ESCO Technologies Inc (ESE) 2008 Q4 法說會逐字稿

Good day, and welcome to the ESCO fourth quarter and year-end 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. And now, to present the forward-looking statements and for introductions, I'd like to turn the call over to Ms. Pat Moore, Director of Investor Relations. Please go ahead ma'am.

Good afternoon everyone. Statements made during this call regarding the timing and amounts of Fiscal 2009 expected results, sales, cash flow, EPS, future growth prospects, anticipated deliveries to our AMI customers, 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 press release, issued today, which is an exhibit to the Company's Form 8-K, 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 Fiscal 2008 results press release issued today, and found on the Company's website at escotechnologies.com, under the links Investor Relations, Financial Report and SEC filings. I'll now turn the call over to Vic.

Thanks Pat. Regarding 2008, we're happy with what we view as very solid operating results across the Company, not only financially, which Gary will discuss in a moment, but also from the re-positioning of the business earlier in the year. The sale of Filtertek and the acquisitions of Doble and LDIC, clearly transformed our business and put us in a much stronger position going forward.

Our [HAAS]growth, HAAS margin business and the Utility Solutions Group is now well over half of our revenue, and greater than 60% of our profit. Doble And LDIC also bring a significant level of predictability through their recurring revenue model. Additionally, they significantly expanded our footprint in the increasingly important international markets.

With the divestiture of Filtertek, we now have a focused filtration business addressing aerospace and space markets from a position of strength. At the same time, we eliminated our filtration exposure to the challenged automotive market. I'll now turn it over to Gary to discuss the '08 financials, and then I'll wrap up by giving you some insight into '09.

Thanks, Vic. As noted in the release, adjusted EPS from continuing operations was $0.87 a share excluding the $0.11 of non-cash amortization related to the TWACS NG software and purchase accounting related assets. GAAP EPS was $0.76 a share, which represents a 33% increase over the prior year fourth quarter in spite of a more challenging economic environment. Recapping Q4, we are very pleased with our year-over-year results, which are detailed in the release.

I'll briefly touch on just a few of the highlights. Sales increased 40%, with Utility Solutions Group growing 79% and filtration up over 12%. EBIT dollars increased over 82%, with Utility Solutions Group EBIT more than doubling during the quarter. Additionally, we entered nearly $180 million of new orders during the quarter, which represents a 63% increase over the prior year fourth quarter. The Q4 order amount included another $34 million from PG&E business, which brings the total cumulative PG&E order book to 2.7 million units with an aggregate value of $171 million.

For the full year, you'll note that every operating metric for 2008 was up substantially over the prior year in spite of significantly higher interest expense, additional amortization charges, and a higher effective tax rate. My only additional comment here is to highlight the Utility Solutions Group performance compared to prior year, where sales increased 84%, EBIT dollars were up approximately 200% and EBIT margin as a percent of sales increased 700 basis points. On the Balance Sheet, I remain very comfortable with our current capital structure and our available liquidity.

I am pleased that even with the cash that we spent on the LDIC acquisition during the fourth quarter, we continued to reduce our net debt outstanding which was below $200 million at September 30, resulting in a very comfortable 2.2 times leverage ratio. Regarding cash flow, net cash provided by operating activities on a continuing ops basis for the year was over $76 million. And we generated approximately $25 million in cash from operations during the fourth quarter. Firm orders continue to be a huge positive for us during 2008, as we book $633 million in new business, representing a 35% increase in orders compared to 2007. As a result, we begin Fiscal '09 with the backlog of approximately $267 million.

I mentioned the PG&E orders a few moments ago, but as a supplement I want to point out that the order numbers mentioned do not include the recent announcements of nearly $125 million in new business opportunities, such as the wins at Idaho Power, New York City Water and the selection by the City of Toronto, their Water Department,for a system-wide AMI project. All of these wins certainly validate our enthusiasm and our confidence towards our growth prospects in '09. And now I'll turn it back over to Vic to provide additional insight into our '09 plan.

Thanks, Gary. We expect 2009 operational EPS, adjusted for certain tangible assets, to be within a range of $2.42 to $2.57 a share. This equates to GAAP earnings between $2 and $2.15 a share. This includes intangible amortization and the Aclara RF facility [exit] and move cost, which are expected to be around $0.05 a share.

