MTS System Value Stock - Dividend - Research Selection

MTS Systems Corporation (the Company or MTS) is a leading global supplier of high-performance test systems and sensors that was incorporated under Minnesota law in 1966. Our operations are organized and managed in two reportable segments, Test and Sensors, based upon global similarities within their markets, products, operations and distribution. The Test and Sensors segments represented approximately 79% and 21% of our revenue, respectively, for the fiscal year ended October 1, 2016.

Products and Markets by Business Segment

Test Segment

Our Test segment (Test) provides testing solutions including hardware, software and services. The testing solutions are used by customers in the development of products to characterize the product’s mechanical properties. Our solutions simulate forces and motions that customers expect their products to encounter in use. Mechanical simulation testing in a lab setting is an accepted method to accelerate product development compared to reliance on full physical prototypes in real-world settings, proving ground testing and virtual testing because it provides more controlled simulation and accurate measurement. The need for mechanical simulation increases in proportion to the cost of a product, the range and complexity of the physical environment in which the product will be used, expected warranty or recall risk and expense, governmental regulation and potential legal liability. A significant portion of the products in Test are considered by our customers to be capital expenditures. We believe the timing of purchases of our products may be impacted by interest rates, general economic conditions, product development cycles and new product initiatives.

A typical Test system includes a reaction frame to hold the prototype specimen, a hydraulic pump or electro-mechanical power source, piston actuators to create the force or motion and a computer controller with specialized software to coordinate the actuator movement and record and manipulate results. Lower force and less dynamic testing can usually be accomplished with electro-mechanical power sources, which are generally less expensive than hydraulic systems. In addition to these basic components, we sell a variety of accessories and spare parts. We also provide a number of service offerings, including installation, calibration, maintenance, training and consulting.

Test has a diverse set of customers by industry and geography. Regionally, the Americas, Europe and Asia represented approximately 26%, 21% and 53% of revenue for fiscal year 2016, respectively, based upon customer location.

Products, service and customers are grouped into the following three global sectors:

• Ground Vehicles (approximately 55% of Test revenue for fiscal year 2016)

This sector consists of automobile, truck, motorcycle, motorsports vehicles, construction equipment, agricultural equipment, rail and off-road vehicle manufacturers and their suppliers. Our products are used to measure and simulate solutions to assess durability, vehicle dynamics and aerodynamics of vehicles, sub-systems and components. Our products include:

◦ Road simulators for durability simulation;

◦ Tire performance and rolling resistance measurement systems;

◦ Moving road-plane systems and balances for aerodynamic measurements in wind tunnels; and

◦ Service to maintain the equipment and maximize the life of the product.

• Materials (approximately 30% of Test revenue for fiscal year 2016)

This sector covers diverse industries such as power generation, aerospace, vehicles and bio-medical. Our products and services support customers in the research and development of products through the physical characterization of material properties, such as ceramics, composites and steel. Bio-medical applications include systems to test durability and performance of implants, prostheses and other medical and dental materials and devices.

• Structures (approximately 15% of Test revenue for fiscal year 2016)

This sector serves the structural testing needs and service in the fields of aerospace, wind energy, oil and gas, and structural engineering, among others. The aerospace structural testing market consists of manufacturers of commercial, military and private aircraft and their suppliers that use our products, systems and software to perform static and fatigue testing of aircraft and space vehicles. The wind energy market consists of wind turbine manufacturers and their component suppliers that use our products to reduce the cost and improve the reliability of blades, bearings and entire wind turbines. Systems for structural engineering include high force static and dynamic testing, as well as seismic simulation tables used around the world to test the design of structures, such as bridges and buildings, and to help governments establish building codes. Structural engineering customers include construction companies, government agencies, universities and the manufacturers of building materials.

Sensors Segment

Our Sensors segment (Sensors) is a global leader in sensing technologies and solutions used by design engineers and predictive maintenance professionals worldwide, serving customers with a focus on total customer satisfaction, offering regional support to provide innovative and reliable sensing solutions. Sensors provides high performance sensors used for acceleration, position, vibration, motion, pressure and force measurement. Our products and solutions are used to enable automation, enhance precision and safety, and lower our customers’ production costs by improving performance and reducing downtime in their operations. Revenue is partially fueled by our customers’ spending on research and development activities and industrial capacity utilization. These products and solutions serve the automotive, aerospace, industrial, research and development, as well as many other markets. Sensors manufactures products utilizing piezoelectric and magnetostriction technology, both of which provide an accurate and reliable sensor, ideal for use in harsh operating environments.

During fiscal year 2016, we completed the acquisition of 100% of PCB Group, Inc. (PCB), a manufacturer of piezoelectric sensors and components used for vibration, pressure and force measurement, for an estimated purchase price of $581,407 subject to certain adjustments that were made at closing for cash, indebtedness, transaction costs and the level of net working capital. The acquisition of PCB expanded our market position in Sensors and our ability to service a large variety of applications including acceleration, pressure, noise, force, load and torque that both enhance the performance of our customers' products and enable those products to enter the market more rapidly and reliably. For additional information related to the acquisition of PCB, see Note 13 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Sensors customers are also diverse by industry and geography. Regionally, the Americas, Europe and Asia represented approximately 40%, 41% and 19% of revenue for fiscal year 2016, respectively, based upon customer location.

Products and customers are grouped into the following four global sectors:

• Position Sensors (approximately 70% of Sensors revenue for fiscal year 2016)

This sector consists of a wide range of industrial machinery original equipment manufacturers (OEMs) and their end use customers with applications in all areas of manufacturing, including plastics, steel, construction, agriculture, wood, mining and other forms of factory automation. These sensors provide position feedback for motion control systems, improve productivity by enabling high levels of automation and reduce maintenance costs, as well as enhance safe operation of the machines.

• Test Sensors (approximately 15% of Sensors revenue for fiscal year 2016)

This sector covers diverse industries, including test and measurement, automotive, rail, aerospace and defense, and a variety of applications, including research and development, structural monitoring, ground testing of aircraft and vehicles, harsh environmental testing, impact sensors for shock and vibration testing, component and system performance, drive and durability handling and noise and vibration and harshness testing. These sensors provide engineers and scientists with precise and accurate measurements that help facilitate technology advancements and reduce development times in bringing new products to market.

• Industrial Sensors (approximately 10% of Sensors revenue for fiscal year 2016)

This sector consists of sensors used in the heavy industrial markets and energy and power generation. Sensors used in heavy industrial markets are primarily used to monitor the vibration and pressure in a large variety of applications including motors, pumps, paper machines and steel rollers. These sensors provide valuable feedback on equipment performance, reducing down-time and maximizing safety and productivity. Sensors used in the energy and power generation markets are equipped to address hazardous and inaccessible locations and serves gas and wind turbines, oil and gas refineries, nuclear power instrumentation as well as other critical energy infrastructure.

• Systems Sensors (approximately 5% of Sensors revenue for fiscal year 2016)

This sector consists of dynamic test, measurement and sensing systems primarily used to test, model and monitor the behavior of structures and processes and ensure safety and compliance from exposure to noise and vibration. This sector also includes selling calibration systems used to calibrate a variety of sensors, and a comprehensive rental offering of both transactional sensor products and consultative systems that serve a broad range of testing and industrial customers.