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 2012 Form 10-K. Such important factors include:

• The Company's business operations may be affected by government contracting risks
• The Company's business is significantly international in scope, which poses multiple risks including, but not limited to: currency value fluctuations; difficulty enforcing agreements and collecting receivables; import and export matters; higher danger of terrorist activity; difficulty in staffing; and compliance with laws
• 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 because the Company's long-term success depends on its ability to expand its business through new product development, mergers and acquisitions, geographic expansion, and service offerings, all of which are subject to inherent risks including, but not limited to: market demand; market acceptance of products; and the Company's ability to advance its technology
• 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 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
• The Company will need to begin disclosing its use of "conflict minerals," which will impose costs on the Company and could raise reputational and other risks

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 2013.

About MTS Systems Corporation

MTS Systems Corporation is a leading global supplier of high-performance test systems and 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 2,147 employees and revenue of $542 million for the fiscal year ended September 29, 2012.

Financial Results

Total Company

Orders and Backlog

Three Fiscal Months Ended December 29, 2012 ("First Quarter of Fiscal 2013") Compared to Three Fiscal Months Ended December 31, 2011 ("First Quarter of Fiscal 2012")

The following is a comparison of First Quarter of Fiscal 2013 and First Quarter of Fiscal 2012 orders, separately identifying the estimated impact of currency translation (in millions):

         Three Fiscal                                Three Fiscal
         Months Ended            Estimated           Months Ended
         December 29,    Business      Currency      December 31,
             2012         Change      Translation        2011

Orders $ 139.2 $ 5.8 $ (1.4 ) $ 134.8

Orders totaled $139.2 million, an increase of $4.4 million, or 3.3%, including an estimated 1.0% unfavorable impact of currency translation, compared to orders of $134.8 million for the First Quarter of Fiscal 2012. This increase was driven by two large (in excess of $5.0 million) custom Test segment ("Test") orders totaling approximately $21 million. There were no large orders in the First Quarter of Fiscal 2012. Test orders grew 5.4% while Sensors segment ("Sensors") orders declined 6.6%.

Backlog of undelivered orders at the end of the quarter was $290.9 million, relatively flat compared to backlog of $291.8 million at the end of the First Quarter of Fiscal 2012. While the Company's backlog is subject to order cancellations, the Company has not historically experienced a significant number of order cancellations. During the First Quarter of Fiscal 2013, one custom order in Test totaling approximately $2.1 million was cancelled. This order was booked in the previous fiscal year. The cancellation reflects a decision made by the customer to postpone the order until such time as the design phase of a testing system project has been completed.

Results of Operations

First Quarter of Fiscal 2013 Compared to First Quarter of Fiscal 2012

The following is a comparison of First Quarter of Fiscal 2013 and First Quarter
of Fiscal 2012 statements of operations (in millions, except per share data):



                                   Three Fiscal Months Ended
                                 December 29,     December 31,
                                     2012             2011         Variance          % Variance
Revenue                          $       142.7    $       133.7   $       9.0                6.7 %
Cost of sales                             86.1             75.0          11.1               14.8 %
Gross profit                              56.6             58.7          (2.1 )             -3.6 %
Gross margin                              39.7 %           43.9 %        (4.2 ) pts

Operating expenses:
Selling and marketing                     19.2             17.0           2.2               12.9 %
General administrative                    12.3             13.2          (0.9 )             -6.8 %
Research and development                   5.0              5.0             -                0.0 %
Total operating expenses                  36.5             35.2           1.3                3.7 %

Income from operations                    20.1             23.5          (3.4 )            -14.5 %

Interest income (expense), net               -             (0.2 )         0.2                 NM
Other income (expense), net                0.4                -           0.4                 NM

Income before income taxes                20.5             23.3          (2.8 )            -12.0 %
Income tax provision                       6.7              7.8          (1.1 )            -14.1 %
Net income                       $        13.8    $        15.5   $      (1.7 )            -11.0 %

