Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" regarding financial projections 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. Words such as "may," "will," "should," "expects," "intends," "projects," "plans," "believes," "estimates," "targets," "anticipates," and similar expressions are used to identify these forward-looking statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those factors described in Part I, Item 1A, "Risk Factors" of our 2011 Form 10-K. Such important factors include:

• The Company's business operations may be affected by government contracting risks
• The Company is the subject of an investigation relating to its past government contracting practices
• The Company's business is significantly international in scope, which poses multiple risks
• Volatility in the global economy could adversely affect results
• The Company's business is subject to strong competition
• The Company may not achieve its growth plans for the expansion of the business
• The Company may experience difficulties obtaining the services of skilled employees
• The Company may fail to protect its intellectual property effectively, or may infringe upon the intellectual property of others
• The Company's business could be adversely affected by product liability and commercial litigation
• The Company may experience difficulty obtaining materials or components for its products, or the cost of materials or components may increase
• Government regulation imposes significant costs and other constraints
• The backlog, sales, delivery and acceptance cycle for many of the Company's products is irregular and may not develop as anticipated
• The Company's customers are in cyclical industries
• Interest rate fluctuations could adversely affect results
• The Company may be required to recognize impairment charges for long-lived assets

In addition to the risk factors listed above, the Company's business and results of operations may be adversely affected if the U.S. Department of Justice does not approve the Company's agreement in principle with the U.S. Attorney's Office for the District of Minnesota ("USAO") settling the U.S. Department of Commerce ("DOC") and USAO's investigation into the Company's past government contracting practices.

The performance of the Company's business and its securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our reports on Forms 10-Q and 8-K to be filed by the Company in fiscal year 2012.

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 2,003 employees and revenue of $467 million for the fiscal year ended October 1, 2011.

Summary of Financial Results

Three Fiscal Months Ended June 30, 2012 ("Third Quarter of Fiscal 2012") Compared to Three Fiscal Months Ended July 2, 2011 ("Third Quarter of Fiscal 2011")

Significant items for the Third Quarter of Fiscal 2012 compared to the Third Quarter of Fiscal 2011 include:

• On July 27, 2012, the Company reached an agreement in principle with the USAO, subject to the approval of the Department of Justice ("DOJ") settling for $7.8 million the DOC and USAO's investigation into the Company's past disclosures on its government certifications and its government contracting compliance policies, general compliance record and practices in areas including export controls and government contracts. If approved, the agreement would conclude the DOC and USAO investigation. In connection with the agreement in principle, the Company accrued a loss contingency equal to the settlement amount.

Further, the Company expects to incur additional General and Administrative expenses related to legal and consulting fees as part of the ongoing settlement discussions. If the settlement agreement is approved by the DOJ, additional legal and consulting fees are not expected to be material. The Company's known external legal and consulting costs related to the investigation and settlement discussions in the third quarter of fiscal 2012 and 2011 totaled $0.1 million and $3.6 million, respectively. For a more detailed discussion of this investigation by the DOC and USAO and the agreement in principle, please refer to Note 11 of the Condensed Notes to Consolidated Financial Statements.

• Orders decreased 1.0% to $148.0 million, including an estimated 4% unfavorable impact of currency translation, compared to $149.5 million for the Third Quarter of Fiscal 2011. Orders in the Third Quarter of Fiscal 2012 included two large (in excess of $5.0 million) Test segment orders totaling approximately $20 million, a decrease of $15 million compared to large Test segment orders in the Third Quarter of Fiscal 2011. Excluding the larger orders, base (less than $5.0 million) orders increased 11.8%, reflecting 19.4% growth in the Test segment, primarily in the Americas and Asia, partially offset by an 11.9% worldwide decline in the Sensors segment, of which an estimated 6% was driven by the unfavorable impact of currency translation.

• Revenue increased 21.3% to $141.7 million, including an estimated 4% unfavorable impact of currency translation, compared to $116.8 million for the Third Quarter of Fiscal 2011. This increase was comprised of 30.2% growth in the Test Segment, resulting primarily from 17.7% higher beginning backlog as well as strong base order growth, partially offset by a 7.6% decline in Sensors, driven by an estimated 5% unfavorable impact of currency translation.

