ESCO Technologies Inc (ESE) 2006 Q1 法說會逐字稿

Good day and welcome to the ESCO first-quarter conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO; Chuck Kretschmer, President and COO; and Gary Muenster, Senior Vice President and CFO.

And now, to present the forward-looking statements and for introductions, I would like to turn the call over to Ms. Pat Moore, Director of Investor Relations. Please go ahead.

As both of our releases were issued today, and are available on our website if you do not already have them, or by calling 314-213-7216. Statements made during this call regarding the future levels and timing of revenue contributions from each segment; the results of recent acquisitions; the timing, ultimate value and quantity of products; software and services to be ordered and accepted under the Company's contracts with PG&E; growth in the AMR market and of the Company's AMR businesses; the impact of the federal energy bill; stock option expensing; fiscal 2006 revenues; EBIT, EBIT margin, sales and EPS; corporate operating expenses; the success, timing and cost of product and software development efforts; effective tax rates; the longer-term success, revenues and earnings of the Company and other statements which are not strictly historical are forward-looking statements within the meaning of the Safe Harbor provisions of the federal securities laws. Investors are cautioned that such statements are only predictions, and speak only as of the date of this call.

The Company's actual results in the future may differ materially from those projected in the forward-looking statements, due to risks and uncertainties that exist in the Company's operations and business environment, including but not limited to the risk factors referenced in each of the Company's two press releases issued today, which are exhibits to the Company's Form 8-K, also filed today. The company disclaims any intent or obligation to update these forward-looking statements.

In addition, during this call, the Company may discuss some non-GAAP financial measures in describing the Company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the above-mentioned Form 8-K and accompanying press release on the Company's website, ESCOTechnologies.com, under the links investor relations, financial reports and SEC filings.

I will now turn the call over to Vic Richey.

First of all, I want to let everyone know that we are very happy to have Gary Moore with us here today. Gary is the President of Hexagram, which, as you now know, was acquired by ESCO yesterday. I am very excited about the addition of both Hexagram and Nexus to the ESCO family this quarter. The access to water and gas utilities is something that we have been interested in for quite some time to really round out our product offering. I'm impressed not only with the product and the market position of Hexagram, but also with the management team and the other employees.

Also, Nexus brings another element to the Company. The software products and expertise are key to our further growth in the advanced metering space. And here as well, I'm impressed with the leadership of Nexus by Harvey Michaels. I will talk more about these acquisitions later in the call. But suffice it to say I'm very excited about our new teammates and what we can accomplish together.

With that, I will turn it over to Gary to review our first-quarter results and '06 outlook.

Thanks, Vic. As noted in the release, our first-quarter EPS was $0.08 a share, and was primarily driven by the unusually low level of AMR sales at DCSI, the lower volume of SecurVision deliveries to Bank of America, the lower level of defense spares at VACCO and a significant increase in SG&A year over year.

With that said, we are still able to reconfirm our previous earnings guidance for the first half as well as the full year. Our first-half EPS guidance remains in the range of $0.35 to $0.40 a share, which implies Q2 EPS of $0.27 to $0.32. Our confidence in the second-quarter outlook is bolstered by nearly $46 million in AMR orders booked at DCSI in the first quarter. We currently expect AMR shipments in the second quarter to be approximately $18 million higher than Q1, for a total of 33 to $34 million.

Filtration sales in the second quarter should be reasonably consistent with the first quarter, and Test sales should increase approximately 10% over Q1. Within the earnings release, we noted the guidance does not include the impact of Hexagram. Within the acquisition release, we noted Hexagram's annual sales during the past three years were between 20 and $35 million. The reason we have not included the '06 EPS impact in our guidance at this time is because purchase accounting rules require that we perform an independent valuation of Hexagram's opening balance sheet and determine the amount and value of identifiable intangible assets other than goodwill.

