ESCO Technologies Inc (ESE) 2011 Q1 法說會逐字稿

Good day, and welcome to the ESCO first quarter 2011 conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO, and Gary Muenster, Vice President and CFO.

And now to present the forward-looking statement I would like to turn the call over to Kate Lowrey, Director, Investor Relations. Please go ahead, ma'am.

Thank you. Statements made during this call regarding the timing and amounts of fiscal 2011 and beyond expected results, the success and the timing of the Company's pursuit of AMI opportunities, including the SoCalGas Project, new product developments, future growth prospects, success in international markets and other statements which are not strictly historical are forward-looking statements within the meaning of the Safe Harbor Provisions of the Federal Securities Laws.

These statements are based on current expectations and assumptions and actual results may differ materially from those projected in the forward-looking statements. Future risks and uncertainties that exist in the Company's operations and business environment, including but not limited to the risk factors referenced in the Company's press release issued today, which is an exhibit to the Company's Form 8-K filed today.

We undertake no duty to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In addition, during the 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 and fiscal 2011 results press release issued today and found on the Company's website at www.escotechnologies.com under the link Investor Relations.

Vic?

Thanks, Kate. Before I give my perspective of the quarter and the year I'll turn it over to Gary for a few financial highlights.

Thanks, Vic.

As noted in the release we reported EPS of $0.40 in Q1 which reflects a 20-fold increase over the $0.02 reported in the prior year. The EPS increase was driven by the significantly higher sales reported across all three operating segments.

Consolidated net sales increased $47 million or 42%, with USG reporting the largest increase at 51%. USG's $31 million sales increase reflects a $28 million increase at Aclara, including nearly $20 million of international sales, primarily at [CFE] in Mexico, an $8 million increase in domestic order, domestic COOP and water AMI sales, and $3 million of additional sales at Doble.

Filtration sales increased over $11 million or 46% with every operating unit showing growth and included Crissair, which added approximately $6 million of sales in the quarter. Test sales increased over $5 million or 19% as several large chamber projects were completed within the quarter.

Also during the quarter our EBIT increased over $14 million to 10.4% of sales. USG was our strongest performer, and Aclara clearly was the biggest profit contributor as our AMI product mix continues to deliver solid incremental margins.

During the quarter we shipped $6.9 million to PG&E compared to $8.3 million in Q1 of fiscal '10. Cumulative through December we've now delivered nearly $4.5 million gas AMI units on the PG&E contract worth approximately $250 million. This project continues to be the largest fully functional fixed network AMI deployment in the country and continues to be instrumental in serving as a favorable reference customer for other AMI opportunities.

We continue to be enthused about the significant amount of orders received across all three operating segments. We booked $186 million in new orders in the first quarter on the heels of our record setting order book in fiscal '10. Also during the quarter even as the contract continues to wind down we continue to book additional orders from PG&E as we recorded $7.5 million of new business on this contract.

On the cash flow and balance sheet front we are very pleased with the $19 million of cash generated by operating activities during the first quarter, as well as our capital structure and available liquidity.

Our net debt outstanding was approximately $111 million at December 31st with a very comfortable leverage ratio of 1.42 and continued favorable pricing on our outstanding debt.

We are reiterating our outlook for fiscal 2011 as we continue to expect both sales and EPS to grow between 10% and 15%. As a reminder, this growth is expected despite a significant sales decrease at PG&E and considering the $10 million in incremental investments across USG.

These incremental costs compared to fiscal '10 are related to new Smart Grid applications, global market expansion initiatives, and pre-deployment costs expected to be incurred on the SoCalGas AMI Project. In total these incremental investments are worth approximately $0.23 a share in 2011.

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

Thanks, Gary.

And I think I'm stating the obvious by saying I'm very pleased with our first quarter operating results, really across the board. These strong results continue to reinforce my confidence that we're making the right investments and that we're continuing to expand our market share in our targeted end markets. Achieving this level of sales and earnings growth, along with our strong cash generation was very satisfying.