While it's not our practice to provide quarterly guidance, since we always have several moving parts and certain long-term contract deliveries, they can move a month or two around at quarter end, I will tell you that consistent with our 2008 results, while not as severe, our 2009 EPS outlook by quarter is again more heavily weighted toward the second half. With that said, we expect favorable EPS comparison during the first half of '09 as compared to the first half of '08, and based on our current expected range should reflect EPS growth of around 35%.

Also want to remind you that during the first quarter of 2008, we had the cumulative catch-up of deferred revenue and profit related to the delivery of the TWACS NG software to PG&E on the PLS side of Aclara. This resulted in $20 million of revenues and $8 million of EBIT in Q1 that is obviously not being repeated in Fiscal 2009. In spite of that large negative comp, we're still expecting a first half EPS improvement that I noted above. Our '09 EPS range at the midpoint represents an increase of approximately 15% over the $1.80 reported in 2008. And our sales at the midpoint are expected to increase roughly 10% over 2008.

Next I'd like to share some thoughts about how we developed our Fiscal '09 plan and provide a little more color around our growth opportunities as we currently see them. Our filtration business continues to show modest GDP type sales growth heading into '09, and we believe we've taken a prudent and conservative approach here. Our test business, while facing some economic challenges domestically, continues to see reasonable growth opportunities in Asia and other international markets. Based on our current bid and proposal activities, which remain high, Asian customers such as NATRIP and others do not seem to be slowing down their planned spending on new product design and development, which benefits our outlook.

Within utilities solutions, we'll continue to benefit meaningfully from Doble, where we will realize a full 12 months of high margin result in '09, versus the 10 months we owned them in '08. Besides a favorable calendar impact, we continue to see reasonable organic growth at Doble supplemented by the LDIC acquisition. On the AMI side, we fully expect to see meaningful ramp up of gas products in '09 to our West Coast customer, along with the start-up of both the Idaho Power and New York City projects, which are both incremental to Fiscal '08.

Our co-op and Muni outlook continues to be solid, and we fully expect certain of our international AMI market opportunities to begin at some level of system deployment in 2009, which will also be additive when compared to this year. Also want to reiterate the fact that our Aclara fixed network water solution seems to be really taking a dominant market position in the US, which is based on active opportunities where we seem to be taking leadership position. Keep in mind that the watermark is very large and it is in the early stages of its migration toward a fixed network solution. We fully expect to continue to capitalize on the situation with our Aclara RF solution.

In summary, we're very pleased with our financial performance in Fiscal '08. And while continuing to face economic challenges along with everyone else, we see our financial outlook entering '09 as reasonable. I'd now be happy to address any specific questions you have.

Thank you. (OPERATOR INSTRUCTIONS). We'll take our first question from Kevin Maczka with BB&T Capital Markets.

Vic, Gary, how are you?

Hi, Kevin, how are you?

Great. First question on margins. If I did my math right, it looks like incremental EBITDA margins in '08 were north of 40%. But it looks like you're forecasting something less than that if you were to hit your revenue target and this minimum $120 million EBITDA target. So maybe Gary, can you just comment on anything that might negatively impact margins if you were to achieve those revenue goals?

Yes. I would say some of the mix changes we have through the filtration segment, signaling out back on particular, as their mix changes between what we call high margin spares on the defense or military side getting replaced with some of the space product deliveries that we're anticipating in '09 for this, as we mentioned before the crew expiration vehicle. The margin shift there and some of these recurring things in defense and are in some cases eight to 10 points higher. So as the mix changes there, it's going to impact that. Also, within the power line side of the business, the deliveries that we had to PG&E in the first half of the year and the cumulative catch-up obviously carried a lot higher margins than the average. So we're replacing them with new business. It's at the front end, where the margin is a little bit lower, plus it's impacted by additional TNG amortization in '09, because after we delivered 3.0 in Fiscal '08 we're going to have a full impact in '09 for what I call the full run rate of TNG. So those things kind of work against us there. On the Doble side, it's pretty consistent across-the-board. So those are really the only two or three things that I see that could put some pressure on the margins.

Okay, and then Gary, just obviously, so much focused on worst case scenarios and a global downturn lately. Can you just talk about the three segments? And have you noticed any change at all in your customer behavior, maybe in the month of October, where things really seemed to get much worse in the macro environment in general?

