ESCO Technologies Inc (ESE) 2009 Q4 法說會逐字稿

Good day and welcome to the ESCO fourth quarter and year end 2009 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 would like to turn the call over to Ms. Pat Moore, Director - Investor Relations. Please go ahead, Ma'am.

Good afternoon. Statements made during this call regarding the timing and amounts of fiscal 2010 and beyond expected results, earnings, orders, sales, cash flow, EPS, EBIT, future growth prospects, [get], investments, M&A opportunities, the success of new technology, the success and timing of the Company's pursuit of AMI opportunities, success in international markets, cost reduction initiatives, the impact of timing on stimulus spending 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 has in exhibit to the Company's Form 8K 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. The reconciliation of these measures to their most comparable GAAP measures can be found in the fiscal 2009 results press release issued today and found on the Company's Website at ESCOTechnologies.com under the link Investor Relations.

I now turn the call over to Vic Richey.

Thanks Pat.

I would like to begin by announcing that we will begin paying our first ever cash dividend during this fiscal year. I'm very pleased that our Board of Directors has approved a $0.32 annual cash dividend payable quarterly at $0.08 a share beginning January.

This dividend reflects the confidence that our Board and management have in our long-term growth opportunities and financial strength. We believe that initiating a dividend this year rewards the loyalty of our long-term investors without sacrificing our financial flexibility going forward.

Our strong cash flow and balance sheet allow us to begin returning a portion of our profits to our shareholders.

Along with the dividend, we remain firmly committed to our ongoing investments in new products to support growth, meet our ongoing capital needs, and paying down debt. I will now turn it over to Gary to provide some financial commentary and then I will wrap up with a brief business overview.

Thanks Vic.

I also share our Board's confidence in our long-term outlook and I firmly believe our financial strength will continue to support our operating needs for years to come, and will also provide us with ample liquidity to supplement our future growth via M&A opportunities.

For the fourth quarter, EPS from continuing operations was $0.82 a share compared to $0.75 in the prior year and, as described in the release, 2009 EPS was impacted by a favorable adjustments to the fourth-quarter tax provision. In 2009, EPS from continuing operations was $1.86 compared to $1.81. And I will remind you that the '08 EPS amount included $0.35 a share related to the accounting revenue recognition deferral at PG&E in the prior year.

Sales were down in the fourth quarter compared to the prior year, but increased for the full year. Fiscal '08 sales included $31 million of revenue that had been deferred related to the Aclara PLS electric contract with PG&E. So from an operational perspective, fiscal '09 sales increased nearly $37 million or 6.3%. The '09 increase was driven by additional sales of gas and water AMI projects; our products at Aclara RF and higher sales at Doble, VACCO and Aclara software.

EBIT margins in the filtration and test segments were strong, despite a decrease in revenues. Filtration has maintained an EBIT margin in the high teens despite an 8% drop in revenues and our test group was able to increase their EBIT margins on lower sales. We continue to make significant R&D investments across the Company, focusing on new products and existing product enhancements. While these investments obviously impact our EBIT, we firmly believe the outcome of these investments will support our future growth.

On the cash site, we continue to be very pleased with the strength of our cash flow. During Q4, we generated over $40 million in cash from operating activities and, for the year, we generated $78 million.

Regarding the balance sheet, I continue to be very pleased with our capital structure and our available liquidity particularly in light of today's challenging credit environment. Our net debt outstanding was approximately $130 million at September 30, reflecting a 34% reduction in net debt from the start of the year. This debt level, compared to our trailing EBITDA, results in a very comfortable 1.86 times leverage ratio.

On the orders front, we are happy to again report a positive book to bill in both the quarter and the fiscal year periods. As a result of the strong order book, our backlog increased to an all-time record high of nearly $300 million. Of special note we booked $34 million of Aclara PLS business in Q4 which brings their total orders to nearly $125 million for the year, mostly consisting of electric, co-op, and MUNY customers.

Regarding our outlook for 2010. While I believe the earnings release lays out the direction we are anticipating for '10, I'd like to touch on a few highlights. We have a number of domestic and international projects across the Company that will be showing meaningful growth in sales and EBIT and these projects will help partially mitigate the year-to-year impact to the PG&E gas project.

In addition, we have implemented a number of cost reduction actions and operating improvements across the Company that will also help offset the PG&E decrease.

Net of these projects and improvement actions, we expect only a nominal decrease in sales and EBIT during 2010. The larger impacted EPS will be driven by a more normalized effective tax rate in '10 as we expect fewer tax benefits and credits during '10, compared to fiscal '09.

