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MTS Systems (NASDAQ:MTSC)

Q4 2011 Earnings Call

November 18, 2011 10:00 am ET

Executives

William V. Murray - Interim Chief Executive Officer, Interim President, Director and Member of Compensation Committee

Susan E. Knight - Chief Financial Officer and Vice President

Analysts

Elizabeth Murphy Lilly

Adam France - Keane Capital

Michael A. Hamilton - RBC Wealth Management, Inc., Research Division

John Franzreb - Sidoti & Company, LLC

Operator

Good day, everyone and welcome to the MTS Fourth Quarter 2011 Earnings Release Call. This call is being recorded. Now I'd like to turn the conference over to Ms. Sue Knight. Please go ahead.

Susan E. Knight

Thank you, Jennifer. Good morning, and welcome to MTS Systems Fiscal 2011 Fourth Quarter Investor Teleconference. Joining me on the call today is Bill Murray, interim Chief Executive Officer.

I'd 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, but they should not be considered in isolation or as a substitute for GAAP measures.

Bill will now begin his update our on fourth quarter results.

William V. Murray

Thanks, Sue. Good morning, everyone. I want to start by acknowledging this is my first earnings call in my role as interim CEO. I've met many of you on the call today, and I look forward to meeting those of you I haven't yet had the pleasure to meet. I have served on the MTS board for just over 1.5 years and I'm approaching 3 months as interim CEO. It's a great time to join the company. We have strong momentum in both of our businesses. We have highly capable and dedicated employees around the world as evidenced by our excellent performance. I am pleased to have the opportunity with Sue today to communicate fourth quarter and full year 2011 results.

I would like to start by outlining the agenda for today's call. I will begin with key messages. Then I will review the order summary for Q4 and the full year. I will provide an update on government matters then I'll turn it back to Sue to review financial details. And finally, I will review our outlook for 2012.

First, let's talk about the 3 key messages from the quarter. Q4 was strong across the board. We achieved an all-time revenue record for a single quarter, which drove total company earnings per share and cash flow. We had strong performance by both businesses. The U.S. Air Force suspension was lifted, and we filled 2 key leadership positions, the General Counsel and Chief Compliance Officer and the General Manager of Test Leadership position.

The second key message was our equally impressive total year performance. We achieved record orders of $540 million. The first time ever to exceed $500 million. The third key message, we are well positioned going into 2012 to continue our momentum by focusing on our unique applications expertise, continuing our ongoing investments in emerging mediums and delivering best total value through product performance improvements and product cost reductions.

Now moving to orders and backlog. In Q4, MTS achieved record orders of $133 million, 3% growth year-over-year, including 2 percentage points favorable currency impact. This is the fifth quarter in a row with greater than $115 million in orders. Also in Q4, we had no large orders greater than $5 million. Adjusting for one large order in the prior year of $6 million base orders grew 8%. For the total year, MTS achieved record orders of $540 million. We exceeded $0.5 billion for the first time. Our performance validates we've got what it takes to win in a tough economic environment by increasing performance, while reducing cost.

Also notable is our backlog remains near our historic high of $287 million. Now reviewing each business segment, Sensors achieved orders of $25 million in Q4, an 11% year-over-year increase, including 4 percentage points favorable currency impact. Europe was up 29%, driven by the energy, plastics and rubbers markets. The Americas and Asia were down slightly, 2% and 6%, respectively, due to the continued weakness in the steel market and weaker demand for liquid level in the oil and gas markets. Overall orders in Q4 were down sequentially, about 10% from Q2 and Q3 but still at a high level. We don't believe there is a significant economic change but we are monitoring closely.

Turning to the 2 major market segments. The Sensors, our industrial orders for the quarter are up 9% year-over-year from $20.2 million to $22.1 million. Energy, particularly wind, continues to be a growth story. We're also seeing a continuation of year-to-date market trends of plastic, rubber, energy and wood all up, while still continues to be weak. Other markets with Q4 strength including machine tools in Europe and Asia and recreational vehicles in North America.

Our Mobile Hydraulics segment is up 21% year-over-year, from $2.3 million to $2.8 million. North America was the driver with growth of 58%, driven by new agriculture customers and strong Caterpillar volume. Europe was down approximately 5% due to weak European road building demand. Our backlog in Q4 declined 10% sequentially from $17.9 million to $16.2 million as we returned to historically lead times of approximately 8 weeks in the Sensors business.

