MTS Systems Management Discusses Q1 2014 Results - Earnings Call Transcript

Jan.31.14 | About: MTS Systems (MTSC)

MTS Systems (NASDAQ:MTSC)

Q1 2014 Earnings Call

January 31, 2014 10:00 am ET

Executives

Susan E. Knight - Chief Financial Officer and Senior Vice President

Jeffrey A. Graves - Chief Executive Officer, President and Director

Analysts

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

John Franzreb - Sidoti & Company, LLC

Daniel Capozzo

Operator

Good day, and welcome to the MTS Systems First Quarter 2014 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Sue Knight. Please go ahead.

Susan E. Knight

Thank you, Ryan. Good morning and welcome to MTS Systems' Fiscal 2014 First Quarter Investor Teleconference. Joining me on the call today is Jeff Graves, President and Chief Executive Officer. I like to remind you that statements made today, which are not a 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. A reconciliation of any non-GAAP measures to the nearest GAAP measure can be found in the company's earnings release. Jeff will now begin his update on our first quarter results.

Jeffrey A. Graves

Thank you, Sue. Good morning, everyone, and thank you for joining us for our first quarter investor call. We appreciate having the opportunity to discuss our financial results for the quarter and update you on our outlook for fiscal '14. I'll begin by discussing the key takeaway messages for the quarter followed by a summary of our orders and backlog results. Sue will then discuss the rest of the quarterly financials. Following Sue's comments, I'll spend a few minutes discussing our current outlook for the full year and then we'll take your questions.

There are 2 key takeaways for today, first, results for the first quarter of our fiscal '14 came in largely as we had expected and consistent with the outlook range we provided to you in our last call. Specifically, EPS, on an operating basis, was a little above the high end of the range, revenue slightly below the range, backlog remained steady and operating cash flow was strong. From a business unit standpoint, our Test business had a solid quarter, including a very strong showing in Test Services. Our Sensor business had an absolute terrific quarter delivering strong top and bottom line growth in the mid-teens on a percentage basis. This drove a favorable business mix which led to our strong earnings performance. Second, based on our first quarter results and our near-term order prospects, we're pleased to confirm our full year guidance range. I'll provide you with additional context on the full year and the second quarter later in this call.

Before I discuss the results for the quarter, again, let me remind you about the nature of our 2 businesses and the market dynamics we're now experiencing. The larger of our 2 businesses is Test, which provides highly engineered testing systems and services to product development groups within automotive, aerospace, energy and infrastructure OEMs worldwide. This business is fueled by our customers research and development spending on new products and these markets are growing in response to strong macroeconomic drivers which we believe will be sustained for several years to come. This market exposure sets us apart from many other companies. Our second business is Sensors which provides products that are essential for automating heavy industrial equipment and increasing the precision and safety of heavy vehicle systems that utilize hydraulic controls. These Sensor markets are directly tied to industrial capacity utilization and heavy equipment demand, which have been in a multi-quarter trough driven by ongoing sluggishness in the global economy from which we are only now beginning to see modest improvements. With this as a backdrop, let's now review orders for the quarter. Total company orders of $139 million were flat due to large order variability. The currency impact was immaterial. Sensors had an excellent quarter, up 15% and Test base orders increased 3% driven by an 18% increase in service orders. These gains were offset by a change in large orders as there were 2 large orders totaling $14 million this year compared to 2 large orders totaling $21 million last year. This difference is typical of the quarter-to-quarter Test variability. Backlog of $288 million was relatively flat compared to the prior year and remains strong by historical measures. While Sensors' backlog of $16 million is relatively small percentage of the total, it was up 17% due to the receipt of large blanket orders, a strong signal from our largest customers that they have a renewed confidence in their business outlook.

