MTS Systems Corporation F1Q10 (Qtr End 01/02/10) Earnings Call Transcript

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MTS Systems Corporation (MTSC) F1Q10 (Qtr End 01/02/10) Earnings Call Transcript February 5, 2010 10:00 AM ET

Executives

Sue Knight – VP & CFO

Laura Hamilton – Chairman & CEO

Analysts

Liam Burke – Janney

John Franzreb – Sidoti

Mike Hamilton – RBC

Operator

Good day everyone and welcome to the MTS first quarter earnings release conference call. Today’s conference is being recorded. At this time for opening remarks and introductions, I will now turn the call over to your host Ms. Sue Knight. Please go ahead ma’am.

Sue Knight

Thank you, Joseph. Good morning and welcome to MTS Systems fiscal 2010 first quarter investor teleconference. Joining me on the call today is Laura Hamilton, Chair and 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. These measures may be used by management to compare the operating performance of the Company over time. It should not be considered in isolation or as a substitute for GAAP measures.

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

Laura Hamilton

Thanks, Sue. Good morning. Today’s we are going to cover five things. We are going to talk first about the key messages for the quarter. We are going to go through the order summary to understand what’s happening in the market. Two, I will take you through more of the financial details. We’ll give you our view of the economy and the outlook, both long term and for 2010.

So, I will start with key messages. And we have two key messages for the first quarter. Our first message is that we are off to a good start and it’s as anticipated. And let me take just a few minutes to expand on this. First, why do we say it’s a good start? It’s good because at $108 million in orders, it’s strong. Orders were up for the third consecutive quarter. It’s good because when we exclude severance we had sequential EBIT growth on lower revenue and it’s good because we are rebuilding backlogs.

And why do we say it’s as anticipated. We said in this economy that a broad order range is possible and feel Q1 orders fell in the top end of this range, as anticipated. Revenue was as anticipated given our opening backlog and earnings were as anticipated because they reflect the 2009 cost reduction actions taken,

The second key message is important. We don’t see orders continuing at this growth rate. Eventually, revenue will grow within a consistent range and orders are going to fluctuate by quarter. So, let’s take a look at orders to understand a little bit more deeply.

Let’s start at the total Company level and we are going to talk only about sequential order comparisons because we think it’s what most relevant today. At $108 million Q1 orders were up 13% and if we exclude the extra week in the fourth quarter, we were up about 20%. This is the highest orders in five quarters and it includes tow $10 million Test orders, which was up from one $7 million order last quarter.

Backlog closed $184 million or up 10% and we are no longer seeing the slide in backlog that we saw in 2009. And we are working through the lag.

Let’s shift to Sensors. Again, sequential orders comparison. At $17.6 million in orders, orders percentage were up 6%, but again if we adjust for the extra week in the fourth quarter, Sensors orders are up 15%. Two points of this attributable to currency. Sensors backlog is essentially flat.

So what’s happening in our Sensors markets? Many segments and/or geographies are up a little, but there is no big single driver. For example, our industrial markets are up a little. Rubber and plastics are up in the U.S. and Europe, heavy machine product line upgrades are increasing a little, and energy is up, whether it’s water, gas, or wind turbines.

Our liquid level business is up a little, but what’s important to remember about liquid level is that these are more project based opportunities, and lesser recurring. And so this may just be front-end loaded for the year. And mobile hydraulics are up a little. We see some new applications taking hold in Europe and in the U.S. we see construction machines coming up off a very low bottom.

Structurally in the Sensors markets, we see low customer inventories causing some re-stockings. We see more rush or just-in-time orders and we still see reluctance to make commitments to longer term blanket orders. I think most people saw The Wall Street Journal article this week on Caterpillar and how those – the article was highlighting that they are doubling their purchases among suppliers. The article also says that Cat won't commit to more than three months.

In summary, for Sensors, we are seeing signs of modest improvement. Q2 is going to be very important as we see how inventory stocking or restocking is affecting this increase, and there are no clear geographic or market growth leaders. We are expecting more of the same.

Let’s shift to Test now. Again, sequential order comparison. At $90 million in orders, Test orders were up 14 points and one point of that is due to currency. It was our third consecutive quarterly increase, but again that’s from a pretty low point on Q2 of ’09 or $53 million. The majority of the increase is really driven from one additional large order. Backlog for Test is up 10%. It’s the second consecutive increase after five quarters of decline. And again, it feels good that the erosion has stopped. We are going to be returning to an overall positive backlog trend, but it will vary by quarter.

