EX-13 8 mts015285_ex-13.txt 2001 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 Six Year Financial Summary (September 30)
2001 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBERS OF SHAREHOLDERS AND EMPLOYEES) OPERATIONS(1) ------------------------------------------------------------------------------------------------------------------------------- Net revenue $396,641 $391,853 $390,542 $362,163 $323,424 $278,170 North America revenue 192,990 194,056 200,556 200,490 156,877 140,249 International revenue 203,651 197,797 189,986 161,673 166,547 137,921 Gross profit 141,408 132,940 151,171 142,227 132,073 116,047 Gross profit as a % of net revenue 35.7% 33.9% 38.7% 39.3% 40.8% 41.7% Research and development costs 22,485 24,619 26,966 24,348 19,798 19,776 Research and development costs as a % of net revenue 5.7% 6.3% 6.9% 6.7% 6.1% 7.1% Income before income taxes 24,578(2) 6,095 18,770 33,448 29,986(3) 21,813 Effective income tax rate 38% 41% 34% 36% 36% 31% Net income 15,176(2) 3,624 12,445 21,539 19,237(3) 15,170 Net income as a % of net revenue 3.8%(2) .9% 3.2% 5.9% 5.9%(3) 5.5% Net income per diluted share of common stock .72(2) .17 .59 1.01 .92(3) .72 Weighted average diluted shares outstanding during the year(4) 21,074 20,935 21,184 21,330 20,945 21,184 Net interest expense 4,837 4,892 4,597 1,948 1,125 1,123 Depreciation and amortization 14,477 15,294 14,424 10,880 9,608 8,673 FINANCIAL POSITION ------------------------------------------------------------------------------------------------------------------------------- Current assets $230,249 $225,273 $223,651 $204,311 $162,814 $137,584 Current liabilities 105,073 108,648 104,713 110,223 83,413 63,465 Current ratio 2.2:1 2.1:1 2.1:1 1.9:1 2.0:1 2.2:1 Net working capital 125,176 116,625 118,938 94,088 79,401 74,119 Property and equipment, net 68,893 72,081 73,633 69,942 51,790 49,476 Total assets 331,759 330,234 333,347 313,022 229,075 197,679 Interest bearing debt 59,305 75,712 71,637 74,682 12,865 11,836 Total shareholders' investment 167,122 157,854 162,859 152,689 133,524 120,578 Shareholders' investment per share 7.95 7.61 7.80 7.39 6.56 5.90 Interest bearing debt as a % of shareholders' investment 35.5% 48.0% 44.0% 48.9% 9.6% 9.8% Return on beginning shareholders' investment 9.6% 2.2% 8.0% 15.4% 15.6%(3) 13.0% Return on average net assets(5) 13.4% 4.9% 10.7% 20.9% 22.7% 17.6% OTHER STATISTICS ------------------------------------------------------------------------------------------------------------------------------- Number of common shareholders of record at year end(6) 2,086 2,229 2,055 1,760 1,575 1,523 Number of employees at year end 2,224 2,350 2,436 2,424 2,125 1,866 New orders received $384,900 $415,900 $350,200 $352,300 $380,900 $302,800 Backlog of orders at year end $156,300 $163,000 $146,800 $187,200 $190,800 $130,600 Cash dividends paid per share $ .24 $ .24 $ .24 $ .24 $ .20 $ .16 -------------------------------------------------------------------------------------------------------------------------------
(1)ALL AMOUNTS HAVE BEEN RESTATED TO REFLECT THE ACQUISITION OF DSP TECHNOLOGY, INC.IN 1999 THAT WAS RECORDED UNDER THE POOLING-OF-INTEREST METHOD. (2)EXCLUDES THE CUMULATIVE EFFECT FROM THE ADOPTION OF STAFF ACCOUNTING BULLETIN NO. 101 "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" AS OF OCTOBER 1, 2000. THE CUMULATIVE EFFECT RESULTED IN A REDUCTION IN NET INCOME OF $2,263 ($0.11 PER DILUTED SHARE) IN FISCAL 2001. (3)EXCLUDES AN AFTER-TAX GAIN OF $2,654 ($0.13 PER SHARE) FROM THE SALE OF LAND DURING 1997. (4)ASSUMES THE CONVERSION OF POTENTIAL COMMON SHARES USING THE TREASURY STOCK METHOD. (5)INCOME BEFORE INCOME TAXES AND NET INTEREST EXPENSE DIVIDED BY AVERAGE NET ASSETS EMPLOYED (EXCLUSIVE OF NON-INTEREST BEARING LIABILITIES). (6)DOES NOT INCLUDE BENEFICIAL SHAREHOLDERS WHOSE STOCK IS HELD BY NOMINEES OR BROKER DEALERS. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations CUSTOMER ORDERS AND BACKLOG 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Customer Orders: North America* $208,400 $233,700 $196,400 International 176,500 182,200 153,800 -------------------------------------------------------------------------------- Total $384,900 $415,900 $350,200 -------------------------------------------------------------------------------- Backlog of Undelivered Orders $156,300 $163,000 $146,800 -------------------------------------------------------------------------------- *INCLUDES U.S. AND CANADA New orders from customers during 2001 totaled $384.9 million, a decrease of $31.0 million or 7.4% compared to customer orders of $415.9 million booked in 2000. In 1999, customer orders totaled $350.2 million. In 2001, the Company received an order from a customer for $10.8 million and in 2000 a contract totaling $18.6 million was received from another customer, each of which were customers of the Mechanical Testing and Simulation ("MT&S") Sector. No individual customer order over $10 million was booked during 1999. Orders for the MT&S Sector totaled $308.2 million in 2001, a decrease of $6.7 million or 2.1%, compared to customer orders of $314.9 million for 2000. The MT&S Sector booked 80.1% of total Company orders in 2001, compared to 75.7% for 2000. During 2001, the Company continued to experience strong order demand worldwide for its aircraft structural testing equipment and in the custom project business of its Advanced Systems business unit, offset somewhat by the continuing slowdown in North American business levels especially as a result of cut backs in capital spending in the North American automotive market. Despite the overall slowdown in the North American automotive market place, the Company, along with its strategic alliance partners, continued to see growing demand for software and analysis products targeted principally at the automotive design validation marketplace. Orders from the ground vehicle industry in North America and for aerospace applications were particularly strong during 2000. Generally, orders from customers outside the United States (including Europe, Japan, Korea and Southeast Asia) during 2001 were strong for each of the business units comprising the MT&S Sector. Orders received during 2000 from the Asia/ Pacific Region, especially Japan, were much stronger for vehicle testing systems and aerospace applications compared to 1999. Orders from Europe in 2000 were consistent with the order levels in 1999. New orders for the Factory Automation ("FA") Sector totaled $76.7 million for 2001, a decrease of $24.3 million, or 24.1%, compared to new orders written during 2000 of $101.0 million. Customer orders in this sector were particularly weak during fiscal 2001, especially as the result of aggressive cut backs in capital spending in the North American automotive market and a precipitous drop in North American and European demand for the Company's automation components in the semiconductor, electronic assembly and industrial markets. The FA Sector accounted for 19.9% of total Company orders during fiscal 2001, compared to 24.3% in 2000. During fiscal 2000, the FA Sector experienced solid growth in Europe and Japan while orders for industrial automation applications (servo motors, amplifiers and motion controllers) and industrial sensors in the North American marketplace were much stronger, compared to the prior year. On a geographical basis, orders from customers located in North America totaled $208.4 million during 2001, down $25.3 million or 10.8% compared to orders received of $233.7 million in 2000. North American orders received during fiscal 1999 totaled $196.4 million. Interna tional orders received during 2001 of $176.5 million decreased by $5.7 million, or 3.1%, compared to orders received during 2000 of $182.2 million. International orders in fiscal 1999 totaled $153.8 million. The following table reflects the geographical analysis of new orders received during the years ended September 30: GEOGRAPHIC ANALYSIS OF NEW ORDERS 2001 2000 1999 -------------------------------------------------------------------------------- North America 54% 56% 56% ------------------------------------------------------------------------------- Europe, Africa, and Middle East 23 26 30 ------------------------------------------------------------------------------- Asia Pacific, including Japan 23 18 13 ------------------------------------------------------------------------------- Other -- -- 1 ------------------------------------------------------------------------------- The backlog of undelivered orders at September 30, 2001 totaled $156.3 million, a decrease of approximately $6.7 million, or 4.1%, compared to backlog of $163.0 million at September 30, 2000. Backlog at the end of fiscal 1999 totaled $146.8 million. NET REVENUE 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) North America $187,998 $205,781 $210,924 International 208,643 186,072 179,618 -------------------------------------------------------------------------------- Total $396,641 $391,853 $390,542 -------------------------------------------------------------------------------- Net revenue of $396.6 million for fiscal 2001 increased $4.7 million or 1.2%, compared to $391.9 million for fiscal 2000. Net revenue for fiscal 1999 totaled $390.5 million. On a sector basis, revenue of the MT&S Sector totaled $315.4 million, comparing favorably to revenue of $302.4 million in fiscal 2000 and $313.7 million in fiscal 1999. The increase in revenue for fiscal 2001 was principally the result of strong demand worldwide for its aircraft structural testing equipment and the custom project business of its Advanced Systems business unit. Despite the slow down in capital spending in the North American automotive market during fiscal 2001, revenue backlog and new orders from customers in the automotive product development market remained at an adequate level during fiscal 2001 to allow the vehicle testing systems business unit to slightly exceed its revenue of fiscal 2000. Net revenue of the FA Sector totaled $81.2 million in fiscal 2001, compared to $89.5 million in fiscal 2000 and $76.9 million in fiscal 1999. Net rev- 6 enue of the FA Sector during 2001 was negatively impacted by the aggressive cut backs in capital spending in the North American automotive market and a precipitous drop in North American and European demand for its automation components in the semiconductor, electronic assembly and industrial markets. The increase in revenue of the FA Sector during fiscal 2000, as compared to fiscal 1999, was the result of strong European demand for sensors and an expansion of the Company's product line offerings for amplifiers, servo-electric motors and motion control products. See Note 3 to Consolidated Financial Statements for additional information on industry sector and geographic information. Net revenue in North America of $188.0 million decreased slightly, compared to $205.8 million in 2000. Net revenue for 1999 totaled $210.9 million. International revenue totaled $208.6 million, an increase of 12.1%, compared to revenue of $186.1 million for 2000. Net revenue from international sources totaled $179.6 million in 1999. Similar to the past several years, revenue from international sources grew at a faster rate than domestic revenue and is generally reflective of improved economic conditions in the international markets in which the Company participates, a broader product offering and stronger order activity in the vehicle dynamics and aerospace industries. Although selective price changes were implemented during each of the three years, the overall impact of pricing changes did not have a material effect on reported revenue. During fiscal 2001, the Company implemented Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which had the effect of increasing reported revenue in fiscal 2001 by $4.9 million. See Notes 1 and 2 to Consolidated Financial Statements for additional information. GROSS PROFIT 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Gross Profit $141,408 $132,940 $151,171 -------------------------------------------------------------------------------- % of Net Revenue 35.7% 33.9% 38.7% -------------------------------------------------------------------------------- Gross profit, as a percentage of net revenue, increased to 35.7% in 2001, compared to 33.9% in 2000. Gross margin for the MT&S Sector was 35.0% in fiscal 2001, up substantially from 31.8% in 2000, while the gross margin of the FA Sector declined to 38.1%, compared to 41.1% in 2000, primarily as the result of the significantly lower manufacturing and shipping volumes during fiscal 2001. Gross margin in the MT&S Sector increased during 2001 despite continued competitive pricing pressures and was the result of a number of factors, including a favorable mix of aerospace and custom projects shipped during the year, more aggressive negotiation strategies, better overall project planning, staffing and management and the positive impact of the Company's re-engineering and front-end project assessment activities initiated in previous periods. The lower gross profit percentage realized by the MT&S Sector during 2000 was the result of higher than expected costs that were required to complete certain custom entertainment and large complex custom projects of the Advanced Systems business unit. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Selling $ 57,669 $ 58,747 $ 58,695 General & Administrative 31,714 36,531 35,071 -------------------------------------------------------------------------------- Total $ 89,383 $ 95,278 $ 93,766 -------------------------------------------------------------------------------- % of Net Revenue 22.5% 24.3% 24.0% -------------------------------------------------------------------------------- Selling, general and administrative ("SG&A") expenses, as a percentage of net revenue, were 22.5%, 24.3% and 24.0% in 2001, 2000 and 1999, respectively. Over the past three years, the Company has focused several initiatives on overall cost control and the alignment of resources with current and anticipated economic conditions and with markets having the greatest potential. Overall spending levels in each of the MT&S and FA Sectors were reduced during 2001 as a result of these management initiatives. During 2000, SG&A expenses of the FA Sector increased in anticipation of accelerated revenue growth of the Sensors and Automation business units. Administrative expenses of the MT&S Sector included a provision of $0.7 million in 2000 related to the closure of the Company's laboratory instrument business as discussed further in Note 9 to the Consolidated Financial Statements. RESEARCH AND DEVELOPMENT COSTS 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Research & Development $ 22,485 $ 24,619 $ 26,966 -------------------------------------------------------------------------------- % of Net Revenue 5.7% 6.3% 6.9% -------------------------------------------------------------------------------- The Company provides funds for product, systems and application developments ("R&D") in the MT&S and FA Sectors. During 2001, approximately 70% of R&D spending was in the MT&S Sector, compared to 73% in fiscal 2000. R&D spending in each of the years presented is focused on the development of new systems and system components such as software, controls and mechanical products, new measurement products and accessories. The overall decrease in R&D spending, as a percentage of net revenue, is primarily due to management initiatives to focus its spending in areas and on products having the greatest market potential and the highest return opportunity. As a result of these initiatives and management's planned cutback in spending in underperforming product lines and/or business units, R&D spending, as a percentage of net revenue, decreased to 5.7% in fiscal 2001, compared to 6.3% in 2000 and 6.9% in 1999. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations INTEREST (INCOME) EXPENSE 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Interest Expense $ 5,209 $ 6,371 $ 5,067 Interest Income (372) (1,479) (470) -------------------------------------------------------------------------------- Interest expense of $5.2 million in 2001, a decrease of $1.2 million compared to fiscal 2000, primarily resulted from lower average borrowings during 2001 and a generally lower interest rate on its borrowings under its bank line of credit. Interest income in 2000 included interest earned of $0.7 million related to the overpayment of income taxes during a prior period. OPERATING RESULTS 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Income Before Income Taxes* $ 24,578 $ 6,095 $ 18,770 % of Net Revenue 6.2% 1.6% 4.8% -------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change, Net of Taxes $ 15,176 $ 3,624 $ 12,445 % of Net Revenue 3.8% .9% 3.2% ================================================================================ Effective Income Tax Rate 38.3% 40.5% 33.7% Return On Beginning Shareholders' Investment* 9.6% 2.2% 8.0% -------------------------------------------------------------------------------- Earnings Per Share - Diluted* $ .72 $ .17 $ .59 ================================================================================ *EXCLUDES THE CUMULATIVE EFFECT OF THE ACCOUNTING CHANGE FOR SAB 101 IN 2001 Income before income taxes totaled $24.6 million in 2001, compared with $6.1 million in 2000, primarily as the result of overall improved product margins and the continuing effect from the Company's cost control and more focused spending programs. Income before income taxes for 2000 included a provision of $3.0 million (of which, $1.2 million is reflected as restructuring, $1.1 million as an increase to cost of revenue and $0.7 million as an increase to administrative expenses) related to the closure of its laboratory instrument business acquired as part of its acquisition of DSP Technology, Inc. ("DSP"). During 1999, the Company recorded a restructuring charge of $5.7 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its electromechanical division in North Carolina and incurred costs of approximately $1.4 million directly related to its acquisition of DSP. For further information, see Notes 8 and 9 to Consolidated Financial Statements. Income from operations of the MT&S Sector increased to $26.8 million in 2001, compared to $3.2 million in 2000. This increase in income from operations was primarily the result of increased net revenue of $13.0 million, improved gross margin of 3.2 percentage points and management's initiative of continued cost control and more focused spending. Income from operations of the MT&S Sector totaled $16.9 million in 1999. Income from operations of the FA Sector declined to $2.7 million in 2001, compared to $8.6 million in 2000 primarily as the result of the aggressive cut backs in capital spending in the North American automotive market, a precipitous drop in North American and European demand for its automation components in the semiconductor, electronic assembly and industrial markets and lower overall gross margins due to the significantly lower manufacturing and shipping volumes during fiscal 2001. Income from operations of the FA Sector totaled $6.4 million in 1999. The effective tax rate for each of the years presented is impacted by the amount of tax credits available from the Company's Foreign Sales Corporation, Extraterritorial Income Exclusion and qualified R&D costs; and on the amount of foreign sourced income that is generally taxed at higher rates than domestic sourced income. A greater percentage of the Company's income was derived from foreign sources in fiscal 2000, compared to 2001 and 1999. In 2001, income before cumulative effect of accounting change for SAB 101 increased to $15.2 million ($0.72 per diluted share), compared to $3.6 million ($0.17 per diluted share) in 2000 and $12.4 million ($0.59 per diluted share) in 1999. During 2001, the Company implemented SAB 101 that had the cumulative effect of reducing net income, net of taxes, by $2.3 million ($0.11 per diluted share) in fiscal 2001. CHANGES IN FOREIGN CURRENCY EXCHANGE RATES The Company is exposed to market risk from changes in foreign currency exchange rates that can affect its operating results and financial condition. To minimize that risk, the Company manages exposure to changes in foreign currency rates through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments, principally forward exchange contracts. Foreign exchange contracts are used to hedge the Company's overall exposure to exchange rate fluctuations, since the gains and losses on these contracts offset gains and losses on the assets, liabilities and transactions being hedged. Historically, approximately 50% of the Company's revenue occurs from shipments to customers outside of the United States and about 65% of this revenue (approximately 30% of the Company's total net revenue) is denominated in currencies other than the U.S. dollar. As a result, a strengthening of the U.S. dollar decreases translated foreign currency denominated revenue and earnings. Conversely, weakening of the U.S. dollar has the reverse impact on revenue and earnings. During the past three years, the U.S. dollar was generally stronger against other major currencies. Gains and losses attributed to translating the financial statements for all non-U.S. subsidiaries are included in the currency translation adjustments. The gains and losses on forward exchange contracts used to hedge these exposures are included as part of "Other expense (income), net" in the accompanying consolidated statements of income. 