MTS Systems' (MTSC) CEO Jeffrey Graves on Q2 2014 Results - Earnings Call Transcript

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MTS Systems (NASDAQ:MTSC) Q2 2014 Earnings Call May 6, 2014 10:00 AM ET


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

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


John Franzreb - Sidoti & Company, LLC


Good day, and welcome to the MTS Second Quarter 2014 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Sue Knight, Senior Vice President and CFO. Please go ahead.

Susan E. Knight

Thank you, Jessica. Good morning, and welcome to MTS Systems Fiscal 2014 Second Quarter Investor Teleconference. Joining me on the call today is Jeff Graves, President 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, or GAAP. These measures may be used by management to compare the operating performance of the company over time. They should not be considered in isolation or as a substitute for GAAP measures. A reconciliation of any non-GAAP measures to the nearest GAAP measure can be found in the company's earnings release.

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

Jeffrey A. Graves

Thanks, Sue, and good morning, everyone. Thank you for joining us for our second quarter investor call. We appreciate having the opportunity to discuss our financial results for the quarter and to update you on our outlook for fiscal 2014.

Before I discuss the results for the quarter, let me remind you about the nature of our 2 businesses. This may be particularly helpful for those newer to following our company. The larger of our 2 businesses is Test, which provides highly engineered testing systems and services, largely to R&D and product development groups within automotive, aerospace, energy and infrastructure OEMs worldwide. This business is fueled by our customer spending on new products, and these markets are growing in response to strong macroeconomic drivers, which we believe will be sustained for years to come. This market exposure sets us apart from many other companies.

Our second business unit is Sensors, which provides products that are essential for automating heavy industrial equipment and increasing the precision and safety of heavy vehicle systems that utilize hydraulic controls. These sensor markets are directly tied to industrial capacity utilization and heavy equipment demand, which have only recently begun to show signs of life with a slowly improving economy.

Fortunately, in spite of a fairly tepid macroeconomic environment, the growth in what some refer to as smart machines, as a percentage of the overall markets, is growing more rapidly; and therefore, providing accelerated growth opportunities for our Sensors beyond simple GDP-driven market expansion. This is exciting, and we believe sustainable in the years ahead.

With this backdrop, I'll now comment on the quarter. Let me start with my disappointment to this quarter, and these are limited to our Test business. As we told you at the outset of our fiscal year last November, we anticipated a first half of relatively flat revenue and earnings, as orders rebuilt our Test backlog and we continued our key investments to drive future growth.

While this proved directionally correct, our second quarter came in at the low end of our revenue guidance range at $137 million, driven by our Test backlog turning more slowly than forecast and certain customer site acceptances being later than planned, pushing them out of the quarter. The backlog turn rate was driven by a larger amount of custom or what I might more accurately describe as engineered-to-order products in the mix. These types of products, which are a hallmark of our Test business, require a high level of engineering activity at the beginning of the project compared to standard products, which are simply configured for each order.

In a custom or engineered-to-order product, the design is optimized for each customer specific application in their labs around the world, a special skill that MTS has honed for almost 0.5 century.

In the second quarter, our engineering resource capacity with limitation, slowing our progress on backlog conversion. Additionally, materials delivery from our suppliers was slower than planned, which also impacted revenue in the quarter. While I'd love to blame the extreme winter or other external factors for these delays, the reality is that we could have done a better job of resource planning internally and with our key suppliers. These execution details are a central focus for us going forward, particularly given our record backlog, our strengthening orders outlook and anticipated product mix, which I'll describe in a few moments.

From a bottom line standpoint, second quarter EPS was disappointing coming in $0.12 below our guidance range. The major drivers included revenue, timing and product mix, as the Test custom products have a lower margin than our standard products. In addition, operating expenses were higher than planned, driven by selling costs and G&A, in part created by a bad debt reserve, which was an extremely rare event at MTS.

We also had an earlier-than-planned approval of a Chinese tax credit, which will have a positive impact on the tax rate in future quarters, but which had an immediate effect of a write-down in our deferred tax assets for Q2. Sue will elaborate on these points later in the call.

Given our Q2 performance and the anticipated timing of our backlog conversion in Test, we've modified our full year guidance range for fiscal '14. We now expect to realize revenue in the range of $580 million to $590 million and EPS for the full year of $3.35 to $3.50 per share, excluding restructuring charges.

