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MTS Reports Fiscal 2019 First Quarter Financial Results

EDEN PRAIRIE, Minn., Feb. 4, 2019 /PRNewswire/ -- MTS Systems Corporation (Nasdaq: MTSC), a leading global supplier of high-performance test and simulation systems and sensors, today reported financial results for its fiscal year 2019 first quarter ended December 29, 2018.

MTS Systems Corporation. (PRNewsFoto/MTS Systems Corporation)

FIRST QUARTER FINANCIAL AND OPERATING HIGHLIGHTS

  • Revenues of $203.2 million, including year-over-year growth in both Test & Simulation and Sensors
  • GAAP diluted earnings per share of $0.54, a decline of $1.18 year-over-year due to the prior year impact of the Tax Act
  • Backlog of $514.7 million, a year-over-year increase of 45%, driven by strong orders growth across both business units
  • Closed $80 million acquisition of E2M Technologies B.V. (E2M), a leading simulation company based in Amsterdam, Netherlands
  • Declared 148th consecutive quarterly dividend

FINANCIAL TABLE


Three Months Ended

(in thousands, except per share data - unaudited)

December 29,

 2018


December 30,

 2017

Revenue

$

203,181



$

194,162


Revenue % increase (decrease)1

4.6

%


(2.6)

%

Gross margin

38.5

%


40.1

%

Operating margin

8.8

%


8.5

%

Earnings before taxes

11,197



9,470


Net income

10,501



33,151


Diluted earnings per share

0.54



1.72


Adjusted diluted earnings per share2

0.59



1.73


Adjusted EBITDA2

30,102



26,878


Cash and cash equivalents, end of period

70,438



94,071


Backlog, end of period

514,705



355,244


Total debt, end of period

466,048



442,047




1

Revenue growth rates in fiscal year 2019 reflect the acquisition of E2M that occurred on November 21, 2018.

Refer to the "Non-GAAP Financial Measures" section below for discussion of the calculation of these non-GAAP financial measures.

EXECUTIVE COMMENTARY - DR. JEFF GRAVES, PRESIDENT AND CHIEF EXECUTIVE OFFICER

"We continue to execute on our growth and diversification strategy, as we capitalize on our expanding opportunities in Sensors, Test Services and Test equipment targeted toward the materials and structures sectors, as well as new market opportunities from our acquisition of E2M late in our first quarter. The success of these efforts is reflected in our strong year-over-year orders performance and an outstanding backlog position of $515 million, which far exceeded not only our prior year position, but also our fiscal year 2018 year-end backlog of $415 million.

Our Sensors business achieved another record orders level of $98 million in the quarter, representing a book-to-bill of 1.26, in part driven by the second purchase order associated with our U.S. Department of Defense contract.

Our Test & Simulation business delivered nearly 15% orders growth year-over-year, driven by our strong technology position associated with advanced materials test systems, as well as structural test systems which simulate seismic events and other unique operating environments for civil infrastructure and wind energy systems. In addition, E2M, with their excellent technology position and approvals, brings us continued opportunity for exciting growth in the flight simulation and entertainment markets.

Given the volume and quality of the orders we experienced in our first quarter of the fiscal year and our record backlog position, we are confident in our ability to deliver on our commitments to growth and expanded profitability in fiscal year 2019 and beyond."

HIGHLIGHTS FOR THE 2019 FIRST FISCAL QUARTER

Revenue

Revenue was $203.2 million, up 4.6% compared to the same prior year period, driven broadly by growth in both business units, along with approximately one month contribution from the acquisition of E2M which closed in late November 2018.

Orders

Test & Simulation orders for the quarter were $125.1 million, up 14.6% compared to the same prior year period, driven primarily by a large order in the structures sector of our Test & Simulation business with increased demand across all market sectors, and particularly strong growth in the Americas region.

Sensors orders for the quarter were $98.2 million, representing a 27.8% increase over the same prior year period. This growth shows continued strength in our Sensors test and position sectors and was driven incrementally by the second purchase order associated with the U.S. Department of Defense, which was funded up to an additional $20 million in the quarter, as well as continued demand for our position sensors.

