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

"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.

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SOURCE MTS Systems Corporation