MTS Reports Fiscal 2020 First Quarter Financial Results
FIRST QUARTER FINANCIAL AND OPERATING HIGHLIGHTS
- Revenue of
$205.8 million , an increase of 1.3% - Sensors revenue growth of 9.7%
- GAAP diluted earnings per share of
$0.27 - Adjusted diluted earnings per share of
$0.37 , including$0.20 of amortization expense - Demand outlook strengthening with growth in orders anticipated for the remainder of the fiscal year
- Executed agreement to acquire R&D entities
- Declared 152nd consecutive quarterly dividend
FINANCIAL TABLE
Three Months Ended |
|||||||
(in thousands, except per share data - unaudited) |
December 28, |
December 29, |
|||||
Revenue |
$ |
205,843 |
$ |
203,181 |
|||
Revenue % increase |
1.3 |
% |
4.6 |
% |
|||
Gross margin |
37.2 |
% |
38.5 |
% |
|||
Operating margin |
7.4 |
% |
8.8 |
% |
|||
Earnings before taxes |
$ |
6,455 |
$ |
11,197 |
|||
Net income |
5,306 |
10,501 |
|||||
Diluted earnings per share |
0.27 |
0.54 |
|||||
Adjusted diluted earnings per share1 |
0.37 |
0.59 |
|||||
Adjusted EBITDA1 |
29,627 |
30,102 |
|||||
Cash and cash equivalents, end of period |
64,071 |
70,438 |
|||||
Backlog, end of period |
395,992 |
514,705 |
|||||
Total debt, end of period |
540,710 |
466,048 |
1 |
Refer to the "Non-GAAP Financial Measures" section below for discussion of the calculation of these non-GAAP financial measures. |
EXECUTIVE COMMENTARY - DR.
"We continue to execute on our long-term strategy of delivering consistent top-line growth and margin expansion, recognizing that individual quarters may be volatile. Central to this strategy is the contribution from our Sensors business, which is delivering near double-digit revenue growth at highly accretive margins to our consolidated operations. In the first quarter, this growth was driven by strength in our Sensors test sector, and by the continued ramp-up of volume associated with our
As anticipated, we continue to experience weakness in the top line for our Test & Simulation business mainly due to delays in order timing from the second half of fiscal year 2019. Despite the volume impact, profitability in our Test & Simulation business was largely maintained at prior year levels due to improved quality of backlog and the increasing impact of our efficiency initiatives that have been our priority over the last two years. These efforts are continuing and anticipated to be increasingly felt with accelerating volume growth in the second half of the fiscal year.
Based upon our opportunity pipeline, we anticipate a strong rebound in order rates, and corresponding growth in backlog as we move into and through the second half of fiscal year 2020. We expect this to be driven primarily by increased strength in our non-automotive markets for both of our businesses. This growth in backlog will ultimately translate to accelerated revenue growth and increased profitability in subsequent quarters.
Subsequent to quarter-end, we were pleased to formally close the acquisition of certain entities of the Danish company R&D ("R&D") as previously announced in
HIGHLIGHTS FOR THE 2020 FIRST FISCAL QUARTER
Revenue
Revenue was
Orders
Test & Simulation orders for the quarter were
Sensors orders for the quarter were
Backlog
Backlog of
Net Income and Diluted Earnings Per Share
GAAP diluted earnings per share was
Adjusted EBITDA
Adjusted EBITDA declined slightly to
Balance Sheet
During the quarter, our total debt balance increased by
Dividend
The Board of Directors declared a quarterly dividend of $0.30 per share. The dividend was payable on December 30, 2019 to shareholders of record as of the close of business on
OUTLOOK
Test & Simulation Business
Given our expectations on order rates, revenue and product mix, as well as the increasing impact of our efficiency initiatives, our performance for the second half of the fiscal year is expected to show a marked improvement over the first half of the fiscal year. This will lead to overall improvement year-over-year in the Test & Simulation business, and a strong backlog position as we exit the year and look to fiscal year 2021. Future orders growth from strength in our simulation platforms, material testing, service offerings and especially our structures sector, is expected to overcome the headwinds experienced in the global economy. While we are continuing to await a resurgence in the automotive markets, we continue to benefit from the rapidly expanding use of advanced materials, such as carbon-fiber composites, the adoption of additive manufacturing methods for net-shape component fabrications, and the rapidly increasing complexity of ground and air vehicles which requires new simulation methods for determining product performance and life. Our energy and infrastructure markets remain robust, driven by continued growth in wind power and advanced building designs that are more resistant to damage from earthquakes, sea and storm events. The simulation market continues to benefit from increased demand for pilot training and rapid theme park expansions, which fits nicely with our expanded product offerings.
