ESCO Technologies Inc (ESE) 2008 Q2 法說會逐字稿

Good day and welcome the ESCO second-quarter conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO and Gary Muenster, Executive Vice President and CFO. Now, to present the forward-looking statements and for introductions, I would like to turn the call over to Ms. Patricia Moore, Director, Investor Relations.

Statements made during this call regarding the timing and amounts of fiscal 2008 and subsequent years' expected results, cash flow and net debt, future developments, including timing and amounts of expected RF AMI sales in connection with the Company's PG&E contracts, the success of AMI pilots, success in international markets 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, including but not limited to the risk factors referenced in the Company's two press releases issued today, which are exhibits 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 measures can be found in the second-quarter results press release issued today and found on the Company's web site at escotechnologies.com, under the links Investor Relations, financial reports and SEC filings.

I'll now turn the call over to Vic.

Thanks, Pat. As I'm sure you all have noticed, we issued two press releases this afternoon -- our earnings release and an update on the orders received on the PG&E contract. I wanted to provide some insight on the decision to issue separate releases.

The order for the 100,000 RF electric modules was not received until late last week. Given that our earnings release was scheduled today, I felt uncomfortable issuing the PG&E release prior to our earnings. But, given the significance of the additional orders, I felt it should be given a prominence commensurate with its importance and not buried in the earnings release. The timing of the orders and the release were awkward this quarter, and I don't expect this to be a regular occurrence.

Now I will turn it over to Gary to review the financials before I provide my perspective on the quarter.

As noted in the release, we reported EPS from continuing operations of $0.23 a share, including $3.5 million or $0.08 a share of amortization expense related to TWACS NG software and purchase accounting-related assets. Excluding these items, EPS from continuing operations generated $0.31 a share.

Prior-year second quarter EPS from continuing operations of $0.34 was favorably impacted by the 18% effective tax rate in 2007, which resulted from the research tax credits recognized in that quarter.

When looking at the second quarter from an operational perspective, I'm very pleased with our year-over-year results, which I've detailed in the release. The primary highlights from operations included the following. Sales increased over 24%, EBIT dollars increased over 19%, EBITDA dollars increase to nearly 32%. We generated $22 million of cash, which was used to pay down debt; and we entered over $164 million in orders, resulting in a book-to-bill of 121%.

Finally, on March 31st we sold the vacant Filtertek property in Puerto Rico, which we exited several years ago. The net cash of $1.3 million was received after quarter end in April. For the comparable six-month periods from continuing operations, I'll touch on a few highlights. Sales increased over 42%, EBITDA orders increased 270%, EBITDA dollars increased 163% and EPS was $0.53, or $0.73 adjusted compared to $0.29 in the prior year.

Our only minor disappointment in the quarter was related to the Test business, where a few large chamber projects slipped to the second half of the fiscal year and while we successfully completed the consolidation into the new building addition in Cedar Park, the cost of the move and certain production inefficiencies cost us a few points of margin within the segment during the quarter.

On a segment basis, the Utility Solutions Group realized the most significant year-over-year growth as sales increased over 50% and EBIT dollars increased nearly 75%. The main sales driver was the addition of Doble, which continues to exceed our expectations on both the top and bottom line.

RF AMI sales increased significantly in the second quarter, driven by additional gas product sales to PG&E. The PLS side of Aclara continues to be the market leader in product deliveries to the COOP and UNI markets, as we delivered $29 million worth of TWACS products to a continually growing customer base.

The Filtration segment again had a very strong quarter, led by the commercial aerospace business at PTI, which had a 12% increase in sales and resulted in an EBIT margin for PTI of nearly 20%. Test segment sales decreased slightly, as I mentioned earlier.

Addressing the balance sheet, I remain very comfortable with our current capital structure, and I am pleased that we continue to reduce our net debt outstanding, which currently stands at less than $220 million, resulting in a 2.7 times leverage ratio. Obviously, this net debt will continue to decrease as we generate cash in the next six months, and we expect to end the year with net debt well below $200 million, equating to a leverage ratio of approximately 1.8 times.