• Income from operations increased 16.7% to $18.2 million, compared to $15.6 million for the Third Quarter of Fiscal 2011. This increase was primarily driven by higher gross profit from increased volume leverage and productivity improvements in the Test segment, net of $11.3 million higher operating expenses. The higher operating expense principally resulted from the $7.8 million accrual related to the previously mentioned U.S Government matter, continued investment in strategic and productivity initiatives, higher headcount to support selling and compliance efforts, as well as planned investments in research and development.

• The effective tax rate for the Third Quarter of Fiscal 2012 was 48.1%, an increase of 14.9 percentage points compared to a tax rate of 33.2% for the Third Quarter of Fiscal 2011, driven by the previously mentioned $7.8 million accrual recognized in the quarter which is nondeductible for income tax purposes.

• Earnings per diluted share decreased $0.10, or 14.5% to $0.59, compared to $0.69 for the Third Quarter of Fiscal 2011. The decrease was primarily driven by a higher effective tax rate as well as a $0.6 million increase in net losses on foreign currency transactions, partially offset by higher income from operations. The previously mentioned $7.8 million accrual recognized in the quarter negatively impacted earnings per diluted share by $0.48.

Nine Fiscal Months Ended June 30, 2012 ("First Nine Fiscal Months of 2012") Compared to Nine Fiscal Months Ended July 2, 2011 ("First Nine Fiscal Months of 2011")

Significant items for the First Nine Fiscal Months of 2012 compared to the First Nine Fiscal Months of 2011 include:

• Orders increased 2.7% to $418.4 million, compared to $407.5 million for the First Nine Fiscal Months of 2011. Orders in the First Nine Fiscal Months of 2012 included three large Test segment orders totaling approximately $25 million, a decrease of $39 million compared to large Test segment order bookings in the First Nine Fiscal Months of 2011. Excluding the large orders, base orders increased 14.5%, reflecting 20.4% worldwide growth in the Test segment, partially offset by a 5.4% decline in the Sensors segment, of which an estimated 3% was driven by the unfavorable impact of currency translation.

• Revenue increased 20.4% to $404.4 million, including an estimated 1% unfavorable impact of currency translation, compared to $335.8 million for the First Nine Fiscal Months of 2011. This increase was comprised of 26.7% growth in the Test Segment, resulting primarily from 36.8% higher beginning backlog as well as strong base order growth, partially offset by a 0.8% decline in Sensors, driven by an estimated 2% unfavorable impact of currency translation.

• Income from operations increased 13.5% to $59.0 million, compared to $52.0 million for the First Nine Fiscal Months of 2011. This increase was primarily driven by higher gross profit from increased volume and improved productivity in the Test segment, net of $26.4 million higher operating expenses. The higher operating expenses principally resulted from continued investment in strategic and productivity initiatives, planned investments in research and development, higher headcount to support selling and compliance efforts, as well as the $7.8 million accrual related to the previously mentioned U.S Government matter.

• The effective tax rate for the First Nine Fiscal Months of 2012 was 37.9%, an increase of 7.1 percentage points compared to a tax rate of 30.8% for the First Nine Fiscal Months of 2011. This increase was primarily driven by the previously mentioned $7.8 million accrual recognized in the First Nine Fiscal Months of 2012 which is nondeductible for income tax purposes, as well as the enactment of tax legislation in the First Quarter of Fiscal 2011 that extended the United States research and development credits and provided an additional tax benefit of $1.0 million in the First Nine Fiscal Months of 2011. This legislation expired as of the end of the First Quarter of Fiscal 2012.

• Earnings per diluted share decreased $0.03, or 1.3%, to $2.26, compared to $2.29 for the First Nine Fiscal Months of 2011. The decrease was driven by a rise in the effective tax rate as well as a $1.2 million increase in net losses on foreign currency transactions, partially offset by higher income from operations. The previously mentioned $7.8 million accrual that was recognized in the First Nine Fiscal Months of 2012 negatively impacted earnings per diluted share by $0.48.