I'll briefly touch on our ongoing contract negotiations with SoCalGas. As I mentioned previously due to the confidentiality agreements we signed this customer and the fact we're actively engaged in negotiating a definitive agreement I'm not able to discuss any specific details on the topic. I can tell you the contract negotiations continue to move forward, and I remain intimately involved, meeting regularly with our Team and the SoCalGas and [Sempra] Senior Management Teams. Contract negotiations are progressing, and our working relationship remains very positive, and I'll leave it at that.

As I said before, I remain very excited about where we stand today in the AMI and Smart Grid market, as well as what I see ahead of us in the way of new business opportunities, and I continue to be enthused with the successes of our wide range in technology offerings.

To update you on Aclara, I'm really happy to announce that we've hired Brad Kitterman as President of Aclara. Earlier this week Brad was introduced to some of our customers at [Distributec] in San Diego, and I was very impressed to see Brad reestablishing relationships with some of his former utility contacts.

Brad has served in many Senior Executive leadership roles throughout his career, including over 15 years' experience serving the utility industry. His most prominent role was heading up [Schlumberger's] North American Utilities Division where he doubled the size of the business both organically and through acquisitions. We're very pleased to have Brad as part of our Management Team.

As Gary mentioned, our order book remained very strong in the first quarter as we again increased our backlog. In our Test business we reported the highest level of first quarter orders in history with nearly $50 million booked. We highlighted two major international orders in the release as I believe these orders continue to validate our global growth initiatives across Test.

Additionally, I'm very happy to see that our international AMI markets continue to gain traction, evidenced by the $20 million follow-on order from CFE in Mexico. Our COOP business remains rock solid, and our Water and Gas business continues to be strong. As I noted before, we continue to experience some weakness in the municipal markets at Aclara but we feel we've adequately addressed this down side risk in our fiscal '11 outlook.

All of our businesses continue to contribute to our success -- Doble, ETS-Lindgren, and our Filtration businesses all enjoy leadership positions in their respective end markets which contributed significantly to the strong performance in the first quarter. And these businesses position us to continue this performance in the future.

So, in summary, we remain in a solid operating position across the Company with ample opportunities for growth, and we will continue prudently investing in the business to ensure our long-term success.

I'd now be glad to answer any questions you have.

(Operator instructions.)

And our first question will come from Steve Sanders from Stephens Incorporated.

Hey, guys. This is [Zach] on for Steve. Congratulations on a fantastic quarter.

Hey, Zach.

First off, wondered if you could give us a little bit more details around South America, what your expectations might be with CFE going forward? And then also if you could address Doble and how -- what type of traction you're seeing internationally with that segment of the Utilities Group?

Sure. Not really clear what's going to happen with CFE as far as the timing. We think it's a huge opportunity. And I think the most important thing is we've got product in the field and it's working like we said it's going to work. And so whether it be there, whether it be the trial we have in China, whether it be what we're doing with TEPCO, really the consistent message that we try to get across is the technology works. And so that's what we're seeing with CFE. Obviously, they feel strongly enough about it that they exercised this doubling of the order that they had initially placed. And so we think that over time that this will be a nice expansion for us.

As far as Doble's international progress, their number one priority is to protect the domestic market, which I'm happy to say they've done. But at the same time they're taking some of those products and services that we have been very successful with here and are migrating those more into the international markets. And as I think most people know we already have five locations outside of the U.S. where we were actively selling the products, but what you may not know is we actually sell in over a hundred countries. So it is already a very international business. I think our goal, though, is to get more people in the concentrated areas, you know, around the world to sell that product.

We did recently open an office in Brazil, and actually it's a joint office, the Aclara folks, Doble, and our Test business, all three are going to have fulltime personnel in that office because we do see a lot of real opportunity for all three businesses there. And so we're obviously trying to get some economies there by having all three businesses share that. And then further to that our plan is in the second half of the year to open an office in the Middle East, as well. So obviously that's where the growth needs to come from Doble, and I think we're taking the right steps to ensure that we get it.

