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United States |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
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x |
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the quarterly period ended March 29, 2014 |
or
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o |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________ |
Commission File Number 0-2382
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MTS SYSTEMS CORPORATION |
(Exact name of Registrant as specified in its charter) |
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MINNESOTA |
41-0908057 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
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14000 Technology Drive, Eden Prairie, MN 55344 |
(Address of principal executive offices) (Zip Code) |
Registrants telephone number, including area code: (952) 937-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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x Yes |
o No |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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x Yes |
o No |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
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o Yes |
x No |
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The number of shares outstanding of the issuers common stock as of May, 1 2014 was 15,140,402 shares.
REPORT ON FORM 10-Q
FOR THE THREE FISCAL MONTHS ENDED MARCH 29, 2014
INDEX
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Page No. |
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Consolidated Balance Sheets as of March 29, 2014 and September 28, 2013 |
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2 |
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3 |
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4 |
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5 |
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6 - 20 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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21 - 33 |
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34 |
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34 |
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34 |
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35 |
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35 |
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36 |
1
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
MTS SYSTEMS CORPORATION
Consolidated Balance Sheets
(unaudited - in thousands except per share data)
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March
29, |
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September
28, |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
43,720 |
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$ |
48,333 |
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Accounts receivable, net of allowances for doubtful accounts of $2,421 and $1,998, respectively |
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120,030 |
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102,860 |
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Unbilled accounts receivable |
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63,933 |
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75,988 |
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Inventories |
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79,407 |
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77,989 |
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Prepaid expenses and other current assets |
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15,178 |
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12,837 |
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Deferred income taxes |
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11,353 |
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11,256 |
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Total current assets |
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333,621 |
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329,263 |
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Property and equipment, net |
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81,304 |
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78,399 |
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Goodwill |
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16,469 |
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16,624 |
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Other intangible assets, net |
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17,656 |
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19,656 |
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Other assets |
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3,307 |
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4,539 |
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Deferred income taxes |
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3,198 |
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2,796 |
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Total Assets |
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$ |
455,555 |
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$ |
451,277 |
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LIABILITIES AND SHAREHOLDERS INVESTMENT |
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Current Liabilities: |
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Short-term borrowings |
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$ |
45,000 |
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$ |
35,000 |
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Accounts payable |
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28,224 |
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29,816 |
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Accrued payroll and related costs |
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30,236 |
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33,528 |
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Advance payments from customers |
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49,967 |
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44,929 |
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Accrued warranty costs |
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5,120 |
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4,694 |
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Accrued income taxes |
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3,424 |
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3,350 |
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Deferred income taxes |
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3,060 |
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3,037 |
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Other accrued liabilities |
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19,457 |
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19,809 |
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Total current liabilities |
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184,488 |
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174,163 |
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Deferred income taxes |
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8,014 |
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8,011 |
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Non-current accrued income taxes |
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4,606 |
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4,311 |
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Defined benefit pension plan obligation |
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3,971 |
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4,434 |
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Other long-term liabilities |
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6,392 |
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3,821 |
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Total Liabilities |
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207,471 |
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194,740 |
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Shareholders Investment: |
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Common stock, $0.25 par; 64,000 shares authorized: 15,180 and 15,408 shares issued and outstanding as of March 29, 2014 and September 28, 2013, respectively |
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3,795 |
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3,852 |
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Retained earnings |
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232,024 |
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240,348 |
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Accumulated other comprehensive income |
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12,265 |
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12,337 |
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Total Shareholders Investment |
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248,084 |
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256,537 |
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Total Liabilities and Shareholders Investment |
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$ |
455,555 |
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$ |
451,277 |
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The accompanying condensed notes to consolidated financial statements are an integral part of these statements.
2
MTS SYSTEMS CORPORATION
Consolidated Statements of Income
(unaudited - in thousands, except per share data)
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Three Fiscal Months Ended |
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Six Fiscal Months Ended |
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March
29, |
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March
30, |
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March
29, |
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March
30, |
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Revenue: |
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Product |
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$ |
116,681 |
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$ |
119,793 |
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$ |
237,840 |
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$ |
244,414 |
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Service |
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20,662 |
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17,124 |
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37,913 |
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35,171 |
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Total revenue |
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137,343 |
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136,917 |
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275,753 |
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279,585 |
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Cost of sales: |
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Product |
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69,380 |
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73,559 |
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144,005 |
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149,519 |
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Service |
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12,429 |
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9,453 |
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21,675 |
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19,559 |
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Total cost of sales |
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81,809 |
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83,012 |
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165,680 |
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169,078 |
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Gross profit |
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55,534 |
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53,905 |
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110,073 |
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110,507 |
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Operating expenses: |
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Selling and marketing |
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22,411 |
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19,519 |
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43,894 |
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38,698 |
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General and administrative |
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13,978 |
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13,175 |
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27,184 |
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25,489 |
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Research and development |
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6,791 |
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5,588 |
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12,494 |
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10,640 |
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Total operating expenses |
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43,180 |
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38,282 |
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83,572 |
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74,827 |
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Income from operations |
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12,354 |
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15,623 |
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26,501 |
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35,680 |
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Interest expense, net |
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(205 |
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(150 |
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(365 |
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(144 |
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Other expense, net |
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(211 |
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(954 |
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(503 |
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(502 |
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Income before income taxes |
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11,938 |
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14,519 |
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25,633 |
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35,034 |
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Provision for income taxes |
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4,159 |
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3,458 |
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8,709 |
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10,190 |
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Net income |
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$ |
7,779 |
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$ |
11,061 |
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$ |
16,924 |
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$ |
24,844 |
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Earnings per share: |
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Basic- |
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Earnings per share |
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$ |
0.51 |
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$ |
0.70 |
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$ |
1.11 |
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$ |
1.58 |
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Weighted average number of common shares outstanding - basic |
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15,245 |
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15,723 |
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15,299 |
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15,696 |
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Diluted- |
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Earnings per share |
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$ |
0.50 |
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$ |
0.69 |
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$ |
1.09 |
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$ |
1.56 |
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Weighted average number of common shares outstanding - diluted |
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15,434 |
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15,928 |
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15,487 |
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15,887 |
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Dividends declared per share |
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$ |
0.30 |
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$ |
0.30 |
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$ |
0.60 |
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$ |
0.60 |
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The accompanying condensed notes to consolidated financial statements are an integral part of these statements.
3
MTS SYSTEMS CORPORATION
Consolidated Statements of Comprehensive Income
(unaudited - in thousands)
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Three Fiscal Months Ended |
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Six Fiscal Months Ended |
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March
29, |
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March
30, |
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March
29, |
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March
30, |
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Net income |
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$ |
7,779 |
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$ |
11,061 |
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$ |
16,924 |
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$ |
24,844 |
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Other comprehensive loss, net of tax: |
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Foreign currency translation adjustments |
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(1,029 |
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(3,584 |
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(69 |
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(3,383 |
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Derivative instruments: |
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Unrealized net (loss) gain |
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(121 |
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1,435 |
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(94 |
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2,239 |
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Net gain reclassified to earnings |
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(737 |
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(581 |
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(418 |
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(480 |
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Defined benefit pension plan: |
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Unrealized net (loss) gain |
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(12 |
) |
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(122 |
) |
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421 |
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30 |
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Net loss reclassified to earnings |
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82 |
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91 |
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163 |
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181 |
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Currency exchange rate change |
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11 |
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180 |
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(75 |
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46 |
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Other comprehensive loss |
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(1,806 |
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(2,581 |
) |
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(72 |
) |
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(1,367 |
) |
Comprehensive income |
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$ |
5,973 |
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$ |
8,480 |
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$ |
16,852 |
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$ |
23,477 |
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The accompanying condensed notes to consolidated financial statements are an integral part of these statements.
4
MTS SYSTEMS CORPORATION
Consolidated Statements of Cash Flows
(unaudited - in thousands)
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Six Fiscal Months Ended |
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March
29, |
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March
30, |
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Cash flows from operating activities: |
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Net income |
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$ |
16,924 |
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$ |
24,844 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Stock-based compensation |
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2,469 |
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2,153 |
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Excess tax benefits for stock-based compensation |
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(917 |
) |
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(568 |
) |
Net periodic pension benefit cost |
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620 |
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|
643 |
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Depreciation and amortization |
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9,037 |
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7,712 |
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Deferred income taxes |
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(527 |
) |
|
932 |
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Bad debt provision (recovery) |
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453 |
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(239 |
) |
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Changes in operating assets and liabilities: |
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Accounts and unbilled accounts receivable |
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(5,178 |
) |
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(29,155 |
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Inventories |
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(1,123 |
) |
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(7,061 |
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Prepaid expenses |
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(1,391 |
) |
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(2,144 |
) |
Accounts payable |
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(1,312 |
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(4,801 |
) |
Accrued payroll and related costs |
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(2,035 |
) |
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(3,443 |
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Advance payments from customers |
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5,015 |
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(2,410 |
) |
Accrued warranty costs |
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408 |
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|
471 |
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Other assets and liabilities |
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1,680 |
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(2,472 |
) |
Net cash provided by (used in) operating activities |
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24,123 |
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(15,538 |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(10,494 |
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(14,420 |
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Cash flows from financing activities: |
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Net receipts under short-term borrowings |
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10,000 |
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4,717 |
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Excess tax benefits from stock-based compensation |
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|
917 |
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|
568 |
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Cash dividends |
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(9,238 |
) |
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(9,670 |
) |
Proceeds from exercise of stock options and employee stock purchase plan |
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3,477 |
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3,429 |
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Payments to purchase and retire common stock |
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(23,322 |
) |
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(26 |
) |
Net cash used in financing activities |
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(18,166 |
) |
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(982 |
) |
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Effect of exchange rate on changes in cash |
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(76 |
) |
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(2,300 |
) |
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Net decrease in cash and cash equivalents |
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(4,613 |
) |
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(33,240 |
) |
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Cash and cash equivalents, at beginning of period |
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48,333 |
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|
79,852 |
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Cash and cash equivalents, at end of period |
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$ |
43,720 |
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$ |
46,612 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for - |
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Interest |
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$ |
202 |
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$ |
36 |
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Income taxes |
|
|
9,854 |
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|
12,383 |
|
Non-cash financing activities: |
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Dividends declared not yet paid |
|
$ |
4,476 |
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$ |
4,633 |
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The accompanying condensed notes to consolidated financial statements are an integral part of these statements.
5
CONDENSED NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of MTS Systems Corporation and its wholly owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated.
The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in these consolidated financial statements includes normal recurring adjustments and reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of such financial statements. The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and GAAP requires the Company to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. The accompanying consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 2013 filed with the SEC. Interim results of operations for the three and six fiscal months ended March 29, 2014 are not necessarily indicative of the results to be expected for the full year.
Summary of Significant Accounting Policies
The Company believes that of its significant accounting policies, the following are particularly important to the portrayal of the Companys results of operations and financial position and may require the application of a higher level of judgment by the Companys management and, as a result, are subject to an inherent degree of uncertainty.
Revenue Recognition. The Company recognizes revenue on a sales arrangement when it is realized or realizable and earned, which occurs when all of the following criteria have been met: persuasive evidence of an arrangement exists; delivery and title transfer has occurred or services have been rendered; the sales price is fixed and determinable; collectability is reasonably assured; and all significant obligations to the customer have been fulfilled.
Orders that are manufactured and delivered in less than six months with routine installations and no special acceptance protocols may contain multiple elements for revenue recognition purposes. The Company considers each deliverable that provides value to the customer on a standalone basis a separable element. Separable elements in these arrangements may include the design and manufacture of hardware and essential software, installation services, training and/or post contract software maintenance and support. The Company initially allocates consideration to each separable element using the relative selling price method. Selling prices are determined by the Company based on either vendor-specific objective evidence (VSOE) (the actual selling prices of similar products and services sold on a standalone basis) or, in the absence of VSOE, the Companys best estimate of the selling price. Factors considered by the Company in determining estimated selling prices for applicable elements generally include overall economic conditions, customer demand, costs incurred by the Company to provide the deliverable, as well as the Companys historical pricing practices. Under these arrangements, revenue associated with each delivered element is recognized in an amount equal to the lesser of the consideration initially allocated to the delivered element or the amount for which payment is not deemed contingent upon future delivery of other elements in the arrangement. Under arrangements where special acceptance protocols exist, installation services and training are not considered separable. Accordingly, revenue for the entire arrangement is recognized upon the completion of installation, training and fulfillment of any other significant obligations specific to the terms of the arrangement. Arrangements that do not contain any separable elements are typically recognized when the products are shipped and title has transferred to the customer.
Certain contractual arrangements require longer production periods, generally longer than six months (long-term contracts), and may contain non-routine installations and special acceptance protocols. These arrangements often include hardware and essential software, installation services, training and support. Long-term contractual arrangements involving essential software typically include significant production, modification, and customization. For long-term arrangements with essential software and all other long-term arrangements with complex installations and/or unusual acceptance protocols, revenue is recognized using the percentage-of-completion method, based on the cost incurred to-date relative to estimated total cost of the contract. Elements of an arrangement that do not separately fall within the scope of the percentage of completion method (e.g., training and post-contract software maintenance and support) are recognized as the service is provided in amounts determined based on VSOE, or in the absence of VSOE, the Companys best estimate of the selling price.
6
Under the terms of the Companys long-term contracts, revenue recognized using the percentage-of-completion method may not, in certain circumstances, be invoiced until completion of contractual milestones, upon shipment of the equipment, or upon installation and acceptance by the customer. Unbilled amounts for these contracts appear in the Consolidated Balance Sheets as Unbilled Accounts Receivable.
Revenue from arrangements for services such as maintenance, repair, consulting and technical support are recognized either as the service is performed or ratably over the defined contractual period for service maintenance contracts. Revenue from post contract software maintenance and support services is recognized ratably over the defined contractual period of the maintenance agreement.
