ESCO Technologies Inc (ESE) 2009 Q1 法說會逐字稿

Good day and welcome to the ESCO first-quarter conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO, and Gary Muenster, Executive Vice President and CFO. And now I will turn the presentation over for forward-looking statements and for introductions to Ms. Pat Moore, Director, Investor Relations. Please go ahead.

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, impact of the stimulus package, 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 the most comparable GAAP measures can be found in the fiscal 2008 results press release issued today and found on the Company's website at www.escotechnologies.com under the link Investor Relations, Financial Reports and SEC filings. I think I said 2008; it's 2009 results press release issued today.

I will now turn the call over to Vic.

Thanks, Pat. Before Gary gets into the specifics on our financials, I would like to provide an overview on the quarter, discuss our current outlook for the year and address why we feel confident in holding our earnings guidance through this difficult economy.

As you know, we've always had a very rigorous and detailed planning process with our operating units that regularly provide us with numerous touchpoints throughout the year. As we began our '09 planning process, we recognized the significant challenges that this economy was presenting. And as a result, we further stepped up our planning and review processes to ensure we were continually addressing our changing business environments.

As we close the first quarter, which came in below our internal expectations due to a few timing items, we went back to our operating unit executives and reviewed in detail the balance-of-the-year expectations, as well as any additional risks or opportunities that may have arisen since our last planning session.

Our January review allowed us to conclude the following. The first-quarter shortfall at Doble, along with the R&D spending at VACCO and Aclara RF, were timing related and should not have a material impact on the year. We had no systemic issues adversely impacting our business in '09. We continue to expect solid cash generation, which allows us to pay down debt.

Our order book remains strong, especially as it relates to our three key catalysts for growth in 2009 -- the gas business of PG&E, New York City Water project and the Idaho Power PLS project, which, while second half loaded, are all off to a solid start.

We did see some softness in our utility business with a few customers pushing up spending from December, and certainly the Boeing strike had a negative impact on our commercial aerospace business at PTI.

And lastly, our overall business platform remains solid. And our corporate assessment operating plan, while challenging, is well understood and appears achievable.

As we look at the full year, we continue to face challenges every day. But based on our current view, we expect to meet our full-year projections.

One advantage that we have is that we've not assumed any major wins in the year necessary to hit our numbers. A major assumption we did include is that our key projects -- PG&E, New York and Idaho -- remain on track. As I mentioned before, they are moving forward as expected.

Obviously, we need to continue to book orders to make our sales and earnings forecasts, but not to large orders, so this certainly minimizes our risk. As long as the co-ops and munis stay reasonably on track and the Doble orders come in as expected, we should be okay for the year.

A side note on Doble -- they sponsored an annual utility customer educational seminar this week in Florida. And based on the oversubscribed attendance at this year's gathering, it certainly appears that several utilities are beginning to free up spending.

Moving on to Aclara's international market opportunities, I am pleased to report we continue to make solid progress on our targeted opportunities in South and Central America and Asia. Our system performance has been solid and our customer enthusiasm remains high. In addition, we anticipate a couple more pilots to be launched this year. And while the timing of the initial deployments is always a variable, we are very pleased with our progress.

Regarding the stimulus package, there's a lot of activity going on and it's moving very fast and seems to be changing constantly. We are actively engaged in monitoring this process with dedicated internal people and resources, as well as participating in various industry groups in advancing our agenda.

We are also working with other AMI companies on this legislation. We feel this is going to be a positive catalyst for our industry over the long term. But until it's more clearly defined, the timing of any near-term benefit is a bit unclear.

As I wrap up my commentary, I'm going to point out that while we have confidence in our ability to achieve our financial goals, we are not standing idle. We are aggressively looking at all of our operating costs, and we'll continue to work our ongoing contingency plans should this economic situation deteriorate further.

At the start of the year, we instituted a broad set of initiatives across our businesses to reduce costs and position ourselves for this downturn. For example, we are taking appropriate costing actions in the following areas. We regularly monitor our force count to ensure we have the appropriate levels of staffing needed to effectively manage the business. We are taking appropriate actions on salary increase, hiring freezes and attrition by not replacing certain open positions. And we're monitoring and reducing all discretionary spending.