Our opportunity pipeline continues to grow approximately 10% or so, but again, probably and timing are challenging. So, what’s happening in our Test markets? The external environment is really essentially unchanged. From a geographic perspective, it’s unchanged. The U.S., Western Europe and China are buying, and China more so than anybody. Japan, Korea, Central and Eastern Europe and Southeast Asia are not so much buying.

From a market perspective, it’s really unchanged. In ground vehicles they are still selectively investing in priority projects. And in infrastructure and aero, they continue to be moderately spending.

And from a customer perspective, it’s still unchanged. Customers are still slow or deliberate in their decision-making. They are funding priority project and stimulus continues to be in place, but its’ not driving a significant change.

The two large orders we booked this quarter do signal some larger investments are being approved. This quarter, we saw one large order that tied to the U.S. space program or Constellation. This is a program that’s in the news these days, but this was an order in the first quarter. It’s about an 18 months project for us and we believe that despite all the question and controversy over future funding that this is a pretty secure order. It is government related and so clearly government has a piece of (inaudible) it’s helping trigger some of these larger orders.

The second large order is a European aerospace research institute, interestingly also partially government and partially stimulus funded. Each of the orders were $10 million.

I am now going to turn this back over to Sue for some of the financial details.

Sue Knight

Thank you, Laura. Today, my remarks will focus on the sequential comparison of the first quarter to the fourth quarter of 2009, and I will begin with revenues. Revenue decreased 5% to $89 million from $94 million. While we benefited from beginning quarter backlog being up $5 million, it was more than offset by the combination of one less shipment week in the first quarter and the holiday period in December. Currency changes had a 1% favorable impact compared to Q4 last fiscal year.

On a segment level, Test revenue declined 8% to $72 million due to the reasons just mentioned. Because Test is a longer cycle backlog business, the revenue decline reflects the approximately six month lag as the lower fiscal 2009 order volume flows through revenue. We expect the lag effect to be substantially behind us after the second quarter. Currency favorably impacted Test revenue by 1%.

Sensors revenues increased 8% to $17 million. Given the short cycle nature of Sensors, Q1 orders drove higher shipments and currency added one point of growth, which more than offset the impact of 13 weeks in Q1 compared to 14 weeks in Q4.

Moving on to gross profit, we had a $3.9 million increase to $35.2 million. Q1 was positively impacted because Q4 included $5 million of severance cost in the Test segment and was negatively impacted by lower revenue volumes. The gross profit rate of 39.5% was an increase of approximately six points. Severance cost in Q4 accounted for 5.4 points of this change. Adjusting for severance cost, the gross profit rate improved by 0.8 points, which was a good performance on lower volumes, evidence of our lower cost structure from actions taken in 2009.

At the segment level, the Test gross profit rate increased seven points to 35.9%. Severance again impacted by the rate by 6.4 points. The Test gross margin rate is expected to gradually improve as revenue increases from the low $70 million that we are currently experiencing.

The Sensors gross profit rate of 54.8% was relatively flat compared to 55% in the fourth quarter. While the margin rate has been under pressure during the recession, the business is more easily scalable than Test and has managed direct costs in order to keep their gross profit rate in the mid-50s despite 30% lower volumes.

Moving on to operating expenses, expenses were $29 million, down $6.4 million of which $3 million is related to Q4 severance cost, $2 was associated with Q4 expenses that were not part of our run rate and $1 million was recurring cost savings. We expect our quarterly operating expenses to be in the range of $29 million to $30 million depending on the timing and size of order related selling cost.

The tax rate in Q1 of 32.7% was within our normal tax rate range compared to 21.5% in the fourth quarter. The fourth quarter rate was unusually low and resulted favorably from the benefit of fixed tax credits on lower earnings.

A couple of comments on earnings per share. Compared sequentially to Q4, earnings per share increased from a loss of $0.18 to a positive $0.23. The fourth quarter loss included $0.33 in tax from severance. Excluding this impact, earnings per share increased $0.08 to $0.23 on lower volumes, a healthy sign of our smaller cost structure.

Now I would like to briefly comment on the results compared to the prior year, moving out of the sequential comparison so you can see the effect of the Test revenue lag on the P&L. Orders of $108 million were up 13% or $13 million while revenue declined 24% or $28 million. The lower revenue was the result of 29% less backlog as we began Q1. The gross profit rate improved 1.6 points to 39.5% and operating expenses declined $3.4 million or 11% from cost reduction.