The Companys sales arrangements typically do not include specific performance-, cancellation-, termination-, or refund-type provisions. In the event a customer cancels a contractual arrangement, the Company would typically be entitled to receive reimbursement from the customer for actual costs incurred under the arrangement plus a reasonable margin.
Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Inventories. Inventories consist of material, labor and overhead costs and are stated at the lower of cost or market, determined under the first-in, first-out accounting method. Inventories at March 29, 2014 and September 28, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
March 29, |
|
September 28, |
|
||
|
|
(expressed in thousands) |
|
||||
Customer projects in various stages of completion |
|
$ |
18,003 |
|
$ |
19,194 |
|
Components, assemblies and parts |
|
|
61,404 |
|
|
58,795 |
|
Total |
|
$ |
79,407 |
|
$ |
77,989 |
|
Software Development Costs. The Company capitalizes certain software development costs related to software to be sold, leased, or otherwise marketed. Capitalized software development costs include purchased materials and services, salary and benefits of the Companys development and technical support staff, and other costs associated with the development of new products and services. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. Based on the Companys product development process, technological feasibility is generally established once product and detailed program designs have been completed, uncertainties related to high-risk development issues have been resolved through coding and testing, and the Company has established that the necessary skills, hardware, and software technology are available for production of the product. Once a software product is available for general release to the public, capitalized development costs associated with that product will begin to be amortized to cost of sales over the products estimated economic life, using the greater of straight-line or a method that results in cost recognition in future periods that is consistent with the anticipated timing of product revenue recognition.
The Company’s capitalized software development costs are subject to an ongoing assessment of recoverability, which is impacted by estimates and assumptions of future revenues and expenses for these software products, as well as other factors such as changes in product technologies. Any portion of unamortized capitalized software development costs that are determined to be in excess of net realizable value will be expensed in the period such a determination is made. Amortization expense for software development costs for each of the three fiscal months ended March 29, 2014 and March 30, 2013 was $0.7 million. Amortization expense for software development costs for each of the six fiscal months ended March 29, 2014 and March 30, 2013 was $1.4 million. See Note 4 in the Condensed Notes to Consolidated Financial Statements for additional information on capitalized software development costs.
Impairment of Long-Lived Assets. The Company reviews the carrying value of long-lived assets or asset groups, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, the Company recognizes an asset impairment charge against operations. The amount of the impairment loss recorded is the amount by which the carrying value of the impaired asset or asset group exceeds its fair value.
7
Goodwill. Goodwill represents the excess of acquisition costs over the fair value of the net assets of businesses acquired. Goodwill is not amortized, but instead tested at least annually for impairment. Goodwill is also tested for impairment as changes in circumstances occur indicating that the carrying value may not be recoverable. Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired.
Warranty Obligations. Sales of the Company’s products and systems are subject to limited warranty obligations that are included in customer contracts. For sales that include installation services, warranty obligations typically extend for a period of twelve to twenty-four months from the date of either shipment or acceptance. Product obligations typically extend for a period of twelve to twenty-four months from the date of purchase. In general, under the terms of these warranties, the Company is obligated to repair or replace any components or assemblies it deems defective due to workmanship or materials. The Company reserves the right to reject warranty claims where it determines that failure is due to normal wear, customer modifications, improper maintenance, or misuse. The Company records general warranty provisions based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty claims experience over the preceding twelve-month period. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. In addition, warranty provisions are also recognized for certain nonrecurring product claims that are individually significant. Warranty provisions and claims for the three and six fiscal months ended March 29, 2014 and March 30, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||
|
|
March 29, |
|
March 30, |
|
March 29, |
|
March 30, |
|
||||
|
|
(expressed in thousands) |
|
||||||||||
Beginning balance |
|
$ |
5,308 |
|
$ |
4,423 |
|
$ |
4,694 |
|
$ |
3,984 |
|
Warranty provisions |
|
|
1,801 |
|
|
1,454 |
|
|
3,964 |
|
|
3,146 |
|
Warranty claims |
|
|
(1,826 |
) |
|
(1,544 |
) |
|
(3,393 |
) |
|
(2,826 |
) |
Adjustments to preexisting warranties |
|
|
(162 |
) |
|
151 |
|
|
(162 |
) |
|
151 |
|
Currency translation |
|
|
(1 |
) |
|
(46 |
) |
|
17 |
|
|
(17 |
) |
Ending balance |
|
$ |
5,120 |
|
$ |
4,438 |
|
$ |
5,120 |
|
$ |
4,438 |
|
Income Taxes. The Company records a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of its deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with managements expectations could have a material impact on the Companys financial condition and operating results. See Note 11 in the Condensed Notes to Consolidated Financial Statements for additional information on income taxes.
Derivative Financial Instruments. The Companys results of operations could be materially impacted by changes in foreign currency exchange rates, as well as changes in interest rates on its floating rate indebtedness. In an effort to manage exposure to these risks, the Company periodically enters into forward and option currency exchange contracts, interest rate swaps and forward interest rate swaps. Because the market value of these hedging contracts is derived from current market rates, they are classified as derivative financial instruments. The Company does not use derivatives for speculative or trading purposes. The derivative contracts contain credit risk to the extent that the Companys bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality. For derivative instruments executed under master netting arrangements, the Company has the contractual right to offset fair value amounts recognized for the right to reclaim cash collateral with obligations to return cash collateral. The Company does not offset fair value amounts recognized on these derivative instruments. At both March 29, 2014 and March 30, 2013, the Company did not have any foreign exchange contracts with credit-risk related contingent features. See Note 7 in the Condensed Notes to Consolidated Financial Statements for additional information on derivatives and hedging activities.
8
2. Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), which requires an entity to disclose information about derivatives subject to enforceable master netting arrangements, including rights of offset, to enable users of its financial statements to understand the effect of those arrangements on its financial position. Subsequently, in January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”), which clarifies the instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. The Company adopted ASU 2011-11 and ASU 2013-01 during the first quarter of fiscal year 2014, and the presentation and disclosure requirements were applied retrospectively. Other than the enhanced disclosures, the adoption of these pronouncements did not impact the Company’s financial position, results of operations or cash flows.
3. Stock-Based Compensation
The Company compensates officers, directors, and employees with stock-based compensation under the stock plan approved by the Company’s shareholders in 2011, and administered under the supervision of the Company’s Board of Directors. Prior to the fiscal year ended September 28, 2013, the Company’s historical practice was to grant an annual Company-wide award of stock options and restricted stock units to officers and employees in July. During the fiscal year ended September 28, 2013, in order to align the grants with a review of individual and Company performance, the timing of the Company-wide award was changed from July to December. As a result, during the first quarter of fiscal year 2014, the Company granted an award of approximately 331,000 stock options and approximately 70,000 restricted stock units to officers and employees Company-wide. The aggregate value of this award increased proportionately, compared to a normal annual Company-wide award, in order to compensate officers and employees for the delayed timing of the grant. The stock options vest proportionally on the first three anniversaries of the grant date and expire seven years from the grant date. The restricted stock units vest proportionally on the first three anniversaries of the grant date.
The stock options were granted at an exercise price equal to the closing market price of the Companys stock on the date of grant. The fair value of stock options granted has been estimated as of the date of grant using the multiple option form of the Black-Scholes valuation model, based on the grant price and assumptions regarding the expected grant life, stock price volatility, dividends, and risk-free interest rates. Each vesting period of an option award is valued separately, with this value being recognized as expense evenly over the vesting period. The weighted average per share fair value of the stock options granted under the Company-wide award during the first quarter of fiscal year 2014 was $13.97. The weighted average assumptions used to determine the fair value of these stock options were as follows:
|
|
|
|
|
Expected life (in years) |
|
|
4.0 |
|
Risk-free interest rate |
|
|
1.0 |
% |
Expected volatility |
|
|
31.2 |
% |
Dividend yield |
|
|
1.8 |
% |
The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. The Company estimates stock price volatility based on a historical weekly price observation. The dividend yield assumption is based on the annualized current dividend divided by the share price on the grant date.
The weighted average per unit fair value of the restricted stock units granted under the Company-wide award during the first quarter of fiscal year 2014 was $62.52, representing the market value of the Companys shares at the date of grant minus the present value of estimated forgone dividends over the vesting period. The proportionate value of restricted stock units associated with each vesting period is allocated to expense evenly over the vesting period.
9
4. Capital Assets
Property and Equipment
Property and equipment at March 29, 2014 and September
28, 2013 consists of the following:
|
|
|
|
|
|
|
|
|
|
March 29, |
|
September 28, |
|
||
|
|
(expressed in thousands) |
|
||||
Land and improvements |
|
$ |
1,713 |
|
$ |
1,713 |
|
Buildings and improvements |
|
|
53,886 |
|
|
54,823 |
|
Machinery and equipment |
|
|
154,026 |
|
|
145,785 |
|
Total |
|
|
209,625 |
|
|
202,321 |
|
Less accumulated depreciation |
|
|
(128,321 |
) |
|
(123,922 |
) |
Property and equipment, net |
|
$ |
81,304 |
|
$ |
78,399 |
|
Goodwill
Goodwill at March 29, 2014 and September 28, 2013 was $16.5 million and $16.6 million, respectively. The change in goodwill during the six fiscal months ended March 29, 2014 was due to currency translation.
Other Intangible Assets
Other intangible assets at March 29, 2014 and
September 28, 2013 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014 |
|
||||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Weighted |
|
||||
|
|
(dollar amounts expressed in thousands) |
|
||||||||||
Software development costs |
|
$ |
15,859 |
|
$ |
(10,264 |
) |
$ |
5,595 |
|
|
5.7 |
|
Patents |
|
|
10,194 |
|
|
(4,001 |
) |
|
6,193 |
|
|
15.3 |
|
Trademarks and trade names |
|
|
6,085 |
|
|
(1,335 |
) |
|
4,750 |
|
|
30.2 |
|
Land-use rights |
|
|
1,256 |
|
|
(138 |
) |
|
1,118 |
|
|
47.8 |
|
Total |
|
$ |
33,394 |
|
$ |
(15,738 |
) |
$ |
17,656 |
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013 |
|
||||||||||
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Weighted |
|
||||
|
|
(dollar amounts expressed in thousands) |
|
||||||||||
Software development costs |
|
$ |
15,860 |
|
$ |
(8,885 |
) |
$ |
6,975 |
|
|
5.7 |
|
Patents |
|
|
10,308 |
|
|
(3,676 |
) |
|
6,632 |
|
|
15.3 |
|
Trademarks and trade names |
|
|
6,149 |
|
|
(1,244 |
) |
|
4,905 |
|
|
30.2 |
|
Land-use rights |
|
|
1,270 |
|
|
(126 |
) |
|
1,144 |
|
|
47.8 |
|
Total |
|
$ |
33,587 |
|
$ |
(13,931 |
) |
$ |
19,656 |
|
|
14.3 |
|
Amortization expense recognized during each of the three fiscal months ended March 29, 2014 and March 30, 2013 was $0.9 million. Amortization expense recognized during each of the six fiscal months ended March 29, 2014 and March 30, 2013 was $1.9 million.
10
5. Earnings Per Common Share
Basic earnings per share are computed by dividing net earnings by the daily weighted average number of common shares outstanding during the applicable periods. Diluted earnings per share include the potentially dilutive effect of common shares issued in connection with outstanding stock-based compensation awards using the treasury stock method. Under the treasury stock method, shares associated with certain stock options have been excluded from the diluted weighted average shares outstanding calculation because the exercise of those options would lead to a net reduction in common shares outstanding. As a result, stock options to acquire 0.3 million and less than 0.1 million weighted common shares have been excluded from diluted weighted shares outstanding for the three fiscal months ended March 29, 2014 and March 30, 2013, respectively. Stock options to acquire 0.2 million and less than 0.1 million weighted common shares have been excluded from diluted weighted shares outstanding for the six fiscal months ended March 29, 2014 and March 30, 2013, respectively. The potentially dilutive effect of common shares issued in connection with outstanding stock options is determined based on net income. A reconciliation of these amounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||
|
|
March
29, |
|
March
30, |
|
March
29, |
|
March
30, |
|
||||
|
|
(expressed in thousands, except per share data) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,779 |
|
$ |
11,061 |
|
$ |
16,924 |
|
$ |
24,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
15,245 |
|
|
15,723 |
|
|
15,299 |
|
|
15,696 |
|
Dilutive potential common shares |
|
|
189 |
|
|
205 |
|
|
188 |
|
|
191 |
|
Total diluted weighted shares outstanding |
|
|
15,434 |
|
|
15,928 |
|
|
15,487 |
|
|
15,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.51 |
|
$ |
0.70 |
|
$ |
1.11 |
|
$ |
1.58 |
|
Diluted |
|
$ |
0.50 |
|
$ |
0.69 |
|
$ |
1.09 |
|
$ |
1.56 |
|
6. Business Segment Information
The Companys Chief Executive Officer and management regularly review financial information for the Companys two operating segments, Test and Sensors. Test provides testing equipment, systems, and services to the ground vehicles, materials and structures markets. Sensors provides high-performance position sensors for a variety of industrial and mobile hydraulic applications.
The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements found in the Companys Annual Report on Form 10-K for the fiscal year ended September 28, 2013. In evaluating each segments performance, management focuses on income from operations. This measure excludes interest income and expense, income taxes and other non-operating items. Corporate expenses, including costs associated with various support functions such as human resources, information technology, finance and accounting, and general and administrative costs, are allocated to the reportable segments primarily on the basis of revenue.