From a full year perspective, our Sensors business enjoyed a record year. At $103 million in orders, we are up 25% year-over-year with 4 percentage points due to favorable currency impact. We delivered double-digit growth in all geographic regions, 34% in Europe, 20% in North America and 13% in Asia.

Turning to growth by markets. Our industrial market grew 24% from $72 million to $89 million while our Mobile Hydraulics market grew 27% from $11 million to $14 million. Looking at the primary growth drivers in the industrial market, our application engine is working. The number of customers increased by 14% is now above our 2008 pre-recession level. All major industrial markets are up globally except steel.

Our Mobile Hydraulic market success is driven by the accelerating technology adoption rate by our customers. We have been successful in meeting market performance and price requirements in this growth area. Our largest equipment category served today our agriculture, material handling, road building and construction. In summary, Sensors delivered very strong results in a relatively modest economic growth environment.

Turning to our Test business, at $108 million in orders, our strong momentum continued in Q4. It is notable that we did not have any large orders greater than $5 million in the quarter. This is also the third quarter in fiscal year 2011 with orders greater than $100 million. Orders were up 1% year-over-year including a 2% favorable currency impact. As a reminder, large order time increased quarterly variability.

If we adjust for $16 million large order in Q4 of 2010, our base orders are up 8%. Looking at our key Test markets, the lead story continues to be our ground vehicle business, which was up 11% globally as OEMs in the Americas and Asia continue increasing Test capacity and capability. Our ground vehicle orders grew from $48 million to $53 million. Our materials business grew 5% in the quarter from $35 million to $37 million and our structures business was down 25% in the quarter from $23 million to $17 million. Important to note, excluding $16 million order in the prior year, the structures business was flat year-over-year.

Geographically the quarter was strongest in Americas, up 25% from $31 million to $39 million. Asia was down 8% but continues to be our largest market going from $45 million down to $42 million. And Europe was down 10% going from $29 million to $26 million. But if we exclude the $6 million large order from the prior year, base orders in Europe were up 13%. Our opportunity pipeline remains at a high-level, but down from 5% from Q3 at $691 million.

The Test full year outlook is also very strong. For total year Test, our orders were $437 million, up 28% year-over-year including 2 percentage points favorable currency impact. Our performance in 2011 set a new record. The $96 million increase was from broad geographic and market growth base and large custom orders. Base order growth was $65 million, a 20% increase. Large customers grew $31 million to a total of $64 million.

Our biggest market story in Test for the year is ground vehicles, which grew from $125 million to $209 million. This represents approximately 90% of total Test growth in fiscal year ‘11. We believe 2 key market drivers are impacting the ground vehicle market. First, automotive safety and fuel efficiency requirements are driving demand in Europe and the Americas. Our tire segment is up 2x from $11 million to $23 million, road simulators are up 2.5x from $15 million to $38 million and steering systems increased from $1 million to $6 million.

Second, the development of China automotive industry is creating a need for new labs and more sophisticated labs. Other notable successes during the year include a return on our wind investment. Orders grew more than 2x from prior year from $16 million to $35 million. Finally, I want to acknowledge the growing importance of China. In 2011, China represents approximately 21% of total Test orders compared to 10% in 2008. This is up 23% from the prior year.

Both ground vehicles and materials are strong in China. Ground vehicles for the reason previously discussed, while materials is due to government investment in heavy industry and a modest increase in the steel industry. In summary, for Test our investments in key market development opportunities, the emerging geographic regions and an increased focus on best total value for our customers is a winning formula.

Turning to the U.S. government proceedings. As we reported in September, we are pleased that the U.S. Air Force has lifted the suspension. We have resumed entering into new federal government contracts and receiving benefit under federal assistance programs. We are also entering into business with state and local government and commercial customers that follow federal suspension decisions. We have ongoing commitments under the administrative agreement, which we intend to fully meet including ethics, compliance, reporting and monitoring requirements. We are committed to meeting the presently responsible contractor requirements.

Additionally, the U.S. government investigation continues. We are cooperating fully. At this time, we are unable to determine the likely outcome or range of impact or resolution time. To date, we have spent $6 million related to the suspension and investigation, and have identified approximately $15 million of market opportunities at the time of the suspension, of which $9 million has been lost through the suspension period. We are unable to quantify bid requests not received.

For fiscal year 2011, U.S. government revenue was approximately 4% of total company revenue. The U.S. government is an important customer to MTS. We are fully cooperating with the Department of Justice and their investigation.

