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MTS Reports Fiscal 2017 Third Quarter Financial Results

EDEN PRAIRIE, MN, Aug. 7, 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 third quarter ended July 1, 2017.

  • Revenues of $194 million, an increase of 23 percent from the prior year
  • Gross margin of 39 percent, an increase of 210 basis points from the prior year
  • GAAP EPS of $0.55, an increase of 20 percent from the prior year
  • Strong year-to-date cash flow from operations of $52 million, ending the quarter with over $100 million in cash

 

MTS Systems Corporation

"We are pleased to report that, as expected, Test orders in the third quarter strengthened, increasing sequentially by roughly 9 percent and year-over-year by 19 percent," stated Dr. Jeffrey A. Graves, President and Chief Executive Officer of MTS Systems. "We expect the improvement in orders to continue into our fiscal fourth quarter, strengthening our Test backlog as we exit the year and positioning us well for future growth. This increase in Test orders momentum is attributed to customers now moving forward with new product investments. Particular strength was noted in infrastructure test markets, as well as wind energy and aerospace, particularly in the U.S. and Europe. The China market remained robust in the third quarter, particularly for materials testing systems. Looking forward, we expect renewed strength in automotive new product markets and broad-based geographic strength to support the acceleration of Test orders in the fourth quarter."

Dr. Graves continued, "From our Sensors business standpoint, beginning in the second half of the third quarter, orders strengthened substantially, boosting our Sensors book-to-bill order rate to 1.1 for the third quarter and positioning us well for revenue growth in the fourth quarter. This strength was driven by a resurgence in mobile hydraulic markets, which correlates in part to the heavy construction and mining equipment industries, as well as broad strength in the primary materials markets of steel and aluminum, which benefits our organic positional Sensors business. The increase in sales momentum as we exited the third quarter reflected broad strengthening in the Sensors test market sectors, as well as improvements in the industrial markets for the first time this year. This strong sales performance reflects the benefits of the ongoing integration of PCB with our organic Sensors business, under a unified leadership structure and strong focus on customer satisfaction worldwide. We are confident that MTS Sensors now has the global reach, scale and broad product portfolio required to provide customers with solutions for the rapid technological innovation occurring across multiple industries to meet new government regulations, increasing environmental standards and the drive for improved productivity for our customers and their new products. We expect this broad-based sales momentum to continue into the fourth quarter and into fiscal year 2018."

Dr. Graves concluded, "With these fundamentals in place across all of our major end markets for both segments, and the integration of PCB proceeding on plan, MTS is well positioned to achieve further growth in order rates for the fourth quarter of our fiscal year 2017, positioning us well for an exciting year ahead in fiscal year 2018."

Fiscal 2017 Third Quarter Results

Total revenue grew $36.1 million, or 22.9 percent, to $193.8 million, compared to the same prior year period. Revenue from the PCB acquisition, which was completed in fiscal year 2016 added 26.5 percent growth, and organic revenue declined by 3.6 percent due to a 6.9 percent decrease in Test partially offset by a 14.4 percent increase in our organic Sensors business.

Test orders for the quarter were $119.6 million, an 8.8 percent sequential increase over the second quarter of fiscal 2017 and 18.5 percent higher than the same prior year period. The orders growth is attributable to accelerated quoting rates and deal closure from the Test opportunity pipeline that remains near $1 billion in opportunities over the next 12 months. The Test segment ended the third quarter with a backlog of $283.5 million.

Earnings before taxes was $8.0 million, a decrease of $2.0 million compared to the prior year. This decline includes the decrease in Test revenue and higher expenses in Sensors for transitioning production from Machida, Japan to Cary, North Carolina. Partially offsetting these items was the decrease in PCB acquisition-related expenses and an increase in organic Sensors revenue.

Diluted earnings per share (EPS) on a GAAP basis was $0.55 compared to $0.46 in the prior year. Fiscal year 2017 results include a reduction in the effective tax rate stemming from the impact of additional U.S. tax credits for the prior fiscal years associated with domestic manufacturing, deductible PCB acquisition-related expenses and U.S. R&D credits. These tax credits provide a $0.15 benefit to our EPS compared to the same prior year period. EPS for fiscal year 2017 also includes higher amortization expense and interest expense related to the PCB acquisition, which was completed on July 5, 2016. In addition, the total number of shares has increased as a result of the shares of common stock and tangible equity units (TEUs) that were issued at the end of the third quarter of fiscal year 2016.

On July 6, 2017, we completed a repricing of our existing $457 million senior secured term loan B facility to reduce the applicable rate by 100 basis points, which we expect will result in annual interest expense savings of at least $4 million.