Consistent with the profile in fiscal '09 and '08, we will begin the second half weighted on sales and EPS. As noted in the business outlook, we expect the first quarter to be essentially breakeven, primarily as a result of the stimulus funding delays which have been impacting customer orders and deliveries.

By the second half of the year, we expect these orders and sales to increase significantly. But this timing item is a big driver of our quarterly profile being backend-loaded.

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

Thanks Gary. As Gary noted, exceptional strong -- exceptionally strong cash flow, entered orders and a favorable tax rate certainly were the main highlights of the quarter.

We did show an increase in our EPS during the quarter and the year. Considering the very difficult economic environment and given to churn everybody is experiencing in the Smart Grid space, I am pleased with our 2009 results.

Overall, we had a very solid year operationally and made meaningful progress in several end markets across the Company. On a consolidated basis, we increase sales through EPS, increased our backlog, and generated nearly $78 million of cash flow from operations. This was accomplished through hard work, tough decision-making, rightsizing our workforce, and improving our manufacturing efficiencies.

We wrapped up '09 with solid performance in our Filtration and Test businesses under what I would call very difficult conditions while Doble continued to provide significant earnings in cash and the AMI business showed strong results.

I firmly believe our multisegment, multi-end market business model continues to benefit us in this tough global economy.

Looking ahead to 2010 at our market opportunities in the AMI space, while everybody has experienced softness and delays as a result of the uncertainties surrounding the timing of the actual stimulus spending, we continue to be bullish about the future of our AMI markets and about the opportunities in our position in this area.

Our success in the New York City water project and the PG&E gas clearly established Aclara as a market leader in both water and gas. This is a good position to be in, since the gas and water markets continue to accelerate through adoption of advanced metering.

We continue to be in a strong position with a large AMI opportunity in California. And based on the latest information, we expect a vendor selection to occur sometime in early calendar '10. Our conference with this opportunity is supported by our success in the gas project at PG&E where we have over 3 million Aclara RF units successfully deployed. The co-op market has always been a bright spot for us as Gary noted and I believe that since the stimulus funding has been identified, these market will be strong as ever for us.

In September we announced our investment in FireTide and the introduction of the Aclara Smart Communications Network. This intelligent network is a high-bandwidth, high-speed, standards-based flexible communication system employing TCIP communications protocols for wireless communications. This wide area network brings together existing utility assets and applications into a single two-tiered architecture.

I'm very excited about the prospects of this revolutionary new technology will bring to us in the Smart Grid area. This provides an ideal interface between utility and IT resources and back office applications for [Scada] systems, AMI systems, and mobile workforce applications. Use of IP standards combined with the wireless mass technology provides a simple, secure, and reliable interoperability to a wider range of utility operating systems and further improves the economics of our AMI technologies.

On the international front, I remain very enthusiastic about our near-term and long-term prospects. We continue to make progress with several utilities and increased our (inaudible) activity.

We have a couple of AMI deployments that appeared to be nearing contract signing. I'm very happy to report that there are opportunities continue to be increasing in both number of customers and number of endpoints.

The timing of these international opportunities remains the issue -- not our ability to appropriately address them. We continue to emphasize investing in our business for growth. We will not shut down R&D and new product development simply for short-term EPS improvement.

To ensure we are appropriately utilizing our capital, we took a hard look at every major R&D project in our plan. In some cases, we truncated those projects that didn't meet our return threshold.

I think the proper strategic for focus needs to be on both the mid and long-term while paying attention to today. Despite all these positives, and there are many, we are currently looking at a down year in EPS in 2010, driven by the rolloff of the PG&E gas contract and a higher effective tax rate.

We hope that some of the AMI projects that we are pursuing or for which we have already been selected would have been further along in their employments which would have allowed us to fill the PG&E revenue gap. And now it looks like the orders will be recorded 2010, but we will recognize some revenues on these projects, but we won't realize the full impact of the revenues and profits until 2011 and beyond.

We will be able to recover a substantial portion of the PG&E sales in EBIT delta with several new projects. And as a result we only expect sales in EBIT to be down marginally.

Bottom line, given a tough economy, I remain very bullish on the business in our near-term and longer-term prospects. I strongly believe ESCO is well-positioned today and for the next couple of years. We will continue to generate cash, pay down debt while investing in new products that will ensure our long-term success.

That wraps up our prepared comments. I'll be glad to answer any questions.

(Operator instructions). Kevin Maczka with BB&T.

I guess my first question, you just mentioned a number of jobs that you are selected on, but you haven't seen the orders and certainly not the deployment. I guess, can you give any more color there in terms of size or timing or anything along those lines?