In addition to these growth opportunities, we continue to invest in operational efficiency initiatives to improve profitability, and to develop new products and technologies to drive margin expansion and to generate the highest demand for Test & Simulation products and services in the coming years.
Sensors Business
Our Sensors business demand is driven by accelerating new product introductions across all major markets and geographies, and expanded opportunities associated with the
Consolidated
Based on these factors, we maintain our expected outlook for fiscal year 2020 including:
Metric |
Current Outlook |
|
Revenue |
$955 million to $995 million |
|
Adjusted EBITDA |
$138 million to $158 million |
|
Diluted earnings per share |
$2.05 to $2.35 |
|
Adjusted diluted earnings per share |
$2.20 to $2.55 |
The above outlook includes:
$12.0 million to $16.0 million for stock-based compensation, acquisition-related and restructuring expenses;- Our most recent acquisitions of Endevco in Sensors and R&D in Test & Simulation; and
- An anticipated effective tax rate, excluding discrete tax items, of 15-19% for fiscal year 2020.
A reconciliation of Adjusted EBITDA and adjusted diluted earnings per share, non-GAAP financial measures, to net income and diluted earnings per share, the most directly comparable GAAP financial measures, respectively, for the above outlook is included in Exhibits E and F of this earnings release, respectively.
FIRST QUARTER CONFERENCE CALL
As announced on
Call toll free +1-800-353-6461 (international toll +1-334-323-0501) and reference the conference pass code 9681358. The conference call replay will be available at
A transcript of the call can also be accessed from the MTS website at http://investor.mts.com beginning on
ABOUT
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), EBITDA excluding the impact from stock-based compensation, restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment (Adjusted EBITDA) and Adjusted EBITDA divided by revenue (Adjusted EBITDA margin) are useful to investors as a measure of leverage and operating performance. We use these measures to monitor and evaluate leverage and operating performance. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin 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. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue.
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 our 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 sales 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 earnings 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 this earnings 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
MTS SYSTEMS CORPORATION |
|||||||
Consolidated Statements of Income |
|||||||
(unaudited - in thousands, except per share data) |
|||||||
Three Months Ended |
|||||||
December 28, |
December 29, |
||||||
Revenue |
|||||||
Product |
$ |
178,858 |
$ |
175,078 |
|||
Service |
26,985 |
28,103 |
|||||
Total revenue |
205,843 |
203,181 |
|||||
Cost of sales |
|||||||
Product |
111,639 |
108,168 |
|||||
Service |
17,595 |
16,708 |
|||||
Total cost of sales |
129,234 |
124,876 |
|||||
Gross profit |
76,609 |
78,305 |
|||||
Gross margin |
37.2 |
% |
38.5 |
% |
|||
Operating expenses |
|||||||
Selling and marketing |
32,719 |
32,089 |
|||||
General and administrative |
21,693 |
21,078 |
|||||
Research and development |
7,039 |
7,172 |
|||||
Total operating expenses |
61,451 |
60,339 |
|||||
Income from operations |
15,158 |
17,966 |
|||||
Operating margin |
7.4 |
% |
8.8 |
% |
|||
