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| MTSC > SEC Filings for MTSC > Form 10-K on 28-Nov-2012 | All Recent SEC Filings |
28-Nov-2012
Annual Report
MTS Systems Corporation is a leading global supplier of high performance test systems and position sensors. The Company's testing hardware and software solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS' position sensors provide controls for a variety of industrial and vehicular applications. MTS had 2,147 employees and revenue of $542 million for the fiscal year ended September 29, 2012.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to September 30. The
fiscal years ended September 29, 2012, October 1, 2011 and October 2, 2010 each
consisted of 52 weeks.
Fiscal Year 2012 Compared to Fiscal Year 2011
Summary of Financial Results
Significant Items for fiscal year 2012 compared to fiscal year 2011 include:
• Orders increased 4.7% to a record-high $565.3 million, compared to $540.0 million for fiscal year 2011. Orders in fiscal year 2012 included four large (in excess of $5.0 million) Test orders totaling approximately $46 million, a decrease of $18 million compared to large Test orders in fiscal year 2011. Excluding the large orders, base orders increased 9.1%, reflecting 13.3% global growth in Test, partially offset by a 5.9% decline in Sensors. Backlog of $299.1 million is a record high, an increase of approximately $10.5 million compared to backlog at the end of fiscal year 2011.
• Revenue increased 16.0% to a record-high $542.3 million, compared to $467.4 million for fiscal year 2011. This increase was comprised of 21.5% growth in Test, resulting primarily from 36.8% higher beginning backlog as well as strong base order growth, partially offset by a 3.1% decline in Sensors which was driven by an unfavorable impact of currency translation.
• Income from operations increased 10.0% to a record-high $80.5 million, compared to $73.2 million for fiscal year 2011. This increase was primarily driven by higher gross profit, reflecting leverage from higher volume and productivity improvements in Test, net of $26.9 million higher operating expenses. The higher operating expenses principally resulted from continued investment in strategic and productivity initiatives, including research and development, higher headcount to support selling and compliance efforts, as well as the $7.8 million settlement cost related to the settlement of the U.S Government matters. See below for additional information regarding the U.S. Government matters during the current fiscal year.
• Operating activities generated a record-high cash flow of $65.0 million, driven by earnings and reduced working capital requirements.
• As was previously disclosed, on August 30, 2012, the Company reached an agreement with the U.S. Department of Commerce ("DOC") and the U.S. Attorney's Office for the District of Minnesota ("USAO"), settling for $7.8 million the DOC and USAO's investigation into the Company's past disclosures on its government certifications and its government contracting compliance policies, general compliance record and practices in areas including export controls and government contracts. For a more detailed discussion of the investigation by the DOC and USAO and the settlement agreement, please refer to Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Detailed Financial Results
Total Company
Orders and Backlog
The following is a comparison of fiscal year 2012 and fiscal year 2011 orders,
separately identifying the estimated impact of currency translation:
Estimated
Business Currency
2012 Change Translation 2011
(expressed in millions)
Orders $ 565.3 $ 35.3 $ (10.0 ) $ 540.0
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Orders totaled $565.3 million, an increase of $25.3 million, or 4.7%, compared to orders of $540.0 million for fiscal year 2011. Fiscal year 2012 orders included $46 million of large Test orders, compared to $64 million in fiscal year 2011. Test orders increased $31.4 million to $468.0 million, driven by strong global base order growth, while Sensors orders decreased $6.1 million to $97.3 million, including an estimated $3.4 million unfavorable impact of currency translation.
The following is a comparison of fiscal year 2012 and fiscal year 2011 orders by geography:
%
Geography 2012 2011 Variance Variance
(expressed in millions)
Americas $ 153.4 $ 162.1 $ (8.7 ) -5.4 %
Europe 170.8 183.2 (12.4 ) -6.8 %
Asia 241.1 194.7 46.4 23.8 %
Total Orders $ 565.3 $ 540.0 $ 25.3 4.7 %
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Backlog of undelivered orders at September 29, 2012 was a record-high $299.1 million, an increase of approximately $10.5 million, or 3.6%, compared to backlog of $288.6 million at October 1, 2011. The Company believes backlog is not an absolute indicator of future revenue because a portion of the orders in backlog could be cancelled at the customer's discretion. While the backlog is subject to order cancellations, the Company has not historically experienced a significant number of order cancellations. During fiscal 2012, two custom orders in Test totaling approximately $9 million were cancelled. These orders were booked in a previous fiscal year and were associated with a Test product line that was sold during fiscal 2012. During fiscal year 2011, one custom order in Test totaling approximately $0.5 million was cancelled. This order was booked in a previous fiscal year.