Yes. I mean obviously we can't get specific because we haven't received the actual awards yet, but we have talked about one with Toronto which is a gas project which we anticipate -- that should be signed sometime this quarter. We should start seeing sales on that after the first of the calendar year or maybe the third quarter.

Another couple of water jobs that we have been selected for which we anticipate having contracts for in the first quarter, later this quarter, maybe the first of the year of the very latest. And then a large gas contract which we talked about. It looks like that selection now is going to be made after the first of the year.

All right. And then on stimulus in general, I mean everybody has seen the delays. We've been talking about that for a couple of quarters. You're expecting with the verdict there that things start to get better, but do you think it starts to get better sooner or is this sort of becoming more of a 2011 situation for this pent up demand to start to actually materialize?

I think we will start to see funds flow after the first of the year. I mean, I think there was some misperception that the day that the awards were made that the money would start flowing.

Obviously that's not the case. Our view is that we'll start to see some awards being made first calendar quarter which is our second quarter and then some deployment start after that. But I think it is going to be probably at least through 2011 before all the money is spent as a minimum.

It just, it does take some time to get through the process. I think some people now or that have been selected are really looking at what the requirements are and what it's going to take to actually receive this money. And some people are even I think having second thoughts on whether they want to take that, given some of the restrictions that may be put on them.

Having said all of that, I think that the other thing that kind of gets lost in this is there are a lot of customers particularly in the co-op side, and even with the [IOU] side as well, where they said they were going to go forward whether we get the funding or not. But now that there's clarity there, I think they will go ahead and move forward.

But, still, that's not -- they don't plan to move forward immediately if you will I guess is what you're saying.

No, I think it will be first quarter -- well, first calendar quarter of the year into the second calendar quarter of the year because a lot of these folks haven't made the final decisions on exactly who the vendor is going to be, when the deployment is going to be. So they still have to go through that process.

And on the international side, is there any other unique delays happening there? Again, you talk about being kind of encouraged about near-term prospects. Have those near-term prospects been delayed?

No. No, I still think that as I said we are I'd say very close on a couple of things. And again I want to reiterate that these things we are not going to get up a huge contract all at once but what we see if we can start getting some deployments rather than pilots from a couple of these customers, that will show that they are serious about going forward.

So again, I think these will be more incremental awards rather than one huge award for an entire utility though. Award a city or two cities and then kind of migrate through that, but I think it's just a matter of the typical slow movement that you often see internationally, in particular in South America.

Okay. Thank you.

Steve Sanders with Stephens Inc.

Just a couple of questions. On the guidance for 2010, can you provide some more color on what just rough sales and EBIT outlook is for filtration and test, relative to '09? So will those start to grow and are at the margins pretty safe there? What can you tell us about that?

Yes, I think what you see is it would be pretty consistent with what we saw this year, both from a sales and EBIT standpoint.

Meaning --? Okay. Meaning relatively flat in those two segments? Not down.

Not down. I mean there's some opportunity for slight increase, but we don't see any decrease there.

Okay and then maybe Gary in terms of the SG&A, I guess we have seen a relatively stable run rate here in the high 30s. You also mentioned some cost control things that you guys did in '09 that you will continue to do. But for our modeling, are we pretty much at the level we should expect for 2010?

Yes, I think it should be -- across the Company I think it should be flat. That would be a fair way to think about it, but within certain aspects of the Company and I would say Doble in particular and maybe Aclara, we are continuing to expand some of our new products around the FireTide-related Smart Communications Network where we are going to build out some additional functionality in that network.

So there is going to be some R&D that is a little higher in '10 versus '09. And at Doble we are going to increase our international marketing efforts and some R&D in [net] side to get some products driven into the international market a little more aggressively. So I would think both Doble and Aclara RF should have a little bit higher G&A, driven by these investments we are making in new products and marketing.

But it is not substantial -- it's not 10 million, 12 million kind of thing. It is incrementally

Okay and then on the PG&E gas project, I think you said around 40 million for your expectation in 2010. What will be left after that or does that pretty much wrap it up?

Yes, that gets -- from a unit's perspective that gets us around 4 million units or so so there should be several hundred thousand units left and so you are starting to get into the single digits worth of millions. Maybe 10 or 12 million left that would roll over into '11 unless they plan to accelerate some of that into '10.

Looking at what we've sold incrementally to date or through September 30, it was about 190 million. So if you put that 40 million on top of it, that puts it up to about 230 million and I think the original contract was roughly 240 give or take a couple single millions around that. So if you thought of 10 million being left after this 40 million, that's probably -- you're in the ballpark.

