MTS Systems Corp. F3Q09 (Qtr End 6/27/09) Earnings Call Transcript

| About: MTS Systems (MTSC)

MTS Systems Corp. (NASDAQ:MTSC)

F3Q09 (Qtr End 6/27/09) Earnings Call

July 23, 2009 10:00 am ET


Sue Knight - Chair and CEO

Laura Hamilton - VP and CFO


John Franzreb - Sidoti & Company

Liam Burke - Janney Montgomery Scott

Mike Hamilton - RBC Capital Markets


Good day, everyone, and welcome to today's MTS Systems Third Quarter 2009 Earnings Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Sue Knight, our Chief Financial Officer. Please go ahead, ma'am.

Sue Knight

Thank you, Jody. Good morning and welcome to MTS Systems fiscal 2009 third quarter investor teleconference. Joining me on the call today is Laura Hamilton, Chair and Chief Executive Officer.

I want to remind you that statements made today, which are not as historical fact, should be considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Future results may differ materially from these statements depending upon risks, some of which are beyond management's control. A list of such risks can be found in the company's latest SEC Forms 10-Q and 10-K. The company disclaims any obligation to revise forward-looking statements made today based on future events.

This presentation may also include reference to financial measures which are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. These measures may be used by management to compare the operating performance of the company over time. They should not be considered in isolation or as a substitute for GAAP measures.

Laura will now begin her update on our second quarter results.

Laura Hamilton

Thanks, Sue. Good morning and thank you for joining our third quarter call. The outlines for today's call are as follows. I am going to start with headlines, then I'll take you through the orders detail to help you understand what's happening in our world. Sue is going to talk you through the financial detail and she'll turn it back over to me for business environment and the outlook.

So let's start with our headlines, which we have for this quarter.

Our first headline is Q3 orders, which are up 17% sequentially or down 31% year-over-year. From our perspective, it appears the economy is moving from stage one, which was in freefall, to stage two, which we call finding bottoms. We believe that finding bottom is going to be a bumpy road.

Our second headline is that we are resizing the company based on concerns about continued end markets weakness.

Our third headline is that our Q3 financials were consistent with the outlooks that we provided last quarter. We said, with no significant order improvement, the annual revenue would be down 10 to 15% and earnings would decline about 50% and that was excluding fourth quarter or restructuring actions.

Our last headline is about the balance sheet and operating cash generation, which remains healthy and allows us to focus on our customers and the future.

So let me take you through orders and help provide some color about what's happening in our markets and at MTS. Let's start with the total company.

Q3 orders, as I said, were up 17% sequentially over Q2, driven by Test. At $81 million, it was down 31% from last year, which follows a 47% year-over-year decline in the second quarter. That was about 34 points of organic decline, two points due to currency and a five point pickup from the acquisition of SANS.

From a general perspective at the company level, I still want to caution that we don't generally draw conclusions from one quarter. Typically, we measure growth on revenue not orders, because they are so lumpy.

We're really pleased about the sequential performance, and we believe that it's a sign that we're finding bottom, but capital spending will continue to be constrained. We're seeing that just a critical few projects are being funded and that there is a high level of delay throughout the market.

The Test and Sensors pipeline show clear evidence that customers are working on new technology, which may not to be for today, but at least for tomorrow. There is clear evidence that energy, the environment and globalization mega-trends are carving quote and order activity in both businesses.

At a company level, the backlog is at $163 million, down 7% from the second quarter, which is a slower decline than we saw last quarter. It's down 33% from last year on an organic basis, but we see five points pickup from SANS.

Right now, to understand orders, let's go to the Test Division. So what I want to start with is a sequential quarter-over-quarter comparison, because we think that's much more relevant today than a year-over-year comparison. On a sequential quarter basis, Test orders were up $30 million or 23% over Q2.

How did we think about that? Relief. We were relieved that orders didn't decline further or stayed the same from the second quarter, but I would also stress, it wasn't easy to bring in Test orders this quarter. It is interesting when we take a look at the Q3 orders and we ask who is spending and why? China is spending. China is spending because their economy is doing better than most other areas of the world. They are spending because they have government investment and stimulus in place. They are spending on automotive, on rail and infrastructure.

