MTS Systems Corporation, a leading global supplier of high-performance test and simulation systems and sensors, announced that, on November 22, 2019, it signed a definitive agreement to acquire the operating entities of R&D, including R&D Test Systems, R&D Engineering, R&D Steel, R&D Prague, RGDK Engineering Private Limited and R&D Tools and Structures (collectively, “R&D”). R&D brings the following to the MTS portfolio:
- Significantly expands MTS Test & Simulation technology base and market presence for wind energy and aerospace markets globally.
- Provides turn-key project engineering and manufacturing capability to enhance total value to MTS customers world-wide.
- Provides a compelling financial profile to enhance MTS revenue growth, margins, earnings, and free cash generation.
R&D, a Danish company founded in 2005, is a recognized leader in the design and manufacture of test systems that accurately simulate the extreme operating environments often encountered by large, rotating structures, such as wind turbines, and aircraft engine propulsion systems. The acquisition is expected to close by December 31, 2019, after the completion of normal and customary closing procedures for this type of transaction.
From its roots in northern Europe, wind power is emerging rapidly as a leading source for clean, renewable electricity around the world. Through the use of advanced composite materials and modern design methods, wind turbines have now become a preferred source for renewable power, driven by dramatic improvements in reliability, performance, and cost per kilowatt-hour. While continuing to expand on land, wind turbines are rapidly expanding offshore into ocean environments, which offer much higher and more consistent wind conditions for energy generation. It is estimated that over $1 trillion of investment will be made in offshore wind energy by 2040, with key growth markets being Europe, U.S., China, and India. Instrumental to reaching this market level is the continued introduction of larger, more complex, turbine systems, which brings with it a requirement to fully validate these systems using large scale, laboratory-based simulation systems. Once developed, these technologies can then be effectively leveraged into adjacent markets, such as those central to advanced aero propulsion systems.
Following closing, the R&D operations will be reported as part of the MTS Test & Simulation segment. Once integrated, R&D will leverage MTS’ global sales and service network to further accelerate growth, particularly in the US, China, and India. In addition to exciting new technology and applications, MTS will gain an expanded local engineering and manufacturing base in its European market, including a new design center in the Czech Republic, along with excellent access to the Asian markets and a very talented leadership team.
R&D is expected to contribute over $40 million in incremental revenues in fiscal 2020 and to be accretive to Adjusted EBITDA margins for the Test & Simulation segment. R&D is further expected to be neutral to earnings in year one, exclusive of transaction costs. The acquisition is structured with an upfront payment of approximately $55 million, which will be funded primarily through MTS’ existing revolving credit facility, with expected earnout payments of up to an additional $25 million based on financial performance through June 2021. Given the strong backlog position of MTS at the end of fiscal 2019, the solid backlog position of R&D, and the expected incremental Adjusted EBITDA generation, MTS expects a rapid strengthening of its balance sheet following the closing of this acquisition, with a forecasted year-over-year net reduction in leverage by the end of fiscal 2020.