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MTS Systems (NASDAQ:MTSC)

Q2 2012 Earnings Call

May 04, 2012 10:00 am ET

Executives

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

William V. Murray - Director

David J. Anderson - Non-Executive Chairman and Member of Audit Committee

Analysts

John Franzreb - Sidoti & Company, LLC

Adam France

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

Edward Lefferman - First Manhattan Co.

Operator

Good day, everyone, and welcome to the MTS Second Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference to your host, Ms. Sue Knight. Please go ahead, ma'am.

Susan E. Knight

Thank you, Augusta. Good morning, and welcome to MTS Systems' Second Fiscal 2012 Second Quarter Investor Teleconference. Joining me on the call today is Bill Murray, interim Chief Executive Officer; and Dave Anderson, Chairman of the Board. I want to remind you that statements made today which are not historical facts 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 on 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.

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

William V. Murray

Thanks, Sue. Good morning, and thank you for joining us on our call today. For today's call, we have a slightly modified agenda. I will start with additional context around Q2 performance and our key message for the quarter and the year. I will then follow with our traditional review of Q2 and year-to-date orders. I will also speak about how we are addressing the critical connectivity trend with our new Test product offering called Echo and I'll comment on the compliance program in government matters. Sue will review financial details. I'll wrap up with a review of our outlook for 2012 and finally, as Sue mentioned, Dave Anderson is with us today and he will discuss the CEO transition. After Dave's remarks, we will open up the call for questions.

Let's start with Q2 performance. Our guidance for the year has been and continues to be revenue growth in the mid- to high-teens and earnings growth in the low- to mid-teens. That remains our outlook and we feel very good about reconfirming our guidance. So the obvious questions are what happened in Q2 and why do we continue to feel optimistic about the year? Sue will speak to the detail, but I would also like to provide context.

While revenue growth was solid at 14% over prior year, it was below our internal projections. As we have scaled to a significantly higher level of business activity in Test, our systems and processes are stretched, which is why we are making the process and systems infrastructure investments. We have upwards of $5 million in additional revenue opportunity that we were unable to realize based on our own internal execution. A significant portion of Test revenue is based on percent completion revenue recognition for which we have quarterly uncertainty.

Second, the reason we have been to date, communicating higher venue growth and earnings growth is our commitment to invest in R&D and the infrastructure necessary to maintain the growth trajectory. We invested $2.5 million more in R&D in Q2 fiscal '12 versus Q2 fiscal '11. As we continue to focus on developing new products and capabilities, including the development of Echo, our new connectivity platform for the Test business. Echo will enhance our customers' productivity, increase uptime and streamline communications through enabling remote monitoring of realtime status.

We are also making investments in our IT compliance and Test project management systems. All of these investments were known. We plan to cover these investments through the additional revenue opportunity. Finally, we had some exceptional items that were not planned in quarter that had impact on our earnings, the Korean investigation, foreign currency, higher medical claims and a bad debt write-off negatively impacted earnings by over $2 million. For our total year outlook, we have critically reviewed where we are with our execution capabilities and also evaluated any potential unusual items. Based on continued strong orders growth of 15% in Q2 and our record backlog, we are confirming our outlook for the year. I will return later in the call to discuss our outlook in more detail.

In Q2, total company orders of $136 million were up strongly, achieving 15% growth year-over-year despite an environment of very modest global economic growth. Growth was Test driven which was up 20%, including one large $5 million order. Sensors was down 4% year-over-year with half the decline due to unfavorable currency comparisons. As we mentioned in our Q1 call, Sensors' order momentum is improving with sequential quarter growth of 7%. For the company in total, base orders were up 10%, a very good result. Finally, our backlog is up 15% year-over-year and another record high.

Now I'd like to provide you with more details by business beginning with Sensors. At $25.7 million, Sensors orders were down 4%, 2 points of which was the result of unfavorable currency in Q2. From a market perspective, the industrial market was down 6%. The weakness was primarily in wind, medical and food packaging machinery similar to Q1. China increased 8% in Q2 versus last year to $3.6 million and is up 16% sequentially, but it was not enough to offset the softness in Europe and the U.S. The mobile hydraulics market grew again in the quarter by 7%. Design wins in construction and agriculture are driving U.S. growth up 33%. Europe declined 7%, primarily due to road building machinery. Geographically, all regions declined, 6% in the Americas, 1% in Europe and 9% in Asia. Backlog was $15.8 million, down 13%.