Now I'll provide you with some additional context on orders and backlog by business. I'll begin with Sensors. This quarter marked the third quarter in a row of year-over-year growth which is a strong indication of a positive trend. Sensors orders were $25.8 million in the quarter, up 15% year-over-year. Adjusted for currency, orders growth was 16%, with increases in both industrial and mobile hydraulics markets. Both the number of customers buying products and the average order size were up. We have broad-based demand globally which was the first time this has occurred in a while. Industrial market orders for Sensors increased 16%. In the Americas, medical, plastics and wood processing drove demand. In Europe, wind energy and liquid-filling machine automation were strong segments, while growth in Asia came largely from plastics and steel-processing machinery applications. Mobile hydraulics orders were also strong, up 8% in the quarter driven by the Americas market, while Europe was flat in the quarter. With our continued focus on Sensor cost, which we brought down by an order of magnitude in recent years, we're opening new markets for mobile hydraulic applications. As an example, we were very pleased to win a $500,000 order from a new customer in the rail industry. In this case for a new train-leveling application. We remain very excited about the prospects for this and several other markets as OEMs innovate to transform their machines into intelligent equipment that can function with very high precision in rugged environments. Geographically for Sensors, all regions were up double digits in local currency. The 25% volume growth in Asia was largely masked by the unfavorable yen. This strong growth in Asia was driven specifically by China. While China is still a relatively small percentage of the Sensor business compared to other locations, at $3.3 million, it had a very impressive growth of 17%. Adjusted for currency, the growth was 40%. And we expect that momentum to continue. Our sales investment in China last year is now paying dividends and our timing is right to capitalize on the emerging Chinese OEM trend of developing more sophisticated machines to compete on a global basis. As previously mentioned, Sensors' backlog was approximately $16 million in Q1, an increase of 17%. Sequentially, the backlog grew 7%.

In summary, we like the broad-based global trends we're seeing in our Sensor business. We're very bullish about both our mobile hydraulics and China growth opportunities, and we're confident that we have the products and the value proposition that the marketplace demands.

Now I'd like to spend a few minutes summarizing the Test markets orders and backlog. Test orders in the quarter were $113 million, down 3%. Currency impact was immaterial. Base orders, which are orders of less than $5 million were strong and $99 million, up 3% year-over-year and driven by service. The modest overall order decline was specifically driven by large customer projects, which were $14 million in the quarter, compared to $21 million in Q1 of last year. This large order comparison is in part attributable to the lumpiness that's normal for this business, but also to the continued relatively high customer deferral rate that we've discussed in the last several calls. The deferral rate this quarter was 62%, relatively unchanged from the 63% in the prior quarter. This remains above the fiscal '12 rate of 56%, an indication that our customers still remain somewhat cautious about spending money on large capital investments. From a market perspective, we were very pleased again this quarter with Test Services growth, which was up 18%. The results in the Americas and Europe were strong driven by in part by our new maintenance contracts. We continue to integrate new technology product offerings in our customer lab management program, including equipment health monitoring and other maintenance technology that now extends to third-party equipment applications.

Next, I'd like to provide a few comments on the Test product markets. In ground vehicles, the 16% orders decline was large order driven as base orders were flat. After the tremendous year we had last year in the automotive sector, this pause was anticipated, but the market remains robust, and we expect another solid year ahead in ground vehicle Test systems. The materials market was flat as large number of orders received in support of aircraft engine development in the Americas offset similar orders last year in Europe. And finally, our structures test market was up 5%. In this case we had significant wins in the quarter, including a large seismic table in China, aerospace structural testing systems in the Americas and a civil structural related order in Asia. These orders all represent focused pursuits to leverage our strengths to win in the competitive marketplace. Geographically, Asia again led the way for our Test business with 22% growth driven by China, but we were up 28% on orders. The Americas increased nicely at 8%, while Europe was down 38% driven by tough comparisons to a strong prior year order pattern. My last comment on Test orders is about our order pipeline, which is our 12-month look ahead on opportunities. We were pleased to see our pipeline rise 7% in the quarter reaching $869 million, a new record high. Encouragingly, this growth in opportunities was largely driven by base orders, which again we define as orders less than $5 million, where we have a strong new product portfolio. From a sequential standpoint, compared to our Q4, the pipeline increased 6%. With a relatively flat sequential order deferral rate, this means that our growth in our opportunity pipeline largely reflects true increasing global demand for our products and services, an encouraging trend that supports our outlook for growth in the year.

Now I'd like to turn the call back to Sue for some additional financial detail on the quarter. Sue?

Susan E. Knight

Thank you, Jeff. My remarks today will summarize our first quarter results based primarily on the year-over-year comparison. Adjustments in the first quarter revenue of $138 million was slightly under our outlook range of $139 million to $144 million. Sensors had a strong quarter with double-digit growth and Test revenue was a little less than expected because of approximately 3 million of customer acceptance timing. These acceptances subsequently occurred in early January. Year-over-year revenue declined 3% and adjusted for currency, revenue declined 2%.

