ESCO Technologies Inc (ESE) 2008 Q1 法說會逐字稿

Good day and welcome to the ESCO first quarter conference call. As a reminder today's call is being recorded. With us today are Vic Richey, Chairman and CEO, and Gary Muenster, Senior Vice President and CFO. And now to present the forward-looking statement and for introductions, I would like to turn the call over to Ms. Pat Moore, Director of Investor Relations. Please go ahead, Ms. Moore.

Good afternoon everyone. Statements made during this call regarding the timing and amounts for fiscal 2008 and subsequent years expected results, future developments, including expected RF AMI sales in connection with the Company's PG&E contracts, future orders from PREPA, additional Test segment sales in Asia, 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.

These statements are based on current expectations and assumptions, and actual results 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, but not limited to the risk factors referenced in the Company's press release issued today, which is an exhibit to the Company's Form 8-K also filed today.

We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 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 measure can be found on the above-mentioned Form 8-K and accompanying press release found on the Company's website at ESCOTechnologies.com under the links, Investor Relations, Financial Reports and SEC filings. I will now turn the call over to Vic.

Before I go through my comments, I will turn it over to Gary for a financial discussion.

As noted in release, we reported EPS from continuing operations of $0.30 a share, including intangible asset amortization and purchase accounting related charges of $4.7 million, or $0.11 a share. Excluding these non-cash items, EPS from continuing operations generated $0.41 a share.

The partial sale of Filtertek resulted in a discontinued operations loss of $0.19 a share, primarily driven by the write-down of the old Filtertek Puerto Rico property and the allocation of the sales proceeds to the tax basis of the foreign subs. A discount tax expense will be shielded from cash payments as a result of the net operating loss carryforward.

During the quarter we renamed the Communications segment, the Utility Solutions Group. This was done to more accurately describe the segment's operating activities and to reflect the strategic alignment of the respective AMI businesses, which were recently brought together under the integrated brand-name of Aclara. As I mentioned during the November call, we are anticipating a solid first quarter, including the deferred revenue recognized at PG&E. And I'm pleased to say that we exceeded our original expectations as sales, EBIT and EPS increased significantly over the prior year first quarter.

The Utility Solutions Group realized the most significant year-over-year growth as sales increased 165%, and EBIT dollars increased nearly 600%, resulting in an EBIT margin of 17% for this segment. The PLC and RF related AMI businesses led the way with sales and profit increases well over 100%, supplemented by the Doble acquisition, which added over $9 million in sales during the month of December.

On the fixed network PLC side of Aclara, we continue to be the market leader in product deliveries to the COOP and muni market, as we delivered $22 million worth of TWACS products to a continually growing customer base during the current quarter.

The Filtration segment again had a very strong quarter, led by the commercial aerospace business at PTI, which had an 11% increase in sales, resulting in an EBIT margin of nearly 21%, representing the highest margin in their history. Test segment sales increased over 13%, but margins were slightly lower, resulting in the current quarter's -- resulting from the current quarter's sales mix.

Addressing the balance sheet, I remain very comfortable with our current capital structure and I'm very pleased with our new credit facility and it's relevant pricing. The effective interest rate today on our current borrowings is approximately 4.5%.

Regarding cash flow during the first quarter, net cash provided by operating activities on a continuing ops basis was over $16 million.

Entered orders continued to be a bright spot as we booked over $130 million of new business, bringing our total backlog to $253 million at December 31. Of particular interest is the receipt of $32 million of AMI orders received from PG&E through today. With our expectation of a meaningful increase in that amount over the next 90 days, based on their current product requirement. Additionally, the $130 million recorded during the quarter only includes $2 million of the $27 million PREPA contract that we signed in December, which is expected to be ordered and delivered over the next 2.5 years.

Moving on to our guidance for the balance of '08. After the sale of Filtertek and the addition of Doble, we now expect operational EPS, adjusted for certain intangible assets and purchase accounting items, to be in the range of $2.22 to $2.32 a share, which represents an improvement of $0.19 a share compared to our November estimate of adjusted EPS.

As noted in the Outlook section of the release, approximately $0.42 a share of TNG amortization and purchase accounting related expenses are included in the 2008 numbers, along with $0.25 a share of interest expense and $0.10 a share related to stock options.

