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MTS Reports Fiscal 2017 Second Quarter Financial Results

EDEN PRAIRIE, MN, May 8, 2017 /PRNewswire/ -- MTS Systems Corporation (Nasdaq: MTSC), a leading global supplier of high-performance test systems and sensors, today reported financial results for its fiscal year 2017 second quarter ended April 1, 2017.

  • Revenues of $193 million, an increase of 41 percent from the prior year period, with continued double digit organic growth of 10 percent and 31 percent growth from the PCB acquisition
  • Gross margin of 41 percent increased 790 basis points from the prior year period driven by continued focus on project execution in Test and Sensors being a larger part of MTS results
  • GAAP EPS increased 90% from the prior year period to $0.38, including a $0.29 negative impact from costs associated with the China investigation and acquisition integration and restructuring expenses
  • Strong year-to-date operating cash flow of $41 million primarily due to continued focus on working capital improvements

MTS Systems Corporation. (PRNewsFoto/MTS Systems Corporation)

"The second quarter of fiscal year 2017 was the third quarter in a row where we saw double-digit organic revenue growth and very strong overall growth with the additional revenue from the PCB acquisition. We continue to improve our Test backlog conversion rates, increase Test gross margin rates and drive solid top and bottom line growth throughout the business. The integration of PCB continues to progress as anticipated, which is translating into additional revenue and earnings in our Sensors segment. Test orders remained a challenge in the second quarter, however we believe the low point is now behind us and anticipate consistent and meaningful improvements in Test order rates throughout the second half of the year and into fiscal year 2018," said Dr. Jeffrey A. Graves, President and Chief Executive Officer of MTS Systems.

Fiscal 2017 Second Quarter Results

Revenue was $193.4 million, up $56.3 million or 41.1 percent, compared to the same quarter in the prior year. The PCB acquisition generated 30.8 percent of the increase. The remaining 10.3 percent increase came from organic revenue growth driven by both the Test business, which increased 8.8 percent from the strong conversion of backlog, as well as continued improvement in the legacy Sensors business, which saw double-digit growth of 17.4 percent under the new integrated Sensors sales leadership team and a strong focus on total customer satisfaction.

Overall, Test orders were down 11.3 percent to $110 million as our customers are targeting order placements later in 2017. Based upon these investment plans by our customers, we believe the low-point in orders was reached in our second quarter, and that we will now see increasing order rates throughout the second half of our fiscal year. Supporting this view, quoting rates have accelerated as we entered our third quarter, and the Test opportunity pipeline remains at a near record level of $1 billion in opportunities over the next twelve months. The Test segment ended the second quarter with a backlog of $298.1 million.

Earnings before taxes was $8.7 million, an increase of $4.4 million compared to the same quarter in the prior year. The increase primarily resulted from higher volumes, improved gross margins and the contribution from the PCB acquisition. These positive impacts were partially offset by $7.8 million of expenses related to the investigation into code of conduct violations in our China operation and acquisition integration and restructuring activities and $7.2 million of higher interest expense on debt used to fund the PCB acquisition.

Diluted earnings per share (EPS) on a GAAP basis was $0.38 compared to $0.20 in the prior year. The increase was driven by continued focus on Test project execution and the contribution from the PCB acquisition. The increase was partially offset by negative impacts of $0.25 from the China investigation, $0.03 from acquisition integration expenses and $0.01 from restructuring expenses. Excluding these items, diluted earnings per share on an adjusted basis would have been $0.67 which includes higher amortization expense and interest expense related to the PCB acquisition. See "Non-GAAP Financial Measures" below for further information.

A non-GAAP financial metric that we are tracking this year is our Adjusted EBITDA, as described in the "Non-GAAP Financial Measures" section, which reached $33.3 million in the second quarter of fiscal 2017, up from $31.5 million in the first quarter of fiscal 2017. A reconciliation of this non-GAAP measure to net income, the most directly comparable GAAP financial measure, is provided in Exhibit D of this earnings release.

Outlook

The company reaffirms its expected fiscal year 2017 revenues of $760 million to $790 million and GAAP earnings per share of $0.80 to $1.20 which includes acquisition integration, acquisition inventory fair value adjustment and restructuring expenses of $16.0 million to $18.0 million and the cost of the China investigation of approximately $9.0 million. In addition, we reaffirm our forecasted adjusted EBITDA for the full year to range between $115 million and $130 million. A reconciliation of this non-GAAP measure to net income, the most directly comparable GAAP financial measure, is included in Exhibit E of this earnings release.