These intangible assets generally include things like firm order, long-term contracts and backlog, license and royalty agreements, patented technology and unpatented technology currently in process. Once these valuations are completed, these identifiable intangible assets will be recorded on the opening balance sheet and amortized over their determined lives. This non-cash amortization expense, which cannot be reasonably estimated at this time, will be a reduction to EBIT.

We expect consolidated EBIT dollars and margins to be up significantly in the second quarter as compared to the first, based on the improved sales profile and the absence of the $1 million charge incurred at DCSI in Q1. As I have noted in previous calls, EBIT within the Communications segment will continue to be impacted by our investment in SG&A at DCSI. The majority of this spending is the result of our outlook for the AMR business and is being spent on marketing, new product development and program management to enhance our pursuit of additional IOU opportunities. As we move through fiscal '06, we expect to maintain this level of investment in this area as we continue to introduce new products, features and software enhancements to our overall AMR product solution.

Our balance sheet remains exceptionally strong, as we ended the first quarter with 70 million in cash and no debt. During the first quarter, we used 5 million of cash to fund operations and 29 million related to the purchase of Nexus. Excluding acquisitions, we currently expect to generate between 20 and $25 million of cash during the year. Yesterday, we spent an additional 65 million for the Hexagram acquisition. Since approximately $40 million of our existing cash balance is at our foreign locations, subject to repatriation and the associated taxes, we anticipate ending the second quarter with approximately 50 million in cash and $40 million in debt, for a net cash position of $10 million.

We have begun our analysis related to the formation of a formal plan for repatriation of our foreign cash and repaying this outstanding debt under the structure of the American Jobs Creation Act of 2004, which was signed into law by the President in October of '04. This act allows domestic corporations to repatriate foreign cash at a significantly reduced effective tax rate than previously charged. I refer you to page 39 of our 2005 annual report for a more detailed description. As the amount of tax expense on this repatriated cash cannot be appropriately determined until our analysis is complete, I have not included the tax impact of this event in our EPS guidance.

Regarding the balance sheet, inventories increased $4 million in the quarter, primarily as a result of additional long leadtime material purchases at VACCO related to the Virginia class program, which has significant delivery scheduled for Q4, and additional finished goods at DCSI to satisfy the significant Q2 sales increase. Other assets increased compared to September 30th, due to the additional capitalized software expenditures related to the development of the TNG software and capitalized intangible assets related to Nexus.

Lastly, and as a reminder, throughout 2006, although we cannot recognize revenue on the PG&E contract, we will be incurring additional indirect costs such as engineering and R&D associated with this contract, as well as other IOUs in the pipeline that will hit the P&L in '06. On a governance front, I'm very proud to say that during the first quarter we successfully completed our initial 404 certification, and we expect continued success with this ongoing project throughout '06.

I will be happy to address any specific financial questions during the question-and-answer, and now I'll turn it back over to Vic.

Thanks, Gary. I believe our first-quarter financial results were thoroughly covered between our press release and Gary's commentary. Clearly, the highlight since our last conference call was the strength of our orders at DCSI, which supports our expectation for substantially better financial performance in the near term. And the acquisitions we completed provide substantial opportunity for continued improvement over the long term.

I intend to spend more time on the acquisitions later in the call, but first I'll take a moment to discuss our '06 outlook, which at this time excludes Hexagram. As Gary commented, our first-half EPS guidance is unchanged. Our expectation for a much stronger second quarter as compared to the first is driven by our outlook at DCSI, where revenues in the second quarter are expected to be more than twice what they were in the first.

For the full year, excluding Hexagram, the top end of our EPS guidance is unchanged. However, our revenue expectations and the low end of our full-year EPS guidance have been raised, primarily as a result of the Nexus acquisition and the additional visibility we have gained during the first quarter.