Diluted earnings per share       $        0.87    $        0.98   $     (0.11 )            -11.2 %

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

The following is a comparison of First Quarter of Fiscal 2013 and First Quarter of Fiscal 2012 results of operations, separately identifying the estimated impact of currency translation (in millions):

                           Three Fiscal                                 Three Fiscal
                           Months Ended            Estimated            Months Ended
                           December 29,     Business      Currency      December 31,
                               2012          Change      Translation        2011
Revenue                    $       142.7   $     10.7   $        (1.7 ) $       133.7
Cost of sales                       86.1         12.2            (1.1 )          75.0
Gross profit                        56.6         (1.5 )          (0.6 )          58.7
Gross margin                        39.7 %                                       43.9 %

Operating expenses:
Selling and marketing               19.2          2.4            (0.2 )          17.0
General administrative              12.3         (0.8 )          (0.1 )          13.2
Research and development             5.0            -               -             5.0
Total operating expenses            36.5          1.6            (0.3 )          35.2

Income from operations     $        20.1   $     (3.1 ) $        (0.3 ) $        23.5

Revenue was $142.7 million, an increase of $9.0 million, or 6.7%, compared to revenue of $133.7 million for the First Quarter of Fiscal 2012. The increase was primarily driven by strong backlog execution in Test, partially offset by a lower beginning backlog and reduced order volume in Sensors, as well as an estimated $1.7 million unfavorable impact of currency translation. Test revenue increased 11.5% to $121.1 million, while Sensors revenue decreased 13.9% to $21.6 million.

Gross profit was $56.6 million, a decrease of $2.1 million, or 3.6%, compared to gross profit of $58.7 million for the First Quarter of Fiscal 2012. Gross profit as a percentage of revenue was 39.7%, a decrease of 4.2 percentage points from 43.9% for the First Quarter of Fiscal 2012. This decrease reflects continued investment in productivity initiatives in both businesses, as well as investment in expanded Test service capacity, an unfavorable mix of lower-margin products, and higher warranty expense in Test, partially offset by volume leverage in Test.

Selling and marketing expense was $19.2 million, an increase of $2.2 million, or 12.9%, compared to $17.0 million for the First Quarter of Fiscal 2012. This increase was primarily due to higher compensation and benefits driven by increased headcount, higher sales commissions, and increased travel and other discretionary expenses to support selling efforts. Selling and marketing expense as a percentage of revenue was 13.5%, compared to 12.7% for the First Quarter of Fiscal 2012.

General and administrative expense was $12.3 million, a decrease of $0.9 million, or 6.8%, compared to $13.2 million for the First Quarter of Fiscal 2012. This decrease is primarily driven by a $1.2 million relatively lower level of investment in legal and compliance initiatives compared to the First Quarter of Fiscal 2012, partially offset by higher compensation and benefits driven by increased headcount. General and administrative expense as a percentage of revenue was 8.6%, compared to 9.9% for the First Quarter of Fiscal 2012.

Research and development expense was $5.0 million, flat compared to the First Quarter of Fiscal 2012. Research and development expense as a percentage of revenue was 3.5% on higher volume, compared to 3.7% for the First Quarter of Fiscal 2012.

Income from operations was $20.1 million, a decrease of $3.4 million, or 14.5%, compared to income from operations of $23.5 million for the First Quarter of Fiscal 2012. This decrease was driven by lower gross profit and increased operating expenses. Operating income as a percentage of revenue was 14.1%, compared to 17.6% for the First Quarter of Fiscal 2012.

Interest income (expense), net was less than $0.1 million of net interest income, compared to $0.2 million of net interest expense in the First Quarter of Fiscal 2012, driven by a $0.2 million reduction in interest expense. Net interest expense in the First Quarter of Fiscal 2012 included $0.2 million of interest expense associated with outstanding borrowings under the Company's credit facility. During the First Quarter of Fiscal 2013, there were no outstanding borrowings under the Company's credit facility.