From an economic perspective, this is certainly an extraordinary time. And as management, we will respond to this with extraordinary actions. We know we will be successful in the long run because we have solid management teams in place across the Company, we have a solid pipeline of new product introductions and we have great products being sold to a diverse set of end market customers.

Now I will turn it over to Gary for some brief financial comments.

Thanks, Vic. As noted in the release, the prior-year first-quarter results included approximately $21 million in sales, $8 million of EBIT and $0.20 a share representing the cumulative effect of deferred revenue recognized on TWACS products deliveries to PG&E associated with our TNG software version 3.0. Since this accounting event was nonoperational, my commentary will compare the current quarter to the 2008 first quarter excluding this TNG revenue recognition, as we believe this is more representative of the true operating results during the period.

EPS from continuing operations was $0.22 a share in Q1 of '09, which represents a 120% increase over the prior-year first quarter's operational EPS of $0.10 a share. While the $0.22 came in below our original expectations laid out in November, as Vic noted, the shortfall was primarily due to the timing of Doble hardware deliveries originally expected in December, which were pushed to the right due to a couple of customers electing to defer spending out of their calendar year-end budgets. This timing-related action was concentrated prematurely over two or three large customers and was not a widespread problem across Doble's customer base.

Also impacting the '09 quarter was our decision to spend additional R&D dollars at VACCO and Aclara RF earlier in the year than our original plan. The VACCO decision was made to ensure that we are in the best position possible to continue to win additional space-related products and projects that are currently out for bid. Our bid and proposal activity at VACCO is at an all-time high, with the majority of the projects centered around Project Constellation, which is the shuttle replacement program.

The Aclara RF development costs were incurred on the recently introduced RF electric product to modify the design to further enhance its functionality, reliability and durability.

Although operating in a challenging economic environment, in spite of the various timing items outlined in the release, I am pleased to report several operational highlights within the quarter.

Sales increased 30%, with Utility Solutions Group growing 50%, Test being up over 10%, and Filtration's sales increased slightly. Cash flow from operating activities generated over $21 million cash in the quarter, which enabled us to pay down an additional $19 million of net debt.

We entered $141 million in new orders, which represents an 8% increase over the prior-year first quarter. The Q1 '09 order amount included another $31 million of PG&E gas business, which brings the cumulative PG&E gas and electric orders to 3.2 million units, worth an aggregate value of $200 million. Additionally, we recorded $8 million in orders representing 12% of the contract on the New York City Water project and $4 million in orders representing 16% of the Idaho PLS contract.

Regarding the balance sheet, I remain very comfortable with our current capital structure and our available liquidity. And we continued to reduce our net debt outstanding, which was below $180 million at December 31, resulting in a very comfortable 2.07 leverage ratio.

Moving on to our current outlook for the balance of '09, we continue to expect 2009 operational EPS, which is adjusted for certain intangible asset amortization, to be within the range of $2.42 to $2.57 a share. This equates to GAAP earnings, which includes the intangible amortization, as well as the Aclara RF facility exit and move costs, which are expected to be around $0.05 a share, to be between $2 and $2.15 a share.

As I mentioned during the last call in November, it is not our preference to provide quarterly guidance, since, as we experienced in the first quarter of '09, we always have several moving parts within our customer base, as well as other long-term contract deliveries that can move a month or two around a quarter end.

But with that said, I will reiterate that, consistent with our 2008 actual results, our '09 EPS outlook by quarter remains more heavily weighted towards the second half of the year. We continue to expect favorable EPS comparisons during the first half of '09 as compared to the first half of '08. And based on our current expectations for the second quarter, our expected results should reflect meaningful EPS growth for the first six months of '09.

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

Okay, that wraps up our prepared comments. Now we'll open the call up to Q&A.

(Operator Instructions). Kevin Maczka, BB&T Capital Markets.

I guess, Vic, the first question on visibility in general. You had some of your revenue items moved to the right, some of your cost items moved to the left. I'm just wondering in general, is that indicative of your normal visibility, or has something changed there that you have less visibility today on both the revenue and the cost side than you normally do?