Summarizing the results by segment. Sensors revenue of $25 million was up impressively at 15%. Adjusting for currency, revenue increased 18%. Performance was driven by short cycle orders, which were also up 15% year-over-year. All regions had double-digit growth led by 20% growth in the Americas. Asia and Europe growth were 16% and 12%, respectively. Test revenue of $113 million was down $8 million, or 6%, based on $10 million lower opening backlog and a comparatively unfavorable backlog mix which we communicated in the fourth quarter call. The currency impact in the quarter was immaterial. Geographically in Test, Europe was down 10%, Asia declined 6% and the Americas were down 3%. As always, these geographic growth rates are most reflective of the backlog mix and the specific projects that are currently in process and are not an indication of the more recent order trend.

Now with context for understanding the first quarter profitability, I'd next like to provide you with a summary of the Test restructuring charge that is included in the results. As we communicated in our last call, we've made significant capital investments to optimize business processes and improve our customers' experience through IT-related automation. Thus, approximately 60 positions in the Americas and Europe have been eliminated in the second and third quarters of this year. The first quarter results include a $4.3 million pretax charge, of which $2.6 million was included in cost of sales, $800,000 in selling and $900,000 in G&A. There will also be a $1 million to $2 million additional charge associated with this restructuring in the second quarter. Combined, the estimated charge is expected to be within the previously communicated range of $4 million to $6 million.

Moving on to the rest of the P&L, I will first explain the GAAP financial results, which includes the restructuring cost. I will then summarize the non-GAAP results so the operating results are clear. Including the $4.3 million pretax restructuring charge, gross profit of $55 million was down 4% compared to the prior year and the gross margin rate was 39.4%. Income from operations was $14 million, down 29%, and EPS was $0.59, down 32% year-over-year. Now I'll transition to the non-GAAP operating results comparison. Gross margin on an operating basis was up 1% on 3% lower revenue, which was a good result. We were also pleased with the gross margin rate, increased 1.5 points in the quarter. In Sensors, gross margin was up 16% on 15% revenue growth. And the gross margin rate was excellent at 55.7%, which was flat year-over-year. Test gross margin was down 3% despite a 6% revenue decline as the gross margin rate was up 1.2 points.

The next topic is operating expenses. Expenses were $2 million -- were up $2 million from the prior year, driven by $700,000 or 14% higher R&D primarily in Test and 1.5 million higher selling costs driven by headcount increases to drive [indiscernible] G&A was flat. As a percent of revenue, operating expenses were at 28%. This rate was within our expected range of 27% to 29%.

Moving next to EBIT and the EBIT rate. EBIT was down $2 million or 12% decline. The impact of lower volume and growth investment spending was partially offset by the benefit of the increased gross margin rate. Test EBIT declined 18%, while Sensors increased 16%. Transitioning next to taxes. The quarterly rate was approximately 33% before and after the charges for restructuring, and flat year-over-year. The R&D tax credit has once again expired for the benefit we typically receive of approximately 2 points is not included in this rate. Earnings per share of $0.78 was slightly above our guidance range of $0.65 to $0.75, as Jeff previously noted. The strong gross margin rate and cost management action drove the performance this quarter. The prior year EPS was $0.87. Additionally, the share count was down 2%.

Finally, I'd like to finish with a perspective on cash. The cash balance remains healthy at $53 million, up $5 million from the fourth quarter. Our first quarter typically has high operating cash flow utilization driven by variable compensation and working capital requirements. But this year we had $24 million of operating cash generation compared to $15 million of utilization last year. $33 million of this $38 million change was working capital related. Billed receivables declined $8 million, but unbilled receivables remain high driven by less favorable contract billing terms and a few customer site-readiness timing issues in Test. An inventory decline of $3 million was more than offset by $5 million of fewer payables and advances. As discussed last quarter, our current business mix continues to require a higher level of working capital than we've had in some time. Additionally, capital expenditures were $5 million, and we also paid $5 million in dividends. We purchased approximately 167,000 shares for $11 million in the first quarter.

