MTS Systems (MTSC) Announces Strong Prelim. FY16 Results; Has Initiated Internal Investigation

MTS Systems Corporation (Nasdaq: MTSC) reported preliminary financial results for its fiscal 2016 full year ended October 1, 2016. The company also announced that it has initiated an internal investigation into apparent violations of the company's code of conduct involving certain employees in its China operations and this investigation will delay the issuance of its fourth quarter and full year earnings as well as the filing of the company's Annual Report on Form 10-K for fiscal 2016. The preliminary financial results included in this release represent the most current information available to management and are subject to completion of the internal investigation described in more detail below, as well as the subsequent completion of the audit of the company's financial statements by the company's independent auditor.

"We are pleased that we finished our fiscal year on a strong note. Our full year GAAP revenue and earnings per share (EPS) were higher than we anticipated as a result of continued improvements in business performance. Preliminary full-year revenue is expected to be in the range of $645 million to $650 million, up from previously issued guidance of $630 million to $640 million, and preliminary GAAP EPS is expected to be in the range of $1.65 to $1.70, up from the previously issued guidance of $1.35 to $1.50," said Dr. Jeffrey Graves, President and Chief Executive Officer of MTS.

*** The Street was looking for revenue of $635.4 million.

"While this delay in reporting our annual results is disappointing, we are very pleased with our performance in the quarter, as reflected in our preliminary financial results. In addition, we have previously communicated our strong desire to reduce our leverage ratio as quickly as possible. Our cash flow was strong in the fourth quarter and we were able to reduce our debt by making the required payments on the debt, while continuing to pay a dividend and funding the acquisition-related costs without needing to utilize our revolving credit facility.

"Regarding the PCB acquisition, the integration is progressing well, as anticipated. We remain very excited about our expanded Sensor product offerings, which greatly deepen our exposure to the "internet of things" for industrial automation and other highly demanding product applications, as well as in the testing environment for the development of new vehicles and structures. While the acquisition did have a negative impact on our fourth quarter earnings from acquisition-related and restructuring expenses, we believe the Sensors and Test businesses are more complementary than ever before and will deliver greater value to our shareholders for years to come. Acquisition-related and restructuring costs for fiscal 2016 were approximately $23 million, significantly higher than previous guidance, driven by the timing of the recognition of an approximately $16 million fair value adjustment to acquired inventory, which is now being recognized evenly over the fourth quarter of fiscal 2016 and the first quarter of fiscal 2017. This negatively impacts each quarter by approximately $8 million," continued Dr. Graves.

"Regarding the internal investigation that has delayed the filing of our Annual Report and earnings release, we are deeply disappointed to report that we recently discovered that certain individuals in our leadership in China appear to have violated MTS's code of conduct, including association with an independent business that may compete with MTS in certain markets. Given the level of the MTS personnel in China who appear to have violated our code of conduct, the filing of our Annual Report on Form 10-K and our earnings release will be delayed until the internal investigation has been completed and its findings evaluated," continued Dr. Graves.

The Audit Committee of the Board of Directors of MTS has engaged independent external counsel in connection with the ongoing internal investigation and will assess the impact on the company's financial inputs from China and review for potential violations of law. MTS has already begun taking certain remedial measures in response to this situation.

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