Finally, on behalf of the board, I am communicating that a nationally recognized search firm has been retained and the CEO search process has started. Additional communication will be provided when appropriate. In the meantime, I continue to focus on leading the company and building our momentum for long-term success.

I will turn it back to Sue for financial details.

Susan E. Knight

Thank you, Bill. My remarks today will focus on the fourth quarter year-over-year comparison. I'll also share some high-level perspectives on the full year financial performance for fiscal 2011.

Beginning with revenue at $132 million, year-over-year growth was 24%. In addition to being the largest revenue quarter this year, it is also the largest revenue quarter in MTS history, exceeding our previous high of $124 million in the fourth quarter of fiscal 2008. The 24% growth rate was primarily driven by 4 things: first, short cycle order demand in Sensors; second, an 18% reduction in average number of weeks of Sensor backlog, results of improved material availability and staffing; third, record level of Test beginning backlog; and fourth, 5 points of favorable currency translation.

On a segment basis, Sensors revenue increased 23% to $26 million, including a 7-point positive effect of currency translation. Revenue exceeded orders by 5% based on the previously mentioned cycle time improvement and timing of customer delivery requirements. From a geographic perspective, Europe increased 41%, of which 8 points was from the strong U.S. dollar. North America and Asia were both up 6%. Test revenue was $105 million, a 25% increase due to 56% higher opening backlog and 4 points favorable currency translation. Asia led the way with 52% growth. Europe was also up impressively at 30%. The Americas declined by 11%, partially attributable to the U.S. government suspension and fewer custom projects as compared to the other 2 geographic areas. Overall, we are very pleased with our revenue results in both segments this quarter.

Moving on to gross profit. $57 million gross margin increased 26% on 24% higher revenue, very strong finish to the year. Approximately 95% of the higher gross margin was from revenue growth and 5% from a slightly higher gross margin rate. On a segment basis, Test contributed roughly 75% of the revenue and gross profit increase and Sensors generated 25%. Similar to revenue, the gross margin with a record high this quarter with strong performance by both Test and Sensors.

Consolidated gross margin rate for the company was 43% within the performance range we achieved in Q1 through Q3 of approximately 43% to 44%. This is an excellent result, particularly considering Test record high level of lower margin custom backlogs. Test, 0.7 point increase to 39.4% benefited from the leverage on 25% higher revenue, which more than offset the impact of negative mix. The 39.4% rate was within the year-to-date quarterly range of 38% to 41%.

The Sensors gross margin rate remains very strong at 57.5%, up 0.9 point compared to the prior year. Volume leverage was the primary driver, more than offsetting slightly higher labor and material costs. 57.5% rate this quarter was in the middle of the year-to-date quarterly range of 56% to 58%.

Operating expenses for the quarter were $35 million, up 12%. Of the 12% increase, 6 points were associated with the legal costs for the government matters, at $2 million this expense was $600,000 less than the amount spent in the third quarter. Of the remaining 6 points of operating expense increase, half was for R&D projects and half was for higher volume-related selling expense. The rate-to-revenue, though, operating expenses declined at 2.8% to 26.9%.

Going forward, quarterly operating expenses, as a percent of revenue, will be in the 26% to 27% range and provides for a higher level of recurring compliance related costs and growth investment.

The next topic is EBIT rate. This quarter, the EBIT rate was 16.2%, an impressive result compared to the prior year rate of 12.9%. The approximate 3-point increase was primarily driven by volume leverage in both indirect factory cost and operating expenses.

Moving on to tax. In the quarter at 29.7%, the rate was quite favorable compared to last year's fourth quarter rate of 36.2%. Lower rate was primarily driven by favorable geographic mix of earnings with a lot of volume in Asia. Full year rate, tax of 30.5% was 1.2 points lower than fiscal 2010, primarily due to the reinstatement of the R&D tax credit, which favorably impacted the annual rate by 1.4 points.

Going forward, the annual tax rate is expected to be in the low 30s. On a quarterly basis, there will be variability based on geographic mix and discrete tax item timing. As a reminder of a discrete item, the tax rate in Q1 of fiscal 2011 included $1 million or 6 percentage points benefit from the legislative retroactive restatement of the R&D tax credit that will not repeat in Q1 of 2012.

Next subject is earnings per share. Earnings per share of $0.94 in the quarter was almost 2x greater than last year's $0.54 result. This $0.40 increase was the net result of 4 items. First, volume and mix contributed $0.50. The lower tax rate impact was $0.08, which more than offset higher costs associated with government matters of $0.09 and other higher operating expenses, volume-related of $0.08. Overall, a very strong showing for earnings per share on a flat share count.