Interest income (expense), net |
(8,272) |
(6,818) |
|||||
Other income (expense), net |
(431) |
49 |
|||||
Income before income taxes |
6,455 |
11,197 |
|||||
Income tax provision (benefit) |
1,149 |
696 |
|||||
Net income |
$ |
5,306 |
$ |
10,501 |
|||
Earnings per share |
|||||||
Basic |
|||||||
Earnings per share |
$ |
0.28 |
$ |
0.55 |
|||
Weighted average common shares outstanding |
19,146 |
19,216 |
|||||
Diluted |
|||||||
Earnings per share |
$ |
0.27 |
$ |
0.54 |
|||
Weighted average common shares outstanding |
19,369 |
19,556 |
|||||
Dividends declared per share |
$ |
0.30 |
$ |
0.30 |
MTS SYSTEMS CORPORATION |
|||||||
Condensed Consolidated Balance Sheets |
|||||||
(unaudited - in thousands) |
|||||||
December 28, |
September 28, |
||||||
ASSETS |
|||||||
Current assets |
|||||||
Cash and cash equivalents |
$ |
64,071 |
$ |
57,937 |
|||
Accounts receivable, net |
131,285 |
121,260 |
|||||
Unbilled accounts receivable, net |
67,368 |
80,331 |
|||||
Inventories, net |
177,017 |
167,199 |
|||||
Prepaid expenses and other current assets |
21,075 |
23,761 |
|||||
Total current assets |
460,816 |
450,488 |
|||||
Property and equipment, net |
101,992 |
101,083 |
|||||
Goodwill |
429,838 |
429,039 |
|||||
Intangible assets, net |
306,134 |
306,585 |
|||||
Other long-term assets |
30,639 |
10,782 |
|||||
Total assets |
$ |
1,329,419 |
$ |
1,297,977 |
|||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|||||||
Current liabilities |
|||||||
Short-term borrowings |
$ |
30,000 |
$ |
— |
|||
Current maturities of long-term debt, net |
27,494 |
27,969 |
|||||
Accounts payable |
46,113 |
46,849 |
|||||
Advance payments from customers |
66,142 |
70,520 |
|||||
Other accrued liabilities |
100,694 |
106,238 |
|||||
Total current liabilities |
270,443 |
251,576 |
|||||
Long-term debt, less current maturities, net |
483,216 |
484,648 |
|||||
Other long-term liabilities |
87,012 |
77,694 |
|||||
Total liabilities |
840,671 |
813,918 |
|||||
Shareholders' equity |
|||||||
Common stock, $0.25 par; 64,000 shares authorized: 19,156 and 19,124 shares issued and outstanding as of December 28, 2019 and September 28, 2019, respectively |
4,789 |
4,781 |
|||||
Additional paid-in capital |
183,948 |
182,422 |
|||||
Retained earnings |
314,887 |
315,329 |
|||||
Accumulated other comprehensive income (loss) |
(14,876) |
(18,473) |
|||||
Total shareholders' equity |
488,748 |
484,059 |
|||||
Total liabilities and shareholders' equity |
$ |
1,329,419 |
$ |
1,297,977 |
MTS SYSTEMS CORPORATION |
|||||||
Condensed Consolidated Statements of Cash Flows |
|||||||
(unaudited - in thousands) |
|||||||
Three Months Ended |
|||||||
December 28, |
December 29, |
||||||
Cash Flows from Operating Activities |
|||||||
Net income |
$ |
5,306 |
$ |
10,501 |
|||
Adjustments to reconcile net income to net cash provided by (used in) operating activities |
|||||||
Stock-based compensation |
2,167 |
1,794 |
|||||
Fair value adjustment to acquired inventory |
540 |
445 |
|||||
Depreciation |
5,662 |
5,144 |
|||||
Amortization |
4,785 |
3,816 |
|||||
(Gain) loss on sale or disposal of property and equipment |
612 |
161 |
|||||
Amortization of debt issuance costs |
867 |
1,060 |
|||||
Deferred income taxes |
66 |
(1,258) |
|||||
Other |
2 |
428 |
|||||
Changes in operating assets and liabilities |
(25,750) |
(11,460) |
|||||
Net Cash Provided by (Used in) Operating Activities |
(5,743) |
10,631 |
|||||
Cash Flows from Investing Activities |
|||||||
Purchases of property and equipment |
(10,572) |
(3,773) |
|||||
Proceeds from sale of property and equipment |