In this quarter, we had a significant win at a Chinese automotive OEM. It was a very competitive situation. It was an order we almost won at the beginning of this year then it got stopped because of the economy; it got turned back on because of stimulus, but then became more competitive because of the current environment, but MTS still won that order at a premium which supported our China's growth plans that said, customers really need MTS to help them build capability. This is a great example of that in action.

Who else is spending and why? Automotive OEM's entire suppliers are spending, which is hard to believe. They are spending on the standardization of the measure of rolling resistance, an increase in the understanding of rolling resistance and its relationship to fuel economy.

We filled three systems; two systems in an upgrade relating to this. Again, as an example, we had a significant win here, which is an example of MTS working hard to drive down our cost, still capturing a premium for the value that we deliver and maintaining our competitiveness and are increasing re-competitive environment.

Who else is spending? Governments and University, and why? First, budget that governments and universities don't always get cut when the economy first turned down, but rather, they finish their cycles and their cutting comes with the next cycle. Governments and universities is also generally buy a smaller system in the $200,000 to $300,000 range and its easier today to get approval for that level of capital.

Stimulus funds don't appear to be a significant reason for why people are spending today, but that's pretty hard to identify. The relationships what we see here is the spending that's happening here correlates to the level of business that we're doing in standard and aftermarket which is doing better this quarter.

Finally, who is spending? Aerospace OEM suppliers and Test labs. Why? Because they still have program requirements that they must meet. In addition to this quarter, we had a significant win at a materials labs for our European aero supplier.

This resulted in a 5% increased in ground vehicles, which is really tied predominantly to Asia, a 17% increase in infrastructure which ties well with the worldwide government and university spending, and a 120% increased in aero, albeit, remember, this is small numbers in aero, which ties to both US and Europe and the laboratory, the materials lab win that we had. Again, this was our third consecutive quarter with no orders great than $5 million.

On a year-over-year basis, again, a quarterly year-over-year comparison is not valuable. Historically, what I would do is use year-to-date over prior year-to-date to take out some of the lumpiness, but Q1 of '09 is what we will consider pre-economic change. So I'm going to give you a little bit of information, because we're de-emphasizing year-over-year, because sequential is more relevant, we can give you a little information about trailing six months versus prior year.

For Test, the trailing six months, America's and Asia are down about 50% over last year. Europe is down about 30%. That's because we are being partially helped by a series of Formula One orders this year.

On the trailing six months, ground vehicle and infrastructure are each down in the 50% range where Aero is down about 10%. Again, remember, small numbers in Aero. From a mixed perspective, custom is down about 55%, which makes sense when we talk to you about the large orders not being approved.

Standard and aftermarket is down about 40% and service 30%. When we look at the opportunity pipeline, and these are the opportunities that are anticipated to close within the next 12 months. The opportunity pipeline going into the fourth quarter is similar to the pipeline we had entering the third quarter. It's down about 4%. What we know about the pipeline is that we continue to be actively quoting.

We've increased our emphasis on ensuring that we're commercially qualifying the leads. We spend a lot of time on solution creation with our customers. It's an expensive step in the sales process and we need to make sure we're doing that with people who have budget. Also, in the pipeline it's important to remember that probabilities of each opportunity are generally lower than they were historically.

The Test backlog ended at a $153 million. It's down in dollars about $30 million. Mix is the same, but may change as we continue to go forward. It's interesting that mix is the same given that our custom orders are down more significantly than our quick cycle orders, but it's all about the timing of the orders.

Turn or the conversion of the backlog in the revenue is increasing slightly. If orders continue at the trailing six months rate, backlog will decrease further, but at the same time, things are changing and we may not carry as much backlog in the future, both due to changes in mix as well as profit improvements.

In summary on Test order level, we believe we're at bottom, but it will be lumpy. We believe that global economic conditions will keep the brakes on capital spending in the near terms. Stimulus will help a little, but it won't be a home run. We're well-positioned with products, application expertise and global presence to serve these market needs albeit fewer for now.

Let's shift to Sensors orders. Again, we're going to go to the sequential quarter comparison. Sequentially, Sensors orders were essentially flat, down 3%. June, we saw was our strongest weekly average since November of '08, but we need to still be cautious. In Caterpillar's quarterly announcement this week, they said they needed to be cautious of quote, widespread and significant rolling factory shutdown in the next quarter. We agree.

