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When management decides to merge or acquire another company they tend to see all the potential positive impacts the move will bring to the bigger company, but a perfect acquisition rarely occurs.  This is the situation facing our Zacks Bear of the Day, MTS Systems Corp (MTSC - Free Report) who saw a negative impact on their EPS due to their recent integration.  

This Zacks Ranked #5 (Strong Sell) 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.

Recent Earnings Report

On April 10th management reported FY 16, and Q1 17 earnings and revenue results where they missed the Zacks consensus earnings estimate, but beat the Zacks consensus revenue estimate.  In the quarter the company saw year over year changes in Revenues +42%, on stronger than expected organic revenue growth.  EPS fell by -29.5% when compared to the year earlier due to a -$0.46 negative impact from acquisition integration.  The company was also negatively affected by violations of the company’s Code of Conduct by some employees.  This investigation resulted in no loss of intellectual property theft, and caused management to create a new Chief Risk and Compliance Officer.  Lastly, management admitted that their PCB acquisitions’ cost and restructuring expenses will have a negative impact on their FY 2017 results.  

FY 2017 Guidance

During the earnings report, management gave updated guidance for FY 2017, and both EPS and revenue were below the Zacks expectations.  Management guided EPS in a range between $1.67 and $2.15, well below the Zacks consensus estimate of $2.82.  Moreover, management adjusted FY 2017 revenue guidance to a range between $760 million and $790 million, well below the previous estimate of $809 million.  

Management’s Take

Dr. Jeffrey A. Graves, President and Chief Executive Officer of MTS Systems commented on their recent results and 2017 outlook stating, “With regard to the business performance and the PCB acquisition that closed in July 2016, fiscal year 2016 ended on a strong note with overall double digit revenue growth that extended into the first quarter of fiscal year 2017. The integration of PCB is progressing as anticipated, and we remain excited about the products and capabilities added to the company, and the revenue and cost synergies we expect to realize from the combination. While the integration costs and restructuring expenses did have a negative impact on our fiscal year 2016 fourth quarter earnings and will negatively impact fiscal year 2017 results, we believe the Test and Sensors businesses are more complementary than ever before and will deliver greater value to our shareholders for years to come.”

Price and Earnings Consensus Graph

As you can see from the chart below, after almost 2 years of declines, the company saw an uptick in early 2017, but the 2017 guidance caused the stock to fall once again.

MTS Systems Corporation Price and Consensus

MTS Systems Corporation Price and Consensus | MTS Systems Corporation Quote

Declining Future Earnings Estimates

Over the past 30 days earnings estimates for Q2 17, Q3 17, FY 17 and FY 18 have all seen significant declines; Q2 17 fell from $0.58 to $0.48, Q3 17 dropped from $0.74 to $0.49, FY 17 slipped from $2.59 to $2.13, and FY 18 plummeted from $3.48 to $2.63

Bottom Line

Merging a new acquisition into your current operations is typically not an easy task, and it appears as though management will continue to have difficulty with this task.  Unfortunately, this merging will have a negative impact through 2017.  Therefore, it would be prudent to wait till these issues are past, and the company can more focus on core items.  

If you are inclined to invest in the Scientific Instruments sector you would be best served by looking into Mettler-Toledo Intl (MTD - Free Report) which currently carries a Zacks Rank #2 (Buy).

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