ESCO Technologies Inc (ESE) 2010 Q1 法說會逐字稿

Good day, and welcome to the ESCO first-quarter 2010 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. Patricia Moore, Director, Investor Relations.

Please go ahead, ma'am.

Good afternoon, everyone. Statements made during this call regarding the timing and amounts of fiscal 2010 and beyond expected results; future growth prospects; capital spending by utilities; impacts of budget cuts to NASA's Constellation program; the success and timing of the Company's pursuit of AMI opportunities; success in international markets; the impact and timing of the stimulus program; 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, also filed today.

We undertake no duty to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

In addition, during this call, the Company may discuss some non-GAAP financial measures in describing the Company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the first-quarter fiscal 2010 results press release issued today and on the Company's website at ESCO Technologies.com under the link investor relations. I'll now turn the call over to Vic.

Thanks, Pat. Before I give my perspective on the quarter, I want to turn it over to Gary for a few financial highlights.

Thank you, Vic. As noted in the release, EPS for the first quarter was $0.02 a share, which came in $2 million better than our November expectations of breakeven. This compares to $0.22 in the prior-year first quarter.

The decrease in quarterly earnings in fiscal 2010 is driven by the lower sales volume, which resulted from the following three items. First, PG&E-related quarterly sales at Aclara RF decreased from $31 million in fiscal 2009 to $7.6 million in the current quarter. This decrease is the result of the wind-down of the gas AMI project, and also due to the fact that the prior-year first quarter included about $5.5 million in sales of RF electric products.

Through December, we've delivered nearly 3.5 million gas AMI units on this contract, worth nearly $200 million. Since quarter-end, we've received an additional gas order, bringing the total committed units to over 4 million.

Second, distributor sales of Aclara PLS products to co-op customers decreased about $5.4 million, primarily due to delays related to the government's ongoing stimulus program. This decrease is timing-related, and we believe once the money is actually disbursed to the customers, we will see stronger sales forthcoming.

Third, we had an $8.5 million decrease in sales within the test business due to the timing of the completion of several large chamber projects.

On the cash flow and balance sheet front, we continue to be pleased with our cash-generating capabilities, as well as our capital structure and available liquidity. Our net debt outstanding was approximately $130 million at December 31 and with a comfortable leverage ratio of 2.0.

Regarding entered orders, we are very pleased to again report a significantly positive book-to-bill ratio for the quarter. I have detailed a few of the major wins within the release, as well as a couple of sizable January wins which support our current operating plan.

Regarding the balance of the year, our current outlook for fiscal 2010 remains consistent with the expectations we laid out in the last earnings release and investor call. I'll remind you that the year is second-half weighted on both sales and EPS, as it has been in the past.

I'll be happy to address any specific questions regarding the financials during the Q&A and I'll turn it back over to Vic.

Thanks, Gary. First of all, I want to say I'm happy with the first-quarter results. While the absolute results are not stellar, they were above our original expectations.

Most importantly, the strong entered orders in the first quarter and continuing through the end of January are helping to solidify our outlook for the balance of the year. These orders are also indicative of our strong product offering across the business.

With our recent announcements, we have attempted to keep you informed of the major project wins as they happen, and for clarity we've summarized them in today's release.

In the utility solutions segment, there are three things which I view as very positive developments. Number one, we appear to be getting increased traction with several AMI customers in South America.

Number two, our fixed-network water product continues to experience meaningful success as evidenced by the recent wins in San Francisco, Toronto, and Florida.

And number three, our order activity at Doble has picked up, leading me to believe that capital spending at the utilities may finally be getting back on track.

I'm very pleased to report that we realized a positive book-to-bill in all three operating segments this quarter, and are off to a very strong start in Q2 based on our January orders.

To give you an update on one of our large and near-term AMI prospects, the SoCalGas decision has moved to the right since we last spoke. The current schedule calls for them to announce their vendor selection and begin the project in the March/April time frame. We continue to believe that the project will go forward and that this movement is simply an administrative timing issue. We remain in regular communications with the customer and we continue diligently supporting their evaluation.

Turning to filtration, we've talked a good bit in the past about our opportunity in the Constellation space program at VACCO. As you may be aware, the administration's budget released this week contained some significant cuts at NASA. While nothing is final at this time, these cuts could significantly impact the program longer term.

Any cuts should have a minimal, if any, impact on 2010. However, any major cuts would have an impact on the long-term outyear growth we had anticipated at VACCO. As this process continues to unfold, we will keep you informed of any major developments.