Yes, this is Vic. Let me just speak to that quickly. It's pretty early-on with this. I would say that we haven't seen any cancellations of deployments or of products being bought. We haven't seen any returns. We haven't seen anything of that magnitude. I would say to date, we're hearing some things. I would say we're certainly hypersensitive to what's going on these days and what customers are saying. But to date, I would say we haven't seen any significant change in consumers' behavior, but that's something that we're going to have to, like everybody else, monitor on a realtime basis going forward.

I'll add one thing to that Kevin, just focusing on cash flow. We are cash positive for the first six or seven weeks here of the fiscal year, and that's a good sign. Because if some of our customers were experiencing a little bit of a challenging financial situation, they possibly could have extended terms or tried to negotiate discounts or in some cases, if customers were shaky enough that they might have gone in an awkward spot. But we didn't see any of that either, evidenced by the strong cash flow for the roughly first half of the first quarter here. So we're pleased to see that at least holding up in the early stages.

Okay. I think I'll hop back in line. Thanks guys.

Okay.

And our next question comes from Carter Shoop with Deutsche Bank.

Good evening. Just wanted to follow up with that last question. Even though you haven't seen any cancellations or customer delays , does your 2009 guidance suggest that you expect to see

Yes, we did. We went through a pretty rigorous planning process this time. I would say even -- I think we usually do a pretty job of that, so always hesitate to say that we really did a good job this time because that might make people think we didn't in the past. But I would say that we have gone through the numbers a number of times. We did our first financial review back at the end of August. And when things started to turn in October, we had everybody re-submit their plans, and I would say that as a result of some of the activity, the numbers did come down. And then with a couple of the larger organizations, we went through that process again just a couple weeks ago. And then Gary and I, as we typically will do, sat down and put our own view on what we thought was going to happen. And so I would say that the operating units maybe are a little more bullish than even we are at this point, but I think it's prudent.

Having said that, we are showing some pretty significant growth in '09 over '08, and that's why I tried to describe some of the differences in '09 versus '08. I mean this isn't like it's all going to be all organic growth. I mean, we do have some one-off things like LDIC for the year which we didn't have last year, a full year of Doble versus 10 months of Doble, kind of a full run rate of PG&E versus -- they were a little lighter the first half of the year on the gas deliveries, than they were in the second half of the year. So there's some very specific things that we can point to to give us some comfort that we should see some growth. Having said that, nobody knows where the markets are really going to go. But given the information today, I think we're taking a very prudent approach here and probably a little more conservative than we have been in some years in the past.

That's helpful.

And one other thing Carter too, just as Vic said with this multiple iterations of the the re-planning. As we experienced in 2008, we had some timing issues which really were economic-driven in some cases, as well as customer-driven in the test business, where some of these large chambers might have been slow-rolled a little bit on the customer end. So I think we took a reasonably conservative approach in how we not only looked at the new business, but how we looked at the existing business as to how it was going to time phase itself throughout the year . So we kind of baked in a little bit of project slippage, not necessarily moving out of the year. But there might have been for example, projects that tentatively were expected to start December 1. We might have moved those back to March 1 or something like that. So we looked at it on a project-specific basis, but we also looked at it relative to customers possibly delaying the start-up, whether it was for financial reasons or whatever. So I think in the test business in particular, we kind of stared down those numbers a little more aggressively than at any of the other subsidiaries because that's where, in '08, we kind of dealt with the most challenging timing of that stuff. We brought it in strong at the end of the year, but we kind of reassessed our evaluation process for '09. I think we've taken a prudent approach

That's helpful. Gary as a follow-up there, when you look at the AMI projects, be it gas, electric, or water, are you factoring in some slippage also there for the macro environment or do you think that the utility spending environment will remain relatively resilient over the next 12 months?