So with the disappointments out of the way, let me move to the good news of the quarter and very good news it is. Total company orders of $163 million were by all measure terrific, up 18%, driven by double-digit growth in both Sensors and Test. It was a record high quarterly orders level for the company. The currency impact was immaterial. There was a broad-based market and geographic demand in both businesses. Approximately half of the growth came from an increase in base orders, which are orders less than $5 million in size. The other half of the growth was from large, meaning over $5 million in value, Test orders. There were 2 large orders in the quarter, totaling $20 million.

Backlog of $304 million was also a record high, increasing 6% year-over-year. While order cancellations are a rare event at MTS, the backlog includes an adjustment for an $11 million ground vehicle testing system cancellation. [Audio Gap] had strong backlog growth this quarter.

Now I'll provide you with some additional color on orders and background by business. Beginning with our Sensors business, as we have said for the last year, we've been investing for growth, particularly in new product developments and an expanded sales force in the emerging markets. Driven off these investments and with a gradually strengthening market environment, Sensors orders were simply fantastic. They had $28.8 million, they set a new record high, as the positive momentum we saw in the prior 2 quarters further accelerated. Orders growth of 20% was fueled by both industrial and mobile hydraulics markets globally. There was no currency impact in the quarter.

Industrial orders for Sensors increased 17%. In the Americas, we saw a continuation of the demand for medical and wood end markets that we saw in the first quarter. The distribution channel was also increasingly strong in this quarter. It serves a wider range of end markets and reflects well on an improving Americas broad industrial markets.

Europe's growth drivers were similar to the first quarter as well, with wind energy, where our technology is proving to be an excellent solution for the positioning of turbine blades, and liquid filling machines being particularly strong. Fluid power orders in Europe were also up over last year, while fluid power and plastics also had strong growth in Asia. We anticipate continuing strength in these industrial markets as the world economy continues to slowly heal.

Even more exciting to us is the pace at which our mobile hydraulics Sensor applications are gaining traction in the market. While mobile hydraulics today is only 20% of the Sensors business, orders growth of 54% in the quarter was great news. This rapid growth is primarily tied to the increased introduction of smart machines by our OEMs, which takes advantage of our embedded Sensor technology, as well as some strengthening in the end-user demand. Orders were driven in part by growth in precision agriculture and road construction applications.

Orders in the Americas increased 47% and in Europe 56%, as leading customers in these regions aggressively move to differentiate their products through embedded sensor technology.

Sensors backlog at the end of the quarter was approximately $19 million, an increase of 27%, driven by order timing in the quarter and an increasing number of large blanket orders. These blanket orders are typically highly correlated with inventory replenishment and positive OEM confidence levels. These results bode well for continued momentum in our Sensor business performance.

Next, I'd like to turn to our Test business. Test delivered orders in the second quarter that at $134 million, I would simply describe as stellar. These bookings equate to a 18% or $21 million increase, with no material currency impact. We were pleased that base orders, which are orders less than $5 million, were up 7% to $115 million, accounting for $8 million of the $21 million increase. It was driven by solid performance in both products and services. Large orders were up $13 million year-over-year from strategic order wins in ground vehicles and structures.

Geographically, the real story was a resurgence of orders in the Americas, which was up 69% over the prior year, while Europe grew 6% and Asia declined 2%, but remained strong from a historical perspective. Asia performance was primarily a reflection of large order timing, with base orders continuing to show consistent year-over-year growth.

Underlying the strong orders performance was an improvement in the deferral rate within our orders pipeline, which declined to 56% in the quarter. This is down from 62% in the prior quarter and is the first time in over 6 quarters that the rate is back in the range of the historical average. This was great news for the quarter, and hopefully -- and a hopeful sign for the future that business confidence is increasing and R&D capital project investments will return to a more normal cadence.

Before commenting on the outlook for our Test business, I'd like to spend a few minutes breaking out our Test services growth from that of our product segment in the quarter. Driven off the investments we have made to expand our service offerings over the last several quarters, our service growth trend is continuing to gain momentum. Orders of $23 million in the quarter were up 14%, reflecting the positive reception we are receiving from our customers to these initiatives. Encouragingly, we are seeing this growth while still being at the early stages of implementing our Echo monitoring technologies, with expanded maintenance contracts as we evolve our services business toward proactive system health maintenance programs. This combination will deliver a higher up-time value proposition for our customers, forming the basis for a unique, longer-term partnership with MTS.