In spite of this recent news, the overall business at VACCO remains very strong, and when considering the other prospects we have identified and are actively pursuing, we believe VACCO could provide some additional upside opportunities near term.

So, in summary, we remain in a solid operating position across the Company. We have ample opportunities for growth and we continue prudently investing in the business to ensure our long-term success. So with that, I'd be glad to answer any questions.

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

I guess, Gary, my first question -- if the revenue guidance for the year is similar to what you guided last time, I think that was down 3% to 5%, so that's about $600 million in total revenue for the year, roughly. You've got about $325 million in backlog now and it looks like, based on what you did in Q1, you'll need more than $480 million for the year to hit that type of $600 million level.

So I'm wondering, can you just give some more color on the visibility you have? I know there's ongoing projects that will place orders and have shipments throughout the year, but obviously the rest of the year is not all in backlog now. So if you just give some comments on how you get to that additional, say, $150 million or $160 million that you'll need?

Right. I'll break it down by segments because I think it'll be a little easier to understand. So when you look at the filtration segment, PTI in particular, it's a quick-turn book-to-bill business, so relative to PTI's backlog today and the confidence, say, in Q4, it's somewhat irrelevant because the backlog turns so quickly.

So within filtration itself, I don't think backlog is a real good indicator of our comfort level and the outlook for the year. So I would say we're comfortable because we understand the business well enough and we know what the cycle is on commercial aerospace and within the packaging business.

VACCO is a backlog-driven business, and looking at the big drivers in the back half of the year, the biggest thing is that Virginia class submarine, which we have in backlog because we booked the big order last year. So I'd set filtration aside because we're very comfortable with the outlook for the year, and there is probably a little more upside than downside.

On the test business, backlog is a more relevant indicator of what the prospects are for the rest of this year, so if you look at the order book for the first quarter, it's about $37 million, which gets us pretty substantial visibility in both the near term and the next two quarters. Beyond that, then you put this large chamber order that we announced in January gets added into that, and I would say a reasonable amount of that is going to ship this year, so we're not really that concerned, give or take $1 million or so, in the test business.

So really, the risk or the benefit, really, drives utility solutions, and so when you see what we booked on the international side, particularly in Mexico and Colombia, that's roughly $25 million between the two of those. That is scheduled to ship this year, and we feel very confident where we're at there. Looking at the co-op business, we still have a little bit of risk on the stimulus-related money. It needs to -- we can't be sitting there dragging that around in July and August.

The RF business, we have a lot of visibility now on the PG&E Gas. The first-quarter order's of roughly 7.5, and then we got another order in January that basically gets us through this year. So, very high degree of confidence on the commitments we've made on the PG&E Gas.

New York City Water, as I announced in the January, that's now fully booked. San Francisco is now fully booked. Toho is partially booked. So as you see the magnitude of these January orders, consistent with the backlog quantities at an all all-time high and the book -- the quick-turn book-to-bill items we have, I would say -- we're obviously not giving specific guidance, but I would say our confidence relative to that $600 million has significantly increased by this order activity. Was that long enough for you?

That was great. I'm just wondering, is it fair to boil it all down and say, look, all of the business we need for the full fiscal year is not in backlog, but we have -- even though visibility has been a little bit of a problem, we have reasonable visibility into X percent, and maybe that's a high percent. Maybe it's 80% or 90% at this point.

Let me jump in. I think you're framing it right. I do think that you are taking the right approach at it. Probably the biggest risk we have, as Gary has mentioned, is really the co-ops coming in, and really that's something that, as we talked about on the last couple of calls, and a lot of our partners in this industry are talking about the same thing, is when that money is going to truly get freed up in a big way with the stimulus.

We're starting to see some of that come loose, but more of it needs to. So I would say as we look at where we have some risk, that's probably the biggest area.

But in the overall business, that's not -- it's an important part of the business. But it's not a huge part of the business. I'd say between what we have in backlog, which, as Gary said, was at kind of an all-time high, and what we've booked, I think we're in pretty solid shape, but it's not without risk. We've still got another eight months to go.

And Kevin, to the percentage you applied, we never get to a scenario on a consolidated basis until you are sitting there, obviously in August or September, when you say 80% or 90% of our revenue projections are in backlog. But we do track it on a monthly basis. The term we use is SNOW, which is shippable new orders, and I will tell you on a percentage basis, jumping ahead to the end of January with the significant orders that we've announced on the large side, and then we also have the recurring stuff behind it, I would say that our percentage today, sitting here at the end of January, for the remaining months of this year, the percentage today is higher than it was in January of last year by a meaningful amount.