Next, I'd like to provide some high-level context on Sensors year-to-date orders. At $49.8 million, orders were down 2%, half of which was due to currency changes. Industrial markets were down 5% with softness in all 3 geographies. Our largest customers are still buying more frequently in smaller quantities rather than committing to large blanket purchase orders. This is likely due to more aggressive inventory management and the general reduced concerns about stability of the global electronics supply chain. As previously mentioned, China growth improved in Q2. We continue to be very pleased with our Mobile Hydraulics year-to-date growth of 21%. The primary drivers are U.S. agriculture and construction through both new applications and increased product volumes. In summary, we expected Q2 orders to be better than Q1 and they were, at 7% growth.

Europe's Q2 results weren't great, down 1% but we're beginning to see some momentum and optimism return. Our application engine is gaining traction and we are confident it will produce new industrial and mobile hydraulics machine opportunities as customers need to make more productive machines to be a differentiator in their markets and our Sensors are one of the keys to enable it.

Finally, as we enter Q3, our orders continue to trend upward with our weekly average for the first month of Q3 trending up versus Q2. However, it is prudent to be cautious given weekly volatility in the first half of the year.

Next, I'll talk about Test Q2 orders. At $110 million, Test achieved very strong 20% year-over-year growth, including 1% unfavorable currency. Included in our results is our first large order of the year, a $5 million Europe ground vehicle motor sports win. I'd like to add that subsequent to Q2, we received a $12 million structures order in Japan. Base orders of $105 million were up solid by 10%. We can attribute our growth in Q2 to 3 important drivers. First, the energy megatrend and our associated investments in wind, tire and material testing. Second, geographic expansion in China for ground vehicles was another key win in our own-the-lab strategy. In Q2, we won orders to complete the fourth of 5 new labs. The fifth and final lab opportunities will develop over the next several quarters. These wins position us for future lab expansions in China as they build their capability and capacity.

Third, our ongoing commitment to motorsports resulted in approximately $8 million motorsports order in Q2. From a market perspective, there was growth in all 3 markets. 14% growth in ground vehicles driven by motorsports and passenger cars; 13% growth in materials with all geographies contributing; and 47% growth in structures, which was arrow driven. Geographically, all regions grew. The Americas grew 6%, including approximately $4 million of U.S. government business. Our government business was essentially flat with prior year. Overall, ground vehicles increased and structures decreased in the Americas. We had an outstanding quarter in Europe with 78% growth driven by ground vehicle, motorsports and materials. Asia grew 6% in the quarter, driven by arrow and civil projects. China led the region with 12% growth. Backlog at $279 million is up 18% year-over-year and up 3% sequentially. We are in a strong position as we begin second half of the year.

Our opportunity pipeline, defined as orders that could close in the next 12 months, is also growing. At $830 million, it is up approximately $85 million or 11% over last year. All geographies are up. We are seeing more seismic and broad ground vehicle opportunities. Our pipeline growth is trending towards more larger opportunities, while base opportunities are flattening out. This could result in more quarterly lumpiness. I'd also like to make a few comments about test year-to-date orders. At $221 million, orders are up 6%. Large orders this year totaled $5 million compared to last year of $29 million. As always, large order timing is quite variable. As previously noted, we have booked a $12 million order in April. Year-to-date base orders of $216 million have been excellent, up 21% versus prior year. Key drivers are energy and geographic expansion trends and a continued strong win rate from our best total value initiative. We are excited about our Test orders performance this year and the growth opportunity outlook for our key markets.

As I mentioned in my opening remarks, we have launched our new Test connectivity platform we call Echo. The Echo software will enhance productivity today for our customers through realtime monitoring and mobility. It will also enable our service people to be more proactive and productive. Echo is a core technology enabler that provides a platform for redefining how we interact and relate with our customers. Our global experts can be connected anytime, anywhere with our global customers. As demand trends continue -- excuse me, as demographic trends continue to place more emphasis on core test and application expertise and our customers decentralize their labs, the Echo platform will enable MTS to respond to our customers' needs and business opportunities. For example, a global customer with labs distributed through Europe, Asia and the Americas can use a single expert to define Test procedures and protocols and monitor Test performance realtime to ensure better outcomes and consistency.