A final topic for the fourth quarter is cash and cash utilization. The cash balance of $104 million, up approximately $3 million compared to Q3. Operating cash flow was strong at $7 million despite $15 million of volume-related increase in working capital.

Capital expenditures were $2.6 million and there were no dividend payments this quarter due to the quarterly calendar close date. You can expect approximately $4 million of cash payments in future quarters. Regarding share purchases, we were out of the market due to the government suspension and investigation. The timing of the restart of our share buyback program continues to depend on the resolution timing.

At this point, I'd like to spend a few minutes recapping my thoughts about MTS' financial performance in 2011. From my perspective, there are 3 takeaways that I'd like to leave with you today. First, building on Bill's comments earlier, $540 million of orders was outstanding. In a lackluster global economic environment, we beat the $0.5 billion mark for the first time and by a sizable amount. Sensors crossed the $100 million threshold for the first time and Test had record orders of $437 million.

We attribute this level of performance in Sensors to the power of our application engine and our leading technology capability and advantage. We contribute the Test performance to higher market win rate from our progress on best total value cost initiatives and our ability to meet customer’s complex testing requirements. And on a combined basis, because of our multiyear investment in China, we see the benefit of that paying off with over $100 million in orders and our solution credibility providing customers with confidence in product performance.

Second key message for the year, we delivered a very strong P&L result. We exceeded our 2008 historical peak performance for both revenue and earnings per share, achieving 25% revenue growth, record revenue of $467 million and 184% increase in earnings per share, leveraging our fixed cost, while covering the government matter-related expenses and investing wisely for the long term. Third and last, we successfully managed our cash flow and put the balance sheet to work for both growth and shareholder value.

From the gross side, we have $43 million operating cash flow, while funding working capital needs and $10 million of capital expenditures. For shareholders, we maintained a healthy balance sheet, paying $9 million in dividends including a 25% increase that was announced in August. And we achieved a return on invested capital of approximately 23%, an excellent post-recession recovery.

In summary, we are proud of our employees around the world, and would like to thank them for their many contributions, which enabled us to achieve these excellent results.

That concludes my comments on the fourth quarter and full year 2011. Now I'd like to turn it back over to Bill for his final comments.

William V. Murray

Thank you, Sue. I'd like to spend a few minutes talking about our 2012 outlook. Regarding 2012, there are 3 key considerations framing our outlook. First, the economy. We are not planning for another recession but do expect the sluggish global economy to continue similar to 2011. While the economy is slow, it's good enough to spur investment. For example, in Q3, capital expenditures for S&P 500 nonfinancial companies grows 24%. We maintain a healthy skepticism, and we'll keep a watchful eye for changing conditions. The second key point is our backlog position. Our backlog is $73 million higher, an increase of 34% compared to prior year, which fuels our revenue growth.

The third key point is the strength of our value proposition and growth priorities in both Sensors and Test. Our value proposition is well aligned with the macro trends of increased energy/fuel economy demands. Productivity and product performance improvements, the ever compressed product development cycle times to market and new global regulations. Our growth priorities are continuing development of application expertise and solutions, product superiority, cost reduction and emerging region expansion.

Thus, our outlook is for revenue and earnings per share growth from operations to be in the low double-digit range. This balances our line-of-sight confidence from our near-record backlog with the uncertainty of the economy and its potential for a more acute impact on our Sensors business.

In conclusion, we are very pleased with our financial performance for fiscal year 2011. We also acknowledge the need for and importance of having a robust governance model. While the economic outlook is uncertain, we believe MTS is well positioned to have an exciting year in 2012. I look forward to updating you again in February. Now I'll turn it back to Jennifer for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] We will hear first from John Franzreb with Sidoti & Company.

John Franzreb - Sidoti & Company, LLC

I guess my first question is, Sue, I think you called out in the fourth quarter results. I think -- I thought I heard $0.09 and $0.08, respectively, for legal and government costs. A, did I hear that right? And B, what were those expenses related to?

Susan E. Knight

Just going back to the operating section -- operating expense section in the quarter. I called out when you walk the quarter on a comparison basis from '11 back to '10, had $0.09 associated with legal costs for government matters and I had $0.08 for higher operating expenses in general. Many of them volume related.

John Franzreb - Sidoti & Company, LLC

Okay. So $0.09 was attributed to the government solution, if you will?

