MTS Systems (MTSC)

Q2 2012 Earnings Call

May 04, 2012 10:00 am ET


Susan E. Knight - Chief Financial Officer and Senior Vice President

William V. Murray - Interim Chief Executive Officer, Interim President and Director

David J. Anderson - Non-Executive Chairman and Member of Audit Committee


John Franzreb - Sidoti & Company, LLC

Adam France

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Edward Lefferman - First Manhattan Co.



Good day, everyone, and welcome to the MTS Second Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference to your host, Ms. Sue Knight. Please go ahead, ma'am.

Susan E. Knight

Thank you, Augusta. Good morning, and welcome to MTS Systems' Second Fiscal 2012 Second Quarter Investor Teleconference. Joining me on the call today is Bill Murray, interim Chief Executive Officer; and Dave Anderson, Chairman of the Board. I want to remind you that statements made today which are not historical facts 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 on the company's latest SEC forms 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 reference to 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. They should not be considered in isolation or as a substitute for GAAP measures.

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.

In Q2, total company orders of $136 million were up strongly, achieving 15% growth year-over-year despite an environment of very modest global economic growth. Growth was Test driven which was up 20%, including one large $5 million order. Sensors was down 4% year-over-year with half the decline due to unfavorable currency comparisons. As we mentioned in our Q1 call, Sensors' order momentum is improving with sequential quarter growth of 7%. For the company in total, base orders were up 10%, a very good result. Finally, our backlog is up 15% year-over-year and another record high.

Now I'd like to provide you with more details by business beginning with Sensors. At $25.7 million, Sensors orders were down 4%, 2 points of which was the result of unfavorable currency in Q2. From a market perspective, the industrial market was down 6%. The weakness was primarily in wind, medical and food packaging machinery similar to Q1. China increased 8% in Q2 versus last year to $3.6 million and is up 16% sequentially, but it was not enough to offset the softness in Europe and the U.S. The mobile hydraulics market grew again in the quarter by 7%. Design wins in construction and agriculture are driving U.S. growth up 33%. Europe declined 7%, primarily due to road building machinery. Geographically, all regions declined, 6% in the Americas, 1% in Europe and 9% in Asia. Backlog was $15.8 million, down 13%.

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