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MTSC > SEC Filings for MTSC > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for MTS SYSTEMS CORP


6-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" regarding financial projections made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 that are subject to certain risks and uncertainties, as well as assumptions, that could cause actual results to differ materially from historical results and those presently anticipated or projected. Words such as "may," "will," "should," "expects," "intends," "projects," "plans," "believes," "estimates," "targets," "anticipates," and similar expressions are used to identify these forward-looking statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those factors described in Part I, Item 1A, "Risk Factors" of our 2012 Form 10-K. Such important factors include:

The Company's business operations may be affected by government contracting risks
The Company's business is significantly international in scope, which poses multiple risks including, but not limited to: currency value fluctuations; difficulty enforcing agreements and collecting receivables; import and export matters; higher danger of terrorist activity; difficulty in staffing; and compliance with laws
Volatility in the global economy could adversely affect results
The Company's business is subject to strong competition
The Company may not achieve its growth plans for the expansion of the business because the Company's long-term success depends on its ability to expand its business through new product development, mergers and acquisitions, geographic expansion, and service offerings, all of which are subject to inherent risks including, but not limited to: market demand; market acceptance of products; and the Company's ability to advance its technology
The Company may experience difficulties obtaining the services of skilled employees
The Company may fail to protect its intellectual property effectively, or may infringe upon the intellectual property of others
The business could be adversely affected by product liability and commercial litigation
The Company may experience difficulty obtaining materials or components for its products, or the cost of materials or components may increase
Government regulation imposes significant costs and other constraints
The backlog, sales, delivery and acceptance cycle for many of the Company's products is irregular and may not develop as anticipated
The Company's customers are in cyclical industries
Interest rate fluctuations could adversely affect results
The Company may be required to recognize impairment charges for long-lived assets
The Company will need to begin disclosing its use of "conflict minerals," which will impose costs on the Company and could raise reputational and other risks

The performance of the Company's business and its securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K to be filed by the Company in fiscal year 2013.

About MTS Systems Corporation

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' high-performance 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.


Table of Contents

Financial Results

Total Company

Orders and Backlog

Three Fiscal Months Ended March 30, 2013 ("Second Quarter of Fiscal 2013") Compared to Three Fiscal Months Ended March 31, 2012 ("Second Quarter of Fiscal 2012")

The following is a comparison of Second Quarter of Fiscal 2013 and Second Quarter of Fiscal 2012 orders, separately identifying the estimated impact of currency translation (in millions):

         Three Fiscal                                Three Fiscal
         Months Ended            Estimated           Months Ended
           March 30,     Business      Currency        March 31,
             2013         Change      Translation        2012

Orders $ 137.7 $ 4.2 $ (2.1 ) $ 135.6

Orders totaled $137.7 million, an increase of $2.1 million, or 1.5%, including an estimated 1.5% unfavorable impact of currency translation, compared to orders of $135.6 million for the Second Quarter of Fiscal 2012. Orders in both the current quarter and prior year included one large (in excess of $5.0 million) custom Test segment ("Test") order of approximately $5 million. Test orders grew 3.5% while Sensors segment ("Sensors") orders declined 6.6%.

Backlog of undelivered orders at the end of the quarter was $287.3 million, a decrease of 2.4% compared to backlog of $294.4 million at the end of the Second Quarter of Fiscal 2012. While the Company's backlog is subject to order cancellations, the Company has not historically experienced a significant number of order cancellations. Second Quarter of Fiscal 2013 beginning backlog was unfavorably impacted by a custom order in Test totaling approximately $2.1 million that was cancelled during the First Quarter of Fiscal 2013. This order was booked in the previous fiscal year.