I'm very pleased to report that Doble will be accretive $0.17 to $0.20 a share for the ten months of 2008, in spite of the interest cost, intangible asset amortization and other purchase accounting related charges.

GAAP earnings per share from continuing operations are expected to be in the $1.80 to $1.90 a share range.

While it is not our practice to provide quarterly guidance, since we always have several moving parts around the quarter end, consistent with our quarterly profile in '07, the 2008 EPS outlook by quarter is also more heavily weighted towards the second half of the year.

On a segment basis, the Utility Solutions Group is leading the EPS growth outlook in 2008 by projecting over 75% topline growth and EBIT margins over 19%, as all product offerings are anticipating significant year-over-year growth.

RF AMI sales, driven by additional product deliveries to PG&E, are now expected to increase over $30 million or nearly 70%. And Comtrak is expected to deliver over $12 million worth of product in 2008.

Filtration and Test are both continuing to project another solid year in '08, as described in detail throughout the release.

I will be happy to address any specific financial questions during the Q&A, and now I will turn it back over to Vic.

It has obviously been a very active first quarter for us here at ESCO. The acquisition of Doble, the divestiture of Filtertek, and major progress on key initiatives has kept us all busy. I am encouraged by our financial performance in our first quarter. And I believe 2008 is going to be an exciting year for ESCO, as all three of our business segments are well-positioned for meaningful growth in their respective served markets.

On a continuing operations basis, before purchase accounting, we're now planning to grow our sales nearly 40%, and increase our EPS nearly 60% compared to the prior year, excluding Filtertek. The strength of our orders during the first quarter, coupled with solid prospects for the remainder of the year, especially in our Utility Solutions Group, provide us with a high level of confidence in our ability to meet our substantial growth targets for the year. I will now provide you with my perspective of what is happening in each of our segments.

Our Filtration segment is in a much different position today compared to a year ago, due to the divestiture of Filtertek. Last year at this time our sales basis Filtration was the largest of our segments, but lagging in profitability. Today Filtration is the smallest segment of our revenue, but profit margin has more than doubled. With the divestiture of Filtertek we have successfully reduced our risk profile in this segment, have eliminated our exposure to the challenging automotive markets. We are now much more focused on a growing aerospace and space markets that place a premium on innovative, high-quality engineered products.

In the Test segment we continue to see Asian markets as very active for both RF test chambers and measurement equipment. Our business has also remained at the forefront of developing standards, both in the U.S. and abroad. For example, we have been selected to provide the antenna measurement system to the WiMAX Forum Lead Lab, which will be used in certification testing of WiMAX products.

We expect additional orders for similar opportunities in Asia within the next few months. During the first quarter we were pleased to announce the acquisition of Doble, which is a worldwide leader in providing high-end diagnostic test solutions for the electric utility industry. In addition to their state-of-art test products, Doble has a well earned reputation for exemplary customer service that is second to none. Doble's strong management team is already proving to be a valuable addition to our Company. It was great to see them get off to such a strong start with their financial performance in December.

With the addition of Doble, we determined it was prudent to redefine our Communications business in terms of our primary served markets. So as previously mentioned, the former Communications segment will now be known as Utility Solutions Group.

Also in recognition of the significant progress that our advanced meter and infrastructure and software companies have made providing seamless solutions, we have recently launched a branding initiative to emphasize that alignment. As a result, we have changed the names of DCSI, Hexagram and Nexus to Aclara Power-Line Systems, Aclara RF Systems, and Aclara Software Systems -- or Aclara Software, respectively.

The new brand name Aclara was introduced at the recent utility industry trade show, Distributek in mid-January. We received positive response from both customers and industry consultants, who are pleased that they will be able to receive an end to end AMI system solution from a single vendor.

The Utility Solutions Group achieved several important accomplishments during the quarter. With the release of the TWACS NG 3.0, we now have a software package that is cable of handling data from up to 6.5 million meters at a single deployment. The scalability of the software is the key feature, as utility customers can take comfort in the fact that their service territory will not outgrow the capabilities of their database software.