Non-GAAP Financial Measures

We believe that disclosing diluted earnings per share excluding the impact from acquisition integration expenses, acquisition inventory fair value adjustment, China investigation expenses and restructuring expenses is useful to investors as a measure of operating performance. We use this as one measure to monitor and evaluate operating performance. Diluted earnings per share excluding these items, is a financial measure that does not reflect United States Generally Accepted Accounting Principles (GAAP). We calculate this measure by adding back the after-tax effect of the acquisition integration expenses, acquisition inventory fair value adjustment, China investigation expenses and restructuring expenses to net income and dividing the result by the diluted weighted average shares outstanding.

We believe that disclosing earnings before interest, taxes, depreciation and amortization (EBITDA) and EBITDA excluding the impact from stock-based compensation, acquisition integration expenses, acquisition inventory fair value adjustment, China investigation expenses and restructuring expenses (Adjusted EBITDA) is useful to investors as a measure of leverage and operating performance. We use these measures to monitor and evaluate leverage and operating performance. EBITDA and Adjusted EBITDA are financial measures that do not reflect GAAP. We calculate EBITDA by adding back interest, taxes, depreciation and amortization expense to net income. Adjusted EBITDA is calculated by adding back stock-based compensation, acquisition integration expenses, acquisition inventory fair value adjustment, China investigation expenses and restructuring expenses to EBITDA.

Investors should consider these non-GAAP financial measures in addition to, not as a substitute for or better than, financial measures prepared in accordance with GAAP. Reconciliations of the components of these measures to the most directly comparable GAAP financial measures are included in Exhibits B, C, D and E to this earnings release.

Second Quarter Conference Call

A conference call will be held on May 9, 2017, at 10:00 a.m. ET (9:00 a.m. CT). Call toll free +1-877-718-5111 (international toll +1-719-325-4823) and reference the conference pass code "1974965". Telephone replay will be available at 1:00 p.m. ET following the call until 1:00 p.m. ET, May 16, 2017. Call toll free +1-888-203-1112 (international toll +1-719-457-0820) and reference the conference pass code "1974965".

A transcript of the call can also be accessed from the MTS website at http://investor.mts.com. It will be available on May 10, 2017.

About MTS Systems Corporation

MTS Systems Corporation's testing hardware, software and services 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's high-performance sensors provide controls for a variety of applications measuring motion, pressure, position, force and sound. MTS had 3,500 employees as of October 1, 2016 and revenue of $650 million for the fiscal year ended October 1, 2016. Additional information on MTS can be found at www.mts.com.

This release contains "forward-looking statements" 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. Statements made under the heading "Outlook" are forward-looking statements, and words such as "may," "will," "should," "expects," "intends," "projects," "plans," "believes," "estimates," "targets," "anticipates," and similar expressions identify forward-looking statements in other parts of the release. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, statements about the expected benefits of the PCB acquisition and other statements that are not historical facts. These statements are based on MTS's current expectations and beliefs and are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. Risks, uncertainties and assumptions that could cause MTS's actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those described in the "Risk Factors" section of MTS's most recent Form 10-K filed with the Securities and Exchange Commission ("SEC") and updated in any subsequent Quarterly Reports on Form 10-Q and other filings with the SEC. The reports referenced above are available on MTS's website at www.mts.com or on the SEC's website at www.sec.gov. Forward-looking statements speak only as of the date on which statements are made, and MTS undertakes 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.