Detailed Financial Results


Total Company


Orders and Backlog

Third Quarter of Fiscal 2012 Compared to Third Quarter of Fiscal 2011

The following is a comparison of Third Quarter of Fiscal 2012 and Third Quarter
of Fiscal 2011 orders, separately identifying the estimated impact of currency
translation (in millions):


         Three Fiscal                                Three Fiscal
         Months Ended            Estimated           Months Ended
           June 30,      Business      Currency         July 2,
             2012         Change      Translation        2011

Orders $ 148.0 $ 4.2 $ (5.7 ) $ 149.5

Orders totaled $148.0 million, a decrease of $1.5 million, or 1.0%, compared to orders of $149.5 million for the Third Quarter of Fiscal 2011, driven by an estimated $5.7 million unfavorable impact of currency translation. Orders in the Third Quarter of Fiscal 2012 included two large custom Test segment orders totaling approximately $20 million, a decrease of $15 million compared to large Test segment order bookings in the Third Quarter of Fiscal 2011. Excluding the large orders, base orders increased 11.8%, reflecting 18.9% growth in the Test segment, partially offset by an 11.9% decline in Sensors.

Backlog of undelivered orders at the end of the third quarter was $286.5 million, a decrease of 1.1% from backlog of $289.7 million at the end of the Third Quarter of Fiscal 2011. The decrease is driven by the cancellation of two custom Test segment orders totaling approximately $9 million that were booked in a previous fiscal year and were associated with a Test product line that was sold in the Second Quarter of Fiscal 2012. Prior to the cancellation of these orders, the Company's fulfillment obligations were limited by stop work orders, both of which were issued to the Company by the customer in the Third Quarter of Fiscal 2010. During the Third Quarter of Fiscal 2012, the customer notified the Company that the unfulfilled portions of both of these orders had been terminated for convenience because the U.S. Government had terminated its underlying contracts with the customer. While the Company's backlog is subject to order cancellations, the Company seldom experiences order cancellations larger than $1.0 million.

Results of Operations

Third Quarter of Fiscal 2012 Compared to Third Quarter of Fiscal 2011

The following is a comparison of Third Quarter of Fiscal 2012 and Third Quarter
of Fiscal 2011 statements of operations (in millions, except per share data):


                                       Three Fiscal Months Ended
                                       June 30,          July 2,
                                         2012             2011          Variance        % Variance
Revenue                              $       141.7    $       116.8    $      24.9             21.3 %
Cost of sales                                 78.0             67.0           11.0             16.4 %
Gross profit                                  63.7             49.8           13.9             27.9 %
Gross margin                                  44.9 %           42.7 %          2.2 pts

Operating expenses:
Selling and marketing                         19.6             17.4            2.2             12.6 %
General administrative                        20.8             12.9            7.9             61.2 %
Research and development                       5.1              3.9            1.2             30.8 %
Total operating expenses                      45.5             34.2           11.3             33.0 %

Income from operations                        18.2             15.6            2.6             16.7 %

Interest income (expense), net                 0.2             (0.1 )          0.3               NM

Other income, net                              0.1              0.9           (0.8 )          -88.9 %

Income before income taxes                    18.5             16.4            2.1             12.8 %
Income tax provision                           8.9              5.4            3.5             64.8 %
Net income                           $         9.6    $        11.0    $      (1.4 )          -12.7 %

Diluted earnings per share           $        0.59    $        0.69    $     (0.10 )          -14.5 %

"NM" represents comparisons that are not meaningful to this analysis.

The following is a comparison of Third Quarter of Fiscal 2012 and Third Quarter of Fiscal 2011 results of operations, separately identifying the estimated impact of currency translation (in millions):

                           Three Fiscal                                 Three Fiscal
                           Months Ended            Estimated            Months Ended
                             June 30,       Business      Currency         July 2,
                               2012          Change      Translation        2011
Revenue                    $       141.7   $     29.5   $        (4.6 ) $       116.8
Cost of sales                       78.0         14.1            (3.1 )          67.0
Gross profit                        63.7         15.4            (1.5 )          49.8
Gross margin                        44.9 %                                       42.7 %

Operating expenses:
Selling and marketing               19.6          2.8            (0.6 )          17.4
General administrative              20.8          8.1            (0.2 )          12.9
Research and development             5.1          1.3            (0.1 )           3.9
Total operating expenses            45.5         12.2            (0.9 )          34.2

Income from operations     $        18.2   $      3.2   $        (0.6 ) $        15.6

Revenue was $141.7 million, an increase of $24.9 million, or 21.3%, compared to revenue of $116.8 million for the Third Quarter of Fiscal 2011. The increase was driven by a 15.5% higher beginning backlog, as well as increased base order volume in the Test segment, partially offset by an estimated $4.6 million unfavorable impact of currency translation. Test segment revenue increased 30.2% to $116.3 million, while Sensors segment declined 7.6% to $25.4 million.