In addition, -- I'm sorry -- in December we delivered a TWACS NG software to PG&E in conjunction with our ongoing AMI deployment. As mentioned in our press release we continue to aggressively pursue the electric portion of PG&E's AMI deployment, with the combination of both powerline and RF-based technologies. While PG&E continues assessing the potential for deploying various technologies for the electric portion of its service territory, we are pleased to confirm that PG&E continues to deploy the Aclara RF solution to address the gas portion of its service territory. Year-to-date we have received orders for approximately 500,000 endpoints for the gas AMI project, worth over $31 million.

While we continued to see both strong orders, as well as significant near-term prospects in our North American utility markets, we are very excited about the promising opportunities of Central and South America, where we have several meaningful pilots under evaluation. In addition, we have seen a heightens interest from customers in other global economies, particularly in Asia, to implement our proven AMI products and solutions.

This overall proven-at-scale concept has been a really positive selling point with our potential customers, both domestically and internationally. In closing, I remain confident that we are continuing to position our Company for the long-term success and creation of shareholder value.

With that, I will be happy to answer any questions.

(OPERATOR INSTRUCTIONS). John Quealy, Canaccord Adams.

I have a couple of questions. First, how much did Doble add to bookings this quarter?

It was an a little over $13 million.

I know in the past, I think you have given us some clarity. PG&E, Gary, if I understood was at $30 million in new orders in the quarter?

No, it was a little less than that. The $32 million counts January up through today. So if you back off about, I think it was about $17 million was booked in January and the first week of February, so take get off of the $32 million and you will get to what they actually booked in the first quarter.

Did you say that is mostly gas at this point, or how are you looking at that?

Really everything that we have entered to date has been gas.

Vic, as you look out for visibility on the gas side, how long does this sort of $32 million through Feb 7 give you for running room? Is this another quarter or to, or what are you looking at there?

Yes, that just gets us to like the middle of the summer. We anticipate additional orders to flesh out the year.

That's fine. Coming back, what is your feeling and you update on the electric side and what PG&E is saying on their SmartMeter program?

As you can imagine, they have not been saying a lot. In fact, even in the filings that they made a couple weeks ago, they just mentioned that they were continuing to evaluate a couple of systems. But they have been very low-key about that. Again, I will say that they are also looking at the Hexagram system and that we have a deployment out there that is being tested currently.

Lastly, Vic, what is your characterization of the AMR/AMI market in North America? Obviously there's a lot of chatter about RFPs and awards. It seems like the awards are spotty. If you could just fill us in on your thoughts for the robustness of the market in this '08 period?

I would say that the activity level has remained at a very high level. The thing that we haven't seen as much of, and there has been some over the last quarter, but as many orders being placed, or as many contracts being consummated, is what we might anticipated six months ago. But certainly the activity is there, so I think it is more of a timing issue than it is any change in the market, if you will.

I am sorry. One last one. On the debt side, we're still looking for the three-year paydown on Doble. And can you comment on what you're looking at future M&A, what you're debt to cap would look like then?

I will take the first part of that. Our cash flow forecast for the foreseeable future still indicates the next 2.5 to 3 years, absent M&A activity, we will have satisfied the debt requirements there.

I would just make a comment on the M&A piece. We are certainly still actively looking for additions to the Company. Given the interest that we had from the banks previously, and we really were oversubscribed at the time that we went out and tried to raise the money. I don't have any concern about getting the money. And I really wouldn't have any concern about taking on additional debt for the right opportunity. Again, I think that is the key, as we have always talked about in the past, is we just want to find the right opportunity. And if we do that, I am confident that we will be able to get the cash to do it, because our debt to equity is still fairly low.

Paul Coster, JP Morgan.

A couple of quick questions. Obviously some people, myself included, are concerned about cyclicality. Can you talk a little bit about the economic outlook and how it relates to each of your segments? And I've got some drill down on the Utility Services Solutions Group.

The overall economic cyclicality, one real advantage we have is the number of end markets that we're in. If you look at our -- if you just kind of look at them one at a time, and the Test business, we are really a global company there. Not really that impacted by some the consumer changes and things like that. We're really selling to industries that are introducing new products. And I don't think that is going to change. That is what people have to do to stay ahead in their game. We have not seen any significant change in those markets. I think we have diversified that business, even within the Test business enough, that it takes some of that cyclicality out, both through the marketplace that we serve and the locations that we serve around the world.