— |
10 |
|||||
Purchases of business, net of acquired cash |
— |
(78,032) |
|||||
Other |
— |
(285) |
|||||
Net Cash Provided by (Used in) Investing Activities |
(10,572) |
(82,080) |
|||||
Cash Flows from Financing Activities |
|||||||
Proceeds from issuance of long-term debt |
— |
80,391 |
|||||
(Payments on) proceeds from financing arrangements, net |
28,065 |
(4,119) |
|||||
Cash dividends |
(5,739) |
(5,359) |
|||||
Proceeds from exercise of stock options and employee stock purchase plan |
41 |
38 |
|||||
Payments to purchase and retire common stock |
(835) |
(356) |
|||||
Net Cash Provided by (Used in) Financing Activities |
21,532 |
70,595 |
|||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
917 |
(512) |
|||||
Increase (decrease) in cash and cash equivalents during the period |
6,134 |
(1,366) |
|||||
Cash and cash equivalents balance, beginning of period |
57,937 |
71,804 |
|||||
Cash and cash equivalents balance, end of period |
$ |
64,071 |
$ |
70,438 |
Exhibit A |
|||||||
MTS SYSTEMS CORPORATION |
|||||||
Segment Financial Information |
|||||||
(unaudited - in thousands) |
|||||||
Three Months Ended |
|||||||
December 28, |
December 29, |
||||||
Test & Simulation Segment |
|||||||
Revenue |
$ |
120,730 |
$ |
125,560 |
|||
Cost of sales |
83,760 |
86,015 |
|||||
Gross profit |
36,970 |
39,545 |
|||||
Gross margin |
30.6 |
% |
31.5 |
% |
|||
Operating expenses |
29,974 |
32,214 |
|||||
Income from operations |
$ |
6,996 |
$ |
7,331 |
|||
Sensors Segment |
|||||||
Revenue |
$ |
85,535 |
$ |
77,950 |
|||
Cost of sales |
45,899 |
39,191 |
|||||
Gross profit |
39,636 |
38,759 |
|||||
Gross margin |
46.3 |
% |
49.7 |
% |
|||
Operating expenses |
31,477 |
28,125 |
|||||
Income from operations |
$ |
8,159 |
$ |
10,634 |
|||
Intersegment Eliminations |
|||||||
Revenue |
$ |
(422) |
$ |
(329) |
|||
Cost of sales |
(425) |
(330) |
|||||
Gross profit |
3 |
1 |
|||||
Income (loss) from operations |
$ |
3 |
$ |
1 |
|||
Total Company |
|||||||
Revenue |
$ |
205,843 |
$ |
203,181 |
|||
Cost of sales |
129,234 |
124,876 |
|||||
Gross profit |
76,609 |
78,305 |
|||||
Gross margin |
37.2 |
% |
38.5 |
% |
|||
Operating expenses |
61,451 |
60,339 |
|||||
Income from operations |
$ |
15,158 |
$ |
17,966 |
Exhibit B |
|||||||||||||||||||
MTS SYSTEMS CORPORATION |
|||||||||||||||||||
Reconciliation of Adjusted Diluted Earnings Per Share |
|||||||||||||||||||
(unaudited - in thousands, except per share data) |
|||||||||||||||||||
Three Months Ended |
|||||||||||||||||||
December 28, 2019 |
December 29, 2018 |
||||||||||||||||||
Pre-Tax |
Tax |
Net |
Pre-Tax |
Tax |
Net |
||||||||||||||
Net income |
$ |
6,455 |
$ |
1,149 |
$ |
5,306 |
$ |
11,197 |
$ |
696 |
$ |
10,501 |
|||||||
Restructuring expenses 1 |
— |
— |
— |
130 |
33 |
97 |
|||||||||||||
Acquisition-related expenses 2 |
1,746 |
366 |
1,380 |
773 |
162 |
611 |
|||||||||||||
Acquisition inventory fair value adjustment 1 |
540 |
113 |
427 |
445 |
67 |
378 |
|||||||||||||
Adjusted net income 3 |
$ |
8,741 |
$ |
1,628 |
$ |
7,113 |
$ |
12,545 |
$ |
958 |
$ |
11,587 |
|||||||
Weighted average diluted common shares outstanding |
19,369 |
19,556 |
|||||||||||||||||
Diluted earnings per share |
$ |
0.33 |
$ |
0.06 |
$ |
0.27 |
$ |
0.58 |
$ |
0.04 |
$ |
0.54 |
|||||||
Impact of restructuring expenses |
— |
— |
— |
0.01 |
— |
0.01 |
|||||||||||||
Impact of acquisition-related expenses |
0.09 |
0.02 |
0.07 |
0.03 |
0.01 |
0.02 |
|||||||||||||
Impact of acquisition inventory fair value adjustment |
0.03 |
— |
0.03 |
0.02 |
— |
0.02 |