On a segment-by-segment basis, our outlook is mixed. In Filtration, where our second-quarter outlook is very similar to the first-quarter results, we expect improved performance in the second half versus the first. The main drivers of the second half improvement in Filtration are at Filtertek, where we expect increased revenues, together with the realization of benefits from the number of steps we have initiated over the past six months, including force count reductions, additional work transfers, the lower cost of facilities and some price improvements.

Our team at Filtertek is continuing to explore additional actions which would help to ensure that the current commitments are met. In the balance of the Filtration business, we're seeing some strength in the commercial aerospace side, and we're looking for opportunities to augment our aerospace offering and take further advantage of the infrastructure we have in place.

Our outlook in the Test business is for sequential improvement in both revenue and margins in the second and third quarters. In the fourth quarter, as a result of the timing of large chamber work, we're expecting revenues and earnings closer to the first-quarter levels. In general, we are well-positioned in the Test business. We're working on further expanding our product offering and, I continue to believe, have more opportunity for margin improvements.

In the Communications segment, again excluding Hexagram, we expect a step change in performance in the second quarter, driven by DCSI and sequential improvement in both the third and fourth quarters. The second-half progress includes incremental contributions from Nexus and a contract we expect the interim upgrades to our video security product to provide some market traction in front of our next-generation product, which is scheduled for release later in 2006.

As an introduction to my discussion of our acquisitions, I want to offer some background on my perspective on the AMR market. The electric co-op market is approximately 50% penetrated, but continues to offer significant opportunity for DCSI. In the municipal market, which is similar in size to the co-op market, but perhaps only 20% penetrated, we're seeing acceleration in the adoption of AMR. Frequently, a municipal utility will provide multiple services, most often water and electric. Our largest served market is the investor-owned space, where we continue to see a significant level of activity, which I believe is driven by the fact that the economics of fixed network AMR demonstrated, and that there are opportunities for significant additional benefits to advanced metering applications. The federal energy bill also provides some stimulus in this area.

In the IOU space, many of the largest utilities provide both electric and gas service. I believe that for the most part, IOU customers want a proven, fixed network capability with the ability to satisfy their entire service territory. Further, I believe that on the electric side, the customer wants the capability to satisfy advanced metering requirements and to support the interpretation and presentation of the collected data. Finally, I believe our customers want an offering that can grow over time, providing additional benefits to both the utility and its customers.

Given my view of the market, I think that in addition to more than doubling our served market, we have accomplished a great deal with the acquisition of Nexus Energy and Hexagram. In combination with DCSI, we now have a suite of products and can satisfy the AMR and AMI requirements of any utility, built on technology platforms that can be expanded to support a wide range of additional applications. I believe our collective offering is unique in both its breadth and the degree to which it has proven its scale. With the addition of Nexus and Hexagram, we have acquired the pieces that we belive are central to meeting our stated long-term objectives.

With that, I would be glad to answer any questions.

(OPERATOR INSTRUCTIONS). James Gentile, Sidoti.

Excellent, you know, deal. It looks great. Gary, you gave us some insight into Q2 AMR revenue, 33 to 34 million. That doesn't include Comtrak or Nexus, I suppose?

No, that's just the AMR piece of DCSI.

And how much is Nexus contributing in Q2?

Between 2.5 and 3.

And Comtrak?

Approximately 1 million.

And then, we've gotten some information with regard to Hexagram's Pacific Gas & Electric natural gas deployment, 225 million. Are we expecting a similar revenue recognition pattern than your electric utility revenue recognition in F '07, which means perhaps in the second half?

No. This contract is very similar to ours, but the reason that we have the revenue recognition deferment is because we're introducing a software that's not fully deployed yet, and it will not be introduced until the middle of '07. Hexagram is delivering the same product, obviously with some enhancements. But the core software in the core technology is exactly the same as what's in the field now. And they do not have the same software deferral that we're going to have, so it will be a much more simplistic unit-to-delivery concept program. So once they start delivering product, they will have revenues, profits and cash flow following in a normal pattern.