Financial information by reportable segment for the three and six fiscal months ended March 29, 2014 and March 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||
|
|
March 29, |
|
March 30, |
|
March 29, |
|
March 30, |
|
||||
|
|
(expressed in thousands) |
|
||||||||||
Revenue by Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Test |
|
$ |
110,885 |
|
$ |
113,943 |
|
$ |
224,408 |
|
$ |
235,046 |
|
Sensors |
|
|
26,458 |
|
|
22,974 |
|
|
51,345 |
|
|
44,539 |
|
Total revenue |
|
$ |
137,343 |
|
$ |
136,917 |
|
$ |
275,753 |
|
$ |
279,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations by Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Test |
|
$ |
7,741 |
|
$ |
12,006 |
|
$ |
17,582 |
|
$ |
28,397 |
|
Sensors |
|
|
4,613 |
|
|
3,617 |
|
|
8,919 |
|
|
7,283 |
|
Total income from operations |
|
$ |
12,354 |
|
$ |
15,623 |
|
$ |
26,501 |
|
$ |
35,680 |
|
11
7. Derivative Instruments and Hedging Activities
The Company uses foreign currency derivatives to hedge against foreign currency exchange risk. Some derivatives are designated as cash flow hedges and qualify as hedging instruments pursuant to Accounting Standards Codification (ASC) 815; others are accounted for and reported under the guidance of ASC 830-20-10. Regardless of the designation for accounting purposes, the Company believes that all of its derivative instruments are hedges of transactional risk exposures. The fair value of the Companys outstanding designated and undesignated derivative assets and liabilities are reported in the March 29, 2014 and September 28, 2013 Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
March 29, 2014 |
|
||||
|
|
Prepaid Expenses |
|
Other Accrued |
|
||
Designated hedge derivatives: |
|
(expressed in thousands) |
|
||||
Cash flow hedges |
|
$ |
119 |
|
$ |
383 |
|
Total designated hedge derivatives |
|
|
119 |
|
|
383 |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges: |
|
|
|
|
|
|
|
Balance sheet derivatives |
|
|
139 |
|
|
|
|
Total hedge and other derivatives |
|
$ |
258 |
|
$ |
383 |
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013 |
|
||||
|
|
Prepaid Expenses |
|
Other Accrued |
|
||
Designated hedge derivatives: |
|
(expressed in thousands) |
|
||||
Cash flow hedges |
|
$ |
1,091 |
|
$ |
1,307 |
|
Total designated hedge derivatives |
|
|
1,091 |
|
|
1,307 |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges: |
|
|
|
|
|
|
|
Balance sheet derivatives |
|
|
|
|
|
167 |
|
Total hedge and other derivatives |
|
$ |
1,091 |
|
$ |
1,474 |
|
12
A reconciliation of the net fair value of foreign exchange cash flow hedge assets and liabilities subject to master netting arrangements that are recorded in the March 29, 2014 and September 28, 2013 Consolidated Balance Sheets to the net fair value that could have been reported in the respective Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014 |
|
||||||||||||||||||||||||||||||||||
Assets |
|
Liabilities |
|
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset |
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
Gross |
|
Net |
|
Derivatives |
|
Cash |
|
Net |
|
Gross |
|
Gross |
|
Net |
|
Derivatives |
|
Cash |
|
Net |
|
||||||||||||
(expressed in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ |
119 |
|
$ |
|
|
$ |
119 |
|
$ |
(78 |
) |
$ |
|
|
$ |
41 |
|
$ |
383 |
|
$ |
|
|
$ |
383 |
|
$ |
(78 |
) |
$ |
|
|
$ |
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013 |
|
||||||||||||||||||||||||||||||||||
Assets |
|
Liabilities |
|
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts not Offset |
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
Gross |
|
Net |
|
Derivatives |
|
Cash |
|
Net |
|
Gross |
|
Gross |
|
Net |
|
Derivatives |
|
Cash |
|
Net |
|
||||||||||||
(expressed in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ |
1,091 |
|
$ |
|
|
$ |
1,091 |
|
$ |
(502 |
) |
$ |
|
|
$ |
589 |
|
$ |
1,307 |
|
$ |
|
|
$ |
1,307 |
|
$ |
(502 |
) |
$ |
|
|
$ |
805 |
|
|
|
|
|
(1) |
Net fair value of foreign exchange cash flow hedge assets that could have been reported in the Consolidated Balance Sheet. |
|
(2) |
Net fair value of foreign exchange cash flow liabilities that could have been reported in the Consolidated Balance Sheet. |
Cash Flow Hedging Currency Risks
Currency exchange contracts utilized to maintain the
functional currency value of expected financial transactions denominated in
foreign currencies are designated as cash flow hedges. Qualifying gains and
losses related to changes in the market value of these contracts are reported
as a component of Accumulated Other Comprehensive Income (AOCI) within
Shareholders Investment on the Consolidated Balance Sheets and reclassified
into earnings in the same period during which the underlying hedged transaction
affects earnings. The effective portion of the cash flow hedges represents the
change in fair value of the hedge that offsets the change in the functional
currency value of the hedged item. Each month, the Company assesses whether its
currency exchange contracts are effective and, when a contract is determined to
be no longer effective as a hedge, the Company discontinues hedge accounting
prospectively. Subsequent changes in the market value of ineffective currency
exchange contracts are recognized as an increase or decrease in Revenue on the
Consolidated Statement of Income, because that is the same line item upon which
the underlying hedged transaction is reported.
At March 29, 2014 and March 30, 2013, the Company had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $36.5 million and $46.2 million, respectively. Upon netting offsetting contracts to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding was $32.2 million and $42.8 million at March 29, 2014 and March 30, 2013, respectively. At March 29, 2014, the net market value of the foreign currency exchange contracts was a net liability of $0.3 million, consisting of $0.4 million in liabilities and $0.1 million in assets. At March 30, 2013, the net market value of the foreign currency exchange contracts was a net asset of $1.9 million, consisting of $2.0 million in assets and $0.1 million in liabilities.
13
The pretax amounts recognized in AOCI on currency exchange contracts for the three and six fiscal months ended March 29, 2014 and March 30, 2013, including gains (losses) reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (“OCI”), are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||
|
|
March
29, |
|
March
30, |
|
March
29, |
|
March
30, |
|
||||
|
|
(expressed in thousands) |
|
||||||||||
Beginning unrealized net gain (loss) in AOCI |
|
$ |
1,298 |
|
$ |
787 |
|
$ |
754 |
|
$ |
(648 |
) |
Net gain reclassified into Revenue (effective portion) |
|
|
(1,163 |
) |
|
(920 |
) |
|
(660 |
) |
|
(760 |
) |
Net (loss) gain recognized in OCI (effective portion) |
|
|
(190 |
) |
|
2,271 |
|
|
(149 |
) |
|
3,546 |
|
Ending unrealized net (loss) gain in AOCI |
|
$ |
(55 |
) |
$ |
2,138 |
|
$ |
(55 |
) |
$ |
2,138 |
|
The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was less than $0.1 million in each of the three and six fiscal months ended March 29, 2014 and March 30, 2013. At March 29, 2014 and March 30, 2013, the amount projected to be reclassified from AOCI into earnings in the next 12 months was a net loss of $0.1 million and a net gain of $2.1 million, respectively. The maximum remaining maturity of any forward or optional contract at March 29, 2014 and March 30, 2013 was 1.5 years and 1.3 years, respectively.
Foreign Currency Balance Sheet Derivatives
The Company also uses foreign currency derivative
contracts to maintain the functional currency value of monetary assets and
liabilities denominated in non-functional foreign currencies. The gains and
losses related to the changes in the market value of these derivative contracts
are included in Other Expense, net in the Consolidated Statement of Income.
At March 29, 2014 and March 30, 2013, the Company had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of $71.2 million and $35.9 million, respectively. Upon netting offsetting contracts by counterparty banks to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding at March 29, 2014 and March 30, 2013 was $23.9 million and $11.3 million, respectively. At March 29, 2014, the net market value of the foreign exchange balance sheet derivative contracts was a net asset of $0.1 million. At March 30, 2013, the net market value of the foreign exchange balance sheet derivative contracts was a net liability of less than $0.1 million.
The net losses recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts for the three and six fiscal months ended March 29, 2014 and March 30, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||
|
|
March
29, |
|
March
30, |
|
March
29, |
|
March
30, |
|
||||
|
|
(expressed in thousands) |
|
||||||||||
Net loss recognized in Other expense, net |
|
$ |
(143 |
) |
$ |
(218 |
) |
$ |
(283 |
) |
$ |
(272 |
) |
8. Fair Value Measurements
In determining the fair value of financial assets and liabilities, the Company currently utilizes market data or other assumptions that it believes market participants would use in pricing the asset or liability in the principal or most advantageous market, and adjusts for non-performance and/or other risk associated with the Company as well as counterparties, as appropriate. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
|
|
|
Level 1 Inputs: Unadjusted quoted prices that are available in active markets for identical assets or liabilities accessible to the Company at the measurement date. |
|
|
|
Level 2 Inputs: Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
|
|
|
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
14
The hierarchy gives the highest priority to Level 1, because this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3.
Financial Instruments Measured at Fair Value
on a Recurring Basis
As of March 29, 2014 and September 28, 2013, financial
assets and liabilities subject to fair value measurements on a recurring basis
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
(expressed in thousands) |
|
||||||||||
Currency contracts(1) |
|
$ |
|
|
$ |
258 |
|
$ |
|
|
$ |
258 |
|
Total assets |
|
$ |
|
|
$ |
258 |
|
$ |
|
|
$ |
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts(1) |
|
$ |
|
|
$ |
383 |
|
$ |
|
|
$ |
383 |
|
Total liabilities |
|
$ |
|
|
$ |
383 |
|
$ |
|
|
$ |
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2013 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Assets: |
|
(expressed in thousands) |
|
||||||||||
Currency contracts(1) |
|
$ |
|
|
$ |
1,091 |
|
$ |
|
|
$ |
1,091 |
|
Total assets |
|
$ |
|
|
$ |
1,091 |
|
$ |
|
|
$ |
1,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts(1) |
|
$ |
|
|
$ |
1,474 |
|
$ |
|
|
$ |
1,474 |
|
Total liabilities |
|
$ |
|
|
$ |
1,474 |
|
$ |
|
|
$ |
1,474 |
|
|
|
|
|
(1) |
Based on observable market transactions of spot currency rates and forward currency rates on equivalently termed instruments. |
Nonfinancial Assets Measured at Fair Value on
a Nonrecurring Basis
The Companys goodwill, intangible assets and other
long-lived assets are nonfinancial assets that were acquired either as part of
a business combination, individually or with a group of other assets. These
nonfinancial assets were initially, and are currently, measured and recognized
at amounts equal to the fair value determined as of the date of acquisition.
Periodically, these nonfinancial assets are tested for impairment, by comparing
their respective carrying values to the estimated fair value of the reporting
unit or asset group in which they reside. In the event any of these
nonfinancial assets were to become impaired, the Company would recognize an
impairment loss equal to the amount by which the carrying value of the
reporting unit, impaired asset or asset group exceeds its estimated fair value.
Fair value measurements of reporting units are estimated using an income
approach involving discounted or undiscounted cash flow models that contain
certain Level 3 inputs requiring management judgment, including projections of
economic conditions and customer demand, revenue and margins, changes in
competition, operating costs, working capital requirements, and new product
introductions. Fair value measurements of the reporting units associated with
the Companys goodwill balances are estimated at least annually in the fourth
quarter of each fiscal year for purposes of impairment testing. Fair value
measurements associated with the Companys intangible assets and other long-lived
assets are estimated when events or changes in circumstances such as market
value, asset utilization, physical change, legal factors, or other matters
indicate that the carrying value may not be recoverable.
Financial Instruments not Measured at Fair Value
Certain of the Companys financial instruments are not measured at fair value
but nevertheless are recorded at carrying amounts approximating fair value,
based on their short-term nature or variable interest rate. These financial
instruments include cash and cash equivalents, accounts receivable, accounts
payable and short-term borrowings.
15
9. Other Comprehensive Income
Other Comprehensive Income, a component of Shareholders Investment, consists of foreign currency translation adjustments, gains or losses on derivative instruments, and defined benefit pension plan adjustments.