Regarding cash flow during the first six months, net cash provided by operating activities on a continuing ops basis was over $37 million. Entered orders continue to be a bright spot with our book to bill being well over 100% for both the quarter and the year-to-date, bringing our total backlog to $282 million at March 31st. Of particular interest was the receipt of nearly $58 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, year-to-date, we have booked $11 million of the $27 million PREPA contract that we signed in December.

Moving onto our guidance for the balance of '08, GAAP earnings per share from continuing operations remained between $1.80 and $1.90 per share, which, at the midpoint of $1.85, represents a 45% increase over the $1.28 GAAP amount reported in 2007. We continue to expect EPS, adjusted for certain intangible assets and purchase accounting items, to be in the range of $2.22 to $2.32 a share. As noted in the outlook section of the release, approximately $0.42 a share of TWACS NG amortization and purchase accounting-related expenses are included in 2008, along with $0.25 a share of interest expense and $0.10 a share related to stock options.

On a segment basis, the Utility Solutions Group continues leading the EPS growth outlook in 2008. We're projecting over 75% top-line growth and EBIT margins around 19%, as all product offerings are experiencing year-over-year growth. RF AMI sales, driven by additional product deliveries to PG&E, are expected to increase significantly, and Comtrak is expected to deliver $12 million worth of products in 2008. Filtration and Test are both on track to deliver another solid year in '08.

And with that, I'll be happy to address any specific financial questions during the q-and-a. Now I'll turn it back over to Vic.

As you saw in our press release, our second quarter was slightly above our plan, and most important, our outlook for the year remains intact if not slightly more solid. I'm encouraged by our orders to date, and our outlook for additional strong order input in the second half, which further solidifies our '08 outlook and sets us up for significant improvement in the out years. We were encouraged by the follow-on RF electric order we received from PG&E this month and are happy to let you know both the PLC and RF deployed technologies are performing well.

In fact, using our AMI technology, PG&E plans to begin offering integral pricing to selected customers this month.

We've talked a good about the international opportunities for our AMI products. While we don't talk about specific opportunities, I will say that we continue to be encouraged by the level of activity and the favorable progress we're making in this market. We have assembled an efficient and highly effective international team to pursue and execute on these opportunities. Additionally, our COOP and MUNI business remains strong, and in the domestic IOU market activity appears to be picking up.

The two strategic moves we made earlier this year -- the acquisition of Doble and the divestiture of Filtertek -- continue to reward us. Doble is performing as anticipated, and we see excellent growth opportunities for them, particularly on the international front.

Let me give you a few specifics on each of the segments. Our Filtration segment, which is now focused on aerospace and space applications, had a solid quarter and is well-positioned for significant organic growth. We're seeing an increase in orders from domestic airlines for filtration modules as they strive to improve fuel efficiency and are making good progress in our drive to establish ourselves in the international markets.

During the quarter we completed the integration of the recently acquired Wintec, so that its operations are performed at our VACCO facility. Our Test segment completed their facility consolidation during the quarter, where we have combined the operations of our acoustic test business into our segment headquarters in Cedar Park, Texas. Although the move had a slightly negative impact on the performance during the quarter, we expect to see both margin improvement and operational efficiencies going forward.

The international market continues to be the driver in this segment, and while a few of our large chamber projects slipped during the quarter, we anticipate a more active international market in the second half.

We had a very active quarter in our Utility Solutions Group, as both Aclara and Doble Engineering hosted user conferences for their respective customers. I participated in both of those conferences and I'm pleased to report that each was very well attended by an impressive group of utility clients. There were approximately 450 customer representatives at the Aclara conference and over 1000 customers at the Doble conference.

To clarify, these conferences are hosted by the Company, but the sessions are run by our customers to discuss all aspects of the given technologies -- the benefit, the issues, necessary training, suggested enhancements, et cetera. These conferences bring us closer to our customers by offering them an opportunity to influence the functionality of our products. Further, the conferences serve as an outlet for industry experts to share ideas and present white papers and studies on the relevant industry topics. I was encouraged by the enthusiasm of the customers in each of the conferences. Truly good to hear directly from the users that our products are doing a great job for them.

So, as I look at our business today, we have stable Test business with good upside opportunity, a focused and very profitable Filtration business and a Utility Solutions Group which is very well positioned to deliver significant growth in the future.

