Continuing to rebound from its mid-April lows below the $45 level, shares of mechanical testing and sensing technology company MTS Systems (MTSC 54.65, -0.50 -0.91%) peel off slightly from early-morning strength; shares made 9-month highs this morning in reaction to the company’s better than expected Q4 print, yet the FY18 guidance could be the impetus behind the stock losing steam into the afternoon.
Put plainly, the Q4 beat caused the stock to move higher this morning; revenues for Q4 came in 6.2% lower than a year ago at $201.5 million, yet beat market expectations while earnings of $0.44 per share also outperformed the Street.
Management highlighted that the reduction in revenues was mainly due to the reduced opening backlog in the Test segment. This reduction in starting backlog was the result of two factors, lower order levels in the second half of fiscal year 2016 and the first half of fiscal year 2017, combined with improvements in manufacturing efficiencies which resulted in accelerated build rates throughout the period. As a result of these factors, Test revenue declined 14.6% year-over-year. Sensors revenue partially offset the decline in the Test business with an 11.7% increase, driven by greater demand in the positional sensors sector and new opportunities in the test sensors sector.
Additionally, Test orders for the quarter were $153.3 million, a 28.2% sequential increase and 11.7% higher than the same prior year period. The orders growth was attributable to accelerated quoting rates and deal closure from the Test opportunity pipeline that remains near $1 billion in opportunities during the next 12 months.
Also, during Q4 MTSC initiated a series of restructuring actions in Test and Sensors to increase organizational effectiveness, gain manufacturing efficiencies and provide cost savings to reinvest in its growth initiatives. The restructuring actions resulted in $3.0 million of additional expense recognized during the quarter. The company expects to incur $1.0-3.0 million of additional expense in fiscal year 2018 for these actions already taken.
Looking to our fiscal year 2018, for the Test business, given the highly skewed orders profile in the second half of fiscal year 2017 and custom project backlog weighting, the company expects to experience flat to slightly declining revenue growth and modest earnings growth for the full year, with the second half expected to perform stronger than the first half of the year. Given the solid outlook for Test demand in the next few years, investments will continue throughout fiscal year 2018, targeted specifically at operational efficiency initiatives and new products. For the Sensor business, strong demand is anticipated to continue in fiscal year 2018, driven by new products across all major markets and geographies.
As such, the company forecasts revenues in the range of $780-820 million and GAAP earnings per share of $2.05-2.30 for FY2018. In addition, MTSC sees adjusted EBITDA for the full year to range between $120-140 million.
Clearly, as the stock is weighed down into midday it’s obvious that investors were not pleased with the second read of the FY18 guidance. With commentary that the second half of the year is expected to perform better on both the top and bottom line compared to the first half, investors may have to sit on their hands for a bit. This morning’s move higher no doubt provided an exit opportunity for those who may not be willing to hang on for the ride, but at the very least the stock’s post-spring rebound has provided some investors with the rationale to wait and see.