My next topic is our compliance program and government matters. I'd like to briefly update you on our progress. Following our internal assessment last year in the implementation of our administrative agreement with the U.S. Air Force last fall, we have made great progress ensuring that we meet the government standards of being a presently responsible contractor, as well as our own commitment to ethical business conduct, it is one of our core values. We have enhanced the capability of the legal and compliance function by adding key positions, including the Office of General Counsel and Chief Compliance Officer. We have strengthened the code of conduct and reinforced its importance to employees through training and dialogue globally. We are improving our processes through enhanced systems, automation and role on responsibility clarification and we are fully compliant with all aspects of the U.S. Air Force administrative agreement. We are committed to being not just good but excellent when it comes to compliance, quality, ethics and integrity. Now specifically with regard to the Department of Justice last congress proceedings, they are still in progress. We are fully cooperating, so this issue can be brought to conclusion. However, we are unable to determine the likely outcome, range of impact or resolution timing.

Now I will turn it over to Sue for financial details.

Susan E. Knight

Thank you, Bill. My remarks today will focus on the second quarter year-over-year comparison beginning with revenue. At $129 million, revenue was up 14% compared to the prior year, and it was all in Test. While double-digit growth is good, the results were less than our projections. Test was approximately $5 million short in the quarter, primarily due to final customer acceptances, commitment dates and completions of letters of credit timing. This revenue will occur in Q3 as a result of them just being timing related. As Bill mentioned, it's also important to note that Test backlog continues to be at a record high. The currency translation impact of the company level this quarter was immaterial. On a segment basis, Sensors revenue of $26 million was down less than 1% from 4% lower orders. Backlog declined approximately $0.5 million. Currency translation had a negative impact of 1.3 percentage points. Geographically, the Americas were up 6%, while Europe and Asia were down 2% and 6%, respectively. Europe was negatively impacted by currency and Asia's decline was driven by China similar to the results in the first quarter. Test revenue was strong at $103 million, up 19% compared to last year. The $16 million increase was primarily driven by our strong backlog position, which was up $45 million or 20% higher as we began the quarter as compared to the prior year. There was no material currency impact in the quarter and for Test. Similar to Q1, growth in all regions was strong. The Americas led the way with 27% growth. Europe was up 19%, and Asia revenue grew 12%.

My next topic is gross profit. At $56 million, gross profit increased 15% on 14% revenue growth. All of the increase was from higher Test revenue volume and productivity improvements. Sensors gross margin was down $400,000 on slightly lower revenue. The gross margin rate was solid at 43.7% and similar to the rate in the first quarter. Year-over-year, the rate increased 0.4 of a point up slightly from 43.3%. Sensors rates remain strong at 57.4%, but it was down 1 percentage point driven by manufacturing utilization and mix. The Test gross margin rate increased 2.5 points from volume leverage and productivity improvements. Operating expenses were approximately $39.2 million, up 26%. As a rate to revenue, expenses were 30.4% and higher than our annual forecast range of 26% to 27%. There are 2 primary reasons for the higher rate. First, our planned spending level in the second quarter for Test productivity investments, compliance capability building and strategic growth initiatives assumed we would achieve our forecasted revenue, which was approximately $5 million higher from previously indicated. Lower revenue impacted the operating expense rate to revenue by approximately 1.6 points. Second, we had unplanned, unanticipated cost, which also accounted for approximately 1 point impact. These costs included $600,000 for resolution of Korean matters and $400,000 for bad debt. In the second half of the year, we do expect operating expenses as a percent of revenue to return to the 26% to 27% range similar to Q1. In the second quarter, operating expenses were up approximately $8.2 million compared to last year. Of the increase, approximately $2.9 million was for strategic initiatives, including the $2.5 million increase in R&D that Bill mentioned. Additionally, $2 million was for higher Test productivity process improvement initiatives, which are required to cost-effectively deliver the increasingly higher level of customer orders and deliver them on time, $300,000 for CEO and board-related expenses, $1 million for the previously mentioned unplanned cost and $700,000 compliance-related costs, and the last item is higher salaries and benefits, particularly in selling and marketing for $1.3 million. In addition, currency had an unusually high negative impact in the quarter of $700,000 due to a 7% change in the yen in the month of February, which was not typical for our business.

