MTS scandal offers lessons on China dealings

on May14

A management scandal in its Chinese office cost MTS Systems Corp. millions of dollars to investigate and create new corporate compliance safeguards and played havoc with the supplier’s recent financial reports to shareholders and the Securities and Exchange Commission.

Although damage to the Minnesota-based auto supplier was limited and no intellectual property was stolen, according to the company, the incident could be a cautionary tale to other companies doing business in China.

Graves: Worker actions violated code of conduct.

MTS Systems CEO Jeffrey Graves informed analysts last month a company investigation had found that “certain senior and middle level Chinese employees” in the company’s materials testing segment in China started “a business to compete with MTS in a low end of the Chinese materials testing market.”

MTS provides hardware and software to manufacturers to determine the precise mechanical behavior of materials, products and structures under the effects of acceleration, position, vibration, motion, pressure, force and sound.

“This conflict of interest is clearly a violation of our MTS code of conduct,” Graves said in the conference call. “We’re disappointed and are taking appropriate actions with regard to all of the persons implicated in the investigation.”

The company has since declined to discuss the trouble or elaborate on MTS’ SEC reports. Based in Eden Prairie, Minn., MTS has 3,500 employees, including about 1,350 outside the United States. Graves said China accounts for more than 20 percent of the company’s revenue.

MTS had to warn investors and the NASDAQ exchange in November that it would postpone filing financial reports until it could investigate the China matter to determine whether false financial information had come out of the overseas office.

Graves made additional details of the situation public in an April conference call to discuss financial results for the fiscal quarter that ended Dec. 31, 2016, and for the fiscal year that ended Sept. 30.

Graves told analysts that the actions of the overseas personnel required MTS to hire outside experts to investigate, which cost about $8 million. He said the investigation included reviewing “tens of thousands” of emails, testing “numerous” transactions, and conducting more than 75 interviews.

The investigation found that MTS did not have any “misstatements” in its financial records. There was no “theft of intellectual property,” and no involvement “by anyone in the finance organization or the MTS executive management team,” MTS said.

In response to the incident, the company created a new office of risk management and appointed a chief risk and compliance officer, who reports directly to the CEO, Graves said in the conference call.

John Franzeb, an analyst for Sidoti & Co. in New York who follows MTS, told Automotive News he has never seen a similar case in more than 20 years as an analyst.

“No intellectual property was stolen, and there was no restatement of earnings,” he said.

“But as to whether other companies dealing in China could encounter similar issues — that’s worth wondering about.” ​

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