|||||||||||||
Adjusted diluted earnings per share3 |
$ |
0.45 |
$ |
0.08 |
$ |
0.37 |
$ |
0.64 |
$ |
0.05 |
$ |
0.59 |
1 |
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. |
|||||||||||||||||||
3 |
Denotes non-GAAP financial measure. |
Exhibit C |
|||||||
MTS SYSTEMS CORPORATION |
|||||||
Reconciliation of EBITDA and Adjusted EBITDA |
|||||||
(unaudited - in thousands) |
|||||||
Three Months Ended |
|||||||
December 28, |
December 29, |
||||||
Net income |
$ |
5,306 |
$ |
10,501 |
|||
Net income margin |
2.6 |
% |
5.2 |
% |
|||
Income tax provision (benefit) |
1,149 |
696 |
|||||
Interest expense, net |
8,272 |
6,818 |
|||||
Depreciation |
5,662 |
5,144 |
|||||
Amortization |
4,785 |
3,816 |
|||||
EBITDA 1 |
25,174 |
26,975 |
|||||
Stock-based compensation |
2,167 |
1,794 |
|||||
Restructuring expenses |
— |
130 |
|||||
Acquisition-related expenses 2 |
1,746 |
758 |
|||||
Acquisition inventory fair value adjustment |
540 |
445 |
|||||
Adjusted EBITDA 1 |
$ |
29,627 |
$ |
30,102 |
|||
Adjusted EBITDA margin 1,3 |
14.4 |
% |
14.8 |
% |
1 |
Denotes non-GAAP financial measure. |
|||||||
2 |
Acquisition-related expenses were adjusted to exclude stock-based compensation that is otherwise included in the stock-based compensation line. |
|||||||
3 |
Adjusted EBITDA was divided by revenue when calculating the Adjusted EBITDA margin. |
Exhibit D |
|||||||
MTS SYSTEMS CORPORATION |
|||||||
Reconciliation of Free Cash Flow |
|||||||
(unaudited - in thousands) |
|||||||
Three Months Ended |
|||||||
December 28, |
December 29, |
||||||
Net Cash Provided by (Used in) Operating Activities |
$ |
(5,743) |
$ |
10,631 |
|||
Purchases of property and equipment |
(10,572) |
(3,773) |
|||||
Proceeds from sale of property and equipment |
— |
10 |
|||||
Free cash flow1 |
$ |
(16,315) |
$ |
6,868 |
1 Denotes non-GAAP financial measure. |
Exhibit E |
||||||
MTS SYSTEMS CORPORATION |
||||||
Reconciliation of EBITDA and Adjusted EBITDA - Outlook |
||||||
(unaudited - in thousands) |
||||||
Twelve Months Ending |
||||||
October 3, 2020 |
||||||
Low |
High |
|||||
Net income |
$ |
40,300 |
$ |
46,200 |
||
Income tax provision (benefit) |
8,700 |
11,000 |
||||
Interest expense, net |
35,100 |
37,200 |
||||
Depreciation and amortization |
41,900 |
47,600 |
||||
EBITDA1 |
126,000 |
142,000 |
||||
Stock-based compensation and non-recurring expenses2 |
12,000 |
16,000 |
||||
Adjusted EBITDA1 |
$ |
138,000 |
$ |
158,000 |
1 |
Denotes non-GAAP financial measure. |
||||||
2 |
Includes pre-tax forecast expenses for stock-based compensation, acquisition-related expenses and acquisition inventory fair value adjustment. |
Exhibit F |
|||||||
MTS SYSTEMS CORPORATION |
|||||||
Reconciliation of Adjusted Diluted Earnings per Share - Outlook |
|||||||
(unaudited - in thousands) |
|||||||
Twelve Months Ending |
|||||||
October 3, 2020 |
|||||||
Low |
High |
||||||
Net income1 |
$ |
40,300 |
$ |
46,200 |
|||
Non-recurring expenses 2 |
3,000 |
4,000 |
|||||
Adjusted net income 3 |
$ |
43,300 |
$ |
50,200 |
|||
Weighted average diluted common shares outstanding |
19,700 |
19,700 |
|||||
Diluted earnings per share |
$ |
2.05 |
$ |
2.35 |
|||
Impact of non-recurring expenses2 |
0.15 |
0.20 |
|||||
Adjusted diluted earnings per share |
$ |
2.20 |
$ |
2.55 |
1 |
Refer to Exhibit E for tax impact on net income guidance. |
|||||||
2 |
Includes forecast expenses for 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
Investor Relations, Brian Ross, Executive Vice President and Chief Financial Officer, brian.ross@mts.com, (952) 937-4000