR FINANCIAL SUMMARY (September 30) 1995 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------------- (dollars expressed in thousands, except share data and pretax income per employee) OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------------- Net revenue $ 234,131 $ 200,550 $189,499 $ 161,013 $157,865 $ 160,159 United States revenue 125,659 101,747 92,153 68,931 72,538 75,901 International revenue 108,472 98,803 97,346 92,082 85,327 84,258 Income before income taxes 14,031 12,629 14,937 6,452 14,350 11,328 Net income 10,461 8,659 10,382 4,915 10,080 8,408 Net income per share, fully diluted basis 2.30 1.85 2.27 1.07 2.25 1.82 Research and development costs 13,733 12,645 13,697 9,999 9,271 11,225 Net interest expense 2,424 1,860 1,207 704 1,061 824 Depreciation and amortization 7,217 6,214 5,648 5,789 5,755 5,617 Total payroll 76,168 61,619 57,784 55,961 49,596 51,777 FINANCIAL POSITION - ----------------------------------------------------------------------------------------------------------------------------------- Current assets $ 131,589 $ 123,206 $123,445 $ 100,929 $ 91,240 $ 85,043 Current liabilities 67,014 66,361 66,961 50,717 44,183 35,565 Current ratio 2.0:1 1.9:1 1.8:1 2.0:1 2.1:1 2.4:1 Net working capital 64,575 56,845 56,484 50,212 47,057 49,478 Inventories 35,669 35,152 25,009 23,591 22,819 24,656 Property and equipment, net 48,490 47,368 37,254 38,079 35,995 35,204 Total assets 189,500 175,708 165,716 144,650 135,627 $ 126,631 Interest bearing debt 22,965 23,851 33,299 19,335 20,565 18,806 Shareholders' investment 106,677 100,046 93,011 84,992 80,739 74,358 Shareholders' investment per share 23.20 21.90 20.47 19.04 18.17 16.48 Free cash flow(1) 8,845 5,414 9,306 2,653 10,786 7,590 OTHER STATISTICS AND RATIOS - ----------------------------------------------------------------------------------------------------------------------------------- Fully diluted shares outstanding(2) 4,545 4,668 4,572 4,595 4,477 4,629 Number of shareholders(3) 1,395 1,394 1,400 1,413 1,838 1,850 Number of employees 1,612 1,557 1,447 1,404 1,372 1,410 Pretax income per employee $ 8,704 $ 8,111 $ 10,323 $ 4,595 $ 10,459 $ 8,034 Backlog of orders 98,757 84,591 88,731 99,221 82,404 71,032 New orders 245,919 195,260 178,786 178,178 169,237 157,212 Net income as a percent of net revenue 4.5% 4.3% 5.5% 3.1% 6.4% 5.2% Research and development costs as a percent of net revenue 5.9% 6.3% 7.2% 6.2% 5.9% 7.0% Effective tax rate 25% 31% 30% 24% 30% 26% Interest bearing debt to equity ratio 22% 24% 36% 23% 25% 25% Return on average net assets(4) 12.9% 11.6% 16.3% 7.6% 17.4% 14.6% Return on beginning shareholders' investment per share 10.5% 9.0% 11.9% 5.9% 13.7% 12.1% Cash dividends paid per share $ .56 $ .56 $ .48 $ .48 $ .40 $ .40 - -----------------------------------------------------------------------------------------------------------------------------------
1 Net income plus depreciation and amortization minus property and equipment expenditures (exclusive of land acquisition and plant construction) minus cash dividends. 2 Presented on a weighted average basis of common shares assuming conversion of common stock equivalents during each year after retroactive adjustments for issued shares, for stock splits and reduction of shares from treasury stock purchases (in thousands of shares). 3 On December 1, 1995, there were 1,395 common shareholders of record, with another estimated 1,500 shareholders whose stock is held by nominees or broker dealers. 4 (Income before income taxes plus net interest expense) divided by (average quarterly assets minus non-interest bearing liabilities). 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKLOG/NEW ORDERS 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) New Orders: North American* $ 137,775 $ 101,498 $ 98,019 International 108,144 93,762 80,767 - ------------------------------------------------------------------------------- Total $ 245,919 $ 195,260 $ 178,786 - ------------------------------------------------------------------------------- Backlog $ 98,757 $ 84,591 $ 88,731 - ------------------------------------------------------------------------------- *Includes U.S. and Canada Record 1995 new orders of $245.9 million were up 26% from the prior year and up 38% from 1993. New orders in 1995 included 67 orders with unit values exceeding $500,000 compared to 30 orders in this category in 1994 and 38 orders in 1993. These orders represented 31%, 26%, and 32% of the new order total for these three years. In 1995, the Mechanical Test and Simulation sector (MT&S) new orders of $200.3 million increased 27% from 1994 and were up 33% compared to 1993. The Measurement and Automation sector (M&A) new orders in 1995 of $45.7 million increased 23% over the prior year and were up 61% from 1993. North American new orders increased 36% in 1995, 4% in 1994 and 11% in 1993. The M&A sector was strong in all three years. The automotive durability simulation systems niche of the MT&S sector strengthened considerably in 1995 compared to order levels achieved in 1994 and 1993. International orders increased 15% in 1995 and 16% in 1994, reversing the 11% decrease experienced in 1993. The 1995 new order increase occurred in Europe and the Far East except for Japan. Most of the 1994 increase occurred in the Far East and as a result of the acquisition of Adamel Lhomargy (France). A majority of the 1993 decline occurred in our automotive durability simulation systems niche in Europe. See Geographic Analysis of new orders for the percentage breakdown by geographic area. The backlog of undelivered orders at September 30, 1995, increased 17% from 1994, the result of new orders received in 1995 and more specifically, the record fourth-quarter order rate totaling $70.9 million. REVENUES 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) United States $ 125,659 $101,747 $ 92,153 International 108,472 98,803 97,346 - ------------------------------------------------------------------------------- Total $ 234,131 $200,550 $ 189,499 - ------------------------------------------------------------------------------- Record 1995 revenues of $234.1 million were up 17% from the prior year and up 24% from 1993. For 1995, the Mechanical Test and Simulation sector (MT&S) revenues of $190.5 million increased 16% from 1994 and were up 18% compared to 1993. The Measurement and Automation sector (M&A) revenues in 1995 of $43.7 million increased 18% over the prior year and were up 53% from 1993. For geographic and sector revenues and income information, see Note 2 of "Notes to Consolidated Financial Statements." U.S. revenues increased 24% in 1995, 10% in 1994 and 34% in 1993, reflecting strengthening markets for most of the Company's business segments during this three-year period. The M&A sector revenue growth reflected the increased demand from original equipment manufacturers (OEMs) as well as acceptance of new products. The MT&S sector revenue increase in 1995 reflected a stronger automotive market and the addition of Power-Tek. International revenues increased 10% in 1995, 2% in 1994, and 6% in 1993. These growth rates are lower than those in the U.S. which reflect the recessionary economies of Europe and Japan during these periods. Our customer base in Europe during 1995 reflected a strengthening market based on new orders received, and in particular our M&A sector shipments to OEM customers. A significant portion of the Company's international revenues are contracted for in foreign currencies. In both 1995 and 1994 the value of the dollar weakened, particularly against European currencies, increasing dollar values on foreign currency revenue in those years by $3.9 million and $3.7 million. The value of the dollar strengthened in 1993, reducing dollar values on translated foreign currency revenues by $2.4 million. Selective price increases and decreases were implemented in all three years. However, the overall impact of pricing changes did not have a material effect on reported revenue volume.