Results of Operations

Second Quarter of Fiscal 2013 Compared to Second Quarter of Fiscal 2012

The following is a comparison of Second Quarter of Fiscal 2013 and Second
Quarter of Fiscal 2012 statements of operations (in millions, except per share
data):


                                       Three Fiscal Months Ended
                                       March 30,        March 31,
                                         2013             2012          Variance          % Variance
Revenue                              $       136.9    $       129.0    $       7.9                6.1 %
Cost of sales                                 83.0             72.6           10.4               14.3 %
Gross profit                                  53.9             56.4           (2.5 )             -4.4 %
Gross margin                                  39.4 %           43.7 %         (4.3 ) pts

Operating expenses:
Selling and marketing                         19.5             19.2            0.3                1.6 %
General administrative                        13.2             13.9           (0.7 )             -5.0 %
Research and development                       5.6              6.1           (0.5 )             -8.2 %
Total operating expenses                      38.3             39.2           (0.9 )             -2.3 %

Income from operations                        15.6             17.2           (1.6 )             -9.3 %

Interest expense, net                         (0.2 )           (0.2 )            -                0.0 %
Other expense, net                            (0.9 )           (0.4 )         (0.5 )            125.0 %

Income before income taxes                    14.5             16.6           (2.1 )            -12.7 %
Income tax provision                           3.4              5.4           (2.0 )            -37.0 %
Net income                           $        11.1    $        11.2    $      (0.1 )             -0.9 %

Diluted earnings per share           $        0.69    $        0.69    $         -                0.0 %


Table of Contents

The following is a comparison of Second Quarter of Fiscal 2013 and Second Quarter of Fiscal 2012 results of operations, separately identifying the estimated impact of currency translation (in millions):

                           Three Fiscal                                 Three Fiscal
                           Months Ended            Estimated            Months Ended
                             March 30,      Business      Currency        March 31,
                               2013          Change      Translation        2012
Revenue                    $       136.9   $     10.1   $        (2.2 ) $       129.0
Cost of sales                       83.0         12.0            (1.6 )          72.6
Gross profit                        53.9         (1.9 )          (0.6 )          56.4
                                    39.4 %                                       43.7 %

Operating expenses:
Selling and marketing               19.5          0.5            (0.2 )          19.2
General administrative              13.2         (0.6 )          (0.1 )          13.9
Research and development             5.6         (0.5 )             -             6.1
Total operating expenses            38.3         (0.6 )          (0.3 )          39.2

Income from operations     $        15.6   $     (1.3 ) $        (0.3 ) $        17.2

Revenue was $136.9 million, an increase of $7.9 million, or 6.1%, compared to revenue of $129.0 million for the Second Quarter of Fiscal 2012. The increase was primarily driven by strong backlog execution in Test, partially offset by a lower beginning backlog and reduced order volume in Sensors, as well as an estimated $2.2 million unfavorable impact of currency translation. Test revenue increased 10.7% to $113.9 million, while Sensors revenue decreased 11.9% to $23.0 million.

Gross profit was $53.9 million, a decrease of $2.5 million, or 4.4%, compared to gross profit of $56.4 million for the Second Quarter of Fiscal 2012. Gross profit as a percentage of revenue was 39.4%, a decrease of 4.3 percentage points from 43.7% for the Second Quarter of Fiscal 2012. This decrease reflects unfavorable mix, resulting from an 11.9% reduction in higher-margin Sensors revenue, as well as a higher proportion of lower-margin custom development products in Test. The gross profit rate was also negatively impacted by approximately 1 percentage point from continued investment in productivity and infrastructure initiatives in Test, as well as 1 percentage point from lower engineering labor utilization in Test. These decreases were partially offset by volume leverage in Test. The productivity and infrastructure initiatives are focused on the building of a scalable enterprise and include investments in the Company's operating system, selling process, and service delivery system. These investments will likely continue for the remainder of fiscal year 2013 and into fiscal year 2014.

Selling and marketing expensewas $19.5 million, an increase of $0.3 million, or 1.6%, compared to $19.2 million for the Second Quarter of Fiscal 2012. This increase was primarily due to increased spending on marketing initiatives, travel and other discretionary spending to support selling efforts, partially offset by lower sales commissions and reduced bad debt expense. Selling and marketing expense as a percentage of revenue was 14.2% on higher volume, compared to 14.9% for the Second Quarter of Fiscal 2012.

General and administrative expense was $13.2 million, a decrease of $0.7 million, or 5.0%, compared to $13.9 million for the Second Quarter of Fiscal 2012. This decrease is primarily driven by a lower level of investment in strategic and compliance initiatives compared to the Second Quarter of Fiscal 2012, partially offset by higher compensation and benefits driven by senior management transition-related expenses in Sensors of $0.5 million as well as increased headcount in Test. General and administrative expense as a percentage of revenue was 9.6%, compared to 10.8% for the Second Quarter of Fiscal 2012.


