MTS Reports Financial Results For Fiscal Year 2016 Full Year And Fiscal Year 2017 First Quarter

EDEN PRAIRIE, MN, April 10, 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 2016 full year ended October 1, 2016 and its fiscal year 2017 first quarter ended December 31, 2016.

Fiscal Year 2016

• Revenue of $650 million increased 15% compared to the prior year with organic revenue growth of 7% from continued improvement in Test backlog conversion efficiencies
• GAAP EPS was $1.70, including a $1.02 negative impact from acquisition-related, acquisition integration, acquisition inventory fair value adjustment and restructuring expenses, consistent with previously issued preliminary earnings
• Test Services achieved record full year revenue of $86 million, an increase of 9%

Fiscal 2017 First Quarter

• Revenue of $199 million, an increase of 42% from prior year due to organic revenue growth of 10%, and 32% growth as a result of the PCB acquisition
• GAAP EPS of $0.09, including a $0.46 negative impact from acquisition integration, acquisition inventory fair value adjustment and restructuring expenses and costs associated with the China investigation
• Strong operating cash flow of $29 million, primarily due to continued focus on working capital improvements

"Before we discuss our financial results and outlook for fiscal year 2017, we will address the investigation undertaken to examine possible violations of the Company's Code of Conduct. The investigation, overseen by the Audit Committee of our Board of Directors, and conducted using external legal counsel and forensic experts, confirmed that certain employees involved with our China Test business violated our Code of Conduct by starting a company that competes with MTS in the low end of the materials test market within China. Importantly, the investigation did not find any evidence of intellectual property theft. However, the investigation did identify opportunities to enhance our processes and controls related to the adherence with our Code of Conduct and compliance policies and procedures, with particular focus on those related to third party sales of our products and local sourcing activities. Numerous steps are being taken to improve our oversight activities in these areas, including the creation of a new 'Chief Risk and Compliance Officer' on my executive staff," said Dr. Jeffrey A. Graves, President and Chief Executive Officer of MTS Systems.

Dr. Graves continued, "With regard to the business performance and the PCB acquisition that closed in July 2016, fiscal year 2016 ended on a strong note with overall double digit revenue growth that extended into the first quarter of fiscal year 2017. The integration of PCB is progressing as anticipated, and we remain excited about the products and capabilities added to the company, and the revenue and cost synergies we expect to realize from the combination. While the integration costs and restructuring expenses did have a negative impact on our fiscal year 2016 fourth quarter earnings and will negatively impact fiscal year 2017 results, we believe the Test and Sensors businesses are more complementary than ever before and will deliver greater value to our shareholders for years to come."

Full Year Results

Revenue was $650.1 million, up $86.2 million or 15.3 percent, compared to the prior year. Excluding the impact from the acquisition of PCB, revenue increased 7.4 percent, driven by the Test segment, which increased 10.7 percent from strong conversion of backlog as a direct result of the organization and process improvement actions the company took earlier in the year. Overall, Test orders were down 1.8 percent versus the prior year principally due to order timing; however, the Test pipeline remains at a record level with over $1 billion in opportunities over the next twelve months. The Test business began the new fiscal year with a backlog of $331.0 million.

Earnings before taxes were $33.5 million, a decrease of $25.7 million compared to the prior year. The decrease primarily resulted from $23.1 million of acquisition-related, acquisition integration, acquisition inventory fair value adjustment and restructuring expenses. In addition, an unfavorable mix from lower margin custom projects in Test, investments in the Test business and higher interest expense negatively impacted earnings before taxes. These negative impacts were partially offset by higher volume and the contribution from the PCB acquisition.

Diluted earnings per share (EPS) on a GAAP basis were $1.70, which included negative impacts of $0.67 from acquisition-related, acquisition integration and restructuring expenses and $0.35 from the inventory fair value adjustment related to the PCB acquisition. Excluding these items, diluted earnings per share on an adjusted basis would have been $2.72. See "Non-GAAP Financial Measures" below for further information.