That translates into confidence, not just the math.

Got it. Got it. And then, one more question, Gary. I'm wondering if you can comment on incremental EBIT margins here. It looks like sequentially from Q4 into Q1 on the way down, they were over 40%. If we say that Q1 revenues are presumably the low watermark here and we start to grow from here out into the back half, should we be thinking about that type of order of magnitude incremental margins as the revenues come back?

Yes, obviously we have a block of fixed costs, so when you're running revenues through it at a rate of about 112, it's really challenging to cover your fixed costs embedded in G&A at $30 million-something, $40 million-something.

So, stepping up to the incremental side, the nice part of how that revenue profile lays out is it steps up from Q1 to Q2, it's reasonably meaningful, and then the big pop is in three and four. The big growth aspect in the back half of the year comes out of Aclara and it comes out of Doble, and so when you look at the incremental margin out of those two businesses, they are the higher highest contributors on the incremental side, so then the fixed costs don't change.

So you're going to see meaningful step-ups -- obviously, at the EBIT level in Q1, it's roughly 2%. It jumps up substantially on the sales growth, and in the back of the year, it gets back to what I would call the historical run rate on a consolidated basis being in the mid teens to upper teens once the volume's there.

So, we haven't dialed in. We have the visibility where it's coming from, and the sweet spot is the largest contribution of the growth from Q1 to Q4 comes out of the utility solutions group where the incremental margins are in the high 40s.

Rob Mason, Robert W. Baird & Company, Inc..

Thanks for the discussion there, Gary, but did you clarify, of the $325 million of backlog, how much you assume will ship in fiscal 2010?

I did not. It's roughly in the neighborhood of 50%. Yet to go. Obviously.

So I'd say kind of in the neighborhood of $172 million to $175 million of the $325 million, ballpark, 50% will be a comfortable number to use.

And again, why that doesn't seem like a sufficiently high number, it's because the PTI VACCO business is -- the filtration business is the quick-turn business, again, as I said, where backlog isn't really a big indicator of what the balance of the year is going to be.

Okay, and you said that you're still comfortable on filtration PTI, even though it seems like for many aftermarket suppliers the December quarter was still a little soft in commercial aerospace.

Yes, I think that's true, but when you look at ours, we were flat from Q1 to Q1 of last year. So we're not seeing any further deterioration. It certainly feels like, when you look at the last five quarters, it seems like we kind of bottomed out in a Q2/Q3 timeframe last year, and we did roughly $11 million or so in Q1, which is relatively consistent with last year, and so it feels like it's stabilized a fair amount.

And the nice part is we've done some things last year as the dip was really pronounced to kind of realign our cost structure a little bit, and the management team there has done just a fantastic job on managing the discretionary spending as well as the period costs, like scrap and warranty and rework and stuff like that. So, the plan for this year is to actually show increased margins at the EBIT level for the year in the aggregate, and that really is from feeling like it bottomed out as well as really effective cost management.

Just with respect to the Constellation program, we talked later last year about the cost, R&D, and project costs going up as a result of that program. Would we expect to see those come down in the near term?

Yes, I would think, absent the news of earlier this week with the administration's budget thinking there, it was going to be generally flat because a lot of the heavy lifting on the things that we had either contracts for or expectations of contracts for, the kind of heavy lifting was already done.

So this year was going to be generally flat until we actually back-half of the year started producing prototype products. So, you know, the interesting part of this recent news is we actually have contracts for certain aspects of the business that we will deliver this year, and they haven't announced that they're going to terminate existing contracts to really -- they're really talking about terminating future contracts.

So the nominal amount of revenue, as Vic said, it's not going to hurt us this year, and obviously this has all happened within the last couple of days. We're doing an evaluation. We were smart enough to not staff up. We knew there was some risk on this thing. So you're not going to see some big charge where we're going in and laying off 50 engineers, that kind of thing. We were smart enough to wait until the contracts came into backlog.

So I would think the investment, we're balancing it, but it's an awkward situation because we still have live contracts that we have to perform on because we've not been formally notified that the development work is terminated, and then as we look back in our history and the defense days, 10 or 15 years ago, when these kind of things would happen, generally when it's terminated for the convenience of the customer, there is an ability to recover some of the costs.

But we're not at that stage yet where we're talking about that. But we don't see it this year or probably next year as being that punitive, other than it's extremely disappointing.