We did bake a little bit of movement back on some of the larger projects where we do have visibility. Those are the easier ones to manage around because we have daily contact with the customer. I'd say where we took a more conservative approach is when you look at the sum of all of the little guys, the $500,000, $1 million, $2 million, whatever co-ops, Munis, that sort of thing, I think we took a little more aggressive haircut on who would go forward in '09. And then on some of the ones where we are in dialogue where the customer might have been planning something in December or January, we either moved it to the summer or maybe even the Fall. So I think we looked at -- we stratified the customer base into large folks who, again, we have daily contact with. And then we kind of took a top level approach to the sum of the -- I don't know how many it is, let's call it 50 little bitty guys that all add up, and that's where we did a corporate assessment and moved the calendar around on those. And baked in some attrition where they might not go forward. With the Munis in particular, based on the credit markets and that sort of thing, the smaller guys might be facing a little bit more challenging situation relative to where they get their funding from, so I think we looked at all levels of that.

And just to clarify though, you have not seen any push-outs on AMI business yet but you are factoring that in?

Not as of yet, no.

Okay. And then could you provide us an update with regards to your international opportunities that you discussed in the press release and help us understand how much international AMI business is baked into '09 guidance?

Yes. We still have a relatively small number baked into our '09 guidance, it's less than $10 million.

Right around $10 million.

Less than $10 million and part of that is some deployment s we already have underway, So we're not ant,anticipating a big win that we start big deliveries on in '09, but we do think that some of the pilots that we currently have underway will be expanded within the year.

Great. Last question. On PG&E Electric, you had 100,000 unit order in September. Does your '09 guidance suggest or discount any future orders on the electric side?

Yes, we are not anticipating -- we're not counting on any additional orders on the RF side, and certainly we're not counting on any additional PLS orders either. I mean, we don't think that we'll get any additional PLS orders, and we're not baking in any additional RF orders.

That's helpful.

The only thing that actually comes through on the revenue line is, of the 300 or so units that we have for PG&E under order in '08, less than half of those shipped, so we will have some revenue coming in for the run out of what we have in backlog. But we're not, as Vic said, we aren't baking in any additional stuff.

Great. Thank you very much and congratulations on a good quarter.

Thank you.

Our next question will come from Richard Eastman with Robert W. Baird.

Vic, could I just clarify?You had said first half '09 earnings would be up 35% year-over-year? Is that the way you phrased that?

Yes. If you look at the first half of '08 versus the first half of '09.

Right, and what are the odds of having an up first quarter? I mean just given that kind of lump sum recognition on the revenue and profit that makes for a big hurdle. And I'm just trying to gauge, excluding that, presumably up earnings is a lay up, is that fair?

Well, those numbers are in there and again, I don't want to get into the quarter-by-quarter deal for all of the reasons we talked about before because we do have some slippage. But we're feeling good about the first half of the year, and if you think about the fact that so much more of that is in backlog than the second half of the year, that's where we have the confidence that we're going to have that type of improvement.

I understand. And then what were the sales to PG&E in the fourth quarter?

Approximately $43 million.

But that included some electric as well as kind of full run rate of gas.

Okay. And the current backlog, the current modules that you have in backlog for PG&E, does that solidify kind of the shipping schedule out into what, the second quarter? On the gas side of PG E?

Yes, they've been -- what we've been shipping, I'm not sure what the installation rate is per quarter, but we've been shipping in kind of a Q3-Q4 time frame about 500,000 units for the sales side. And so if you look at where they're at now, on total orders in '08, on number of units versus what we've shipped to them, it probably gets us at least into January or February based on where we're at. I don't know that we have enough to go through the whole quarter, but I will say that the way their order profile works in this, it's almost we ship it, we get the next one, we ship it, we get the next one. So when you look at the magnitude of the dollars of orders to the magnitude of the sales, they tend to kind of just continue to roll over so -- But where we're at in that process relative to the number of units cumulatively that we shipped on the gas side, we've shipped a 1.5 million cumulatively since the start of the project on the gas side so -- And relative to the order book they have there, it's roughly two million, so --

Okay. Very good. Thank you.

You bet.

(OPERATOR INSTRUCTIONS). We'll take our next question from Paul Coster with JPMorgan.

Thank you. Good afternoon. Clearly you're seeing some strength still in the test segments and filtration. Can you give us a little bit of color around which industry verticals are holding up for you and how you anticipate that evolving in either of those two segments through the remainder of next year?