GEOGRAPHIC ANALYSIS OF NEW ORDERS 1995 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------------- NORTH AMERICA 57% 52% 55% 49% 46% 48% - ----------------------------------------------------------------------------------------------------------------------------------- EUROPE/AFRICA/MIDDLE EAST 25 21 20 25 35 31 - ----------------------------------------------------------------------------------------------------------------------------------- ASIA PACIFIC 17 26 23 25 18 18 - ----------------------------------------------------------------------------------------------------------------------------------- SOUTH AMERICA/REST OF THE WORLD 1 1 2 1 1 3 - -----------------------------------------------------------------------------------------------------------------------------------
12 GROSS PROFIT 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) Gross Profit $ 91,638 $ 79,840 $ 78,882 - ------------------------------------------------------------------------------- % of Revenues 39.1% 39.8% 41.6% - ------------------------------------------------------------------------------- The gross profit percentage for 1995 declined from 39.8% in 1994 to 39.1% reflecting the effect of foreign currency rate changes on low-margin projects in our Mechanical Testing and Simulation sector. The majority of these projects were shipped during the first half of 1995 at which point our gross profit margin began to show improvement. The fourth quarter gross profit percentage rose to 44.4% due to higher and more profitable revenues, operating efficiencies, and a more favorable business mix. The 1994 gross profit percentage declined 1.8 percentage points from 1993, primarily caused by a higher-than-normal content of development costs in some large customer projects resulting in much lower than expected gross profit margins. In 1993, the gross profit percentage had increased 3.1 percentage points from 1992, due to increased revenues and a better economic climate domestically for our higher-margin, short-delivery standard products. RESEARCH AND DEVELOPMENT 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) R & D Expense $ 13,733 $12,645 $ 13,697 - ------------------------------------------------------------------------------- % of Revenues 5.9% 6.3% 7.2% - ------------------------------------------------------------------------------- The Company does not do basic research, but does fund product, system and application developments (R&D). The majority of the development expenditures in all three years was for software, control products, new measurement products, servo motors and amplifiers, electromechanical load frames and accessories. The product development spending percentages in 1995 and 1994 are representative of what the company normally commits to in its annual planning process. Product development in 1993 included $1.8 million related to a large complex automotive contract which involved significant software and controls development. The Company also undertakes "first of their kind" high technology system projects which can contain considerable technical pioneering, the cost of which is reported in cost of sales. The combination of internally funded R&D and system innovation typically approximates 10% of revenues. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) Selling/Marketing $ 45,088 $ 40,351 $ 37,103 General & Administrative 16,053 12,682 10,697 - ------------------------------------------------------------------------------- Total $ 61,141 $ 53,033 $ 47,800 - ------------------------------------------------------------------------------- % of Revenues 26.1% 26.4% 25.2% - ------------------------------------------------------------------------------- Selling/Marketing and General & Administrative (SG&A) expenses for 1995 as a percentage of revenues were 26.1% down .3% from 1994 but up .9% from 1993. Full year spending for 1995 totaled $61.1 million which represented a $8.1 million (15%) increase over 1994. Acquisitions represented $2.2 million of the expense increase with the majority of the remaining increase being attributable to investments by our Measurement and Automation sector to support its strong growth rate, higher translated European expenses caused by the weak dollar, and inflation. All three years were similar in that cost containment and elimination were at the forefront of the planning process as well as aligning resources with markets with the greatest potential. The $5.2 million (11%) increase in SG&A expense in 1994 from 1993 was directly related to the acquisition of Adamel Lhomargy. The 1993 SG&A expense increase of $4.0 million (9%) included the acquisition of Custom Servo Motors, new sales office in Korea, and restructuring costs of our Machine Controls Division which was merged into Custom Servo Motors. 13 INCOME 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) Income Before Income Taxes $ 14,031 $ 12,629 $ 14,937 - ------------------------------------------------------------------------------- % of Revenues 6.0% 6.3% 7.9% - ------------------------------------------------------------------------------- Net Income $ 10,461 $ 8,659 $ 10,382 - ------------------------------------------------------------------------------- % of Revenues 4.5% 4.3% 5.5% - ------------------------------------------------------------------------------- Effective Tax Rate 25.4% 31.4% 30.5% - ------------------------------------------------------------------------------- Return On Beginning Equity Per Share 10.5% 9.0% 11.9% - ------------------------------------------------------------------------------- Net Income Per Share $ 2.30 $ 1.85 $ 2.27 - ------------------------------------------------------------------------------- Income before income taxes (pretax income) in 1995 increased $1.4 million (11%) from 1994 as a result of improving margins in our fourth quarter and higher revenues. For 1995, the Mechanical Testing and Simulation sector (MT&S) pretax income of $9.6 million increased 11% from 1994 but was down 30% from 1993. The Measurement and Automation sector (M&A) pretax income in 1995 of $4.5 million increased 11% over the prior year and was up 238% from 1993. Pretax income in 1994 decreased $2.3 million (16%) from 1993 as a result of significant development costs incurred on specific leading-edge technology projects affecting gross profit margins, and a $2.1 million charge to operations for a work-force reduction offset by a non-operating gain of $3.9 million realized from the sale of our Berlin, Germany facility. Pretax income in 1993 increased 132% from a pretax income in 1992 that was well below company expectations. Several factors affected 1992: lower-than-planned revenues, a revenue mix with more than normal leading-edge technology projects which also contained significant development content, under-utilization of plant capacity, planned accelerated internally funded R&D projects, and charges associated with employee terminations and early retirements. Net income in all three years benefited from an effective tax rate that was lower than the federal statutory tax rate, primarily the result of Research and Development tax credits and the tax benefit of the Company's Foreign Sales Corporation. See Note 4 of "Notes to Consolidated