MTS Reports Fiscal 2020 Second Quarter Financial Results

EDEN PRAIRIE, Minn., May 4, 2020 /PRNewswire/ -- MTS Systems Corporation (Nasdaq: MTSC), a leading global supplier of high-performance test systems, motion simulators and sensors, today reported financial results for its fiscal year 2020 second quarter ended March 28, 2020.

SECOND QUARTER FINANCIAL AND OPERATING HIGHLIGHTS

• Record orders of $277.4 million, an increase of 31.1%, reflecting record orders in both our Test & Simulation and Sensors Business Units
• Backlog strong at $500.1 million, an increase of 1.4% over prior year
• Revenue of $211.5 million, a decline of 9.3%
• Sensors revenue growth of 4.6%
• GAAP diluted loss per share of $(0.06), reflecting the impact of the restructuring actions taken amidst economic uncertainty
• Adjusted diluted earnings per share of $0.27, including $0.26 of amortization expense

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

"As we confront the ongoing effects of the global COVID-19 pandemic, we are focused on protecting the well-being of our employees and continuing to service our long-standing customer base while managing our cash, maximizing liquidity, and reducing our cost infrastructure. Despite the pandemic's impact, we achieved record orders in the second quarter in both our Test & Simulation and Sensors businesses and a near-record backlog. Notably, our Test & Simulation segment was awarded the largest order in MTS history for an advanced seismic simulation system in China, valued at over $70 million. These results demonstrate the mission-critical nature of our offering and our customers' long-term commitment to new product development.

Towards the end of the quarter, we saw softer demand as the pandemic forced many customers to temporarily shut down their operations and delay orders. Additionally, temporary closures of some of our facilities as well as government restrictions on cross-border access created logistical delays and further limited our employees' access to customers. Nevertheless, as an essential critical infrastructure business, we are continuing to serve clients in the U.S. and in other parts of the world as permissible.

We continue to act decisively to mitigate COVID-19's impact on our business. While the decision to restructure the business and reduce costs was difficult, we completed these initiatives rapidly to improve operating efficiencies and strengthen our financial position. We took further short-term cost actions, including implementing furloughs, extending paid time-off, and reducing work schedules, to address the immediate effects of the virus' impact on our customers, our suppliers and our internal operations. We suspended our dividend to maximize liquidity, helping ensure that we are able to meet our financial obligations while continuing to make the most critical investments in our business.

We remain confident we will emerge from this crisis stronger owing to our highly diverse customer base, our broad geographic footprint, and the critical nature of the MTS product portfolio relative to the markets we serve. While the duration and scale of COVID-19's economic impact remains unknown, we believe companies globally will continue to prioritize R&D over the long-term and that we are uniquely positioned to shorten their development cycles and decrease their costs, supporting their product development and ultimately their success."

HIGHLIGHTS FOR THE 2020 SECOND FISCAL QUARTER

Revenue

Revenue was $211.5 million, down 9.3% compared to the same prior year period, driven by a decline in Test & Simulation, partially offset by growth in Sensors. Test & Simulation revenue decreased primarily due to a decline in volume from the continued weakness in our ground vehicles sector and lower service volume, which was negatively impacted by COVID-19 due to the closure of customer sites. The decline was partially offset by contributions from the acquisition of the R&D entities in Denmark (R&D) of $14.7 million, which was completed early in the second quarter, and volume growth in our structures sector. Sensors experienced continued revenue growth primarily driven by strong global demand in our test sector, which included continued U.S. Department of Defense volume growth and the addition of Endevco, which closed during the fourth quarter of fiscal year 2019. Sensors growth was partially offset by weakness in the other three Sensors sectors driven largely by COVID-19.

Orders

Test & Simulation orders for the quarter were a record at $176.5 million, up 33.6% compared to the same prior year period. This performance was primarily driven by the award of the largest order in MTS history for an advanced seismic simulation system in China, valued at over $70 million, and the addition of wind energy orders from the acquisition of R&D. The increase was partly offset by lower orders in our ground vehicles sector, materials sector and services reflecting the global impact of COVID-19.