And then, Vic, just last question, you mentioned that some of the co-ops are still stymied, waiting on stimulus funding. What are you seeing out of the co-op or muni customer base that did not receive grants that they had applied for? Are they starting to free up and place orders and move ahead with the projects, even though they didn't get the funding?

Yes, they are. I think we've -- I won't get the number exact, Rob, I should get that, but I think we have something like 10 new customers this year on the co-op side. I think that's at least 10 new customers.

So we still are entering orders, so I don't want to give the impression that we aren't getting anything from those guys. It's just that some of the things that we thought are -- that we think are going to be a bit larger are being held up. But we still are getting orders.

Steve Sanders, Stephens Inc..

Pat, congratulations on your retirement. Vic, maybe first on CFE, so you got the initial order and you booked that, and it sounds like that's going to be installed over the next quarter or two. Can you kind of talk a little bit about what happens after that? What are they looking for in terms of system performance, and then how are they talking about kind of the next few years and the potential there?

Yes, it's still a little bit up in the air, other than the contract that we have allows them to double the size of the order without going back and looking at the contract again. So that piece obviously negotiates -- that's something that should get us through this year and maybe part of next year.

Longer term, they are talking about doing a much larger deployment. But the thing that we're focused on is really putting a product in-field that works for them and works well, and then I think we'll have a good opportunity for much larger deployments in the future.

But they've really kind of focused this on the Acapulco area, and so, it's a pretty contained service territory, so I think once we get that done, we prove out the technology, we hopefully will be able to move on to more larger deployments in the future.

And one thing I will add to that, Steve, is the primary focus, even though the system we're selling has full AMI capabilities, and ultimately that's their goal is to do things beyond the mitigation of non-technical losses, which is a polite term for theft. But it's -- the business case is very real for them to get this system put in in a quicker versus a slower fashion.

So, it feels like -- the $20 million equates to 90,000 units, and as Vic said, there is an immediate backstop behind it of another $20 million. Once they get that in and they'll see the performance of this and the way this solution very quickly mitigates the theft, it would be -- it would be very -- a very strong incentive for them to put this in, and if you know the history of how CFE ended up with the absorption of CFL, the main thing that caused their what used to be sister company, or now is a sister company, the reason that they ended up in the same family is because of the rampant losses that they were experiencing.

So, there is some government -- I don't mean financial incentives, but certainly some impetus from the government to get this theft thing under control because it's just literally money going out the door and they need to stop it.

Yes, and Steve, to answer the other part of your question because I don't think I did, was just on performance, what we're looking forward to do. Other than some structural changes, we're doing some coal mines and things like that, which we are working through and we've been working on sometimes ourselves and with partners, but as far as the functionality of the system, our understanding is that the functionality that's currently inherent in the core product is sufficient to do everything that they want to do today.

And then on the water side, maybe a general update on what you're seeing internationally. I would assume that the Toronto project getting off the ground gives you some momentum in Canada. I don't know if you're seeing opportunities in Latin America as well, but if you could just provide some additional color on the international water pipeline?

Sure. There is not a lot of firm projects that we are chasing today. There has been a lot of interest particularly in Central and South America. We do have one very small deployment in South America.

But certainly there is -- appears to be a tremendous amount of interest there, and what really drives that, in large part, is leak detection because they want to have better leak detection products, and so that's something we continue to enhance on our side.

But I would say Canada is a good opportunity, certainly, and I think having this deployment in Toronto will certainly help us there, as well as some of the kind of high-profile customers we have here, and I would say really the city of New York has probably been the thing that has gotten us a lot of credibility, if you will, in South America. So it's been a little slow to develop, but I think that's absolutely something that over the next couple of years should be a big play for us.

Okay. And then, you made some -- I think a comment sort of along the lines that Doble surprised you a bit on the upside in the quarter. Can you just provide a little bit more color there and kind of let us know what that does for your outlook for Doble for the year? Is it positioned to grow? Is it a little too early to say that? Just whatever color you can provide there would be helpful.

Certainly our current outlook is it's going to be -- it's going to grow over this past year.

Now, again, I always remind people there's two pieces of Doble. There is a recurring piece. That was rock solid last year. It continues to be this year. In fact, I think we probably had less attrition on the recurring side of the business this past year than we've ever had, so that's good.

What's happened, though, is we've gotten a little more -- more sales in the hardware side than what we had had over the past four quarters. So, most of those, I would say, the big jobs that kind of came up that we were -- maybe didn't have in our outlook or some international opportunities, we had a big one in South America and we had a big one in Central Europe.