When is that expected to begin? When is the first module going to be delivered for the natural gas piece?

(Multiple speakers) is currently scheduled for September-October timeframe.

Of 2006?

That's correct.

And could you comment on the operating profitability of Hexagram in total, relative to DCSI?

I think what we need to do is do a little more work and go through the process that Gary talked about, to get that out. I would said that they are currently a bit lower, and that's really driven by volume. I think that when we're running at scale, they should be fairly similar. But today, they don't have the same level of -- the same volume that we have at DCSI.

And I'm lazy; what is the cost of debt associated with the credit facility that you borrowed against?

It will be in the low 5's. I think as of yesterday, it was 5.15.

Thanks. Excellent deal, very exciting.

Richard Eastman, Robert Baird.

Just as a follow-up, on Hexagram, can I just ask -- they've got some ongoing business, I know, around the Boston area on the water side. But what would you project their 12-months revenue to be from this point forward, just to get some feel for it?

I don't think we can really talk a lot about the specifics on Hexagram, only because, as you know, when we put out our announcement on this call, we did not mention the fact that we had acquired Hexagram. And so I think we have to be pretty close to what we have in the release, as far as what we talk about. And so I think that's adding a little more information than what we probably should do on this call. But as we get a little farther down the road, we will certainly provide more information.

If we look at the Pacific Gas & Electric contract that they have in hand, when you look out, say, to '07, would you look at their run rate and assume that their revenue will double?

This is probably a fair assumption. I think the way you just need to look at the contract is you know the size of the contract, you know the duration of the contract, and you saw the kind of curve that we saw at PPL, for instance. And a large deployment like a PG is going to be very similar to that. So I think you just need to kind of go and build a model based on that. But I would say the probably second half of '07 before they get up and running at full rate.

And I just have to say, of course, that's based on our current view of what PG&E is going to do. And it really -- the deployment, until they start deployment, it's hard for us to say. But if you just look at, again, compared to what PPL has done, I think that's what we'd be comfortable with.

But if I look at the cash flows, the projected cash flows on Hexagram, the thing that jumps out at me is the profitability on that business, if it runs similar to yours, is the price paid versus the profitability in that project would be similar. But there is an underlying base of business in the 25 to 30 million range and growing as well, correct?

Yes. Our view is this is a good opportunity for us, even before they won the PG&E contract. We've been pursuing this for quite some time, so we were very interested in the Company before, because it brings a lot of the things that we were looking for. It gives us access to water and gas. It gives us the underlying business that we think is going to grow over time. So we see that as a good, solid business that we were very excited about, in any case. And then, thirdly, the win at PG&E was an adder, for sure.

Any color on this warranty expense on the commercial transponder? Is that a one-timer?

Yes. What happened is we had a commercial meter that we deployed, that we had some issues with. And it started arcing a little bit and overheating. We found that in the field; it had been deployed for some period of time. It was probably deployed for a good 12 months before we had an issue with it. Once we had the issue, we did some testing to understand what the problem was. And it was a problem that was going to be repeated, so we decided to pull those units out of the field, repair those, the ones that were deployed. Some of them had just been delivered and actually not installed yet. So it's one commercial meter, we understand the problem, we fix the problem and it's just a matter of getting it cleaned up.

David Smith, Citigroup.

Just quickly, on DCSI, can you talk about some of the order flow in the quarter that looks like it built in addition to Nexus? It looks like a pretty healthy number. Can you talk about where some of that came from?

The majority of that was co-op orders. As you may remember, in the fourth quarter of last year we had a very soft quarter. And so it's a little bit of timing, to be honest. And even with the co-ops, it can fall from one quarter to the other. But the majority of that for co-op orders, we did have an order from TXU as well, for something under $10 million. The vast majority of the rest of that was co-op orders.

Has TXU added more end points this quarter?

Yes. We are delivering -- they did add about another $9 million that we are deploying.