Results of Operations
The following is a comparison of fiscal year 2012 and fiscal year 2011 statements of operations (in millions, except per share data):
%
2012 2011 Variance Variance
Revenue $ 542.3 $ 467.4 $ 74.9 16.0 %
Cost of sales 306.1 265.4 40.7 15.3 %
Gross profit 236.2 202.0 34.2 16.9 %
Gross margin 43.6 % 43.2 % 0.4 % pts
Operating expenses:
Selling and marketing 74.6 69.8 4.8 6.9 %
General administrative 59.2 44.2 15.0 33.9 %
Research and development 21.9 14.8 7.1 48.0 %
Total operating expenses 155.7 128.8 26.9 20.9 %
Income from operations 80.5 73.2 7.3 10.0 %
Interest expense (0.9 ) (1.3 ) 0.4 -30.8 %
Interest income 0.6 0.4 0.2 50.0 %
Other (expense) income, net (0.4 ) 1.0 (1.4 ) NM
Income before income taxes 79.8 73.3 6.5 8.9 %
Provision for income taxes 28.2 22.4 5.8 25.9 %
Net income $ 51.6 $ 50.9 $ 0.7 1.4 %
Diluted earnings per share $ 3.21 $ 3.24 $ (0.03 ) -0.9 %
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The following is a comparison of fiscal year 2012 and fiscal year 2011 results of operations, separately identifying the estimated impact of currency translation:
Estimated
Business Currency
2012 Change Translation 2011
(expressed in millions)
Revenue $ 542.3 $ 83.4 $ (8.5 ) $ 467.4
Cost of sales 306.1 46.4 (5.7 ) 265.4
Gross profit 236.2 37.0 (2.8 ) 202.0
Gross margin 43.6 % 43.2 %
Operating expenses:
Selling and marketing 74.6 6.1 (1.3 ) 69.8
General administrative 59.2 15.3 (0.3 ) 44.2
Research and development 21.9 7.3 (0.2 ) 14.8
Total operating expenses 155.7 28.7 (1.8 ) 128.8
Income from operations $ 80.5 $ 8.3 $ (1.0 ) $ 73.2
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Revenue
Revenue was $542.3 million, an increase of $74.9 million, or 16.0%, compared to
revenue of $467.4 million for fiscal year 2011. This increase was driven by
34.4% higher beginning backlog as well as strong standard short-cycle orders in
Test, partially offset by a decline in Sensors resulting from an unfavorable
impact of currency translation. Test revenue increased 21.5% to $442.0 million,
while Sensors revenue decreased 3.1% to $100.3 million.
The following is a comparison of fiscal year 2012 and fiscal year 2011 revenue by geography:
%
Geography 2012 2011 Variance Variance
(expressed in millions)
Americas $ 169.5 $ 135.5 $ 34.0 25.1 %
Europe 167.8 150.1 17.7 11.8 %
Asia 205.0 181.8 23.2 12.8 %
Total Revenue $ 542.3 $ 467.4 $ 74.9 16.0 %
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Although selective product price changes were implemented during each of these fiscal years, the overall impact of pricing changes did not have a material effect on revenue.
Gross profit
Gross profit was $236.2 million, an increase of $34.2 million, or 16.9%,
compared to gross profit of $202.0 million for fiscal year 2011. Gross profit as
a percentage of revenue was 43.6%, an increase of 0.4 percentage points from
43.2% for fiscal year 2011. The increase reflects leverage on higher volume and
improved productivity in Test, partially offset by the unfavorable impact of a
higher proportion of Test revenue compared to total Company revenue.
Selling and Marketing Expense
Selling and marketing expense was $74.6 million, an increase of $4.8 million, or
6.9%, compared to $69.8 million for fiscal year 2011. This increase was
primarily due to higher compensation and benefits driven by increased headcount,
higher sales commissions, as well as higher travel and other discretionary
expenses to support selling efforts. This was partially offset by an estimated
$1.3 million favorable impact of currency translation. Selling and marketing
expense as a percentage of revenue was 13.8% on higher volume, compared to 14.9%
for fiscal year 2011.