In conclusion, we had a good start to the year and we did what we said we would do. That concludes my prepared remarks for today. I'd like to turn the call back to Jeff for his final comments. Thank you.

Jeffrey A. Graves

Thanks, Sue. Now I'd like to update you on our first half and full year revenue and EPS guidance ranges. Given our first quarter results and our outlook for the markets ahead, we're confirming our previous estimate for the first half revenue growth as relatively flat. As we communicated last quarter, this is driven by an $8 million lower beginning fiscal year '14 backlog and the execution timing of several large customer projects that are currently in backlog for our Test business. We also assume continuing momentum in our Sensor business. Considering all of these factors, second quarter revenue is expected to be 100 -- in the range of $136 million to $141 million. First half EPS before additional restructuring costs of $1 million to $2 million anticipated in Q2 is still expected to be flat to down 8% driven by the continuation of our growth in productivity investments. This translates to a second quarter EPS before restructuring costs of $0.65 to $0.78 per share. From a full year standpoint, given the continuing positive market outlook for both of our business units and a solid performance delivered in Q1, we're pleased to confirm our full year revenue range of $585 million to $605 million, an EPS range of $3.55 to $3.70 per share, excluding restructuring costs. We currently anticipate that the positive Sensor market trend will continue as the global economy continues to heal and that the Test order rates will begin to accelerate as our pipeline opportunities increase and customer deferral rates ease later in the year. The exact timing is as always uncertain but with the productivity infrastructure investments we've made, we're prepared to move quickly in response order volume changes so customer delivery needs are met. That concludes my prepared remarks. I'll turn the call over to you, Ryan, for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Liam Burke with Janney Capital Markets.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Jeff, you talked about the growth rates, both in mobile hydraulic and in industrial, and industrial looked a lot stronger up 16%, which is the larger percent of your revenue contribution. Mobile hydraulic was 8%-ish. I would think that they would be reversed since the mobile hydraulic is your faster growing, smaller contributor. What was slowing the yards? It is just a seasonal thing on mobile hydraulic.

Jeffrey A. Graves

Liam, I think the -- and this is somewhat speculation on my part, but it's certainly consistent from what we hear from our customers. On the industrial side of the Sensor business, the supply chain has been leaned out so much. Inventory levels in our customer base are at very low points. So as they see an increase in demand for the products at the end or increased capacity utilization, they're needing more sensors. It flows through almost immediately though. So I think the industrial tick-up is driven by the overall economy in the world and it was very broad-based. I mean, we had customer strength in the Americas, Europe and particularly, obviously, in Asia. So that was encouraging. And you could speculate with kind of record car sales in China, you see an uptick in steel demand, you see people starting to bring capacity back online as they're more encouraged about the macroeconomic environment. So that's what I attribute the industrial strength to, is a little uptick in in-demand and no inventory in the supply chain, so we were asked to fill orders very quickly. On the mobile hydraulic side, the only issue there is the lead time on new platform introduction. We have some wonderful wins in the design phase, and coming into new tractors, earthmovers, cranes, other construction equipment. It's just a matter of, are customers selling those products? And I think that's just -- it's just a longer cycle and you see some uptick in that now, but it's relatively flat in the market but there's more of these smart machines being introduced. So I think that represents really market expansion rather than in-demand driven at this point. So most all of that, Liam, is speculation on my part but that's the color I'm hearing back from our customer base.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Okay, great. And you touched on China on your answer. That's -- on the Sensors side has not traditionally been a great market for you. You touched on steel production. Are there any other applications that have given your some traction on that market?

Jeffrey A. Graves

Yes, I think the Chinese economy, again, people talk about slowdowns but it's still growing at marvelous rates and -- but there is a big transformation happening over there with internal Chinese consumption. So you see an uptick in materials that go into automotive, soon to be aerospace applications and all the way down to day-to-day consumer goods. The -- and the build-out of their infrastructure continues. So the Chinese consumption of products made in China is going up quickly, and I think that's really fueling the industrial equipment that's using our sensors. And more broadly, you see the Chinese OEMs now looking to the world stage to compete on something other than price. And as they try to upgrade their machines to compete with established OEMs in the West, they're trying to make their machines smarter and more precise, safer. And all of that really fuels our Sensor business. So again China's just a marvelous end market for several reasons for us both internal consumption in China and as an export market out of China for new industrial equipment and mobile hydraulics. So I threw a lot into that response to you, but I just can't say it enough. I mean, China we've got a wonderful business in China on both Test and Sensors, and it's just booming.