Is there a number to the end points on that, 100,000 end points? Or is it --

It was about 100,000. Right.

On Hexagram, is there going to be any second-quarter inventory charge that would be associated with that?

I don't believe so. We've spent quite a bit of time in the due diligence process. And as Vic mentioned throughout, the management team up there does a very, very good job of managing the Company and managing the books. And so, in the course of our due diligence, nothing came to our attention that indicates that there's any issues with their balance sheet.

I just need more on the write-up of inventory, is what I'm --

Oh, I'm sorry. Well, the valuation work is going on right now. It looks like, relative to the processes, even though that they were privately held company, they generally conform with GAAP. And so I do not believe -- if there is anything, you are talking $100,000. But I would say you are safe saying zero.

Would it be fair to say, once -- second half of '07 kind of timeframe, that margins at Hexagram would be roughly equal to what you guys see right now?

Well, again, I think that's going to be very dependent on the volume. And so they are not running at the same level that we are running at DCSI. But they are good, solid margins.

By the second half of '07, you expect to be (multiple speakers)?

Oh, second half of -- I apologize. Second half of '07, I think so.

Can you give us a sense of what their customer base is today?

They've got about 75 customers. The vast majority of those are water customers. They have deployed a good-sized system at Wisconsin Public Service, where we have as well. They also recently won a project at Corpus Christi, Texas. So the majority of the products to date have been water. They now have made an entrance into gas as well, and the WPS is a fairly sizable project. And then, of course, the win at Pacific Gas & Electric.

Is there any electric on their books right now?

There's a very, very minor amount.

Patrick Forkin, Tejas Securities.

Congratulations on both Hexagram and Nexus. I was wondering if you could talk a little bit about the approach both you and DCSI and Hexagram were successful at, at PG&E. Having Hexagram in the fold now, how does it change your approach or their approach in some of the other California opportunities, both San Diego and SoCal Edison?

Well, of course, you get me before I've been able to think through everything, Pat. But the reality is, what we have now is I think we have two very well proven systems that have been successful, and at least one place in Wisconsin and we are confident of being successful at PG&E. So I think it just gives us a real leg up as we go forward, in that people have really looked at this and seen that this makes a lot of sense. And so we're going to be able to be successful out there.

And certainly, I think a lot of the utilities, whether it be in California or somewhere else, like being able to go to one vendor. And although these two companies are going to be run separately, they still both have the backing of ESCO. And they are certainly going to work together on some of these larger opportunities. So I would say, from a utility perspective, I would think they would see this as a positive, because now they are going to be working with one larger company, although it's made up of two smaller companies.

I assume that you had to get some kind of approval for assignment of the contract at PG&E. What was their reaction to the deal?

They were aware of it, and they did have to provide a consent to -- contractually, they had to consent to us making the acquisition.

Are there any other contingent regulatory approvals, or is the deal completely finalized?

Oh, the deal was completely finalized.

And then, Vic, last quarter you had talked about getting some traction in the muny market, and I saw the deal that Hexagram did down at Corpus Christi. (Technical difficulty) in your product suite maybe even make the potential for even more traction in the munies, because a lot of the munies have gas, water and electric.

Yes, certainly that's one of the big advantages, I think, because we have been somewhat limited in what we could do. We have made some traction there using our current product. But certainly, we are going to have a much stronger offering as we go forward with these guys now.

And then, with respect to San Diego, they are supposed to be coming out with a short list in March here, there, (technical difficulty). Do you have any comments on that, or can you confirm that both you and Hexagram are at least involved in the process?

Well, obviously, we been involved in the process. As far as talking anything further than that, or what their intentions are, I certainly can't talk to that.

And then on the regulatory side, on PG&E, the Division of Ratepayer Advocates filed their responses and their expert testimony last week. And I was kind of surprised to see that they did recommend to the full commission for approval of this project. Could that speed up the regulatory process, do you think?