 

 MTS SYSTEMS CORPORATION

 Condensed Consolidated Statements of Income

 (unaudited - in thousands, except per share data)










Three Months Ended


Six Months Ended


April 1,
 2017


April 2,
 2016


April 1,
 2017


April 2,
 2016









 Revenue

$

193,424



$

137,098



$

392,703



$

277,599


 Cost of sales

114,568



91,954



240,383



179,944


 Gross profit

78,856



45,144



152,320



97,655


 Gross margin

40.8

%


32.9

%


38.8

%


35.2

%









 Operating expenses








 Selling, general and administrative

54,183



35,021



108,676



68,637


 Research and development

9,261



5,752



17,942



11,046


   Total operating expenses

63,444



40,773



126,618



79,683










 Income from operations

15,412



4,371



25,702



17,972


 Operating margin

8.0

%


3.2

%


6.5

%


6.5

%









 Interest income (expense), net

(7,418)



(257)



(14,698)



(458)


 Other income (expense), net

666



107



(163)



(203)










 Income before income taxes

8,660



4,221



10,841



17,311


 Provision for income taxes

1,461



1,223



1,937



2,539


 Net income

$

7,199



$

2,998



$

8,904



$

14,772










Earnings per share








 Basic








   Earnings per share

$

0.38



$

0.20



$

0.47



$

1.00


   Weighted average common shares outstanding

19,016



14,756



18,992



14,808










 Diluted








   Earnings per share

$

0.38



$

0.20



$

0.47



$

0.99


   Weighted average common shares outstanding

19,109



14,851



19,095



14,925


 


 MTS SYSTEMS CORPORATION

 Condensed Consolidated Balance Sheets

 (unaudited - in thousands, except per share data)






April 1,
 2017


October 1,
 2016

 ASSETS




 Current assets




   Cash and cash equivalents

$

97,433



$

84,780


   Accounts receivable, net

115,830



133,500


   Unbilled accounts receivable

73,951



76,626


   Inventories, net

125,146



132,566


   Other current assets

21,378



12,793


   Total current assets

433,738



440,265






 Property and equipment, net

99,131



100,789


 Goodwill

369,224



369,700


 Intangible assets, net

260,513



266,789


 Other long-term assets

9,291



10,477


 Total assets

$

1,171,897



$

1,188,020






 LIABILITIES AND SHAREHOLDERS' EQUITY








 Current liabilities




   Current maturities of long-term debt, net

$

10,218



$

9,850


   Accounts payable

41,480



46,383


   Advance payments from customers

86,766



72,728


   Other accrued liabilities

73,019



87,160


   Total current liabilities

211,483



216,121






 Long-term debt, less current maturities

449,798



455,001


 Other long-term liabilities

106,572



111,638


 Total liabilities

767,853



782,760






 Shareholders' equity




 Common stock, $0.25 par; 64,000 shares authorized:




16,724 and 16,660 shares issued and outstanding as




of April 1, 2017 and October 1, 2016, respectively

4,181



4,165


 Additional paid-in capital

157,277



154,879


 Retained earnings

255,459



256,589


 Accumulated other comprehensive income (loss)

(12,873)



(10,373)


 Total shareholders' equity

404,044



405,260


 Total liabilities and shareholders' equity

$

1,171,897



$

1,188,020


 


Exhibit A

MTS SYSTEMS CORPORATION

Segment Financial Information

(unaudited - in thousands)














Three Months Ended



Test Segment

April 1,
 2017


April 2,
 2016


% Variance







Revenue

$

123,840



$

113,797



9

%

Cost of sales

79,106



80,628



(2)

%

Gross profit

44,734



33,169



35

%

Gross margin

36.1

%


29.1

%









Operating expenses

38,367



31,454



22

%







Income from operations

$

6,367



$

1,715



271

%







Sensors Segment












Revenue

$

69,584



$

23,301



199

%

Cost of sales

35,462



11,326



213

%

Gross profit

34,122



11,975



185

%

Gross margin

49.0

%


51.4

%









Operating expenses

25,077



9,319



169

%







Income from operations

$

9,045



$

2,656



241

%







Total Company












Revenue

$

193,424



$

137,098



41

%

Cost of sales

114,568



91,954



25

%

Gross profit

78,856



45,144



75

%

Gross margin

40.8

%


32.9

%









Operating expenses

63,444



40,773



56

%







Income from operations

$

15,412



$

4,371



253

%

 


Exhibit B

MTS SYSTEMS CORPORATION

Reconciliation of Earnings Per Share Excluding Acquisition Integration,

China Investigation and Restructuring Expenses

(unaudited - in thousands, except per share data)