On the Filtration side, we really have focused that business now on aerospace and space. Certainly I think everybody would agree that those markets are fairly robust now. And I would say we're kind of at the front end of probably a pretty long cycle, given the orders at Boeing and Airbus and others we have been receiving. With the elimination of Filtertek that has taken a lot of that overall market cyclicality out, because there we had the automotive, the medical and we had some consumer business. I would say that we have -- making that change has really taken some of the cyclicality out.

If you look at our Utility Solutions Group, again, the two pieces that we have I think provide a level of stability for that business. We have the COOP business, the municipal business, which is pretty solid state. We don't see that as having a big change. Then now with the addition of Doble, again, that is something where maintaining the infrastructure of utility is going to be required and probably enhanced going forward. We don't see that as being a very cyclical part of the business. In fact, that was one of the reasons -- one of the primary reasons we wanted them to join ESCO to provide that level of stability.

The piece where we do have some potential for volatility is with these large AMI projects. But with PG&E rolling out the way they are, we have a pretty good insight into what the growth is going to be at least '08 and '09.

As far as AMI is concerned, '08 is still sort of a transitionary year with pilot projects and some large scale. Is it really going to peak in '09, 2010, is that you're thinking?

Yes. I certainly think the real growth of the business is going to be in '09, '10. Having said that, I think we're showing some pretty significant growth in our piece of the business, in our AMI business in '08. Some of the things that we are doing, both domestically and internationally, will pay dividends I think in the out years.

Finely, on the international side, I know that you have looked to Central America and parts of Europe in the past. How are things developing there?

We feel pretty positive about things actually. I would say that getting some people focused on that, and we very recently hired a couple of more folks outside of the U.S. to help us with that process. I would say that that market is starting -- those markets are starting to mature fairly quickly. I would say that as a result of some of things that are happening in the U.S., as well as some international economies doing better than they had in the past, both of those things are playing a role in some of the decisions that are being made and what I think will be a pretty good role for us.

With the exception of the Puerto Rico contract, not yet in backlog or pipeline?

We do have a couple of deployments outside of the U.S., actual deployments other than PREPA underway. But we do have, I would say a more significant number of pilots underway.

(OPERATOR INSTRUCTIONS). Richard Eastman, Robert Baird.

Just a question, on the entered orders in the Utility Solutions business, how should we be thinking about that? The book to bill was less than 1, and we've got some orders in there for Doble, and we have some PG&E gas, which is good. But what about the balance of that business? The orders don't look that strong in the balance of the business.

One thing I will point out is that on the book to bill keep in mind that the $20 million of [cum cash] from the accounting situation on the TNG revenue, the sales of $80 million obviously reflects it. So obviously it does impact backlog. But if you look at it from a pure product perspective, the actual product deliveries and installations versus the new business, it is $67 million or $68 million of orders into really $59 million of sales, when you ignore the [cum cash] for the actual installations we've gone in the past.

So I guess how we're looking at it is, our first quarter historically has tended to be relatively light, just with it being at the end of the calendar year, some of the utilities put some of these decisions on hold. But I will say looking at the prospect and the profile that we have for the sales weighting going into the back half of the year, I would say going into this period we're in now, second through fourth for the year, we probably have the lowest amount of risk relative to what we're looking at in these businesses.

Hexagram with the acceleration on the gas side, I think Doble with its continuity of its business plan, certainly doesn't give us a whole lot of concern in the second half of the year. And DCSI with these international pilots, individually these are pretty reasonable dollar amounts for pilots. These are not free pilots. So you are doing pilots in the $2 million to $4 million or $5 million range, and you start getting a sizable number of these, that is a meaningful contribution through the balance of the year.

I wouldn't be overly concerned on the order profile based on the first quarter. And that should not give you any concern for the second half of the year. Again, because the visibility is there by productline that we have, and this is probably the highest level of confidence we have had sitting here in February for the second half of the year.