Income tax expense or benefit allocated to each component of Other Comprehensive Income for the three and six fiscal months ended March 29, 2014 and March 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014 |
|
||||||||||||||||
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||||||||
|
|
Pretax |
|
Tax |
|
Net
of |
|
Pretax |
|
Tax |
|
Net
of |
|
||||||
|
|
(expressed in thousands) |
|
||||||||||||||||
Foreign currency translation adjustments |
|
$ |
(1,029 |
) |
$ |
|
|
$ |
(1,029 |
) |
$ |
(69 |
) |
$ |
|
|
$ |
(69 |
) |
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net loss |
|
|
(190 |
) |
|
69 |
|
|
(121 |
) |
|
(149 |
) |
|
55 |
|
|
(94 |
) |
Net gain reclassified to earnings |
|
|
(1,163 |
) |
|
426 |
|
|
(737 |
) |
|
(660 |
) |
|
242 |
|
|
(418 |
) |
Defined benefit pension plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (loss) gain |
|
|
(17 |
) |
|
5 |
|
|
(12 |
) |
|
603 |
|
|
(182 |
) |
|
421 |
|
Net loss reclassified to earnings |
|
|
117 |
|
|
(35 |
) |
|
82 |
|
|
233 |
|
|
(70 |
) |
|
163 |
|
Currency exchange rate change |
|
|
11 |
|
|
|
|
|
11 |
|
|
(75 |
) |
|
|
|
|
(75 |
) |
Other comprehensive loss |
|
$ |
(2,271 |
) |
$ |
465 |
|
$ |
(1,806 |
) |
$ |
(117 |
) |
$ |
45 |
|
$ |
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2013 |
|
||||||||||||||||
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||||||||
|
|
Pretax |
|
Tax |
|
Net
of |
|
Pretax |
|
Tax |
|
Net
of |
|
||||||
|
|
(expressed in thousands) |
|
||||||||||||||||
Foreign currency translation adjustments |
|
$ |
(3,584 |
) |
$ |
|
|
$ |
(3,584 |
) |
$ |
(3,383 |
) |
$ |
|
|
$ |
(3,383 |
) |
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gain |
|
|
2,270 |
|
|
(835 |
) |
|
1,435 |
|
|
3,545 |
|
|
(1,306 |
) |
|
2,239 |
|
Net gain reclassified to earnings |
|
|
(920 |
) |
|
339 |
|
|
(581 |
) |
|
(760 |
) |
|
280 |
|
|
(480 |
) |
Defined benefit pension plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (loss) gain |
|
|
(174 |
) |
|
52 |
|
|
(122 |
) |
|
43 |
|
|
(13 |
) |
|
30 |
|
Net loss reclassified to earnings |
|
|
132 |
|
|
(41 |
) |
|
91 |
|
|
260 |
|
|
(79 |
) |
|
181 |
|
Currency exchange rate change |
|
|
180 |
|
|
|
|
|
180 |
|
|
46 |
|
|
|
|
|
46 |
|
Other comprehensive loss |
|
$ |
(2,096 |
) |
$ |
(485 |
) |
$ |
(2,581 |
) |
$ |
(249 |
) |
$ |
(1,118 |
) |
$ |
(1,367 |
) |
The changes in the net-of-tax balances of each component of AOCI during the three and six fiscal months ended March 29, 2014 and March 30, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014 |
|
||||||||||||||||||||||
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||||||||||||||
|
|
Foreign |
|
Unrealized |
|
Defined |
|
Total |
|
Foreign |
|
Unrealized |
|
Defined |
|
Total |
|
||||||||
|
|
(expressed in thousands) |
|
||||||||||||||||||||||
Beginning balance |
|
$ |
18,279 |
|
$ |
823 |
|
$ |
(5,031 |
) |
$ |
14,071 |
|
$ |
17,319 |
|
$ |
477 |
|
$ |
(5,459 |
) |
$ |
12,337 |
|
Other comprehensive (loss) income before reclassifications |
|
|
(1,029 |
) |
|
(121 |
) |
|
(1 |
) |
|
(1,151 |
) |
|
(69 |
) |
|
(94 |
) |
|
346 |
|
|
183 |
|
Amounts reclassified to earnings |
|
|
|
|
|
(737 |
) |
|
82 |
|
|
(655 |
) |
|
|
|
|
(418 |
) |
|
163 |
|
|
(255 |
) |
Other comprehensive (loss) income |
|
|
(1,029 |
) |
|
(858 |
) |
|
81 |
|
|
(1,806 |
) |
|
(69 |
) |
|
(512 |
) |
|
509 |
|
|
(72 |
) |
Ending balance |
|
$ |
17,250 |
|
$ |
(35 |
) |
$ |
(4,950 |
) |
$ |
12,265 |
|
$ |
17,250 |
|
$ |
(35 |
) |
$ |
(4,950 |
) |
$ |
12,265 |
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2013 |
|
||||||||||||||||||||||
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||||||||||||||
|
|
Foreign |
|
Unrealized |
|
Defined |
|
Total |
|
Foreign |
|
Unrealized |
|
Defined |
|
Total |
|
||||||||
|
|
(expressed in thousands) |
|
||||||||||||||||||||||
Beginning balance |
|
$ |
16,935 |
|
$ |
497 |
|
$ |
(5,317 |
) |
$ |
12,115 |
|
$ |
16,734 |
|
$ |
(408 |
) |
$ |
(5,425 |
) |
$ |
10,901 |
|
Other comprehensive (loss) income before reclassifications |
|
|
(3,584 |
) |
|
1,435 |
|
|
58 |
|
|
(2,091 |
) |
|
(3,383 |
) |
|
2,239 |
|
|
76 |
|
|
(1,068 |
) |
Amounts reclassified to earnings |
|
|
|
|
|
(581 |
) |
|
91 |
|
|
(490 |
) |
|
|
|
|
(480 |
) |
|
181 |
|
|
(299 |
) |
Other comprehensive (loss) income |
|
|
(3,584 |
) |
|
854 |
|
|
149 |
|
|
(2,581 |
) |
|
(3,383 |
) |
|
1,759 |
|
|
257 |
|
|
(1,367 |
) |
Ending balance |
|
$ |
13,351 |
|
$ |
1,351 |
|
$ |
(5,168 |
) |
$ |
9,534 |
|
$ |
13,351 |
|
$ |
1,351 |
|
$ |
(5,168 |
) |
$ |
9,534 |
|
The effect on certain line items in the Consolidated Statements of Income of amounts reclassified out of AOCI for the three and six fiscal months ended March 29, 2014 and March 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
Affected Line Item in the |
|
|||||||||
|
|
March 29, |
|
March 30, |
|
March 29, |
|
March 30, |
|
Consolidated Statements |
|
|||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
of Income |
|
|||||
Derivative instruments: |
|
(expressed in thousands) |
|
|
|
|
||||||||||
Currency exchange contracts |
|
$ |
1,163 |
|
$ |
920 |
|
$ |
660 |
|
$ |
760 |
|
|
Revenue |
|
Total net gains included in income before income taxes |
|
|
1,163 |
|
|
920 |
|
|
660 |
|
|
760 |
|
|
|
|
Income tax expense |
|
|
(426 |
) |
|
(339 |
) |
|
(242 |
) |
|
(280 |
) |
|
|
|
Total net gains included in net income |
|
|
737 |
|
|
581 |
|
|
418 |
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses |
|
|
(58 |
) |
|
(44 |
) |
|
(127 |
) |
|
(85 |
) |
|
Cost of sales |
|
Actuarial losses |
|
|
(37 |
) |
|
(39 |
) |
|
(66 |
) |
|
(78 |
) |
|
Selling and marketing |
|
Actuarial losses |
|
|
(22 |
) |
|
(49 |
) |
|
(40 |
) |
|
(97 |
) |
|
General and administrative |
|
Total losses included in income before income taxes |
|
|
(117 |
) |
|
(132 |
) |
|
(233 |
) |
|
(260 |
) |
|
|
|
Income tax benefit |
|
|
35 |
|
|
41 |
|
|
70 |
|
|
79 |
|
|
|
|
Total net losses included in net income |
|
|
(82 |
) |
|
(91 |
) |
|
(163 |
) |
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net-of-tax reclassifications out of accumulated other comprehensive income included in net income |
|
$ |
655 |
|
$ |
490 |
|
$ |
255 |
|
$ |
299 |
|
|
|
|
17
10. Financing
Short-term borrowings at March 29, 2014 and September 28, 2013 consist of the following:
|
|
|
|
|
|
|
|
|
|
March
29, |
|
September
28, |
|
||
|
|
(expressed in thousands) |
|
||||
Bank line of credit, variable rate loan maturing April 2014, with optional month-to-month term renewal and loan repricing until September 2017 |
|
$ |
35,000 |
|
$ |
35,000 |
|
Bank line of credit, swing line loan maturing September 2017 |
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
$ |
45,000 |
|
$ |
35,000 |
|
The Company’s credit facility provides for up to $100 million for working capital financing, permitted acquisitions, share purchases, or other general corporate purposes and expires in September 2017. At March 29, 2014 and September 28, 2013, outstanding borrowings under the credit facility were $45.0 million and $35.0 million, respectively. At March 29, 2014, the interest rates applicable to outstanding swing line and variable rate credit facility borrowings were 3.25% and 1.035%, respectively. At September 28, 2013, the interest rate applicable to outstanding variable rate credit facility borrowings was 1.065%. The variable interest rate at each date was the monthly U.S. LIBOR plus 87.5 basis points. At March 29, 2014, based upon the Company’s intention and ability to repay the entire balance within the next twelve fiscal months, the outstanding borrowings on the swing line loan are classified as short-term. At March 29, 2014, the Company had outstanding letters of credit drawn from the credit facility totaling $11.5 million, leaving $43.5 million of unused borrowing capacity. At September 28, 2013, the Company had outstanding letters of credit drawn from the credit facility totaling $14.3 million, leaving $50.7 million of unused borrowing capacity.
11. Income Taxes
During the second quarter of fiscal year 2014, the Internal Revenue Service (IRS) began an audit of the Companys fiscal tax years ending October 1, 2011 and September 29, 2012. The Company believes that it is reasonably possible that its liability for unrecognized tax positions may change upon conclusion of the IRS audit. However, an estimate of the amount or range of the change cannot be made at this time. As of March 29, 2014, the Companys liability for unrecognized tax benefits was $4.6 million, of which $3.0 million would favorably affect the Companys effective tax rate if recognized. As of September 28, 2013, the Companys liability for unrecognized tax benefits was $4.3 million.
12. Retirement Benefit Plan
One of the Companys German subsidiaries has a non-contributory, defined benefit retirement plan for eligible employees. This plan provides benefits based on the employees years of service and compensation during the years immediately preceding retirement, early retirement, termination, disability, or death, as defined in the plan.
During the three and six fiscal months ended March 29, 2014, as a result of the productivity improvements in Test segment business processes gained through investments in infrastructure and technology, the Company initiated workforce reduction actions. These actions resulted in terminations of German employees who are eligible to receive future benefits under the German defined benefit pension plan. Certain of the termination actions were executed under early retirement plan arrangements which provide, among other benefits, special termination benefits involving the Company’s funding of the defined benefit pension plan for future service periods in effect throughout the contractual term of each early retirement arrangement. During the three fiscal months ended March 29, 2014, effective with the date these early retirement agreements were finalized, cost adjustments associated with the special termination benefits amounts were recognized. During the three fiscal months ended March 29, 2014, the Company recognized a reduction in costs associated with these special termination benefits of $0.1 million. During the six fiscal months ended March 29, 2014, the Company recognized costs associated with these special termination benefits of $0.1 million. The special termination benefits are expected to be paid directly from the Company’s assets throughout the contractual terms of the arrangements, the lengths of which range from approximately 4.9 to 6.0 years. See Note 13 in Condensed Notes to Consolidated Financial Statements for additional information regarding the Company’s cost reduction actions that were initiated during the three and six fiscal months ended March 29, 2014.
18
The cost for the plan for the three and six fiscal months ended March 29, 2014 and March 30, 2013 included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
Six Fiscal Months Ended |
|
||||||||
|
|
March 29, |
|
March 30, |
|
March 29, |
|
March 30, |
|
||||
|
|
(expressed in thousands) |
|
||||||||||
Service cost |
|
$ |
201 |
|
$ |
174 |
|
$ |
401 |
|
$ |
344 |
|
Interest cost |
|
|
210 |
|
|
194 |
|
|
419 |
|
|
384 |
|
Expected return on plan assets |
|
|
(258 |
) |
|
(175 |
) |
|
(515 |
) |
|
(345 |
) |
Net amortization and deferral |
|
|
117 |
|
|
132 |
|
|
233 |
|
|
260 |
|
Special termination benefits |
|
|
(109 |
) |
|
|
|
|
82 |
|
|
|
|
Net periodic benefit cost |
|
$ |
161 |
|
$ |
325 |
|
$ |
620 |
|
$ |
643 |
|
The weighted average expected long-term rate of return on plan assets used to determine the net periodic benefit cost for the three and six fiscal months ended March 29, 2014 and March 30, 2013 was 5.5% and 5.2%, respectively.
13. Severance and Related Costs
During the first quarter of fiscal year 2014, the Company announced that it expects to realize productivity improvements in Test segment business processes gained through investments in infrastructure and IT technology. Associated with these savings, the Company initiated workforce and other cost reduction actions at certain of its locations in the U.S. and Europe during the three and six fiscal months ended March 29, 2014. As a result of these cost reduction actions, the Company incurred severance and related costs of $4.8 million, of which $3.1 million was unpaid as of March 29, 2014.
In Europe, severance and related costs recognized during the first quarter of fiscal year 2014 included statutory minimum amounts for which final agreement had neither been reached nor communicated to the affected employees. During the three fiscal months ended March 29, 2014, effective with the date each of these agreements was both finalized and communicated, any additional severance and related costs above the statutory minimum amounts were recognized. In the U.S., severance and related costs recognized during the three and six fiscal months ended March 29, 2014 were determined based upon a formal severance plan.
The following table summarizes the severance and related costs included in the Companys Consolidated Statement of Income for the three and six fiscal months ended March 29, 2014:
|
|
|
|
|
|
|
|
|
|
Three Fiscal |
|
Six Fiscal |
|
||
|
|
(expressed in thousands) |
|
||||
Cost of sales |
|
$ |
415 |
|
$ |
2,957 |
|
Selling and marketing |
|
|
129 |
|
|
939 |
|
General and administrative |
|
|
48 |
|
|
948 |
|
Total severance and related costs |
|
$ |
592 |
|
$ |
4,844 |
|
19
The following table summarizes the severance and related costs included in the Companys March 29, 2014 Consolidated Balance Sheet:
|
|
|
|
|
|
|
March 29, |
|
|
|
|
(expressed in thousands) |
|
|
Accrued payroll and related costs |
|
$ |
1,240 |
|
Other accrued liabilities |
|
|
38 |
|
Defined benefit pension plan obligation |
|
|
83 |
|
Other long-term liabilities |
|
|
1,777 |
|
Total severance and related costs |
|
$ |
3,138 |
|
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
About MTS Systems Corporation
MTS Systems Corporation is a leading global supplier of high-performance test systems and position sensors. The Companys 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 2,299 employees at September 28, 2013 and revenue of $569 million for the fiscal year ended September 28, 2013.
Terms
When we use the terms we, us, the Company, or our in this report, unless the context otherwise requires, we are referring to MTS Systems Corporation.
Second Quarter of Fiscal 2014 refers to the three fiscal months ended March 29, 2014; Second Quarter of Fiscal 2013 refers to the three fiscal months ended March 30, 2013; First Half of Fiscal 2014 refers to the six fiscal months ended March 29, 2014; First Half of Fiscal 2013 refers to the six fiscal months ended March 30, 2013. Fiscal 2014 refers to the fiscal year ended September 27, 2014. Fiscal 2013 refers to the fiscal year ended September 28, 2013.