The margin rate improvement and operating expense reductions only partially offset the impact of the volume decline. Thus, earnings per share declined 60% to $0.23 as we balanced both the short term and long term need for the Company.

Next subject is cash and cash utilization. At $114 million, our cash position remains a strength. Cash from operations was $2 million, which is good considering Q1 is typically not a strong cash generating quarter for us due to our business cycle. Capital expenditures were $1.8 million, consistent with the last few quarters as we continue to prudently spend.

Our dividend payment remains unchanged, which resulted in $2.5 million of payments, and share purchases in the quarter were $1.4 million.

In summary, and as Laura previously stated, our financial performance was good and as anticipated. We are pleased about the order improvement, profitably working through the residual impact as Test revenue lag and realizing the benefits of our lower operating cost structure and our healthy balance sheet.

Now, I would like to turn it back over to Laura.

Laura Hamilton

Okay. So, let’s shift to our view of the economy, which again is unchanged. Despite a strong Q1 orders, we still really believe that there are reasons to be both cautious and optimistic and as we start with why cautious, we’d like to quote Bark Benarke [ph] the Chief Economist from the conference board. And he characterized the situation as, “the recovery is about the long time out of a deep hole.” We think that’s enough reason to be cautious. But if you add to that unemployment and debt levels remain high, inventory restocking may be the biggest cause for the current improvement. There is excess asset capacity out there. Stimulus will eventually run out. And there is still increasing competition for a smaller pie.

But there are reasons to be optimistic and why are we optimistic? Because some of the fundamentals are improving especially if you look at December manufacturing indices. The U.S. indices showed a fifth straight month of expansion. In China, the manufacturing sector expanded at the faster rate in 20 months. And the EU’s index rose to a 21-month high.

We are seeing approval of investment for priority projects linked to productivity, efficiency and new technology. Government programs are creating some demands and the fear has subsided and economic confidence is rising. The economic outlook while not dire is still uncertain, but we feel that we are well positioned.

So, let’s shift to our long range outlook. Our long range outlook is that MTS is well-positioned to take advantage of the opportunity. Throughout 2009, we discussed that customers need to respond to new challenges. Challenges like the economic reality, challenges like macro trends in energy, the environment, and globalization, and challenges like increased competition. And in response to these challenges, our customers are driving new product introductions faster, they are pushing technology for differentiation, and they are increasing their focus on China. As they respond to these challenges, it’s creating opportunity. And MTS is well positioned to capture this opportunity.

For example, was well positioned when a leading automotive OEM approached us with an opportunity. Their issue was competitiveness, not just today but tomorrow. They need to accelerate their product development process. They are behind in the use of today’s vehicle evaluation technology and it is affecting their product differentiation and reliability.

The opportunity they presented was for MTS to be their exclusive partner to benchmark today’s worldwide testing technology and to help them develop their concept and roadmap. Their conclusion is that MTS has the track record, the application expertise, and the technical leadership to help them chart their course for the future.

Let me share one more example of how we are well-positioned for opportunity. Sensors was well-positioned to capture the opportunity presented by a leading steel manufacturer. Their issue was downtime for maintenance and calibration was creating a higher cost of ownership. The opportunity they presented was for MTS to replace our competitor’s sensors with a more rugged sensor while maintaining comparable measurement capability. Their conclusion was that MTS has superior technology as well as invaluable applications expertise and responsiveness and that working with MTS is helping them to enhance their competitive position.

These are just two examples of MTS being well-positioned for opportunity and why we maintain a positive long term outlook. We believe that despite the uncertain growth rate we can grow faster than the market, that we can return to historical profitability at lower revenue levels and ultimately return to 20% on invest capital.

So, let’s shift to our 2010 outlook. I am not going to give you specific revenue and earnings per share numbers, but we can share our current thinking about 2010. The key variable is orders. Here is how we think about it. We believe that base orders, something that we’ll define as the Company orders excluding the large orders in Test. We believe that base orders are stabilizing around $85 million plus or minus. If you look at base orders for the last three quarters, we’ve been at $81 million, $89 million, and $88 million. So, we are stabilizing around $85 million plus or minus.

But then we need to take into account that there is going to be significant quarter-over-quarter variability driven by the large orders. If you consider that just a few large orders can swing the results and that probability and timing, which has always been hard to predict is even harder in this economic environment, we still see a broad range of possibilities in quarterly orders. We think the range is about $80 million to $110 million per quarter.

So given this broad range, it’s hard to come up with a predictable or a tight range around revenue and earnings, but we’ll continue to keep an eye as this plays out. The other variable is the timing, the later that we book the orders in the year, the less (inaudible) entering year revenue.