Shifting gears to our Test products. In total, Q2 saw product orders of $111 million, up 19%, as there were strength in all 3 of our product segments: ground vehicles, materials and structures.

In ground vehicles, a $12 million custom project in the Americas and 6% base business growth resulted in 17% orders growth in the quarter. New testing investments are being made by our customers to support the increasing development of more fuel-efficient vehicles and to expand overall lab capacity throughout the world, particularly in Asia, where we are well positioned by our early focus and investments.

These results reinforce our overarching belief that we are well positioned to capitalize on the mega-trends related to the emerging market consumers, scarcity of energy and rising environmental concerns, all of which lead to rising demand for new vehicle types.

The materials market growth in the quarter was very solid at 7%. The demand was driven by oil and gas production research and the continuing trend for lightweight, more fuel-efficient aircraft systems, including both engines and airframes.

We were also pleased to see a 10% increase in orders for our newer Criterion and Acumen products, reflecting success in our R&D activities over the last few years. We expect more new product families to follow in the coming quarters, as we address the exciting growth opportunities we see for advanced materials testing.

While structure is the smallest of our 3 product markets for Test, the most volatile in a quarter-to-quarter basis because of its large custom order composition, in Q2, orders were up 50% to $18 million. The increase was attributable to a $7 million advanced aircraft testing system, a key strategic win for us in this competitive global marketplace.

With this orders performance, Test backlog, representing book to orders that are not yet delivered, ended the quarter at $286 million, record level in our company's history. Backlog increased 5% year-over-year and was net of an $11 million order cancellation. Cancellations again are rare in our business, but we did have a Formula 1 racing customer that had to cancel their order for a custom testing system, which we extracted from backlog in the quarter.

Product backlog was $256 million, up 3% year-over-year, while service backlog was $29 million, up 23% year-over-year. All of the service increase was from extended annual or multiyear service contracts. This demonstrates that our service strategy resonates well with our customers, as we are capturing more of the installed base aftermarket opportunity.

Looking to the future. I'd like to end with a brief comment on our Test pipeline of future opportunities, which we define as a 12-month look ahead on potential orders. It's a very important metric we use internally to gauge the future organic growth opportunities for our Test business.

Compared to 7% growth in the first quarter, our pipeline expanded by 14% in the second quarter to $915 million, a new record for our Test business. The growth in opportunities was primarily driven by base orders, again defined as orders less than $5 million, which we would expect over time to have added benefits in terms of margin performance and excluding the effects of large orders on a quarterly revenue volatility basis.

This accelerated expansion rate for our opportunity pipeline is particularly encouraging, given the sharp decline in customer deferral rates we observed in the quarter, which would act to deplete these future opportunities as they turn into firm purchase orders.

In short, the increase in our orders pipeline represents expanding global opportunities that are largely related to the emerging markets, energy, the environment and demographic mega-trends. Our products and services, combined with the technical expertise and long-term customer relationships that we've developed over the last 0.5 century with some of the strongest OEMs in each of the markets we serve, are well aligned with these mega-trends, which is the underpinning of our belief in increased growth rates and profitability in the future.

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

Susan E. Knight

Thank you, Jeff. My remarks today will summarize our second quarter results based on a year-over-year comparison. As Jeff mentioned, second quarter revenue of $137 million came in near the bottom of our guidance range of $136 million to $141 million and reflective of the estimating challenges associated with the lumpy project-based Test business.

Sensors delivered another quarter of sequential and year-over-year growth, which was in line with our expectations.

Test was within the expected range but at the low end, as customer acceptance timing and material receipt timing resulted in revenue recognition delays. The good news is that this work remains in backlog for revenue recognition in the second half of the year.

Year-over-year, revenue was flat and the currency impact was immaterial.

Summarizing the revenue results by segment. Sensors revenue of $26 million was up 15%, an impressive increase, which was fueled by the 20% orders growth in the quarter. Regionally, all geographies posted gains, led by 29% growth in the Americas. Europe and Asia were up 11% and 7%, respectively.

