MTS Systems Corporation (NASDAQ:MTSC) Q1 2015 Earnings Conference Call - Final Transcript

Feb 03, 2015 • 10:00 am ET

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MTS Systems Corporation (NASDAQ:MTSC) Q1 2015 Earnings Conference Call - Final Transcript

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Presentation
Operator
operator

Good day and welcome to the MTS Systems First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andy Cebulla, Director of IR and Treasurer.

Executive
Andy Cebulla

Thank you, Joe. Good morning and welcome to MTS' fiscal 2015 first quarter investor teleconference. Joining me on the call today is Jeff Graves, President and CEO and Jeff Oldenkamp, SVP and CFO.

(Forward-looking cautionary statement).

Jeff will now begin his update on our first quarter results.

Executive
Jeff Graves

Thanks Andy and good morning, everyone. Thank you for joining us for our first quarter investor call. We appreciate having the opportunity to discuss our financial results for the quarter and update you on our outlook for fiscal 2015.

First, let me remind you about the nature of our two business units. This may be particularly helpful for those newer to following our company. The larger of our two businesses is Test which provides highly engineered testing systems and services largely to R&D and product development groups within automotive, aerospace, energy, and infrastructure OEMs worldwide. This business is fueled by our customer's spending on new products and these markets are growing in response to strong macroeconomic drivers which we believe will be sustained for years to come.

This market opportunity sets us apart from many other companies. Our second business unit is Sensors, which provides products that are essential for automating heavy industrial equipment and increasing the precision and safety of heavy vehicle systems that utilize hydraulic controls. These sensor markets are directly tied to industrial capacity utilization and heavy equipment demand.

Fortunately, in spite of fairly tepid macroeconomic environments, the growth in what some refer to as smart machines, as a percentage of the overall market, is growing more rapidly and therefore providing accelerated growth opportunities for our sensors beyond simple GDP driven market expansion. This is exciting and we believe sustainable in the years ahead.

With this backdrop, I'll start with the headlines. There are three key takeaways for the quarter. First, results for the first quarter of our fiscal 2015 came in largely as we had expected. Despite significant headwinds from currency translation, revenue grew 3% and our earnings were up 15% excluding the restructuring activities in the prior year. If you exclude the negative effects from currency, revenue grew a healthy 7% in the quarter. Backlog remains near record levels and our operating cash flow for the quarter was solid. Orders in the quarter continued their solid performance, being relatively flat year-over-year with base orders growing 4% in the quarter. I'll provide more color on orders shortly.

Second, as we've discussed in prior earnings calls, the test gross margin rate continues to be affected by negative product mix resulting from the high level of custom content in our backlog flowing through our engineering and manufacturing processes. We would expect this to moderate to more historical levels in the future.

Although the test margin rates are not where we would expect them to