FOR IMMEDIATE RELEASE

January 22, 2003

For More Information Contact:

Susan Knight, Chief Financial Officer

(952) 937-4000

Thomas Minneman, Treasurer

(952) 937-4647

MTS Exceeds First Quarter Earnings Estimate

Eden Prairie, Minn., January 22, 2003 – MTS Systems Corporation (Nasdaq: MTSC) today reported net income of $5.4 million, or $0.25 per diluted share, for its first quarter ended December 28, 2002, compared to the previously communicated estimate range of $0.16 - $0.18. The increase in earnings was primarily attributable to stronger than anticipated revenue and reduced operating expenses. Income before the cumulative effect of accounting change was up $1.7 million, or $0.08 per diluted share, compared to the first quarter of fiscal 2002. 

First quarter orders of $81.8 million fell short of the estimate range of $85 - $90 million. Orders for the quarter were down 15 percent compared to orders of $96.7 million in the same period last year, primarily due to the booking of a $13 million aerospace order in the first quarter of fiscal 2002. Total backlog in the quarter decreased approximately $9 million, to approximately $168 million. 

First quarter revenue was $91.3 million, above the estimate range of $85 - $90 million. Net revenue was up five percent compared to first quarter results of $87.2 million for the same period last year, driven by favorable performance in the Mechanical Testing and Simulation segment.“The Company’s strong earnings performance demonstrates our ability to improve bottom-line results despite the impact of the delayed economic recovery,” said Sidney W. Emery, Jr., Chairman and CEO. “The productivity and cost structure changes the Company has made in the past several quarters continue to have a favorable impact on earnings.”

Segment Results

Mechanical Testing and Simulation Segment (MT&S):

Orders for the MT&S segment were $65.3 million for the first quarter of fiscal 2003, down 20 percent from orders of $81.7 million in the first quarter of fiscal 2002, primarily due to continued weakness in North American capital spending as well as the booking of a $13 million aerospace order in the first quarter of fiscal 2002. Backlog decreased approximately $8 million, or five percent, to approximately $155 million at the end of the quarter. First quarter revenue was $74.0 million, an increase of five percent compared to $70.3 million for the same period last year, driven by strong performance in the European automotive and motorsports markets and the worldwide civil engineering market. The MT&S gross margin rate was 35.4 percent, a decrease of 1.6 percentage points compared to 37.0 percent in the first quarter of fiscal 2002, primarily due to product mix. The segment reported $8.4 million in operating earnings for the quarter compared to $6.6 million in the first quarter of fiscal 2002. The favorable earnings performance is due to the higher revenue volume as well as reduced operating expenses in the quarter.

Factory Automation Segment (FA):

Orders for the FA segment were $16.5 million for the first quarter of fiscal 2003, a 10 percent improvement from the $15 million reported for the same period in the prior year, reflecting improved orders performance in the segment’s Automation division. Backlog decreased by approximately $1 million, or eight percent, to approximately $13 million at the end of the quarter. Revenue was up two percent, to $17.3 million, from $16.9 million in the prior year, reflecting favorable performance in the segment’s Sensors business. The FA gross margin rate was 40.4 percent, an increase of 10.2 percentage points, compared to gross margin of 30.2 percent in the first quarter of fiscal 2002, largely due to charges for obsolete and surplus inventory recorded in the first quarter of fiscal 2002 in the Automation division. Operating earnings for the segment were $0.4 million compared to an operating loss of $1.5 million in the first quarter of fiscal 2002, driven by favorable volume as well as the Automation inventory charges recorded in the first quarter of fiscal 2002. 

About MTS Systems Corporation

MTS Systems Corporation is a global supplier of integrated simulation solutions that help customers accelerate and improve their design, development, and manufacturing processes. MTS supplies products for determining the mechanical behavior of materials, products and structures – including computer-based testing and simulation systems, modeling and testing software, and consulting services – as well as products for automating manufacturing processes. MTS had 1,900 employees and revenue of $356 million for the fiscal year ended September 28, 2002. Additional information on MTS can be found on the worldwide web at http://www.mts.com.