I would now be glad to answer any questions.

(OPERATOR INSTRUCTIONS). Steve Sanders, Stephens Inc.

First, a question on PG&E. I think 1.7 million units in total, and you gave us the breakdown. What have you delivered, and what do you think has been installed beyond the 300,000 that you mentioned in the release here?

Steve, from sales recognized to date through the quarter end, it was about $713 million -- I'm sorry -- about 713,000 units, sorry, $45 million. So project to date -- that was 2008. Project to date, it's right at 1 million units and about $70 million since the start of the project, which began late in 2006.

In terms of the installations, did you give me that?

It's roughly 400,000 to 425,000. I think PG&E has a number out there of about 430, so 425 is probably a good point.

And then, you indicated that you expect additional orders, I think you said something along the lines of over the next 90 days. How should we think about the mix of orders over the balance of 2008?

I would say that, going forward, the mix -- it really depends, Steve, on how they choose to deploy additional products. But I would hazard a guess and say that it's probably going to be roughly 50-50 gas and electric.

And then all RF?

On the electric side, I would say in the near-term, yes.

Then, as we think about on the electric side the RF versus the Power-Line, the relative performance of your RF versus your Power-Line, and then relative to the expectations for PG&E, would you draw significant distinctions between the two technologies, kind of outline some of the pros and cons, whatever you think would be relevant there?

The whole issue, the whole reason this was reopened, I guess, a year ago -- I guess it was last June -- was this concerned about whether there were going to be things that were going to be required in the future beyond what had been committed to under the original contract. So the functionality that would be present in the RF products certainly will be equal to what we have in the PLC product but with additional bandwidth so that if they do choose to do something in the future beyond what was in the original requirement, there would be more capability to do that.

The other thing is, I think we are in a good spot, in that the infrastructure that will go in place for the gas modules will also support the electric RF module. So it's not a matter of going in and putting in an additional infrastructure to support that product.

In terms of the domestic AMI activity, can you just provide some additional detail on your commentary about -- I think it was picking up, and whether you are seeing an equivalent amount interest in the Power-Line versus the RF or whether things are shifting more toward the RF?

I would say that there still remains interest in both, but certainly I think there's more interest today, and if you just look at a number of opportunities and the way people seem to be leaning, there is more interest in the RF from a strip numbers capability. But there does remain interest in both.

You seem to feel pretty good about some of the international pilots you have going. Have you added any additional pilots, or do you expect to add additional pilots to the back half of the year? I think, last call, you talked about several that were installed and running. Can you just bring us up-to-date on new pilots?

We have started a couple of more since we last talked, and we anticipate at least an additional two more pilots, at least two more pilots in the second half of the year.

Still primarily Central/South America, or are you branching out?

The ones I just spoke of are Central/South America. We certainly have some opportunities we're actively pursuing outside of that area, but those are the nearest-term opportunities that we have.

Gary, just a couple of detailed questions. The test facility consolidation, the step-up at Doble -- did those have an EPS impact in the quarter? And if so, can you give us what that was?

Yes. I would say, on the Test side, the nonrecurring cost, the absolute [caution] you can quantify is about $700,000. The production inefficiency is a bit of a softer number because, on certain days of the week, the facility was not shut down but it was inefficient while we were moving equipment, things like that. So that's a little softer, but I'd probably put that in the neighborhood of $500,000. So between the two, it was roughly $1 million worth of costs that are obviously nonrecurring, all recognized within the second quarter because that's when the move was completed. And we are fully up and running as of about March 1st, so that's all behind us. Overall, it was a great success to move that large of a facility that far into a brand new place. I'd say we gave them an A+, expecting a little downside. It just took a little bit longer than we had anticipated.

Was there any benefit that flowed through during the quarter for Puerto Rico?

No, because we had fully written down the building in the first quarter, when we sold Filtertek. So it was a net zero because we generally had the contract written with the folks in December, and that it was really just a matter of 90 days of them processing through the due diligence and all the other stuff the buyer needed to do. So it was basically sold at the contract value that was recorded as of the end. But as I noted, the cash -- we closed, actually, on 3/31, so there's no P&L impact. But, with it being in Puerto Rico, the money wasn't wired until April 1st. So that cash is not reflected in the numbers. It will be a third-quarter cash event and it's neutral to the P&L.

