MTS Systems Corporation (MTSC)

F4Q2010 Earnings Call Transcript

November 19, 2010 10:00 am ET

Executives

Sue Knight – VP and CFO

Laura Hamilton – Chairman and CEO

Analysts

John Franzreb – Sidoti & Co.

Stanislav Lopata – Mawer

Mike Hamilton – RBC

Rand Gesing – Neuberger Berman

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to today’s MTS fourth quarter 2010 earnings release call. Just as a reminder, today’s call is being recorded, and at this time, I would like to turn the call over to Ms. Sue Knight. Please go ahead, ma’am.

Sue Knight

Thank you, Nicole. Good morning, and welcome to MTS Systems fiscal 2010 fourth quarter investor teleconference. Joining me on the call today is Laura Hamilton, Chair and Chief Executive Officer.

I’d like to remind you that statements made today which are not a historical fact should be considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Future results may differ materially from these statements depending upon risks, some of which are beyond management’s control. A list of such risks can be found in the company’s latest SEC Form 10-Q and 10-K.

The company disclaims any obligation to revise forward-looking statements made today based on future events. This presentation may also include references of financial measures which are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. These measures may be used by management to compare the operating performance of the company over time, but they should not be used in isolation or as a substitute for GAAP measures.

Laura will now begin here update on our fourth quarter and annual results.

Laura Hamilton

Thank you, Sue. Welcome to our call today. We’re going to follow our typical format. I’m going to start you out with our Q4 key messages, followed by order summary, and will take you through both the quarter and the full year. Su will take you through financial details and then I’ll close out with the outlook for 2011.

We have three key messages for the fourth quarter. The first is a little obvious. It’s that orders at $129 million was very strong. This was well above our expectations of $80 million to $110 million per quarter. It was even more so given that this was base order driven not large custom order driven. This was the highest quarter since Q2 of 2008, and we are obviously very pleased. At the same time, we remain respectful of the lumpy nature of our business.

Our second key message, Q4 revenue and earnings per share exceeded our outlook. This was really driven by the strong Test business execution combined with continued excellent performance in Sensors. We did what we said we’d do following our low Q3 results.

Our last key message is that the strong quarter helps us to move ahead more confidently into fiscal year ‘11, and we’ll talk more about this later.

Let me walk you through orders, I’m going to start with Sensors, I’ll go through the quarter and the year, then do Test quarter and full year. Sensors at $22.6 million for the quarter, was the largest quarter for this fiscal year. Sensors was up 4% on a sequential basis, but without currency it was essentially flat. But what’s important about the essentially flat is when we break this down between industrial and mobile hydraulics.

Definitely, we’ve seen a second half growth moderation in sensors following kind of a first half recovery driven growth rates. But overall, we still believe we’re seeing a very positive overall trend. At $22.5 million for the quarter, we’re at 90% of pre-recession volumes, which feels good.

Industrial was up 11% sequentially, so this was definitely a continued positive growth trend. Some of our strongest markets in industrial continued to be plastics and rubber worldwide, steel in China, and wind power in Europe.

Mobile hydraulics however was down 33% sequentially. In part this is the law of small number, but at the same time, we’re seeing the possible effects of the timing of blanket orders, inventory replenishments, seasonality, and stimulus.

Mobile hydraulics is still quite new to us and we’re still learning about the ordering pattern in this business. Sensors backlog ended at about $16 million, up 13% sequentially. So, we’re in a strong position going into fiscal ‘11.

Sensors from a full year perspective at $83 million. Sensors orders were up 26% year-over-year. Two-thirds of this growth was driven in the industrial segment, one-third was driven through mobile hydraulics. Fundamentally, 26% growth is about how far things dropped off in fiscal ‘09. It’s about the pace of the economic recovery, and it’s about new applications and new customers in our business. In fiscal year ‘10, we saw a return to pre-recession new customer rates in industrial after a significant decline last year.

In mobile hydraulics, we saw a doubling of the number of new customers, as there was more capacity in this industry created by the recession and there is a greater need to differentiate coming out. We also saw a three to four times increase in the number of projects in mobile hydraulics that moved from prototyping to new production.

At 26% from a total Sensors basis, on a year-over-year, from a geographic view, all geographies were up. This ranged from about 15% increase in the Americas to about 40% increase in Asia. Mobile hydraulics ended the year at 13% of total orders for the Sensors business, about two times what it was last year.

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