8 LIQUIDITY AND CAPITAL RESOURCES 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Total Interest Bearing Debt $ 59,305 $ 75,712 $ 71,637 % of Total Capitalization 26.2% 32.4% 30.5% -------------------------------------------------------------------------------- Total Shareholders' Investment $167,122 $157,854 $162,859 -------------------------------------------------------------------------------- Shareholders Investment Per Share $ 7.95 $ 7.61 $ 7.80 -------------------------------------------------------------------------------- The Company's capital structure as of September 30, 2001 included long-term debt (including current maturities) of $58.9 million, notes payable to banks of $0.4 million and total shareholders' investment of $167.1 million. The ratio of total interest-bearing debt to total capitalization was 26.2% at September 30, 2001, as compared to 32.4% and 30.5% at September 30, 2000 and 1999, respectively. Total interest-bearing debt decreased by $16.4 million during 2001. This decrease resulted from the repayment of advances totaling $11.5 million under its domestic bank revolving credit agreement and scheduled payments of $4.9 million of long-term debt. At September 30, 2001, the Company had no borrowings outstanding under its $50.0 million domestic bank revolving credit agreement. Shareholders' investment increased by $9.3 million during fiscal 2001 to $167.1 million. The change in shareholders' investment during 2001 was primarily the result of profitable operating results, funds received of $3.5 million from the exercise of employee stock options and employee purchases of the Company's stock under its stock purchase plan, offset in part, by the payment of cash dividends of $5.0 million and repurchases of the Company's stock totaling $1.6 million. CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES provided cash of $39.1 million during 2001, compared to $3.0 million generated in 2000 and $26.7 million generated in 1999. The increase in cash during 2001 resulted primarily from improved operating results and the increase in advanced payments from customers of $8.3 million. Accounts receivables and inventory balances, in the aggregate, remained relatively unchanged at September 30, 2001 and 2000. CASH FLOWS FROM INVESTING ACTIVITIES required cash usage of $10.5 million during 2001, compared to $13.2 million in 2000 and $17.2 million in 1999. Cash was used primarily for additions to property and equipment in each of the years. Capital expenditures for fiscal 2002, including investments in facilities and equipment to support the on-going operations, are planned to approximate $8.0 million. CASH FLOWS FROM FINANCING ACTIVITIES required the use of cash of $19.6 million during 2001 primarily as a result of the repayment of interest-bearing debt of $16.6 million, the payment of cash dividends of $5.0 million and repurchases of its common stock of $1.6 million, partially offset by funds received in connection with employees' exercise of stock options and purchases under the Company's stock purchase plan. During 2000, the Company used cash of $1.0 million in its financing activities primarily as the result of paying cash dividends of $5.0 million and repurchasing $2.2 million of its common stock, partially offset by additional new borrowings of $6.1 million and the funds received in connection with employees' exercise of stock options and stock purchases. During 2001, cash and cash equivalents increased by $9.3 million. The Company believes that the current capital resources, internally generated funds and unused financing sources will be adequate to finance on-going operations and anticipated capital expenditures, allow for investment in opportunities to internally grow its business and to make selected strategic acquisitions. OTHER MATTERS EURO CONVERSION On January 1, 1999, certain member countries of the European Economic and Monetary Union adopted the "Euro" as a form of common currency. For a three-year transition period, both the Euro and the member countries' currencies remained in use. The Company has upgraded its information and reporting systems, where necessary, in order to appropriately effect conversion to the Euro. Although the Company began processing Euro transactions with its customers beginning in 1999, its European operations began reporting in this currency on various dates beginning in 2000. The cost of upgrading its systems to handle the Euro conversion did not have a material impact on the Company's financial condition or operating results for any period presented. RESTRUCTURING AND OTHER CHARGES During 2000, the Company announced a restructuring charge related to the discontinuation of a line of data acquisition products acquired as part of its acquisition of DSP in 1999. The restructuring charge of $1.2 million included a provision for severance costs of $0.7 million, the write-off of leasehold improvements and production and other equipment no longer needed of $0.3 million and other costs of $0.2 million associated with the closedown of the facility and the wind-down of the related product line. During the year ended September 30, 2001, the restructuring reserve was reduced by severance costs of $0.8 million, the write off of leasehold improvements, equipment and other assets aggregating $0.2 million and costs associated with the closing of the facility and the wind-down of the product line of $0.2 million. In addition to the restructuring charge, the Company recorded an additional provision of $1.8 million in fiscal 2000 to cover excess and obsolete inventory, uncollectible receivables and the write off of the remaining book value of fixed assets no longer needed. Of this amount, $1.1 million was charged to cost of revenue and $0.7 million was charged to general and administrative expenses. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations During 1999, the Company recorded a restructuring charge of $5.7 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its electromechanical division in North Carolina. In connection therewith, cash outlays of $2.6 million were made during 1999 and $3.1 million were made during 2000. Such costs were financed primarily with funds from continuing operations and borrowings under its bank line of credit. QUARTERLY FINANCIAL INFORMATION Revenue and operating results, as reflected on a quarterly basis, do not necessarily reflect changes in the demand for the Company's products or its operating efficiency. Revenue and operating results in any quarter can be significantly affected by shipment and/or installation delays or the acceleration of the completion of one or more high-value systems where revenue is not recognized on the percentage-of-completion accounting method. The Company's use of the percentage-of-completion revenue recognition method for large longer-term projects, generally helps to alleviate significant fluctuations between quarters. See Notes 1 and 2 to Consolidated Financial Statements for additional information on the Company's revenue recognition policy. High-value, state-of-the-art custom projects often contain leading-edge applications of the Company's technology that caused the Company to experience lower than expected gross margins during 1999 and 2000. Product development for these types of state-of-the-art custom projects, along with its funded research and development programs, are essential to the Company's long term growth. Quarterly earnings also vary as the result of the use of estimations including, but not limited to the rates used in providing federal, state and foreign income taxes. See Notes 1 and 5 to Consolidated Financial Statements for additional information on the Company's use of estimates and income tax related matters. DIVIDENDS AND OTHER STOCK MATTERS The Company's dividend policy is to maintain a payout ratio that allows dividends to increase with the long-term growth of earnings per share, while sustaining dividends in down years. The Company's dividend payout ratio target is approximately 25% of earnings per share over the long term. The Company paid a quarterly dividend of 6 cents per share during 1999, 2000 and 2001. During 2001, the Company repurchased 0.2 million shares of its common stock at an average cost of $8.19 per share. Pursuant to the plan adopted by its Board of Directors, the Company has authorization as of September 30, 2001 to repurchase an additional 0.5 million shares of its common stock. The Company also repurchased 0.3 million shares of its common stock ($7.28 per share) in 2000. The Company's primary long term objective relative to its share repurchase program is to offset the dilutive effect of shares of common stock issued in connection with its employee stock option and stock purchase programs. During the three years ended September 30, 2001, the Company has issued approximately 872,000 shares of its common stock under the stock option and stock purchase programs. QUARTERLY STOCK ACTIVITY(1) The Company's shares of its common stock trade on The Nasdaq Stock Market's National Market under the symbol "MTSC". The following table sets forth the high and low prices and volume of shares traded (expressed in thousands) for the periods indicated: 2001 2000 -------------------------------------------------------------------------------- PRICE SHARES PRICE SHARES HIGH LOW TRADED HIGH LOW TRADED -------------------------------------------------------------------------------- 1st Quarter $ 7.88 $ 5.50 1,698 $10.63 $ 7.50 3,526 2nd Quarter $ 9.19 $ 6.75 1,711 $ 9.59 $ 5.3 4,318 3rd Quarter $14.60 $ 7.88 5,233 $ 7.88 $ 6.1 4,648 4th Quarter $15.60 $10.00 5,365 $ 7.50 $ 6.0 3,385 ================================================================================ (1) SOURCE: THE NASDAQ STOCK MARKET 10 Selected quarterly financial information for the three fiscal years ended September 30 is presented below:
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) ----------------------------------------------------------------------------------------------------------------- 2001 Net revenue $ 91,563 $ 98,272 $ 99,031 $107,775 $396,641 Gross profit 31,951 35,600 37,210 36,647 141,408 Income before income taxes 2,772 6,408 6,933 8,465 24,578 Income before cumulative effect of accounting change, net of taxes 1,698 3,853 4,233 5,392 15,176 Cumulative effect of accounting change, net of taxes (2,263) -- -- -- (2,263) ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (565) $ 3,853 $ 4,233 $ 5,392 $ 12,913 ----------------------------------------------------------------------------------------------------------------- Earnings per share Basic Before cumulative effect of accounting change $ .08 .19 .20 $ .26 $ .73 Cumulative effect of accounting change, net (.11) -- -- -- (.11) ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (.03) $ .19 $ .20 $ .26 $ .62 ----------------------------------------------------------------------------------------------------------------- Diluted Before cumulative effect of accounting change $ .08 .18 .20 $ .25 $ .72 Cumulative effect of accounting change, net (.11) -- -- -- (.11) ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (.03) $ .18 $ .20 $ .25 $ .61 ----------------------------------------------------------------------------------------------------------------- 2000 Net revenue $ 87,214 $ 95,291 $ 94,988 $114,360 $391,853 Gross profit 22,786 34,470 34,797 40,887 132,940 Income (loss) before income taxes (9,221) 2,213 5,831 7,272 6,095 ----------------------------------------------------------------------------------------------------------------- Net income (loss) $ (6,040) $ 1,371 $ 3,697 $ 4,596 $ 3,624 ----------------------------------------------------------------------------------------------------------------- Earnings per share Basic $ (.29) $ .07 $ .18 $ .22 $ .17 Diluted (.29) .07 .18 .22 .17 ----------------------------------------------------------------------------------------------------------------- 1999 Net revenue $ 96,142 $ 93,262 $ 95,363 $105,775 $390,542 Gross profit 38,064 36,775 37,818 38,514 151,171 Income before income taxes 5,722 4,666 8,269 113 18,770 ----------------------------------------------------------------------------------------------------------------- Net income $ 3,726 $ 3,146 $ 5,293 $ 280 $ 12,445 ----------------------------------------------------------------------------------------------------------------- Earnings per share Basic $ .18 $ .15 $ .25 $ .01 $ .60 Diluted .18 .15 .25 .01 .59 -----------------------------------------------------------------------------------------------------------------
11 Consolidated Balance Sheets (September 30)