I don't think there's anything significant. What I would say is that with the Doble business in particular, which we did have some items move to the right, I think that was more, in this first quarter, the capital budgets were tight. I think people were very uneasy, unsure what they should be spending.

And so when we projected that business going into the year, the guys looked at it and said, okay, here's what we expected in the -- or here's what we experienced for hardware deliveries in the first quarter of the year. And so we would assume that it's going to be pretty much the same because that's what it has been in the past. And I think the big difference this year is that just with everything going on in the economy and people being concerned about that, some of those things just pushed to the right. So that's the first year we've had these guys for the full first quarter, and it was a pretty unusual quarter, I would say.

As far as the timing of the expenses, it was primarily focused at VACCO. And as Gary mentioned, that was some IRAD and B&P spending for these projects that we were bidding. And those things sometimes come in before you think they're going to and sometimes afterwards. It just happened that a large number of those, they wanted those responses before year end, before calendar year end. And so we had those kind of costs that we absorbed in the first quarter, which we had not anticipated and that we thought we would be doing that this quarter.

So I don't think it's a systemic issue. I think it was just a couple of anomalies that happened to hit at the same time.

Okay. Then in the environment we are in, Vic, and the stressed budgets that most of your customers, I'm sure, have, in terms of the domestic and international pilots that you're involved with and your muni and co-op steady business, can you just talk about how that has changed? Has anything changed in the way these pilots are progressing or the way new pilots are being signed up? And is that muni and co-op business still as steady today as it was six months ago?

Okay, I will address that in two pieces, because the pilots are really more international based. We don't see as much of the pilot activity, or we don't from -- in our business, anyway, domestically. So from the international pilots, as Gary mentioned in his commentary, I believe we had a couple assumed -- we assumed we were going to get a couple more this year. So that's not inconsistent with what we've seen in the past.

As far as the co-op and the munis, the first quarter was a little softer than what we had anticipated. That appears to be picking up now in the second quarter. And again, the first quarter this year was unlike anything we've seen in quite some time. So I think there was an overriding nervousness with some of those customers about making decisions, but we're starting to see some of that free up now, and hopefully it will pick up. We will know a lot more in the next couple of months, whether those guys are going to move forward as they have in the past or not.

So you're actually seeing some of that business reaccelerate now?

Yes.

Okay, great. I will hop back in line. Thank you.

Steve Sanders, Stephens.

Vic, there's obviously a lot of buzz out there about the stimulus bill and some large numbers being tossed around in terms of subsidies and potential deployments. Could you just share your take on where this is in terms of kind of a final version and how you are positioned relative to some of the more technical language and requirements around the program?

Yes, it's an ever-moving target right now. We've not had a chance or I haven't had a chance to check today to see what activity has taken place, just because we've been in a Board meeting. But I do think that, despite a couple of amendments that were introduced yesterday to try to pull out all the smart grid funding, I do think that's going to stick. I think that's one part of the package that everybody seems to be behind.

So my view is, there's going to be some funding there. It's a little unclear exactly how that's going to be deployed at this point in time, anyway.

As far as our position to take advantage of it, I think we are in as good a position as anyone. Currently the language that's in place is open to all participants, which is the way I think it should be.

What I'd really like to -- what we're going to spend some more time on is understanding if there's opportunities for the utilities and some of our customers to access some of these funds to purchase Doble equipment, because in my view, what we are really trying to do, in addition to automating the distribution network, is to make it a lot more robust and make it more reliable and ensure that it's maintained properly so that you don't have some of the issues we've had in the past.

And if we are able to get more of our product out in the field that does that, I think that does a lot to help improve the reliability of the transmission and distribution network.

Okay. And then you talked a little bit about some of the push-outs at Doble. So is it safe to assume that the weakness you saw in the December quarter, you'll be caught up on that in this quarter?

I don't think we will get it all caught up in this quarter, no. I think that a couple of the larger things that got pushed out, I think we will get some of those. But I don't think we will recover that all in the second quarter, no.

And honestly, as we look at the business -- I don't mean to interrupt, but as we looked at the business, we've taken a little discount on that business in case it doesn't come back fully. And I should make a point that, if you look at the Doble business, it's really two pieces. It's a consultive service business, which is about half the business, and then you've got the hardware deliveries.