Company Strategy
Our goal is to grow profitably, generate strong cash flow, and deliver a strong return on invested capital to our shareholders by leveraging our leadership position in the research and development, product development and industrial equipment global end markets. Our desire is to be the innovation leader in creating test and measurement solutions to enable our customers success. Through innovation we believe we can create value for our customers that will drive our growth. There are four global macro trends that will help enable this growth: energy scarcity; environmental concerns; continued globalization and the development of the emerging markets; and global demographics. These macro trends have significant implications for our customers, such as increasing the demand for new and more innovative products and increasing our customers organizational complexity. We believe we have an excellent geographic footprint and are well positioned in both Test and Sensors to take advantage of these macro trends and deliver significant profitable growth in the years ahead.
We are working toward our previously communicated goal of achieving $1 billion in annual revenue. Economic conditions and the competitive environment will impact the timing of when the $1 billion goal is achieved. Our three priorities to achieve this goal are:
|
|
|
|
|
Accelerating innovation; |
|
|
|
|
|
Capturing opportunities in the rapidly emerging markets; and |
|
|
|
|
|
Realizing the potential of the Test service business. |
Our business model supports achieving our $1 billion revenue milestone through both organic growth and strategic acquisitions, assuming we continue to move aggressively to build our infrastructure, expand our offerings and execute on our opportunities with our key customers around the world. In order to accelerate our revenue growth over the next few years, investments in infrastructure, sales support and field service capacity and capability are essential. We began investing in earnest in both fiscal years 2012 and 2013, and will continue investing in Fiscal 2014.
Financial Results
|
Total Company |
Orders and Backlog
The following is a comparison of Second Quarter and First Half of Fiscal 2014 and Second Quarter and First Half of Fiscal 2013 orders, separately identifying the estimated impact of currency translation (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Fiscal |
|
|
|
|
|
|
|
Three
Fiscal |
|
Six
Fiscal |
|
|
|
|
|
|
|
Six
Fiscal |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
Estimated |
|
|
|
Estimated |
|
|
||||||||||||||||
|
|
|
Business |
|
Currency |
|
|
|
Business |
|
Currency |
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Orders |
|
$ |
163.2 |
|
$ |
25.6 |
|
$ |
(0.1 |
) |
$ |
137.7 |
|
$ |
302.0 |
|
$ |
25.7 |
|
$ |
(0.7 |
) |
$ |
277.0 |
|
21
Orders
Orders in the Second Quarter of Fiscal 2014 were a quarterly record $163.2 million, an increase of $25.5 million, or 18.5%, compared to $137.7 million for the Second Quarter of Fiscal 2013. The increase is driven by variability in large (in excess of $5.0 million) orders as well as base order growth in both the Test segment (“Test”) and Sensors segment (“Sensors”). Orders in the Second Quarter of Fiscal 2014 included two large custom Test orders totaling $19.0 million. Orders in the Second Quarter of Fiscal 2013 included one large $5.5 million custom Test order. Excluding the large orders, base orders increased 9.1%, reflecting growth of 6.7% in Test and 20.0% in Sensors.
Orders in the First Half of Fiscal 2014 totaled $302.0 million, an increase of $25.0 million, or 9.0%, compared to $277.0 million for the First Half of Fiscal 2013. The increase is driven by base order growth in both Test and Sensors as well as variability in large orders. Orders in the First Half of Fiscal 2014 included four large custom Test orders totaling $32.9 million. Orders in the First Half of Fiscal 2013 included three large custom Test orders totaling $26.2 million. Excluding the large orders, base orders increased 7.3%, reflecting growth of 5.0% in Test and 17.2% in Sensors.
Backlog
Backlog of undelivered orders at the end of the Second Quarter of Fiscal 2014 was an all-time high of $304.2 million, an increase of 6.3% compared to $286.3 million at the end of the Second Quarter of Fiscal 2013. While we are subject to order cancellations, historically, we have not experienced a significant number of order cancellations. During the Second Quarter of Fiscal 2014, one custom order in Test totaling $11.1 million was cancelled. This order was booked in the previous fiscal year.
Results of Operations
The following is a comparison of Second Quarter and First Half of Fiscal 2014 and Second Quarter and First Half of Fiscal 2013 statements of operations (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Fiscal Months Ended |
|
|
|
|
Six Fiscal Months Ended |
|
|
|
|
||||||||
|
|
March
29, |
|
March
30, |
|
% Variance |
|
March
29, |
|
March
30, |
|
% Variance |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
137.3 |
|
$ |
136.9 |
|
|
0.3 |
% |
$ |
275.8 |
|
$ |
279.6 |
|
|
-1.4 |
% |
Cost of sales |
|
|
81.8 |
|
|
83.0 |
|
|
-1.4 |
% |
|
165.7 |
|
|
169.1 |
|
|
-2.0 |
% |
Gross profit |
|
|
55.5 |
|
|
53.9 |
|
|
3.0 |
% |
|
110.1 |
|
|
110.5 |
|
|
-0.4 |
% |
Gross margin |
|
|
40.4 |
% |
|
39.4 |
% |
|
|
|
|
39.9 |
% |
|
39.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
22.4 |
|
|
19.5 |
|
|
14.9 |
% |
|
43.9 |
|
|
38.7 |
|
|
13.4 |
% |
General administrative |
|
|
14.0 |
|
|
13.2 |
|
|
6.1 |
% |
|
27.2 |
|
|
25.5 |
|
|
6.7 |
% |
Research and development |
|
|
6.8 |
|
|
5.6 |
|
|
21.4 |
% |
|
12.5 |
|
|
10.6 |
|
|
17.9 |
% |
Total operating expenses |
|
|
43.2 |
|
|
38.3 |
|
|
12.8 |
% |
|
83.6 |
|
|
74.8 |
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
12.3 |
|
|
15.6 |
|
|
-21.2 |
% |
|
26.5 |
|
|
35.7 |
|
|
-25.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(0.2 |
) |
|
(0.2 |
) |
|
0.0 |
% |
|
(0.4 |
) |
|
(0.2 |
) |
|
100.0 |
% |
Other expense, net |
|
|
(0.2 |
) |
|
(0.9 |
) |
|
NM |
|
|
(0.5 |
) |
|
(0.5 |
) |
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
11.9 |
|
|
14.5 |
|
|
-17.9 |
% |
|
25.6 |
|
|
35.0 |
|
|
-26.9 |
% |
Income tax provision |
|
|
4.1 |
|
|
3.4 |
|
|
20.6 |
% |
|
8.7 |
|
|
10.2 |
|
|
-14.7 |
% |
Net income |
|
$ |
7.8 |
|
$ |
11.1 |
|
|
-29.7 |
% |
$ |
16.9 |
|
$ |
24.8 |
|
|
-31.9 |
% |
Diluted earnings per share |
|
$ |
0.50 |
|
$ |
0.69 |
|
|
-27.5 |
% |
$ |
1.09 |
|
$ |
1.56 |
|
|
-30.1 |
% |
22
NM represents comparisons that are not meaningful to this analysis.
The following is a comparison of Second Quarter and First Half of Fiscal 2014 and Second Quarter and First Half of Fiscal 2013 results of operations, separately identifying the impact of currency translation and severance and related costs (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|
|
Three |
|
Six |
|
|
|
|
|
|
|
|
|
|
Six |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
Severance |
|
|
||||||||||
|
|
|
Estimated |
|
|
|
|
Estimated |
|
|
|
||||||||||||||||||||
|
|
|
Business |
|
Currency |
|
|
|
|
Business |
|
Currency |
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
137.3 |
|
$ |
0.5 |
|
$ |
(0.1 |
) |
$ |
|
|
$ |
136.9 |
|
$ |
275.8 |
|
$ |
(2.6 |
) |
$ |
(1.2 |
) |
$ |
|
|
$ |
279.6 |
|
Cost of sales |
|
|
81.8 |
|
|
(1.6 |
) |
|
|
|
|
0.4 |
|
|
83.0 |
|
|
165.7 |
|
|
(5.9 |
) |
|
(0.5 |
) |
|
3.0 |
|
|
169.1 |
|
Gross profit |
|
|
55.5 |
|
|
2.1 |
|
|
(0.1 |
) |
|
(0.4 |
) |
|
53.9 |
|
|
110.1 |
|
|
3.3 |
|
|
(0.7 |
) |
|
(3.0 |
) |
|
110.5 |
|
|
|
|
40.4 |
% |
|
|
|
|
|
|
|
|
|
|
39.4 |
% |
|
39.9 |
% |
|
|
|
|
|
|
|
|
|
|
39.5 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
22.4 |
|
|
2.8 |
|
|
|
|
|
0.1 |
|
|
19.5 |
|
|
43.9 |
|
|
4.5 |
|
|
(0.2 |
) |
|
0.9 |
|
|
38.7 |
|
General administrative |
|
|
14.0 |
|
|
0.6 |
|
|
0.1 |
|
|
0.1 |
|
|
13.2 |
|
|
27.2 |
|
|
0.6 |
|
|
0.2 |
|
|
0.9 |
|
|
25.5 |
|
Research and development |
|
|
6.8 |
|
|
1.2 |
|
|
|
|
|
|
|
|
5.6 |
|
|
12.5 |
|
|
1.8 |
|
|
0.1 |
|
|
|
|
|
10.6 |
|
Total operating expenses |
|
|
43.2 |
|
|
4.6 |
|
|
0.1 |
|
|
0.2 |
|
|
38.3 |
|
|
83.6 |
|
|
6.9 |
|
|
0.1 |
|
|
1.8 |
|
|
74.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
12.3 |
|
$ |
(2.5 |
) |
$ |
(0.2 |
) |
$ |
(0.6 |
) |
$ |
15.6 |
|
$ |
26.5 |
|
$ |
(3.6 |
) |
$ |
(0.8 |
) |
$ |
(4.8 |
) |
$ |
35.7 |
|
Revenue
Revenue in the
Second Quarter of Fiscal 2014 was $137.3 million, an increase of $0.4 million,
or 0.3%, compared to $136.9 million for the Second Quarter of Fiscal 2013. The
increase was driven by higher beginning backlog and increased order volume in
Sensors, partially offset by timing of custom order backlog conversion in Test.
Test revenue decreased 2.6% to $110.9 million while Sensors revenue increased
14.8% to $26.4 million.
Revenue in the First Half of Fiscal 2014 was $275.8 million, a decrease of $3.8 million, or 1.4%, compared to $279.6 million for the First Half of Fiscal 2013. The decrease was driven by lower beginning backlog in Test, as well as an estimated $1.2 million unfavorable impact of currency translation, partially offset by higher beginning backlog and increased order volume in Sensors. Test revenue decreased 4.6% to $224.4 million while Sensors revenue increased 15.5% to $51.4 million.
Severance and Related Costs
As previously disclosed, productivity benefits from investments in Test
business processes are expected to result in $4 to $5 million of cost savings during Fiscal 2014. The cost savings that began during
the Second Quarter of Fiscal 2014 and are expected to continue over the last six months of Fiscal 2014 will be reinvested primarily
in the Test business to enable our long-term growth objectives. Associated with these savings, we initiated workforce reduction
and other cost reduction actions throughout the First Half of Fiscal 2014. As a result of these cost reduction actions, we incurred
severance and related costs. During the Second Quarter of Fiscal 2014, we incurred severance and related costs of $0.6 million,
of which $0.4 million, $0.1 million, and $0.1 million were reported in Cost of Sales, Selling and Marketing, and General and Administrative
expense, respectively. During the First Half of Fiscal 2014, we incurred severance and related costs of $4.8 million, of which
$3.0 million, $0.9 million, and $0.9 million were reported in Cost of Sales, Selling and Marketing, and General and Administrative
expense, respectively.
Gross
Profit
Gross profit in the Second Quarter of Fiscal 2014 was $55.5 million, an
increase of $1.6 million, or 3.0%, compared to $53.9 million for the Second
Quarter of Fiscal 2013. Gross profit as a percentage of revenue was 40.4%, an
increase of 1.0 percentage points from 39.4% for the Second Quarter of Fiscal
2013. The previously mentioned severance and related costs of $0.4 million
unfavorably impacted gross profit as a percentage of revenue by 0.3 percentage
points. Excluding these costs, the gross margin rate increased 1.3 percentage
points, primarily driven by a favorable mix of product and service sales in
Test, as well as a favorable impact of the relative increase in Sensors revenue
compared to total Company revenue.
23
Gross profit in the First Half of Fiscal 2014 was $110.1 million, a decrease of $0.4 million, or 0.4%, compared to $110.5 million for the First Half of Fiscal 2013. Gross profit as a percentage of revenue was 39.9%, an increase of 0.4 percentage points from 39.5% for the First Half of Fiscal 2013. The previously mentioned severance and related costs of $3.0 million unfavorably impacted gross profit as a percentage of revenue by 1.1 percentage points. Excluding these costs, the gross margin rate increased 1.5 percentage points, primarily driven by reduced spending on productivity and infrastructure initiatives, favorable product mix in Test, as well as a favorable impact of the relative increase in Sensors revenue compared to total Company revenue.
Selling
and Marketing Expense
Selling and marketing expense in the Second Quarter of Fiscal
2014 was $22.4 million, an increase of $2.9 million, or 14.9%, compared to
$19.5 million for the Second Quarter of Fiscal 2013. Selling and marketing
expense in the First Half of Fiscal 2014 was $43.9 million, an increase of $5.2
million, or 13.4%, compared to $38.7 million for the First Half of Fiscal 2013.
Both increases were driven by higher compensation and benefits resulting from
increased headcount, higher sales commissions, as well as the previously
mentioned severance and related costs of $0.1 million and $0.9 million in the
Second Quarter of Fiscal 2014 and the First Half of Fiscal 2014, respectively.
Selling and marketing expense as a percentage of revenue for the Second Quarter
of Fiscal 2014 was 16.3%, compared to 14.2% for the Second Quarter of Fiscal
2013. Selling and marketing expense as a percentage of revenue for the First
Half of Fiscal 2014 was 15.9%, compared to 13.8% for the First Half of Fiscal
2013.