And then two quick ones. Maybe Gary there was another expense line about $1.6 million, if you could just let us know what that was and then maybe for you, Vic -- on the stimulus side we saw several utilities hit get $100 plus million awards that had yet to name a vendor. Do you feel like you guys have a shot at one or more of those?

Yes, we are certainly in talking with those guys and some of it whether it be straight AMI or what we have with the FireTide project, product and then also on the demand response side. So they haven't made a decision. We certainly have folks in talking with those companies.

Steve, on the other costs net, we had some severance that we paid out. We had some terminations of some senior managers across the Company, primarily up in the East Coast and we paid out his contract. It was related to an acquired company.

And then we had some cleanup things we went through and disposed of some assets as we've migrated away from some legacy products. We have a little bit of PP&E that we disposed of of a couple hundred thousand here and there. So I would say severance and some aged assets that we cleaned up.

Great. Thanks very much.

Carter Shoop with Deutsche Bank.

Maybe starting off with a question about the dividend. Help us understand why we are initiating a dividend this quarter compared to the last quarter or even in the year ago quarter? What has changed? Is it your appetite for acquisitions, outlook for growth? Why now?

No. I don't think -- certainly we tried to word that appropriately so people understood that we weren't, didn't have a different view of our ability to grow the business or make acquisitions.

I think a modest dividend is appropriate now. I mean, we are in a position where we can do that financially. I think we want to make sure that people understand we have the financial wherewithal to do that and we just thought it was an appropriate time to do that. We had a great cash-generating year this year and I think it was time to give back to our major shareholders.

Yes I think, Carter, from a financial end as we looked at our five-year outlook -- and obviously we don't have the crystal ball beyond a year or two, but we have a significant amount of opportunities both domestically and internationally,. The way the debt paydown is looking, we are essentially going to be out of debt certainly within the next two years. The credit facility is pretty well locked in for a couple more years.

So we are going to have plenty of liquidity or as we call it the dry powder. We fully invest in the Company with these new product development opportunities we have. We have plenty of capacity to do the acquisitions that we currently have in the pipeline.

The borrowing rate that we are at is -- while it is not free money, it is essentially free money. Versus doing a stock buyback that our belief is that it kind of rewards the people on their way out.

We think, relative to the shareholders we've had in the portfolio for a long period of time it's time to reward them with some of this cash we're generating. We think it is the right thing to do and it certainly is the right time to do it to show the confidence we have in the longer-term outlook.

And I think this is putting your money where your mouth is that we are standing firmly behind our outlook.

Shifting gears to amortization. Is there anything else in there right now, excluding the [TWACS] software? Or can we assume roughly $4.5 million per year on a go forward basis?

Yes, there's a little bit more. We have some other software platforms and we still have that purchase accounting, the residual stuff that comes out of the acquisitions from the former Hexagram as well as Doble. So if you look at for the year, the amortization was $19 million and about $12.5 million of that $19 million was TNG.

And so you have 6 or 7 of what I would call the other stuff and of that other stuff, 4 of it relates to the acquisitions. And then some of the other stuff is really just a small software platforms that we have across the Company.

So I think if you just took that $19 million and backed $8 million out, which is the delta from the $12 million to the roughly $4.5 million we will have, that is kind of how the model ought to look going forward. And then bleeding off maybe if you go out more than two years, it will bleed down starting three years out, if you carry your numbers out that far.

When we talk about the year being backend-weighted, I mean obviously over the past several years that's been the case. I mean, can investors think about it being a normal seasonal year for you next year? Where you do, say, 21% of sales in the first quarter, 45% in the first half as you've done in the past four years on average?

: I think that's probably fair to look at it. We don't have any unusual spikiness. It is kind of driven by the same things that it has been historically.

You've got the big VACCO submarine project in the fourth quarter. You have international content in tests that tends to get delivered in the second half of the year and that sort of thing. And then I think what we moved this year, I think we took a conservative posture as Vic said on the timing of the stimulus spending along with Kevin's call. We don't see the money. You know they didn't announce the awards and send a check to the folks that day.

So we believe that with all of the administrative matters that the customers have to endure to get this money -- and it's probably going to add 60 to 90 days' worth -- so we see a plan where on the co-op side of the business, especially in our second quarter and third quarter, we will see meaningful growth out of the co-op business. And in the fourth quarter will be substantial relative to what it's looked like in the past.

So it's probably generally consistent as a percentage. But I think it might be a little bit flatter than we've had. The steepness of the curve probably is not as high as it has been in the past. But you're close enough with the percentages that you mentioned.

Lastly, can you talk a little bit about FireTide? [If] you created an interoperable system with your AMI or AMI solution yet? And talk about some of the recent successes there or recent indications of success?