Other income (expense), net was $0.4 million of net other income, compared to less than $0.1 million of net other expense in the First Quarter of Fiscal 2012. The net other income primarily consists of royalty income associated with the sale of a Test product line that was sold by the Company in fiscal year 2012.

Provision for income taxes totaled $6.7 million for the First Quarter of Fiscal 2013, a decrease of $1.1 million, compared to $7.8 million for the First Quarter of Fiscal 2012. This decrease was primarily due to decreased income before income taxes and a lower effective tax rate. The effective tax rate for the First Quarter of Fiscal 2013 was 32.8%, a decrease of 0.6 percentage points compared to a tax rate of 33.4% for the First Quarter of Fiscal 2012, primarily driven by changes in certain foreign tax rates.

Net income was $13.8 million, a decrease of $1.7 million, or 11.0%, compared to $15.5 million for the First Quarter of Fiscal 2012. Earnings per diluted share decreased $0.11 to $0.87, compared to $0.98 for the First Quarter of Fiscal 2012. The decrease was primarily driven by lower income from operations.

Segment Results


Test Segment


Orders and Backlog

First Quarter of Fiscal 2013 Compared to First Quarter of Fiscal 2012

The following is a comparison of First Quarter of Fiscal 2013 and First Quarter
of Fiscal 2012 orders for Test, separately identifying the estimated impact of
currency translation (in millions):


         Three Fiscal                                Three Fiscal
         Months Ended            Estimated           Months Ended
         December 29,    Business      Currency      December 31,
             2012         Change      Translation        2011

Orders $ 116.7 $ 6.7 $ (0.7 ) $ 110.7

Orders totaled $116.7 million, an increase of $6.0 million, or 5.4%, compared to orders of $110.7 million for the First Quarter of Fiscal 2012. The First Quarter of Fiscal 2013 orders included a $12 million European order in the ground vehicles market for a rolling road wind tunnel measurement system, and a $9 million Americas' structures market order for a vehicle motion simulator. There were no large orders in the First Quarter of Fiscal 2012. Geographically, Europe increased 47.5% and the Americas grew 7.3%, driven by the previously mentioned large orders. Asia declined 19.1%, primarily due to the cyclical nature of Chinese seismic orders in the structures market. Although base orders (those under $5.0 million) declined 13.6%, the Company believes this decline was caused by variability in order timing. Currency translation unfavorably impacted orders by approximately $0.7 million. Test accounted for 83.9% of total Company orders, compared to 82.1% for the First Quarter of Fiscal 2012.

Backlog of undelivered orders at the end of the quarter was $276.1 million, relatively flat compared backlog of $275.5 million at the end of the First Quarter of Fiscal 2012. As previously mentioned, backlog at the end of the First Quarter of Fiscal 2013 was negatively impacted by the cancellation of a custom order totaling approximately $2.1 million.

Results of Operations

First Quarter of Fiscal 2013 Compared to First Quarter of Fiscal 2012

The following is a comparison of First Quarter of Fiscal 2013 and First Quarter
of Fiscal 2012 results of operations for Test, separately identifying the
estimated impact of currency translation (in millions):


                           Three Fiscal                                 Three Fiscal
                           Months Ended            Estimated            Months Ended
                           December 29,     Business      Currency      December 31,
                               2012          Change      Translation        2011
Revenue                    $       121.1   $     13.5   $        (1.0 ) $       108.6
Cost of sales                       76.5         13.4            (0.8 )          63.9
Gross profit                        44.6          0.1            (0.2 )          44.7
Gross margin                        36.9 %                                       41.2 %

Operating expenses:
Selling and marketing               15.0          1.9            (0.1 )          13.2
General administrative               9.5         (0.6 )             -            10.1
Research and development             3.7            -               -             3.7
Total operating expenses            28.2          1.3            (0.1 )          27.0

Income from operations     $        16.4   $     (1.2 ) $        (0.1 ) $        17.7

Revenue was $121.1 million, an increase of $12.5 million, or 11.5%, compared to revenue of $108.6 million for the First Quarter of Fiscal 2012. The increase was primarily driven by a 5.2% higher beginning backlog and strong short cycle orders in Asia, partially offset by an estimated $1.0 million unfavorable impact of currency translation. The backlog execution was primarily driven by the implementation of operational process improvements that have resulted from the Company's investment in various growth and productivity initiatives.