General and Administrative Expense
General and administrative expense was $59.2 million, an increase of $15.0
million, or 33.9%, compared to $44.2 million for fiscal year 2011. This increase
was primarily driven by higher investment in strategic, productivity and
compliance initiatives, as well as higher compensation and benefits driven by
increased headcount, and includes the previously mentioned $7.8 million
settlement cost related to the settlement of the U.S. Government matters.
General and administrative expense as a percentage of revenue was 10.9%,
compared to 9.5% for fiscal year 2011.
Research and Development Expense
Research and development expense was $21.9 million, an increase of $7.1 million,
or 48.0%, compared to $14.8 million for fiscal year 2011. Planned expenditures
were higher in both segments. In addition, the Company allocated certain of its
resources towards capitalized software development activities during fiscal year
2012 and 2011. Total software development costs capitalized during fiscal years
2012 and 2011 were $0.5 million and $3.7 million, respectively. Research and
development expense as a percentage of revenue was 4.0%, compared to 3.2% for
fiscal year 2011.
Income from Operations
Income from operations was $80.5 million, an increase of $7.3 million, or 10.0%,
compared to income from operations of $73.2 million for fiscal year 2011. This
increase was primarily driven by higher volume and gross profit rate, partially
offset by increased operating expenses, including the previously mentioned $7.8
million U.S. Government settlement costs. Operating income as a percentage of
revenue was 14.8%, compared to 15.7% for fiscal year 2011.
Historically, the Company's operating costs have been impacted by a level of inflation ranging from -1% to 4%. The Company uses a number of strategies to mitigate the effects of cost inflation including cost productivity initiatives such as global procurement strategies, as well as price increases. However, if the Company's operating costs were to become subject to significant inflationary pressures, it may not be able to fully offset such higher costs.
Interest Expense, net
Interest expense, net was $0.3 million, a decrease of $0.6 million, compared to
$0.9 million for fiscal year 2011. Interest expense declined $0.4 million due to
lower interest rates incurred on short-term borrowings as well as a reduction in
the accrued interest liability associated with the Company's uncertain tax
positions. Interest income increased $0.2 million primarily due to interest
earned on higher average cash balances maintained in interest-bearing accounts.
Other (Expense) Income, net
Other (expense) income, net was $0.4 million of net other expense, compared to
$1.0 million of net other income in fiscal year 2011. The decrease was primarily
due to $1.1 million of net losses on foreign currency transactions in fiscal
year 2012 compared to $0.2 million of net gains on foreign currency transactions
in fiscal year 2011.
Provision for Income Taxes
Provision for income taxes totaled $28.2 million, an increase of $5.8 million,
compared to $22.4 million for the fiscal year 2011. This increase was primarily
due to increased income before taxes as well as a higher effective tax rate. The
effective tax rate for the fiscal year was 35.4%, an increase of 4.9 percentage
points compared to 30.5% for fiscal year 2011. This increase was primarily
driven by the previously mentioned settlement cost related to the U.S.
Government matters, which is nondeductible for tax purposes, as well as a
reduction in U.S. research and development tax credits. The enactment of
legislation in the first quarter of fiscal year 2011 that retroactively extended
the U.S. research and development tax credits provided a tax benefit of $1.0
million during fiscal year 2011. The U.S. research and development tax credit
legislation expired as of the end of the first quarter of fiscal year 2012.
Net Income
Net income was $51.6 million, an increase of $0.7 million, compared to $50.9
million for fiscal year 2011. The increase was primarily driven by higher income
from operations, partially offset by a higher effective tax rate and increased
net losses on foreign currency transactions. Earnings per diluted share
decreased $0.03 to $3.21, compared to $3.24 for fiscal year 2011. The decrease
was primarily driven by the $0.48 per diluted share negative impact from the
previously mentioned settlement cost related to the U.S. Government matters.
Additionally, the increase in shares outstanding negatively impacted earnings
per diluted share by $0.07.
Segment Results
Test Segment
Orders and Backlog
The following is a comparison of fiscal year 2012 and fiscal year 2011 orders
for Test, separately identifying the estimated impact of currency translation:
Estimated
Business Currency
2012 Change Translation 2011
(expressed in millions)
Orders $ 468.0 $ 38.0 $ (6.6 ) $ 436.6
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Orders totaled $468.0 million, an increase of $31.4 million, or 7.2%, including an estimated 1.5% unfavorable impact of currency translation, compared to orders of $436.6 million for fiscal year 2011. Fiscal year 2012 orders included four large orders totaling approximately $46 million, of which $41 million was in the structures market and $5 million was in the ground vehicles market. Fiscal year 2011 orders included five large orders totaling approximately $64 million, of which $35 million was in the structures market and $29 million was in the ground vehicles market. Excluding the large orders, base orders increased 13.3%, reflecting strong growth in the ground vehicles, materials and structures markets. Test accounted for 82.8% of total Company orders, compared to 80.9% for fiscal year 2011.