And then the final comment on the outlook is we have adjusted our cost structure, so we are okay around $80 million. Okay means we are profitable and we are cash positive and the results will be better if we – if the results come in better than $80 million per quarter.

So, in closing, like we said, we are off to a good start for the year. We see opportunity in the market, and we are staying focused on capturing the near term order opportunity while also continuing to position ourselves for long term sustainable growth.

At this point I will turn this back over to Joseph to open up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) We'll proceed with our first question coming from Liam Burke of Janney.

Liam Burke – Janney

Good morning Laura, good morning Sue.

Sue Knight

Hi, Liam.

Laura Hamilton

Good morning, Liam.

Liam Burke – Janney

Laura, you mentioned in the course of your discussion the opportunity pipeline is up 10%. Could you give us a little detail about which segment and what types of business opportunities are out there or is it just generally across the board?

Laura Hamilton

Okay, and so when we talk about the opportunity pipeline, it’s specific to Test. While Sensors continues to always be working their application model, we don’t refer to that as pipeline and the pipeline growth. So, in the Test pipeline, I think there are two things. There is more of the general and I’d say it’s more generally up a little, but then there is also the order effect. So the more we see some of these bigger dollar items that also drives an increase in the pipeline. And then I’d say it really goes back to the things that are what have changed and what hasn’t changed. There is no dramatic change in the pipeline as it relates to market, as it relates to geography. So the once who are buying are still buying. The pipeline reflects the strength in China. All of that is pretty consistent and since – on quarter-over-quarter basis.

Liam Burke – Janney

Okay. If I can look at applications and if I generally look at –infrastructure has been stronger, automotive is holding its own, but is that how the opportunity pipeline is unfolding.

Laura Hamilton

Yes, I’d say generally that, yes, that – so ground vehicles we’d say there are opportunities on some of the priority projects that ground vehicles in addition to passenger car includes rail opportunity. In infrastructure I’d say it’s both kind of a base materials as well as some strength in the civil seismic the infrastructure related in China. And then infrastructure also includes wind opportunity. And then aerospace is then – it’s a smaller piece and I’d say it’s been more consistent.

Liam Burke – Janney

Great. Thank you.

Operator

(Operator instructions) We’ll move on now to hear from John Franzreb of Sidoti.

John Franzreb – Sidoti

Good morning, Laura and Sue.

Sue Knight

Hey, John.

Laura Hamilton

Hi, John.

John Franzreb – Sidoti

I guess I want to get – go back to your perspective on orders, Laura, because when I look back at the order trends and I kind of got the – looking back to 2000, it seems to me large order variability has always been a fact of life at the firm. And that from my reckoning that this only eight times that the order book has been above that current – the current 108 threshold during that timeline. So I am kind of surprised that you are not more encouraged at the outlook going forward given that those kind of trends and how they have been unfolding.

Laura Hamilton

John, let’s see back – when I started, so it was a couple of year ago – I only wanted to talk about revenue trends because order trends are hard to talk about because I mean if you look it’s like orders could be up $20 million from one quarter to the next and then they are down and being down in those kind of historically weren’t a problem. They were more in the nature of the big stuff hitting at the end of December versus in February.

John Franzreb – Sidoti

Okay.

Laura Hamilton

So, then I think 2009 kind of threw all that out and right now what we can see is if we are going – if we are looking forward 90 days, we have – the order book we think will close. We’ve got the whole set of orders in backup and then we’ve got the third set of orders behind that and all of that is required these days to hit the number we think we are going to hit. And we don’t usually have to have so much backup to hit the number. And that’s the variability that we are still trying to work through. So, in Q1 I mean we are really pleased with that 108, but we also know that two $10 million orders hitting in the quarter is not repeatable and then to book, if we are going to say this, trend will continue. That means we’ve got to do another 15% which means we’ve got to do another two to three $5 million to $10 million orders, and at this rate we don’t see the trends continuing. It’s – we are really carving [ph] out a strong quarter. We think there could be more strong quarters. But we see a lot of variability.

John Franzreb – Sidoti

I mean my view has always been that a commitment to a large piece of capital equipment would be a positive data point. I know they are lumpy. They always have been lumpy. But I think it’s harder to put capital off your project manager, a lot of capital into a ERP [ph] systems than may be buy something cheaper. So I thought – I always thought that – viewed that as a positive. I might not right in that. Granted one of them is a government project, but still isn’t that – wouldn’t that be a positive kind of indicator?