Moving on to EBIT and EBIT rate. EBIT was approximately $17 million, down 6% from higher operating expenses and 13% of the EBIT rate was impacted by these expenses as well. It was approximately 3 points less than the average EBIT rate over the previous 5 quarters. Compared to the first half of the year, we do expect the EBIT rate to improve by 1 to 2 points in the second half based on the outlook for revenue volume and operating expenses. The tax rate of 32.7% was essentially flat with last year's rate of 32.9%. And our tax rate outlook for the full year continues to be in the low 30% range. Earnings per share of $0.69 was down $0.06 compared to $0.75 in 2011. Revenue volume and productivity improvements from Test contributed $0.33. This increase was offset by $0.34 for the operating and other expense increases, $0.03 from the negative impact of currency and $0.01 from a 2% higher share count. The net impact was a 6% decline in earnings per share.

My last topic today is cash and cash utilization. Cash balance increased $20 million to end the quarter with $123 million on the balance sheet. Operating cash flow was strong at $17 million, driven by $11 million of net income and a $6 million reduction in working capital as compared to the first quarter. In the quarter, billed receivables declined $15 million on strong collections, which was partially offset by Test inventory and unbilled receivables increases to deliver the record high backlog. Capital expenditures were $4.4 million and dividend payments were $4 million as well. There were no share purchases in the quarter as we continue to be out of the market until the government matter is resolved.

That's the end of my update on the second quarter results. I'll turn it back over to Bill. Thank you.

William V. Murray

Thanks, Sue. My last topic for today is the outlook for the year. While we've acknowledged that Q2 fell short of our performance expectations, we still have confidence in our previous outlook range compared to fiscal 2011 of revenue growth in the mid- to high-teens and earnings per share growth from operations in the low- to mid-teens. We anticipate momentum building through Q3 and continuing through Q4 with Q4 being our largest quarter consistent with last year. Why are we confident? Global economic growth is not robust but consistent with our view. We have record Test backlog up approximately $40 million compared to prior year and our order pipeline positions us well as we begin the second half of the year. We have maintained a modest Sensors growth outlook, which is unchanged from last quarter. We are playing for and managing to a lowering operating and expense profile as a percent of revenue for the remainder of the year following peak spending in Q2. Sensors and Tests are well positioned with product and customer service capabilities in their respective markets to respond to macro trends.

Before I turn the call over to Dave, I'd like to say it has been a pleasure to be the interim CEO during the last 8 months. I've appreciated having the opportunity to lead MTS while making progress and growth and productivity initiatives and enhancing our compliance capabilities and achieving our financial plans. I've enjoyed working with the employees around the world and meeting many of our customers and shareholders. I have a more in-depth understanding of the company that will enable me to be a stronger board member going forward.

That's end of my remarks. I will turn the call over to Dave.

David J. Anderson

Thank you, Bill. I'm pleased to participate in today's investor call to share with you a few brief comments as we transition the CEO leadership role from Bill Murray to Jeff Graves. First, on behalf of the Board of Directors, I would like to thank Bill for his dedication and many contributions to the company during the last 8 months. Bill stepped into the interim leadership role at a critical time and has provided strong stewardship for MTS while the board conducted a search process to fill the CEO position. Under Bill's leadership, the company has made progress in its strategic initiatives, met its commitments under the U.S. Air Force administrative agreement and delivered solid financial results. We're grateful for Bill's leadership and look forward to his ongoing contributions as a board member.