When I look at the COOP and muni business, it appears to have had a very good quarter. Can you just give us a sense of how you expect that piece of the Solutions Group to end up for the year, just in dollars? Are you looking at something in the $95 million range, or how do you --?

What we're looking at is probably something in the $85 million to $95 million range. That is fairly consistent with what we did last year, and that pipeline remains pretty robust.

Is Doble, given the type of business that it is, is it very seasonal?

No, really I would say that the only piece you see is right at the end of the year. Typically they will get a large number of orders because they can take advantage of some of this kind of catch up, or some of this leftover money people have at the end of the year. But I would say that for the most part what you'll see for the rest of this year is fairly steady orders and sales that they take.

So there is not a lot of -- as the consulting business maybe the first quarter of the holiday quarter might be a little softer, but otherwise shipments or sales I guess would be pretty linear?

Right. Right. You have to remember a good bit of their business are these contracts that they will put in place for the year, and so they will flow over the year. And those are just billed on a monthly basis.

Just one last question. The margins on the Test side of the business, again, I know they can fluctuate with mix, but that -- is what occurred there in the quarter?

Yes. We seem to go through this a lot with these guys. If you look at their margins for the year, they're going to be above what they were last year. I think their first quarter always for some reason seems to be light, but it is really good timing issue on some of the deliveries that they make. And they can fluctuate a lot. If you take sales on a chamber versus a large number of components, you're going to have a pretty significant fluctuation. They actually did exactly what we expected them to do in the -- what we had internally expected them to do in the first quarter.

Stuart Bush, RBC Capital Markets.

This is Anthony Riley for Stuart Bush. I want to drill down a little bit on Doble. Could you walk us through a scenario, kind of describe for us how does Doble, with their services as part of your Utility Solutions Group umbrella now, how did that potentially increase the odds of you guys winning these AMI, AMR bids that are being bid right now?

I would say that there's not a direct correlation there. That was not really the intent of acquiring Doble. There were a number of things that went into it. Certainly we think there is some benefit of adding another access point within the utilities, to having relationships within the utilities we may not already have, and to have very strong brand recognition that Doble does have within the utilities.

But to say that is something that is going to specifically flip an AMI project our way versus somebody else, quite honestly I think that would be a stretch. If you go back and look at the reasons we acquired Doble, it was really to provide some stability or some -- take some of the variability out of the sales and get recurring sales. We get a company that enhanced our position within the utilities, and also that brought some good margin business to us.

Patrick Forkin, Tejas Securities.

One more question on Doble. I just want to make sure I've got it right. You said there's not much seasonality. And when you guys what that, I think there was a runrate on revenues trailing 12 months of about $80 million. If you take a look -- I think Gary you said they did $9 million in December. That would equate to a runrate significantly above that $80 million. What are your -- or they doing better than expected, and what are your expectations going forward here?

But, again, as I said a while ago when I answered the question, the end of the year is the place where they have a higher level of sales than they have throughout the year. So our expectation is still to do something in $80 million to $90 million range. And so you can't take December because it is always their highest month.

I will say relative to the historical runrate, and certainly how we valued the company, they're going to do -- they historically have been growing in the 6 to 8% range. So I think if you take Vic's numbers annualized, obviously we're only going to own them for ten months this fiscal year. But I would say the short answer is they're going to be up 6 to 10% over their historical runrate, obviously for a stub period. I would say their EBIT margins will be the same, if not better, in the foreseeable future, at least for the 10 month period we have them.

When I made by comments of their accretion of the 17 to 19%, you can kind of back into what their margins are relative to our interest rate at 4.5%. I laid out what the amortization is. So it could be that they are yielding an EBIT margin at or above their trailing 12 month, which is very, very impressive.

Good. And then a couple of questions on PG&E. I don't know if you guys have talked about this before, but how many end points are you piloting or testing the RF electric product out there?

I think there is about 2500.

Are you guys piloting that same product at other utilities?

We're actually deploying that same product. Well, actually we're deploying a earlier generation of that product in Indiana.

What is the ballpark on the number of end points there?

About 40,000.

Then if you look at this filing that PG&E did a couple of weeks ago, it is still not very certain as to when these guys are going to make a decision. What is your guys understanding of the timing on the electric piece of this?