Three Months Ended


April 1, 2017


Pre-Tax

Tax

Net

Net income

$

8,660


$

1,461


$

7,199


Acquisition integration expenses1

690


188


502


China investigation expenses1

6,759


1,827


4,932


Restructuring expenses2

381


134


247


Adjusted net income3

$

16,490


$

3,610


$

12,880






Weighted average diluted common shares outstanding



19,109






Diluted earnings per share

$

0.45


$

0.07


$

0.38


Diluted earnings per share - Impact of acquisition integration expenses

0.04


0.01


0.03


Diluted earnings per share - Impact of China investigation expenses

0.35


0.10


0.25


Diluted earnings per share - Impact of restructuring expenses

0.02


0.01


0.01


Adjusted diluted earnings per share3

$

0.86


$

0.19


$

0.67






1

In determining the tax impact of acquisition integration and China investigation expenses, we applied a U.S. effective income tax rate before discrete items to these expenses.



2

In determining the tax impact of restructuring expenses, we applied the statutory rate in effect for each jurisdiction where restructuring expenses were incurred.



3

Denotes non-GAAP financial measure.

 

Exhibit C

MTS SYSTEMS CORPORATION

Reconciliation of Earnings Per Share Excluding Acquisition Integration

Acquisition Inventory Fair Value Adjustment, China Investigation and Restructuring Expenses

(unaudited - in thousands, except per share data)










Six Months Ended


April 1, 2017


Pre-Tax

Tax

Net

Net income

$

10,841


$

1,937


$

8,904


Acquisition integration expenses1

2,378


624


1,754


Acquisition inventory fair value adjustment1

7,724


1,993


5,731


China investigation expenses1

8,735


2,337


6,398


Restructuring expenses2

944


330


614


Adjusted net income3

$

30,622


$

7,221


$

23,401






Weighted average diluted common shares outstanding



19,095






Diluted earnings per share

$

0.57


$

0.10


$

0.47


Diluted earnings per share - Impact of acquisition integration expenses

0.12


0.03


0.09


Diluted earnings per share - Impact of acquisition inventory fair value adjustment

0.40


0.10


0.30


Diluted earnings per share - Impact of China investigation expenses

0.46


0.12


0.34


Diluted earnings per share - Impact of restructuring expenses

0.05


0.02


0.03


Adjusted diluted earnings per share3

$

1.60


$

0.37


$

1.23






1

In determining the tax impact of acquisition integration, acquisition inventory fair value adjustment and China investigation expenses, we applied a U.S. effective income tax rate before discrete items to these expenses.



2

In determining the tax impact of restructuring expenses, we applied the statutory rate in effect for each jurisdiction where restructuring expenses were incurred.



3

Denotes non-GAAP financial measure.

 

Exhibit D

MTS SYSTEMS CORPORATION

Reconciliation of EBITDA and Adjusted EBITDA to Net Income

(unaudited - in thousands)








Three Months Ended

Six Months Ended



April 1, 2017

April 1, 2017

Net income

$

7,199


$

8,904


Provision for income taxes

1,461


1,937


Interest (income) expense, net

7,418


14,698


Depreciation and amortization

8,440


16,832


EBITDA1

$

24,518


$

42,371





Stock-based compensation

916


2,637


Acquisition integration expenses

690


2,378


Acquisition inventory fair value adjustment


7,724


China investigation expenses

6,759


8,735


Restructuring expenses

381


944


Adjusted EBITDA1

$

33,264


$

64,789





1

Denotes non-GAAP financial measure.

 


Exhibit E

MTS SYSTEMS CORPORATION

Reconciliation of EBITDA and Adjusted EBITDA to Net Income - Outlook

(unaudited - in thousands)








Twelve Months Ended



September 30, 2017


Low

High

Net income

$

15,400


$

23,000


Provision for income taxes

3,900


6,500


Interest (income) expense, net

30,000


31,000


Depreciation and amortization

34,000


35,000


EBITDA1

$

83,300


$

95,500





Stock-based compensation and non-recurring expenses2

31,700


34,500


Adjusted EBITDA1

$

115,000


$

130,000





1

Denotes non-GAAP financial measure.



2

Includes pre-tax forecast expenses for stock-based compensation, acquisition integration, acquisition inventory fair value adjustment, restructuring and China investigation.

 

 

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SOURCE MTS Systems Corporation

Investor Relations Contact: Brian Ross, Corporate Controller, (952) 937-4000