Second, I would like to share with you the board's selection process and why we believe Jeff is the right person to lead MTS forward. The process was led by the governance and nominating committee which selected Korn/Ferry, a highly respected search firm, as our partner. Their well-established global practice and their expertise in the industrial markets are critical to helping us find the right candidates. The selection criteria we used to select Jeff included industrial market domain experience and global experience, particularly China, since 2/3 of the company's revenue comes from outside the Americas. A technical engineering background, strategic and operational capability, experience with the U.S. government contracting of public company CEO experience were also very important. Our candidate pool included leaders from industrial companies, which are highly respected for their ability to develop business leaders, who create sustainable shareholder value. The independent directors of the board engaged in the decision process to select Jeff Graves as the CEO. I am very happy that he will be joining us next Monday, May 7.

Jeff has 25 years' experience in power systems and standby storage electronic components and technologically advanced aircraft components. He's had a broad range of functional experience, including research and development, design engineering, global operations and business development. For nearly a decade he served in a public company CEO position at C&D Technology and Kemet Corporation. Jeff's career also includes management positions at GE and Rockwell. I know that Jeff is very excited to get started and he's anxious to engage with our employees, our customers and our shareholders.

Lastly, I'd like to thank all of MTS's employees for remaining focused on meeting our customer needs, enhancing our compliance capability and supporting Bill during these last several months. Your commitment has been outstanding and greatly appreciated by the Board of Directors. I know we can count on you to give Jeff your full support as well. That concludes my remarks and I'll turn it back to Bill.

William V. Murray

Thank you, Dave. That concludes our prepared comments. I will turn the call over to Augusta for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Franzreb from Sidoti.

John Franzreb - Sidoti & Company, LLC

First, Bill, I wanted to say congratulations. It's been nice working with you and your time as in your time as interim CEO and good luck on whatever future endeavor you plan on going on with.

William V. Murray

I appreciate it, John, it's been a pleasure working with you as well.

John Franzreb - Sidoti & Company, LLC

Regarding the opportunity pipeline, I wonder if you could kind of bring us up to speed on what the composition of this pipeline is. It's up year-over-year, I think that's rather impressive. Are there any changes on either the geographic mix or the customer makeup of the opportunity pipeline that's noticeable?

William V. Murray

Well, as I mentioned in my remarks, John, there is some movement. I wouldn't say it's dramatic but we are seeing some increased opportunity pipeline in seismic and particularly in Asia. And so those projects tend to be on the larger orders side. So some of the pipeline opportunities from that perspective are shifting, if you will, to seismic and to Asia, if you will. And ground vehicles in general continues to be a solid opportunity area for us and that's been fairly consistent.

John Franzreb - Sidoti & Company, LLC

Is ground vehicles also concentrated in Asia?

William V. Murray

That's a broader, more global trend. And the companies -- we are seeing some trends where some of the ground vehicle companies may have decisions that are made in one particular region but the actual products are distributed globally now.

John Franzreb - Sidoti & Company, LLC

Okay. And regarding the new Echo platform, it sounds like something of a realtime interactive software platform. I think you've been working on this for quite some time. Can you talk a little bit about how much was spent putting the platform together, what the revenue expectations are for it and should we be expecting a higher contribution margin because it is a software platform going forward?

William V. Murray

No. We won't get into the details, specifically how much we spent on Echo. I will say which you said before that this has been an investment that has been ongoing for a number of years culminating in the launch this past quarter. Now it's a core enabling capability that will be able to be leveraged across our platforms. So it essentially, if you think about the conductivity trends and the mobile trends that are there for -- in the consumer world, that's what we are able to do with our products. And as a result, I think where you will see opportunities are going to be in a couple of areas. First, just an overall competitiveness in features and capabilities making our systems easier to use, easier to support both from our customers and from our end. And then over the longer term, as we continue to build applications and future capabilities, there's an opportunity to then look at some different service business models but that's not completely defined yet. But just from an overall productivity and efficiency with our customers, it's going to be highly appreciated. But I wouldn't suggest that you'd want to change your modeling in terms of core margins.

John Franzreb - Sidoti & Company, LLC

How about what you think the revenue contribution of this business could be 3 to 5 years out? Think of it longer term.

William V. Murray

Well, it has the potential to redefine certain aspects of our business but we're not at a point yet from a strategic standpoint. And I think it's probably something that needs more time to really understand how to think about the revenue that far out.