Susan E. Knight

That's correct. $15 million.

John Franzreb - Sidoti & Company, LLC

Okay. And how much of that should we expect to continue to roll forward into the fiscal '12 year?

Susan E. Knight

Most of these costs are associated with the suspension and investigation activity. But then we'll have some higher level of expenditures in 2012, which will be recurring compared to nonrecurring. And I think in that rate range that I gave for operating expenses, those 26% to 27%, there is probably, in a broad sense, a couple million dollars of cost.

John Franzreb - Sidoti & Company, LLC

Okay. So we're not really going to claw back much of the benefit of those legal expenses going away next year?

Susan E. Knight

Well, we spent $6 million in total this year. And on an ongoing basis, we think we'll have to reinvest a couple. So $4 million of reduction.

John Franzreb - Sidoti & Company, LLC

Okay. That's fair enough. And Bill, when you've -- I don't know if you've completed your first walk through of all the businesses and maybe customers of the company. But what's your perception of the direction of the company going in? This quarter was a great quarter. Do you see any material changes need to be made, absent the government beefing up of your internal controls?

William V. Murray

Yes, obviously, as you said, John, we had a really excellent quarter and year. And so there's a lot that is going well within the company and I, at the present time, haven't made any sort of decisions or directions around massive or significant changes in what we're doing. I think in terms of the outlook, if you will, we think that our existing business priorities continue to be -- to support our growth commitments that we have for double digits. And I'd also just like to acknowledge that it's been less than 90 days, and so I'm looking at all segments of the business and trying to make sure that I have a good base understanding of both our customers, our markets and the opportunities going forward. And from a first impressions perspective and you've heard me say this before, MTS is highly regarded and valued by our customers. We provide a unique capability both in our Sensors and Test business. And because of that unique capability, we are well positioned to meet their needs and be tested in the ground vehicle segment in particular. All of the mega trends around energy are driving demand in the ground vehicle segment to update their platforms, which is driving both material Test requirements as well as the ground vehicle Test segment. So we see that trend continuing. And that basically frames our Test business, which is close to half of our overall business for our Test segments. So that's an important parameter for us is to keep an eye on and understand how the ground vehicle segment goes. On the Sensors side, as I mentioned before, we've continued to enjoy a growth in the number of customers we're dealing with, which says that we have had success with our applications engine. And that's a key part of our growth strategy there because well, the recurring revenue happens in production. You have to get designed in, so it's still very much a new technology, value capability sale in the early part of the product development cycle. People are clearly recognizing the value of precise position sensing in terms of new capabilities for their systems. So I'd say application engine and the mega trends around energy are the 2 things that have positioned us well for the outlook going into 2012.

John Franzreb - Sidoti & Company, LLC

And I guess that's certainly evident in the growth in the backlog, up 34% year-over-year, which leaves me to wonder why we only have a low double-digit revenue growth rate against that kind of a strong backlog trend, especially since I think you said you assumed -- you're not assuming, I'm sorry, any recessionary conditions in the year ahead, so why would the revenue growth be stronger in the coming year, or am I missing something?

William V. Murray

Well, I think the way we're looking at it right now, John, is that clearly, as you identified, we do have record backlog. It's very strong. But we also recognize that this is a balance between what we have in terms of the backlog with the uncertainty in the market and acknowledging that our Sensors business has -- is a shorter cycled business. And so from that perspective, any acute impact in the Sensors business would show up more quickly. And so I would say, it's a balance perspective between what we know and the uncertainties that are out there in the marketplace today.

Operator

[Operator Instructions] We'll move next to Mike Hamilton with RBC Wealth Management.

Michael A. Hamilton - RBC Wealth Management, Inc., Research Division

A couple of things. One, on the Test business, fourth quarter margin and given the mix there, can you comment on why you think you got the strength that you did given the custom mix?

Susan E. Knight

Mike, I can comment and then Bill can probably add to that. We have been working on best total value cost initiative for the last -- about 1.5 years now. And there are productivity benefits that have come from some of the process changes that have been made internally in Test. I also would attribute some of that performance to the project management teams within that organization because when you think about custom projects, there is a development aspect and risk that goes with fixed rate contracting in that area. And we've really done a great job in this period of managing the risks of those jobs, with technology investment upfront, with more details and robust dropping of quotes. And I think it's a combination of these things that have offset some of that custom mix, which is typically lower margin.