Test revenue of $111 million was down $3 million compared to the prior year on $4 million lower opening backlog and comparatively unfavorable product mix from slower backlog conversion of custom projects which we've talked about in the last 2 quarters.

Now with context for understanding the second quarter profitability, I'd like to provide you with a summary of the Test restructuring charge that was expected in the quarter. As you may recall from our first quarter conference call, we expected to have a $1 million to $2 million charge associated with the IT-related capital automation projects. The actual restructuring costs were $600,000, of which $400,000 was included in cost of sales and $200,000 was included in selling cost. Combined with the $4.2 million of restructuring costs in the first quarter, the total cost to date is $4.8 million. We also anticipate that there will be up to $1 million of restructuring charges in Q3 for a total cost within our original range of $4 million to $6 million. These headcount changes will generate approximately $7 million of annual savings that will be reinvested in the business for growth.

Next, I'd like to spend a few minutes discussing gross margin. Our results were driven primarily by volume growth in Sensors. Including the $400,000 restructuring charge, gross profit of $56 million increased 3% on flat revenue. This was driven by a 1 point higher gross margin rate, which was a positive year-over-year result.

In Sensors, gross margin increased 13% on 15% revenue growth. The gross margin rate of approximately 54% was strong but down 1 point year-over-year due to product mix, driven -- based on an increase in sales and certain industrial and mobile hydraulic markets, which generally have lower margin rates.

The Test gross margin was flat, a solid outcome considering a 3% revenue decline. The gross margin rate in Test expanded 90 basis points.

My next topic is operating expenses. Expenses increased $5 million from the prior year. R&D growth initiatives accounted for $1.2 million of the increase. Selling costs were up $2.9 million and primarily related to higher orders and G&A was up $800,000. Legal expenses were higher, and a $400,000 bad debt reserve was established, associated with one customer that drove the G&A expense.

As a percentage of revenue, operating expenses were 31%, which is above our normal range of 27% to 29%.

EBIT declined $2.6 million, which includes $600,000 of restructuring costs. Test declined $3.4 million and Sensors increased $900,000. The gross margin increase was more than offset by higher operating expenses.

Moving on to taxes. The quarterly tax rate was 35%, which includes a 2-point impact from the deferred tax asset write-down, associated with the approval of the China manufacturing tax credit in the quarter that Jeff referred to earlier. The tax credit will reduce our China tax rate going forward from 25% to 15%. The remaining 9 percentage point increase is related to the impact of the retroactive R&D tax credit in fiscal 2013 but does not repeat this year. R&D tax credit legislation is pending, so there's no benefit included in the second quarter rate.

Earnings per share was $0.50, which included a $0.03 impact of the restructuring charge. This compares to $0.69 in the prior quarter. Higher operating expenses to support growth and a higher tax rate more than offset the gross margin increase and the benefit of a 3% lower share count.

Finally, I'd like to conclude my remarks with some comments on cash. The cash balance is healthy at $44 million, which is down $10 million from the prior quarter. Operating cash flow from net income was offset by $7 million of other assets and liabilities, associated with the timing of payroll-related and tax payments, as well as $6 million of working capital utilization. The good news on working capital is that advances were up $8 million on new customer contracts and unbilled receivables declined $10 million. The decline in unbilled [indiscernible] the asset into billed receivables, which takes us one step closer to getting cash in the bank.

Additionally, capital expenditures were $6 million, and cash was returned to shareholders through a dividend distribution of $4.6 million and a share repurchase of approximately 173,000 shares for $12.3 million.

Our year-to-date operating cash flow of $24 million is better than the prior year by $40 million [ph]. We are expecting operating cash flow in the second half of the year to exceed $40 million, driven by custom order billing milestones that are achieved, billed and collected. This will result in very strong cash flow performance for the fiscal year.

That concludes my remarks for today. I will turn the call back to Jeff for his final comments. Thank you.

Jeffrey A. Graves

Thanks, Sue. So in short, it was a quarter in which we were awarded handsomely by our customers with record orders, for our continuing investments in R&D, sales and services infrastructure, positioning us well for accelerated growth in revenue and profitability into the future. Fulfilling our long-term growth objectives requires us to focus strongly on operational excellence, as our customers respond aggressively to the mega-trends that are now increasingly impacting the global markets. I'm pleased with the progress we've made to date to position MTS so that we can capitalize on these expanding opportunities, and excited about our future.