So, it appears that the -- and then, the domestic has held pretty steady. So it appears that, overall, that's starting to pick up some. We had anticipated it was going to pick up some, but it's encouraging to see the orders kind of fall in the way we thought they would going into the year.

And then, last one, Gary, just in terms of the SG&A, kind of looking at this quarter relative to the balance of the year, are you making any significant incremental investments? Any opportunities to save some money? How should we think about that?

I'd say if you're going to look at this quarter, it's pretty fair, relative to how the profile should look for the year. The only place I'd say that we're making a discrete investment is at Doble. We are seeing the revenue pop, so it's giving us some of the EBIT flexibility, but we do have some initiatives going on and some new products, as well as some additional enhancements to existing products to kind of move them up the food chain a little bit. They are already pretty high up there.

So, we're bringing on a few additional engineers and we continue to focus on our international expansion, so we have some sales or business development people as well. So, I'd say over the course of the year, it's probably in the neighborhood of $3 million, or so, $3.5 million. So if you kind of call that $600,000, $700,000, or $800,000 a quarter compared to last year, and obviously, this is an initiative we launched in 2010 so we probably don't have all those people on board as of December 31, so you might see an incremental step up, but we're not talking -- across the Company, we're not talking $5 million and $7 million.

I'd say Doble's getting the focus. Aclara RF kind of continues. With the Firetide partnership we signed up to, there's some development things going on there. But again, those are a couple of hundred thousand here and there, and some of the other radio enhancements we're doing, which I would call relatively consistent with last year.

So, just a nominal uptick in Q2 versus one, maybe a little higher in three. But the profile that you see in Q1 is reasonably consistent with the year.

Sean Hannan, Needham & Company.

So just a quick question. You've been making, obviously, a lot of solid progress in the water and the gas side. We've talked about that a bit tonight. But can you discuss a little bit around your strategy to build out the electric side of your STAR offering, and particularly the level of interest that you're getting in the U.S., and is there a consistent profile for those types of utilities?

You're saying for the STAR electric product?

Yes.

Yes, so we have that under development. We deployed some of the product. I think the standards changed pretty significantly on what customers are looking for. So, we are enhancing that product. I think it's going to be sometime this summer before we have a product we can deploy.

I would say there is good interest out there. People want to see the product first, of course, and we are committed not to get the product out there until it's really ready for prime time. So what I would say is the core technology, again, that we are using utilizing on the water and gas products are the same core technology that we're going to be utilizing on the electric.

So, the successes we are seeing there, I think are very easily transferable. So the development we have underway are to meet some of those standards like the IP-based system and to pull some of the data out of the meter and to be able to transfer that effectively.

So, we have a very good idea of what we need to do and I think the thing that is going to ensure that we are successful with that product is that core communications technology, because it has been proven so reliable with the other two types of utilities.

Carter Shoop, Deutsche Bank.

You had talked about guidance for fiscal 1Q of breakeven three months ago. I was hoping you could give us some kind of a range for 2Q that you're comfortable with today.

Directionally, it's going to be less than Q2 of last year. And again, as the sales ramp-up pulls through, looking at what we did Q2 was about $0.40, and I would say it's going to be in the neighborhood of half of that or so.

But I really can't get any more specific than that, but it doesn't go from $0.02 in Q1 up to $0.40. So I think kind of splitting the difference and putting a band around that would be reasonable, but that's really about as tight as I can narrow it down right now.

That's helpful. And then, in addition to the improving unique co-op orders that you're expecting, can you discuss some of the other more significant orders within the Utility Solutions Group that you're expecting to receive over the next, say, three months to enable you to meet the 2010 guidance? In particular, are you expecting the SoCalGas contracts to contribute to 2010 numbers?

Yes, really, that's the only significant order that we're anticipating, and some of the things that were entered in the first four months of the year were the other things that we were kind of counting on. So I would say that the only big order in that arena is the SoCalGas.

There was an assumption that there was going to be a small amount of sales taken in 2010. It's a fairly small amount. And so, as -- obviously, as that continues to slide to the right a bit, that does put that in a little bit of a precarious position, but hopefully we'll have some other pick-ups in some other parts of the business that would cover that if it does continue to slip.

But, you shouldn't think that we were counting on $8 million or $10 million of sales in the year for SoCalGas. It was a pretty insignificant amount.

Yes, it's less than $5 million. So, it's meaningful and it's $1 million, but it's not something that if it doesn't happen, we're going to have some meaningful decrement in our EPS.