Fiscal 2017 First Quarter Results

Compared to the same quarter in the prior year, reported revenue was $199.3 million, up $58.8 million or 41.8 percent. Of this increase, the PCB acquisition generated 32.2 percent, while the remaining 9.6 percent increase came from organic revenue primarily driven by the Test segment, which increased 10.4 percent from the strong conversion of backlog, and a return to growth for the legacy Sensors business, which was up 5.7 percent. Earnings before taxes were $2.2 million, a decrease of $10.9 million compared to the prior year. The decrease primarily resulted from $12.0 million of expenses for acquisition integration, acquisition inventory fair value adjustment, restructuring activities, and the investigation into code of conduct violations in our China operations. Higher interest expense also negatively impacted earnings before taxes. These negative impacts were partially offset by higher volume, improved gross margins and the contribution from the PCB acquisition.

Diluted earnings per share (EPS) on a GAAP basis were $0.09 compared to $0.78 in the prior year. The decline was primarily driven by negative impacts of, $0.30 from the acquisition inventory fair value adjustment, $0.07 from acquisition integration expenses, $0.07 from the China investigation and $0.02 from restructuring expenses. Excluding these items, diluted earnings per share on an adjusted basis would have been $0.55 which includes higher interest expense of $0.24 and amortization expense of $0.12, related to the PCB acquisition. See "Non-GAAP Financial Measures" below for further information.

Outlook

For fiscal year 2017, with the higher backlog conversion rates in Test and more modest order levels in the first quarter, we will likely experience relatively flat to slightly lower revenue and earnings from the Test business this year. In addition to the added PCB business, we expect to see solid demand in our Sensors business, driven by market fundamentals and the resurgence of investment in the basic materials industries around the world.

Based on these factors, the company is forecasting revenues in the range of $760 million to $790 million and GAAP earnings per share of $0.80 to $1.20 for our fiscal year 2017. Also included in this guidance are 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 is expected to range between $8.0 million and $9.0 million. In addition, we are forecasting 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 closest GAAP measure, is included in Exhibit E of this earnings release.

Longer term, the PCB acquisition supports the strategic priorities of investing in markets with the opportunity to achieve sustainable double-digit top and bottom line growth, strengthening the MTS global footprint and focusing on areas that generate strong free cash flow. MTS has experienced the combined Sensors business for two full quarters and has a greatly expanded product portfolio delivered with outstanding customer service which will enhance the value of MTS to both customers and shareholders for years to come.

Dr. Graves concluded, "Although overall orders were down slightly in fiscal year 2016, there were many positives coming into fiscal year 2017. We are encouraged by the strong first quarter results of both the Test and Sensors businesses, and believe that our improved project execution and backlog conversion capability in Test, as well as our growing Test Service business, will position us well for the remainder of the year. Our Sensors business exposure to excellent fundamental market drivers such as industrial automation, testing of new products and energy generation, combined with an outstanding global customer base and delivery model, make us optimistic about the sustained growth prospects for our Sensors business this year and well into the future."

Non-GAAP Financial Measures

We believe that disclosing diluted earnings per share excluding the impact from acquisition-related expenses, 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-related expenses, 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-related expenses, 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-related expenses, 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 release.

FY2016 Full Year and FY17 First Quarter Conference Call

A conference call will be held on April 11, 2017, at 10:00 a.m. ET (9:00 a.m. CT). Call toll free +1-888-601-3878 (international toll +1-913-312-0421) and reference the conference pass code "6053550". Telephone replay will be available at 1:00 p.m. ET following the call until 1:00 p.m. ET, April 18, 2017. Call toll free +1-888-203-1112 (international toll +1-719-457-0820) and reference the conference pass code "6053550".

A transcript of the call can also be accessed from the MTS website at http://investor.mts.com. It will be available on April 12, 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.

SOURCE MTS Systems Corporation

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