Operator

And we'll take our next question from John Franzreb with Sidoti & Company.

John Franzreb - Sidoti & Company, LLC

Just to stick with that Sensor theme, in your press release, you mentioned long-term purchase agreements by significant customers. Could you talk a little bit about that dynamic? Explain that a little bit more?

Jeffrey A. Graves

Yes. John, we're seeing some of our traditional customers now where they had -- if you go back probably a year and a half, John, when we saw the rapid decline in the Sensor business back in the first couple of quarters of '12, of our fiscal '12, it was -- part of that was a falloff in blanket orders the customers used to place that might span a year where they have staggered delivery dates throughout the year. So they placed a purchase order at the beginning of the year and we'd shipped them several thousand sensors over the course of the year. That really dried up back in the early part of '12 and it's only now that we're seeing customers confident enough in the outlook for a full year to actually start placing those orders again. And it was a few different end markets, the medical end market is a niche end market for us which has been an interesting one. That's starting to -- and again it's not that it was ever really weak, but they stopped placing longer-term purchase orders. They went to very short-term price orders, so you see those blanket orders starting to come back now, which to us says these guys now have confidence in full year projections. So you see it in -- we saw it medical, we saw it in support of the plastics industry. So things that imply more robust in demand that's visible out several months now for these guys.

John Franzreb - Sidoti & Company, LLC

Great, that's helpful. Regarding your guidance, last quarter, you suggested on the conference call that we'd have sequentially better quarters going forward. And now it sounds like we're going to have a flat quarter and a back-ended second half. Based on what you've just said about the Sensor business, I assumed this is all going on in Test is -- what's the pushback? Is that a fair assessment, and what's going on in Test that's closing that pushback?

Jeffrey A. Graves

Yes. It's simple to explain conceptually, the math gets a little complicated, but, yes, Sensors is a very much a month-to-month, quarter-to-quarter business, and we just see nice continued growth quarter-to-quarter on both the top and bottom line. There's been volume leverage in that business. We see continued strengthening in the top line and bottom line kind of consistently throughout the year. But remember, 80% of our revenue comes out of Test. Test is very much our backlog-driven business, and what we saw, if you looked at the order pattern in our fourth quarter last year, Q4 was -- Q2 and Q3 last year were weak and Q4 was a monster. Q4 was big. And what that means is the average delivery time on those projects is -- it begins at 6 months and then goes out to maybe 1.5 years. So based on that order pattern and at the end of last year, with Q2 and Q3 being weak and Q4 being very strong, those orders really won't be processed and shipped until the second half of this year and out into '14 -- out into '15. So it's really just a backlog effect. Now there were some timing issues here in Q1 that remained in terms of order -- landing orders, but they were very minor variations on what we see historically. So I would've expected the orders rate to be a little bit stronger in Test for the quarter, but not much. It's normal variation. The real effect here you're seeing is, we started with a slightly lower backlog coming in because we turned backlog much faster in Q4. And we had a big order spike in Q4 which doesn't ship until the second half of the year. So that's purely the explanation on our revenue and it's the dominant one. So it's what we would have told you last quarter and you see it now confirmed again this quarter, so -- and if it's -- if you want me to explain that again, I'd be happy to do it or if you want Sue to elaborate we can add more. But I want -- no, I really do want our investors to understand the timing issues in our Test business are a little complicated with backlog.

John Franzreb - Sidoti & Company, LLC

Okay. So summing it up, essentially, it's the lumpiness of the order delivery, we're not seeing any cancellations or anything that would give you cause for concern?

Jeffrey A. Graves

No, absolutely not. The orders pipeline -- and again given that the deferral rate is now stabilized, I mean I wish it were lower, but it's -- at least it's stabilized. The fact that our quarter-over-quarter, I mean, our sequential quarterly orders rate was up like 7%, our pipeline -- I'm sorry, our pipeline was up 7%. I'm really encouraged about the rest of the year. I think there's every indication that the year's going to be a good one and the second half should be strong.