Gross profit was $63.7 million, an increase of $13.9 million, or 27.9%, compared to gross profit of $49.8 million for the Third Quarter of Fiscal 2011. Gross profit as a percentage of revenue was 44.9%, an increase of 2.2 percentage points from 42.7% for the Third Quarter of Fiscal 2011. This increase was driven by leverage on higher volume and improved productivity, partially offset by the unfavorable impact of the increase in the proportion of Test segment revenue to total Company revenue.

Selling and marketing expensewas $19.6 million, an increase of $2.2 million, or 12.6%, compared to $17.4 million for the Third Quarter of Fiscal 2011. This increase was primarily due to higher compensation and benefits driven by increased headcount, higher sales commissions, as well as a rise in travel and other discretionary expenses to support selling efforts. These increases were partially offset by an estimated $0.6 million favorable impact of currency translation. Selling and marketing expense as a percentage of revenue was 13.8% on higher volume, compared to 14.9% for the Third Quarter of Fiscal 2011.

General and administrative expensewas $20.8 million, an increase of $7.9 million, or 61.2%, compared to $12.9 million for the Third Quarter of Fiscal 2011. This increase is primarily driven by the previously mentioned $7.8 million accrual related to the Company's agreement in principle to settle the U.S Government investigation, continued investment in strategic, productivity and compliance initiatives, and increased compensation and benefits driven by a rise in headcount. General and administrative expense as a percentage of revenue was 14.7%, compared to 11.0% for the Third Quarter of Fiscal 2011.

Research and development expensewas $5.1 million, an increase of $1.2 million, or 30.8%, compared to $3.9 million for the Third Quarter of Fiscal 2011, primarily due to a higher level of planned expenditures in both segments. In addition, during the Third Quarter of Fiscal 2011, the Company allocated certain of its Test segment resources towards capitalized software development activities. Total software development costs capitalized during the Third Quarter of Fiscal 2011 were $1.0 million. No software development costs were capitalized during the Third Quarter of Fiscal 2012. Research and development expense as a percentage of revenue was 3.6%, compared to 3.3% for the Third Quarter of Fiscal 2011.

Income from operations was $18.2 million, an increase of $2.6 million, or 16.7%, compared to $15.6 million for the Third Quarter of Fiscal 2011. This increase was primarily driven by higher gross profit, partially offset by increased operating expenses. Operating income as a percentage of revenue was 12.8% on higher volume, compared to 13.4% for the Third Quarter of Fiscal 2011.

Interest income (expense), net was $0.2 million of interest income in the Third Quarter of Fiscal 2012 compared to $0.1 million of interest expense in the Third Quarter of Fiscal 2011. Net interest income in the Third Quarter of Fiscal 2012 was driven by a $0.3 million reduction in the accrued interest liability associated with the Company's uncertain tax positions.

Other income, net was $0.1 million, a decrease of $0.8 million compared to $0.9 million for the Third Quarter of Fiscal 2011. This decrease was primarily due to $0.2 million of net losses on foreign currency transactions in the Third Quarter of Fiscal 2012 compared to $0.4 million of net gains on foreign currency transactions in the Third Quarter of Fiscal 2011.

Provision for income taxes totaled $8.9 million for the Third Quarter of Fiscal 2012, an increase of $3.5 million, or 64.8%, compared to $5.4 million for the Third Quarter of Fiscal 2011, primarily due to increased income before income taxes and a higher effective tax rate. The effective tax rate for the Third Quarter of Fiscal 2012 was 48.1%, an increase of 14.9 percentage points compared to a tax rate of 33.2% for the Third Quarter of Fiscal 2011. This increase was primarily due to recognition in the quarter of the previously mentioned $7.8 million accrual related to the U.S. Government matter.