We have heard a number of different things. The way I'm thinking about it is it is probably going to be sometime this summer before they would make a final decision, I would say. And I don't even know what the final decision would really mean. Before they would make a decision to deploy some other product or to go back to what they started with. But I do think it would be difficult for them to have any, or any significant, number of different product than what they are already buying in '09. Only because -- unless it was our product. I think there is certainly a capability to do that. But if you think about the trial they have in place, they're going to have to prove out, get comfortable with the functionality and performance. Things like that have a -- you know, negotiated contracts and get a manufacturer ramped up. So as we all know, that is not a short-term process.

If you guys were able to keep that electric business, do you think -- is there a chance it would still be with TWACS or would it definitely be -- if you were to keep it, it would definitely be with the RF electric products?

I think there is a number of scenarios that could take place. If we were to keep it, certainly I think some of it, if not the majority, of all of it go with the RF. However, having said that, I think they're going to have to continue at the less populated areas and see if that is the right solution for any RF solution, or whether they're better served with the PLC solution. That is something I think only time is going to tell. But where they are deploying the system today is not in those areas. As they continue to build out the system I think they will have to look at it on a region by region basis and make a decision. Some of that will be driven by what electric solution they do go with in the more urban environment.

You guys have mentioned a couple of times in the call some of the pilots that you're working on outside of the U.S. Are those TWACS pilots?

They are.

Can you give us any feel for -- not the size of the pilots, but if you were successful, what size deployments you are looking at, a range?

Most of the international utilities are much larger than -- are larger utilities like we see in California. There are significant opportunities out there if we can be successful.

North of 1 million end points?

Certainly, certainly.

Good. Are those competitive pilots?

No.

They're not. Okay. The last question on them. You mentioned Asia or China, I think, but can you give us any feel for what parts of the world we're looking at on some of these pilots?

Again, Central/South America are the places we are most active now. There's a number of where we are in a little earlier stages in Asia, and looking at some opportunities. And there are a couple of others as well. I'm not trying to be evasive here, by the way. We think we're in a pretty good position on some of these, and we really don't, for competitive purposes, don't want to shed a lot of light on it.

(OPERATOR INSTRUCTIONS). Steve Sanders, Stephens Inc.

Gary, I just wanted to see if you could walk us through the seasonality again. We have obviously got the COOP muni business ramping over the course of the year, PREPA. Test mix gets better. But can you go through that in a little bit more detail?

If you look at it on a segment basis and take in the individual pieces, PTI at the commercial aerospace side is relatively constant. Obviously is growing, but I wouldn't say there is seasonality at VACCO. They tend to be back half loaded based on the size of some of these projects, like the Virginia Class Submarine and some things like that.

As the next generation of the T-700 valve for the Black Hawk helicopter comes through, there was very little sales of Black Hawks in the first quarter. They ramp up in the second, third and fourth. I don't know that I would necessarily say Filtration has seasonality, as much as it just has just the timing of customer expectations on deliveries. That profile, excluding Filtertek obviously, will look just like it did last year with the slope going from first to fourth quarter, and a meaningful ramp up there.

On the Test side, as Vic said, there is a few of these large chambers. And where we have migrated to, especially with our Asian contribution, we sell a lot more chambers that have an individual value of $1 million to $2 million. I don't know that I would call it seasonality as much as I would just say the quantity of the chamber business that we're putting through here, whether it is this new WiMAX project, or this big automotive chamber we're doing in India, based on the milestones on that construction you tend to get, the milestones payments and the milestones revenue recognition items are happening in the middle of the year.

Again, I think what you're going to see there first, second, third and fourth is meaningful changes in the second half of the year. Those are things we have in backlog that we're currently building on, so the confidence level is high.

Looking at DCSI, on the -- or the Aclara PLC. I apologize. That one with the COOP business is relatively constant. So really where the upside comes in the back half of the year is where, as Vic described, these pilots. And as I mentioned earlier, these are sizable dollar amounts. You start adding up $1 million, $2 million, $4 million pilots it is pretty meaningful.

