News Release

FOR IMMEDIATE RELEASE
JULY 26, 2006

For More Information Contact:
Susan Knight, Chief Financial Officer
(952) 937-4000
Paul Runice, Treasurer
(952) 937-4003

   

MTS Reports Third Quarter EPS of $0.49 Before Stock Compensation Expense; Raises Full Year EPS Guidance to $1.93-$1.98 on Strong Fourth Quarter Outlook

Eden Prairie, Minn., July 26, 2006 – MTS Systems Corporation (NASDAQ: MTSC) today reported earnings per diluted share of $0.49 before stock compensation expense of $0.8 million, or $0.04 per diluted share, flat with the comparable period in fiscal 2005. Third quarter net income was $8.5 million, or $0.45 per diluted share, a decrease of 14 percent compared to net income of $9.9 million, or $0.49 per diluted share, for third quarter fiscal 2005.

“While third quarter orders rebounded nicely, significant Test segment order volume was booked late in the quarter, which reduced third quarter revenue and margin performance,” said Sidney W. Emery, Jr., Chairman and CEO. “This revenue shortfall will impact the full year, and thus we expect fiscal 2006 revenue to be in the $392-$397 million range, versus $395-$405 million as previously communicated. Despite the revised full year outlook, we anticipate strong fourth quarter revenue growth, with margin rates returning to the levels experienced in the first half of the fiscal year. Based on a strong fourth quarter outlook, together with the favorable effects of reduced shares outstanding and a positive tax situation, we are raising our full year fiscal 2006 earnings per share outlook to $1.93-$1.98 from the previously communicated range of $1.80-$1.90.”

Third quarter orders totaled $97.7 million, up 20 percent compared to orders of $81.2 million for third quarter fiscal 2005, primarily driven by increased order volume in the Test segment across all geographies, particularly in North America, plus increased volume in the Industrial segment in Europe and Asia. Backlog increased 2 percent in the quarter, to $198 million from $195 million.

Revenue for the third quarter totaled $95.9 million, up 1 percent compared to $94.7 million for third quarter fiscal 2005. This increase was primarily attributable to increased short-cycle and service business in the Test segment and continued growth in the Industrial segment. There was no significant impact on revenue from currency translation in the quarter.

Gross profit for the third quarter was $41.0 million, a decrease of 3 percent compared to $42.3 million for third quarter fiscal 2005. This decrease was primarily due to unfavorable product mix, higher engineering and manufacturing costs, and $0.3 million of stock compensation expense in the Test segment, partially offset by increased volume in the Industrial segment and an estimated $0.2 million favorable impact of currency translation. Third quarter income from operations totaled $11.8 million, down 22 percent compared to income from operations of $15.2 million for third quarter fiscal 2005. This decrease was due to lower gross profit in the Test segment, planned increases in operating expenses, and $1.0 million of stock compensation expense, partially offset by an estimated $0.1 million favorable impact of currency translation. Net income for the third quarter was $8.5 million, a decrease of 14 percent compared to net income of $9.9 million for third quarter fiscal 2005, driven by lower income from operations and $0.2 million income from discontinued operations in third quarter fiscal 2005, partially offset by a $1.2 million net favorable impact of foreign currency transaction gains. Reduced share count, resulting primarily from the Company’s fiscal 2006 share purchases, contributed $0.03 to earnings per share in the third quarter.

Cash, cash equivalents and short-term investments at the end of the third quarter totaled $115 million, compared to $107 million at the end of second quarter fiscal 2006. The Company purchased 134,800 of its shares during the quarter.

Segment Results

Test Segment:

Test segment orders totaled $80.7 million for third quarter fiscal 2006, an increase of 24 percent compared to orders of $65.2 million for third quarter fiscal 2005, reflecting an increase in large custom orders in North America and Asia. Backlog increased 1 percent in the quarter, to $191 million, from $189 million. Third quarter revenue was $79.3 million, an increase of 1 percent compared to $78.9 million for third quarter fiscal 2005, as increased short-cycle and service business was substantially offset by decreased custom revenue. There was no significant impact on revenue from currency translation for third quarter fiscal 2006. Third quarter gross profit was $31.9 million, a decrease of 7 percent compared to $34.2 million for third quarter fiscal 2005, primarily due to unfavorable product mix, higher engineering and manufacturing costs, and $0.3 million of stock compensation expense, partially offset by an estimated $0.2 million favorable impact of currency translation. Income from operations for third quarter fiscal 2006 totaled $8.9 million, down 28 percent compared to income from operations of $12.3 million for third quarter fiscal 2005. The decrease was primarily attributable to decreased gross profit and planned increases in operating expenses and $0.9 million of stock compensation expense, partially offset by an estimated $0.1 million favorable impact of currency translation.

Industrial Segment:

Industrial segment orders totaled $17.0 million for the quarter, an increase of 6 percent compared to orders of $16.0 million for third quarter fiscal 2005, reflecting continued growth in the Sensors business in Europe and Asia. Backlog increased 17 percent in the quarter, to $7 million from $6 million. Third quarter revenue was $16.6 million, an increase of 5 percent compared to revenue of $15.8 million for third quarter fiscal 2005. There was no significant impact on revenue from currency translation in the quarter. Third quarter gross profit was $9.1 million, an increase of 12 percent compared to $8.1 million for third quarter fiscal 2005, attributable to increased volume and improved capacity utilization. There was no significant impact on gross profit from currency translation in the quarter. Income from operations for third quarter fiscal 2006 was $2.9 million, flat compared to third quarter fiscal 2005, as higher gross margin was offset by planned increases in operating expenses.

Non-GAAP Financial Measures

A reconciliation of financial results before and after the impact of stock compensation expense is included in this release as Exhibit A. This reconciliation includes financial measures that do not reflect generally accepted accounting principles (GAAP). These non-GAAP financial measures are provided for additional clarification of the Company’s comparable financial performance. Investors should consider these non-GAAP financial measures in addition to, not as a substitute for or better than, financial measures prepared in accordance with GAAP.

Third Quarter Conference Call
A conference call will be held on Thursday, July 27, at 10:00 a.m. EDT (9:00 a.m. CDT). Call +1-785-832-1508; and state the Conference ID “MTS” or Program Title “MTS Quarterly Conference Call.” Telephone re-play will be available through 11:59 p.m. EDT, August 10, 2006. Call +1-402-220-2673.

If you prefer to listen live over the Internet, please log on to the web at http://www.mts.com/en/InvestorRelations/events/index.asp and click link. The call will be archived through 11:59 p.m. EDT, November 15, 2006.

About MTS Systems Corporation
MTS Systems Corporation is a leading global supplier of test systems and industrial position sensors. The Company’s testing hardware and software solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS’ high-performance position sensors provide controls for a variety of industrial and vehicular applications. MTS had 1,549 employees and revenue of $374 million for the fiscal year ended October 1, 2005. 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. The Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition to the factors discussed above, other important risk factors are delineated in the Company’s most recent SEC Form 10-Q and 10-K filings.