Okay. With all of that said, can we walk away from the call tonight under the impression that you are much more comfortable with the full-year guidance than you were three months ago?

(Multiple speakers). Yes, certainly. I think given the order activity we've had thus far, and again, the only caveat -- you know me, I like to be full disclosure, but the only -- the concern that we have, that I have, is the co-op market developing the way we think it's going to.

Other than that, I would say we're more confident today than we were because until you win San Francisco, until we get a contract with Toronto, some of the key milestones and particularly on the international side that happened in the first four months, certainly make me feel better about where we are than I did four months ago.

Two more quick ones, if I may. Can you talk about what co-op sales were last year, and then what you are expecting them to be in fiscal 2010?

Carter, the phone is kind of cutting out.

(Multiple speakers) year-over-year co-op sales I think are pretty consistent. Maybe up just a little bit.

Are you talking for the year, or first quarter to first quarter?

For the year. So fiscal 2009, what were the co-op sales? I think they were almost $110 million in 2008, so what were they in 2009? And then, what are you expecting them to be in 2010?

They were relatively consistent in 2009 versus 2008, and then in 2010, we've dialed them back a little bit because at the beginning of the year we had anticipated a little bit of the stimulus pressure, so we kind of baked that back, so we're looking at something right now in the 85 to 90 range.

And now that roughly four months of the year have passed, we still feel good about it, but, like I said earlier, we can't be waiting on the stimulus money to be rolling in here in July and August. So, I'd say using an 85 to 90, with the decrement being, I think, timing related because the number of customers that we have in the pipeline is continuing to be 50 or 60 more customers every year.

So we're not losing traction in the number of customers. We're just losing a little traction in some of this stimulus-related timing.

Great. Last question. The tax rate was 35% in the quarter and you guys were guiding to 38% for the full year. Is 38% still an okay number for the full year?

Probably 36% would be a better feeling for the balance of the year.

Great, thank you very much. Congratulations on a good booking quarter.

Jeremy Hellman, Divine Capital Markets LLC.

I just wanted to go back over a couple items. On the Constellation topic, the way I read it, it made it sound like the government was going to opt for, dare to think, but stimulus-type measures in the private sector. So I guess those guys should probably go find a new line of work.

But if that were the case, and the government is out there essentially trying to stuff pockets on the private side, is it not then unreasonable to think that you guys might have some ability to gain substitute business that way?

Yes, absolutely. That's the thing, and people talk about going from government to the private, and the reality is NASA outsources a lot of this already, I mean, obviously, to companies like ours.

But having said that, if they do go with commercial companies to do this, they still have to do the same types of things. They still have to do the same types of things that we do, and I can tell you, there aren't many companies that do it. And so, there aren't that many of the types of engineers and the types of products that we make so, I think over time -- let's just say it plays out the way they are talking about doing it, it's going to delay.

But I don't think that the (multiple speakers) will totally go away because they still have to have latch valves and they still have to have thruster valves. They're the kinds of things that we do and we do very well.

I don't think they are going to go redevelop those on their own. I think they will work with companies like ours. But I do think it could certainly cause a delay in the overall development of these products.

And Jeremy, just to add a little more to that, if you were able to get access to all of the public communications on this one, to your point of they've already set aside some quote stimulus money for these private companies. They've picked, I think, seven companies to already donate -- or designate money to.

And if you look at who they are, yes, there are a couple of little things you've never heard of, but one of them is United Launch Alliance, which is a gigantic company that has been doing this for years; Boeing and the Jet Propulsion Lab are getting some of the money; Lockheed Martin is getting a chunk of this money that they are calling private sector money in this pool of seven people.

And so, it's a little awkward when there is unnamed companies, but then you've got United Launch Alliance, Boeing, and all these other guys who play in the game anyway, so it's new to us here because it's a few days old, but it just feels a little bit awkward on how they are kind of thinking about this.

You know, we don't know how it's going to play out yet, but I felt compelled since we had the information -- it's pretty public information. We have talked a lot about Constellation in the past, that we've mentioned it and we kind of tell you that, longer -- well, two things we want to make sure you understood. Near term, it's not going to have an impact. Longer term, it could have an impact, but that piece of it, I'd say, is a little unclear. So as this thing plays out, we'll continue to communicate with you guys.

I appreciate that color. A lot of time on a small slice, actually. Going back to the international business, I wanted to see if there is any comments you can share with respect to other pilot projects you have -- TEPCO, in particular, in the international arena, anything that may have changed from prior communications you've had with the Street on that.