You are at, I guess, about $0.53 first half, so $1.25 plus in the second half. Can you just help us a little bit directionally with Q3 versus Q4 on that?

Yes. I would say Q4 is a little more heavily weighted. If you look at last year, in the fiscal '07 relationship, the fourth quarter is always our strongest. What you're going to see there is the Filtration side of the business is relatively normalized, the test business is going to be very heavily weighted in the second half with fourth quarter being probably 25% higher than Q3. And what's going to drive the big EPS kick in Q4 is a lot of these PG&E orders that we're booking now will be shipping in the fourth quarter as well as the Comtrak units. If you look year-to-date, it's almost zero. So the $12 million is going to be in the second half of the year. So that's why we have such a high degree of confidence, because we're well on our way. So I would probably put something in Q3 in the upper 40s to mid 50s, somewhere in that range.

Carter Shoop, Deutsche Bank.

I wanted to try to best understand the disconnect between talking about exceeding all the internal targets and getting PG&E electric orders which weren't forecasted into guidance and then not [rated] in the full-year guidance.

Well, the number of the PG&E or the size of the PG&E order, excuse may, it was not that large. As we go into the year, we don't have everything clearly identified. So we had some thought on some things that were going to happen and one part of the business that maybe didn't happen. But then get some of these orders, and so we had -- I won't say softness in parts of the business, but as we went into the year, it wasn't clear where exactly every order was going to come. So the PG&E he orders have covered some of the other areas where we hadn't gotten orders where we'd anticipate getting them as we entered into the year.

That's really not unusual for our business. As we go into the year, we have a forecast, and it's not unusual for there to be a mix change between segments or even within the segment.

One other thing I'd add is, that's part of the reason we keep a $0.10 range on there. I would say two things have changed is the confidence factor is certainly at a more reliable level. Obviously, A, with the passage of time we're sitting here seven months in, and I would say with the new orders, the majority of those will ship in Q3 and Q4. We're basically within the range there at a much more confidence factor level. Then I think, within the range, if you look at what that $0.10 range does, if we were at the lower end of the range or the higher end of the range, I think we're still within that bandwidth. So I would say that you really ought to hang your head on the confidence factor of all of this stuff building in there and the fact that, as I mentioned with Steve, we do have a pretty substantial fourth quarter. From a risk protection perspective, I think this does a very good job of covering us on that side.

That's very helpful, thanks. When we think about the PG&E (technical difficulty) and the impact to revenue, when would we need to see the orders for you guys to recognize the revenue by the end of this fiscal year?

I would say, based on where they're at now, on the RF electric product, the lead time is probably in the neighborhood of six weeks, six to seven weeks.

I'll go along with that. I would say we have the test -- let me answer it this way. I think we have the vast majority of the orders that we need to make the forecast that we have today. We either have the orders or we have very clear insight into when we will get those.

I was under the impression that the electric orders for PG&E were not already factored into guidance.

What we did was, we took out the PLC electric orders. But again, there are some orders that, as we went into the year, that we anticipated getting to other customers that we didn't get. So these RF electric orders, PG&E, has helped to cover that.

So, just to be clear, when we see PG&E orders coming over the next 90 days, that would not be incremental to the current full-year guidance?

That's correct, unless -- if it is, we'll let you know. We would say, we would change our guidance and tell you that that's the case.

I would say incremental from where we are today, Carter, to kind of specifically address what you're saying, you're absolutely correct. We have baked in zero on the electric side for '08. So these two, the 88,000 and then, now, the 100,000 -- obviously, it's the plan to actually monetize that into revenue over the balance of the year. So that roughly, whatever that is, $8 million or so, is now a very high degree of certainty of getting shipped. What it's doing is mitigating some of the other things that may have moved out of the year, whether it was something like a new IOU we might have anticipated a little earlier than expected or maybe a slower delivery schedule at other customers. So there's a lot of moving parts, and that's where I go back to the confidence level here. This $8 million gives us a tremendous amount of protection in the second half of the year.