Earnings Before Taxes

Earnings before taxes of $11.2 million was up $1.7 million compared to the same prior year period. This earnings increase was driven by lower Test & Simulation operating expenses and growth in Test & Simulation gross profit, partially offset by $0.8 million of acquisition-related expenses and a $0.4 million acquisition inventory fair value adjustment. Efforts to reduce our operating expenses resulted in a $1.1 million reduction compared to the same prior year period. Excluding acquisition-related costs, operating expenses declined $1.9 million.

Net Income and Diluted Earnings Per Share

Diluted earnings per share was $0.54 compared to $1.72 in the same prior year period on net income of $10.5 million and $33.2 million, respectively. First quarter of fiscal year 2019 results were impacted by $0.04 of non-recurring costs associated with the acquisition inventory fair value adjustment and acquisition-related expenses. Conversely, results for the first quarter of fiscal year 2018 reflect a reduction in the effective tax rate and discrete benefits stemming from the Tax Cuts and Jobs Act of 2017 (the Tax Act). The Tax Act provided a $0.07 benefit in the first quarter of fiscal year 2019, as compared to a $1.32 benefit in the first quarter of fiscal 2018.

Adjusted EBITDA

Adjusted EBITDA of $30.1 million grew 12.0% from the same prior year period. This growth was primarily due to lower Test & Simulation operating expenses, higher Test & Simulation gross profit and approximately one month contribution from the acquisition of E2M. A reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income, the most directly comparable GAAP financial measure, is provided in Exhibit C of this earnings release.

Capital Structure

During the quarter, our total debt balance increased by $77.7 million, primarily due to the acquisition of E2M which closed in late November and was financed by drawing approximately $80 million on our Revolving Credit Facility. In addition, we made $3.7 million of mandatory debt payments during the first quarter of fiscal year 2019. With the expected Adjusted EBITDA growth from E2M and our strong backlog position at the end of the quarter, we anticipate a net reduction in our leverage ratio between now and the end of fiscal year 2019.

Dividend

The Board of Directors declared a quarterly dividend of $0.30 per share. The dividend was payable on December 31, 2018 to shareholders of record as of the close of business on December 17, 2018. This was our 148th consecutive quarterly dividend.

OUTLOOK

Test & Simulation Business

Overall, the outlook in our Test & Simulation business remains positive, particularly in our core markets of materials and structures, test services and the broad based need for intelligent machines that can simulate complex operating environments. The addition of E2M brings to us exposure to flight simulation, entertainment and other advanced simulation markets that will further expand our growth opportunities for this business. The underlying growth drivers include the rapidly growing application of advanced carbon fiber composites in flight and ground vehicles, continued growth in the use of additive manufacturing, and expansion in wind energy and civil infrastructure that is more resistant to damage from powerful earthquake, sea and storm events. In addition to our exciting growth opportunities, we continue to invest in operational efficiency initiatives to improve profitability and in new products and technologies to generate the highest demand for Test & Simulation products and services in the coming year.

Sensors Business

Strong demand in the Sensors business is anticipated to continue during fiscal year 2019 across all sectors, driven by accelerating new product introductions across all major markets and geographies, and expanded opportunities associated with the U.S. Department of Defense. This combination of positive factors is expected to yield annual, double-digit top line growth, along with Adjusted EBITDA expansion for the Sensors business in fiscal year 2019.

Consolidated

Based on these factors, we maintain our expected outlook for fiscal year 2019 including:

Metric


Current Outlook

Revenue


$830 million to $870 million

Adjusted EBITDA


$122 million to $142 million

Diluted earnings per share


$2.30 to $2.60

Adjusted diluted earnings per share


$2.42 to $2.72

The above outlook includes:

  • $8.5 million to $11.0 million for stock-based compensation, restructuring expenses, acquisition-related expenses and acquisition fair value inventory adjustment;
  • Our acquisition of E2M, in addition to the slightly positive effects of the implementation of the new revenue recognition standard as compared to the previous standard; and
  • An anticipated effective tax rate, excluding discrete tax items, of 15-19% for fiscal year 2019.

A reconciliation of Adjusted EBITDA and Adjusted diluted earnings per share, non-GAAP financial measures, to net income, the most directly comparable GAAP financial measure, for the above outlook is included in Exhibit E and F of this earnings release, respectively.