Not really any big changes. I mean, as we've mentioned on that specific project, it's working with the R&D group there. It's going very well. They are very happy with what they've seen.

It's a long process. And I think we've been pretty consistent with that. So I don't think that that's anything that would turn into meaningful orders in the next several years.

Beyond that, some of the other pilots we have outside of the U.S. continue to perform well. As you can imagine, over the holiday season, first part of the year is a little slower. So, I think as we're now getting back into people working hard, we'll get a little more insight into some of those things. But there have not been significant changes since we last talked.

One last one for me. Just looking at gross margins, any light you'd care to shed on where you see margins over the course of the year, either in an absolute [comment] type style or versus prior years' margins?

I would say relative Q1 to Q2, jumping ahead sequentially, you'll see some reasonable movement up, and again, it kind of pulls through with the sales increase from Q1 to Q2. So, dialing it up a half a point to three-quarters of a point is probably fair, and then as you get through the balance of the year, we outsourced manufacture at some of the larger growth items, so you don't get the extreme pullthrough on some of the pieces.

But I would say incrementally, taking it up to kind of at a Q4 level into the low 40s, kind of a 42-ish kind of thing, feels okay at the volume thresholds we are staring at in Q4. So, we did roughly 40 in Q1. We get to 42 or 42.5 in the back of the year and just kind of -- I think if you just kind of straight-line it up to that as the volume ramps, it would be a fair way to look at it.

Walter Nasdeo, Ardour Capital Investments.

This is Robert Lahey speaking on behalf of Walter. Most of my questions have been answered, actually, but can I get a headcount from you guys current for the Company?

That's a good one.

About 2,700.

I was going to say 2,750 or so is what we had in the 10-K, and it's probably within 25 people of that. We've not added anyone substantially across the Company, nor have we had a big force reduction. So it's pretty consistent with what we shared in the 10-K.

Great, thanks. Regarding the stimulus, I know we're still sort of waiting for the first funds to roll out, but right now in DC, they're debating a second stimulus/jobs package. Is there any upside for you guys or for the space? It's supposed to have a slant towards our sector a little bit. Is there anything specific you think you'd benefit from?

I don't think we have enough insight into what they might or might not do, other than they are trying to push a lot of it towards green jobs and those types of things. So, it really depends on if it goes forward and then how they define it.

Certainly, we are tracking that closely. And any opportunity we have to access some of that through our customers, we will take advantage of. But I just don't think it's defined enough for us to have good insight just yet.

And we also have a regulatory affairs group within the Aclara side of the organization. So we do stay pretty close to it. So as that type of thing develops, we certainly want to make sure that we are participating in it as soon as it becomes available, as opposed to kind of chasing it. So the folks that take care of that for us are pretty well informed.

John Quealy, Canaccord Adams.

Pat, congratulations. A couple of questions. Vic, in terms of timing on stimulus and how it impacts the muni co-op business, what is your best guess? And I know this is fraught with risk for the entire sector, but what's your best guess on when you get clarity on when the money flows? Is it up until the beginning of Q4 for you folks to -- a reasonable expectation of when some of this money actually gets out there? How do you handicap that?

I think we'll get a lot better insight here in the next 60 to 90 days.

And let me ask you in terms of the business on the Firetide side, what can we look for? How are you judging the milestones for that business -- for the maturity of that business? Is that 2011 we should see some commercial stuff going on, or how are you gauging that relationship?

I think that that's probably a safe way to say it. As you know, we have deployments where we've been really shaking it out. It's working well. I think we are going to be expanding that in the pretty near term.

We've bid at a number of places, tremendous amount of interest. We just got another call on the product today, and so -- but I would say before we're going to see anything substantial, it's probably going to be next year. I think we will see some additional deployments this year, but substantially it will be next year.

And I would say, John, relative to the beta tests that we're running, we obviously laid out expectations. We're either -- on some of the milestones, we're either on schedule or ahead of schedule because the performance has been better, and also we're extremely pleased with our partner who is very, very adept at this type of thing. So the folks over at Firetide are doing an absolutely wonderful job on holding up their end of the bargain, if not exceeding expectations.

So that keeps it on track to give us a little more confidence that this manifestation of sales in 2011 has a pretty good high degree of probability.

And just a couple final ones. With regard to Mexico and Colombia in the PLS side, Gary, did you mention you were expecting additional order flow over the next 18 months, or this initial tranche should take you on the P&L the next year into 2011?