John Franzreb - Sidoti & Company, LLC

Jeff, you've mentioned that deferral rate, it's the first I've ever heard you use it in prepared remarks. Can you just talk about what that is and give us some color behind that number?

Jeffrey A. Graves

Yes, sure, John. It's -- and this goes back to trying to explain to investors the timing issues with a backlog business. But when -- we've got an orders pipeline out in front of us that are all of the orders that we're going after in earnest and we end up capturing a significant amount of those. But it could be confusing to investors when we talk about a robust pipeline ahead of us and they say, "But your orders rate is volatile." So we started quoting a deferral rate and I think this goes back probably a couple of quarters here now, but...

Susan E. Knight

At least 5 or 6.

Jeffrey A. Graves

So -- and what we are highlighting it more than we used to, John, to try to explain it. But our traditional run rate, if you go back into fiscal '12, was kind of in the fifth -- mid-50s -- mid-50% range just to calibrate you. And what that means literally is about 50% of the big orders in that pipeline end up being deferred. It's generally for the building delays when they're putting in a new facility, things like that. We end up capturing most of those orders, but they end up being deferred on a quarterly basis. So the run rate to calibration in the fiscal '12 was in the kind of the mid-50-ish range, 55%, 56%. And then in -- and it cruised along at that through the first quarter of last year. And then in the second, third quarter of last year, we saw that spike to like 70%, okay? So we were up over 70%, very suddenly. So Q2 and Q3 from an order standpoint were soft last year and then we saw it have a step function down in Q4 into the 60, mid-60 range, 66%, 65%-ish kind of range in Q4. And you saw a spike up in orders accordingly. And now what I'm telling you in Q1, that was about the same. It was in the mid-60s again. And in spite of that, the orders pipeline actually grew 7%. So it wasn't a deferral rate making the pipeline bigger. It was actually at the pipeline growing bigger because there's more demand out there. So I was quite encouraged by that. So again, I'm sorry for the complexity, John, hopefully you followed that. We're trying to [indiscernible]...

John Franzreb - Sidoti & Company, LLC

No, actually, that's exactly what I was looking for. That's perfect, Jeff. And one last question. The Services side of the business, revenue was sequentially down $17.25 million, I would have thought we would have more traction given how long we've been putting resources into the Services side. Could you just talk a bit about your expectations for the business. Are you happy with some of the traction you guys made? Because it seems like the revenue was kind of stuffed for now -- a year now.

Jeffrey A. Graves

I would tell you the thing to keep your eye on in Services, because some of these are all long-term maintenance contracts we're starting to sign now. So again they're sitting backlog for a while. The thing to watch in Services to mark our success is an orders number. So again orders were up 18%, Q1 this year to Q1 last year, up 18%. So those sit in -- those increasingly kind of sit in backlog because -- and this is by design. We're trying to sign longer-term maintenance agreements with customers. So it's just like a blanket order. We'll take an order in Q1 that we might fulfill throughout the rest of the year so keep your eye on the orders rate. That's the benchmark you want to look at for success in our Services business because orders eventually flow through to revenue.

John Franzreb - Sidoti & Company, LLC

So the -- so what's the turn on the orders on the Services side?

Jeffrey A. Graves

So -- oh, the turn? I can't quote you a number, John. I don't have it. I don't have it here. It's a high [indiscernible]

John Franzreb - Sidoti & Company, LLC

So I guess, if orders are up 18% in the first quarter, should we see a translation of Services revenue up 18% by year end?

Susan E. Knight

So, John, so the way to think about Service, the slower the turn, the better because that means that we're getting more long-term contracts, multi-year contracts for work which is where we're headed from an opportunity point of view because then you would capture those customers on a recurring basis rather than when their equipment breaks. And we don't talk broadly about a turn associated with that, but having a differential between incoming order rates for service and revenue is good. It means we've got more long-term contracts.

Operator

[Operator Instructions] We'll take our next question from Sezary Nedecky [ph] with Schroders.

Unknown Analyst

I'm kind of going through the numbers, and I know you spend a lot of time on the Test orders, so confused me as much as everybody else probably. But can you give us a little bit of visibility if you have any on the large orders? Looking at the comps you kind of have few quarters with lower expectations there or lower numbers historically. And just kind of how much visibility you have going forward. And then on the second question on the Sensors side, I think you talked about 17% increase in backlog but I think last year you guys reported $15 million backlog. So my question is are there some moving pieces there? Is there something that shifts?