ASSETS 2001 2000 --------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents $ 17,515 $ 8,211 Accounts receivable, net of allowance for doubtful accounts of $2,709 and $2,255 97,661 117,866 Unbilled contracts and retainage receivable 45,287 26,765 Inventories 63,381 62,520 Prepaid expenses 6,405 9,911 --------------------------------------------------------------------------------------------------------- Total current assets 230,249 225,273 --------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Land 3,247 3,247 Buildings and improvements 45,785 44,733 Machinery and equipment 110,419 107,325 Accumulated depreciation (90,558) (83,224) --------------------------------------------------------------------------------------------------------- Total property and equipment, net 68,893 72,081 --------------------------------------------------------------------------------------------------------- OTHER ASSETS 32,617 32,880 --------------------------------------------------------------------------------------------------------- Total Assets $331,759 $330,234 --------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT --------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Notes payable to banks $ 428 $ 11,945 Current maturities of long-term debt 5,260 5,663 Accounts payable 16,672 22,755 Accrued payroll-related costs 33,661 29,285 Advance payments from customers 26,572 18,673 Accrued warranty costs 4,559 6,487 Other accrued liabilities 16,395 13,680 Accrued income taxes 1,526 160 --------------------------------------------------------------------------------------------------------- Total current liabilities 105,073 108,648 --------------------------------------------------------------------------------------------------------- Deferred income taxes 5,947 5,628 Long-term debt, less current maturities 53,617 58,104 --------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 10) SHAREHOLDERS' INVESTMENT: Common stock, 25(cent) par value; 64,000 shares authorized: 21,031 and 20,748 shares issued and outstanding 5,258 5,187 Additional paid-in capital 8,946 7,072 Retained earnings 154,159 146,234 Accumulated other comprehensive loss (1,241) (639) ========================================================================================================= Total shareholders' investment 167,122 157,854 ========================================================================================================= Total Liabilities and Shareholders' Investment $331,759 $330,234 =========================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. 12 Consolidated Statements of Income and Shareholders' Investment (For the Years Ended September 30)
INCOME 2001 2000 1999 --------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) NET REVENUE $396,641 $391,853 $390,542 COST OF REVENUE 255,233 258,913 239,371 --------------------------------------------------------------------------------------------------- GROSS PROFIT 141,408 132,940 151,171 --------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling 57,669 58,747 58,695 General and administrative 31,714 36,531 35,071 Research and development 22,485 24,619 26,966 Restructuring -- 1,210 5,711 Acquisition -- -- 1,391 --------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 29,540 11,833 23,337 --------------------------------------------------------------------------------------------------- Interest expense 5,209 6,371 5,067 Interest income (372) (1,479) (470) Other expense (income), net 125 846 (30) --------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 24,578 6,095 18,770 PROVISION FOR INCOME TAXES 9,402 2,471 6,325 --------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 15,176 3,624 12,445 CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES (NOTE 2) (2,263) -- -- --------------------------------------------------------------------------------------------------- NET INCOME $ 12,913 $ 3,624 $ 12,445 =================================================================================================== NET INCOME PER SHARE Basic Before Cumulative Effect of Accounting Change $ .73 $ .17 $ .60 Cumulative Effect of Accounting Change (.11) -- -- --------------------------------------------------------------------------------------------------- NET INCOME PER SHARE $ .62 $ .17 $ .60 =================================================================================================== Diluted Before Cumulative Effect of Accounting Change $ .72 $ .17 $ .59 Cumulative Effect of Accounting Change (.11) -- -- --------------------------------------------------------------------------------------------------- NET INCOME PER SHARE $ .61 $ .17 $ .59 ===================================================================================================
SHAREHOLDERS' INVESTMENT
Common Stock ------------------- Additional Accumulated Other Total Shares Paid-In Retained Comprehensive Shareholders' Issued Amount Capital Earnings Income (Loss) Investment ------------------------------------------------------------------------------------------------------------------------------ (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) BALANCE, SEPTEMBER 30, 1998 20,657 $ 5,164 $ 5,818 $139,782 $ 1,925 $152,689 ------------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 12,445 -- 12,445 Foreign currency translation -- -- -- -- 36 36 Unrealized loss on investment, net of tax -- -- -- -- (60) (60) ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 12,445 (24) 12,421 Exercise of stock options 235 59 2,396 -- -- 2,455 Common stock repurchased and retired (8) (2) (92) -- -- (94) Cash dividends, 24(cent)per share -- -- -- (4,612) -- (4,612) ------------------------------------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 1999 20,884 5,221 8,122 147,615 1,901 162,859 ------------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 3,624 -- 3,624 Foreign currency translation -- -- -- -- (2,594) (2,594) Unrealized gain on investment, net of tax -- -- -- -- 54 54 ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 3,624 (2,540) 1,084 Exercise of stock options 163 41 1,048 -- -- 1,089 Common stock repurchased and retired (299) (75) (2,098) -- -- (2,173) Cash dividends, 24(cent)per share -- -- -- (5,005) -- (5,005) ------------------------------------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 2000 20,748 5,187 7,072 146,234 (639) 157,854 ------------------------------------------------------------------------------------------------------------------------------ Net income -- -- -- 12,913 -- 12,913 Foreign currency translation -- -- -- -- (391) (391) Derivative instruments -- -- -- -- (72) (72) Unrealized loss on investment, net of tax -- -- -- -- (139) (139) ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- 12,913 (602) 12,311 Exercise of stock options 474 119 3,390 -- -- 3,509 Common stock repurchased and retired (191) (48) (1,516) -- -- (1,564) Cash dividends, 24(cent)per share -- -- -- (4,988) -- (4,988) ------------------------------------------------------------------------------------------------------------------------------ BALANCE, SEPTEMBER 30, 2001 21,031 $ 5,258 $ 8,946 $154,159 $ (1,241) $167,122 ==============================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 13 Consolidated Statements of Cash Flows (For the Years Ended September 30)
2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) OPERATING ACTIVITIES: Net income $ 12,913 $ 3,624 $ 12,445 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 14,477 15,294 14,424 Deferred income taxes 232 455 889 Restructuring provision -- (1,210) (5,711) Provision for doubtful accounts (992) (645) (544) Provision for inventory obsolesence (4,132) (1,500) (1,370) Changes in operating assets and liabilities: Accounts, unbilled contracts, and retainage receivables 2,716 (8,914) (10,741) Inventories 1,982 (5,259) 1,743 Prepaid expenses 3,570 (2,395) (3,493) Accounts payable (6,032) 2,025 884 Accrued payroll and related costs 4,809 4,232 (1,006) Advance payments from customers 8,317 (5,919) 8,711 Accrued warranty costs (2,061) 1,633 360 Other current liabilities 3,317 1,606 10,149 -------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 39,116 3,027 26,740 -------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Additions to property and equipment (7,583) (12,399) (15,990) Acquisitions, net of cash acquired (2,720) -- (1,036) Increase in other assets (211) (841) (132) -------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (10,514) (13,240) (17,158) -------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net borrowings (repayments) under notes payable to banks (11,451) 1,853 (18,168) Proceeds from issuance of long-term debt -- 4,271 16,837 Repayments of long-term debt (5,122) (998) (924) Dividends paid (4,988) (5,005) (4,612) Proceeds from issuance of stock under employee stock option and stock purchase plans 3,509 1,089 2,455 Repurchases of common stock (1,564) (2,173) (94) ========================================================================================================================== NET CASH USED IN FINANCING ACTIVITIES (19,616) (963) (4,506) ========================================================================================================================== EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 318 1,304 418 ========================================================================================================================== CASH AND CASH EQUIVALENTS Increase (decrease) during the year 9,304 (9,872) 5,494 Balance, beginning of year 8,211 18,083 12,589 Balance, end of year $ 17,515 $ 8,211 $ 18,083 ========================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest $ 5,724 $ 6,298 $ 4,291 Income taxes 6,516 5,105 6,731 ==========================================================================================================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 14 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of MTS Systems Corporation and its wholly and majority-owned subsidiaries (the "Company"). Significant intercompany balances and transactions have been eliminated. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign subsidiaries are translated to U.S. dollars at exchange rates prevailing at the end of the fiscal year. Income statement items are translated using average exchange rates for the year. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within shareholders' investment. Gains and losses resulting from translation of foreign currency transactions and from foreign exchange hedge contracts are included in "Other expense (income), net" in the Consolidated Statements of Income and amounted to gains aggregating $1.1 million in 2001 and losses aggregating $0.5 million and $0.4 million in 2000 and 1999, respectively. REVENUE RECOGNITION The Company implemented Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial State ments," in the fourth quarter of fiscal 2001 and has applied it retroactively to the beginning of fiscal 2001. SAB 101 provides guidelines on the timing of revenue recognition based on factors such as passage of title, installation, payment terms and customer acceptance. Prior to the adoption of SAB 101, the Company recognized revenue on short-duration projects at the time the systems were shipped and title passed to the customer. Revenue on projects requiring longer delivery periods (longer-term contracts) and other customized orders that allow for progress billings to the customer was recognized using the percentage-of-completion method based on the cost incurred to date as compared to the total estimated cost of the contract (cost-to-cost method). The effect of any revision to the total estimated cost, on an individual contract basis, and its impact on revenue is recorded in the period in which the revision becomes known. When a loss is anticipated on a contract, the anticipated loss is provided in the period the loss is identified. Under the guidelines of SAB 101, the Company changed its revenue recognition method to delay the recognition of revenue on short-duration projects from the date of shipment to the time the Company obtains customer acceptance. Revenue on longer-term contracts continues to be recognized on the percentage-of-completion method. Customer acceptance generally is received within a period of less than three months following shipment to the customer. See Note 2 to the Consolidated Financial Statements for additional information regarding the impact of SAB 101 on the Company's revenue and operating results. Revenue for services rendered is recognized at the time the services are performed and ratably over the defined contractual period for service maintenance contracts. ACCOUNTS RECEIVABLE AND LONG-TERM CONTRACTS The Company grants credit to its customers, but generally does not require collateral or other security from domestic customers. Receivables from customers residing outside of the United States, where deemed appropriate, are supported by letters of credit from financial institutions. The Company enters into longer-term contracts for customized equipment sold to its customers. Under terms of such contracts, revenue recognized using the percentage of completion method may be invoiced upon completion of contractual milestones, upon shipment to the customer or upon installation and acceptance by the customer. Unbilled or retained amounts relating to these contracts are reflected as Unbilled Contracts and Retainage Receivables in the accompanying Consolidated Balance Sheets. Amounts unbilled or retained as of September 30, 2001 are expected to be invoiced during fiscal 2002. WARRANTY OBLIGATIONS The Company warrants its products against defects in materials and workmanship under normal use and service, generally for one year after installation. The Company maintains reserves for estimated future warranty costs based on its past experience. RESEARCH AND DEVELOPMENT Research and product development costs associated with new products are charged to operations as incurred. CASH EQUIVALENTS Cash equivalents represent short-term highly liquid investments having a maturity of three months or less at the time of purchase and are recorded at cost which approximates fair value. INVENTORIES Inventories consist of material, labor and overhead costs and are stated at the lower of cost or market, determined under the first-in, first-out accounting method. Inventory components as of September 30, were as follows: 2001 2000 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Customer projects in various stages of completion $ 4,709 $ 2,704 Components, assemblies and parts 58,672 59,816 -------------------------------------------------------------------------------- Total $ 63,381 $ 62,520 ================================================================================ 15 Notes to Consolidated Financial Statements (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): 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: 3 to 15 years. Building and equipment additions are generally depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income tax reporting purposes. DERIVATIVE FINANCIAL INSTRUMENTS Effective October 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No.138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of SFAS Statement No. 133"("SFAS No. 133"), which requires the Company to recognize all derivative financial instruments on the balance sheet at fair value. Derivatives that are not classified as a hedge are required under SFAS 133 to be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings or in other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has determined that the impact of the adoption of SFAS 133 was not material to the earnings and financial position of the Company. The Company periodically enters into forward exchange contracts principally to hedge the estimated cash flow of foreign currency denominated transactions (primarily the EURO, British Pound, Swedish Krona and Japanese Yen). Gains and losses resulting from forward exchange contracts that hedge undelivered orders denominated in foreign currency and net exposed assets are included in "Other expense (income), net" in the accompanying Consolidated Statements of Income. The Company's accounting policy for these contracts is based on its designation of foreign currency contracts as hedging transactions. The criteria used by the Company in designating a specific contract as a hedge include, among other items, the contract's effectiveness in reducing risk and the specific matching of a contract to the underlying transactions. The Company's documentation policies were revised as considered necessary to comply with the requirements of SFAS 133. However, the Company made no substantive changes to its risk manage- ment strategy as a result of adopting SFAS 133. Open hedge contracts totaled $39.4 million, $40.5 million and $7.3 million as of September 30, 2001, 2000 and 1999, respectively. The Company does not use derivative financial instruments for speculative or trading purposes. OTHER ASSETS Other assets principally consist of patents, other intellectual property and goodwill. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and has been amortized over periods up to 40 years. The carrying value of goodwill, net of accumulated amortization, was $21.5 million and $24.2 million at September 30, 2001 and 2000, respectively. Amortization expense was $3.0 million in 2001, $3.2 million in 2000 and $3.3 million in 1999. Effective October 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 which requires that goodwill and intangible assets with indefinite lives are not to be amortized, but tested for impairment annually, except in certain circumstances, and when ever there is an impairment indicator. The Company periodically evaluates whether events and circumstances have occurred which may affect the estimated useful life or the recoverability of the remaining balance of its goodwill and other long-lived assets. If such events or circumstances were to indicate that the carrying amount of these assets would not be recoverable, the Company would estimate the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) were less than the carrying amount of goodwill and other long-lived assets, the Company would recognize an impairment loss. With the adoption of SFAS No. 142 on October 1, 2001, goodwill and intangible assets with an indefinite life will be assessed for impairment on an annual basis, except in certain circumstances, and whenever there is an impairment indicator. The assessment is a two step process. The first step is to compare the estimated fair value of a reporting unit to its carrying value. If the carrying value exceeds the fair value then the second step is to perform a valuation of all tangible and intangible assets to determine the amount, if any, by which goodwill and/or an intangible asset is impaired. The Company will assess the impact of SFAS No. 142 by performing the initial impairment study during the first half of fiscal 2002 and will complete any required goodwill impairment calculations by the end of fiscal 2002 as required by SFAS No. 142. INCOME TAXES Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. 16 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): EARNINGS PER SHARE Basic earnings per common share is based on the weighted average number of common shares outstanding in each year. Diluted earnings per common share is computed using the treasury stock method and includes the dilutive effect of potential common shares, such as stock options, that would have been outstanding if these shares had been issued. The computation of basic and diluted earnings per common share is as follows: 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Income before cumulative effect of accounting change $ 15,176 $ 3,624 $ 12,445 Cumulative effect of accounting change, net of taxes (2,263) -- -- -------------------------------------------------------------------------------- Net income $ 12,913 $ 3,624 $ 12,445 -------------------------------------------------------------------------------- Weighted average common shares outstanding 20,755 20,842 20,763 Dilutive potential common shares 319 93 421 -------------------------------------------------------------------------------- Total dilutive common shares 21,074 20,935 21,184 -------------------------------------------------------------------------------- Earnings per share: Basic Before cumulative effect of accounting change $ .73 $ .17 $ .60 Cumulative effect of accounting change, net of taxes (.11) -- -- -------------------------------------------------------------------------------- Net income per share $ .62 $ .17 $ .60 -------------------------------------------------------------------------------- Dilutive Before cumulative effect of accounting change $ .72 $ .17 $ .59 Cumulative effect of accounting change, net of taxes (.11) -- -- -------------------------------------------------------------------------------- Net income per share $ .61 $ .17 $ .59 ================================================================================ COMPREHENSIVE INCOME The Company follows the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income, unrealized gains or loss on investment, derivative instruments gains or losses and foreign currency translation adjustments and is presented as a component of Shareholders' Investment. RECLASSIFICATIONS Certain amounts included in the consolidated financial statements have been reclassified in prior years to conform to the current year presentation. These reclassifications had no effect on previously reported shareholders' investment or net income. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates. The Company undertakes significant technological innovation on certain of its long-term contracts. These contracts involve performance risk that may result in delayed delivery of product and/or recognition of revenue and gross profit variation resulting from difficulties in estimating the ultimate cost of such contracts. 2. CHANGE IN ACCOUNTING FOR REVENUE RECOGNITION: The Company implemented SAB 101 in the fourth quarter of fiscal 2001 and has applied it retroactively to the beginning of fiscal 2001. See Note 1 to the Consolidated Financial Statements for additional information regarding the Company's revenue recognition policy. In accordance with SAB 101, the new method of accounting for revenue recognition has been applied retroactively to the beginning of fiscal 2001. The cumulative effect adjustment of the change in accounting for all periods through September 30, 2000 was a reduction in net income of $2.3 million (net of income taxes of $1.4 million), or $0.11 per diluted share, which has been accounted for as a charge to the financial results for the first quarter of fiscal 2001. The effect of the change as compared to the revenue recognition policy previously followed in accounting for revenue recognition on the quarter ended September 30, 2001, was to decrease net revenue by $2.5 million and reduce income before cumulative effect of the accounting change, net of taxes, by $0.6 million, or $0.03 per diluted share. The effect of the change for the total fiscal year of 2001 was to increase revenue by $4.9 million and to increase income before cumulative effect of the accounting change, net of taxes, by $0.9 million, or $0.04 per diluted share. Pro forma accounts showing the retroactive application of SAB 101 for periods prior to 2001 could not be reasonably determined and have not been provided. 