Net income was $9.6 million, a decrease of $1.4 million, or 12.7%, compared to $11.0 million for the Third Quarter of Fiscal 2011. Earnings per diluted share decreased $0.10 to $0.59, compared to $0.69 for the Third Quarter of Fiscal 2011. This decrease was primarily driven by a higher effective tax rate as well as increased net losses on foreign currency transactions, partially offset by higher income from operations. The previously mentioned $7.8 million accrual recognized in the quarter negatively impacted earnings per diluted share by $0.48.

Segment Results


Test Segment


Orders and Backlog

Third Quarter of Fiscal 2012 Compared to Third Quarter of Fiscal 2011

The following is a comparison of Third Quarter of Fiscal 2012 and Third Quarter
of Fiscal 2011 orders for the Test segment, separately identifying the estimated
impact of currency translation (in millions):


         Three Fiscal                                Three Fiscal
         Months Ended            Estimated           Months Ended
           June 30,      Business      Currency         July 2,
             2012         Change      Translation        2011

Orders $ 123.5 $ 5.9 $ (4.1 ) $ 121.7

Orders totaled $123.5 million, an increase of $1.8 million, or 1.5%, including an estimated 3.4% unfavorable impact of currency translation, compared to orders of $121.7 million for the Third Quarter of Fiscal 2011. Orders in the quarter include an estimated $4.1 million unfavorable impact of currency translation. The Third Quarter of Fiscal 2012 orders included two large orders in the structures market totaling approximately $20 million. The Third Quarter of Fiscal 2011 included three large orders in the structures market totaling approximately $35 million. Excluding the large orders, base orders increased 19.4% driven by increased volume in the Americas and Asia. The Test segment accounted for 83.5% of total Company orders, compared to 81.4% for the Third Quarter of Fiscal 2011.

Backlog of undelivered orders at the end of the quarter was $272.0 million, an increase of 0.4% compared to $270.8 million at the end of the Third Quarter of Fiscal 2011. As previously mentioned, backlog at the end of the quarter was unfavorably impacted by the cancellation of two custom orders totaling approximately $9 million.

Results of Operations

Third Quarter of Fiscal 2012 Compared to Third Quarter of Fiscal 2011

The following is a comparison of Third Quarter of Fiscal 2012 and Third Quarter of Fiscal 2011 results of operations for the Test segment, separately identifying the estimated impact of currency translation (in millions):

                           Three Fiscal                                  Three Fiscal
                           Months Ended            Estimated             Months Ended
                             June 30,       Business      Currency         July 2,
                               2012          Change      Translation         2011

Revenue                    $       116.3   $     30.1   $        (3.1 ) $         89.3
Cost of sales                       67.1         14.3            (2.5 )           55.3
Gross profit                        49.2         15.8            (0.6 )           34.0
Gross margin                        42.2 %                                        38.1 %

Operating expenses:
Selling and marketing               15.7          3.1            (0.4 )           13.0
General administrative              16.1          6.7               -              9.4
Research and development             3.7          1.0               -              2.7
Total operating expenses            35.5         10.8            (0.4 )           25.1

Income from operations     $        13.7   $      5.0   $        (0.2 ) $          8.9

Revenue was $116.3 million, an increase of $27.0 million, or 30.2%, compared to revenue of $89.3 million for the Third Quarter of Fiscal 2011. The increase was driven by a 17.7% higher beginning backlog and strong base-order growth, partially offset by an estimated $3.1 million unfavorable impact of currency translation.

Gross profit was $49.2 million, an increase of $15.2 million, or 44.7%, compared to gross profit of $34.0 million for the Third Quarter of Fiscal 2011. Gross profit as a percentage of revenue was 42.2%, an increase of 4.1 percentage points from 38.1% for the Third Quarter of Fiscal 2011, primarily from leverage on higher volume and improved productivity.

Selling and marketing expensewas $15.7 million, an increase of $2.7 million, or 20.8%, compared to $13.0 million for the Third Quarter of Fiscal 2011. This increase was primarily due to higher compensation and benefits driven by increased headcount, higher sales commissions, an increase in travel and other discretionary expenses to support selling efforts, as well as increased investment in marketing initiatives, partially offset by a $0.4 million favorable impact of currency translation. Selling and marketing expense as a . . .