Sensors orders for the quarter were $100.9 million, a 27.1% increase compared to the same prior year period primarily driven by additional funding associated with the U.S. Department of Defense, the addition of orders from the acquisition of Endevco and growth in our systems sector. The increase was partially offset by continued weakness in our position and industrial sectors, primarily in Europe.

Backlog

Backlog of $500.1 million, the second highest in MTS history, was up 1.4% compared to the same prior year period. Sequentially, from the first quarter of fiscal year 2020, backlog was up 26.3% driven by the record orders performance in both of our business units. Ending backlog for Test & Simulation and Sensors was $412.1 million and $88.0 million, respectively.

Net Income and Diluted Earnings Per Share

GAAP diluted earnings (loss) per share was $(0.06) compared to $0.73 in the same prior year period on net income (loss) of $(1.1) million and $14.2 million, respectively. The $0.79 decrease was primarily driven by a decline in Test & Simulation gross profit from depressed revenue volume reflecting the impact of COVID-19, higher restructuring costs from actions taken in the second quarter to manage and reduce operating costs, lower Sensors gross profit from unfavorable product mix, higher interest expense on increased debt levels and slightly higher operating expenses in Sensors mainly from the acquisition of Endevco. The decline was partially offset by lower compensation expense in both businesses from cost containment measures and a reduction in the effective tax rate.

Second quarter of fiscal year 2020 and 2019 results include $0.33 and $0.03, respectively, of non-recurring costs associated with restructuring actions taken in the second quarter of fiscal year 2020, and acquisition-related expenses and acquisition inventory fair value adjustment from the acquisitions of R&D in the second quarter of fiscal year 2020 and E2M and Endevco in the first and fourth quarters of fiscal year 2019, respectively. Adjusting for these items, adjusted diluted earnings per share was $0.27 for the second quarter of fiscal 2020, and $0.76 for the same period in the prior year. A reconciliation of adjusted diluted earnings per share, a non-GAAP financial measure, to diluted earnings per share, the most directly comparable GAAP financial measure, is provided in Exhibits B and C of this earnings release. Our diluted earnings per share and adjusted earnings per share include the amortization of purchased intangible assets of $0.26 and $0.18 for the three-months ended March 28, 2020 and March 30, 2019, respectively. We incurred pre-tax amortization expense of $6.3 million ($5.0 million post-tax) and $4.4 million ($3.5 million post-tax) for the three-months ended March 28, 2020 and March 30, 2019, respectively, in relation to companies that we have acquired.

Adjusted EBITDA

Adjusted EBITDA declined to $31.5 million in the second quarter of fiscal year 2020, down 16.0% compared to the same prior year period. This decrease was primarily due to a decline in Test & Simulation gross profit from lower revenue volumes reflecting the impact of COVID-19, unfavorable Sensors product mix and higher Sensors operating expenses mainly from the acquisition of Endevco. The decline was partially offset by lower compensation expense in both businesses and cost containment measures. A reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income, the most directly comparable GAAP financial measure, is provided in Exhibit D of this earnings release.

Coronavirus 2019 (COVID-19) Pandemic

The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. As an essential critical infrastructure business, we have continued to operate in the U.S. and plan to continue to operate in other parts of the world as permitted. Restrictions on our employees' ability to access our customers and the temporary closures of our facilities or the facilities of our customers negatively impacted our sales and operating results for the second quarter of fiscal year 2020. We anticipate these challenges to continue to negatively impact our fiscal year 2020 revenue and operating results. The future impact COVID-19 will have on our business, operations and financial results is unknown at this time, and we are unable to accurately quantify the impact due to the significant global economic uncertainty. In response, we continue to right-size our operations and manage short-term business risk to allow for bottom-line improvement through the execution of cost savings initiatives previously communicated.