The following is a comparison of fiscal year 2012 and fiscal year 2011 orders for Test by geography:
Geography 2012 2011 Variance % Variance
(expressed in millions)
Americas $ 127.4 $ 133.9 $ (6.5 ) -4.9 %
Europe 121.9 132.0 (10.1 ) -7.7 %
Asia 218.7 170.7 48.0 28.1 %
Total Orders $ 468.0 $ 436.6 $ 31.4 7.2 %
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Backlog of undelivered orders at September 29, 2012 was $285.3 million, an increase of 5.2% from backlog of $271.2 million at October 1, 2011. As previously mentioned, backlog at the end of fiscal 2012 was negatively impacted by the cancellation of two custom orders totaling approximately $9 million. Also, as previously mentioned, backlog at the end of fiscal 2011 was negatively impacted by the cancellation of a custom order totaling approximately $0.5 million.
Results of Operations
The following is a comparison of fiscal year 2012 and fiscal year 2011 results
of operations for Test separately identifying the estimated impact of currency
translation:
Estimated
Business Currency
2012 Change Translation 2011
(expressed in millions)
Revenue $ 442.0 $ 83.3 $ (5.2 ) $ 363.9
Cost of sales 262.1 45.0 (4.2 ) 221.3
Gross profit 179.9 38.3 (1.0 ) 142.6
Gross margin 40.7 % 39.2 %
Operating expenses:
Selling and marketing 59.6 6.6 (0.9 ) 53.9
General administrative 45.2 12.8 - 32.4
Research and development 16.8 6.7 - 10.1
Total operating expenses 121.6 26.1 (0.9 ) 96.4
Income from operations $ 58.3 $ 12.2 $ (0.1 ) $ 46.2
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Revenue
Revenue was $442.0 million, an increase of $78.1 million, or 21.5%, compared to
revenue of $363.9 million for fiscal year 2011. The increase was primarily due
to 36.8% higher beginning backlog and strong base order growth, partially offset
by an estimated $5.2 million unfavorable impact of currency translation.
The following is a comparison of fiscal year 2012 and fiscal year 2011 revenue for Test by geography:
Geography 2012 2011 Variance % Variance
(expressed in millions)
Americas $ 141.0 $ 108.2 $ 32.8 30.3 %
Europe 119.1 98.6 20.5 20.8 %
Asia 181.9 157.1 24.8 15.8 %
Total Revenue $ 442.0 $ 363.9 $ 78.1 21.5 %
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Gross Profit
Gross profit was $179.9 million, an increase of $37.3 million, or 26.2%,
compared to gross profit of $142.6 million for fiscal year 2011. Gross profit as
a percentage of revenue was 40.7%, an increase of 1.5 percentage points from
39.2% for fiscal year 2011. This increase was driven by leverage on higher
volume and improved productivity.
Selling and Marketing Expense
Selling and marketing expense was $59.6 million, an increase of $5.7 million, or
10.6%, compared to $53.9 million for fiscal year 2011. This increase was
primarily due to higher compensation and benefits driven by increased headcount,
higher sales commissions, and higher travel and other discretionary expenses to
support selling efforts. Also included was increased investment in marketing
initiatives, partially offset by an estimated $0.9 million favorable impact of
currency translation. Selling and marketing expense as a percentage of revenue
was 13.5% on higher volume, compared to 14.8% for fiscal year 2011.
General and Administrative Expense
General and administrative expense was $45.2 million, an increase of $12.8
million, or 39.5%, compared to $32.4 million for fiscal year 2011. This increase
was primarily driven by higher investment in strategic, productivity and
compliance initiatives, as well as higher compensation and benefits driven by
increased headcount. Also included was $6.1 million of the $7.8 million
settlement costs related to the previously mentioned U.S. Government matters.
General and administrative expense as a percentage of revenue was 10.2%,
compared to 8.9% for fiscal year 2011.