General
and Administrative Expense
General and administrative expense in the Second Quarter of
Fiscal 2014 was $14.0 million, an increase of $0.8 million, or 6.1%, compared
to $13.2 million for the Second Quarter of Fiscal 2013. General and administrative
expense in the First Half of Fiscal 2014 was $27.2 million, an increase of $1.7
million, or 6.7%, compared to $25.5 million for the First Half of Fiscal 2013.
Both increases were primarily driven by higher legal expenses, higher
compensation and benefits driven by increased headcount, as well the previously
mentioned severance and related costs of $0.1 million and $0.9 million in the
Second Quarter of Fiscal 2014 and the First Half of Fiscal 2014, respectively.
These increases were partially offset by a lower level of investment in
productivity and infrastructure initiatives. General and administrative expense
as a percentage of revenue for the Second Quarter of Fiscal 2014 was 10.2%,
compared to 9.6% for the Second Quarter of Fiscal 2013. General and
administrative expense as a percentage of revenue for the First Half of Fiscal
2014 was 9.9%, compared to 9.1% for the First Half of Fiscal 2013.
Research
and Development Expense
Research and development expense in the Second Quarter of
Fiscal 2014 was $6.8 million, an increase of $1.2 million, or 21.4%, compared
to $5.6 million for the Second Quarter of Fiscal 2013. Research and development
expense in the First Half of Fiscal 2014 was $12.5 million, an increase of $1.9
million, or 17.9%, compared to $10.6 million for the First Half of Fiscal 2013.
Both increases were primarily driven by higher compensation and benefits
resulting from increased headcount in both Test and Sensors. Research and
development expense as a percentage of revenue for the Second Quarter of Fiscal
2014 was 5.0%, compared to 4.1% for the Second Quarter of Fiscal 2013. Research
and development expense as a percentage of revenue for the First Half of Fiscal
2014 was 4.5%, compared to 3.8% for the First Half of Fiscal 2013.
Income
from Operations
Income from
operations in the Second Quarter of Fiscal 2014 was $12.3 million, a
decrease of $3.3 million, or 21.2%, compared to income from operations of $15.6
million for the Second Quarter of Fiscal 2013. Excluding the previously
mentioned severance and related costs of $0.6 million, income from operations
decreased 17.3%, driven by a $4.7 million increase in operating expenses
resulting from ongoing investments for growth in sales and research and
development, partially offset by higher gross profit. Operating income as a
percentage of revenue for the Second Quarter of Fiscal 2014 was 9.0%, compared
to 11.4% for the Second Quarter of Fiscal 2013.
Income from operations in the First Half of Fiscal 2014 was $26.5 million, a decrease of $9.2 million, or 25.8%, compared to income from operations of $35.7 million for the First Half of Fiscal 2013. Excluding the previously mentioned severance and related costs of $4.8 million, income from operations decreased 12.3% for the First Half of Fiscal 2014, driven by a $7.0 million increase in operating expenses resulting from ongoing investments for growth in sales and research and development. Operating income as a percentage of revenue for the First Half of Fiscal 2014 was 9.6%, compared to 12.8% for the First Half of Fiscal 2013.
24
Interest
Expense, net
Net interest expense in the Second Quarter of Fiscal 2014 was
$0.2 million, flat compared to the Second Quarter of Fiscal 2013. Net interest
expense in the First Half of Fiscal 2014 was $0.4 million, an increase of $0.2
million compared to the First Half of Fiscal 2013. The increase was driven by a
relatively higher level of outstanding borrowings under the Companys credit
facility during the First Half of Fiscal 2014 compared to the First Half of Fiscal
2013.
Other
Expense, net
Other expense, net
in the Second Quarter of Fiscal 2014 was $0.2 million, compared to $0.9 million
in the Second Quarter of Fiscal 2013. This decrease was driven by $0.9 million
decreased net losses on foreign currency transactions primarily due to
volatility in the value of the U.S. dollar against the Japanese Yen during the
Second Quarter of Fiscal 2013.
Other expense, net in the First Half of Fiscal 2014 was $0.5 million, flat compared to the First Half of Fiscal 2013, as decreased net losses on foreign currency transactions were substantially offset by royalty income in the First Half of Fiscal 2013 that did not repeat in the First Half of Fiscal 2014.
Provision
for Income Taxes
Provision for income
taxes in the Second Quarter of Fiscal 2014 totaled $4.1 million, an
increase of $0.7 million, or 20.6%, compared to $3.4 million for the Second
Quarter of Fiscal 2013. The increase is primarily due to an increase in the
effective tax rate, partially offset by decreased income before taxes. The
effective tax rate for the Second Quarter of Fiscal 2014 was 34.8%, an increase
of 11.0 percentage points compared to a tax rate of 23.8% for the Second
Quarter of Fiscal 2013. The increase was primarily driven by the enactment of
tax legislation in the Second
Quarter of Fiscal 2013 that retroactively extended the U.S. research and
development tax credits and provided a tax benefit of $1.3 million, as
well as changes in certain foreign tax rates. The U.S. research and development tax credit expired as of the
end of the First Quarter of Fiscal 2014.
Provision for income taxes in the First Half of Fiscal 2014 totaled $8.7 million, a decrease of $1.5 million, or 14.7%, compared to $10.2 million for the First Half of Fiscal 2014. The decrease is primarily due to lower income before income taxes, partially offset by a higher effective tax rate. The effective tax rate for the First Half of Fiscal 2014 was 34.0%, an increase of 4.9 percentage points compared to a tax rate of 29.1% for the First Half of Fiscal 2013. The increase was primarily driven by the previously mentioned U.S. research and development tax credit tax legislation in the prior fiscal year that retroactively extended the United States research and development tax credit and provided a tax benefit of $1.0 million, as well as changes in certain foreign tax rates.
Net
income
Net income in
the Second Quarter of Fiscal 2014 was $7.8 million, a decrease of $3.3 million,
or 29.7%, compared to $11.1 million for the Second Quarter of Fiscal 2013. The decrease was primarily driven
by lower income from operations and a higher effective tax rate, partially
offset by decreased net losses on foreign currency transactions. Earnings
per diluted share were $0.50, a decrease of $0.19 per share, or 27.5%, compared
to $0.69 per share for the Second Quarter of Fiscal 2013. The previously
mentioned $0.6 million charge for severance and related costs in the Second
Quarter of Fiscal 2014 negatively impacted earnings per diluted share by $0.03.
Net income in the First Half of Fiscal 2014 was $16.9 million, a decrease of $7.9 million, or 31.9%, compared to $24.8 million for the First Half of Fiscal 2013. The decrease was primarily driven by lower income from operations. Earnings per diluted share were $1.09, a decrease of $0.47 per share, or 30.1%, compared to $1.56 per share for the First Half of Fiscal 2013. The previously mentioned $4.8 million charge for severance and related costs in the First Half of Fiscal 2014 negatively impacted earnings per diluted share by $0.21.
25
Segment Results
|
Test Segment |
Orders and Backlog
The following is a comparison of Second Quarter and First Half of Fiscal 2014 and Second Quarter and First Half of Fiscal 2013 orders for Test, separately identifying the estimated impact of currency translation (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Fiscal |
|
|
|
|
|
|
|
Three
Fiscal |
|
Six
Fiscal |
|
|
|
|
|
|
|
Six
Fiscal |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
Estimated |
|
|
|
Estimated |
|
|
||||||||||||||||
|
|
|
Business |
|
Currency |
|
|
|
Business |
|
Currency |
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Orders |
|
$ |
134.4 |
|
$ |
20.9 |
|
$ |
(0.2 |
) |
$ |
113.7 |
|
$ |
247.4 |
|
$ |
17.4 |
|
$ |
(0.4 |
) |
$ |
230.4 |
|
Orders
Orders in
the Second Quarter of Fiscal 2014 totaled $134.4 million, an increase of $20.7
million, or 18.2%, compared to orders of $113.7 million for the Second Quarter
of Fiscal 2013, primarily driven by variability in large orders as well as 6.7%
growth in base orders. Second Quarter of Fiscal 2014 orders included two large
orders in the Americas totaling $19.0 million, one of which was a $12.2 million
order in the ground vehicle market for a rolling road system and the other was
a $6.8 million order in the structures market for aircraft structural testing.
Orders in the Second Quarter of Fiscal 2013 included a $5.5 million European
order in the ground vehicles market. The 6.7% increase in base orders was
fueled by 13.9% orders growth in the service business from strong worldwide
demand, as well as growth in the European materials market. Currency
translation unfavorably impacted orders by approximately $0.2 million. Test accounted for 82.4%
of total Company orders, compared to 82.6% for the Second Quarter of Fiscal
2013.
Orders in the First Half of Fiscal 2014 totaled $247.4 million, an increase of $17.0 million, or 7.4%, compared to orders of $230.4 million for the First Half of Fiscal 2013, primarily driven by variability in large orders as well as 5.0% growth in base orders. First Half of Fiscal 2014 orders included two large orders in China totaling $13.9 million, one of which was an $8.0 million order in the structures market for seismic testing and the other was a $5.9 million ground vehicle order for suspension testing, as well as the two previously mentioned large Americas orders totaling $19.0 million. Orders in the First Half of Fiscal 2013 included two large European orders in the ground vehicles market totaling $17.2 million, as well as a $9.2 million Americas order in the structures market. The 5.0% increase in base orders was fueled by 15.9% orders growth in the service business from strong demand in Europe and the Americas. Currency translation unfavorably impacted orders by approximately $0.4 million. Test accounted for 81.9% of total Company orders, compared to 83.2% for the First Half of Fiscal 2013.
Backlog
Backlog of
undelivered orders at the end of the second quarter was $285.6 million, an
increase of 5.2% compared to backlog of $271.6 million at the end of the Second
Quarter of Fiscal 2013. As previously mentioned, Second Quarter of Fiscal 2014
beginning backlog was negatively impacted by the cancellation of a custom order
totaling $11.1 million.
Results of Operations
The following is a comparison of Second Quarter and First Half of Fiscal 2014 and Second Quarter and First Half of Fiscal 2013 results of operations for Test, separately identifying the impact of currency translation and severance and related costs (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
|
|
|
|
|
|
|
|
Three |
|
Six |
|
|
|
|
|
|
|
|
|
|
Six |
|
||||
|
|
|
|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
Severance |
|
|
|
|
|
|
|
|
|
Severance |
|
|
||||||||||
|
|
|
Estimated |
|
|
|
|
Estimated |
|
|
|
||||||||||||||||||||
|
|
|
Business |
|
Currency |
|
|
|
|
Business |
|
Currency |
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
110.9 |
|
$ |
(2.9 |
) |
$ |
(0.1 |
) |
$ |
|
|
$ |
113.9 |
|
$ |
224.4 |
|
$ |
(10.1 |
) |
$ |
(0.6 |
) |
$ |
|
|
$ |
235.1 |
|
Cost of sales |
|
|
69.6 |
|
|
(3.4 |
) |
|
|
|
|
0.4 |
|
|
72.6 |
|
|
142.4 |
|
|
(9.4 |
) |
|
(0.3 |
) |
|
3.0 |
|
|
149.1 |
|
Gross profit |
|
|
41.3 |
|
|
0.5 |
|
|
(0.1 |
) |
|
(0.4 |
) |
|
41.3 |
|
|
82.0 |
|
|
(0.7 |
) |
|
(0.3 |
) |
|
(3.0 |
) |
|
86.0 |
|
|
|
|
37.2 |
% |
|
|
|
|
|
|
|
|
|
|
36.3 |
% |
|
36.5 |
% |
|
|
|
|
|
|
|
|
|
|
36.6 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
17.4 |
|
|
1.8 |
|
|
|
|
|
0.1 |
|
|
15.5 |
|
|
34.0 |
|
|
2.6 |
|
|
|
|
|
0.9 |
|
|
30.5 |
|
General administrative |
|
|
11.1 |
|
|
1.3 |
|
|
0.1 |
|
|
0.1 |
|
|
9.6 |
|
|
21.1 |
|
|
0.9 |
|
|
0.2 |
|
|
0.9 |
|
|
19.1 |
|
Research and development |
|
|
5.1 |
|
|
0.9 |
|
|
|
|
|
|
|
|
4.2 |
|
|
9.3 |
|
|
1.3 |
|
|
|
|
|
|
|
|
8.0 |
|
Total operating expenses |
|
|
33.6 |
|
|
4.0 |
|
|
0.1 |
|
|
0.2 |
|
|
29.3 |
|
|
64.4 |
|
|
4.8 |
|
|
0.2 |
|
|
1.8 |
|
|
57.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
7.7 |
|
$ |
(3.5 |
) |
$ |
(0.2 |
) |
$ |
(0.6 |
) |
$ |
12.0 |
|
$ |
17.6 |
|
$ |
(5.5 |
) |
$ |
(0.5 |
) |
$ |
(4.8 |
) |
$ |
28.4 |
|
26
Revenue
Revenue in the
Second Quarter of Fiscal 2014 was $110.9 million, a decrease of $3.0 million,
or 2.6%, compared to revenue of $113.9 million for the Second Quarter of Fiscal
2013. Revenue in the First Half
of Fiscal 2014 was $224.4 million, a decrease of $10.7 million, or 4.6%,
compared to revenue of $235.1 million for the First Half of Fiscal 2013,
including an estimated $0.6 million unfavorable impact of currency translation.
These decreases were primarily driven by lower beginning backlog as well as the
timing of conversion of custom order backlog, partially offset by growth in
service and short cycle products.
Gross
Profit
Gross profit in the Second Quarter of Fiscal 2014 was $41.3 million on lower
volume, flat compared to the Second Quarter of Fiscal 2013. Gross profit as a
percentage of revenue was 37.2%, an increase of 0.9 percentage points from
36.3% for the Second Quarter of Fiscal 2013. The previously mentioned severance
and related costs of $0.4 million unfavorably impacted gross profit as a
percentage of revenue by 0.4 percentage points. Excluding these costs, the
gross margin rate increased by 1.3 percentage points. Of the increased gross
profit rate, approximately 1.6 percentage points resulted from a favorable mix
of higher-margin products and services, and 0.5 percentage points resulted from
favorable engineering variances driven by higher labor utilization. These
increases were partially offset by a 0.6 percentage point unfavorable impact
from decreased leverage on lower volume.