Yes, we'll start with the easy one first, I think filtration. And certainly what continues to drive that business, primarily aerospace business. We pulled our horns in a little bit just because of the Boeing strike. I would say that set things back just a little bit, but certainly we think long term that aerospace business is going to remain strong. So we don't have a lot of growth baked in there for that reason, but we do see that as a solid business going forward and a very profitable business. On the test side, you have to look at it in a couple pieces. The MRI business, MR Shielding business remains very strong both domestically and internationally and particularly domestically. If you look at the test and measurement portion of the business, we're seeing a strength really again in Asia, and those end customers really vary. Obviously, we've got the big Boeing Aerospace, big Boeing job that we're finishing. We have the automotive chambers we're building in India, as well as a couple of other large chambers in India and China.

So it's really kind of across-the-board, and I think that's one reason why even though a lot of the specific end markets are getting hit a little bit. we aren't so dedicated to one that a downturn there would have a big impact. And also, a lot of the larger chambers that we're currently doing are really more for -- funded by the government, like the ones in India for the automotive industry. So that's a little more stable than just an electronics company that's looking to put one in for new product development. So it's really kind of across-the-board that the things are kind of -- winning today I would say is our Asian operations. And even Europe has had some level of strengths. If you look at that test business, we're about 60% -- in '08 we did about 60% of that business outside of the US.

Got it, and am I correct in assuming that the pricing is in US dollars?

No. We do local currency for the most part. I mean it really depends on where the end customer is purchasing from, and why I say that is important. There are some customers where we manufacture in Austin, Texas and ship it to China, and there's other ones we manufacture in China and ship within China. And so the currency really is pretty well local currency-driven. So we do have currency risk on the things that cross borders. But when we're within Europe, we produce and manufacture and sell in Euros, and in China it's local currency. But if we're shipping from the States there, then we do have some currency exposure which, obviously with the dollar going the direction it is, puts a little bit of pressure on it. But fortunately it's not a huge number.

To give you an example, in '08 it was roughly $4 million positive, and so if the $4 million at risk. But I think we baked in -- obviously we have to forecast around expectations of where the dollar's strength or weakness is going to be baked in, and I think we've done a fair amount to maintain a reasonable level of conservatism so that we're not going to see a $4 million hole created in our plan because currency went upside down.

All right, thank you. And then you've been gaining share, it seems, in the RF segment of the water market. Why?

[The] product works really, really well. And if you look at New York City, for instance, I mean it did pretty extensive trial with ours and other systems, and I would say the performance that they were able to achieve was exceptionally good. And one area where we really excelled with that specific project, was because we used that license frequency, and being in New York City we were able to get the signals out of the basements, out of the pits and things like that very reliably. whereas some other systems struggled doing that. So I think it's really a matter of performance. I would say that from a pricing perspective, we have been able to maintain our price that we've had historically, so it really is all about performance.

Great. Thank you.

The next question will come from Steve Sanders with Stephens Inc.

Good afternoon guys.

Hey, Steve.

Just a follow-up on PG&E. What are you expecting on the gas side in terms of shipments in '09? I think we've heard a couple of numbers. Last quarter you talked about maybe something in the $80 million to $90 million range for the year. It sounds like it's been running higher than that so --

I would say that's pretty consistent with what our expectations are.

Okay, and then do you feel like the installation is picking up such that you don't expect a significant interruption over the course of 2009?

Yes, I was out there I don't know, a month or so ago, and I forget the exact number that's installed, but it's pretty impressive how many there are getting installed. So we've not seen any indication of that. And certainly, as you know, the overall projects are a little bit behind schedule from what they initially thought, and so they are pulling out all the stops to catch up on those installations.

And Steve, the number around that -- I think we talked about this at the end of June. That was a concern some folks had, that they might have been buying things faster than they could put them in, and they were building up inventory and there was maybe a little concern on your guys' side that they might have to put it on hold to kind of let the inventory bleed off or catch up. And I will say that relative to where that inventory was in number of units at June 30 versus now, it's about 33% lower, meaning they've caught up on their installation profile. So what they're sitting at some level of inventory with number of units is 33% lower than it was at June. So they are going in the right direction.

Okay, and I think New York and Idaho are three-year projects and Toronto is five. How do we think about those in 2009?

Yes, Idaho, we started some deliveries, there. I would say that this year is probably going to be the lightest of the years, and certainly the same thing with New York. We're not looking at starting that project with -- in gusto until the second half of the year. They're starting to put some of the infrastructure in, but it's probably going to be second half of the year before they start significant installations.