Now, Jessica, I'd like to turn the call back to you for our Q&A session.

Question-and-Answer Session


[Operator Instructions] And we'll go first to John Franzreb with Sidoti & Company.

John Franzreb - Sidoti & Company, LLC

I guess, first, around Test here. You said you had some deferrals in the quarter, if I heard Sue properly, that those deferrals are going to be realized in the second half of the fiscal year. If that's the case, why was it necessary to reduce the revenue outlook for the full year?

Jeffrey A. Graves

Well, there's -- so there were 2 effects, John. One was our backlog turn and just looking at the backlog mix, which was the bigger driver of our revenue re-forecasting. In terms of the deferral rates for sites, we had about a dozen key sites that pushed out of the quarter. And obviously, we expect those to hit in Q3, but there is a cascade of events. So we're installing a record amount of equipment now. Our installation resources are stretched thin. So we're modeling some kind of a domino effect on that. So we hit these 12, and there's more that cascades. So it's more of that effect. And I would tell you, John, I think it's more of the backlog mix effect than it really is site installations.

Susan E. Knight

John, just as a point of reference, our Test backlog typically has about 60% custom and then 40% of the faster turn standard products and service. And right now, it's just over 70% custom. And that's the slower moving revenue that is pushing the result into FY '15.

John Franzreb - Sidoti & Company, LLC

Okay. And if that's the case, Sue, the gross margin in Test in the quarter is actually up sequentially versus the first quarter on lower revenue, which normally I would think is a good thing. I can't quite reconcile why the negative mix resulted in a better gross margin. And can you just kind of work me through the mechanics there?

Susan E. Knight

So even within the custom business itself, as we work on particular projects, there's a wide range of gross margin associated with an individual project. For example, if we're working on a seismic system that has a lot of concrete in it, you got to build the pit and the structure for the equipment itself. That's very low-margin work as compared to engineering time, which is our specialty and we can mark it up at a much higher rate. So overall, I think that there is an improvement associated from -- well, there's a change relative to the mix perspective. And I also just want to ask whether you're looking at margin rates before or after the restructuring charge, because that had a drag in the quarters as well, particularly in the first quarter.

John Franzreb - Sidoti & Company, LLC

I was actually just looking at it, I guess, on absolute terms.

Susan E. Knight

Okay. On an as-reported basis, it would skew the results a bit. If you take out the restructuring cost, the gross margin rate for Test is actually down 0.5 point.

John Franzreb - Sidoti & Company, LLC

Okay, I mean -- okay, maybe that's where my math is wrong. I guess, a similar question then is on the services side, because on the gross margin on services, sequentially, we saw -- or at least I saw a significant drop in the gross margin in services from roughly 46% to 40%. That kind of surprised me because I thought that was a high gross margin business. Is there something embedded in the services gross margin that we should be cognizant of?

Susan E. Knight

Not on an ongoing basis other than we're still adding a modest amount of additional headcount, and there is the learning aspect associated with that. But we had a few jobs in the quarter where the margins were low, based on difficult fixes. We didn't get it fixed right the first time and we spent more money to get the work done than what we had anticipated and what is typical of our performance in the service business.

Jeffrey A. Graves

So rule of thumb, John, as we've talked about several times that the -- you can think of our equipment business in total as roughly a 40% kind of gross margin business. Services is generally 50%. There's a couple of point drag due to the hiring and training and all of that, that we're doing over time, which we expect to begin seeing a reduction of in the out years. So that's the rule of thumb. That said, you can always have these quarterly variations that Sue talked to.

John Franzreb - Sidoti & Company, LLC

Okay. And one last question and I'll get back into queue. You seemed to allude to the fact, Jeff, that mobile hydraulic is one of the fastest growing businesses. It sounds like you're adding personnel to increase your reach both geographically and maybe in end user. But if mobile hydraulic is the fastest growing business, should we be thinking about a lower gross margin profile in Sensor going forward? Is there some mix we should be cognizant about not only in end market, but maybe also in geographic going forward that will be a drag on the gross margin in the Sensor business?