I think the way to think about it when we think about it is, if you look at, it's [$8 million] an order, that's significant. It's more significant, I think, because of the customers and what the product is. But if you look at our total orders, input for the year, it's not a huge percentage of what's out there. So, again, as Gary said and I said, we're just -- basically, this is covering some of the things where we had anticipated something which we might not have gotten during the year.

In regards to the gas business at PG&E, can you discuss your level of confidence of continuing to remain on that (technical difficulty) for its entirety?

Well, for the entirety, I don't think we can ever say that because that's just not the way the contract is set up. But I will say, they're very happy with the performance of the product. It's going in, it's working as advertised and we have not been given any indication that they have an intention of doing anything any differently than what they're doing today.

Last question on PG&E. Have you started to see the deployments on the electric side help you in regards to marketing other IOU's? Clearly, you're starting to get some serious volume at PG&E on the electric side. Are we starting to see either IOU's warmup to the idea that a combined RF/electric/gas solution from Aclara is a very viable and competitive solution?

Yes. I would certainly say that we've gotten calls specifically as a result of that, gotten into a couple of doors specifically because of that. So obviously, the decision they've made has given the product a lot of credibility, so that has helped us with a number of customers.

Lastly, on the international opportunities, I know you don't want to discuss a lot of details with regards to the utilities, et cetera. Any way to help the investment community in regards to sizing that opportunity on any near-term or mid-term basis?

It is difficult. I would say that we're anticipating -- we're anticipating at least one customer going to a larger scale, probably in late '09 or '10. But we don't have a huge amount baked into the way we're thinking about our business now. So the good news is, we feel like we're going to have good growth over the next several years even without that. But, we think that there's really good opportunity to turn some of those into real sizable opportunities in the second half of next year, and some opportunity to do that before then.

The issue always with the international business -- as you probably know, about 25% of ESCO's overall business is international. So we do have a good bit of experience there. One thing we've learned is it is a bit more unpredictable than what we have in the US. So, rather than getting out ahead of ourselves, we're going to take a more measured approach there. But we're certainly excited about the international opportunities, and they are very sizable. If you look at the way the utility industries are structured, particularly in South America and in Central America, for that matter, they have fewer utilities but they are much larger utilities. So I think the long-term opportunity there is excellent.

John Quealy, Canaccord Adams.

Just doubling back, you may have said this, just some more housekeeping staff. On the debt this quarter, did you pay down $15 million? Was that what it was, or just looking at the balance sheet?

Yes.

What's your outlook for future paydowns or prepayments on that, given the cash flow?

We'll be well below $200 million, somewhere in the neighborhood of $175 million to $180 million of net debt.

Also, did you break out Doble EBIT or EBITDA contribution this quarter on a percentage basis for that business line?

No, we did not. Obviously, for competitive reasons we'd rather not do that, other than to say that it's as expected if not slightly better. So if you look back at what they were running at when we purchased them, we're not seen diminishing margins.

And Vic, I think you said you went out to that conference out here in Boston. In terms of the cross-selling opportunity or at least the introduction of the Doble customer base to the Aclara brands or the ESCO umbrella, is that sort of a staggered rollout, or how are you seeing that introduction take place over the coming periods?

I think it's going to take some time, John, but we had a couple of the Aclara guys at that conference meeting with the reps, with Doble's reps, both domestic and international and we've had a couple of leads already that have come as a result of that. I think it's a matter of everybody getting to each other and the capabilities more. But we're certainly planning to take advantage of that. It's one of those things you can't really force, I don't think, but it is taking place I would say probably even more so on the international side than the domestic.

On AMI, I think there was some commentary on the Texas market, some compression there year on year. I assume that's TXU or Encore. Can you give us an update, what exactly is going on from your perspective down in the Texas market for Aclara opportunity moving forward?

I would say that right now, I think we talked a little bit about it last quarter, it certainly is in the regulators' hands right now, I guess, in that we're not anticipating doing anything down there in the near-term. I think we have to wait until that settles down some. Fortunately, we didn't have a lot baked in there, anyway and some of the other opportunities we've had covered that. We're staying very close to the customer, and again, I think our customers are happy with the product we have deployed there; that's certainly not the issue. It's just that I think customers don't want to put product out there until they very clearly understand what is that the regulators are going to want. So a little bit of a waiting game there, but again, we have opportunities to offset that.