This release contains “forward-looking statements” made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 that are subject to certain risks and uncertainties, as well as assumptions, that could cause actual results to differ materially from historical results and those presently anticipated or projected. In addition to the factors discussed above, other important risk factors are delineated in the Company’s SEC reports, including Form 10-K for the year ended September 28, 2002.

MTS SYSTEMS CORPORATION

Consolidated Statements of Income

(unaudited - in thousands of dollars, except per share data)

Three Months Ended

December 28,

December 31,

 2002

 2001

Revenue

 $       91,261

 $       87,164

Cost of sales

          58,095

          56,090

Gross profit

          33,166

          31,074

Operating expenses:

Selling

          13,168

          13,772

General and administrative

            6,920

            7,137

Research and development

            4,286

            5,102

Total operating expenses

          24,374

          26,011

Income from operations

            8,792

            5,063

Interest expense

            1,127

            1,153

Interest income

             (491)

             (137)

Other expense (income), net

                 18

          (1,299)

Income before income taxes and cumulative effect of accounting change

            8,138

            5,346

Provision for income taxes

            2,767

            1,633

Income before cumulative effect of accounting change

            5,371

            3,713

Cumulative effect of accounting change, net of taxes

                   -

        (13,721)

Net income (loss)

 $         5,371

 $     (10,008)

Earnings (loss) per share:

Basic-

Before cumulative effect of accounting change

 $           0.25

 $           0.17

Cumulative effect of accounting change, net of taxes

                 -  

            (0.65)

Earnings (loss) per share

 $           0.25

 $         (0.48)

Weighted average number of common shares outstanding - basic

          21,132

          21,027

Earnings (loss) per share:

Diluted-

Before cumulative effect of accounting change

 $           0.25

 $           0.17

Cumulative effect of accounting change, net of taxes

                 -  

            (0.64)

Earnings (loss) per share

 $           0.25

 $         (0.47)

Weighted average number of common shares outstanding - diluted

          21,355

          21,398

MTS SYSTEMS CORPORATION

Consolidated Balance Sheets

(unaudited - in thousands of dollars, except per share data)

December 28,

September 28,

 2002

 2002

ASSETS

Current Assets:

Cash and cash equivalents

          53,293

          62,924

Short-term investments

          42,394

          35,094

Accounts receivable, net of allowances for doubtful accounts

          65,593

          64,663

Unbilled contracts and retainage receivable

          35,218

          32,276

Inventories

          39,771

          41,357

Prepaid expense

            6,664

            5,502

Current deferred tax asset

            9,068

            8,739

Total current assets

        252,001

        250,555

Property and Equipment:

Land

            3,247

            3,247

Buildings and improvements

          46,952

          46,253

Machinery and equipment

          88,467

          86,702

Accumulated depreciation

        (79,598)

         (76,590)

Total property and equipment, net

          59,068

          59,612

Goodwill

            4,304

            4,268

Other assets

            3,943

            4,071

Non-current deferred tax asset

            1,611

            1,593

Total Assets

 $     320,927

 $     320,099

LIABILITIES AND SHAREHOLDERS' INVESTMENT

Current Liabilities:

Notes payable to banks

               618

               598

Current maturities of long-term debt

            6,052

            8,605

Accounts payable

          11,738

          14,621

Accrued payroll-related costs

          29,621

          27,409

Advance payments from customers

          35,953

          37,209

Accrued warranty costs

            5,718

            5,071

Accrued income taxes

            8,744

            9,585

Other accrued liabilities

            9,835

            9,769

Total current liabilities

        108,279

        112,867

Deferred income taxes

            1,714

            1,627

Long-term debt, less current maturities

          43,572

          43,340

Shareholders' Investment:

Common stock

            5,283

            5,302

Additional paid-in capital

            9,073

            9,770

Retained earnings

        150,957

        146,857

Accumulated other comprehensive income

            2,049

               336

Total shareholders' investment

        167,362

        162,265

Total Liabilities and Shareholders' Investment

 $     320,927

 $     320,099