FIRST QUARTER CONFERENCE CALL

As announced on January 21, 2019, a conference call will be held on February 4, 2019 (today), at 11:00 a.m. ET (10:00 a.m. CT). Dr. Jeffrey A. Graves, President and Chief Executive Officer, and Brian T. Ross, Senior Vice President and Chief Financial Officer, will host the call, which will include a question and answer session after prepared remarks.

Call toll free +1-888-220-8474 (international toll +1-720-452-9217) and reference the conference pass code 8744810. Telephone replay will be available at 1:00 p.m. ET following the call until 1:00 p.m. ET, February 11, 2019. Call toll free +1-888-203-1112 and reference the conference pass code 8744810.

A transcript of the call can also be accessed from the MTS website at http://investor.mts.combeginning on February 5, 2019.

ABOUT MTS SYSTEMS CORPORATION

MTS Systems Corporation's testing and simulation hardware, software and service 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 sensors provide measurements of vibration, pressure, position, force and sound in a variety of applications. MTS had 3,400 employees as of September 29, 2018 and revenue of $778 million for the fiscal year ended September 29, 2018. Additional information on MTS can be found at www.mts.com.

NON-GAAP FINANCIAL MEASURES

We believe that disclosing adjusted diluted earnings per share, which is diluted earnings per share excluding the impact from restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment is useful to investors as a measure of operating performance. We use this as one measure to monitor and evaluate operating performance. Adjusted diluted earnings per share 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 restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment 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, restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment (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, restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment to EBITDA.

We believe that disclosing free cash flow is useful to investors as a measure of operating performance. We use this measure as an indicator of the Company's strength and ability to generate cash. Free cash flow is a financial measure that does not reflect GAAP. We calculate free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment and businesses, net of cash acquired plus cash proceeds from sale of property and equipment.

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, E and F of this earnings release.

FORWARD-LOOKING STATEMENTS

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 opportunities and outlook for our Sensors and Test & Simulation sectors and other statements that are not historical facts. These statements are based on our 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 our 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 our most recent Annual Report on 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 our 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 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.


 MTS SYSTEMS CORPORATION

 Consolidated Statements of Income

 (unaudited - in thousands, except per share data)






Three Months Ended


December 29,
 2018


December 30,
 2017





Revenue




Product

$

175,078



$

169,241


Service

28,103



24,921


Total revenue

203,181



194,162


Cost of sales




Product

108,168



100,494


Service

16,708



15,740


Total cost of sales

124,876



116,234


Gross profit

78,305



77,928


 Gross margin

38.5

%


40.1

%





Operating expenses




Selling and marketing

32,089



32,028


General and administrative

21,078



20,562


 Research and development

7,172



8,841


 Total operating expenses

60,339



61,431






Income from operations

17,966



16,497


 Operating margin

8.8

%


8.5

%





Interest expense, net

(6,818)



(6,804)


Other income (expense), net

49



(223)






Income before income taxes

11,197



9,470


Income tax provision (benefit)

696



(23,681)


Net income

$

10,501



$

33,151






Earnings per share




 Basic




 Earnings per share

$

0.55



$

1.73


 Weighted average common shares outstanding

19,216



19,124






 Diluted




 Earnings per share

$

0.54



$

1.72


 Weighted average common shares outstanding

19,556



19,254






Dividends declared per share

$

0.30



$

0.30


 


 MTS SYSTEMS CORPORATION

 Condensed Consolidated Balance Sheets

 (unaudited - in thousands)






December 29,
 2018


September 29,
 2018

 ASSETS








 Current assets




 Cash and cash equivalents

$

70,438



$

71,804


 Accounts receivable, net

115,384



122,243


 Unbilled accounts receivable, net

60,656



70,474


 Inventories, net

183,465



139,109


 Other current assets

30,085



24,572


 Total current assets

460,028



428,202






 Property and equipment, net

89,266



90,269






 Goodwill

402,152



369,275


 Intangible assets, net

288,076



246,138


 Other long-term assets

8,342



5,512


 Total assets

$

1,247,864



$

1,139,396






 LIABILITIES AND SHAREHOLDERS' EQUITY








 Current liabilities




 Current maturities of long-term debt, net

$

30,462



$

32,738


 Accounts payable

49,191



47,886


 Advance payments from customers

101,367



80,131


 Other accrued liabilities

76,247



78,358


 Total current liabilities

257,267



239,113






 Long-term debt, less current maturities, net

435,586



355,640


 Other long-term liabilities

81,676



66,711


 Total liabilities

774,529



661,464






 Shareholders' equity




Common stock, $0.25 par; 64,000 shares authorized: 17,872 and 17,856 shares issued and outstanding as of December 29, 2018 and September 29, 2018, respectively