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 $26.7 million in the third quarter of fiscal year 2017, down from $33.3 million in the second quarter of fiscal year 2017, primarily due to the decline in Test revenue. A reconciliation of this non-GAAP financial measure to net income, the most directly comparable GAAP financial measure, is provided in Exhibit D of this earnings release.

Outlook

The company now expects fiscal year 2017 revenues of $770 million to $785 million and GAAP EPS to be in the range of $1.15 to $1.30, up from the previous guidance of $0.80 to $1.20 per share due to the discrete tax benefits recognized in the third quarter of fiscal year 2017. GAAP EPS includes acquisition integration, acquisition inventory fair value adjustment and restructuring expenses of $13 million to $14 million, the cost of the China investigation of approximately $9 million and discrete tax benefits of $3 million. We have updated our guidance for Adjusted EBITDA for the full fiscal year 2017 to range between $115 million and $120 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, restructuring expenses and acquisition-related expenses is useful to investors as a measure of operating performance. We use this as one measure to monitor and evaluate operating performance. Diluted EPS 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, restructuring expenses and acquisition-related 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 of this earnings release.

Third Quarter Conference Call

A conference call will be held on August 8, 2017, at 10:00 a.m. ET (9:00 a.m. CT). Call toll free +1-888-727-7656 (international toll +1-719-884-1604) and reference the conference pass code "5745526". Telephone replay will be available at 1:00 p.m. ET following the call until 1:00 p.m. ET, August 15, 2017. Call toll free +1-888-203-1112 (international toll +1-719-457-0820) and reference the conference pass code "5745526". A transcript of the call can also be accessed from the MTS website at http://investor.mts.com beginning on August 9, 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


Nine Months Ended


July 1,
 2017


July 2,
 2016


July 1,
 2017


July 2,
 2016









Revenue

$

193,764



$

157,700



$

586,467



$

435,299


Cost of sales

118,208



99,587



358,591



279,531


 Gross profit

75,556



58,113



227,876



155,768


 Gross margin

39.0

%


36.9

%


38.9

%


35.8

%









Operating expenses








 Selling, general and administrative

50,583



42,226



159,259



110,863


 Research and development

8,356



6,198



26,298



17,244


   Total operating expenses

58,939



48,424



185,557



128,107










Income from operations

16,617



9,689



42,319



27,661


   Operating margin

8.6

%


6.1

%


7.2

%


6.4

%









Interest expense, net

(7,711)



(375)



(22,409)



(833)


Other income (expense), net

(923)



668



(1,086)



465










Income before income taxes

7,983



9,982



18,824



27,293


Income tax provision (benefit)

(2,627)



2,832



(690)



5,371


Net income

$

10,610



$

7,150



$

19,514



$

21,922










Earnings per share








 Basic








   Earnings per share

$

0.56



$

0.46



$

1.03



$

1.46


   Weighted average common shares outstanding

19,052



15,514



19,012



15,044










 Diluted








   Earnings per share

$

0.55



$

0.46



$

1.02



$

1.45


   Weighted average common shares outstanding

19,138



15,660



19,108



15,169


 

 MTS SYSTEMS CORPORATION

 Condensed Consolidated Balance Sheets

 (unaudited - in thousands, except per share data)






July 1,
 2017


October 1,
 2016

 ASSETS




 Current assets




   Cash and cash equivalents

$

101,620



$

84,780


   Accounts receivable, net

106,473



133,500


   Unbilled accounts receivable

83,865



76,626


   Inventories, net

129,447



132,566


   Other current assets

23,341



12,793


   Total current assets

444,746



440,265






 Property and equipment, net

101,083



100,789


 Goodwill

369,399



369,700


 Intangible assets, net

257,794



266,789


 Other long-term assets

8,623



10,477


 Total assets

$

1,181,645



$

1,188,020






 LIABILITIES AND SHAREHOLDERS' EQUITY








 Current liabilities




   Current maturities of long-term debt, net

$

19,523



$

9,850


   Accounts payable

44,546



46,383


   Advance payments from customers

78,488



72,728


   Other accrued liabilities

73,232



87,160


   Total current liabilities

215,789



216,121






 Long-term debt, less current maturities

440,400



455,001


 Other long-term liabilities

106,020



111,638


 Total liabilities

762,209



782,760






 Shareholders' equity




   Common stock, $0.25 par; 64,000 shares authorized: 16,832 and 16,660 shares issued and outstanding as of July 1, 2017 and October 1, 2016, respectively

 

4,208



 

4,165


   Additional paid-in capital

162,344



154,879


   Retained earnings

261,021



256,589


   Accumulated other comprehensive income (loss)

(8,137)



(10,373)


   Total shareholders' equity

419,436



405,260


 Total liabilities and shareholders' equity

$

1,181,645



$

1,188,020


 