17 Notes to Consolidated Financial Statements (Continued) 2. CHANGE IN ACCOUNTING FOR REVENUE RECOGNITION (CONTINUED): The effect of the accounting change for revenue recognition for each of the first three quarters of fiscal 2001 is as follows: QUARTER ENDED -------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 2000 2001 2001 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS EXCEPT PER SHARE DATA) Net revenue, as previously reported $ 84,989 $ 97,935 $ 98,586 Effect of change in revenue recognition 6,574 337 445 -------------------------------------------------------------------------------- Revenue, as restated $ 91,563 $ 98,272 $ 99,031 -------------------------------------------------------------------------------- Gross profit, as previously reported $ 29,619 $ 35,059 $ 37,563 Effect of change in revenue recognition 2,332 541 (353) -------------------------------------------------------------------------------- Gross profit, as restated $ 31,951 $ 35,600 $ 37,210 -------------------------------------------------------------------------------- Net income, as previously reported $ 264 $ 3,520 $ 4,446 Effect of change in revenue recognition, net of taxes 1,434 333 (213) -------------------------------------------------------------------------------- Income before cumulative effect of change in revenue recognition, net of taxes 1,698 3,853 4,233 Cumulative effect on prior years of the change in accounting, net of taxes (2,263) -- -- -------------------------------------------------------------------------------- Net income (loss), as restated $ (565) $ 3,853 $ 4,233 -------------------------------------------------------------------------------- Earnings per share: Basic- Net income, as previously reported $ .01 $ .17 $ .21 Effect of change in revenue recognition, net of taxes .07 .02 (.01) -------------------------------------------------------------------------------- Income before cumulative effect of change in revenue recognition, net of taxes .08 .19 .20 Cumulative effect on prior years of the accounting change (.11) -- -- -------------------------------------------------------------------------------- Net income (loss), as restated $ (.03) $ .19 $ .20 -------------------------------------------------------------------------------- Diluted- Net income, as previously reported $ .01 $ .17 $ .21 Effect of change in revenue recognition, net of taxes .07 .01 (.01) -------------------------------------------------------------------------------- Income before cumulative effect of change in revenue recognition, net of taxes .08 .18 .20 Cumulative effect on prior years of the accounting change (.11) -- -- -------------------------------------------------------------------------------- Net income (loss), as restated $ (.03) $ .18 $ .20 ================================================================================ 3. BUSINESS SEGMENT INFORMATION: The Company follows the provisions of Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments on an Enterprise and Related Information." As such, the Company has determined that it has five operating business units: Vehicle Testing Systems, Material Testing Systems, Advanced Systems, Automation and Sensors. Vehicle Testing Systems manufactures and markets systems for vehicle and component manufacturers to aid in the acceleration of design development work and to decrease the cost of product manufacturing. Material Testing Systems manufactures and markets systems to aid customers in product development and quality control toward an effort of design improvement. Advanced Systems offers highly customized systems primarily for simulation and manufacturing purposes. The Automation business manufactures and markets products for high performance industrial machine applications in a wide range of industries. The Sensors business unit manufactures and markets displacement and liquid level sensors used in various applications to monitor and automate industrial processes. The economic characteristics, nature of products and services, production processes, type or class of customer, method of distribution and regulatory environments are similar for the Vehicle Testing Systems, Material Testing Systems and Advanced Systems business units. As a result of these similarities, these units have been aggregated for financial statement purposes into one reportable segment called Mechanical Testing and Simulation ("MT&S"). The economic characteristics, nature of products and services, production processes, type or class of customer, method of distribution and regulatory environments are similar for the Automation and Sensors business units. As a result, these business units have been aggregated into a reportable segment called Factory Automation ("FA"). The Company's Chief Executive Officer reviews operating results of its MT&S and FA segments on a periodic basis. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements. In evaluating the performance of each segment, management focuses primarily on income from operations and return on assets employed. This measurement excludes special charges (such as restructuring charges and acquisition-related expenses), interest income and expense, income taxes and other non-operating income or expense. Corporate administrative expenses, including expenses related to various support functions such as human resources, information technology and finance, are allocated to the reportable segments primarily on the basis of revenue. 18
2001 2000 1999 -------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) NET REVENUE BY SEGMENT Mechanical Testing & Simulation $315,392 $302,353 $313,685 Factory Automation 81,249 89,500 76,857 -------------------------------------------------------------------------------------- Total $396,641 $391,853 $390,542 -------------------------------------------------------------------------------------- INCOME FROM OPERATIONS BY SEGMENT Mechanical Testing & Simulation Income before restructuring and acquisition costs $ 26,835 $ 4,460 $ 23,809 Restructuring charge -- (1,210) (5,510) Acquisition costs -- -- (1,391) -------------------------------------------------------------------------------------- Total 26,835 3,250 16,908 -------------------------------------------------------------------------------------- Factory Automation Income before restructuring and acquisition costs 2,705 8,583 6,630 Restructuring charge -- -- (201) -------------------------------------------------------------------------------------- Total 2,705 8,583 6,429 -------------------------------------------------------------------------------------- Total Income from Operations $ 29,540 $ 11,833 $ 23,337 -------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS BY SEGMENT Mechanical Testing & Simulation $270,703 $267,666 $272,491 Factory Automation 61,056 62,568 60,856 -------------------------------------------------------------------------------------- Total Assets $331,759 $330,234 $333,347 ====================================================================================== OTHER SEGMENT DATA Mechanical Testing & Simulation: Capital expenditures $ 3,509 $ 10,057 $ 13,822 Depreciation and amortization 10,600 11,782 11,028 -------------------------------------------------------------------------------------- Factory Automation: Capital expenditures $ 4,074 $ 2,342 $ 2,168 Depreciation and amortization 3,877 3,512 3,396 -------------------------------------------------------------------------------------- Geographic segment information was as follows: 2001 2000 1999 -------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) TOTAL NET REVENUE United States $170,704 $194,056 $200,556 Germany 41,847 49,771 47,172 Other European Countries 54,313 60,494 69,185 Far East 98,711 69,444 56,897 Other 31,066 18,088 16,732 -------------------------------------------------------------------------------------- Total $396,641 $391,853 $390,542 -------------------------------------------------------------------------------------- TOTAL PROPERTY AND EQUIPMENT, NET United States $ 58,008 $ 60,496 $ 59,926 Germany 10,106 10,604 12,821 Other European Countries 413 429 658 Far East 288 454 114 Other 78 98 114 -------------------------------------------------------------------------------------- Total $ 68,893 $ 72,081 $ 73,633 --------------------------------------------------------------------------------------
Revenue by geographic location is based on revenue generated from each country's operations. No country, other than the United States and Germany, exceeded 10% of consolidated net revenue on a recurrent annual basis. No single customer accounted for 10% or more of consolidated net revenue during any of the periods presented. 19 Notes to Consolidated Financial Statements (Continued) 4. FINANCING: Long-term debt as of September 30 was as follows:
2001 2000 --------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) 6.6% Notes, unsecured, due in annual installments of $4,375 beginning in July 2001 $ 30,625 $ 35,000 7.5% Note, unsecured, due in semi-annual installments of $1,153 beginning in July 2003 15,000 15,000 Variable Rate Note, due in varying installments through April 2007, collateralized by building 5,005 5,519 5.4% Mortgage, due in quarterly installments of $39 through October 2015, collateralized by building 4,843 4,829 6.0% Note, unsecured, due in annual installments of $194 through July 2008 1,943 1,943 Other 1,461 1,476 --------------------------------------------------------------------------------------------------------------------------- TOTAL INDEBTEDNESS $ 58,877 $ 63,767 LESS CURRENT MATURITIES (5,260) (5,663) --------------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $ 53,617 $ 58,104 ===========================================================================================================================
Aggregate annual maturities of long-term debt for the next five fiscal years are as follows: 2002--$5.3 million; 2003--$7.0 million; 2004--$6.4 million; 2005--$7.6 million; 2006--$7.1 million and $25.5 million thereafter. The carrying value of the Company's long-term debt at September 30, 2001 is approximately $0.4 million higher than the estimated fair value as determined using current interest rates available to the Company for debt having similar characteristics and remaining maturities. At September 30, 2001, the Company has a $50 million revolving credit agreement with a domestic bank group that allows the Company to borrow funds at various interest rates. The revolving credit agreement expires in January 2003. Under the provisions of its revolving credit agreement, the Company is required, among other matters, to maintain certain financial ratios and to meet certain indebtedness and restricted payments tests. At September 30, 2001, the Company had $26.0 million available for restricted payments, as defined. No borrowings were outstanding under this credit agreement at September 30, 2001. In addition, the Company has standby letter-of-credit lines totaling $30 million. At September 30, 2001, standby letters of credit outstanding totaled $9.7 million. The Company was in com pliance with respect to all such covenants and conditions of its revolving credit and other debt agreements as of September 30, 2001. Information on short-term borrowings for the years ended September 30 were as follows:
2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Balance outstanding at year end $ 428 $ 11,945 $ 10,071 Average balance outstanding during the year 8,553 22,617 24,903 Maximum balance outstanding during the year 24,000 37,500 34,700 Interest rate at year end 6.8% 8.1% 6.0% Weighted-average interest rate during the year 7.4% 7.0% 5.7% ==========================================================================================================================