4,468



4,464


 Additional paid-in capital

173,065



171,407


 Retained earnings

299,493



300,585


 Accumulated other comprehensive income (loss)

(3,691)



1,476


 Total shareholders' equity

473,335



477,932


 Total liabilities and shareholders' equity

$

1,247,864



$

1,139,396


 


 MTS SYSTEMS CORPORATION

Condensed Consolidated Statements of Cash Flows

 (unaudited - in thousands)






Three Months Ended


December 29,
 2018


December 30,
 2017





Cash Flows from Operating Activities




Net income

$

10,501



$

33,151


Adjustments to reconcile net income to net cash provided by (used in) operating activities




Stock-based compensation

1,794



1,622


Fair value adjustment to acquired inventory

445




Depreciation and amortization

8,960



8,736


(Gain) loss on sale or disposal of property and equipment

161



67


Amortization of financing fees

1,060



1,310


Deferred income taxes

(1,258)



(30,352)


Other

428



724


Changes in operating assets and liabilities

(11,460)



(6,035)


Net Cash Provided by (Used in) Operating Activities

10,631



9,223






Cash Flows from Investing Activities




Purchases of property and equipment

(3,773)



(2,801)


Proceeds from sale of property and equipment

10



69


Purchases of business, net of cash acquired

(78,032)




Other

(285)




Net Cash Provided by (Used in) Investing Activities

(82,080)



(2,732)






Cash Flows from Financing Activities




Proceeds from issuance of long-term debt

 

80,391




Payments on financing arrangements, net

(4,119)



(16,897)


Cash dividends

(5,359)



(5,330)


Proceeds from exercise of stock options and employee stock purchase plan

38



212


Payments to purchase and retire common stock

(356)



(744)


Net Cash Provided by (Used in) Financing Activities

70,595



(22,759)






Effect of Exchange Rate Changes on Cash and Cash Equivalents

(512)



1,606


Cash and Cash Equivalents




Increase (decrease) during the period

(1,366)



(14,662)


Balance, beginning of period

71,804



108,733


Balance, End of Period

$

70,438



$

94,071


 


Exhibit A

MTS SYSTEMS CORPORATION

Segment Financial Information

(unaudited - in thousands)














Three Months Ended




December 29,
 2018


December 30,
 2017


% Variance

Test & Simulation Segment






Revenue

$

125,560



$

118,203



6

%

Cost of sales

86,015



79,064



9

%

Gross profit

39,545



39,139



1

%

Gross margin

31.5

%


33.1

%









Operating expenses

32,214



33,530



(4)

%







Income from operations

$

7,331



$

5,609



31

%







Sensors Segment






Revenue

$

77,950



$

75,959



3

%

Cost of sales

39,191



37,170



5

%

Gross profit

38,759



38,789



%

Gross margin

49.7

%


51.1

%









Operating expenses

28,125



27,901



1

%







Income from operations

$

10,634



$

10,888



(2)

%







Intersegment Eliminations






Revenue

$

(329)



$




Cost of sales

(330)






Gross profit

1












Income (loss) from operations

$

1



$










Total Company






Revenue

$

203,181



$

194,162



5

%

Cost of sales

124,876



116,234



7

%

Gross profit

78,305



77,928



%

Gross margin

38.5

%


40.1

%









Operating expenses

60,339



61,431



(2)

%







Income from operations

$

17,966



$

16,497



9

%

 


 

Exhibit B

MTS SYSTEMS CORPORATION

Reconciliation of Earnings Per Share Excluding Restructuring, Acquisition-Related

and Acquisition Inventory Fair Value Adjustment Expenses

(unaudited - in thousands, except per share data)


















Three Months Ended


December 29, 2018


December 30, 2017


Pre-Tax

Tax

Net


Pre-Tax

Tax

Net

Net income

$

11,197


$

696


$

10,501



$

9,470


$

(23,681)