On the Aclara gas and water business, did you comment on opportunities? Obviously, a lot of us are focused on electric stuff. But did you focus on the pipeline of opportunities or potential domestically for the gas and water businesses in terms of RFPs and response and how healthy that market, you think, is?

The gas kind of follows the electric, typically. So there aren't that many stand-alone gas opportunities. Where you really see the stand-alone opportunities are the water, and I would say that seems really solid. I think the fact that other people are trying to get into the fixed network kind of shows that there really is a market there and I think a pretty sizable market. But it's very active now and I think we've had some good recent successes and hope to have, and I think we'll have additional successes throughout the year. So that market remains strong, and I think it's going to get even larger over the next 18 months or so.

A lot of the names in the metering group have had some good appreciation in Q1, and certainly private companies have had a lot of, I'd say, higher visibility this quarter. Can you comment both domestically and offshore, what you're seeing for valuations in this advanced metering/smart grid group, and how that would affect any potential investments or acquisitions you'd consider?

The folks that we've been talking to, I think that certainly they're higher than they were several years ago, but it does seem to have settled down a little bit, I think, with the tightening of the availability of funds and so forth. So I think we have to pay higher multiples, maybe, than we would have paid three or four years ago. I think that, based on what you saw with Doble, for instance, I think we paid a full value there, but we are certainly -- that's turned out to be a very accretive acquisition for us and even more accretive than what we had it was going to be when we acquired it. So I think there are opportunities out there. I think it's a matter of being patient and going for the right things at the right time.

Paul Coster, JP Morgan.

Just a quick question first of all on the Test side of the business. It sounded like there was a little bit of weakness. Was it concentrated in any subset of your customer base? What is it that you are seeing that gives you the confidence in the back end ramp at the moment for Test?

Most of this, Paul, it's not a matter of the orders slipping out; it's a matter of just getting some of the projects delivered. Not that we are holding it up, what's really happening is, a lot of times they won't take our products until the building is ready or until they have some of the other subcontractors have done some things.

So it's just a matter of timing with some of the deployments, if you will. So the order base has been good. I think the pipeline is there, and it's just a matter of delivering some of the projects and having the customers take those. Not to say that we haven't seen any weakness. I would say the one place we've seen some is more on the domestic side, but it appears that the opportunities in the international market are going to offset that.

So you are not seeing the communications industry, particularly handset guys, pulling in some of their investments at all?

We haven't, we haven't, but we keep our eye on it.

So, the book to bill, which was greater than 1, was that the across all businesses? I realize it's highly concentrated on the Utilities, but is it also true of Filtration and Test?

Yes. Filtration orders in the quarter were about $32 million versus sales of $27 million. The Test was a little bit below $100 million; it was a $32.5 million of orders and $33.5 million of sales, so a little bit below 1 to 1. Then Utilities Solutions was almost $100 million of orders and $75 million of sales. So that -- Utilities Solutions was the big driver in the quarter to get it to the percentage that it's at. Then for the year, Test is essentially at 1 to 1. For the year, orders were $65.8 million and sales were $65.6 million, so it's slightly above $100 million.

On the international AMI side, can I just make sure I understand here that -- are those primarily RF contracts? Are there any PLC contracts that we should be aware of in the new contracts?

No. Currently, all of the pilots are PLC.

Okay. Europe is obviously a huge opportunity it seems, there's a number of programs that are being discussed. Are you as optimistic about PLC in Europe as you are with respect to Central and South America?

We have not spent as much time in Europe. I will say, we have a couple of opportunities there, one of which is PLC. Another, I believe, is RF. So certainly, I think what you see more in Europe today is GPRS, so I think they are more comfortable with the RF. But I would say, we have not concentrated as much there as we have in Central and South America.

What percentage of revenue was PG&E? Can you share that with us?

For the quarter, it was between $10 million and $12 million of sales.

Kevin Maczka, BB&T Capital Markets.