Table of Contents

Research and development expensewas $5.6 million, a decrease of $0.5 million, or 8.2%, compared to $6.1 million for the Second Quarter of Fiscal 2012, primarily due to timing of planned expenditures in Test. Research and development expense as a percentage of revenue was 4.1%, compared to 4.7% for the Second Quarter of Fiscal 2012.

Income from operationswas $15.6 million, a decrease of $1.6 million, or 9.3%, compared to income from operations of $17.2 million for the Second Quarter of Fiscal 2012. This decrease was driven by lower gross profit, partially offset by decreased operating expenses. Operating income as a percentage of revenue was 11.4%, compared to 13.3% for the Second Quarter of Fiscal 2012.

Interest expense, net was $0.2 million, relatively flat compared to the Second Quarter of Fiscal 2012.

Other expense, netwas $0.9 million, an increase of $0.5 million, or 125.0%, compared to $0.4 million in the Second Quarter of Fiscal 2012. This increase was primarily due to $0.6 million increased net losses on foreign currency transactions driven by volatility in the value of the U.S. dollar against the Japanese Yen during Second Quarter of Fiscal 2013.

Provision for income taxestotaled $3.4 million for the Second Quarter of Fiscal 2013, a decrease of $2.0 million, or 37.0%, compared to $5.4 million for the Second Quarter of Fiscal 2012, primarily due to a lower effective tax rate as well as decreased income before income taxes. The effective tax rate for the Second Quarter of Fiscal 2013 was 23.8%, a decrease of 8.9 percentage points compared to a tax rate of 32.7% for the Second Quarter of Fiscal 2012. This decrease was primarily due to the enactment of tax legislation in the Second Quarter of Fiscal 2013 that retroactively extended the United States research and development tax credit and resulted in a tax benefit of $1.3 million.

Net income was $11.1 million, relatively flat compared to $11.2 million for the Second Quarter of Fiscal 2012, as lower income from operations and increased net losses on foreign currency transactions was substantially offset by a decrease in the effective tax rate. Earnings per diluted share were $0.69, flat compared to the Second Quarter of Fiscal 2012.

Segment Results

Test Segment


Orders and Backlog

Second Quarter of Fiscal 2013 Compared to Second Quarter of Fiscal 2012

The following is a comparison of Second Quarter of Fiscal 2013 and Second
Quarter of Fiscal 2012 orders for Test, separately identifying the estimated
impact of currency translation (in millions):


         Three Fiscal                                Three Fiscal
         Months Ended            Estimated           Months Ended
           March 30,     Business      Currency        March 31,
             2013         Change      Translation        2012

Orders $ 113.7 $ 5.2 $ (1.4 ) $ 109.9

Orders totaled $113.7 million, an increase of $3.8 million, or 3.5%, compared to orders of $109.9 million for the Second Quarter of Fiscal 2012. Orders in both the Second Quarter of Fiscal 2013 and Fiscal 2012 included a $5 million European order in the ground vehicles market. Geographically, Asia grew 16.4% and the Americas increased 0.8%, driven by growth in base orders (those under $5.0 million) in the ground vehicles market. Europe declined 10.8%, primarily driven by timing of wind energy orders in the structures market, partially offset by growth in service orders. Currency translation unfavorably impacted orders by approximately $1.4 million. Test accounted for 82.6% of total Company orders, compared to 81.0% for the Second Quarter of Fiscal 2012.


Table of Contents

Backlog of undelivered orders at the end of the quarter was $271.6 million, a decrease of 2.5% compared backlog of $278.6 million at the end of the Second Quarter of Fiscal 2012. As previously mentioned, Second Quarter of Fiscal 2013 beginning backlog was negatively impacted by a custom order totaling approximately $2.1 million that was cancelled during the First Quarter of Fiscal 2013.