Yes. Basically what this system does, I mean as you know with our RF-based system we shoot all the information back to the data collection unit. And today, what most utilities do is then take that information used in a cellular basis, for the most part, and use that for backhaul.

Some people use WiFi, WiMAX, satellite, some other things, but primarily satellite or cellular. The issue with that is that they don't own the network. They are not -- have the number one priority and there is a monthly fee to do that.

So the first thing we will be doing with this system is use it as a backhaul system from our day collection units. Longer term, I think we could use it, the backhaul information for the substations as well.

The thing that has a lot of the utilities excited beyond that -- because it is pretty quick payback once we're able to establish that backhaul network -- is that it is broad enough that they can use it for other applications. So that is something we could feed substation information into. We could feed other Smart Grid devices into either to monitor those or control those and even to do dispatching and those types of things that are underneath that.

The system was originally designed to provide security -- video security wirelessly -- so you can imagine the amount of bandwidth that is available. So what we are going to be demanding of that system I think is far less than what it is capable of.

As far as where we are at with the system today, we have had to make modifications because it was really set up for video. And so we've worked it into our system. We have about a dozen endpoints to play with one of our customers where we've been testing that. That has been going very well.

I think we are in a position to roll that out in the pretty near future. We have a lot of customers that we've talked to. They are excited about this. They see this as an opportunity to have a private network where they can do a lot of things in addition to just backhauling the AMI data.

Last question for you guys. In the past you talked about potentially introducing a white label meter either into the US market or international market. Could you give us an update there?

Yes. We have a couple of partners in China that we've been working with we've talked about in the past. I think we are in a position to probably roll the first of those out here in the next 60 days.

The second one is going through [chema testing] as we speak and that should be, right after the first of the year, be in a position to roll that out. It is going to be for the international market. We are not looking to bring in that meter back to the US.

So it is an IAC meter which we see as a good opportunity to sell into South America initially. As well as (multiple speakers).

When you say roll it out is that in regards to a contract you have won or roll it out into being available?

Well, it will be available. I think that we do have some places for that with even some of the pilots that we have. Where they are going to increase those numbers, we will actually get that product in the field.

The other thing is both of these folks would like to be partners with us and probably will be partners with us in the Asian market. So where they have a presence already, they are already delivering meters and have partnerships with utilities there, and have a great deal of interest and represented us as we go forward into deploying product there as well.

Thank you.

Paul Coster with JPMorgan.

I have a couple of housekeeping questions first. Was there any sort of currency effect that we should be aware of this quarter or for the year for that matter? And also, the tax rate that you are expecting next year. What should we model that?

As part of the tax rate I think if you held it at 38% I think give or take 1/2 point you will be on track there because obviously we are not going to have the same level of benefits coming through in '10 as we had in '09.

And then regarding currency, I would say it was not material. It was probably a couple million on the sales, less than a couple million and then couple hundred thousand at the EBIT line. Fortunately where we see the dollar working one direction in Europe, relative to our volume in Asia, it works in the other direction and it kind of -- we fought to a tie, basically. So I would say it was an immaterial impact for us this year in '09.

Thank you. Vic, last time we came out of recession, I can't speak for Doble, but certainly looking at other test and measurement companies, one of the biggest issues they faced was really the [gray] market of refurbished equipment that they were essentially competing with their own product for a while. Do you have a similar issue as we come out of this slowdown or is that a nonissue?

I don't think so. Only because this business has always had two pieces of it where you have got the lease to product. As you lease the product, you get the service, you get the access to the database, you get access to engineers and then you have the hardware market. You know a straight sales of the hardware.

And as we've gone through this process through this recession if you will, that lease market has remained rock solid. And what's happened is for customers that bought let's say 10 units in the past, they've cut back and bought six units this year.

So there's not an available gray market out there, if you will. I mean, our products are our products. So there's the demand that's there, it's just a matter of those capital budgets being freed up.

So it's to date that service market has not been impacted but it has really all been on the hardware side. And not for lack of desire, just lack of funding. So I think that, as that picks up, we will be able to get back to the rate that we've had in the past or maybe a bit better if we have some pent-up demand on the hardware side.

My last question, is -- it's really tremendously confusing for anyone on the outside looking in on those Smart Grid projects at the moment. With so many companies offering communication solutions in particular, what is your perspective on the way in which the competitive landscape is evolving. And what impact is it having in terms of pricing or future sets or whatever dynamics that sort of come to bear on you?

I do think there's a lot of, I won't say confusion, but there's a lot of options out there and I think that a lot of people have tried to enter the market. I would say that it's going to wash out pretty quickly and the primary players that have been strong players for years or strong players today are going to remain the strong players.