Just a question on the top line in general. I guess one of the things I struggled with a little bit this quarter is why the top line didn't grow faster than it did. When I look at your -- on an apples-to-apples basis, you have about $26 million in revenue growth, but $22 million of that came from Doble. So can you just give a little more color? I know there were some hiccups in Test, but give a little bit more color on why the core business, ex-Doble, wasn't growing faster than that?

I'll touch on the pieces, and then I'll let Vic put some commentary on there. Filtration was up about $1.4 million in the second quarter this year versus second quarter last year. The Test business is down about $500,000; and, again, that's the timing of the orders. You are right; Doble was up $20-something million. In the RF business, Aclara was up about $5 million. So it's really, the PLC business was down about $1.8 million or so. Really, that's really driven by the timing of the IOU business because, if you remember last year, we were still running pretty well full -- not full-tilt, but pretty heavy on TXU. In this quarter, TXU is essentially zero, so that was a big driver of the net delta down.

So the co-op business is up substantially at PLS, and the IOU business is down $6 million or $7 million, so -- driven by TXU, as John or somebody earlier mentioned on a little bit of the uncertainty in Texas. So we got pulled down a little bit on TXU, trying again to sort out what the regulatory environment is going to be. So if you add all those numbers up, you should get back to about $26 million, net positive.

Okay, and that TXU, $6 million or $7 million, that will continue to be a drag going forward, I guess, as you don't have that business? Or, will that come back as the regulatory situation works itself out?

Yes, we're not projecting that in the back half of the year. Where you're really going to see the improvement, I mean you're really going to see it across all three segments of the business because the Filtration is certainly stronger in the second half. The Test business is a good bit stronger in the second half. And then as we see deliveries accelerate or some of the deliveries that the PG&E products have been ordered in the first half of the year, they'll be delivered in the second half. So that's where we're really getting the growth in the second half over the first.

Kevin, from a TXU-specific perspective, you're not going to have an unfavorable comp in the second half of the year because their slowdown or wind-down really started in the second half of '07. So the comp of TXU as a stand-alone IOU second half of '07 versus second half of '08 will not be as awkward as it is right now.

Switching gears to the Utility group, incremental margins there looked like they were about 17%, if I did the math right. My question is, I thought Doble was running much higher than that, and I thought some of your, a good portion of your core business was also higher than that. So is there some particular drag that -- why those margins aren't higher than they were?

Well, the amortization is substantially higher in the second quarter because, as we delivered TNG 3.0 in December, we only had a little bit of a hit for the beginning of the amortization on that piece of the tranche of the tiers of TNG. So, for the second quarter, we get a full load of that amortization. That's part of it. Then, the other side of it is, again, within Aclara, as Vic said in his commentary, we are staffing up the international marketplace to pursue these relatively large opportunities. So incrementally, G&A is up in the business development side of that. Some of the new product development costs are a little bit higher because we're going to be launching some things here in the second half, and then the amortization is incrementally higher. So those three things, in the short-term, work against you. When the volumes come back in the second half of the year at the levels that we're anticipating, those, quote, fixed costs, will be absorbed much more sufficiently.

Then a more general question on the competitive landscape. Are you seeing any notable change there? Everyone is trying to develop the best mousetrap, and the technology is evolving quickly. Is there anything notable there that's changed in terms of your competitors' behavior or their product offering?

I can't say that there's anything notable. Folks are still talking about some of the things they are coming out with. Obviously, there's been some trial on some of the products that have taken place. But I would say, over the last quarter, we've not seen anything significantly different than what we've seen in the past. It's a matter of some of the competition's products getting out in the field and seeing if they are going to work as advertised and if they are going to work in volume, which is always the tougher thing to accomplish and also the tougher thing to prove. But, nothing major.

On Doble, if you didn't already mention it, what was the growth rate at Doble in the quarter?

Compared to?

Year over year.

We don't really have the stand-alone numbers from last second quarter. Obviously, we have the pro forma numbers from the due diligence. I would say that relative to that pro forma number, they are up greater than 10%.

(OPERATOR INSTRUCTIONS). Patrick Forkin, Tejas Securities.

Vic, with respect to the increased activity in Central and South America, what are the drivers for the increased activity, the business cases for these projects?