I don't know that I would call it seasonality other than expected growth. The same with the RF solutions at Aclara. It is all PG&E related. And so as they have kind of had this thing on pause here for a little while, and as Pat Forkin mentioned, with the requirements they're putting out there, they have a little bit of catch-up time. So I would say that system deployment is accelerating very quickly, and opportunistically there's more to come.

The Doble business is relatively flat. If you put a $20 million a quarter and put $1 million of variability around that $19 million to $21 million a quarter, is kind of how that business looks. I don't like the word seasonality because it indicates that there's something outside influencing that is driving it, where it is really -- the back half weighting is really a growth thing that we see. And we expect that growth to continue obviously beyond '08. It is a long answer, but hopefully gets you a lot more clarity into the pieces of the puzzle we have.

It does. That is very helpful. Then for Hexagram outside PG&E, can you just talk a little bit about what they're seeing in the business and maybe specifically about the water side?

That is a primary focus outside of PG&E, although other than some of the things we are doing on the electric side. But the water market remains strong. It is really a combination of the municipals as well as some larger water projects that people are looking at. I would say the water market seems to be accelerating nicely. So we see that as a good ongoing business. While PG&E certainly is driving their second half, it is not the only thing that is assumed in their second half. We have some other good orders that we have already entered and things we're looking for in the future.

Some of the pilots, Central and South America that you mentioned in terms of timing for those utilities to make a decision, how should we be thinking about that?

You know how timing is in utility industry. It is probably going to be, I would say, the last half of the year certainly, and maybe even the fourth quarter. And some of these are going to go forward, some aren't. The timing is very difficult to get your arms around. There are things that we have just been putting in more recently, and will be putting in, so they will require some level of time before they will make a decision.

Could you give us an update on TXU?

I would say we're probably --.

It is not TXU anymore and is not (multiple speakers).

Encore. Yes. I would say the product that we have down there, the system we have done there is working exceptionally well. I would say the customer is very happy with it. The issue that we have now is just kind of some of the regulatory uncertainty, in that the regulators still haven't clearly defined everything that they want. Some of things that they have defined, we are working to satisfy crude. And are very comfortable we will be able to do that. But the issues at Encore are not related to our product or really related to what the regulators are working with the utilities on.

Then last question on Doble, is the majority of their growth coming within North America or outside the U.S. and just talk a little bit about that? Is it expansion with existing customers, adding new customers? Whatever you can (multiple speakers)?

It is a little bit of both. But certainly the longer-term growth at Doble is going to be outside of the U.S. They enjoy a very significant share of the market in the U.S. And have been working ever the past couple of years putting up offices, made a couple of acquisitions outside of the U.S. So if you look at where they are outside of the U.S., they are in Norway, they are in the UK, they are in South Africa, they are in Australia, they are in India and they are in China.

I would say that we're going to reap the fruits of some of the investments that have been made in the past there, because they're just are getting established there -- have gotten established over the last couple of years. We see significant growth for Doble coming there. And we will continue to look for some drop-in acquisitions that could also aid the growth of Doble as well.

Lavon Von Redden, Hockey Capital.

Could you run me through the cash flow assumptions as you look at 2008 as to what kind of cash you expect to generate, D&A, all that good stuff?

I think if you look at the cash flow statement attached to that, for the depreciation and amortization you can basically just multiply that out. Obviously the earnings are going to be the big driver there. But looking at the specific non-cash items that you add back, what you're seeing represented in the first quarter there is generally one-fourth of what we expect for the year.

As the earnings go up, you're not going to see much coming in an awkward fashion through the non-cash items. We are going to also see some meaningful improvements in working capital along the way. We are looking at net cash provided from operating activities at $16 million for the first quarter. That number is going to be substantially greater for the balance of the year.

Looking down at the investing activities, the capitalized software that you see there, it shouldn't be that high going forward, because again in the first quarter that was the finalization of the delivery of TNG, so that is a little higher than normal. You can actually scale that piece of the cash flow statement down.

What do you think that will be for the full year?

For TNG or for cap software total?

Total.

Probably in the neighborhood of $12 million to $13 million. And then the capital expenditures there of $4 million or $5 million, I will point out, and I think I have mentioned in the past that we closed one of the facilities in Austin, Texas for the Test business, consolidated into our headquarters, building down there in Cedar Park for a net savings of about 30,000 or 40,000 square feet. So finishing up that building is about $3 million of that $4.5 million of CapEx you see there.