20 5. INCOME TAXES: The components of income before income taxes for the fiscal years ended September 30 are as follows: 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Income before income taxes: Domestic $ 7,412 $ (9,441) $ 8,775 Foreign 17,166 15,536 9,995 -------------------------------------------------------------------------------- Total $ 24,578 $ 6,095 $ 18,770 -------------------------------------------------------------------------------- The provision for income taxes for the years ended September 30 consists of the following: 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Current provision (benefit): Federal $ 3,716 $ (3,469) $ 2,239 State 694 (413) 432 Foreign 4,725 5,974 2,773 Deferred 267 379 881 -------------------------------------------------------------------------------- Total provision $ 9,402 $ 2,471 $ 6,325 -------------------------------------------------------------------------------- A reconciliation from the Federal statutory income tax rate to the Company's effective rate for the years ended September 30 is as follows: 2001 2000 1999 -------------------------------------------------------------------------------- Statutory income tax rate 35% 35% 35% Tax benefit of Foreign Sales Corporation/Extraterritorial Income Exclusion (2) (9) (3) Foreign provision in excess of U.S. tax rate 2 32 4 State income taxes, net of federal benefit 2 (4) 2 Research and development tax credits (1) (9) (5) Other, net 2 (4) 1 -------------------------------------------------------------------------------- Effective income tax rate 38% 41% 34% -------------------------------------------------------------------------------- Following is a summary of the deferred tax assets and liabilities as of September 30: 2001 2000 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) DEFERRED TAX ASSET: Accrued compensation and benefits $ 1,147 $ 1,073 Inventory reserves 3,764 3,649 Allowance for doubtful accounts 347 242 Other assets (859) (1,229) -------------------------------------------------------------------------------- TOTAL DEFERRED TAX ASSET 4,399 3,735 ================================================================================ DEFERRED TAX LIABILITY: ================================================================================ Property and equipment 5,947 5,628 -------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITY $ 1,548 $ 1,893 ================================================================================ 21 Notes to Consolidated Financial Statements (Continued) 6. STOCK OPTIONS: The Company has made certain stock-based awards to its officers, non-employee directors and key employees under various stock plans. Awards permitted under these plans include incentive (qualified) stock options, non-qualified stock options, stock appreciation rights, restricted stock, deferred stock, and other stock-based and non stock-based awards. During the year ended September 30, 2001, the Company awarded incentive stock options and non-qualified stock options. These awards have been granted at exercise prices that are 100% of market value at the day of grant. Beginning one year after grant, the options generally can be exercised proportionately each year for periods of three, four or six years, as defined in the respective plans. Options currently expire no later than seven years from the grant date, as defined. Option holders may exercise options by delivering Company stock already owned, cash or a combination of stock and cash. During 2001 and 2000, option holders delivered 85,075 shares and 7,145 shares, respectively, of the Company's stock in full or partial payment of options exercised. A status of the Company's stock option plans is summarized below (in thousands of shares):
2001 2000 1999 ---------------------------------------------------------------------------------------------------------------- SHARES WAEP* SHARES WAEP* SHARES WAEP* ---------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 3,625 $ 9.98 2,816 $11.21 2,143 $10.30 ---------------------------------------------------------------------------------------------------------------- Granted 728 $12.30 1,115 $ 7.17 880 $12.95 ---------------------------------------------------------------------------------------------------------------- Exercised (410) $ 8.00 (19) $ 6.44 (138) $ 7.25 ---------------------------------------------------------------------------------------------------------------- Forfeited (863) $ 8.81 (287) $11.30 (69) $13.38 ---------------------------------------------------------------------------------------------------------------- Options outstanding at end of year 3,080 $11.12 3,625 $ 9.98 2,816 $11.21 ---------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 1,415 $11.58 1,891 $10.23 1,566 $ 9.46 ================================================================================================================
*WEIGHTED-AVERAGE EXERCISE PRICE The following summarizes information concerning stock options outstanding as of September 30, 2001 (in thousands of shares):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ---------------------------------------------------------------------------------------------------------------- $5.78-$7.25 450 2.66 years $ 6.53 221 $ 6.30 ---------------------------------------------------------------------------------------------------------------- $7.3125-$9.875 612 3.82 years $ 7.43 188 $ 7.45 ---------------------------------------------------------------------------------------------------------------- $10.00-$13.00 975 3.27 years $ 12.15 354 $ 10.82 ---------------------------------------------------------------------------------------------------------------- $13.125-$14.625 712 3.07 years $ 13.41 321 $ 13.69 ---------------------------------------------------------------------------------------------------------------- $15.375-$19.375 331 1.33 years $ 16.23 331 $ 16.23 ---------------------------------------------------------------------------------------------------------------- TOTAL 3,080 3.03 YEARS $ 11.12 1,415 $ 11.58 ================================================================================================================
The number of stock options scheduled to expire, if not exercised by specified dates in the following fiscal years are as follows: 2002: 513,000; 2003: 424,000; 2004: 300,000; 2005: 859,000; 2006: 984,000. Prices for options exercised during the three-year period ended September 30, 2001 ranged from $6.25 to $14.55. Total options available for future grant as of September 30, 2001 were 2,077,828. In 1992, the Company's shareholders authorized an Employee Stock Purchase Plan (the "Purchase Plan"), whereby 1.0 million shares of the Company's common stock were reserved for sale to employees. Participants of the Purchase Plan were issued 149,748 shares in 2001 and 157,818 shares in 2000. During 2001, participants subscribed to purchase 111,266 shares at 85% of market price for issuance in 2002. 22 6. STOCK OPTIONS (CONTINUED): PRO FORMA INFORMATION: The Company has elected to follow Accounting Principles Board Opinion No. 25, ("APB No. 25") "Accounting for Stock Issued to Employees," in accounting for its employee stock options. Under APB No. 25, no compensation cost for stock options is recognized for stock options granted at or above fair value. However, Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensa tion," requires the use of option valuation models to estimate compensation cost from the granting of employee stock options and to present the pro forma effect of such cost on reported net income and earnings per share. SFAS No. 123 requires this information be determined as if the Company had accounted for employee stock options granted in fiscal years beginning subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of options granted, as reported below, has been estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions: 2001 2000 1999 -------------------------------------------------------------------------------- Expected life (in years) 1.5 1.8 2.7 Risk-free interest rate 2.9% 6.0% 5.8% Expected volatility .54 .49 .49 Dividend yield 2.1% 3.4% 2.3% ================================================================================ The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models required the input of highly subjective assumptions, including the expected stock price volatility. The weighted average estimated fair value of employee stock options granted during 2001, 2000, and 1999 was $4.20, $2.14 and $4.47, respectively. For purpose of the pro forma disclosure, the estimated fair value of the options is amortized to expense over the vesting period of the options. The Company's net income, as reported, and pro forma earnings per share are as follows (in thousands, except per share amounts): STOCK OPTION PRO FORMA DISCLOSURE YEARS ENDED SEPTEMBER 30 2001 2000 1999 -------------------------------------------------------------------------------- Income Before Cumulative Effect of Accounting Change, Net of Taxes As Reported $ 15,176 $ 3,624 $ 12,445 Pro forma 13,700 2,216 10,553 -------------------------------------------------------------------------------- Basic Earnings Per Share* As Reported $ .73 $ .17 $ .60 Pro forma .66 .11 .51 -------------------------------------------------------------------------------- Diluted Earnings Per Share* As Reported $ .72 $ .17 $ .59 Pro forma .65 .11 .50 ================================================================================ *EXCLUDES THE CUMULATIVE EFFECT OF THE ACCOUNTING CHANGE FOR SAB 101 IN 2001 7. EMPLOYEE BENEFIT PLANS: The Company offers a 401(k) Pay Conversion Plan for eligible employees in the United States. Employees are able to supplement their retirement income by participating in this voluntary pretax savings plan by designating a percentage of their gross income, subject to limitations imposed by federal law. Employees are fully vested in their voluntary contributions. The Company matches a portion of the employees' voluntary contributions. This matching contribution totaled $647,000 in 2001, $843,000 in 2000 and $730,000 in 1999. The Company also has a profit sharing plan that serves 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 Company's Board of Directors approves the contribution annually. The plan provides for a minimum con tribution of 4% of participant compensation, as defined, up to the social security taxable wage base, and 8% of participant compensation in excess of the social security taxable wage base up to the maximum profit sharing contribution allowed by federal law, so long as the entire contribution does not exceed pretax income. The Company's contributions totaled $4.2 million in 2001, $4.4 million in 2000, and $3.9 million in 1999. Prior to 1998, two of the Company's international subsidiaries had 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. In 1998, one of the plans was modified to provide for contributions based solely on annual compensation levels. 