Financial Statements" for the reconciliation between the federal statutory and effective income tax rates and other related tax information. FOREIGN CURRENCIES EFFECTS In 1995, the U.S. dollar was generally weaker in relation to European economies, specifically in relationship to the German Deutsche Mark, which increased translated European foreign currency denominated revenues by $3.9 million. Over the year as a whole, there was little change in translated yen denominated revenues. A weaker dollar generally has a positive effect on overseas results because foreign exchange denominated revenues and earnings translate into more U.S. dollars; a stronger dollar has a negative translation effect. However, the cost of overseas operations and products sourced for domestic use, which were not significant, are affected in the opposite direction. Throughout 1994, the dollar weakened against all major foreign currencies, which increased translated foreign currency denominated revenues by $3.7 million. In 1993, European currency exchange rates weakened against the dollar while the Japanese yen continued to strengthen. As a result, translated foreign currency revenues were reduced by $2.4 million. The Company recorded foreign currency transaction gains of $1.4 million, $1.1 million, and $564 thousand, for the years 1995, 1994, and 1993, respectively. The Company's foreign currency risk-management program focuses on foreign currencies of countries where the Company operates (German Deutsche Mark, French Franc, English Pound, Swedish Kroner, Italian Lire and Japanese Yen). This involves entering into forward foreign currency hedge contracts, options, and foreign currency denominated loans. On September 30, 1995, there were open currency hedge contracts, primarily denominated in Yen, with various settlement dates, totaling $2.8 million. Gains under these contracts were not material as of September 30, 1995. These contracts are targeted to limit transaction exposures where equipment and services costs are incurred in U.S. dollars and the customer contracts in a foreign currency. LIQUIDITY AND CAPITAL RESOURCES 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) Total Interest Bearing Debt $ 22,965 $ 23,851 $ 33,299 % of Total Capital 17.7% 19.3% 26.4% - ------------------------------------------------------------------------------- Shareholders' Investment $ 106,677 $100,046 $ 93,011 - ------------------------------------------------------------------------------- Per Share $ 23.20 $ 21.90 $ 20.47 - ------------------------------------------------------------------------------- 14 FINANCIAL CONDITION At September 30, 1995, the Company's capital structure comprised $11.5 million of current debt, $11.5 million long-term debt and $106.7 million shareholders' equity. The ratio of total debt to total capital was 17.7%, compared with 19.3% at September 30, 1994. Total debt decreased $900 thousand during 1995 to $23.0 million. This resulted from a $7.0 million reduction in short-term debt, offset by a $6.1 million increase in long-term debt. The 1995 increase in long-term debt financed the Company's 1994 purchase of a new facility in Berlin, Germany. Shareholders' equity increased $6.7 million in 1995 to $106.7 million. Shareholders' investment per share in 1995 increased to $23.20 from $21.90 in 1994. The increase was primarily due to an increase in retained earnings of $10.5 million from current year net earnings, $900 thousand from employee stock option and purchase plans, $800 thousand increase from acquisitions accounted for under the pooling of interests method, and a $600 thousand increase in the cumulative translation adjustment. These increases were offset by dividends of $2.5 million and $3.6 million of treasury stock repurchases. CASH FLOWS Operating activities generated cash of $23.1 million in 1995 and $20.9 million in 1994. In 1993, operating activities consumed $9.7 million of cash. The cash generated in 1995 was largely from earnings, depreciation and amortization, and advanced billings to customers. These funds supported $6.3 million of capital expenditures, $2.5 million of dividend payments, $3.6 million of stock repurchases, and $4.7 million required for the acquisition of Power-Tek, Inc. Cash and cash equivalents increased $3.8 million during 1995. Capital expenditures for property, plant and equipment totaled $6.3 million in 1995, compared to $18.2 million in 1994, and $4.7 million in 1993. Capital spending in 1994 included $11.3 million for a new facility to support the Company's Berlin, Germany operations. This amount was net of the sale of the existing facility. Capital spending in 1996 is planned to be $6.5 million. The Company anticipates that 1996 capital expenditures will be financed primarily with funds from operations. DIVIDENDS At the end of 1995, the Company revised its dividend practice to target a pay out ratio of 33% of the average earnings per share of the last two years. This policy is intended to allow dividends to increase with the long-term growth of earnings per share, while sustaining dividends in down years. In November, 1995, the Company's Board of Directors increased the quarterly dividend to 16 cents per share from 14 cents per share. Annualized, this dividend pay out equates to 31% of the 1994 and 1995 average earnings per share. SHARE REPURCHASE PLAN In 1995, the Company repurchased 158,840 shares of common stock on the open market for $3.6 million, at an average cost of $22.74 per share. The Company repurchased 40,039 shares in 1994 for $900 thousand, and 51,433 shares in 1993 for $1.2 million. The Company's practice for share repurchases is to offset the dilutive impact of shares of common stock issued from the Company's stock option and stock purchase plans, and for other corporate stock based programs. During this three year period, the Company issued 254,579 shares of its common stock from these stock option and stock purchase plans. In January, 1995, the Company's Board of Directors authorized the repurchase of 250,000 shares of common stock in the open market within the Securities and Exchange Commission guidelines. At the end of 1995, the Company had authorizations to repurchase up to 284,631 shares of its common stock subject to price and market conditions. The Company believes that its 1996 anticipated cash flows from operations, a forecast decrease in unbilled contract and retainage receivables, and its short-term lines of credit will adequately finance ongoing operations, allow for the possible completion of the common-stock repurchase program and strategic acquisitions. QUARTERLY STOCK ACTIVITY(1) The Company's common shares trade on The Nasdaq Stock Market's National Market under the symbol MTSC. The following table sets forth the high, low and volume of shares traded (expressed in thousands) for the periods indicated: 1995 1994 - ------------------------------------------------------------------------------- SHARES SHARES HIGH LOW TRADED(2) HIGH LOW TRADED(2) - ------------------------------------------------------------------------------- 1st Quarter 24 1/4 20 1/2 551 31 27 3/4 569 2nd Quarter 25 3/4 22 1/2 548 31 3/4 29 5/8 704 3rd Quarter 27 3/4 23 1/2 399 29 25 3/4 332 4th Quarter 29 26 3/4 353 28 1/4 22 3/4 434 - ------------------------------------------------------------------------------- (1) Source: Wall Street Journal (2) Source: Barron's 15 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarter-to-quarter revenue and earnings comparisons do not necessarily reflect changes in the demand for the Company's products or its operating efficiency. Revenues and earnings in any quarter can be significantly affected by delivery delays or acceleration of one or more high value systems, not accounted for using the percentage-of-completion accounting method. The use of the percentage-of-completion revenue recognition method for large long term projects helps alleviate this. (See Note 1 of "Notes to Consolidated Financial Statements"). High value, state-of-the-art custom orders can also contain leading-edge applications of the Company's technology which in some cases have resulted in lower than expected gross profit margins. This "system level" product development is as equally essential to the Company's long term growth as is company funded research and development. Management believes these orders have significant long-term benefits for the Company despite their potential impact on earnings. Quarterly earnings will also vary based on the use of estimated, effective income tax rates for providing federal, state, and foreign income taxes. See Note 4 of "Notes to Consolidated Financial Statements" for the reconciliation between the statutory and effective income tax rates. Selected quarterly financial information, for the three fiscal years ended September 30, 1995, is presented below.
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands except per share data) 1995 Revenues $49,468 $ 58,949 $ 55,709 $70,005 $ 234,131 Gross margin 18,195 21,061 21,327 31,055 91,638 Pretax income 1,652 2,022 1,961 8,396 14,031 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,239 $ 1,511 $ 1,488 $ 6,223 $ 10,461 - ----------------------------------------------------------------------------------------------------------------------------------- Income per share $ .27 $ .34 $ .33 $ 1.33 $ 2.30 - ----------------------------------------------------------------------------------------------------------------------------------- 1994 Revenues $47,241 $ 46,357 $ 48,468 $58,484 $ 200,550 Gross margin 19,443 17,380 18,902 24,115 79,840 Pretax income 3,526 5,015 1,442 2,646 12,629 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,361 $ 3,181 $ 1,002 $ 2,115 $ 8,659 - ----------------------------------------------------------------------------------------------------------------------------------- Income per share $ .51 $ .68 $ .21 $ .45 $ 1.85 - ----------------------------------------------------------------------------------------------------------------------------------- 1993 Revenues $40,016 $ 43,168 $ 48,824 $57,491 $ 189,499 Gross margin 16,705 17,871 20,127 24,179 78,882 Pretax income 2,462 3,373 4,361 4,741 14,937 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,674 $ 2,187 $ 2,864 $ 3,657 $ 10,382 - ----------------------------------------------------------------------------------------------------------------------------------- Income per share $ .37 $ .48 $ .63 $ .79 $ 2.27 - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
16
CONSOLIDATED BALANCE SHEETS (September 30) ASSETS 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands) CURRENT ASSETS: Cash and cash equivalents $ 8,736 $ 4,919 Accounts receivable, net of allowance for doubtful accounts of $1,824 and $1,439 65,106 44,534 Unbilled contracts and retainage receivable 19,668 35,584 Inventories 35,669 35,152 Prepaid expenses 2,410 3,017 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets 131,589 123,206 - ----------------------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Land 3,461 3,703 Buildings and improvements 38,574 36,452 Machinery and equipment 55,826 50,803 Accumulated depreciation (49,371) (43,590) - ----------------------------------------------------------------------------------------------------------------------------------- Total property and equipment, net 48,490 47,368 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS 9,421 5,134 - ----------------------------------------------------------------------------------------------------------------------------------- $ 189,500 $ 175,708 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT - ----------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Notes payable to banks $ 10,475 $ 17,007 Current maturities of long-term debt 1,043 1,516 Accounts payable 11,768 10,969 Accrued compensation and benefits 20,194 18,058 Advance billings to customers 14,784 9,660 Other accrued liabilities 8,475 8,170 Accrued income taxes 275 981 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 67,014 66,361 - ----------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES 4,362 3,973 LONG-TERM DEBT 11,447 5,328 - ----------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT: Common stock, 25 cents par; 16,000,000 shares authorized: 4,598,311 and 4,568,374 shares issued and outstanding 1,150 1,142 Additional paid-in capital 255 2,928 Retained earnings 100,443 91,762 Cumulative translation adjustment 4,829 4,214 - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 106,677 100,046 - ----------------------------------------------------------------------------------------------------------------------------------- $ 189,500 $ 175,708 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. 17
CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' INVESTMENT (For the Years Ended September 30) INCOME 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands except for share data) NET REVENUE $ 234,131 $ 200,550 $ 189,499 COST OF REVENUE 142,493 120,710 110,617 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 91,638 79,840 78,882 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling 45,088 40,351 37,103 General and administrative 16,053 12,682 10,697 Research and development 13,733 12,645 13,697 Interest expense 2,670 2,150 1,722 Interest income (246) (290) (515) Other expense, net 309 (327) 1,241 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 77,607 67,211 63,945 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 14,031 12,629 14,937 PROVISION FOR INCOME TAXES 3,570 3,970 4,555 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 10,461 $ 8,659 $ 10,382 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE $ 2.30 $ 1.85 $ 2.27 - ----------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,545 4,668 4,572 - ----------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock Additional Cumulative Shares Paid-In Retained Translation Issued Amount Capital Earnings Adjustment - ----------------------------------------------------------------------------------------------------------------------------------- (dollars expressed in thousands) BALANCE, SEPTEMBER 30, 1992 4,463,303 $1,115 $ 1,673 $ 77,958 $4,246 - ----------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 119,749 30 2,112 -- -- Translation adjustment -- -- -- -- (709) Common stock purchased and retired (51,433) (12) (1,165) -- -- Acquisition through pooling of interests 11,984 3 57 (531) -- Net income -- -- -- 10,382 -- Cash dividends, 48 cents per share -- -- -- (2,148) -- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1993 4,543,603 1,136 2,677 85,661 3,537 - ----------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 64,810 16 1,187 -- -- Translation adjustment -- -- -- -- 677 Common stock purchased and retired (40,039) (10) (936) -- -- Net income -- -- -- 8,659 -- Cash dividends, 56 cents per share -- -- -- (2,558) -- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1994 4,568,374 1,142 2,928 91,762 4,214 - ----------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 44,277 11 899 -- -- Translation adjustment -- -- -- -- 615 Common stock purchased and retired (158,840) (39) (3,572) -- -- Acquisitions through pooling of interests 144,500 36 -- 743 -- Net income -- -- -- 10,461 -- Cash dividends, 56 cents per share -- -- -- (2,523) -- - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1995 4,598,311 $1,150 $ 255 $100,443 $4,829 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 18