And folks like [Itron] and Silver Springs and [Landis & Gear] and ourselves and a handful of others are people that are going to remain in the mix. Because I think the capabilities of all -- that these companies have our group of companies have are very competitive with any of the newcomers.

And I think the other difference is most of us have a financial strength and capability to withstand times like we're going through now. And I think utilities coming out of this are going to value that more and more, because they see that they need a company that's going to be able to weather a storm like this, because they are counting on us to stand behind their product for the next 20 plus years.

And so they want to make sure that there's a company that's got robust technology for sure, but also has a financial wherewithal to withstand if we go through heaven forbid another period of economic downturn like we're having now.

Thank you.

Ben Schuman with Pacific Crest Securities.

Gary, a couple of quarters ago I think you mentioned that growth meters would limit the decline at PG&E in 2010 to around 20 million to 25 million. With you guiding to the high 50s now, what changed since then?

Say that again. Cut off right in the middle of that, Ben. If you could say that one more time. I'm sorry.

Sorry. I think a couple quarters ago you guys had mentioned that some growth meters in the PG&E territory would limit the decline in 2010 to around 20 million to 25 million. Now guiding to 40 million next year what has changed since then?

Yes, I think as -- and I'm speaking for PG&E which I probably shouldn't be, but their emphasis on the electric product, I'm sure you have seen in the press that they're dealing with some churn out there. So I think they've redirected some of their efforts in trying to sort that out. You know, the electric deployment with one of our competitors is facing some challenges in certain parts of the communities out there.

And I think from a company perspective they look at our project which is going along as well as can be. It's getting installed. It's working. They plug it in and punch it and it plays.

So I think they have redirected some efforts to try to get the electric product installed at a faster pace. So that has distracted a little bit on the gas side. And then they also think, relative to the houses or the particular premises that they have to attend, they've satisfied most of the gas-only units so they are going to the electric houses on -- electric-only houses and that has slowed down a little bit of the gas deployment.

And because they crossed over this or they will have crossed over this 4 million end point threshold at the end of this year, if they do this 40 million with us as they've committed to already, and we did just get an additional order here in Alaska for weeks, and that essentially gets them to the 5 yard line punching into the end zone.

So I think their pace of play has slowed down a little bit because of the focus that they need to put on the electric product to get back caught up. Because they are basically sitting there with roughly 1 million to 1.5 million electric and they have twice that soon coming up to 2.5 times that on the gas and they have got to play a little catch up.

Yes. Let me try to answer it a slightly different way because I think what you are asking is you're surprised about the drop-off in '10 being as large as it is. Right.

And the reality is going into 2009 we did not anticipate delivering a number of gas meters to PG&E that we did. So they took a lot more in 2009 than we had anticipated. So we thought it was going to be a little smoother deployment than what we've actually experienced. So everything that got deployed extra in 2009 I would say that probably close to 20% of what got deployed got pulled out of 2010.

And then if you look at your customers that received stimulus funds, is that almost all MUNYs? Small MUNYs and co-ops or is there anything kind of in the $100,000 plus endpoint range, outside of Idaho, I guess?

Yes. Well I was going to say other than new customers that are strictly (inaudible) yes I would say that they were smaller ones. Somebody mentioned earlier there were some larger potential customers. There were larger utilities that received stimulus that we weren't specifically identified nor was anyone else that we will be in talking with.

And then on the international side, I mean I know South America is a big potential market for you guys and I think the regulators in Brazil have made some decisions recently kind of promoting AMI.

Have you guys seen that and are you more incrementally positive I guess about Brazil, specifically, because of that?

Yes, we have been following that and as you know we have a number of people down there. So we are encouraged that the government is getting that involved because I would say that the majority of what we have been doing to date has really been correctly with utilities. Which is good because utilities see the benefit of doing this, see the cost advantage of doing it and are supportive of doing that.

But just like we are seeing here in the US, getting some regulatory support and push on this is helping here in the US. And I think the same thing will happen there.

Okay and then the last one on the Test side. Do you expect any particularly lumpy or large projects in 2010, similar to what we saw in 2009?

I think that everything that we have in backlog we fully understand how it is going to get deployed. There are a couple of big projects that are flowing through in 2010. But they are to the point where we understand what the deployment schedule is and unless there is some big hiccup there -- there shouldn't be -- any lump -- well, any significant lumpiness in 2010.

Okay. Thanks.

Richard Eastman with Robert Baird.

I just wanted to pick up, Vic and Gary, right where you left off. Did that $8 million type of order ship in the fourth quarter in Test?