Market conditions have really remained unchanged from the second quarter for Sensors. In Industrial machine, we are seeing weakness in plastics, wood and metal forming. Energy is active, but slow caused partially by financing challenges. We do see that global steel in up slightly, clearly led by China. In mobile hydraulics, construction continues to be down. Agriculture, material handling and military vehicles are more favorable.

On a trailing six-month basis versus prior year, our industrial business is down 35%. Mobile hydraulics is down about 55%. Again, remember, this is small numbers and mobile hydraulics has very little impact on the overall Sensors' numbers.

In local currency, Europe and Asia are each down about 40%. The U.S. is down 25%. We're down less in the U.S. in part due to strengths in medical and marine applications that were stronger in our second quarter. Remember, these are more episodic and can be lumpy.

Sensors backlog grew a $1 million in the quarter which is unusual for Sensors ending with backlog at $10 million. In the third quarter, we started to get some, albeit still small blanket orders, but customers are not releasing that. What we've started to interpret this as is they wanted some place savers, so they needed to put the orders in, but they are only going to release them as demand actually materializes resulting in a growing backlog.

In summary for Sensors orders, very similar to Test. We're finding bottoms and we expect ups and down. The order pattern is more a small, quick turn demand versus blanket orders in the past. The recession is providing much needed time as well as attention for our customers on new product introduction. So we see a growing pipeline of new customers and new applications, whether it be machines or cutting, or hot rolling processes in steel, glass moldings, presses, hay balers or airports snow [ph] sweepers, we are on them and we're well-positioned when the economy approved.

I am going to turn it back over to Sue for the financial details.

Sue Knight

Thank you, Laura. Today my summary will highlights the revenue and earnings results for the third quarter. I will take a little bit different approach then in the past because as Laura said, in these times, the year-over-year comparison is less relevant.

I'll begin with the sequential comparison to the second quarter for revenue and earnings, followed by an abbreviated comparison to last year. I'll close with a discussion of cash and cash flow, which is always an important topic.

So starting with the sequential quarter comparison. Compared to the second quarter, revenue declined 16% to 91 million. The opening backlog for Q3 of 175 million was 20% lower than the Q2 opening backlog of 218 million. Thus, the backlog turned or conversion to revenue accelerated in the third quarter by three points to 52%.

The Test business mix and their work to improve cycle time, favorably impacted Q3 revenue. Revenue declined by segments were similar with Test down 16% and Sensors declining 15%. Currency changes were not a factor compared to Q2.

The growth margin rate of 38.1% compared to 38.6% in Q2, a small 50 basis points decline on lower revenue. Despite this 16% revenue decline, margin results were pretty good reflecting cost reductions taken through June.

Gross margin dollars declined 17%, or approximately 7 million, from the 16% revenue decline. Operating expenses were flat at 30 million and the impact of currency related hedging items improved from 1.3 million expense in Q2 to $100,000 of income in Q3.

Severance charges in the quarters were 1.2 million compared to 2.8 million in the second quarter. The tax rate was 29.9%, up two points compared to 27.9 in Q2, attributable to business mix, but remains well below the U.S. federal statutory rate of 35%.

Earnings per share was $0.19 compared to $0.44 last quarter, down 57% on lower volume and flat operating expenses. Overall, our results were as expected given lower opening backlog and the year-to-date cost reduction and containment actions that we've taken.

Now, I'd like to spend a couple of minutes on the year-over-year comparison of third quarter results beginning with revenue. As previously stated, revenue was 91 million, a decline of 22% driven by a 33% lower opening backlog and fewer new orders in the quarter compared to the prior year.

The revenue results included a 25% decline in the organic or pre-SANS business, 3% negative currency impact, which was partially offset by a 6% benefit from SANS. Geographically, the Americas and Europe were down by approximately one-third, while Asia was down 8%. Excluding SANS, Asia was down approximately 25%.

Moving onto the segment revenue performance. Test revenue declined 17% to 77 million on a 29% decline in backlog. Evidence of improvements we've made in cycle [ph] times as the mix of standard and customs business was unchanged. SANS contributed to seven points of growth which was offset by a 21% decline in the organic business and three points due to unfavorable currency changes.