Gross profit in the First Half of Fiscal 2014 was $82.0 million on higher volume, a decrease of $4.0 million, or 4.7%, compared to $86.0 million for the First Half of Fiscal 2013. Gross profit as a percentage of revenue was 36.5%, relatively flat compared to 36.6% for the First Half of Fiscal 2013. The previously mentioned severance and related costs of $3.0 million unfavorably impacted gross profit as a percentage of revenue by 1.3 percentage points. Excluding these costs, the gross margin rate increased by 1.2 percentage points. Of the increased gross profit rate, approximately 1.0 percentage point resulted from reduced spending on productivity and infrastructure initiatives, and 0.6 of a percentage point resulted from favorable manufacturing and engineering variances driven by higher labor utilization. These increases were partially offset by 0.4 of a percentage point unfavorable impact from decreased leverage on lower volume.
Selling
and Marketing Expense
Selling and marketing expense in the Second Quarter of Fiscal
2014 was $17.4 million, an increase of $1.9 million, or 12.3%, compared to
$15.5 million for the Second Quarter of Fiscal 2013. Selling and marketing
expense in the First Half of Fiscal 2014 was $34.0 million, an increase of $3.5
million, or 11.5%, compared to $30.5 million for the First Half of Fiscal 2013.
Both increases were driven by continued investment in sales expansion to drive
future revenue growth, higher sales commissions, as well as the previously
mentioned severance and related costs of $0.1 million and $0.9 million in the
Second Quarter of Fiscal 2014 and the First Half of Fiscal 2014, respectively.
The continued investment in sales expansion primarily consists of higher
compensation and benefits resulting from increased headcount. Selling and
marketing expense as a percentage of revenue for the Second Quarter of Fiscal
2014 was 15.7%, compared to 13.6% for the Second Quarter of Fiscal 2013.
Selling and marketing expense as a percentage of revenue for the First Half of
Fiscal 2014 was 15.2%, compared to 13.0% for the First Half of Fiscal 2013.
General
and Administrative Expense
General and administrative expense in the Second Quarter of
Fiscal 2014 was $11.1 million, an increase of $1.5 million, or 15.6%, compared
to $9.6 million for the Second Quarter of Fiscal 2013. General and
administrative expense in the First Half of Fiscal 2014 was $21.1 million, an
increase of $2.0 million, or 10.5%, compared to $19.1 million for the First
Half of Fiscal 2013. Both increases were primarily driven by higher legal
expenses, higher compensation and benefits driven by increased headcount, as
well as the previously mentioned severance and related costs of $0.1 million
and $0.9 million in the Second Quarter of Fiscal 2014 and the First Half of
Fiscal 2014, respectively. These increases were partially offset by a lower
level of investment in productivity and infrastructure initiatives. General and
administrative expense as a percentage of revenue for the Second Quarter of
Fiscal 2014 was 10.0%, compared to 8.4% for the Second Quarter of Fiscal 2013.
General and administrative expense as a percentage of revenue for the First
Half of Fiscal 2014 was 9.4%, compared to 8.1% for the First Half of Fiscal
2013.
27
Research
and Development Expense
Research and development expense in the Second Quarter of
Fiscal 2014 was $5.1 million, an increase of $0.9 million, or 21.4%, compared
to $4.2 million for the Second Quarter of Fiscal 2013. Research and development
expense in the First Half of Fiscal 2014 was $9.3 million, an increase of $1.3
million, or 16.3%, compared to $8.0 million for the First Half of Fiscal 2013.
Both increases were primarily driven by higher compensation and benefits
resulting from increased headcount. Research and development expense as a
percentage of revenue for the Second Quarter of Fiscal 2014 was 4.6%, compared
to 3.7% for the Second Quarter of Fiscal 2013. Research and development expense
as a percentage of revenue for the First Half of Fiscal 2014 was 4.1%, compared
to 3.4% for the First Half of Fiscal 2013.
Income
from Operations
Income from
operations in the Second Quarter of Fiscal 2014 was $7.7 million, a
decrease of $4.3 million, or 35.8%, compared to $12.0 million for the Second
Quarter of Fiscal 2013. Excluding the previously mentioned severance and
related costs of $0.6 million, income from operations decreased 30.8%, driven
by a $4.1 million increase in operating expenses, partially offset by higher
gross profit. Operating income as a percentage of revenue for the Second
Quarter of Fiscal 2014 was 6.9%, compared to 10.5% for the Second Quarter of
Fiscal 2013.
Income from operations in the First Half of Fiscal 2014 was $17.6 million, a decrease of $10.8 million, or 38.0%, compared to $28.4 million for the First Half of Fiscal 2013. Excluding the previously mentioned severance and related costs of $4.8 million, income from operations decreased 21.1%, driven by decreased gross profit as well as a $5.0 million increase in operating expenses. Operating income as a percentage of revenue for the First Half of Fiscal 2014 was 7.8%, compared to 12.1% for the First Half of Fiscal 2013.
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Sensors Segment |
Orders and Backlog
The following is a comparison of Second Quarter and First Half of Fiscal 2014 and Second Quarter and First Half of Fiscal 2013 orders for Sensors, separately identifying the estimated impact of currency translation (in millions):
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Three
Fiscal |
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Fiscal |
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Fiscal |
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Fiscal |
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Orders |
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$ |
28.8 |
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$ |
4.7 |
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$ |
0.1 |
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$ |
24.0 |
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$ |
54.6 |
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$ |
8.3 |
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$ |
(0.3 |
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$ |
46.6 |
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Orders
Orders in
the Second Quarter of Fiscal 2014 totaled $28.8 million, an increase of $4.8
million, or 20.0%, compared to orders of $24.0 million for the Second Quarter
of Fiscal 2013. The industrial and mobile hydraulic markets were up 13.3% and
56.8%, respectively, driven by strong demand in all geographic regions. We
continued to see broad-based increases in demand across multiple markets, and
growth was achieved from both new and existing customers. Sensors accounted for
17.6% of total Company orders, compared to 17.4% for the Second Quarter of
Fiscal 2013.
Orders in the First Half of Fiscal 2014 totaled $54.6 million, an increase of $8.0 million, or 17.2%, including an estimated 0.6% unfavorable impact of currency translation, compared to orders of $46.6 million for the First Half of Fiscal 2013. The industrial and mobile hydraulic markets were up 14.5% and 31.1%, respectively, driven by strong demand in all geographic regions. Sensors accounted for 18.1% of total Company orders, compared to 16.8% for the First Half of Fiscal 2013.
Backlog
Backlog of
undelivered orders at the end of the second quarter was $18.6 million, an
increase of 26.5% compared to backlog of $14.7 million at the end of the Second
Quarter of Fiscal 2013.
28
Results of Operations
The following is a comparison of Second Quarter and First Half of Fiscal 2014 to Second Quarter and First Half of Fiscal 2013 results of operations for Sensors, separately identifying the estimated impact of currency translation (in millions):
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Revenue |
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$ |
26.4 |
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$ |
3.4 |
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$ |
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$ |
23.0 |
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$ |
51.4 |
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$ |
7.5 |
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$ |
(0.6 |
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$ |
44.5 |
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Cost of sales |
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12.2 |
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1.8 |
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10.4 |
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23.3 |
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3.5 |
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(0.2 |
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20.0 |
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Gross profit |
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14.2 |
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1.6 |
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12.6 |
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28.1 |
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4.0 |
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(0.4 |
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24.5 |
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53.8 |
% |
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54.8 |
% |
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54.8 |
% |
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55.1 |
% |
Operating expenses: |
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Selling and marketing |
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5.0 |
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1.0 |
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4.0 |
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9.9 |
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1.9 |
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(0.2 |
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8.2 |
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General administrative |
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2.9 |
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(0.7 |
) |
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3.6 |
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6.1 |
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(0.3 |
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6.4 |
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Research and development |
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1.7 |
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0.3 |
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1.4 |
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3.2 |
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0.5 |
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0.1 |
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2.6 |
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Total operating expenses |
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9.6 |
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0.6 |
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9.0 |
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19.2 |
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2.1 |
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(0.1 |
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17.2 |
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Income from operations |
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$ |
4.6 |
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$ |
1.0 |
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$ |
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$ |
3.6 |
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$ |
8.9 |
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$ |
1.9 |
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$ |
(0.3 |
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$ |
7.3 |
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Revenue
Revenue in the
Second Quarter of Fiscal 2014 was $26.4 million, an increase of $3.4 million,
or 14.8%, compared to revenue of $23.0 million for the Second Quarter of Fiscal
2013. Revenue in the First Half
of Fiscal 2014 was $51.4 million, an increase of $6.9 million, or 15.5%,
compared to revenue of $44.5 million for the First Half of Fiscal 2013,
including an estimated $0.6 million unfavorable impact of currency translation.
Both increases were primarily driven by higher beginning backlog and
increased order volume.
Gross
Profit
Gross profit in the Second Quarter of Fiscal 2014 was $14.2 million on higher
volume, an increase of $1.6
million, or 12.7%, compared to $12.6 million for the Second Quarter of
Fiscal 2013. Gross profit as a percentage of revenue was 53.8%, a decrease of
1.0 percentage points from 54.8% for the Second Quarter of Fiscal 2013. Gross
profit in the First Half of Fiscal 2014 was $28.1 million on higher volume, an increase of $3.6 million, or 14.7%, compared to $24.5
million for the First Half of Fiscal 2013. Gross profit as a percentage of
revenue was 54.8%, a decrease of 0.3 percentage points from 55.1% for the First
Half of Fiscal 2013. The lower gross margin rates were driven by significant
sales improvement in certain industrial and mobile hydraulic markets that have
a lower margin rate.
Selling
and Marketing Expense
Selling and marketing expense in the Second Quarter of Fiscal
2014 was $5.0 million, an increase of $1.0 million, or 25.0%, compared to $4.0
million for the Second Quarter of Fiscal 2013. Selling and marketing expense in
the First Half of Fiscal 2014 was $9.9 million, an increase of $1.7 million, or
20.7%, compared to $8.2 million for the First Half of Fiscal 2013. Both
increases were 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 for the Second Quarter of Fiscal 2014 was
18.9%, compared to 17.4% for the Second Quarter of Fiscal 2013. Selling and
marketing expense as a percentage of revenue for the First Half of Fiscal 2014
was 19.3%, compared to 18.4% for the First Half of Fiscal 2013.
General
and Administrative Expense
General and administrative expense in the Second Quarter of
Fiscal 2014 was $2.9 million, a decrease of $0.7 million, or 19.4%, compared to
$3.6 million for the Second Quarter of Fiscal 2013. General and administrative
expense in the First Half of Fiscal 2014 was $6.1 million, a decrease of $0.3
million, or 4.7%, compared to $6.4 million for the First Half of Fiscal 2013.
Both decreases were primarily driven by expenses recognized in the Second
Quarter of Fiscal 2013 related to a senior management transition. General and
administrative expense as a percentage of revenue for the Second Quarter of
Fiscal 2014 was 11.0%, compared to 15.7% for the Second Quarter of Fiscal 2013.
General and administrative expense as a percentage of revenue for the First
Half of Fiscal 2014 was 11.9%, compared to 14.4% for the First Half of Fiscal
2013.
29
Research
and Development Expense
Research and development expense in the Second Quarter of
Fiscal 2014 was $1.7 million, an increase of $0.3 million, or 21.4%, compared
to $1.4 million for the Second Quarter of Fiscal 2013. Research and development
expense in the First Half of Fiscal 2014 was $3.2 million, an increase of $0.6
million, or 23.1%, compared to $2.6 million for the First Half of Fiscal 2013.
Both increases were primarily driven by higher compensation and benefits
resulting from increased headcount. Research and development expense as a
percentage of revenue for the Second Quarter of Fiscal 2014 was 6.4%, compared
to 6.1% for the Second Quarter of Fiscal 2013. Research and development expense
as a percentage of revenue for the First Half of Fiscal 2014 was 6.2%, compared
to 5.8% for the First Half of Fiscal 2013.
Income
from Operations
Income from
operations in the Second Quarter of Fiscal 2014 was $4.6 million, an
increase of $1.0 million, or 27.8%, compared to income from operations of $3.6
million for the Second Quarter of Fiscal 2013. Income from operations in the First Half of Fiscal 2014 was $8.9
million, an increase of $1.6 million, or 21.9%, compared to income from
operations of $7.3 million for the First Half of Fiscal 2013. Both increases
were driven by higher gross profit, partially offset by increased operating
expenses. Operating income as a percentage of revenue for the Second Quarter of
Fiscal 2014 was 17.4%, compared to 15.7% for the Second Quarter of Fiscal 2013.
Operating income as a percentage of revenue for the First Half of Fiscal 2014
was 17.3%, compared to 16.4% for the First Half of Fiscal 2013.
Capital Resources and Liquidity
We had cash and cash equivalents of $43.7 million at the end of the Second Quarter of Fiscal 2014. Of this amount, $6.1 million was located in North America, $20.6 million in Europe, and $17.0 million in Asia. Of the $40.4 million of cash located outside of the U.S., approximately $27.1 million is not available for use in the U.S. without the incurrence of U.S. federal and state income tax.
The North American balance was primarily invested in bank deposits. In Europe and Asia, the balances were primarily invested in money market funds and bank deposits. In accordance with our investment policy, we place cash equivalent investments with issuers who have high-quality investment credit ratings. In addition, we limit the amount of investment exposure we have with any particular issuer. Our investment objectives are to preserve principal, maintain liquidity, and achieve the best available return consistent with our primary objectives of safety and liquidity. At the end of the Second Quarter of Fiscal 2014, we held no short-term investments.