CONSOLIDATED STATEMENTS OF CASH FLOWS (For the Years Ended September 30) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands) OPERATING ACTIVITIES Net income $ 10,461 $ 8,659 $ 10,382 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 7,217 6,214 5,648 Deferred income taxes 278 731 96 Gain from sale of land and building (418) (3,930) (658) Changes in operating assets and liabilities: Accounts receivable, unbilled contracts, and retainages (2,625) 8,789 (22,591) Inventories 1,065 (10,143) (1,418) Prepaid expenses 718 (1,085) (187) Accrued income taxes (745) 255 (3,045) Advance billings to customers 4,629 2,336 (556) Other assets and liabilities, net 2,494 9,084 2,588 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 23,074 20,910 (9,741) - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Property and equipment additions, net (6,310) (6,901) (4,576) Plant purchases and new construction, net -- (11,277) (92) Proceeds from sale of land and building 671 6,131 750 Purchase of Power-Tek, Inc. (4,687) -- -- Other assets (405) (469) (93) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (10,731) (12,516) (4,011) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net borrowings under notes payable to banks (8,134) (11,595) 16,295 Proceeds from issuance of long-term debt 8,257 4,341 -- Repayments of long-term debt (3,185) (2,194) (2,331) Cash dividends (2,523) (2,558) (2,148) Proceeds from employee stock option and stock purchase plans 910 1,203 2,142 Payments to purchase and retire common stock (3,611) (946) (1,177) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (8,286) (11,749) 12,781 - ----------------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (240) 677 (709) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,817 (2,678) (1,680) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,919 7,597 9,277 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,736 $ 4,919 $ 7,597 - ----------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest $ 2,615 $ 2,069 $ 1,743 Income taxes 3,317 3,715 7,600 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CONSOLIDATION AND TRANSLATION The consolidated financial statements include the accounts of MTS SYSTEMS CORPORATION (the Company) and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. All balance sheet accounts of foreign subsidiaries are translated at the current exchange rate as of the end of the accounting period. Income statement items are translated at average exchange rates. The resulting translation adjustment is recorded as a separate component of shareholders' investment. Gains and losses resulting from foreign currency transactions are included in "Other expense, net" in the Consolidated Statements of Income. These transactions resulted in net exchange gains of $1,401,000 in 1995, $1,058,000 in 1994 and $564,000 in 1993. The Company has a foreign currency risk management program which principally involves entering into forward foreign currency hedge contracts, options, and foreign currency denominated loans to address specific exposures related to future foreign currency transactions. On September 30, 1995, there were open hedge and options contracts, with various future settlement dates, totaling $2,748,000. The net unrealized gain on such contracts was $41,000 at September 30, 1995. REVENUE RECOGNITION Revenue is recognized upon shipment of equipment when the customer's order can be manufactured, delivered and installed in less than twelve months. Revenue on contracts requiring longer delivery periods (long-term contracts) and other customized orders that permit progress billings is recognized using the percentage-of-completion method based on the cost incurred to date relative to estimated total cost of the contract (cost-to-cost method). The cumulative effects of revisions of estimated total contract costs and impact on revenues are recorded in the period in which the facts become known. When a loss is anticipated on a contract, the amount is provided currently. LONG-TERM CONTRACTS The Company enters into long-term contracts for customized equipment sold to its customers. Under terms of certain 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 such contracts appear in the Consolidated Balance Sheets as unbilled contracts and retainage receivable. Amounts unbilled or retained at September 30, 1995 are expected to be invoiced during fiscal 1996. Long-term contracts consider the duration of the manufacturing and collection cycles at the time the contract is bid. Accordingly, Accounts Receivable in the accompanying Consolidated Balance Sheets approximate fair value. WARRANTY OBLIGATIONS The Company warrants its products against defects in materials and workmanship under normal use and service, generally for one year. The Company maintains reserves for warranty costs based upon its past experience with warranty claims. CASH EQUIVALENTS Cash equivalents represent short-term investments which have an original maturity of 90 days or less. Accordingly, the amounts shown on the accompanying Consolidated Balance Sheets approximate fair value. ACCOUNTS RECEIVABLE The Company grants credit to customers, but generally does not require collateral or other security from domestic customers. International receivables, where deemed necessary, are supported by letters of credit from reputable banking institutions. INVENTORIES Inventories consist of material, labor and overhead and are stated at the lower of first-in, first-out cost or market. Inventory components as of September 30, were as follows: 1995 1994 - ------------------------------------------------------------------------------- (expressed in thousands) Customer projects in various stages of completion $ 13,304 $ 14,336 Components, assemblies and parts 22,365 20,816 - ------------------------------------------------------------------------------- Total $ 35,669 $ 35,152 - ------------------------------------------------------------------------------- 20 PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Additions, replacements and improvements are capitalized at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is provided over the following estimated useful lives of the property: Buildings and improvements: 10 to 40 years. Machinery and equipment: 5 to 10 years. Most major building and equipment