John Franzreb - Sidoti & Company, LLC

Okay. One last question on Echo. Is there going to be an uptick in selling costs associated with rolling out the product line?

William V. Murray

No.

John Franzreb - Sidoti & Company, LLC

Okay. On some of the onetime items. You said there was about $700,000 in currency related yen cost, Sue. That's not normally the case. Why did that incur in the quarter?

Susan E. Knight

On our long-term contracts, we hedge our receivables. And typically, the way we do it is to put a range that we pay for around the currency expected outcome. And even though currency changes and we adjust over time, when it moves 7% in a month, it was beyond the coverage that we had and it impacted particular contracts that we had opened in Japan. So it was highly unusual. I mean, we hardly ever talk about currency on this call because we manage it within 100k and that kind of movement in the 30-day period caught everybody by surprise.

John Franzreb - Sidoti & Company, LLC

Okay. Okay, and one last question. I guess, we're hearing a lot of different cross currents about what's going in Europe. What is your customer base saying in Europe across both business lines?

William V. Murray

Yes. So I think that as we look at -- to start with Test, as you know, almost half of our business in Test is ground vehicles and that continues to be very solid. And the ground vehicle segment in Europe for our business, we have to differentiate from global players and local European market issues or challenges. So our ground vehicle business continues to be very solid and the opportunities continue to be very solid as a result. We have seen, as we said in Sensors, a flattening to, actually in Europe, I think it was down just slightly the last quarter. So there has been somewhat more softness in Europe than there has been in other areas. Having said that, there's still a pretty strong export component for our products in Europe. And so that's why we haven't, I think, seen as much momentum loss as other companies have.

Operator

Our next question comes from Adam France of 1492 Capital.

Adam France

Could you -- I got myself a little bit confused here. You mentioned half of Test is ground vehicles. Is half of European Test also ground vehicles? How does that weigh out?

William V. Murray

We don't get into that level of specificity. What I will tell you is that when you look at our overall company makeup between Asia, the Americas and Europe, we're slightly larger in Asia than we are in the other 2 areas though. But essentially, very similar size in all 3 areas.

Operator

[Operator Instructions] We'll go next to Liam Burke of Janney Capital Markets.

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

Bill, I guess, Sue on her prepared remarks, she mentioned in the beginning, orders on Sensors are up sequentially. What would be the mix? Are you seeing any recovery in industrial or is it continued strength in Mobile Hydraulics?

William V. Murray

The Mobile Hydraulics is the stronger aspect of that piece right now. Although I think we are seeing some modest improvement in China in particular in the Industrial segment, it's not enough to change the overall trend yet.

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

Okay. And on the just larger picture on ground vehicle. Obviously, there had been some pent-up demand by the automotive world for Test equipment. You're seeing record backlog. Is there anything structurally within the automotive industry that's different now than it was prior to the recovery in demand for the Test products?

William V. Murray

It's a good question, Liam. There's a couple that I would point to. One is, we've talked about this before, there's still the energy megatrend that is driving innovation throughout the ground vehicle industry and that continues. There is still global expansion happening in Asia. I think recently, Ford announced a major investment into China and you see -- we still see labs developing there. And the third item -- I'm going to lose my train of thought there for a minute -- on the overall innovation, if you look at the markets versus the recessionary period, product cycles are decreasing. The cycle time is improving there in terms of new product innovations in ground vehicles. And so with that, in all segments of the market not just the high end, there is feature differentiation and performance expectations happening in the marketplace that drives innovation and demand for Test.

Operator

We have a follow-up question from John Franzreb.

John Franzreb - Sidoti & Company, LLC

You mentioned a $12 million large structural order in Japan that's already been booked for the Q3. Did I hear that properly?

William V. Murray

You did.

John Franzreb - Sidoti & Company, LLC

Is it fair to assume then, given that it's already in the book that the order take should -- in Q3 is at least being set up to be at least as good we've had in the last 3, 4 quarters?

William V. Murray

Well, John, as you know, we say this all the time, our orders are lumpy. And especially when you get these large capital orders and you're going through. And that $12 million one is an excellent example where you're going through a process and then there's key decision-makers that want to review it again or have a question and it can move things easily one way 1 month or 1 quarter. So we feel very good about the backlog, the pipeline and the prospects, which we've set up the quarter to, as we said, to be a very good performance quarter. But I wouldn't want to give you a point estimate or projection on our [indiscernible].