Gross profit was $44.6 million, relatively flat compared to gross profit of $44.7 million for the First Quarter of Fiscal 2012. Gross profit as a percentage of revenue was 36.9%, a decrease of 4.3 percentage points from 41.2% for the First Quarter of Fiscal 2012. Of the reduced gross profit rate, approximately 2 percentage points resulted from continued investment in productivity initiatives and expanded service capacity, approximately 2 percentage points resulted from an unfavorable mix of lower-margin products, and approximately 1 percentage point resulted from higher warranty expense. These decreases were partially offset by an approximate 1 percentage point benefit from volume leverage.

Selling and marketing expense was $15.0 million, an increase of $1.8 million, or 13.6%, compared to $13.2 million for the First Quarter of Fiscal 2012. This increase reflects continued investment in sales expansion and is primarily comprised of higher compensation and benefits, driven by increased headcount, as well as increased travel and other discretionary expenses to support sales efforts. Selling and marketing expense as a percentage of revenue was 12.4%, compared to 12.2% for the First Quarter of Fiscal 2012.

General and administrative expense was $9.5 million, a decrease of $0.6 million, or 5.9%, compared to $10.1 million for the First Quarter of Fiscal 2012. This decrease is primarily driven by a relatively lower level of investment in legal and compliance program enhancement initiatives, partially offset by higher compensation and benefits driven by increased headcount. General and administrative expense as a percentage of revenue was 7.8% on higher volume, compared to 9.3% for the First Quarter of Fiscal 2012.

Research and development expense was $3.7 million, flat compared to the First Quarter of Fiscal 2012. Research and development expense as a percentage of revenue was 3.1% on higher volume, compared to 3.4% for the First Quarter of Fiscal 2012.

Income from operations was $16.4 million, a decrease of $1.3 million, or 7.3%, compared to income from operations of $17.7 million for the First Quarter of Fiscal 2012. The decrease was driven by increased operating expenses. Operating income as a percentage of revenue was 13.5%, compared to 16.3% for the First Quarter of Fiscal 2012.

Sensors Segment


Orders and Backlog

First Quarter of Fiscal 2013 Compared to First Quarter of Fiscal 2012

The following is a comparison of First Quarter of Fiscal 2013 and First Quarter
of Fiscal 2012 orders for Sensors, separately identifying the estimated impact
of currency translation (in millions):


          Three Fiscal                                  Three Fiscal
          Months Ended            Estimated             Months Ended
          December 29,     Business      Currency       December 31,
              2012          Change      Translation         2011

Orders   $         22.5   $     (0.9 ) $        (0.7 ) $         24.1

Orders totaled $22.5 million, a decrease of $1.6 million, or 6.6%, including an estimated 2.9% unfavorable impact of currency translation, compared to orders of $24.1 million for the First Quarter of Fiscal 2012, primarily due to soft market conditions in Europe and Japan in both the industrial and mobile hydraulics markets. Industrial market orders in the U.S. and China were strong. Sensors accounted for 16.1% of total Company orders, compared to 17.9% for the First Quarter of Fiscal 2012.

Backlog of undelivered orders at the end of the quarter was $14.8 million, a decrease of 9.2% from backlog of $16.3 million at the end of the First Quarter of Fiscal 2012.