purchases are depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax purposes. OTHER ASSETS Other assets consist principally of patents and excess cost over net assets acquired, net of accumulated amortization of $7,275,000 and $3,304,000 in 1995 and 1994, respectively. These assets are being amortized over various periods from 8 to 40 years. RESEARCH AND DEVELOPMENT Research and product development costs associated with new products are charged to operations as incurred. NET INCOME PER SHARE Net income per share is computed by dividing net in come by the weighted average number of shares of common stock and common stock equivalents outstanding in each period. Fully diluted and primary net income per share amounts are approximately equivalent for the years presented. ACQUISITIONS In April 1994 the Company completed the purchase of 100% of the stock of Adamel Lhomargy, a French manufacturer of material testing systems, for cash and assumption of debt. The transaction was accounted for by the purchase method of accounting. In November 1994 the Company acquired the stock of Power-Tek, Inc. of Farmington Hills, Michigan for an initial payment of cash and a contingent payment. The transaction was accounted for by the purchase method of accounting. Power-Tek manufactures dynamometers and clean-air testing systems for the auto, truck and construction equipment industries. The company is a wholly owned subsidiary conducting business as MTS-PowerTek, Inc. In May and September 1995 the Company completed transactions to exchange shares of its common stock for all the outstanding shares of Gull Engineering, Inc. and Incon Corporation. Both transactions were accounted for as poolings of interests. The companies manufacture proprietary products used by existing MTS operating units. MTS was the sole customer of both companies. Financial data for prior periods have not been restated for the acquisitions by the pooling of interests as both assets and operations were not material, individually or in total, to the Company's Consolidated Financial Statements. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. INDUSTRY SECTOR AND GEOGRAPHIC INFORMATION: The Company provides customers with hardware and software products and services they can use to improve product quality, stimulate innovation, and increase machine and worker productivity. MTS markets these products and services in two business sectors--Mechanical Testing and Simulation (MT&S) and Measurement and Automation (M&A). MT&S customers use the Company's products and services to determine how their products (materials, vehicles, components or structures) will perform under actual service conditions. M&A customers use the Company's instrumentation products to monitor and automate industrial processes and equipment. Financial information by sector follows:
1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands) NET REVENUE Mechanical Testing & Simulation $ 190,464 $ 163,502 $ 160,198 Measurement & Automation 43,946 37,276 29,667 Transfers within and between sectors (279) (228) (366) - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 234,131 $ 200,550 $ 189,499 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES Mechanical Testing & Simulation $ 9,550 $ 8,606 $ 13,612 Measurement & Automation 4,481 4,023 1,325 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 14,031 $ 12,629 $ 14,937 - ----------------------------------------------------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS Mechanical Testing & Simulation $ 161,678 $ 152,763 $ 145,378 Measurement & Automation 36,048 29,558 24,755 Eliminations between sectors (8,226) (6,613) (4,417) - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 189,500 $ 175,708 $ 165,716 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER SECTOR DATA Mechanical Testing & Simulation: Capital expenditures $ 6,319 $ 16,464 $ 4,199 Depreciation 5,456 4,917 4,634 Amortization 417 108 18 - ----------------------------------------------------------------------------------------------------------------------------------- Measurement & Automation: Capital expenditures $ 1,243 $ 1,396 $ 1,080 Depreciation 1,086 945 767 Amortization 258 244 229 - -----------------------------------------------------------------------------------------------------------------------------------
22 A geographic summary of the Company's operations and related year-end asset information for each of the three years in the period ended September 30, 1995 follows:
International ------------------------------------------------------------------------ United Elimi- Consoli- States Far East Europe Other nations dated - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands) OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1995 Net revenue $125,659 $ 42,032 $54,634 $11,806 $ -- $ 234,131 Transfers between geographic areas 1,256 16,620 9,998 585 (28,459) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total $126,915 $ 58,652 $64,632 $12,391 $ (28,459) $ 234,131 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 15,046 $ (192) $(1,955) $ 1,132 $ -- $ 14,031 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1994 Net revenue $101,747 $ 45,541 $45,099 $ 8,163 $ -- $ 200,550 Transfers between geographic areas -- 19,343 15,439 871 (35,653) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total $101,747 $ 64,884 $60,538 $ 9,034 $ (35,653) $ 200,550 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 7,736 $ 4,010 $ 1,242 $ (359) $ -- $ 12,629 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1993 Net revenue $ 92,153 $ 46,490 $43,633 $ 7,223 $ -- $ 189,499 Transfers between geographic areas 366 16,914 10,815 1,321 (29,416) -- - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 92,519 $ 63,404 $54,448 $ 8,544 $ (29,416) $ 189,499 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes $ 9,340 $ 5,031 $ 956 $ (390) $ -- $ 14,937 - ----------------------------------------------------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS AT SEPTEMBER 30: 1995 $164,341 $ 12,895 $51,708 $ 311 $ (39,755) $ 189,500 1994 154,954 $ 19,454 $40,825 $ 791 $ (40,316) $ 175,708 1993 162,090 24,135 24,661 527 (45,697) 165,716 - -----------------------------------------------------------------------------------------------------------------------------------
Transfers between geographic areas are made at prices which allow appropriate markup to the manufacturing or selling unit. Individual countries, other than the United States, do not exceed 10% of consolidated revenues on a recurrent annual basis. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. FINANCING: Long-term debt as of September 30 follows:
1995 1994 - ----------------------------------------------------------------------------------- (expressed in thousands) 7.75% Mortgage, due in October 2015, secured by land and building $ 8,085 $ -- 6.69% Note, unsecured, due in August 1997 2,408 2,234 9.5% Note, unsecured, due in August 1996 1,611 1,975 8.3% Note, unsecured, due in September 1996 313 576 3.5% Note, unsecured, paid during 1995 -- 1,685 4.75% Note, unsecured, paid during 1995 -- 370 Other, secured 73 4 - ----------------------------------------------------------------------------------- TOTAL $12,490 $6,844 - ----------------------------------------------------------------------------------- LESS CURRENT MATURITIES (1,043) (1,516) - ----------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $11,447 $5,328 - -----------------------------------------------------------------------------------