Total cash and cash equivalents decreased $4.6 million in the First Half of Fiscal 2014, primarily due to purchases of our common stock, investment in property and equipment, dividend payments, and increased working capital requirements, partially offset by earnings and proceeds received from short-term borrowings. Total cash and cash equivalents decreased $33.2 million in the First Half of Fiscal 2013, primarily due to increased working capital requirements, investment in property and equipment, and dividend payments, partially offset by earnings.
Cash flows from operating activities provided cash totaling $24.1 million for the First Half of Fiscal 2014, compared to the use of cash totaling $15.5 million for the First Half of Fiscal 2013. Cash provided for the First Half of Fiscal 2014 was primarily due to earnings and $5.0 million increased advanced payments received from customers driven by the mix of orders in the quarter, partially offset by $5.2 million increased accounts and unbilled receivables resulting from general timing of billing and collections, $1.3 million decreased accounts payable resulting from general timing of purchases and payments, and $1.1 million increased inventories to support future revenue.
Cash used for the First Half of Fiscal 2013 was primarily due to $29.2 million increased accounts and unbilled receivables resulting from general timing of billing and collections, $7.1 million increased inventories to support future revenue, $4.8 million decreased accounts payable resulting from general timing of purchases and payments, $2.4 million decreased advance payments received from customers driven by the timing of orders, and $3.4 million net employee incentives and related benefit payments.
30
Cash flows from investing activities required the use of cash totaling $10.5 million for the First Half of Fiscal 2014, compared to the use of cash totaling $14.4 million for the First Half of Fiscal 2013, each of which reflects investment in property and equipment. The decrease was driven by a lower level of investment in various growth and productivity initiatives.
Cash flows from financing activities used cash totaling $18.2 million for the First Half of Fiscal 2014, compared to the cash used totaling $1.0 million for the First Half of Fiscal 2013. The cash used for the First Half of Fiscal 2014 was primarily due to the use of $23.3 million to purchase approximately 339,600 shares of our common stock, as well as dividend payments of $9.2 million, partially offset by $10.0 million proceeds from short-term borrowings, and $3.4 million received in connection with stock option exercises. The cash used for the First Half of Fiscal 2013 was primarily due to cash dividend payments totaling $9.6 million, partially offset by $5.0 million proceeds from short-term borrowings, and $3.4 million received in connection with stock option exercises.
Under the terms of our borrowing agreements, we have agreed to certain financial covenants. At the end of the Second Quarter of Fiscal 2014, we were in compliance with the financial terms and conditions of those agreements.
Off-Balance Sheet Arrangements
As of March 29, 2014, we did not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies
The Consolidated Financial Statements are prepared in accordance with GAAP, and GAAP requires us to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, we have made our best estimates and judgments of certain amounts, giving due consideration to materiality. We believe that of our significant accounting policies, the following are particularly important to the portrayal of the Company's results of operations and financial position, may require the application of a higher level of judgment by us, and as a result, are subject to an inherent degree of uncertainty. For further information see “Summary of Significant Accounting Policies” under Note 1 to the Consolidated Financial Statements, included in Item 8 of our Annual Report on Form 10-K for Fiscal Year 2013.
Revenue Recognition: We are required to comply with a variety of technical accounting requirements in order to achieve consistent and accurate revenue recognition. The most significant area of judgment and estimation is percentage of completion contract accounting. We develop cost estimates that include materials, component parts, labor and overhead costs. Detailed cost plans are developed for all aspects of the contracts during the bidding phase of the contract. Cost estimates are largely based on actual historical performance of similar projects combined with current knowledge of the projects in progress. Significant factors that impact the cost estimates include technical risk, inflationary cost of materials and labor, changes in scope and schedule, and internal and subcontractor performance. Actual costs incurred during the project phase are monitored and compared to the estimates on a monthly basis. Cost estimates are revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident.
Inventories: We maintain a material amount of inventory to support our engineering and manufacturing operations. This inventory is stated at the lower of cost or market. On a regular basis, we review our inventory and identify that which is excess, slow moving, and obsolete by considering factors such as inventory levels, expected product life, and forecasted sales demand. Any identified excess, slow moving, and obsolete inventory is written down to its market value through a charge to income from operations. It is possible that additional inventory write-down charges may be required in the future if there is a significant decline in demand for our products and we do not adjust our manufacturing production accordingly.
Impairment of Long-Lived Assets: We review the carrying value of long-lived assets or asset groups, such as property and equipment and intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate that the carrying value may not be recoverable. When this review indicates the carrying value of an asset or asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group, we recognize an asset impairment charge against operations. The amount of the impairment loss recorded is the amount by which the carrying value of the impaired asset or asset group exceeds its fair value.
31
Goodwill: We test goodwill at least annually for impairment. Goodwill is also tested for impairment as changes in circumstances occur indicating that the carrying value may not be recoverable. Goodwill impairment testing first requires a comparison of the fair value of each reporting unit to the carrying value. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired.
We have three reporting units, two of which are assigned goodwill. At March 29, 2014, one reporting unit was assigned $14.9 million of goodwill while another was assigned $1.6 million. The fair value of a reporting unit is estimated using a discounted cash flow model that requires input of certain estimates and assumptions requiring our judgment, including projections of economic conditions and customer demand, revenue and margins, changes in competition, operating costs, and new product introductions. At September 28, 2013, the estimated fair value of the reporting unit assigned $1.6 million of goodwill was substantially in excess of its carrying value, while the estimated fair value of the reporting unit assigned $14.9 million of goodwill exceeded its carrying value by approximately 25%. While we believe the estimates and assumptions used in determining the fair value of our reporting units are reasonable, significant changes in estimates of future cash flows, such as those caused by unforeseen events or changes in market conditions, could materially impact the fair value of a reporting unit that could result in the recognition of a goodwill impairment charge.
Software Development Costs: We incur costs associated with the development of software to be sold, leased, or otherwise marketed. Software development costs are expensed as incurred until technological feasibility has been established, at which time future costs incurred are capitalized until the product is available for general release to the public. A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized software costs, we compare expected product performance, utilizing forecasted revenue amounts, to the total costs incurred to date and estimates of additional costs to be incurred. If revised forecasted product revenue is less than, and/or revised forecasted costs are greater than, the previously forecasted amounts, the net realizable value may be lower than previously estimated, which could result in the recognition of an impairment charge in the period in which such a determination is made.
Warranty Obligations: We are subject to warranty obligations on sales of our products. We record general warranty provisions based on an estimated warranty expense percentage applied to current period revenue. The percentage applied reflects historical warranty claims experience over the preceding twelve months. Both the experience percentage and the warranty liability are evaluated on an ongoing basis for adequacy. In addition, warranty provisions are also recognized for certain nonrecurring product claims that are individually significant. A certain amount of judgment is required in determining appropriate reserve levels for anticipated warranty claims. While these reserve levels are based on historical warranty experience, they may not reflect the actual claims that will occur over the upcoming warranty period, and additional warranty reserves may be required.
Income Taxes: We record a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those deferred tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining net realizable value of our deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with managements expectations could have a material impact on our financial condition and operating results.
Other Matters
Our 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 through economic cycles. Our dividend practice is to target over time a payout ratio of approximately 30% of net earnings per share.
32
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 2013 Form 10-K. Such important factors include:
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We may not achieve our growth plans for the expansion of our business because our long-term success depends on our ability to expand our 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 Companys ability to advance its technology |
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The changes we are making in our Test segment processes and operating systems may not deliver the results we require for growth of the business |
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Our business operations may be affected by government contracting risks |
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Our business is significantly international in scope, which poses multiple risks including, but not limited to: currency value fluctuations; difficulty enforcing agreements and collecting receivables; trade protection measures and import and export matters; tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign earnings; higher danger of terrorist activity; imposition of tariffs, exchange controls and other restrictions; difficulty in staffing and managing global operations; and compliance with a variety of foreign laws and regulations; changes in general economic and political conditions where we operate, particularly in emerging markets |
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We may be required to recognize impairment charges for long-lived assets |
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Volatility in the global economy could adversely affect results |
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Our business is subject to strong competition |
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We are subject to risks because we design and manufacture first-of-kind products |
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We may experience difficulties obtaining the services of skilled employees |
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We may fail to protect our intellectual property effectively, or may infringe upon the intellectual property of others |
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Our business could be adversely affected by product liability claims and commercial litigation |
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We may experience difficulty obtaining materials or components for our products, or the cost of materials or components may increase |
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Government regulation imposes significant costs and other constraints |
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The backlog, sales, delivery and acceptance cycle for many of our products is irregular and may not develop as anticipated |
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Our customers are in cyclical industries and a downturn in those industries could adversely affect results |
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We will need to begin disclosing our use of conflict minerals, which will impose costs on us and could raise reputational and other risks that could adversely affect results |
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Interest rate fluctuations could adversely affect results |
The performance of our business and our 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 risks with caution and form your own critical and independent conclusions about the likely effect of these risks 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 Forms 8-K to be filed by the Company in Fiscal 2014.
33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our investment portfolio at March 29, 2014 included $43.7 million of cash and cash equivalents. The cash equivalent portion of our investment portfolio is invested in money market funds and bank deposits. A hypothetical 1.0 percentage point increase or decrease in market interest rates would have caused interest income to increase or decrease by $0.3 million for the six fiscal months ended March 29, 2014.
We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We manage exposure to changes in foreign currency exchange rates through our regular operating and financing activities and through the use of foreign currency exchange contracts. These contracts are used to manage our overall exposure to exchange rate fluctuations, as the gains and losses on these contracts are intended to offset gains and losses on our assets, liabilities, and cash flows.
A hypothetical 10% appreciation or depreciation in foreign currencies against the U.S. dollar, assuming all other variables were held constant, would have resulted in an estimated increase or decrease of $13.0 million in revenue for the six fiscal months ended March 29, 2014.
At March 29, 2014, our short-term borrowings outstanding consisted of $45.0 million utilization of the revolving credit facility. This utilization of the credit facility involves interest payments calculated at a floating rate and, therefore, is impacted by the effect of increases or decreases in market interest rates. Because we anticipate the borrowing to be outstanding for only a short period of time, we have elected not to mitigate this risk. A hypothetical 1 percentage point increase or decrease in interest rates, assuming all other variables were held constant, would have resulted in an estimated increase or decrease of $0.2 million in interest expense for the six fiscal months ended March 29, 2014.
Item 4. Controls and Procedures
Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 29, 2014, our disclosure controls and procedures were effective.
There were no changes that occurred during the fiscal quarter ended March 29, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II ------ OTHER INFORMATION
Investigative
Matters
As previously reported by us with disclosures starting in
March 2012, we investigated certain gift, travel, entertainment and other
expenses incurred in connection with some of our operations in the Asia Pacific
region. This investigation focused on possible violations of our policy, corresponding
internal control issues and possible violations of applicable law, including
the Foreign Corrupt Practices Act. Substantial investigative work was completed
on this matter and we took remedial actions, including changes to internal
control procedures and removing certain persons formerly employed in our Korea
office. We voluntarily disclosed this matter to the Department of Justice and
the SEC (the Agencies). We presented the results of our investigation and our
corrective actions to representatives of the Agencies on January 16, 2013. We
are now investigating certain business practices in China. This ongoing
investigation has a similar focus to the prior investigation as described
above. The investigation is still in process; however, we have taken certain
initial remedial actions, including changes to internal control procedures. We
are in regular communication with the Agencies regarding this investigation. We
cannot predict the outcome of the matters described in this paragraph at this
time or whether these matters will have a material adverse impact on our
business prospects, financial condition, operating results or cash flows.
Litigation
We are subject to various claims, legal actions, and
complaints arising in the ordinary course of business. We believe the final
resolution of legal matters outstanding as of March 29, 2014 will not have a
material adverse effect on our consolidated financial position or results of
operations. We expense legal costs as incurred.
34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Company Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Total Number |
|
Average |
|
Total Number |
|
Maximum |
|
||||
December 29, 2014 - |
|
|
64,484 |
|
$ |
71.41 |
|
|
64,484 |
|
|
1,349,736 |
|
February 2 2014 - |
|
|
53,860 |
|
$ |
71.32 |
|
|
53,860 |
|
|
1,295,876 |
|
March 2, 2014 - |
|
|
54,293 |
|
$ |
71.44 |
|
|
54,293 |
|
|
1,241,583 |
|
|
|||||||||||||
Total |
|
|
172,637 |
|
$ |
71.39 |
|
|
172,637 |
|
|
|
|
We purchase our common stock to mitigate dilution related to new shares created by employee equity compensation such as stock option, restricted stock, restricted stock units, and employee stock purchase plan awards, as well as to return excess capital to shareholders.
During the First Half of Fiscal 2014, our share purchases were executed under a 2.0 million share purchase authorization approved by our Board of Directors and announced on February 11, 2011. Authority over pricing and timing under the authorization has been delegated to management. The share purchase authorization has no expiration date.
|
|
|
Exhibit |
|
Description |
|
|
|
10.1 |
|
Letter Agreement, dated January 22, 2014, by and between the Company and Michael B. Jost, incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed February 18, 2014. |
|
|
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
31.2 |
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
32.1 |
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith). |
|
|
|
32.2 |
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith). |
|
|
|
101.INS ** |
XBRL Instance Document (furnished herewith). |
|
|
|
|
101.SCH ** |
XBRL Taxonomy Extension Schema Document (furnished herewith). |
|
|
|
|
101.CAL ** |
XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith). |
|
|
|
|
101.DEF ** |
XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith). |
|
|
|
|
101.LAB ** |
XBRL Taxonomy Extension Label Linkbase Document (furnished herewith). |
|
|
|
|
101.PRE ** |
XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith). |
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
35
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
MTS SYSTEMS CORPORATION |
|
|
Dated: May 5, 2014 |
/s/ SUSAN E. KNIGHT |
|
Susan E. Knight |
|
Senior Vice President and Chief Financial Officer * |
* Executing as both the principal financial officer and a duly authorized officer of the Company.
36