Laura Hamilton

Yes, it is positive. I think that’s what we were trying to say is two entities in the first quarter committed $10 million. That’s two out of thousands, and so that’s still kind of a small number, and – but it’s good because last year we didn’t have any committing like this. Or eventually I guess by the end of the year we had one.

Sue Knight

We had one.

Laura Hamilton

So, yes we see it as a positive. We see more entities talking to us about committing bigger dollars. But to go get that commitment is taking so much more time and a lot of times the people think they are going to go get approval and then they get there and they find out the Board won't approve this and they send them back or they cut the budget 15% or there is still too many twists that play out. And that’s the lack of certainty.

John Franzreb – Sidoti

Well, I won't stop you from pressing your sales force to continue work hard.

Laura Hamilton

Yes, again, we will continue to play…

John Franzreb – Sidoti

The other question is I think you touched on it before, I’ve read comments from a President – a former President not here, out in North America, and one of the things that he attributed to the current problems that the Company had was actually the lack of prototype testing. He said that the Company is aligned too much on computer simulated testing. I don’t know if you saw that comment. I don’t know how – A) I want to – I am curious how much business do you do with Toyota, if you do any at all, I am not sure? And B) are you getting more increase given the current problems – or do you expect to get any renewed increase because of that given that they have been – the automakers have been so tight on capital spending over the past few years?

Laura Hamilton

Okay. So, yes, we do business with Toyota. They are an important customer. But no customer at MTS is more than 10%. But they are an important customer. I think all of – many, many of our automotive customers are feeling the effects of 2008-2009 cuts in people. One of the things, when we talk about excess capacity, we had one of the U.S. OEMs talk to us about how they are still going through their assets and trying to figure out which ones to decommission. So, they are feeling an incredible amount of pressure and internally and they are feeling an incredible amount of external pressure to have reliable cars that they don’t have recalls, et cetera. So, yes, we hear from them. Yes, they do have pressure. They do know that they have – and some of them have had to do more with less. And so they talk to us in a couple of ways. And this is the – they are the ones we are talking about when we say priority projects are being funded.

John Franzreb – Sidoti

Right.

Laura Hamilton

So – but they are having to sort through the critical and the nice to have, which is the hard thing to do when you are talking about a car. They are also talking to us about how do I do more with what I have. So, it does, that’s why we keep saying as they respond to their challenges, we see opportunity and some of it is to sell equipment, but some of it is for us to go back and to help them improve the utility of the assets they have. So, we are working on both.

John Franzreb – Sidoti

Okay. And one final question. The priority jobs, and I kind of call them rush jobs, if you will, do they tend to carry a higher margin because of the timing effect or not?

Laura Hamilton

So, in Sensors is where we talked about rush orders, just-in-time orders, and in Sensors I’d say we are able to maintain our pricing, which is strong. In Test, when we say priority projects, I would say the pricing is less reflective of – that it is a priority and it’s more a factor of the system – a number of other things. The budget that they are allowed – we’ve got examples where priority projects required X amount of funding and got approved, but it got approved, but they had to do it for 15% less. So even though it was a priority they weren’t exempt from figure out a cheaper way. We need to conserve cash.

John Franzreb – Sidoti

Okay. Okay, thanks a lot Laura and Sue, I appreciate it.

Laura Hamilton

Sure.

Sue Knight

Thanks John

Operator

(Operator instructions) We’ll take the last question in queue from Mike Hamilton of RBC.

Mike Hamilton – RBC

Good morning.

Laura Hamilton

Good morning.

Sue Knight

Good morning, Michael.

Mike Hamilton – RBC

Could you give a little bit of an evaluation on the large project receives as to how to think how much of that is standard and how much of that is pushing the envelope and how you are thinking about magnitude of potential margin risk versus standard, if that’s the case?

Laura Hamilton

Sure. And Mike is your question about the two orders or more of the pipeline and how we see large orders playing out?

Mike Hamilton – RBC

I guess both but to start with the three that we’ve taken in here in the last couple of quarters.

Laura Hamilton

Okay. The three that we’ve taken are not bleeding edge. They all pull from existing capability. So, they are large because the systems are significant, but they are – so one is a rolling road, which – those are the ones we make for the Formula One aerodynamics, but this is an aerospace application. So, it’s different, but it really pulls from some core capability that we’ve demonstrated multiple times.

So I think all of them are really pulling from major core capabilities already demonstrated and so the risk piece is pretty moderate as opposed to some of the high risk stuff when we were breaking in and doing it for the first time.