It did.

Okay so that shipped and then there's still about 7 million of that left?

That's correct.

And that will ship in the next year. Okay. And then can you size -- Vic, can you just size the co-op business at the end of fiscal '09 and I know you guys throw a [PREPA] in there. But is that 100 million? What's -- (multiple speakers)?

(inaudible) press release. I think we called that in a press release -- it seems like it was $87 million of co-ops and of that $5 million or $6 million of it was demand response. So it would be in the low 80s.

And that includes PREPA?

That does not include PREPA. I don't think. Does it, Gary?

In the fourth quarter PREPA was only about $600,000 or $800,000. So of the sales at the powerline side of the business which is about $37 million we had maybe $3 million or $4 million of international and you can round up to 1 million at PREPA and the rest would be co-ops for the quarter.

And then for the year at the powerline side we did about $117 million in business and PREPA was about $8 million of that. And then international was approximately $10 million to $12 million as subsets of that 117.

Do I remember that we were kind of waiting on a follow-on PREPA order in this fourth quarter? Because we've had that three-year piece of business, but didn't that pretty much wind down and we were looking for an order to continue that rollout and deployment in '10 and beyond?

Yes. We did get $8 million worth of orders in Q4 on PREPA.

Okay. So we could continue to bill on that. And so when we look at the co-op business you know at $87 million, is that the number that we should be thinking about growing at I mean, give me a percentage. I mean should that grow 20% -- the benefit -- as we expect from the stimulus dollars or faster or how --? How big (multiple speakers) in the stimulus dollars have in that co-op number?

Yes. I'm not sure that I would look for anything significantly higher than what we have seen for the past couple of years and the reason being, I mean certainly, we are going to get some benefit from the stimulus.

But on the other side what that is doing is kind of supporting a pretty penetrated market. I mean if you look at the co-op market itself, it is much more penetrated than the IOU or the gas or the water market.

So we had thought maybe a year or two ago, that we were going to start rolling that business off as we talked about, where it was going to start being a $60 million business or maybe a little bit less. So the stimulus money, I think, has allowed us to keep that business at kind of steady state over what was seen over the past couple of years at $80 million to $90 million.

And then just a clarification. Gary, in that corporate expense number when you bust down the EBIT by contribution by segment, that corporate number has the amortization. If I pull that out, does that also have and include this other expense item that shows on the full P&L?

A big part of it does and I would say beyond the amortization we carry all of the stock compensation expense at corporate, relative to options and restricted shares and things like that. We don't push that down to the subs because we administer it out of here. So that is part of the driver of the corporate cost there.

The severance that I was referring to is actually expensed at the subsidiary where the individual is working at.

All right and then, just the last thing. I was just milling around a little bit with the breakeven level now with the investments you've made at Aclara and in that business and at Doble, you know it I guess if I queue up the earlier question and assume 20% of your rev comes in. Did your breakeven level then it's down in $120 million to $125 million quarterly rev range? Is that about right?

Yes. It might even be a little bit lower than that, but let me just glance at something real quick. I think you can break even with the cost structure we have in place right now. Obviously the mix impacts it a little bit, obviously, based on the weighting of some of our margin spreads like a Doble or something like that.

But somewhere in the $112 million to $120 million range will get you into the dollar amount of sales with a balanced mix that gets you to breakeven.

Thank you.

Walter Nasdeo with Ardour Capital.

Getting this is [Sean Lockman] for Walter. Just a quick question. Just wanted to see if you guys could outline what you are seeing both in filtration and test in terms of just challenges and opportunities in 2010? If you just give us a little more detail on what you're seeing in those markets.

Yes. On the filtration side I would say that it feels like the business has bottomed out and I think that it was obviously a down year and the guys did a good job of working the cost side to keep us in a good position from the EBIT perspective.

As I mentioned on one of the earlier questions, we see that business kind of flat year-over-year and it certainly has driven as we've talked about the past by just air miles flown. And I think that that's going to be pretty consistent next year versus this year. So we don't see anything big that it's going to make a huge difference there.

I mean, I guess the one bit of a wild card there is what is going on with the Constellation program and we talked a lot about that in the past and we've been very successful winning projects there. What's really going to drive that is the amount of funding that is provided for that project this next year.

On the Test business, from a sales perspective, we see that being again pretty consistent. We have seen a lot more price pressure, I would say, over the past 12 months than we've seen in the past. I think we've got that under control, but it is just tough, particularly in a market like this where we have a real advantage of being a market share leader, have the most technology, turnkey provider -- all of those great things.