Jeffrey A. Graves

No, John, I wouldn't worry about the geography effects, because most of folks we sell to are very much global players, so it's -- there's very little difference geographically. We have said that mobile hydraulics tends to be a lower -- a slightly lower gross margin business as it sits today. But a lot of our prior investments have been in factory automation around assembly of those mobile hydraulic sensors. So we would expect that to be the fastest volume growth, which may be a bit of a drag from a mix standpoint on gross margins. But we have some marvelous factory automation in line to reduce the cost of those sensors over time. And again, once you're designed in and in production, there's very little pricing movement after that. So we expect to see that -- those automation effects improve gross margin in mobile hydraulics looking out over the next couple of years.

Susan E. Knight

As well as the leverage from that volume.


[Operator Instructions] And there are no further questions at this time. Dr. Graves -- I apologize, we will go back to John.

John Franzreb - Sidoti & Company, LLC

Okay. I'll make this real quick. Well, firstly, why -- unless I missed it, why did you drop giving out the 3Q guidance or quarterly guidance for the quarter, Jeff?

Jeffrey A. Graves

John, I would tell you there's a lot of engineering work to be done in the third quarter. Before you hit these payment milestones on these projects that have progress payments, there's a lot of engineering work to be done around the edges of the project, if you will, to -- it's not a complete customization, but it's -- there's a lot of engineering work to make sure the equipment fits specifically in the lab that it's targeted to. And a lot of that heavy lifting gets done in the third quarter. So the exact pace of completion of that work and the receipt of materials for the -- based on the bill of materials and labor contents, just looking at the accounting rules around that, we're trying to do our best guess at how much of that will hit in the third quarter and how much is pushed to the fourth quarter. So I think we're being realistic. We've looked at our whole backlog and said, "How many engineering resources do we have to hit our different payment milestones?" And that's really why it's certainly a second half story. And within the second half, it's a Q4 story more than Q3. But we are working through backlog. So we feel pretty good about the annual guidance. I don't feel as good about giving you exact numbers for Q3 and Q4.

John Franzreb - Sidoti & Company, LLC

Do you expect to resume giving quarterly guidance for Q4?

Jeffrey A. Graves

It's not been our historic practice, John. It's just with the lumpiness of the business, we've been inclined to do it. And this Q2 kind of tells us the pitfalls of that. There's a lot of moving parts. So I -- frankly, for this business, I'm much more comfortable with annual guidance. And we try to give enough color for people to perform their own estimates quarter by quarter. So no, I don't expect as a rule to be going back to quarterly guidance rule. We may occasionally if we've got very concrete reasons to do so.

John Franzreb - Sidoti & Company, LLC

Okay. What expenses did not repeat in the quarter? Can you kind of give me an absolute number on that?

Susan E. Knight

John, it would be about $1.5 million.

John Franzreb - Sidoti & Company, LLC

And what was that associated with again, Sue? I'm sorry.

Susan E. Knight

So we have bad debt reserve that we established. We have higher legal costs in the quarter, and we had some specific selling costs that were trade show related that happened once a year.

John Franzreb - Sidoti & Company, LLC

Okay. And I guess, one last question. You're adding a lot of overhead related to the build-out in the services side and increased customer penetration. Do you have a sense in absolute dollar terms how much you've incrementally added over the last 3 years or so that this process has been going on?

Susan E. Knight

John, that's not something that I have an answer for off the top of my head. So let me get back to you on that.

Jeffrey A. Graves

And John, in terms of -- it's -- I bristled just a little bit -- overhead. I mean, most of this -- most of the hiring we're doing in services right now has been and will continue to be field service engineers. That's guys in the field are actually doing the work. And it's -- largely, that's our sales mechanism and that's our execution mechanism combined. It's a fairly lean operation. In terms of product sales infrastructure, we have been expanding, particularly in the emerging markets, where we're seeing the most exciting growth. So that's the nature of the investments. And to Sue's point, we haven't broken those out in great detail. But that's the nature of the investments.


And there are no questions. I'll turn the call over back over to Dr. Graves for closing remarks.

Jeffrey A. Graves

Thanks, Jessica. So thank you, all, for joining our call today. While the second quarter proved to be more challenging than expected from an operation standpoint, our backlog of orders and our opportunity pipeline are at record highs, and the market outlook is quite positive. These conditions support our second half revenue and EPS forecast range and positions us to achieve record full year orders and revenue.

We look forward to speaking with you again next quarter. Thank you, and have a great day.


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

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