I don't know that it will speed it up, except to the extent that there maybe not be as many issues to address as there would have been. It really would depend on whether, had they opposed it, whether they would have opposed it on some of the same grounds that [Turin] is or not. But I think the process is going to go at the process' own pace. And it is moving forward. We were happy that they didn't push back, but we still are not through the final wicket here. And that testimony is due to take place the first couple weeks of March.

Steve Sanders, Stephens, Inc.

Congratulations on the deal. I wanted to see if you could talk a little bit about the economics to the customer for a Hexagram water/gas system versus a drive-by system? Do you see a significant gap there? And if so, what are the opportunities to close that over time?

Well, I would say that it kind of breaks into two pieces. And I'm going to look at Gary while I'm answering, because I think I know what I'm talking about, but I want him to correct me if I don't. I haven't spent as much time, obviously, with this as I have with some of the others.

I think on the water side, we are getting really, really close to being price competitive with the drive-by system. In fact, I would say that maybe three, three-and-a-half years out, it's kind of crossover, and then we get to a position of advantage. I don't think we are there yet with the gas, but we've made some significant progress. And I think that's something that's fairly achievable. So these guys have done a great job of reducing price or reducing costs -- Chuck gave me a look there -- taking costs out of the product and getting into a much more competitive position. So I think that our ability to compete against the drive-by, particularly when you add in some of the benefits that the customers do get for being able to do things like on-demand reads and more frequent reads, I think they are in a great position to compete.

And then on the manufacturing side, do they use an outsource model? Or how will that integrate with what you guys are doing?

Currently they do a bit of both, and that's something we're going to work through in the next couple months.

On the small utility AMR side, obviously a very strong bookings number in the December quarter. I understand some of that was catch-up. I think the last call, you threw out sort of an $80 plus million number being sustainable for the small utility segment on an annual basis. But, based on your muny comments, based on what you did in the December quarter -- I don't want to get too far ahead of you, but that certainly seems conservative.

Well, I think, now that we have added Hexagram to the fold, that's certainly going to help. We spent a little time to understand exactly what we were going to be able to do there. But as I mentioned in my opening comments, the thing that we are fighting against is penetration on the co-op side. So as that's gotten more competitive, or as that gotten more penetrated and more competitive, as I've talked about in the past, that's retarding that growth a little bit. But our hope is, and what we are seeing is that we are going to do a better job on the muny side. So I think we need another quarter or two to really get our arms around that, but that would seem to the case.

And on the large IOU side, you obviously made some positive comments. Just relative to a few months ago, any more or less visibility on something else there in '06?

I don't think anything in addition to what we talked about the last time. The opportunities -- there's still a lot of opportunities that are kicking around and that we are bidding on. And it's really just a matter of some of these guys making that decision. And we have a number of things at one level of activity or the other. But I would say it's pretty consistent with the last time we talked.

(OPERATOR INSTRUCTIONS). John Quealy, Canaccord Adams.

Congratulations. First, probably the broadest question, you have done a lot of due diligence on the AMR space. What was it in particular on Hexagram? Was it the fixed network? There have been a lot of properties out there, both gas and water and electric. What was it that drove you there for that acquisition?

Certainly, and I think of been very consistent with this, that we are really only interested in the fixed network at this time. We think that's the future. We think that's what the customers are wanting more and more. So certainly it's going to be a fixed network.

Also, we just like the design, the technology that they have, with the license approach. You know, they have one level of infrastructure versus some of the others that have multiple levels of infrastructure. So we like that part of it.

It's also been proving in scale, and so there are a lot of smaller companies out there that have done some of these things but have not done them at scale.

That and they've got a good, solid management team, well-respected and have a good reputation in the industry. And so those things together, I think it was just a natural fit for us.