23 Notes to Consolidated Financial Statements (Continued) 7. EMPLOYEE BENEFITS PLANS (CONTINUED): The cost for these plans include the following components: 2001 2000 1999 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Service cost-benefit earned during the period $ 190 $ 188 $ 209 Interest cost on projected benefit obligation 237 235 249 Net amortization and deferral 14 50 17 -------------------------------------------------------------------------------- NET PERIODIC PENSION COST $ 441 $ 473 $ 475 ================================================================================ The following summarizes the change in benefit obligation and the plan assets: 2001 2000 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Change in benefit obligation: Projected benefit obligation, beginning of year $ 6,120 $ 5,877 Service cost 190 177 Interest cost 237 211 Translation change (245) (156) Actuarial loss 42 49 Benefits paid (44) (38) -------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION, END OF YEAR $ 6,300 $ 6,120 ================================================================================ Change in plan assets: Fair value of plan assets, beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contributions 44 38 Benefits paid (44) (38) -------------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS, END OF YEAR $ -- $ -- ================================================================================ The funded status of the Company's pension retirement plans at September 30 is as follows: 2001 2000 -------------------------------------------------------------------------------- (EXPRESSED IN THOUSANDS) Funded status $ (6,300) $ (6,120) Unrecognized net gain (26) (31) Unrecognized net liability being amortized 584 528 Required adjustment to recognize minimum liability (23) (34) -------------------------------------------------------------------------------- ACCRUED PENSION LIABILITY $ (5,765) $ (5,657) -------------------------------------------------------------------------------- Major assumptions used in the above calculation include: Discount rate 3.5 to 6.0% 3.5 to 6.0% Expected rate of increase in future compensation levels 3.0% 3.0% ================================================================================ 8. ACQUISITIONS: During 1999, the Company completed a merger with DSP Technology, Inc. ("DSP"), an enterprise active in the automotive engine development market segment. Under the terms of the merger agreement, the Company issued approximately 2.1 million shares of its common stock in exchange for all of DSP's outstanding shares of common stock. In connection with the acquisition, the Company and DSP incurred acquisition related costs, in the aggregate, of approximately $1.4 million that have been charged to operations during 1999. The acquisition qualified as a tax-free exchange and was recorded under the pooling-of-interests accounting method. 24 9. RESTRUCTURING AND OTHER CHARGES: During 2000, the Company announced a restructuring charge related to the discontinuation of a line of data acquisition products acquired as part of its acquisition of DSP in 1999. The restructuring charge of $1.2 million included a provision for severance costs of $0.7 million, the write-off of leasehold improvements and production and other equipment no longer needed of $0.3 million and other costs of $0.2 million associated with the closedown of the facility and the wind-down of the related product line. During the year ended September 30, 2001, the restructuring reserve was reduced by severance costs of $0.8 million, the write off of leasehold improvements, equip ment and other assets aggregating $0.2 million and costs associated with the closing of the facility and the wind-down of the product line of $0.2 million. In addition to the restructuring charge, the Company recorded an additional provision of $1.8 million to cover excess and obsolete inventory, uncollectible receivables and the write off of the remaining book value of fixed assets no longer needed. Of this amount, $1.1 million was charged to cost of sales and $0.7 million was charged to general and administrative expenses in fiscal 2000. As the activity for which the restructuring charge and the additional provision were created is essentially complete as of September 30, 2001, the Company does not expect any significant additional charges to be incurred in future periods. During 1999, the Company recorded a restructuring charge of $5.7 million as a result of the closure of its manufacturing operations in France and the transfer of this product line to its electromechanical division in North Carolina. In connection therewith, cash outlays of $2.6 million were made during 1999 and $3.1 million were made during 2000. Such costs were financed primarily with funds from continuing operations and borrowings under its bank line of credit. While certain of the effects from such restructuring were expected to be realized during fiscal 2000, other costs associated with the integration of the product line into the North Carolina facility offset much of the benefit expected from such restructuring. As a result, the Company has yet to realize substantial improvement in operating results from this restructuring. 10. COMMITMENTS AND CONTINGENCIES: LITIGATION: The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, final resolution of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company. LEASES: The Company has noncancelable operating lease commitments for equipment and facilities that expire on various dates through 2011. Minimum annual rental commitments at September 30, 2001 for the fiscal years 2002 through 2006 and thereafter are $6.0 million, $5.2 million, $4.1 million, $3.2 million and $3.8 million, respectively. Total lease expense was $4.3 million in 2001, $3.9 million in 2000 and $4.2 million in 1999. 25 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, 2001 and 2000, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended September 30, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States. As discussed in Note 2 to the consolidated financial statements, effective October 1, 2000, the Company changed its method of revenue recognition upon adoption of Staff Accounting Bulletin No. 101. Arthur Andersen LLP Minneapolis, Minnesota, November 15, 2001 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 consolidated financial statements have been prepared in accordance with account ing principles generally accepted in the United States 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. Arthur Andersen LLP, independent public accountants, has audited the financial statements included in this annual report. We have been advised that their audits were conducted in accordance with auditing standards generally accepted in the United States and included such reviews of internal controls and tests of transactions as they considered necessary in setting the scope of their audits. Sidney W. Emery, Jr Chairman and Chief Executive Officer Susan E. Knight Vice President and Chief Financial Officer 26 Corporate Information BOARD OF DIRECTORS Sidney W. Emery, Jr. Chairman and Chief Executive Officer MTS Systems Corporation Charles A. Brickman President Pinnacle Capital Corporation Jean-Lou Chameau Provost, Vice President Georgia Institute of Technology Bobby I. Griffin Consultant; formerly Executive Vice President Medtronic, Inc. Brendan C. Hegarty Chief Executive Officer NanoMagnetics Bruce D. Hertzke Chairman, Chief Executive Officer, President Winnebago Inustries, Inc. Barbara J. Samardzich Chief Engineer, Automatic Transmission Engineering Operations Ford Motor Company Linda Hall Whitman, Ph.D Consultant; formerly President Ceridian Performance Partners EXECUTIVE MANAGEMENT Sidney W. Emery, Jr. Chairman and Chief Executive Officer Steven M. Cohoon Vice President Integrated Vehicle Dynamics Development Division Kelly H. Donaldson, Jr. Vice President Noise and Vibration Business and Corporate Product Management James M. Egerdal Vice President Service & Support Division Laura B. Hamilton Vice President Material Testing and Aerospace Division Susan E. Knight Vice President Chief Financial Officer Donald G. Krantz Vice President, Advanced Engineering Solutions Division Larry Moulton Vice President Powertrain Technology Division Werner Ongyert Vice President Europe Kathleen M. Staby Vice President Human Resources Mauro Togneri Vice President Sensors and Automation Divisions M. Perry Walraven Vice President Electromechanical Material Testing Division Ryoji Yamaguchi Vice President Asia/Pacific SUBSIDIARY OFFICER Frank G. Arcella President, AeroMet Corporation CORPORATE OFFICERS Barbara J. Carpenter Assistant Corporate Secretary John R. Houston Secretary Partner, Robins, Kaplan, Miller & Ciresi LLP Thomas J. Minneman Treasurer REFERENCES Bank Reference US Bank Minneapolis, MN Transfer Agent Wells Fargo Bank Minnesota, N.A. South St. Paul, MN Shareholder Assistance: 800-468-9716 General Counsel Robins, Kaplan, Miller & Ciresi LLP Minneapolis, MN Patent Counsel Westman, Champlin & Kelly Minneapolis, MN Independent Public Accountants Arthur Andersen LLP Minneapolis, MN NOTICE OF ANNUAL MEETING The annual meeting of shareholders will be held at 5:00 p.m. (Central Standard Time) on Tuesday, January 29, 2002 at the Company's Headquarters in Eden Prairie, Minnesota. SHAREHOLDERS WHO CANNOT ATTEND THE MEETING ARE URGED TO EXERCISE THEIR RIGHT TO VOTE BY PROXY. A PROXY CARD, A PROXY STATEMENT, AND A RETURN ENVELOPE ARE ENCLOSED FOR THIS PURPOSE. 10-K REPORT AND OTHER FINANCIAL INFORMATION Copies of the Annual Report on Form 10-K, filed with the Securities and Exchange Commission are available on request without charge. MTS Systems Corporation 14000 Technology Drive Eden Prairie, Minnesota 55344-2290. Telephone: 952-937-4213 COMMON STOCK MTS Systems Corporation's common stock publicly trades on The Nasdaq Stock Market's National Market under the symbol "MTSC". FOR NEWS RELEASES AND OTHER INFORMATION Our latest news releases are available on the World Wide Web at http://www.mts.com. INVESTOR RELATIONS Securities analysts, portfolio managers, and representatives of financial institutions seeking information about the Company should direct their inquiries to: Thomas J. Minneman Treasurer and Manager of Investor Relations MTS Systems Corporation 14000 Technology Drive Eden Prairie, Minnesota 55344-2290. Telephone: 952-937-4647 Email: tom.minneman@mts.com DIVIDEND REINVESTMENT PLAN Under the plan, shareholders can invest MTS Systems dividends in additional shares of MTS stock and make periodic voluntary cash investments for the purchase of MTS stock. Both alternatives bear a nominal transaction charge which is netted against the funds used to purchase shares of MTS stock. Shareholders may obtain a brochure giving further details by calling Wells Fargo Shareholder Services at 800-468-9716. TRADEMARKS MTS, Flat-Trac, Nano Indenter, SWIFT, and Temposonics are registered trademarks; AeroPro, Empirical Dynamics Models, EDM, SensorlessServo, Sound Quality, Virtual Test Lab, and VTL are trademarks; and AeroMet and SmartSim Community are servicemarks of MTS Systems Corporation. 27 CORPORATE HEADQUARTERS MTS Systems Corporation 14000 Technology Drive Eden Prairie, Minnesota 55344-2290 Telephone: 952-937-4000 info@mts.com www.mts.com NORTH AMERICAN SUBSIDIARIES AeroMet Corporation INTERNATIONAL SUBSIDIARIES MTS Automation Antriebstechnik Verwaltungs GmbH MTS Automation Antriebstechnik GmbH MTS Automotive Sensors GmbH MTS Holdings France, SARL MTS International Ltd. MTS(Japan) Ltd. MTS Korea, Inc. MTS Powertrain Technology Ltd MTS Sensor Technologie Verwaltungs GmbH MTS Sensor Technologie GmbH and Co. KG MTS Sensors Technology K.K. MTS Systems (China) Inc. MTS Systems do Brazil, Ltda. MTS Systems SA MTS Systems GmbH MTS Systems Holdings for Europe GmbH MTS Systems (Hong Kong) Inc. MTS Systems Limited MTS Systems Norden AB MTS Systems (Singapore) Pte Ltd. MTS Systems SRL MTS Testing Systems (Canada) Ltd. 28