If you take the balance, exclude that building addition, and take the balance of that, that is kind of our runrate on a quarterly basis. That should get you the pieces of what you're looking for. Kind of when you pull it altogether, we are looking in this $50 million to $70 million cash flow range this year.

The other question I guess I have, and I am trying to think of how to put this in delicate -- I guess one of the things as we look forward and think about the muni and COOP side of the business, and obviously these things are not directly economically as sensitive as I guess people might think. But to the extent that we don't have as much commercial building taking place within regions etc., etc., how do you look at that ultimately impacting the overall growth in the business as you go forward in the Utility Solutions Segment, as you guys call it now?

I think the COOP business is really driven more by existing residences, businesses, things like that, more so than new construction. Certainly we get some benefit from new construction, but where we're making our sales today are we are going into cooperatives and munis that don't currently have a system, and selling them a system. I don't think any slowdown like you are talking about from that perspective would have a significant impact to the COOP business. Really the issue with the COOP business is some number of years out, but still that piece of utility market is more heavily penetrated with AMI or AMR solutions, at least the investor on utilities are.

Richard Eastman, Robert Baird.

Gary, can I just try to reconcile something here for a second? Originally we had guidance of $1.75 to $1.90. And when we -- the preliminary thought with Doble is that it would add let's just say $0.20. And I think you said $0.15 to $0.20, but just to keep the math simple. Now that would put us at what, $1.95 to $2.10. And the commentary now is that we are thinking $2.22 to $2.32, which would be adjusted pro forma, whatever you want to call it. Was Filtertek in your plan at a loss?

No, in November guidance they were at a profit. And obviously with our cash flow projections, not doing the acquisition at the date of the November release, we had a meaningful amount of interest income as well. When you look at had we not sold Filtertek and had we not sold Doble -- or purchased Doble, the previous numbers we had of $1.75 to $1.90 had Filtertek in at roughly $9 million or $10 million of profit. And we had interest income of probably $4 million or $5 million. What you're basically doing is you're swapping off Filtertek plus interest income, obviously converting that to interest expense. Doble is a net positive, but where the real impact of Doble shows is in the adjusted numbers. And that is the primary driver of that $0.19 increase there.

Is anything more profitable in the base business? Again, I understand the add backs. That is just essentially a function of what you paid and the purchase accounting. But is anything more profitable in the base business?

I think the volume increases that we have at Hexagram relative to PG&E is a adder. Then I think just with our generally conservative posture we're making sure that we keep a reasonable amount of risk mitigated along other parts of the business.

Essentially the original $0.20, $0.15 to $0.20 accretion was a conservative estimate?

That would be a fair statement.

Then I was under the impression that Filtertek, we're going to show a gain on that sale.

Yes, we were. Two things happened. One, obviously we were planning to continue to hold the Puerto Rico property for sale, although it was getting a little long in the tooth. I will say that relative to where that was located within the island of Puerto Rico, it was challenging. It is a great building, but it logistically was a challenge to get to. We finally got someone -- an offer for it. And the old saying of first money is best money, we are obviously taking it.

We're going to be able to monetize that property for about $1.5 million of cash. So that required a write-off of $2.5 million to $3 million. And so I don't want to call that a surprise. I think that is a good business decision, obviously, to write that off. So that was $3 million of the book adjustment, if you will. And then on the tax side, -- I don't want to indicate that we were surprised by it, but relative to the way the transaction ultimately was done, and the allocation of purchase price between domestic subsidiaries and foreign subsidiaries, and which portions of tax liabilities we retained, the short answer is the way the purchase price was allocated to the foreign subsidiaries, compared to their basis, created tax gains.

So for bookkeeping purposes there is tax gains that actually have tax expense against them. But for cash purposes they are basically shielded by the NOL. So from a bookkeeping perspective we have a loss, but from a cash perspective it is neutral.

That does conclude today's questions. Now I would like to turn the call back over to Mr. Vic Richey.

I appreciate everybody's interest today. We will be talking to you next quarter. Thank you.

Thank you.

That concludes today's conference. Thank you for attending.