You know, the recurring part of the business, the service part of the business, has not been impacted at all. And that's the very steady part of the business. That's gone very well. And then the hardware business is the piece where we saw some softness.

But I also would kind of remind everybody that even with this, the EBIT margins we are seeing in that business, even in the first quarter, are really the best we have across the business. So they are in the high 20s. So I don't want to give anybody the impression that there's an issue at Doble; it's just that the order input has been a little slower than what we had initially anticipated.

Okay, thanks for that. And then, on the pilot activity for some of the larger projects, both domestic and internationally, how would you characterize the progress from moving through the pilots and making decisions? And if you could differentiate between North America and whether the stimulus is having an impact on that versus various other regions of the world, that would be helpful.

Well, I don't think we can measure what the impact of the stimulus package is going to be yet until it really gets funded. So I'm not sure how I could comment on that.

If we look at the pilot activity internationally, though, I would say that they are very active in the ones that we have out there. As I mentioned before, we are pretty confident that we are going to have a couple of additional ones within the calendar year -- or within the fiscal year.

Okay. I guess just more specifically, there are some large North American projects that are out there that have been in the pilot stage for awhile. So, relative to a few months ago, are they still on a similar timeline in terms of making decisions, or do they seem to be moving to the right as well?

Well, the only reason I'm a little confused -- Steve, maybe you could help me. I mean, we don't have any pilots in North America. So if you're talking about any pilots that have taken place, I'm probably not the best guy qualified to answer the question. But the things -- I read all the same information everybody else does.

Okay, okay.

I mean, I guess the one -- PG&E is something where we were involved. And I think they kind of put that on hold for awhile. And there's been some talk about it getting reengaged later in the year.

Okay, that was along the lines of what I was looking for. And then, Gary, I think you've obviously given us some good detail on the first half. As you see the business playing out over the second half of the year, does it feel like it's another heavily fourth-quarter-loaded year, or do the third and fourth quarters look fairly comparable?

Well, the fourth is going to be higher than the third. But it's not going to be tilted the way it was in '08, because, if you remember, in 2008 we had a, quote, big bet down on the Test business because we had about 40 projects in process in the second half of the year that obviously the majority of those needed to be completed. And we did complete those, but we are not going to see that same tilting in the Test business. So that will help normalize part of it.

The Filtration will generally be flat. And now that PG&E gas has kind of stabilized at a good run rate, we will see -- the real tilting will come from the likes of New York and Idaho. But again, as we've talked, those are three three-year projects that are starting in that period. So you're really going to be looking at twos, threes and $5 million kind of things and not the 10s and 12s that we had in 2008 -- deltas in the fourth quarter.

So fourth is still going to be higher than the third, but it's not going to be at the increment increase that we had in '08. So I would flatten it out a little bit, tilt it a little flatter.

Carter Shoop, Deutsche Bank.

Wanted to follow up in regards to the ramp here, particularly in the Aclara business line. So if it sounds like PG&E gas is at a pretty steady run rate here this quarter -- and I want to make sure I'm understanding it correctly, that we should expect that to kind of flatline at current levels -- when you add Idaho Power and New York City together, how much of an increase are we going to see, half over half, in regards to the second half '09 versus first half '09 for those two projects, Idaho Power and New York combined?

Well, kind of the way we are seeing it play out, obviously with the order book in place, we have a little more visibility than we did, obviously, in November before those orders came in. And so the way it is currently projected is they are starting -- both projects are taking infrastructure right now. On the New York job, they are putting the antennas and data collection units in place. And at Idaho, they are taking care of the substation equipment and all the core infrastructure items.

So those are not the high runners or the high dollars. So once they get that staged at a point where the endpoints start getting put in, we've looked at this and basically said -- and I think the math will be the same, but the dollars will be different -- they are essentially three-year projects that will be starting probably midway through our third quarter. So you can basically divide that by the three years and take roughly half of one year and then put posts around that based on some things that could influence it.