The biggest thing, Pat, is reducing meter reading costs and theft of electricity. If they want to get the electricity that's produced, they want to get it paid for, and I would say the same thing is going to happen on the water side -- not the theft of the water, but more the [lead] detection and those type of things. So it's really getting paid for what's being generated. So I would say that the application of the technology that they are looking for is more like you would see in a co-op market and some of the smaller investor-owned utilities.

You mentioned water. Are you guys involved in any water opportunities down there?

We have a couple of discussions going on. It's not as fully developed as the electric, certainly, but we do have a number of discussions underway there.

So, under those scenarios, it seems, how would that work if you're looking primarily at a Power-Line carrier solution on the electric side? Would some of those opportunities down there be RF-based for water?

Potentially. Well, yes, for the water, I think they certainly would be. Again, I think this may be a good opportunity for a hybrid solution as well. As you know, with some of these utilities, as large as they are, they're going to have a real mix of service territory. So, again, it's pretty early days. While we know that we have a good opportunity with the PLC, certainly we're going to go and see what the opportunity is with the RF because I think that, again, there may be some opportunities to sell both to the same customer.

Then on the PLC side, do you get additional leverage from all the work you've done on TNG down there, or is it just a less robust product that they are looking for?

The reality is, anything that we do down there were will be using TNG, because -- and the primary reason is, we need that for the quantities that you are looking at. We're talking about very large utilities, and so you need horsepower that TNG brings to be able to operate the larger systems.

So, I'm glad you brought up the size thing, because I know you don't want to talk too much about it. But depending on which locales you are looking at down there, it looks like some of the opportunities may be in excess of $5 million or $10 million [end] points. Are you involved in opportunities of that size, the ultimate deployment size?

That would be the ultimate prize with a lot of these. That's the size of the utilities. Now, whether utilities are going to do a full deployment, how long it's going to take them to do a full deployment is a whole different story. But certainly, that's the size of the utilities down there. As I mentioned earlier, that is one difference they are then here, in that they have fewer utilities, but they are larger.

Last question on the international. Would you have to partner up with anybody to accomplish some of those larger projects either in Central America or South America?

I don't think we have to. We do have a couple of partners that we're working with to do it more efficiently because, you know, it is not in the states, and so you need to have people on the ground there. So it's going to be a mixture, I think, of folks that we are putting in place for project implementation as well as, really, some long-established relationships we've had with other companies down there.

(OPERATOR INSTRUCTIONS) Zack Schafran, Waddell & Reed.

Two questions, actually. One, you alluded to PG&E beginning on a selective basis to do some interval pricing. Could you talk a bit about, as a supplier to them, how you see that unfolding and what application that's most conducive towards? And then, two, with respect to the book to bill, approximately what portion of the book to bill or the backlog is comprised of PG&E?

I'll handle the first half while Gary is getting the answers here. What they're really doing is they want to go out to where they have the system deployed already and offer some integral billing to residential customers so that, if -- and, I think, some of the commercial customers as well, so that they can go in and do some time-of-use billing so they can have some variable rates based on what time of day that they are actually utilizing the electricity. So this is basically what a lot of people have been talking about doing for a long time, but these guys are actually putting a program in place. It's a voluntary program that people can sign up to do this.

Zack, relative to the -- and I'm going to roll you forward through today, so we're going to count the orders that we have in the separate press release for the additional 200 plus. So this number is not included in the 281 backlog that's disclosed as of 3/31. So if you jump ahead to the April orders, you are sitting there, as I noted in that release, cumulative orders of about 112. Then we've shipped roughly 70, so you are sitting there with the difference is what will be incrementally in backlog as of May 1st, yet to ship.

So, as you think about the 281, though, what portion of that, perhaps, is PG&E?

Well, obviously, we haven't shipped any of the thing we booked in April, so just kind of backing up off of that, you can back out $11 million off of the $112 million.

About $30 million.

So take that down, you've got about $30 million sitting there as of March 31st, embedded in the $281 million.

As we have no further questions, this concludes today's questions. Now I'd like to turn the call back over to Mr. Vic Richey.

I appreciate the interest in the quarter, and we'll be talking next quarter. Thank you very much.

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