When you look out a couple quarters, once you have got this [company] fully integrated pretty soon, what do you think leads into combined sales on the muny side? Would the electric lead to gas and water or vice versa? Or where do you see the best opportunity near term for the combined company, if you follow my thought there?

Well, I think I follow your thought. Let me try to answer it, and if I'm answering the wrong question, let me know. But our view is whichever municipal -- if it's a water municipal that has a little electric, than the water is going to lead it. And if it's electric, then vice versa. So it's really going to be on a municipal-by-municipal basis. And certainly our view is we're just interested in supporting all the customers, and so we're going to be flexible, depending on what type of municipal is actually leading that.

And I would imagine, if you do a two-for, if you will, the cost profile must at least be very attractive on the drawing board versus mobile. Is that kind of your thought process there?

I would think that would help. You do need to understand, though, that we are -- still there are going to be instances where -- a lot, where we're going to have two bits of infrastructure and we are going to continue to use a power line, near term, for the electric. And obviously, their technology is RF. I think the advantages, particularly in the munies, there's not going to be a lot of infrastructure that's going to have to go in on the RF side. So I think that's a real advantage we have again. Because it's a licensed technology, they are able to get good range, and so you don't have to put a lot of these collectors into the infrastructure to collect the data.

Just final two questions on AMR -- the ramp in the book in Q1, there's some catch-up. Can you talk a little bit about how much of it was a newer product offering versus the legacy, i.e., some of the new [mirror board] functionality, et cetera?

Really, everything that was there was really the legacy product. We had not sold a lot of the enhanced throughput to the co-ops yet, but for the most part they haven't needed that. So it's really -- the majority of that to the co-ops has been the legacy product.

And my last one on AMR -- TXU, and we heard all the broadband over power line news. You've had a couple months or weeks here to sort through it. Can you give us your thoughts on that follow-on opportunity, as we get through calendar year '06 and '07, and what those folks are telling you?

Yes, that will be interesting. As you know, they have got over 3 million customers, and what they have publicly said their commitment was to BPL was 2 million. So it's certainly our hope to fulfill the rest of that requirement. And in fact, as I've mentioned a couple of times now, we continue to receive orders and successfully deploy our system. So our plan is really simple. We plan to fully support the customer, be ready to respond if they want to expand beyond what we are looking at now. So they have made a decision, and we're going to support what we can support. And we'll see where it goes longer-term.

Just to step away from TXU for a minute, though, and talk about BPL, because I think it's important to kind of put it in context. There is a lot of buzz around it but, as we understand it, at least, there's a lot of limitations. It appears that it's necessary that they have a revenue stream beyond just AMR to justify this kind of investment. It has not been proven at scale. I talked about Hexagram being proven at scale; certainly, we are. But they haven't been proven at scale, and that's a big deal. There's a lot of numbers flying around, but we haven't seen any evidence that the number of people that are actually connected to BPL is greater than 5,000 homes. So I would say it's still in a very early stage

And a lot of utilities -- I'm sure you read the same things I do -- have tried the system. And a lot of them now have kind of backed away from it and are scaled back in their deployment. So, having said all that, it is a technology we're going to continue to monitor very closely, because it has the potential to be an issue.

And my last one. Gary, I may have missed this. In terms of the date for the purchase price accounting, when we could get that? And lastly, monetization of any filtration assets -- is that still on the table? Or are you just going to take the offshore cash to fund this?

I think right at the moment, the offshore cash certainly is sufficient, so we'll finish that analysis. And then, the first part of your question on the locking down the valuation on the purchase accounting -- I think we'll have that wrapped up within 30 days. And what we're talking about internally here is that as that valuation plays out and we see the actual value of the identifiable intangibles, if it is going to change our guidance materially, certainly if it's adverse, we will come out mid-quarter with an update so you can see the specifics of that. And at that point, we'll be in a lot better position to talk a little more tangibly on ranges. If not, if you don't hear anything in the meantime, what that means is you don't have to expect anything adverse. And in the normal cycle of our updating of guidance and May is when we will pick back up and give you a very comprehensive analysis of how that went. So if anything changes between now and May, you guys will be the first to know.