Mike Hamilton – RBC

Yes, thanks, that’s exactly what I was looking for. Could you give a little bit of evaluation of what you are seeing in China and to the degree you’ve got near-term outlook there what it is?

Laura Hamilton

Sure. China at this – it’s hot. China is I guess if we first start, China is investing in their infrastructure and that’s – whether that’s roads and bridges or high-speed rails or aerospace or energy, wind, it’s all of it. And what’s exciting about China is they are going to put in next generation capability not old last-year’s, last generation capability, whether it’s wind or like high-speed rail. So, they are really pushing to be very capable as they are building this infrastructure. So, that’s exciting. So this is all the support stuff as well as some of the Sensor applications that tie to their infrastructure development.

At the same time, from an automotive industry, China is going to be – first they have their own domestic demand, which is exciting, everybody talks about how critical capturing China’s domestic market is in the automotive industry. But also there are a lot of companies that say we are not just going to supply the Chinese market, we are going to be world competitors. So, all of that comes not only with “I need equipment or I need Sensors that make my machines more capable,” but it comes with – they are looking for the application expertise that we bring, both in Sensors and in Test to say, with Sensors, “Help me bring my plastic molding machine up to the next level competitiveness and help me understand how I use the sensors and controls together to accomplish these results.” And in Test it’s, “Okay I buy the equipment, but you’ve got the people that can actually help me learn how to run the equipment and get the information I need from the equipment so that I can improve my products.

So, China is really exciting and I think for MTS it’s more than just having the right products.

Mike Hamilton – RBC

Could you, and perhaps for Sue, give a picture of year-over-year on SANS and sequential on SANS if it’s still possible to look at it that way.

Sue Knight

Yes, we are really not breaking it out. What SANS is doing – so both SANS – standalone is still within their markets. They are driven – steel is one of their larger markets, which is kind of moderate in China right now. But SANS is also – right now it’s – we are working on how SANS supports our overall China growth strategy. So, it is – it’s less and less about breaking it out and more about integrating it.

Mike Hamilton – RBC

On your – trying to look at revenue to backlog, it sounds to me from your comments earlier like the recent large orders skew that and my conclusion of what you are saying is it’s not a given that coming quarters shows the sequential revenue turn. Is that an accurate assessment?

Laura Hamilton

Let’s see. one of the comments I made, I am not sure if this is the one you are referring to was as we were talking about the outlook, we were saying orders are going to vary – could vary, so that’s one factor. And then I said, and remember the latter we book the orders, the less they turn the revenue. So that was more just our average six-month turn. I don’t think we were saying, and I am looking at Sue, I don’t think we were saying that there is a significant shift in our turn model this year.

Sue Knight

Michael, when your question about the rate of the backlog turn being impacted by the two large orders or…?

Mike Hamilton – RBC

Right because the implication would be if you run what you’ve run in the last couple of quarters, we see a sequential upturn in revenue over here in the March quarter and it just sounded to me of – my takeaway from Laura’s caution was that that is not a given in here.

Sue Knight

Well backlog is up. It is driven by those two large orders and those two large orders will not have an impact in the second quarter. They are just – it slowly gets started on those large orders and the – the first 60, 90 days of work isn’t generally significant on an 18-month project. But I think it’s – given our backlog position and how we see our historical turn rates, I think, I stated we would be through the lag effect in the second quarter. and I would expect that revenue would certainly not be going down as compared to Q1.

Mike Hamilton – RBC

No, that’s good color, thank you. The last one is just in anticipation to the degree you want to peg out your tax rate thinking your near term, is that 32.70 reasonable or–?

Sue Knight

I think at this point in the year we would suggest that the tax rate would be in the low 30% for modeling purposes.

Mike Hamilton – RBC

So probably this is the upper band of the range, what we saw in the first quarter?

Sue Knight

No, we were just under 33%, so I think that’s a good conclusion.

Mike Hamilton – RBC

Thanks for all the insights. Appreciate it.

Sue Knight

You are welcome.

Operator

It would appear there are no further questions from the telephone audience at this time.

Laura Hamilton

Okay, great, thank you, Joseph. Well, again, we are pleased with the start to the year. We believe the economy is still uncertain, but that doesn’t mean that there is not opportunity and we are not going after it aggressively. So there is a range of possibilities, but we think they are all within – they are all on the good side of the ledger. And so thanks for participating in the call and we’ll talk to you next quarter.

Operator

That does conclude today’s conference call. Thank you everyone for your participation.

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