Geographically, Test revenue, excluding SANS, declined in all three geographies approximately 25%. SANS revenue in the quarter was 6.5 million, which added 22% growth in Asia. So combining SANS growth with a decline in the organic Asia business, Asia was down 2%.

From a market perspective, ground vehicles was down 47%, infrastructure grew 25% and was comprised of 5% organic and 20 points from SANS. Aero was actually flat in the quarter.

Sensors revenue of 14 million was a decline of 42% compared to the prior year and similar to the orders decline as it is the short cycle business. The results included 3% negative impact from currency and we saw all geographies down roughly 40 plus percent with the biggest decline in Europe.

Moving onto growth margins. Margin dollars decreased 27% to 35 million, primarily due to the 22% revenue decline compared to last year. As a rate to revenue, margins declined 230 basis points on lower volume, of which 70 basis points, or 600,000, was attributable to severance cost.

At 35.2%, the Test growth margin rate declined 110 basis points from the prior year, again due to lower volume and severance cost. Private costs were as expected in the quarter. The organic business rate declined 170 basis points, while SANS gross margin was strong at 41% which favorably impacted Test segment margins by 60 basis points.

The results include 400,000 of expense associated with the valuation of inventory as fair market associated with the SANS acquisition. Approximately 100,000 of remaining valuation-related expense will be expensed in the fourth quarter.

Gross margin dollars in the Test segment were approximately 27 million, down 20% compared to last year. Sensor margins of 7.7 million were down 43% comparable to the 42% revenue decline. The cost actions taken in both the second and third quarters enabled us to maintain a high margin rate of 54%, down modestly from 55.8% in the prior year.

Moving onto to operating expenses, we had a decrease of 8%, or 2.7 million, from the reported results last year. If you exclude SANS, the operating expenses of the organic business were actually down 16%, or 5.3 million, on lower employment levels and reduce discretionary spending reflecting actions previously taken as business conditions changed. Operating expense included 600,000 of severance cost and the expenses were lower in both segments.

Earning before tax were 4.5 million, a decline of 71% from 2008. Operating income was down 68%. Currency related hedging items were 100,000 favorable, compared to 400,000 of expense last year, and net interest expense was 400,000 compared to 900,000 of interest income last year based on lower interest rates and higher expense associated with acquisition borrowing.

Tax expense for the quarter was down 1.3 million, or 71%, on lower income. The tax rate was 29.9% as previously stated, compared to 28.3 in the prior year. The higher rate is primarily attributable to geographic mix.

Net income in the quarter decreased to 3.1 million, or 75%, compared to the prior year. Last year's result included a net gain on the sale of the Nano Instruments net assets of 1.8 million. Income before discontinued operations declined 71%. Earnings per share decreased similarly 74% from $0.74 last year to $0.19. Adjusting for the Nano Instruments and net gain which contributed $0.10 of earning per share in the quarter, earnings were down 71%.

My final comments are about cash and cash flow. We ended the quarter with 190 million of cash and increase of 20 million in the quarter. Operating cash flow was 21 million, primarily driven from reduced working capital requirements and positive net income. Capital expenditures were 1.8 million, a decline from 2.8 million last quarter because there is some lumpiness to our quarterly profile of capital. We continue to purchase our shares buying approximately 126,000, or 2.7 million, and we continue to pay dividends spending 2.5 million of cash in the third quarter.

We have a very strong balance sheet in our proactively managing working capital and making investments in the most important aspects of our strategy to enable our success both through the slow economic period and into the future.

Now, I'll turn the meeting back over to Laura for her concluding remarks.

Laura Hamilton

Okay. Thanks. Let's talk about business environment and we've already shared our view of the economy, where we said, we really believe that we're moving from stage one to stage two. We believe that we are still on the recession, but its no longer in freefall. We believe there will positive and negative signals over the next several months, which we call the bumpiness of finding bottoms. We don't believe that finding bottom will be quick, but we also know that following stage two and stage three, and we will move on to gradual improvement.