We only booked 20, approximately 20. That's for the first 90, and then as Vic said, the way the contract is set, it has an automatic double-up feature, that they don't have to go back into the board and whatever. So the 20 kind of really feels like 40, even though we don't have the firm order.

We're a lot more conservative, so the way the schedule lays out is first $20 million should deliver this fiscal year. We think we'll get the other $20 million order this fiscal year, and then, depending on the pace deployed down there in Mexico, we won't get the full second million in this year, but there's a possibility to get 10% of it this year. But it gives us a high degree of confidence through the first quarter, maybe even first half of 2011.

So it feels like $40 million over the next 12 months to 15 months from today, with $20 million of it definitely in hand to be delivered this year.

And the same with Colombia. It's a unique order feature that both organizations in that part of Latin America did a double-up. The $5 million or so at Colombia has an automatic double-up feature for the second $5 million, and it's probably going to be deployed the same way. The $5 million definitely is going to hit this year, and I think we have a likelihood to both book and ship the second $5 million, but we haven't really counted it just yet.

And then, with regard -- again, comments at the outset about the full year 2010 and the lack of guidance at this point. Last year was about two-thirds of revenues in the back half with over half of the EPS. Is that a similar ratio or in the ballpark of what we should be looking for for fiscal 2010 results?

It might be a little bit more skewed there because last year in the first quarter, we had $0.22 towards the running start, and now we have $0.02. So we're obviously coming off of a lesser starting point.

So just the percentage is skewed a little differently relative to the $0.02, but I would say, as a comment I made earlier, while it's a higher percentage of waiting in the next three quarters, the confidence level is higher because the SNOW or the prospects we are anticipating have been booked earlier in the year.

There was a little bit of stress or trauma as we were sitting there in the summer to get across the finish line in September. I don't feel that same level of apprehension or stress today because of these -- of where we're at through January. Take the 325 and add the January, and that's where I get to the higher percentage of comfort and math on the backlog, that what we have to satisfy the rest of the year, we are in a better position today at January 31 than we were last year by a meaningful percentage.

Okay, and then, lastly, in terms of the guidance, do you think you have to go through half the year and sort of reinstitute it, or is this going to be the new normal, you think, just with no guidance and sort of play it as the quarters go?

I think we're just going to have to wait and see. We're going to have to wait until we get a lot better clarity. So, I wouldn't -- honestly, I don't anticipate giving guidance the rest of this year. If some something happens to change that, we certainly would do that, and as far as next year, we'll have to wait until later this year before we make that decision.

(Operator Instructions). Paul Coster, JPMorgan.

It's Mark Strouse on behalf of Paul Coster. With regard to your Utility Solutions revenue on a global basis, are you able to provide a split as far as how much comes from powerline sales versus RF?

Yes, are you talking about for the first quarter or for expectations for the year?

I guess what I'm looking at is, now, how that has trended over the past year, and then based on backlog what you are expecting for the next foreseeable future.

Yes, I would say from the powerline side of the business, relative to the quantities that we pumped through last year on PLS, we did about $120 million in revenue, and I would say that the international content was roughly $15 million.

Obviously, we didn't have Mexico and Colombia and that sort of thing, so it was mostly kind of Caribbean-centric, if you will. We had some things down in Dominican Republic and the British Virgin Islands and things like that.

So, obviously, if that's your baseline of 15 for fiscal 2009, you're going to show a meaningful percentage increase as well as dollar increase as Mexico and Colombia come through. So -- and then, we still have recurring revenue on some of the other businesses. So getting it up kind of in the $35 million to $40 million range this year is not an unreasonable way to look at it.

Within the STAR, the RF business, that's all -- today is all domestic until Toronto starts, and then obviously the Canadian business will fall in the international bucket. Doble has -- a nominal piece of their business is international. So it's about 30% of that, and call that about $85 million last year, so 30% of that.

And then the software business, last year at roughly $20 million, I would say was all -- maybe 5% (multiple speakers). So, hopefully that gives you a little clarity of how the mix is, and so obviously from a growth perspective, we are really focusing on the PLS side for the big numbers and then strategically at Doble, it's -- you're not getting $20 million contracts at Doble. It's kind of, you are building out your service business and your hardware business, so the incremental growth is a lot smaller.

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

Okay, thank you. Appreciate everybody's interest. One thing I want to say, a couple of people mentioned Pat's retirement. Pat's our Director of Investor Relations, and we appreciate her contributions over the year and we're going to miss you. So with that, we will sign off. Thank you very much.

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