Jeffrey A. Graves

Yes. The Sensors one is -- it's an easy one to explain. There -- it's not a hugely backlog-driven businesses. We turn orders really fast in Sensors, where we were shipping in 2 to 3 weeks. So they historically don't have a large backlog. The fact that our backlog actually rose was encouraging because we saw increasing orders trends throughout the quarter. So it was nice to see an uptick in backlog and revenue growth at the same time in Sensors. So it just represents increasing demand consistently throughout the quarter. On the Test side, I think your question -- and I apologize if I confused the matter further by my explanation before, it is -- there are a lot of moving parts in terms of our backlog and flow through to revenue in Test, which really takes somebody a little time to understand. But in terms of large projects, we have a really healthy large project business and our brand is very well-known for these first-of-a-kind and other large complex highly engineered projects. So we continue to be aggressively out there in the world selling these and it's in high demand. I don't see any downward pressure on that right now. I mean, there is -- the frustrating thing to me is there is quarter-to-quarter variability of when the orders come in and for a company our size at least a lumpiness in both the orders rate and revenue as it flows through. But by and large, it's a really healthy piece of our business. It -- we learned a lot on the projects. We do a lot of first of a kind technology work that then cascades through the industry and the end markets. So it's really a good business for us. It's generally a slightly lower margin business, but it is a very meaningful business of our business that we're trying to drive. What should help over time in smoothing out that lumpiness is as we grow base orders, that is things below what we call $5 million orders, that's base for us. As we grow that, it's much more of a book and then ship business, faster-turn business, better margin business, as that piece of it grows, which again is cascading kind of the technology-leading elements into the base orders and then turning those faster. As we grow that percentage business, things smooth out. And then as we grow our Services business, our orders and revenue profile should smooth out over the next few years. So I think your question started with the feeling about the large projects. We have a very good visibility in the long-term trends of our customers and what labs they are building in different parts of the world. They plan these things sometimes for several years. And I would tell you it's as healthy as any quarter I've seen in the last year and a half in terms of the long-term trend. The frustrating thing is you can have deferrals spanning 1 quarter, 2 quarters where they pushed an order out because their business cash flow is weaker or because they're uncertain about future or just a weather issue on building construction. So all of those can lead to variability in the exact order timing we see.

Operator

[Operator Instructions] We'll take our next question from Dan Capozzo with Invicta.

Daniel Capozzo

Just going back to the Services business. I'm trying to reconcile the orders versus the revenue. I know you had a pretty good year last year in terms of orders, up 10%, and even the Q4 was up I think over 30%. So how should I expect that to kind of flow through on the revenue line? Is that more of a multiyear kind of flow-through? What were the notional amount of [ph] the orders?

Susan E. Knight

So, Dan, when orders exceed the revenue, it is a sign that we are getting more longer-term contracts. I think I commented on this earlier in the call. But when we think about the future of the Service business, we want customers who are making longer-term commitments beyond a phone call because their equipment isn't running, because we can help them to keep their lab operational so they can meet their delivery times for testing. And that requires annual or multi-year contracts. So when there's a difference and there often is, typically is, a difference between the order rates and the revenue growth rate, that is a sign of the multi-year or multi-period contracts because then we record those revenue ratably over the period of the contract. So if you have a 12-month contract, we would take 1/12 per month. So that differential is positive. We should consider maybe providing some backlog information on Service -- we don't today, but that would be telling in terms of the positive trend relative to service because the difference between an orders growth and a revenue growth is backlog. So we'll think about that for the future.

Daniel Capozzo

Okay. So just kind of numbers, the orders were up $10 million. That $10 million may flow through longer than 12 months and maybe multi-year?

Susan E. Knight

Yes. That's correct.

Operator

[Operator Instructions] And we have no further questions in the queue at this time.

Jeffrey A. Graves

Okay. Thanks, Ryan. Well, thank you all for participating in our call today. We're pleased that we've met our commitments in delivering solid first quarter results and we made meaningful progress in building the robust platform necessary to support our objective of becoming a growth company. I look forward to updating you on our second quarter results and continued progress in May. Thank you and goodbye.

Operator

And that does conclude today's conference. Thank you for your participation.

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