Results of Operations

Second Quarter of Fiscal 2013 Compared to Second Quarter of Fiscal 2012

The following is a comparison of Second Quarter of Fiscal 2013 and Second
Quarter of Fiscal 2012 results of operations for Test, separately identifying
the estimated impact of currency translation (in millions):


                           Three Fiscal                                 Three Fiscal
                           Months Ended            Estimated            Months Ended
                             March 30,      Business      Currency        March 31,
                               2013          Change      Translation        2012
Revenue                    $       113.9   $     12.7   $        (1.7 ) $       102.9
Cost of sales                       72.6         12.5            (1.4 )          61.5
Gross profit                        41.3          0.2            (0.3 )          41.4
                                    36.3 %                                       40.2 %

Operating expenses:
Selling and marketing               15.5          0.2            (0.1 )          15.4
General administrative               9.6         (0.9 )             -            10.5
Research and development             4.2         (0.6 )             -             4.8
Total operating expenses            29.3         (1.3 )          (0.1 )          30.7

Income from operations     $        12.0   $      1.5   $        (0.2 ) $        10.7

Revenue was $113.9 million, an increase of $11.0 million, or 10.7%, compared to revenue of $102.9 million for the Second Quarter of Fiscal 2012. The increase was primarily driven by strong backlog execution, partially offset by an estimated $1.7 million unfavorable impact of currency translation. The backlog conversion rate benefited from the implementation of operational process improvements. These improvements include the implementation of project scheduling and sales and operations planning processes which are used to forecast and schedule engineering and manufacturing labor requirements based on planned future sales.

Gross profit was $41.3 million, relatively flat compared to the Second Quarter of Fiscal 2012. Gross profit as a percentage of revenue was 36.3%, a decrease of 3.9 percentage points from 40.2% for the Second Quarter of Fiscal 2012. Of the reduced gross profit rate, approximately 3 percentage points resulted from an unfavorable mix of lower-margin projects, 1 percentage point resulted from continued investment in productivity and infrastructure initiatives, and 1 percentage point resulted from lower engineering labor utilization caused primarily by increased innovation and training initiatives during the quarter. These decreases were partially offset by leverage on higher volume. As previously mentioned, the productivity and infrastructure initiatives are focused on the building of a scalable enterprise and include investments in the Company's operating system, selling process, and service delivery system. These investments will likely continue for the remainder of fiscal year 2013 and into fiscal year 2014.

Selling and marketing expense was $15.5 million, relatively flat compared to the Second Quarter of Fiscal 2012. Continued investment in sales expansion to drive future revenue growth, primarily comprised of higher compensation and benefits resulting from increased headcount, as well as increased travel and other discretionary expenses to support current sales efforts, was largely offset by lower sales commissions, severance charges of $0.6 million recognized in the Second Quarter of Fiscal 2012, and reduced bad debt expense. Selling and marketing expense as a percentage of revenue was 13.6% on higher volume, compared to 15.0% for the Second Quarter of Fiscal 2012.

General and administrative expense was $9.6 million, a decrease of $0.9 million, or 8.6%, compared to $10.5 million for the Second Quarter of Fiscal 2012. This decrease is primarily driven by a lower level of investment in strategic and compliance initiatives. General and administrative expense as a percentage of revenue was 8.4%, compared to 10.2% for the Second Quarter of Fiscal 2012.


Table of Contents

Research and development expensewas $4.2 million, a decrease of $0.6 million, or 12.5%, compared to $4.8 million for the Second Quarter of Fiscal 2012, due to the timing of planned expenditures. Research and development expense as a percentage of revenue was 3.7%, compared to 4.7% for the Second Quarter of Fiscal 2012.

Income from operationswas $12.0 million, an increase of $1.3 million, or 12.1%, compared to income from operations of $10.7 million for the Second Quarter of Fiscal 2012, primarily driven by decreased operating expenses. Operating income as a percentage of revenue was 10.5%, compared to 10.4% for the Second Quarter of Fiscal 2012.

Sensors Segment


Orders and Backlog

Second Quarter of Fiscal 2013 Compared to Second Quarter of Fiscal 2012

The following is a comparison of Second Quarter of Fiscal 2013 and Second
Quarter of Fiscal 2012 orders for Sensors, separately identifying the estimated
impact of currency translation (in millions):


          Three Fiscal                                  Three Fiscal
          Months Ended            Estimated             Months Ended
           March 30,       Business      Currency        March 31,
              2013          Change      Translation         2012
Orders   $         24.0   $     (1.0 ) $        (0.7 ) $         25.7

Orders totaled $24.0 million, a decrease of $1.7 million, or 6.6%, including an estimated 2.7% unfavorable impact of currency translation, compared to orders of $25.7 million for the Second Quarter of Fiscal 2012. The industrial market was down modestly at 4.0%, primarily driven by weaker demand in the plastics and steel markets in Asia. The mobile hydraulic market was down 15.9%, primarily driven by Original Equipment Manufacturers reducing their inventory levels in response to lower demand in the Americas and Europe. Sensors accounted for 17.4% of total Company orders, compared to 19.0% for the Second Quarter of Fiscal 2012.