$

33,151


Restructuring expenses 1

130


33


97



246


62


184


Acquisition-related expenses 2

773


162


611






Acquisition inventory fair value adjustment 1

445


67


378






Adjusted net income 3

$

12,545


$

958


$

11,587



$

9,716


$

(23,619)


$

33,335










Weighted average diluted common shares outstanding



19,556





19,254










Diluted earnings per share

$

0.58


$

0.04


$

0.54



$

0.49


$

(1.23)


$

1.72


Impact of restructuring expenses

0.01



0.01



0.01



0.01


Impact of acquisition-related expenses

0.03


0.01


0.02






Impact of acquisition inventory fair value adjustment

0.02



0.02






Adjusted diluted earnings per share3

$

0.64


$

0.05


$

0.59



$

0.50


$

(1.23)


$

1.73











In determining the tax impact of restructuring expenses and acquisition inventory fair value adjustment, we applied the statutory rate in effect for each jurisdiction where the expenses were incurred.


2  

In determining the tax impact of acquisition-related expenses, we applied a U.S. effective income tax rate before discrete items to these expenses.


3 

Denotes non-GAAP financial measure.

 


Exhibit C

MTS SYSTEMS CORPORATION

Reconciliation of EBITDA and Adjusted EBITDA to Net Income

(unaudited - in thousands)










Three Months Ended


December 29,
2018


December 30,
2017

Net income

$

10,501



$

33,151


Income tax provision (benefit)

696



(23,681)


Interest expense, net

6,818



6,804


Depreciation and amortization

8,960



8,736


EBITDA 1

26,975



25,010






Stock-based compensation

1,794



1,622


Restructuring expenses

130



246


Acquisition-related expenses 2

758




Acquisition inventory fair value adjustment

445




Adjusted EBITDA 1

$

30,102



$

26,878







1 

Denotes non-GAAP financial measure.


 

Acquisition-related expenses were adjusted to exclude stock-based compensation that is otherwise included in the stock-based compensation line.

 


Exhibit D

MTS SYSTEMS CORPORATION

Free Cash Flow

(unaudited - in thousands)










Three Months Ended


December 29,
2018


December 30,
2017

Net Cash Provided by (Used in) Operating Activities

$

10,631



$

9,223


Purchases of property and equipment

(3,773)



(2,801)


Proceeds from sale of property and equipment

10



69


Free cash flow1

$

6,868



$

6,491








1

Denotes non-GAAP financial measures.

 


Exhibit E

MTS SYSTEMS CORPORATION

Reconciliation of EBITDA and Adjusted EBITDA to Net Income - Outlook

(unaudited - in thousands)








Twelve Months Ending



September 28, 2019


Low

High

Net income

$

44,500


$

50,000


Income tax provision (benefit)

7,000


11,000


Interest expense, net

26,000


28,000


Depreciation and amortization

36,000


42,000


EBITDA1

113,500


131,000





Stock-based compensation and non-recurring expenses2

8,500


11,000


Adjusted EBITDA1

$

122,000


$

142,000









1

Denotes non-GAAP financial measure.





2

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

 


Exhibit F

MTS SYSTEMS CORPORATION

Reconciliation of Diluted Earnings per Share and Adjusted Diluted Earnings per Share - Outlook

(unaudited - in thousands)










Twelve Months Ending

 


September 28, 2019


Low


High

Net income1

$

44,500



$

50,000


Non-recurring expenses 2

2,250



2,300


Adjusted net income 3

$

46,750



$

52,300






Weighted average diluted common shares outstanding

19,350



19,250






Diluted earnings per share

$

2.30



$

2.60


Impact of non-recurring expenses2

0.12



0.12


Adjusted diluted earnings per share

$

2.42



$

2.72











1

Refer to Exhibit E for tax impact on net income guidance.






2

Includes forecast expenses for restructuring expenses, acquisition-related expenses and acquisition inventory fair value adjustment.






3

Applied anticipated tax rate, excluding discrete tax items, of approximately 15-19%.

 

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SOURCE MTS Systems Corporation

Brian Ross, Senior Vice President and Chief Financial Officer, brian.ross@mts.com, (952) 937-4000