And in Idaho, how they are doing it, Steve, is obviously they put the substation equipment in first as the hub and then they build the spokes around it. So they are investing right now, their time and efforts directed towards the substation equipment because they -- obviously, that's the thing that takes the longest to do, and they want to make sure they have that right on the installation side before they start building the spokes. And so the real high-runner things really won't start on Idaho until probably January, February, March kind of thing, because they will have enough substations in by then that they can start hitting the pods on the spokes to get the transponders in.

Okay, and then last question. The bookings in filtration looked like they were a little bit softer in the quarter. Anything unusual there?

No, not really. Historically what we've had is some of that Virginia class submarine product that is the one off things that are $1 million to $2 million, and that's coming near the end of its life in next year. So there was not a Virginia class order in this quarter as there has been historically, but taking that out of the equation, I don't think -- Vic?

No, I don't think anything specific. I mean there's always a little bit of ups and downs, but nothing of concern.

Okay. Thanks very much.

You bet.

We'll take our next question with John Quealy with Canaccord Adams.

Hi, good afternoon. Just a question on AMI in the US and outside the US. Can you comment on some of the projects you're chasing down, electric gas, water? What the pace has been, especially for some of the -- there's only a couple of handful of big ones left out there in the near-term for RFP and short lists. Can you talk a little bit about your expectations on timing on some of these big ones and how you feel competitively?

Yes, well let me start by saying we're not assuming any big wins that we started deployments within '09. So that's one reason we have a little confidence -- we have a lot of confidence in where we are going within the year and that we haven't made that assumption. If we want to get concerned about something, I think anybody in this industry -- If things are already -- decisions being made, deployments started, we think that's going to go forward so we see that as a positive. If people are in that process, we do see some opportunity that maybe they are going to slowdown a little bit and take a harder look at it.

Having said that, we do have a number -- and here, I'm talking about the investment in utilities because we haven't seen a change in municipals or the co-ops yet. And so some of the larger [investor] in utilities that we have that's outstanding, again we never talk about specifics there. But certainly, the water and gas side of it is probably a little more active today than some of the electric is because so many awards have been made on the electric side that I think there's some view that '09 is going to be a year where people are really going to evaluate the performance of the vendors they've already selected. Ourselves included. So if you look at some of the things that we won on the electric side, some of the things that some of the competitors have won on the electric side, people that haven't made a decision yet I think are going to see how some of these deployments go. And see if the products really perform as advertised before they move forward to the next level.

And Vic, on the gas side clearly there's at least one fairly supersized gas project potentially in '09. The utility wants to move forward fairly quickly on it. If you're going to compete for that effectively, can you comment on -- do you need to upgrade the technology or show continued product development for pitching that type of business? Or do you feel the PG&E Hex platform is -- the leverage is already there, and you can just hopefully exploit that on some of these big RFPs for gas?

Yes, I would say the core product that we have is very good compared to what the requirement is. We have made some additional improvements to the product, and we don't want to get into a lot of specifics there because I think it's competitive information that I'd rather not share. But we don't sit still with any of our products. And I would say on the gas and water side, we've made some pretty significant improvements, enhancements and continued to do that. And with some of the larger customers, we've been very aggressive in talking with them about what some of those things are and why we think that, not only do we have the most proven large scale system out there today with PG&E , but we are further enhancing that

And I'll say, John, that having 900,000 gas units in a fixed network system at PG&E installed and working, certainly doesn't hurt.

Yes, that's right. And in terms of international, there's been chatter for awhile about that. Can you talk a little bit more about your view in sovereign risk in some of these places where we are talking about utilities that are only a handful, and economies are really under stress everywhere? So can you comment a little bit about your expectations for the international business?

Yes, international is always a little more troubling as a result of that. If you look at the places we are, we talk about Brazil, Mexico, they all have their economic challenges as well as some of the aging countries we've been working at. They all have their challenges, there's no doubt about that. But they're not like we're in some very small countries or countries that don't have the financial wherewithal to make these decisions if they choose to. And as we've talked about before, if you look at the payback in some of the countries, particularly in South America,and the payback that they can get just by eliminating electricity for instance, the payback is there. So the investment is something that they can see a return on in a relatively short period of time, much shorter than you can see here.