But the problem is, most of our competitors are small, privately owned businesses which, you know, will take a project at breakeven to keep some business and do that while they wait for the next one to come along. So I would say that we have seen pricing pressure this year. Fortunately this is for the most part a business that really is driven by technology and people really understand that.

But there always is somebody that's willing to come in and get very aggressive on the pricing. So we have had to fight that some.

Thanks. One other quick question. You know as we look at -- I wanted to talk a little bit about gross margins. [We looked] at sort of gross margin progress last year. 1Q was about 37% and then you guys pulled up into the 40s in overall gross margin.

Should we expect a similar trend this year or will margins sort of pull back maybe in 1Q as revenues pull back and so forth? Or how -- what's a good way to look at that as we look at gross margins?

I think, obviously, it follows sales and I don't think it will be in the 40s with the lower level of sales we have in the first part of the year. But in the aggregate for the year, I think we could keep that starting with a 4 there for the year and be in the mix changes throughout the quarters we might have a couple of points up or down around it. But holding it at 40 or slightly above that for the year and the aggregates, I think, are fair.

That kind of supports the cost savings initiatives and some of the efficiency improvements we've put in place. These weren't one-time things. Obviously some of the headcount reductions are, but we didn't go in and rehire people so those cost savings are going to stick for us going forward in a positive way.

Thanks.

(Operator Instructions). John Quealy with Canaccord Adams.

Thanks for the additional color on the outlook for '10. So if I'm listening correctly we got clearly a very big ramp coming in the back half of Q4. Book to bill was okay but lagging in the utility group.

When do we need to start to see these orders in the book? Is it calendar Q1? Is it drop dead to hit the P&L in Q4 or how do we think about it for the utility group?

No, I don't think so. I mean certainly we think will have solid quarters every quarter, but as you know particularly on the co-op side, we can take orders and make deliveries easily within a quarter. We've done within two weeks and so one thing you may have seen if you look closely is, we have been carrying a little higher level of inventory in that part of the business that we have historically for that very reason.

A lot of times customers come in and if we can meet a demand or requirement quickly, then we get an order. So we have been carrying a little higher inventory there to ensure that if a customer wants something, we can provide it to them.

So I would say that, even, let's just say we had a soft first quarter with orders. That is not something that would get us tips over. We kind of understand what's there, what has to happen and a lot of the larger projects, in particular, we have a good insight into whether they are going to happen and always a wildcard, a little bit, is the MUNYS and the co-ops.

We understand that and I think we are making prudent investments in inventory to ensure that we are able to meet those demands.

And on the EBIT side on the Utility Solutions Group, I realize the business -- the characterization of the business and the product offering has changed and certainly the reporting of the group has changed the last couple of years, but could you imagine given that you're continuing standing on the R&D side of it and cost optimization aside, could you see single-digit EBIT margins in that group as you stay committed to the long-term opportunity? But very clearly Q1 is going to be tough?

No. I don't see coming out that way. You have got to keep in mind Doble even though with the challenges they face this year is well into the 20s on an EBIT margin contribution in the RF business. Bounces around based on its mix and its volume kind of between a 16 and 22 type EBIT.

And so even if -- and the software business, we swung that from reasonably negative to successfully positive this year and we don't see it going backwards. So the real wild card, if you will, is the powerline side of the business where the volatility may move up and down, but because the other three aspects of the Utility Solutions Group kind of at least two of them stare at a 20, I don't see a scenario where it could be a single-digit group EBIT anytime soon.

Thanks. The last one, the last couple of quarters I think we had Doble hardware pushouts. We were expecting perhaps to close it by your end with service at Doble staying firm. How did (technical difficulties) end up for the year?

The service business continued to increase so historically the mix was 50-50. Based on how it shook out this year, it was a little closer not exactly 6040 but it was probably 55-45 service to hardware.

So is there any quote pushout in hardware that you would expect to get recaptured in Doble as we go into fiscal '10?

There may be some. To be quite honest what's happening -- and it is kind of the same thing we ran into with the Boeing strike last year where they went on strike and in the past, they maybe had bought everything they planned to buy before, I am not sure we are going to get a big pickup. Hopefully there will be some because certainly the demand's there from the customer. It's just whether how much that capital budget they are going to be able to get.

The other piece of it is how quickly Europe picks up. We did make that acquisition in Europe. That has not been as strong as what we had hoped just because European economy is -- makes ours look pretty good right now. So that's been a bit of an issue.

So I think we may get some marginal pickup there but I don't think it's going to be 20% or anything like that. But we should be able to get back to the levels we've had the year that we bought the business.

Thanks.

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

Okay, well, thanks again for your interest and we will be communicating on a regular basis, obviously. Thank you.

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