Soaring EPS Takes MTS Systems Ahead - Analyst Blog

MTS Systems Corp. (MTSC) reported that first quarter EPS soared 273.9% from last year to 86 cents, which also significantly surpassed the Zacks Consensus Estimate of 46 cents.

Management said that the strength in areas of Test ground and Sensors Europe experienced in the latter part of fiscal 2010 continued into this fiscal year. The results, according to the management, reflect being closer to the long term goals.

Quarter in Detail

Revenue increased 19.0% year over year to $105.9 million, which also surpassed the Zacks Consensus Revenue Estimate of $99 million.

Both segments, namely Test and Sensors, increased 14.7% and 36.3% year over year to $82.5 million and $23.3 million, respectively. The increase was due to higher backlog at the beginning and higher order volume.

Gross profit increased 32.7% from the prior year quarter to $46.7 million. Gross margin increased 4.6 percentage points to 44.1%, benefiting from favorable product mix, increased leverage due to higher volume, and reduced Test warranty expense.

Orders increased 29% from last year to $115.8 million and included $29 million worth of two large ground vehicles orders. The first quarter of the previous year included two materials and structures orders totaling approximately $20 million. Foreign exchange adversely affected orders by 2% and backlog increased 16% sequentially to $230 million.

MTS Systems exited the quarter with cash and cash equivalents of $80.3 million, compared to $76.6 million at the end of prior quarter. Cash from operation was $5.8 million and the company invested $2.3 million in capital expenditures.

On November 30, 2010, management announced an increase in the quarterly cash dividend by 33% to 20 cents per share. Reportedly this reflected management's confidence in the company's long-term market opportunities and ability to continue to generate strong operating cash flow.

The Way Forward

Management stated that for the remainder of the year, the higher percentage of longer-cycle, custom projects and the project development for growth initiatives like Wind will contribute to some continued quarterly variability. Nevertheless, this is a highly positive and most welcomed start to 2011.

Management said that the present conditions are better, but the company operates in a challenging environment. The way out of the recession was a result of the actions that the company had taken over the last 18 months and an improved global economy. Management said that achieving the performance goals was not about reaching, or even exceeding, the goals in one quarter but it is about sustainable performance.

Taking into consideration a similar economic condition, management expects to exceed the revenue performance goal of a 6-9% with yearly revenue growth estimated at the mid-teens level.

Management also said that with strong revenue growth, historical EBIT rates are expected to be achieved with return on invested capital (ROIC) nearing its long-term performance goal of greater than or equal to 20%.

Conclusion

Estimates for the quarter had been stable in the run-up to the earnings release, with no analysts revising estimates in the last two months. The full-year estimate for next year is $2.21 per share. The full-year Zacks Consensus Estimate for current year is $1.97 per share.

Peers of MTS Systems include Caliper Life Sciences, Inc. (CALP), Newport Corp. (NEWP) and IRIS International Inc. (IRIS).

We currently have a Zacks #3 Rank for MTS Systems, which translates into a Hold rating on short term basis. For long term we have a Neutral recommendation.