Cost Reductions and Restructuring Actions

Although we believe our financial position is strong, given the level of economic uncertainty, our cost reduction actions provide an increased level of flexibility during these challenging times. We expect to incur total restructuring charges of approximately $8 million to $12 million, which includes approximately $7.0 million to $10.6 million for the reorganization of our Test & Simulation European operations previously announced, during fiscal year 2020 and fiscal year 2021 based on notice period requirements, of which $6.1 million was incurred and recognized in the second quarter of fiscal year 2020. These cost reductions are permanent changes to our business and were focused at reorganization efforts to more efficiently service our customers. We expect these actions to yield annual cost savings exceeding $10 million once fully implemented by the end of fiscal year 2020.

Additionally, we have implemented temporary, incremental cost reduction measures that will provide for further short-term flexibility and will remain in place until we begin to see marked improvement in the markets we serve. These temporary measures will save at least $5 million through the end of fiscal year 2020.

Our combined permanent restructuring actions and temporary cost reduction measures will reduce our expense infrastructure exceeding $10 million through the end of fiscal year 2020. While we expect these actions will be sufficient to provide the needed flexibility to weather the current economic environment, we continue to evaluate the ongoing impact of COVID-19 and may need to take further cost reduction actions or other actions in the future.

Balance Sheet and Liquidity Estimates

During the quarter, our total debt balance increased by $59.9 million to $600.6 million, due to the closing of the acquisition of the R&D entities in Denmark. We ended the quarter with $66.6 million of cash on the balance sheet, leading to a net debt balance of $534.0 million. The ratio of interest-bearing debt to Adjusted EBITDA and the ratio of net interest-bearing debt to Adjusted EBITDA remain in full compliance with the debt covenant levels specified in our debt agreements and debt maturities not occurring until July 2023 and August 2027.

"Our liquidity position remains sound, with over $100M including cash and undrawn credit available through our revolving facility. We continue to maintain a constructive dialogue with lenders and are confident in our ability to access additional capital if needed to preserve the near-term strength of the business and make critical investments to position us for future growth opportunities," stated Brian Ross, Executive Vice President and Chief Financial Officer.

Dividend Suspension

During the second quarter of fiscal year 2020, the Board of Directors declared a quarterly dividend of $0.30 per share. The dividend was paid on March 30, 2020 to shareholders of record as of the close of business on March 16, 2020. As previously announced on April 16, 2020, we are suspending our quarterly dividend of $0.30 per share, equating to approximately $23.0 million in annualized cash payments. The suspension of our dividend helps us maximize our liquidity for the foreseeable future as we face uncertain economic times. Our Board of Directors remains committed to maximizing value to shareholders in the most efficient and effective way possible and will consider future dividends and share repurchases as the economic landscape and visibility improves.

Guidance Suspension

Consistent with our announcement on April 16, 2020, given the continued uncertainties in the business environment, we remain unable to accurately predict the specific extent, or duration, of the impact of COVID-19 on our financial results. As a result, financial guidance has been withdrawn for fiscal year 2020.

SECOND QUARTER CONFERENCE CALL

As announced on April 21, 2020, a conference call will be held on May 5, 2020 (tomorrow), at 10:00 a.m. ET (9:00 a.m. CT). Dr. Jeffrey A. Graves, President and Chief Executive Officer, and Brian T. Ross, Executive Vice President and Chief Financial Officer, will host the call, which will include a question and answer session after prepared remarks.

Call toll free +1-800-367-2403 (international toll +1-334-777-6978) and reference the conference pass code 3918217. The conference call replay will be available at 1:00 p.m. ET following the call until 1:00 p.m. ET, May 12, 2020. Call toll free +1-888-203-1112 and reference the conference pass code 3918217.

A transcript of the call can also be accessed from the MTS website at http://investor.mts.com/events-and-presentations/presentations beginning on May 6, 2020.

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 3,500 employees as of September 28, 2019 and revenue of $893 million for the fiscal year ended September 28, 2019. 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), 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 and E 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, statements about the impact of COVID-19 and related economic uncertainty, 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, the currently-unknown impact of COVID-19 and related economic uncertainty and 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.

SOURCE MTS Systems Corporation

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