So what is MTS's response to this? First, we're resizing the company. We're too big for the foreseeable market opportunity. We announced last week additional workforce reductions that we took in April and July to reduce excess capacity. We've also announced internally a salary and wage-free for fiscal year '10, and we've communicated that there will be further workforce and cost reductions to reach annual savings of $15 to $20 million. We're not just cutting, we're improving processes and changing structure to better serve our customers and strengthen the company while we get smaller.

What else are we doing? On the short-term order side, we're focusing on customers who are spending money today or in the near term. We're supporting our customers in the pursuit of stimulus funds. We are targeting energy, environments and geographic trends which results in opportunities and wind, rail, and tire and wheel, as well as opportunities throughout China and India. We are driving our cost and increasing our competitiveness on near term custom opportunity.

We are combating competitor's aggressive pricing while maintaining profitability. We are continuing product development in support of medium term customer needs, while we carefully aligning our resources with the most real opportunities. At the same time, we're maintaining or accelerating our strategic priorities. We are aggressively working to be designed in our new Sensor applications, even if today's volumes are low. We're continuing our investment in mobile hydraulics, knowing the markets will provide long-term growth for MTS.

We're maintaining our commitments in geographic growth, focusing on the next step for SANS. We're investing in key products, like Test, tire and wheel and mechanical hardware in the lieu [ph]. We're continuing our commitments to lifecycle management believing it is critical to our long-term success.

So, what's the outlook? For fiscal year '09, our outlook is consistent with the view from last quarter. We're expecting no significant change in Q4 orders, and we've said, therefore, full year revenue will be down about 10 to 15% and full year earning per share will be down about 50% excluding potential Q4 severance cost. Our earning per share estimates includes $4 million of year-to-date severance or $0.17 per share.

Looking forward to fiscal year '10, there's still too much variability to give a clear picture. We're prepared for no growth, but we're driving hard for better. There remains reasons to be cautious, the uncertain economy, the slow recovery and pressure on capital spending. There also remain reasons to be optimistic. The industrial market is stabilizing and the mega-trend, which our driving-changing market needs are resulting in investment across our market. We remain confident we can manage through the short-term while positioning MTS for long-term success.

Thank you. That's the end of our prepared remark. At this point, I'm going to turn this over to Jodi to facilitate our Q&A session.

Question-and-Answer Session


(Operator Instructions). We'll take our first question from John Franzreb.

John Franzreb - Sidoti & Company

I guess my first question is given the restructuring actions that you've taken and I guess your comments, Laura, is that you expect the order book to be generally flat. Are you currently rebalancing the firm to operate a low '80s kind of order rate or do you have a personnel in place if the order rates return the mid '90s that you would be okay?

Laura Hamilton

I think we have flexibility, John. So I think we're okay over a range if we're not at a single point. That's our plan.

John Franzreb - Sidoti & Company

Can you just talk a little bit about the Sensor business? I believe you said that June was the best month in the quarter. How is July playing out for the Sensor business?

Laura Hamilton

Well, so July, we are entering in summer. We are entering Germany in July and I mean so, July more as expected than indicative. So, I think the biggest challenge is, historically, we would have never drawn conclusions on a month and may be even not on the quarter and now we want to draw conclusions on weeks. So, it's really kind of this hyper period of time. I think right now there is no indication in Sensors, good or bad that anything is changing into July.

John Franzreb - Sidoti & Company

The R&D line are upticked in the quarter sequentially. Could you talk a little bit of what the additional spending are reflecting?

Laura Hamilton

Well, I think the biggest thing is that, no I am going to start and then Sue might add. One thing to remember in Test is that there could be fluctuations between R&D and cost to good sold depending on what our engineers are working on. So, I think we've seen a shift we had given the high revenue of the first two quarters. We have the opportunity to move back, some of the engineers on the orders, back to some of the planed R&D projects for the year. A piece of that was Sensors and then a piece of that was Test for the quarter.

John Franzreb - Sidoti & Company

One last question. This one last for you is, talk a little bit about the competitive landscape and then I actually I have one for Sue [inaudible].

Laura Hamilton

It's okay. On the Sensor side, what we see more then anything is a weakening in some of our competitors and the opportunity to take share. What's interesting in the Sensor business is that not all of our competitors have the same makeup as we do in terms of technology and focus of the business.