Research and Development Expense
Research and development expense was $16.8 million, an increase of $6.7 million,
or 66.3%, compared to $10.1 million for fiscal year 2011, due to a higher level
of planned expenditures. As previously mentioned, $0.5 million and $3.7 million
of costs associated with software development activities were capitalized in
fiscal year 2012 and 2011, respectively. Research and development expense as a
percentage of revenue was 3.8%, compared to 2.8% for fiscal year 2011.
Income from Operations
Income from operations was $58.3 million, an increase of $12.1 million, or
26.2%, compared to income from operations of $46.2 million for fiscal year 2011.
This increase reflects higher revenue and gross profit, partially offset by
increased operating expenses. Operating income as a percentage of revenue was
13.2%, compared to 12.7% for fiscal year 2011.
Sensors Segment
Orders and Backlog
The following is a comparison of fiscal year 2012 and fiscal year 2011 orders
for Sensors, separately identifying the estimated impact of currency
translation:
Estimated
Business Currency
2012 Change Translation 2011
(expressed in millions)
Orders $ 97.3 $ (2.7 ) $ (3.4 ) $ 103.4
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Orders totaled $97.3 million, a decrease of $6.1 million, or 5.9%, including an estimated 3.3% unfavorable impact of currency translation, compared to orders of $103.4 million for fiscal year 2011, primarily due to weaker global demand in the industrial market. Sensors accounted for 17.2% of total Company orders, compared to 19.1% for fiscal year 2011.
The following is a comparison of fiscal year 2012 and fiscal year 2011 orders for Sensors by geography:
%
Geography 2012 2011 Variance Variance
(expressed in millions)
Americas $ 26.0 $ 28.2 $ (2.2 ) -7.8 %
Europe 48.9 51.2 (2.3 ) -4.5 %
Asia 22.4 24.0 (1.6 ) -6.7 %
Total Orders $ 97.3 $ 103.4 $ (6.1 ) -5.9 %
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Backlog of undelivered orders at September 29, 2012 was $13.8 million, a decrease of 20.7% from backlog of $17.4 million at October 1, 2011.
Results of Operations
The following is a comparison of fiscal year 2012 and fiscal year 2011 results
of operations for the Sensors segment, separately identifying the estimated
impact of currency translation:
Estimated
Business Currency
2012 Change Translation 2011
(expressed in millions)
Revenue $ 100.3 $ 0.1 $ (3.3 ) $ 103.5
Cost of sales 44.0 1.4 (1.5 ) 44.1
Gross profit 56.3 (1.3 ) (1.8 ) 59.4
Gross margin 56.2 % 57.4 %
Operating expenses:
Selling and marketing 15.0 (0.5 ) (0.4 ) 15.9
General administrative 14.0 2.5 (0.3 ) 11.8
Research and development 5.1 0.6 (0.2 ) 4.7
Total operating expenses 34.1 2.6 (0.9 ) 32.4
Income from operations $ 22.2 $ (3.9 ) $ (0.9 ) $ 27.0
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Revenue
Revenue was $100.3 million, a decrease of $3.2 million, or 3.1%, compared to
revenue of $103.5 million for the fiscal year 2011. This decrease was primarily
driven by an estimated $3.3 million unfavorable impact of currency translation.
The following is a comparison of fiscal year 2012 and fiscal year 2011 revenue for the Sensors segment by geography:
%
Geography 2012 2011 Variance Variance
(expressed in millions)
Americas $ 28.5 $ 27.3 $ 1.2 4.4 %
Europe 48.7 51.5 (2.8 ) -5.4 %
Asia 23.1 24.7 (1.6 ) -6.5 %
Total Revenue $ 100.3 $ 103.5 $ (3.2 ) -3.1 %
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Gross Profit
Gross profit was $56.3 million, a decrease of $3.1 million, or 5.2%, compared to
gross profit of $59.4 million for fiscal year 2011. Gross profit as a percentage
of revenue was 56.2%, a decrease of 1.2 percentage points from 57.4% for fiscal
year 2011, primarily due to decreased leverage on lower volume.
Selling and Marketing Expense
Selling and marketing expense was $15.0 million, a decrease of $0.9 million, or
5.7%, compared to $15.9 million for fiscal year 2011. The decrease was driven by
lower expenditures on marketing initiatives, as well as an estimated $0.4
million favorable impact of currency translation. Selling and marketing expense
as a percentage of revenue was 15.0%, compared to 15.4% for fiscal year 2011.
General and Administrative Expense
General and administrative expense was $14.0 million, an increase of $2.2
. . .
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