So it's really all about us getting out and ensuring that we're effectively helping the utilities understand the real benefit they are going to get. But the international market always is a little more difficult than the domestic market, but I think there's really a crying need for products like ours out there. One thing that I think we do bring to the party is, a lot of these customers want a good, solid, proven,robust system that they can put in today, and do all of the basic functionality and have the ability to grow to some of the more advanced functionality. And we can provide that to them today.

And last question. Your commentary is really as I understand it, you really haven't seen that much softening on the utility side thus far, across the different end markets. First part is what would cause you to see that? I mean obviously you've seen some pretty bearish comments out of EEI this week about utility CapEx spending. So what are you looking for in your business to signal perhaps a downturn in the customer side? And then secondly, how comfortable do you feel in the model, that you have enough flex points and levers that you can adjust to it quickly?

Good question. I guess the first one -- okay, I'm sorry, I was think the at the second question. As far as how we stay close to understand when a downturn is going to happen, I think the best thing to do, and what we're doing, is staying a lot closer with our sales folks, because they are the people that really know what's going on. You can read all of the articles in the newspaper you want and read all of the studies you want, but I think the most important thing is to talk to people that are talking to the customers. Because they are going to get the real scoop on what's going on, and if there's capital available, if there's budget available, then they are going to know about it and if it's getting frozen out they know about it as well. So I think the first line of defense is probably the best one we have, and so having people out talking to the customers is probably the best thing that we can do. As far as -- as well as all of the others. I mean we do pay attention, obviously, to some of the more macro things as well. But staying close to customers, I think, is the best way to do that.

As far as some of the other levers, as I mentioned earlier, we did take a harder look at how we were forecasting this year than we ever have. And I would say that in talking to our subsidiary management teams, we've told them that we need to be in a position to -- if it turns quickly to take some action. And so unfortunately, action usually means if you have to look at spending, whether it be discretionary spending , SG&A, whatever the case may be. But we're putting plans in place now to look at that, rather than getting six months into the year and saying Oh, wow, this is really bad, and being so far down that you have a hard time recovering. So we'll look to be very proactive if things do change and we'll just be a lot more -- a little hypersensitive to any changes this

Great. Thanks guys.

You bet.

We have a follow-up question from Carter Shoop, Deutsche Bank.

Hi, guys. Just on the test and filtration business, could you disclose what percentage of revenue for both those divisions is from defense-related end markets, and then what the impact would be following a pull-out from Iraq?

Are you talking about filtration?

He said filtration test.

Yes. I know a lot of it is in the actual space business. I think a lot of people kind of group the military and space divisions together. Just wanted to kind of better understand how much is actually defense-related versus actually space.

Yes, Gary's trying to grab some numbers here, but I'll just tell you from the test perspective, I don't know that we have anything that's strictly defense-related other than this large chamber that we're finishing for Boeing. But that's a one-time project, and it's really so that the Korean military can develop and test their own indigenous fighters, and so that's not something that has any impact on what we're doing with the US military. So I would say from the test segment there's really no exposure. On the filtration side, all we do there are some defense spares for some specific projects, and I would say they've been not high runners in some of the conflicts that we're currently in. So it's not like they're burning through a lot of spares based on activity like they have in some other conflicts in the past. So I would think a pull-out from there would have very little, if any, impact on our businesses.

Okay, that's helpful. And last question, when you look at the opportunity to vertically integrate on the AMI side, particularly on the electric AMI side, have you started to look closely at developing your own electric meter and, if so, could you provide an update there?

We have had some preliminary work done, or I guess a little more than preliminary work, with some low-cost manufacturers outside of the US. And so I don't want to get into a lot of detail about that, again because that's more of a competitive issue and not necessarily to bring back into the US, but those are something we may sell either in that area or some other areas around the world. But that is something we've had underway for quite some time.

Okay, thank you.

You bet.

There are no more questions at this time. Mr. Richey, I'd like to turn the call back over to you for any additional or closing remarks.

Okay, well appreciate everybody's attention and interest. Again, I think we had a nice solid year, and today we are looking at a pretty solid year in '09. We've had economic challenges that everyone else has, but I think we're fortunate that given the position we are with our backlog and with our key customers, that we have a good opportunity to have some good growth going into '09.

Thank you.

This does conclude today's conference. We thank you for your participation, and have a nice day.