So doing the math on that, if you use $70 million for New York and take a third of that for the three-year project, take a half of that for this year, I think you'll be in the ballpark of the kind of numbers we are talking about. So if you add the two together, you should get into a kind of a delta of $10 million to $12 million.

Okay. And then to get to the full-year guidance, it looks like we'll probably need to see a pretty significant snapback in the Test and Filtration businesses also. Is that your expectation?

Well, in Filtration, the magnitude of these Project Constellation deliveries are pretty substantial. We have quite a few of them in hand already, where we've been selected, contracts have been negotiated. So you are going to see a ramp-up in the VACCO portion of it. I would say the risk profile we are dealing with in Filtration is, how is the commercial aerospace business going to play out at PTI?

We are comfortable in the fact that the strength of VACCO right now is offsetting the softness in commercial aero. And what we saw in the first quarter with the Boeing strike and the implications it had on us on the OEM side of the business, it is not going to be a situation where Boeing is going to play catch-up and try to make up the lost time and the lost product that we had in the first three months. So essentially, at PTI, on the OEM side of the commercial aero, it's really going to be representative of essentially nine months of product deliveries. So that's not going to come back.

So PTI will be relatively flatlined across the next three quarters. So the real strength comes from VACCO, where we always have the back half of the year, where we have the Virginia class submarine valve system that we deliver to Electric Boat. You know, that's a $3 million or $4 million delta, second half to the first. Then you'll see four or five of these Project Constellation component units that we will be developing for delivery to our customer that will probably be in the neighborhood of $5 million in the aggregate in the second half of the year that's not present in the first half.

Then you also asked about the Test side. And what I would say is that the Test was where we expected them to be in the first quarter, and they were -- they ramped up last year. They are not going to ramp up as severely this year as they did last year. So actually, they are off to a pretty solid start.

I've spent a good bit of time with those guys recently, and what we're seeing with the Test businesses is the domestic business is fairly flat year over year. The European business is down a little bit, but the Asian business is really picking it up. So we are looking for some pretty solid growth year over year for the Test business, and I would say right now it feels very good.

Okay, that's very helpful. Thanks. In regards to the stimulus, I know that it's still pretty early to tell exactly how you guys would be positioned to benefit. But if it were to pass, similar to what we're talking about now with the House version, do you think that Aclara would benefit more from IOUs merging more towards a smarter grid or adopting a smarter grid, or do you think your co-op and muni business would benefit more on a dollar basis?

Yes, that's going to be hard to answer until we get into the details of exactly how it's going to be administered. I guess I would think about it this way -- I would say obviously our PLS business is better positioned to take advantage of the co-op business. And if you look at some of the things that they are doing in the stimulus package outside of the smart grid side, but really looking at improving some of the service in the rural environments, I think there's a concentration there. So I think there may be a good bit of money going there, which we would be able to access with our co-op business. Then on the muni side, on the investor-owned utilities, it's a matter of getting positioned right with our RF business -- on the RF business side.

So I think we've got a couple of opportunities to play here in both the co-op and munis and investor-owned utilities. And as I said earlier, I think the wild card here is if we can access some of that money for grid reliability utilizing our Doble product.

Great. Last question for you, too. In regards to the gas solution at Aclara, can you talk a little bit about the pipeline there and what you see? Obviously, there's a pretty large contract in Southern California. But besides that, are you seeing any other multimillion-point deals that could be signed over the next 12 to 18 months?

You know, the very large ones are fairly few and far between, although I was talking to the guys today about one. Obviously, I can't talk about where it is because it just kind of came on our radar screen. But I think there are at least two other pretty good-size gas-only opportunities that are going to be available to us within that timeframe.

Now, whether they're actually going to go to contract in that timeframe or not is yet to be seen, but there are a couple more popping up. And I think that's indicative of what we're going to see on the gas side and on the water side. And I think, given our experience at PG&E and what we're seeing in New York City and in Boston and those type of things, I think we are very well positioned to take advantage of those.

(Operator Instructions). John Quealy, Canaccord Adams.

On utility margins, can you just talk about the moving pieces? Vic, I think you said Doble hung steady in the high 20s there, if I understood it right, from an EBIT perspective. But was it the lack of DCSI at PG&E that hurt it in Q1?