Results of Operations

First Quarter of Fiscal 2013 Compared to First Quarter of Fiscal 2012

The following is a comparison of First Quarter of Fiscal 2013 and First Quarter
of Fiscal 2012 results of operations for Sensors, separately identifying the
estimated impact of currency translation (in millions):


                            Three Fiscal                                  Three Fiscal
                            Months Ended            Estimated             Months Ended
                            December 29,     Business      Currency       December 31,
                                2012          Change      Translation         2011
Revenue                    $         21.6   $     (2.8 ) $        (0.7 ) $         25.1
Cost of sales                         9.6         (1.2 )          (0.3 )           11.1
Gross profit                         12.0         (1.6 )          (0.4 )           14.0
Gross margin                         55.5 %                                        55.9 %

Operating expenses:
Selling and marketing                 4.2          0.5            (0.1 )            3.8
General administrative                2.8         (0.2 )          (0.1 )            3.1
Research and development              1.3            -               -              1.3
Total operating expenses              8.3          0.3            (0.2 )            8.2

Income from operations     $          3.7   $     (1.9 ) $        (0.2 ) $          5.8

Revenue was $21.6 million, a decrease of $3.5 million, or 13.9%, compared to revenue of $25.1 million for the First Quarter of Fiscal 2012. This decrease was primarily driven by a 20.8% lower beginning backlog, reduced order volume, and an estimated $0.7 million unfavorable impact of currency translation.

Gross profit was $12.0 million, a decrease of $2.0 million, or 14.3%, compared to gross profit of $14.0 million for the First Quarter of Fiscal 2012, driven by lower revenue volume. Gross profit as a percentage of revenue was 55.5%, relatively flat compared to 55.9% for the First Quarter of Fiscal 2012.

Selling and marketing expense was $4.2 million, an increase of $0.4 million, or 10.5%, compared to $3.8 million for the First Quarter of Fiscal 2012. The increase was primarily due to higher compensation and benefits driven by increased headcount to support future sales growth. Selling and marketing expense as a percentage of revenue was 19.4% on lower volume, compared to 15.1% for the First Quarter of Fiscal 2012.

General and administrative expense was $2.8 million, a decrease of $0.3 million, or 9.7%, compared to $3.1 million for the First Quarter of Fiscal 2012. This decrease is primarily driven by a relatively lower level of investment in compliance program enhancement initiatives. General and administrative expense as a percentage of revenue was 13.0% on lower volume, compared to 12.4% for the First Quarter of Fiscal 2012.

Research and development expense was $1.3 million, flat compared to the First Quarter of Fiscal 2012. Research and development expense as a percentage of revenue was 6.0% on lower volume, compared to 5.2% for the First Quarter of Fiscal 2012.

Income from operations was $3.7 million, a decrease of $2.1 million, or 36.2%, compared to income from operations of $5.8 million for the First Quarter of Fiscal 2012. The decrease was primarily due to lower gross profit. Operating income as a percentage of revenue was 17.1%, compared to 23.1% for the First Quarter of Fiscal 2012.

Capital Resources and Liquidity

The Company had cash and cash equivalents of $47.9 million at the end of the First Quarter of Fiscal 2013. Of this amount, $2.6 million was located in North America, $32.1 million in Europe, and $13.2 million in Asia. Of the $45.3 million of cash located outside of North America, approximately $34.9 million is not available for use in the U.S. without the incurrence of U.S. federal and state income tax consequences.

The North American balance was primarily invested in bank deposits. In Europe and Asia, the balances were primarily invested in money market funds and bank deposits. In accordance with its investment policy, the Company places cash equivalent investments with issuers who have high-quality investment credit ratings. In addition, the Company limits the amount of investment exposure it has with any particular issuer. The Company's investment objectives are to preserve principal, maintain liquidity, and achieve the best available return consistent with its primary objectives of safety and liquidity. At the end of the First Quarter of Fiscal 2013, the Company held no short-term investments.

Total cash and cash equivalents decreased $31.9 million in the First Quarter of Fiscal 2013, primarily due to increased working capital requirements, dividend payments, investments in property and equipment, and employee incentives and related benefit payments, partially offset by earnings. Total cash and cash equivalents decreased $0.4 million in the First Quarter of Fiscal 2012, primarily due to increased working capital requirements and employee incentives . . .