William V. Murray

Mike, in addition, what I would add is that what the team has done from a strategic development perspective is really identify some of the things that are, if you will, common even though it's a custom program and also being somewhat insightful in investing in advanced programs to develop capabilities that would support some of the custom projects and de-risk them, if you will. So we're going into these programs with a better understanding of the requirements and the capabilities that we have to meet those requirements. And that doesn't mean that the risk goes away but it helps us manage the risk and obviously, avoid excess engineering labor required to make changes or adjustments.

Susan E. Knight

Mike, just building on your question, we didn't highlight it in our quarterly messages but probably should have, and that's the fact that we have received acceptance of our first wind project that we had an order for -- in late 2010. That's a big deal for us to have got an acceptance on time and within budget for that project. And it's an example of what Bill and I were just talking about in risk and project management.

Michael A. Hamilton - RBC Wealth Management, Inc., Research Division

How do you feel about the gross margin and customers you roll into '12?

Susan E. Knight

I would say I feel the same about '12 as my experience in '11. We always have custom work. There's always a risk aspect of that, but our mix today is similar to what it has been for the second half of 2011, and I expect it with what I know today to be similar.

Michael A. Hamilton - RBC Wealth Management, Inc., Research Division

And last one on the guidance you've given, what's the front half versus back half revenue mix for the year on the guidance that you're giving now?

Susan E. Knight

Proportionately equal within a few percentage points first half, second half.

Operator

There are no other questions in the queue at this time. [Operator Instructions] And we do have a question from Beth Lilly with Gabelli.

Elizabeth Murphy Lilly

Say, I wanted to just get an update on the CEO search and just where things are at. And Bill, I know you have the interim title, but I'm wondering, are you part of the candidate pool?

William V. Murray

I am in the candidate pool, Beth. And beyond that right now I think it's premature to say anything else about the search than what I described in my comments.

Operator

We have another question. It will come from Adam France of 1492 Capital.

Adam France - Keane Capital

Sue, what do you need for CapEx in this fiscal year?

Susan E. Knight

From a forecasting point of view, we generally target about 3% of revenue. So in that 3% to 3.5% range would be appropriate for '12.

Operator

[Operator Instructions] We'll take a follow-up question from John Franzreb.

John Franzreb - Sidoti & Company, LLC

Yes, I was wondering if you could kind of discuss your appetite for acquisitions. You have a healthy balance sheet, it's probably underutilized. Bill, you care to provide some color around M&A?

William V. Murray

Sure. As we said previously, when I joined the company that this didn't signal any significant shift in our strategic direction. Now having said that, we continually look at and evaluate opportunities for growth within the company and so acquisitions are not precluded, if you will. It's not that it's a driving force for our strategy. Our primary driving force is reinvesting in our existing business segments first, and trying to pursue those opportunities. But that, as I said, wouldn't preclude looking at other M&A sorts of activities. I would also just acknowledge, as I said before, John, we're really just kind of getting into looking at the strategic growth scenarios and options for the business going forward. And I need a little bit more time before I can give you a whole lot more insight there. We are right at the beginning of, as we cycle through last fiscal year into new fiscal year, our strategic planning process. And so as we go through that activity, we'll continue to look at both investments to grow our business organically, as well as if there are opportunities that are appropriate to consider, we would certainly consider them. But it's not a primary driving force for us right now.

John Franzreb - Sidoti & Company, LLC

Okay. And historically, the Sensors business has been a good leading indicator of industrial demand out there. I think you alluded to the fact that the steel business has been somewhat soft. I just want to know if you can give us some sort of characterization of what the demand profile, what your customers are telling you right now in the Sensors business? Is there any kind of inventory buildup going on? Is the sell-through good, just any kind of additional color would be helpful.

William V. Murray

Yes, I understand the question, John. And I think what you see in media and the market is sort of what we hear and it tends to be day-to-day. One day you hear about things going way up and another day you hear about something that causes people concern. As you look at just bottom line numbers, we're not seeing anything that would suggest a significant shift in our business, at this point in time, and that's as far as we can really project just given all of the dynamics that are out there that are going on in the broader economy.

Operator

There are no other questions in the queue at this time. [Operator Instructions] It appears that we have no further questions at this point.

William V. Murray

Okay. I think we're finished with our Q&A right now, and I'd like to just thank everybody for joining the call today, and I look forward to speaking to you again in February at our earnings call. Have a good day.

Operator

And again, that does conclude our conference. Thank you all for your participation.

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