Yes, I will address that, John, real quick. As Vic alluded to, the Doble stayed in the high 20s. It's north of 28%, to refine it a little bit. The RF business continues in the low 20s. The former DCSI business, the powerline business, obviously is a little bit challenged because of the absence of that PG&E revenue. Pulling that out in the comparable periods impacts it pretty dramatically.

But two things are working against the PLS business when the volumes are this low. The fixed amortization on the TNG software obviously remains constant, so the absorption of that gets a bit challenging. And the magnitude of the additional expenditures that we have for our international business development group, we staffed that up roughly halfway through last year. So there really isn't -- there essentially was zero in the first quarter of last year. And that's at a run rate of a couple million dollars a year, based on the number of people we have, the countries we're addressing with specific, dedicated resources on the ground.

So until that revenue starts coming through, you're not going to have a favorable comp probably until the third quarter, or at least a normalized comp.

So when you add those two things together on the cost side and you take out the $8 million of EBIT that was contributed from the accounting event last year, you get a bit of an awkward EBIT percentage there.

So the software business was profitable; the video security business essentially broke even. So really the only delta that presents an adverse comp is the powerline side of the business, and it's volume-related with the items I talked about.

What about on the RF product? I think in the release, it's $800,000. How is that going to trend moving forward, a similar number per quarter, or what sort of delta should we look for there?

I don't know that the investment that we made in that redesign work or additional enhancement design work is going to be repeated. This was kind of done with a bit of a sense of urgency for some opportunities we're looking at and also to keep us engaged at PG&E with the trial that they are doing there.

So it was really -- you never want to call it a one-off thing, but it was a little earlier in the year. We kind of had a little more ratable program with that. We accelerated it to try to get some additional enhancements into some people's hands to allow them to see how we are moving forward with this thing. I don't see an additional $800,000 popping in the second quarter on a delta perspective.

Just another couple -- on EBITDA, I think last quarter you were talking about $120 million. Your guidance is basically the same. You had a good Q1. Is that roughly what you folks are thinking, or you're going to address EBITDA guidance later?

We will probably address it later. We didn't want to refine it that tight. But because we've held the EPS guidance, and the tax rate and interest and that sort of thing didn't change in the variable side, the EBITDA is generally consistent, within a couple million dollars of the number we disclosed last time. So we did not see a big deterioration in the aggregate or the annual level of EBITDA for the year.

And then, Vic, just two last ones. On M&A, given the cash profile and all the moving pieces in smart grid right now, can you just give us an update what your thoughts are there?

Yes. I would say we're going to keep our eyes open. I mean, we are more focused on executing the business today. I would say that we are in a good position to make acquisitions. We have people actively looking for things. And if there are opportunities that present themselves, I would say in the second half of the year, it would add product, if you will, that would enhance our smart grid offering, that's something we would certainly be interested in doing.

And this is a bit more subjective question, but when you look at execution risk in the back half of the year for you folks on your AMI-related projects, do you feel like you are fully in control of your destiny, rolling out some of these AMI project? Or, at least when I was at the show, you get a sense of everyone is looking around to see how -- whether -- how Itron does in San Diego or SoCal, how some other things start rolling out. How do you feel that you can control your destiny on the AMI side versus all this buzz in the marketplace?

Yes, well, that's one area where I have a great deal of confidence. We, I think, have proven product. We have a lot of it in the field that works well. We know how to get it out there. So the execution piece of getting these projects out -- A., there's always hiccups. But we do not have a -- I don't have a concern about our product network. I mean, you can go to -- you guys have all heard the same story, but I will tell you again. You go to three different places and see a million endpoints operating at a very high read rate at 99%-plus read rate, and you can go to 300, 250 co-ops and see the same thing, and you can go to New York City before long and see that work, and you can go to a lot of our other current customers and see our RF product working as well. So that's an area where I have a tremendous amount of confidence.

Paul Coster, JPMorgan.

Yes, a couple of quick questions on the housekeeping side, Gary. Can you first of all provide us with some thoughts on tax rate moving forward, why it has come down relative to our expectations, perhaps, and how it will shape out moving forward?