Those competitors that are closely tied to the automotive industry aren't been heard more, those competitors we've seen a competitor where the magnetostrictive side of their business was small and they seem to not being able to allocate the resources to that as much. So in Sensors, it's an opportunity.

On the tax side not seeing the same results, we have, I'd say, a couple of competitors that I think are similar to MTS, they are very rational and methodical in terms of what to focus on in these times and what not to. I think we're well-positioned when we focus on our core to compete against those competitors.

We have a few competitors that are under more financial pressure and seem more willing to drop price to win orders. Then we've got one competitor who is very aggressive, has been aggressive and from time-to-time will buy share. In Test, we've got to be prepared for all of that.

John Franzreb - Sidoti & Company

Sue, the cash, could you remind us where it's located? I know it's not all here in North America?

Sue Knight

So thinking about the cash balance, roughly 80% would be overseas. Of that 80%, I'd say 85% is in Europe.


We'll take our next question from Liam Burke - Janney Montgomery Scott.

Liam Burke - Janney Montgomery Scott

Laura, on the organic gross margins on Test, they were down 170 basis points. Now I know there were some restructuring in there that would affect gross margins, but how much would be restructuring and how much pricing or product mix?

Laura B. Hamilton

So I'm going ask Sue answer you.

Sue Knight

Liam, that would be approximately $0.5 million of cost in cost of sales associated with restructuring in the quarter.

Liam Burke - Janney Montgomery Scott


Sue Knight

Forecast, and for total company, it'd be about 600,000.

Liam Burke - Janney Montgomery Scott

How about pricing in the pricing environment during the quarter? I know you mentioned during the course of the previous discussion that there were competitors that have been aggressive, but generally with the gross margin shaking out, did competitive pricing have no effect there?

Sue Knight


Liam Burke - Janney Montgomery Scott


Sue Knight

So, remember that very few of the orders that we were pricing in Q3 were going to revenue. So remember, the backlog piece, but actually while we see competitiveness, one of the things I highlighted is that we are more aggressively going after cost than in my tenure history here. It's exciting.

I think we see opportunity and what that allows us to do is make sure that we are not taking excess cost of the market and that keeps our premium to be for the value-add that we deliver as opposed to cover the extra cost that we're bringing to the market. So, yes there is pressure, but no, we're not seeing right now that that's having a significant impact on our today's margins or what we think will be tomorrow's margin.

Liam Burke - Janney Montgomery Scott

On SANS, there was sequentially order decline. I know we shouldn't extrapolate on quarter-to-quarter basis, but was there anything significant in there?

Sue Knight

We shouldn't, but we will because we can't help ourselves.

Liam Burke - Janney Montgomery Scott

There you got.

Sue Knight

Yes, steel was a piece of that. The Chinese government kind of pulled back on steel production and that's their single biggest industry. We were down about 7% or 500,000 at SANS. So I think when we first started with SANS, we saw a little bit of effect on orders just because of the acquisition and the disruption.

I think this is more economy and it's going to be mostly tied to steel and kind of a bumpiness of China's economy. So what I would say though is, in retrospect, this acquisition is more valuable given the way the economy has played out. I mean it was more timely with the way the economy played out than we saw when we were buying it.


Ladies and gentlemen, at the time, we do have one remaining question in the queue. (Operator Instructions). We'll go now to Mike Hamilton - RBC.

Mike Hamilton - RBC

I was wondering if you could follow-up on the SANS commentary and give a little bit of your feelings of what you're addressing tactically in here, if there's anything that's either accelerating or slowing in how you're approaching it based on what's going on in global economies and any additional nuances on what you're trying to address as you're getting your arms around the business?

Sue Knight

So why did we buy them? We said that the number one reason for the acquisition was China growth and in light of the economy, while China was very important before, it's the single economy that's actually still growing. It's one off economy that's growing. So, it's as important as not more important over the near term. So that reason is unchanged and we will continue to work on that.

Second was that SANS could help support our business partners in the emerging geographies and some of the emerging geographies are also still opportunities like India, and that we will continue and we're glad we've done that.