Exhibit A

MTS SYSTEMS CORPORATION

Segment Financial Information

(unaudited - in thousands)














Three Months Ended



Test Segment

July 1,
 2017


July 2,
 2016


% Variance







Revenue

$

124,359



$

133,512



(7)%


Cost of sales

83,240



87,788



(5)%


Gross profit

41,119



45,724



(10)%


Gross margin

33.1%



34.2%










Operating expenses

32,410



35,041



(8)%








Income from operations

$

8,709



$

10,683



(18)%








Sensors Segment












Revenue

$

69,405



$

24,188



187%


Cost of sales

34,968



11,799



196%


Gross profit

34,437



12,389



178%


Gross margin

49.6%



51.2%










Operating expenses

26,529



13,383



98%








Income (loss) from operations

$

7,908



$

(994)



896%








Total Company












Revenue

$

193,764



$

157,700



23%


Cost of sales

118,208



99,587



19%


Gross profit

75,556



58,113



30%


Gross margin

39.0%



36.9%










Operating expenses

58,939



48,424



22%








Income from operations

$

16,617



$

9,689



72%


 

Exhibit B

MTS SYSTEMS CORPORATION

Reconciliation of Earnings Per Share Excluding Acquisition Integration,

Acquisition Inventory Fair Value Adjustment, China Investigation, Restructuring and Acquisition-Related Expenses

(unaudited - in thousands, except per share data)










Three Months Ended


July 1, 2017


Pre-Tax

Tax

Net

Net income

$

7,983


$

(2,627)


$

10,610


Acquisition integration expenses1

577


167


410


Acquisition inventory fair value adjustment1

251


73


178


China investigation expenses1

245


66


179


Restructuring expenses2

92


32


60


Acquisition-related expenses1


814


(814)


Adjusted net income3

$

9,148


$

(1,475)


$

10,623






Weighted average diluted common shares outstanding



19,138






Diluted earnings per share

$

0.42


$

(0.13)


$

0.55


Impact of acquisition integration expenses

0.03


0.01


0.02


Impact of acquisition inventory fair value adjustment

0.01



0.01


Impact of China investigation expenses

0.01



0.01


Impact of restructuring expenses

0.01



0.01


Impact of acquisition-related expenses


0.04


(0.04)


Adjusted diluted earnings per share3

$

0.48


$

(0.08)


$

0.56






1  In determining the tax impact of acquisition integration, acquisition inventory fair value adjustment, China investigation and acquisition-related 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, Restructuring and Acquisition-Related Expenses

(unaudited - in thousands, except per share data)










Nine Months Ended


July 1, 2017


Pre-Tax

Tax

Net

Net income

$

18,824


$

(690)


$

19,514


Acquisition integration expenses1

2,955


791


2,164


Acquisition inventory fair value adjustment1

7,975


2,066


5,909


China investigation expenses1

8,980


2,403


6,577


Restructuring expenses2

1,036


362


674


Acquisition-related expenses1


814


(814)


Adjusted net income3

$

39,770


$

5,746


$

34,024






Weighted average diluted common shares outstanding



19,108






Diluted earnings per share

$

0.99


$

(0.03)


$

1.02


Impact of acquisition integration expenses

0.15


0.04


0.11


Impact of acquisition inventory fair value adjustment

0.42


0.11


0.31


Impact of China investigation expenses

0.47


0.13


0.34


Impact of restructuring expenses

0.05


0.01


0.04


Impact of acquisition-related expenses


0.04


(0.04)


Adjusted diluted earnings per share3

$

2.08


$

0.30


$

1.78






1  In determining the tax impact of acquisition integration, acquisition inventory fair value adjustment, China investigation and acquisition-related 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

Nine Months Ended



July 1, 2017

July 1, 2017

Net income

$

10,610


$

19,514


Income tax provision (benefit)

(2,627)


(690)


Interest expense, net

7,711


22,409


Depreciation and amortization

8,598


25,430


EBITDA1

$

24,292


$

66,663





Stock-based compensation

1,288


3,925


Acquisition integration expenses

577


2,955


Acquisition inventory fair value adjustment

251


7,975


China investigation expenses

245


8,980


Restructuring expenses

92


1,036


Adjusted EBITDA1

$

26,745


$

91,534





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 Ending


September 30, 2017


Low

High

Net income

$

22,000


$

24,800


Income tax provision (benefit)


500


Interest expense, net

31,000


31,500


Depreciation and amortization

33,500


34,000


EBITDA1

$

86,500


$

90,800





Stock-based compensation and non-recurring expenses2

28,500


29,200


Adjusted EBITDA1

$

115,000


$

120,000





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, Brian Ross, Senior Vice President and Chief Financial Officer, (952) 937-4000