Again, congratulations, guys.

Chris Kotowicz, A.G. Edwards.

Congratulations. I wanted to follow up on, obviously, AMR. Can you comment at all on the order pace with the co-op group in January? Was that kind of the same, better, worse than it had been in the December quarter?

I can talk about -- until we publicly say something about the quarter, we just really don't talk about a month-to-month basis. So I really can't comment to that.

Maybe so I'm clear, the discussion about TXU earlier -- can you guys maybe just say what your total value is to date and your end points, so we're all on the same page?

Right now it's approximately 365,000 end points and roughly 28 million of value.

I just wanted to be sure there wasn't any incremental, based on the comments. Should we assume that the acquisition pipeline is shut over the next quarter or two, while you're straightening out the cash position? I couldn't tell by the press release if you are still looking at some things.

Well, certainly. We want to do a good job of getting these guys on board and getting them used to the ESCO way and so forth. So I don't think we'll be charging off and doing anything near-term in that regard.

And maybe in a different segment, you mentioned that Test in Asia was pretty good. Any additional comments there?

Yes. There's so much going on now, and we use those Test products in the new product development phase. So many people are moving their production to Asia -- I'm sorry, they are moving their development to Asia, particularly China. But also in this last quarter, we have seen a good pickup in Korea, Taiwan and India, in fact. So there's just a lot of activity over there, as more and more people are doing new product development over there.

So that has been good for us. We have opened a few small sales offices around China to take advantage of that. These are pretty low-cost things to do, but really getting it out closer to the customers. And I think that has helped us, as well.

Patrick Forkin, Tejas Securities.

Could you give us a quick update on where you're at with the TNG project?

It continues to move forward. You can see the money that we spent on it, but I would say it's going well. It remains on schedule, and I think it's a key part of the future of the company. It really does bring a lot more capability to our system, and I think it's going to be really key in these large deployments and satisfy the future needs of the customer.

So it's on schedule and on budget?

Right.

On the PG&E contract, in some of their recent filings with the CPUC, they referred to possibly some supplemental equipment that DCSI might supply, sounded like customer portal, maybe smart thermostats and remote turnoff. Would those items be in addition to the $300 million number that you guys have talked about with respect to PG&E? And what are the prospects for maybe some of those types of add-ons?

I think, if you read that, and I know you did -- I'm sure you did -- one concern that have is that we are going to license those -- the capability, the IP to other people to be able to provide those as well. Because what they don't want to do is be in a position where they are captive to one vendor. So, having said that, some of those things will require us to license to those folks, or provide some pieces of equipment, or we do have the opportunity to provide some of those directly to PG&E.

So the short answer is yes, they would be in addition. We don't have a clear view of what they all are yet or where exactly we're going to play in the whole supply chain, if you will. I mean, it could be everything from licensing IP to providing hardware. And I think that's a ways away before that gets any clearer.

Have you guys done any development work behind the meter, with respect (technical difficulty) or load control or, I guess, at the meter, the remote turnoff?

We do have a remote disconnect switch. We have deployed that in a number of places. We have developed an in-home display, which has been introduced. I guess those are the two major things behind the meter that we've introduced. (Multiple speakers) -- I'm sorry -- load control we have done, of course, because we have a very large deployment at Florida Power & Light, where we've got about 800,000 homes under direct load control.

And that concludes today's questions, and now I would like to turn the call back over to Mr. Vic Richey.

I'm glad to hear everybody is excited about the acquisition, because we certainly are. We see a lot of great opportunity with both Nexus and with Hexagram, with DCSI. I think we've got a real winning team, and I think the future is real bright as a result. So with that, I appreciate your interest. And we'll talk to you next quarter.

And that does conclude our conference call. We do think you for your participation.