Yes, we are still holding to our 36% for the year. And as I noted in the press release, that the lower than 36% rate that we realized was in our guidance. And the reason that we expected it at the beginning of the year, it really relates to the research credit that obviously we get every year. And Congress normally does this in the session, usually in the summer. But with all the other fun stuff they were dealing with, the decision to extend the research credit for all the US companies was deferred until November.

So the way the accounting works on that, you are really not allowed to take that research credit deduction into your rate reconciliation until Congress officially extends it. So that's why it was a first-quarter event. It was in our plan. This did not influence -- it doesn't change anything relative to original expectations because it came in within $2000 relative to where we thought.

So while it may look low, it was totally expected. So when you go into Q2, Q3 and Q4, you're obviously going to be a little north of 36% because, for the aggregate, to get to 36% starting with something below that, you have to be a little north of that.

So I don't anticipate any anomalies in the tax rate in Q2, Q3 and Q4 going forward. It doesn't mean we aren't looking. Obviously, that's money, and it's cash. And our tax department clearly is focused on making sure that they treat their costs no different than our operating guys treat their costs. So we are always trying to harvest opportunities there.

What percentage of your revenue came from outside the US this last quarter, and how will that change during the year? Does that have any impact on tax rate?

Obviously, it does have an impact based on the country where the income is sourced, but we don't see any spiking throughout the quarter that's influencing it. The Test business has the most exposure to the foreign content. It's a little bit over 50/50 right now. I think it's about 55% of the Test business for the year should come internationally. And then stratifying that further, it's primarily coming out of Asia. So you do get a little favorable impact there. But again, that's dialed into the plan.

On the Aclara and Doble side of it, Doble is continuing to increase its international content, but it's still not a significant percentage of Doble in total. It's kind of in the 10% to 20% of Doble's total. Aclara is pretty nominal at the moment, and that's where our focus is on growth.

As we jump ahead and we start to get more revenue out of a Brazil or a Mexico or Japan or something like that, in the future, years out, that will impact long-term rates, but not today.

Okay. Vic, you came back from Asia pretty encouraged by what you saw in the pipeline for Test. Can you just share with everyone what the composition of that pipeline is in terms of the type of customers?

Yes. A lot of that and the reason I came back pretty positive about it is a lot of the -- and you would expect that a lot of the electronic manufacturers that are over there may be pulling in their horns at little bit, and certainly on the manufacturing side they are. I would just remind everybody, our Test equipment is only used in the new product development phase, so it's a little different.

But the thing I'm most encouraged about is the vast majority of the larger projects that we have in China and India in particular are really government-funded projects. So it's not really a matter of an electronics company going out and putting in a new system. It's really, like with the Indian job -- or the NATRIP job we have in India, that's a government-funded project. And then we have a number of Chinese opportunities and actually a couple in our backlog already as well that are government-funded projects. So that helps from that perspective, that we don't have the same level of risk of those being canceled or pushed out.

Richard Baxter, Ardour Capital.

Just a question on the order flow for utility customers during the downturn. You talked a little bit about the change in order timing, but can you talk a little bit more about the change in the product or service mix you're seeing, if any, as your customers watch their purchasing?

No, I would say the only change in the mix is, as far as the mix itself -- I mean, some things were slower, but as far as the mix itself, it was really more at Doble, where we didn't have as much of the hardware sales as we had anticipated, while the service revenue remained steady.

And let me add one more comment to the service side of Doble. The nice part, as somebody had asked earlier, relative to visibility, the majority of the service contracts that we are engaged with at Doble are on a cycle of January 1 renewals. So obviously, we are a month past that, and the majority of the customers renewed. So we do have visibility on the service side of the business, as Vic alluded to, because the attrition where customers cancel their service contract was very, very nominal. So the visibility on that half of the business gives us a pretty good level of confidence for the next 12 months.

And there are no further questions at this time. Mr. Richey, I will turn things back to you for any additional or closing remarks.

Okay. Well, again, I appreciate everyone's interest. We will be talking with you throughout the quarter, some of you, and we will have our next call this time next quarter. Thank you very much.

And that does conclude today's conference call. Thank you for your participation. Have a wonderful day.