John Franzreb - Sidoti & Company, LLC

Fair enough, Bill. How about this, given the lack of large orders in the backlog that we've seen over certainly the past 6 months and extending somewhat into last year. Is the timing of delivery of that backlog changed meaningfully from historic trends?

William V. Murray

So our last year versus this year, we are behind in terms of large orders. I think we did $29 million last year and if you look at now with the 12...

Susan E. Knight

In the first half.

William V. Murray

In the first half, excuse me. The opportunity pipeline that we're looking at would suggest that we have in the zone types of large order opportunities this year. They wouldn't indicate that there's some macro trend that our profile, our business is changing. The base order business does have usually a shorter-term cycle than some of the larger orders. But there's nothing that I would say trend-wise that you should look to think about changing how you model our business as a result of the opportunities that we have at the present time.

John Franzreb - Sidoti & Company, LLC

Okay. And I know you said you don't have any thoughts or timing about the resolution of the government matter and its finality. Do we know what the hangup is?

William V. Murray

Well, with the government, we've cooperated throughout this process and the way I've described it before, John, is that during different phases, there's a discovery or a learning phase and it can be expansive. The interactions we have with the government right now have been very infrequent. And so I think that there's just the reality of there's a lot of stuff on their plate, and so we're very responsive when they ask us questions or have meetings. But that is totally dictated by their schedule and timing. So there's nothing that is holding it up from our end. It's really just their process and timing and workload, if you will.

John Franzreb - Sidoti & Company, LLC

Okay. And since we have the Chairman of the Board on the line, could you talk about the decision not to be active in buying back stock on the open market? It's certainly not what I would consider normal MTS purchasing patterns.

David J. Anderson

Well, that's an excellent question. And obviously, how we use capital is always under consideration. And whether it's dividends or share buybacks. But at this point, we're just taking somewhat of a conservative position. And we do review that regularly, multiple times a year during the board meeting. So it's not a change in practice or philosophy.

William V. Murray

Yes, just to add, John, the government investigation had -- we took a position to be conservative while we were under investigation from the government. So last year, we had a program that was in place before the suspension occurred. And since that, we've just been conservative and out of the market.

Susan E. Knight

We've been out of the market since August when we completed our ASR. And we'll get back in as soon as we have resolutions.

John Franzreb - Sidoti & Company, LLC

I'm just -- I mean, there seems to be no real reason stay out of it at this point given the cash build. I don't see why -- at least go back to your normal share repurchase timing. I don't see the reason why not to.

David J. Anderson

I think the concern is it could be whatever we do could be misinterpreted and we just don't want to appear -- we don't want to be trading when we're so close to these events and it just could be misinterpreted, I think, by the market. So we felt it was safer to stay out and wait until it's resolved and then our actions can be clearly interpreted correctly.

John Franzreb - Sidoti & Company, LLC

Okay. Again, setbacks are up. Any consideration to give a special dividend as the cash builds?

David J. Anderson

That's on the table as well and I think it all has to do with how we want to deploy the capital and that is part of the conversation as well. That's not excluded from our discussions.

Operator

Our next question comes from Ed Lefferman with First Manhattan.

Edward Lefferman - First Manhattan Co.

Essentially, that was my question on the share repurchase strategy. But I guess, I would also add is that a strategy that would be on hold once we have the new CEO on board to see what his capital allocation requirements are or is there a strong direction from the board that to continue with share repurchase policy, which has been in place for quite some time at the company?

David J. Anderson

It's a direction from the board and the board has been so involved and closely monitoring the investigations, and so it's a position that the board has taken. So if you're looking for it, well, it's just a -- it's a board position, so don't anticipate it to change with the new CEO.

Operator

And there are no other questions of this time.

William V. Murray

Very good. I think that at this point in time, we're going to conclude the call. Thanks for participating today and Jeff will be with you for the next quarterly update in July.

Operator

That does conclude today's conference. Thank you, all, for your participation.

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