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MTS Systems' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Bill will now begin his update on our second quarter results.

William V. Murray

Thanks, Sue. Good morning, and thank you for joining us on our call today. For today's call, we have a slightly modified agenda. I will start with additional context around Q2 performance and our key message for the quarter and the year. I will then follow with our traditional review of Q2 and year-to-date orders. I will also speak about how we are addressing the critical connectivity trends with our new Test product offering called Echo and I'll comment on the compliance program in government matters. Sue will review financial details. I'll wrap up with a review of our outlook for 2012 and finally, as Sue mentioned, Dave Anderson is with us today and he will discuss the CEO transition. After Dave's remarks, we will open up the call for questions.

Let's start with Q2 performance. Our guidance for the year has been and continues to be revenue growth in the mid- to high-teens and earnings growth in the low- to mid-teens. That remains our outlook and we feel very good about reconfirming our guidance. So the obvious questions are what happened in Q2 and why do we continue to feel optimistic about the year? Sue will speak to the detail, but I would also like to provide context. While revenue growth was solid at 14% over prior year, it was below our internal projections. As we have scaled to a significantly higher level of business activity in Test, our systems and processes are stretched, which is why we are making the process in systems infrastructure investments. We have upwards of $5 million in additional revenue opportunity that we were unable to realize based on our own internal execution. A significant portion of Test revenue is based on percent completion revenue recognition for which we have quarterly uncertainty. Second, the reason we have been to date, communicating higher venue growth and earnings growth is our commitment to invest in R&D and the infrastructure necessary to maintain the growth trajectory. We invested $2.5 million more in R&D in Q2 fiscal '12 versus Q2 fiscal '11. As we continue to focus on developing new products and capabilities, including the development of Echo, our new connectivity platform for the Test business. Echo will enhance our customers' productivity, increase uptime and streamline communications through enabling remote monitoring of realtime status. We are also making investments in our IT compliance and Test project management systems. All of these investments were known. We plan to cover these investments through the additional revenue opportunity. Finally, we had some exceptional items that were not planned in quarter that had impact on our earnings, the Korean investigation, foreign currency, higher medical claims and a bad debt write-off negatively impacted earnings by over $2 million. For our total year outlook, we have critically reviewed where we are with our execution capabilities and also evaluated any potential unusual items. Based on continued strong orders growth of 15% in Q2 and our record backlog, we are confirming our outlook for the year. I will return later in the call to discuss our outlook in more detail.

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