Aggregate annual maturities of long-term debt for the next five fiscal years are as follows: 1996--$1,043,000; 1997--$3,461,000; 1998--$436,000; 1999--$228,000; 2000--$244,000 and $7,078,000 thereafter. The carrying value of the Company's long-term debt at September 30, 1995, approximates the fair value at current interest rates offered to the Company for debt of the same remaining maturities. The Company has credit agreements with two domestic banks totaling $30,000,000. One credit agreement, for $5,000,000, permits the Company to issue domestic and Euro-currency notes. The other credit agreement, for $25,000,000, permits the Company to issue domestic notes, Euro-currency notes, and banker's acceptances. As part of the same credit agreement, and within the $25,000,000 limit, the bank has agreed to issue term loans up to a maximum of $10,000,000 until September 30, 1996. This agreement provides for repayment of these term loans through September, 1998. The Company compensates both banks with loan commitment fees on the unused portion of the credit lines. The Company also has four uncommitted lines of credit with banks that total $40,000,000. In addition, the Company has standby letter-of-credit lines totaling $15,000,000. At September 30, 1995, standby letters of credit outstanding totaled $8,989,000. Under the terms of its credit agreements, the Company has agreed, among other matters, that (a) its defined cash flow or fixed charge coverage will exceed a defined minimum level; (b) its interest bearing debt will not exceed a defined percentage of total capital; (c) its tangible net worth will exceed a defined minimum amount; and (d) repurchases of its common stock will not exceed a maximum amount. At September 30, 1995, tangible net worth exceeded the defined minimum amount by $17,772,000 and the Company had $7,404,000 available for repurchases of its common stock. The Company was in compliance with the terms of its credit agreements and its lines of credit at September 30, 1995. Information on short-term borrowings for the years ended September 30 follows. 1995 1994 1993 - ------------------------------------------------------------------------------- (expressed in thousands) Balance outstanding at September 30 $10,475 $17,007 $28,602 Average balance outstanding 22,286 23,702 21,409 Maximum balance outstanding 26,642 30,302 29,446 Year-end interest rate 7.0% 5.8% 3.9% Weighted-average interest rate 6.5% 4.4% 3.9% - ------------------------------------------------------------------------------- 24 4. INCOME TAXES: The provision for income taxes for the years ended September 30 consisted of: 1995 1994 1993 - -------------------------------------------------------------------------------- (expressed in thousands) Currently payable (receivable): Federal $ 3,211 $ 2,249 $ 2,378 State 662 411 411 Foreign (295) 1,203 1,604 Deferred (8) 107 162 - -------------------------------------------------------------------------------- Total provision $ 3,570 $ 3,970 $ 4,555 - -------------------------------------------------------------------------------- A reconciliation from the Federal statutory income tax rate to the Company's effective rate for the years ended September 30 follows: 1995 1994 1993 - -------------------------------------------------------------------------------- Statutory rate 35% 35% 35% Tax benefit of Foreign Sales Corporation (7) (4) (4) Foreign provision in excess of U.S. tax rate -- 5 3 State income taxes, net of Federal benefit 3 2 2 Research and development tax credits (7) (4) (4) Other, net 1 (3) (2) - -------------------------------------------------------------------------------- Effective rate 25% 31% 30% - -------------------------------------------------------------------------------- Deferred tax assets and liabilities are recorded for the differences between the amounts reported for financial reporting and income tax purposes. Components of the net deferred tax liabilities as of September 30 were as follows: DEFERRED TAX ASSETS: 1995 1994 - ------------------------------------------------------------------------------- (expressed in thousands) Accrued payroll/benefits $1,444 $1,547 Inventory reserves 860 1,162 Accounts receivable 216 113 Other assets 21 187 - ------------------------------------------------------------------------------- TOTAL DEFERRED TAX ASSET $2,541 $3,009 - ------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: 1995 1994 - ------------------------------------------------------------------------------- Property and equipment $4,362 $4,050 Real estate tax accrual -- 266 Other liabilities -- 23 - ------------------------------------------------------------------------------- TOTAL DEFERRED TAX LIABILITY $4,362 $4,339 - ------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITY $1,821 $1,330 - ------------------------------------------------------------------------------- 25 5. STOCK OPTIONS: The Company has made certain stock-based awards to its officers, non-employee directors, and key employees under various stock plans. Awards under these plans can include incentive stock options (qualified), non-qualified stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-based and non stock-based awards. At September 30, 1995, the Company had awarded incentive stock options and non-qualified stock options. These were granted at exercise prices that are 100% of the fair-market value at the date of grant. Beginning one year after grant, the options generally can be exercised proportionately each year for periods of three, four, and six years, as defined in the respective plans. Option holders may exercise options by delivering Company stock already owned, cash, or a combination of stock and cash. The shares tendered in the exchange are cancelled and, therefore, reduce shares issued. During 1995 and 1994, option holders exchanged 15,273 and 20,655 shares, respectively, of the Company's stock in payment of options exercised. Under the Plans, options for 541,821 shares are outstanding at $13.00 to $31.75 per share, of which options for 330,222 shares were exercisable at September 30, 1995. Another 322,881 options remain available for granting beyond September 30, 1995. During 1995 and 1994, options for 44,157 and 65,927 shares were exercised at prices of $13.00 to $26.75 and $13.00 to $25.38 per share, respectively. In January, 1992, the Company's shareholders authorized an Employee Stock Purchase Plan (the Purchase Plan), whereby 250,000 shares of the Company's common stock were reserved for sale to employees until April 2002. Participants in the 1995 phase of the Purchase Plan were granted options to purchase shares at 85% of the market price of the Company's common stock, and participants in the 1994 phase of the Purchase Plan were granted options to purchase shares at 95% of the market price of the Company's common stock, all at dates specified in the Purchase Plan. Participants were issued 15,393 shares in 1995, and 19,538 shares in 1994. During fiscal 1995, participants subscribed to purchase 25,000 shares at 85% of market price for issuance in fiscal 1996. Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (Statement No. 123), issued in October 1995 and effective for fiscal years beginning after December 15, 1995, encourages, but does not require, a fair value based method of accounting for employee stock options or similar equity instruments. It also allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting had been applied. The Company expects to adopt Statement No. 123 in 1996. While the Company is still evaluating Statement No. 123, it currently expects to elect to continue to measure compensation cost under APB No. 25 and comply with the pro forma disclosure requirements. If the Company makes this election, this statement will have no impact on the Company's results of operations or financial position because the Company's plans are fixed stock option plans which have no intrinsic value at the grant date under APB No. 25. 6. EMPLOYEE BENEFIT PLANS: The Company's profit sharing plan functions as a retirement program for most U.S. and certain international employees. Employees who have completed 1,000 hours of service during the plan year are eligible to participate. The formula for calculating the Company's contribution is approved annually by the Board of Directors and is based primarily on operating results for the year, before management variable compensation. The plan provides for a minimum contribution of 4% of participant compensation, as defined, up to the social security taxable wage base, and 8% of participant compensation in excess of the taxable wage base, so long as this calculation does not exceed pretax income. The contributions for 1995, 1994, and 1993 were 4.3%, 4.3%, and 4.2% of participant compensation, respectively. The provisions for profit sharing were $2,132,000 in 1995, $2,281,000 in 1994, and $2,118,000 in 1993, and are distributed among the various operating expenses shown in the accompanying Consolidated Statements of Income. Two of the Company's international subsidiaries have noncontributory, unfunded retirement plans for eligible employees. These plans provide benefits based on the employee's years of service and compensation during the years immediately preceding retirement, early retirement, termination, disability or death, as defined in the respective plans. 26 The expenses for these plans consist of the following components:
1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands) Service cost-benefit earned during the period $ 395 $ 214 $ 235 Interest cost on projected benefit obligation 278 195 192 Net amortization and deferral 40 (16) 7 - ----------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC PENSION COST $ 713 $ 393 $ 434 - -----------------------------------------------------------------------------------------------------------------------------------
The status of the Company's plans and the amounts recognized in the financial statements are:
1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- (expressed in thousands) ACTUARIAL PRESENT VALUE: Accumulated benefit obligation: Vested $ 3,201 $1,604 Nonvested 778 63 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL 3,979 1,667 - ----------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation 4,968 2,234 Plan assets at fair value -- -- Unrecognized net gain (429) (784) Unrecognized net liability being amortized 233 74 Adjustment required to recognize minimum liability -- -- - ----------------------------------------------------------------------------------------------------------------------------------- ACCRUED PENSION LIABILITY $ 4,772 $1,524 - ----------------------------------------------------------------------------------------------------------------------------------- Major assumptions at year-end are: Discount rate 3.5 to 7% 8.0% Rate of increase in future compensation levels 3% 4.0% - -----------------------------------------------------------------------------------------------------------------------------------
27 REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO MTS SYSTEMS CORPORATION: We have audited the accompanying consolidated balance sheets of MTS SYSTEMS CORPORATION (a Minnesota corporation) AND SUBSIDIARIES as of September 30, 1995 and 1994, and the related consolidated statements of income, shareholders' investment, and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MTS Systems Corporation and Subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 21, 1995 REPORT OF MANAGEMENT The management of MTS Systems Corporation is responsible for the integrity and objectivity of the financial information presented in this Report. The financial statements have been prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgment. Management is also responsible for establishing and maintaining the Company's accounting systems and related internal controls, which are designed to provide reasonable assurance that assets are safeguarded, transactions are properly recorded, and the policies and procedures are implemented by qualified personnel. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, meets regularly with management and its independent auditors to review audit activities, internal controls, and other accounting, reporting, and financial matters. This Committee also recommends independent auditors for appointment by the full Board, subject to shareholder ratification. The financial statements included in this annual report have been audited by Arthur Andersen LLP, independent public accountants. We have been advised that their audits were conducted in accordance with generally accepted auditing standards and included such reviews of internal controls and tests of transactions as they considered necessary in setting the scope of their audits. Donald M. Sullivan Chairman and Chief Executive Officer /s/ Donald M. Sullivan Marshall L. Carpenter Vice President and Chief Financial Officer /s/ Marshall L. Carpenter 28 EX-21 5 EXHIBIT 21 MTS SYSTEMS CORPORATION AND SUBSIDIARIES OF THE COMPANY Incorporation Name Jurisdiction MTS Systems (Hong Kong) Inc. Minnesota, U.S.A. MTS Testing Systems (Canada) Ltd. Canada MTS Systems GmbH Germany MTS Sensors Technologie GmbH and Co. KG Germany MTS Systems France France MTS Adamel Lhomargy S.A France MTS Holdings France, SARL France MTS (Japan) Ltd. Japan MTS Sensors Technology K.K Japan MTS Systems Limited (London) United Kingdom MTS Systems SRL (Italy) Italy MTS International, Ltd. West Indies MTS Systems Norden AB Sweden MTS Sistemas do Brasil, Ltda Brazil MTS Systems (China) Inc. Peoples Republic of China Custom Servo Motors, Inc. Minnesota, U.S.A. MTS Korea, Inc. Republic of Korea MTS-PowerTek, Inc. Michigan, U.S.A. EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (Registration Nos. 2-99389, 33-21699, 33-35288, 33-45386 and 33-45386) and Form S-3 (Registration No. 33-60485). ARTHUR ANDERSEN LLP Minneapolis, Minnesota, December 21, 1995 EX-27 7
5 1,000 12-MOS SEP-30-1995 SEP-30-1995 8,736 0 86,598 1,824 35,669 131,589 97,861 49,371 189,500 67,014 12,490 0 0 1,150 105,527 189,500 234,131 234,131 142,493 220,100 0 620 2,670 14,031 3,570 14,031 0 0 0 10,461 2.30 2.30
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