Backlog of undelivered orders at the end of the quarter was $15.7 million, relatively flat compared to backlog of $15.8 million at the end of the Second Quarter of Fiscal 2012.

Results of Operations

Second Quarter of Fiscal 2013 Compared to Second Quarter of Fiscal 2012

The following is a comparison of Second Quarter of Fiscal 2013 and Second
Quarter of Fiscal 2012 results of operations for Sensors, separately identifying
the estimated impact of currency translation (in millions):


                            Three Fiscal                                  Three Fiscal
                            Months Ended            Estimated             Months Ended
                             March 30,       Business      Currency        March 31,
                                2013          Change      Translation         2012
Revenue                    $         23.0   $     (2.6 ) $        (0.5 ) $         26.1
Cost of sales                        10.4         (0.5 )          (0.2 )           11.1
Gross profit                         12.6         (2.1 )          (0.3 )           15.0
                                     54.8 %                                        57.4 %

Operating expenses:
Selling and marketing                 4.0          0.3            (0.1 )            3.8
General administrative                3.6          0.3            (0.1 )            3.4
Research and development              1.4          0.1               -              1.3
Total operating expenses              9.0          0.7            (0.2 )            8.5

Income from operations     $          3.6   $     (2.8 ) $        (0.1 ) $          6.5


Table of Contents

Revenue was $23.0 million, a decrease of $3.1 million, or 11.9%, compared to revenue of $26.1 million for the Second Quarter of Fiscal 2012. This decrease was primarily driven by lower order volume, as well as an estimated $0.5 million unfavorable impact of currency translation.

Gross profit was $12.6 million, a decrease of $2.4 million, or 16.0%, compared to gross profit of $15.0 million for the Second Quarter of Fiscal 2012, driven by lower revenue volume. Gross profit as a percentage of revenue was 54.8%, a decrease of 2.6 percentage points from 57.4% for the Second Quarter of Fiscal 2012, driven by reduced leverage on lower volume.

Selling and marketing expensewas $4.0 million, an increase of $0.2 million, or 5.3%, compared to $3.8 million for the Second Quarter of Fiscal 2012. The increase was primarily due to higher compensation and benefits driven by increased headcount to support future sales growth. Selling and marketing expense as a percentage of revenue was 17.4%, compared to 14.6% for the Second Quarter of Fiscal 2012.

General and administrative expensewas $3.6 million, an increase of $0.2 million, or 5.9%, compared to $3.4 million for the Second Quarter of Fiscal 2012. This increase is primarily driven by $0.5 million higher compensation and benefits for senior management transition-related expenses, partially offset by a lower level of investment in strategic and compliance initiatives. General and administrative expense as a percentage of revenue was 15.7%, compared to 13.0% for the Second Quarter of Fiscal 2012.

Research and development expensewas $1.4 million, relatively flat compared to the Second Quarter of Fiscal 2012. Research and development expense as a percentage of revenue was 6.1%, compared to 5.0% for the Second Quarter of Fiscal 2012.

Income from operationswas $3.6 million, a decrease of $2.9 million, or 44.6%, compared to income from operations of $6.5 million for the Second Quarter of Fiscal 2012. The decrease was primarily due to lower gross profit and higher operating expenses. Operating income as a percentage of revenue was 15.7%, compared to 24.9% for the Second Quarter of Fiscal 2012.

Financial Results

Total Company


Orders and Backlog

Six Fiscal Months Ended March 30, 2013 ("First Half of Fiscal 2013") Compared to
Six Fiscal Months Ended March 31, 2012 ("First Half of Fiscal 2012")

The following is a comparison of First Half of Fiscal 2013 and First Half of
Fiscal 2012 orders, separately identifying the estimated impact of currency
translation (in millions):


          Six Fiscal                                   Six Fiscal
. . .
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