The third opportunity was really aspects of SANS that could help fill out our overall product line. Those are some of the things we're looking at. Are there opportunities to accelerate that, given the change in the economy? Again, remember these are single. It's a product here and a product there, but every couple of million dollars help and we're working on opportunities to do that.

Mike Hamilton - RBC

Could you, knowing this is tough, give any assessment you've got on key market areas where you feel like you're taking market share in the tough environment?

Sue Knight

In Sensors, basically its share from another competitor, so it's more broad across whatever applications in Sensors. In Test, its really, I think, I'm not sure if this is taking share as much as capturing some of the new opportunities, so let's say, rail or wind.

On one hand, we could say, we've been in wind for 20 to 30 years. On the other hand, what's really playing out in the market is who is going to win the current kind of phase of advance in wind testing. I think we've got some good wins under our belt.

Mike Hamilton - RBC

Then I guess, finally, are there any areas geographically where global financing issue seems to be a factor in ability to drive business right now?

Sue Knight

Specific with our customers and our opportunity pipeline, we don't get a lot of global financing issues. I think we do have the flexibility to provide bleaching [ph] option which just keeps the door open and that's something that our balance sheet affords us that others can't. Maybe the only place where broadly we've really seen it is Eastern Europe has really just tried that.

Mike Hamilton - RBC

No great surprise there.

Sue Knight

Yeah, exactly. In fact, the rest of our business, it maybe an underlying factor but when we're down to this piece of equipment or moving forward we don't see it at our business level.


We'll take our next question from Rand Gessing [ph] - Neuberger Berman.

Unidentified Analyst

Good. You I think mentioned that the service line of revenues was down 30% on the trailing six months, is that correct?

Laura Hamilton

That's right.

Unidentified Analyst

Could you just sort of discuss that a little bit, flush that out? I mean, is that surprising for you? I just thought if that was a big number?

Laura Hamilton

Big number?

Unidentified Analyst


Laura Hamilton

What's happening with our customer? So was it surprising? I guess in the beginning, yes, and then when you think about it not so. So as everybody is working to save money, a couple of things happened instead of this. One, they don't enter into multi-year contacts. So, that was the surprising part, where we've been focusing on building that side of the business, anything elective gets delayed.

So, the multi-year contracts, we've seen a decrease there and you can go from a contract base to an event base which drive-ups, which also you see a reduction in the orders. There's also elective service. Calibration is a great example. Our systems need to be calibrated and customers go back and maybe they have been calibrating annually and now they've step back and say, well, actually, we could go buying every two years. So anywhere that they can really pull back, they're trying to save cash.

Unidentified Analyst

I guess I expected this is some of the deferred, but maybe just, initially everyone sort of stops and then there's no fully effect [ph] to ease back in.

Laura Hamilton

Yes. I think to your point, it would an easing back in of when is the right time to go back to an annual maintenance agreement, that sort of things. Yes.

Unidentified Analyst

I know you gave us lot of data, I'm not sure if I missed that, but did you talk about how big China was as relates to the orders in the quarter?

Laura Hamilton

We don't usually give China as a single number, but it is driving the changes in Asia.

Unidentified Analyst

Obviously, it has become much more significant for you in that...

Laura Hamilton

We've said three key growth areas, one of which is geographic expansion and of that, China is number one. So, we've been working on our China growth plans. We're in our third year of five-year clearly articulated. I mean we've been in China for 30 years, but we're in our third year going into our fourth year of very focused efforts about how we're going to expand our business in China.

Unidentified Analyst

One other comments out of India, have you seen some help there?

Laura Hamilton

India is more of a mix. We have a strong business partner in India, which has been a good change for us over the last few years. Probably the biggest single thing in India right now is their commitment to investing in automotive development, and so that's really still coming.


(Operator Instructions) Okay. We have no further questions. Ms. Knight, I'd like to turn the conference back to you for any additional or closing remarks.

Laura Hamilton

Okay, thank you. This is actually Laura, but I'm going to just close and I think what I'm going to do is really just highlight. We're planning in case things remain this way through the long-term, but we are driving for better and we really do believe we are well-positioned for the long-term. So we're pleased with the quarter and the tracking really to what we think is the long-term future. So thank you for your participation.


That concludes today's conference. Thank you for your participation.

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