And kind of to follow-up on that question, just focusing more on the Brazilian market are you starting to see RFPs coming out? There's been a significant amount of discussion recently for the Brazilian opportunity with some of the mandates that the Government there has put out. Are you starting to see proposals and requests coming out of that area?

There's been more discussion than there has been hard RFPs. I mean we've seen some things, but really I think the Government mandates need to get further clarified and I think the plan is for that to happen over the next 12 months or so. And I think once those mandates, if you will, get fully clarified then we'll start seeing more real flow of opportunities. But it's important to have the people down there now, and that's why we have several people on the ground down there, both from a sales side as well as a program management side. Because we do have a number of active pilots underway still there and so we have the technical people on the ground to ensure that those are going well.

Great, great. Thanks. And then just one final question. Gary, wondered if you could maybe put a little bit of meat around what we should think about with margins going forward throughout the year and free cash flow generation?

Yes, I think on the margin side, you know, we should see some expansion going across. The mix obviously influences the quarter-to-quarter particulars, but obviously starting off the year at 10.4 that's not our annual goal obviously, it comes up off the volume and certainly compared to Q1 of '10 it's extremely favorable. But you should see expansion as the volumes increase across the next three quarters. It will pull margin up with it, and also you'll see the mix change as we get more Utility Solutions Group.

As we've said historically the first quarter is usually our lowest quarter both on revenue and profit contributions, and we're going to see that again this year, as I said before, flatter than in years past but certainly you're going to see expansion at the top line and that'll eat through the fixed costs and you should see the margins moving up. If you kind of look at the 15%, 10% to 15% growth we have at the bottom line I would expect you'd see that at the EBIT side, as well, compared to last year on a quarter-to-quarter basis.

So hopefully that helps, but I think you can ramp-up Q2, 3, and 4 off of this base, just not as steeply as we had it last year, and I think that should -- if you ramp-up the revenue you should get the margin pull through because the G&A is not going to be substantially different.

He asked about cash, too?

Oh, and on the cash, we're on track kind of on a free cash flow to do somewhere between $75 million and $90 million. And so we're off to a good start with $19 million. So we are going to have a little bit of fits and starts on that. This was an exceptional quarter. We had a gigantic sales quarter in Q4, and a lot of those collections hit in, you know, we did $208 million or so in Q4 so that's why this cash, this quarter's cash was so high. Coming off of $159 million I wouldn't expect $19 million to be in the second quarter but it'll be in the teens and then you'll see a nice ramp in the second half as the volumes pull-up through that. So I think if you pegged $75 million to $90 million for the year and then just kind of split it by quarter I think you'll be okay.

All right. Hey, thanks for that color. And, again, gents, congratulations on a great quarter.

Thanks.

We'll now go to John Quealy from Canaccord Genuity.

John, you're breaking up.

Oh, can you hear me now?

Yes, you're a little rough but give it a shot.

Real quick, how much did you spend on the incremental UGA investments this quarter? First off, good quarter. But how much did you spend on the incremental investments?

I'd say it was about between a million and million-and-a-half. The ramp-up really comes in the beginning in Q2, so I think if you used a million-and-a-half you'll be okay.

Okay, then secondly on the -- and I'm sorry, I'm on the road here -- the Test orders sound like they came in good, can you comment on the sustainability and the visibility there on the Test side on the bookings side?

Well, you know, I don't think we're going to do $200 million this year, so I don't think you can annualize it. And then we did have a couple of big orders. I think they were called or they were called out in the press release -- one in Argentina and one in Turkey.

Turkey.

So those were about $13 million or so of the overall $48 million, $49 million. Beyond that we also delivered four [mono] chambers in the first quarter. So we had a nice first quarter. I think that we'll have a solid year this year. Certainly we're projecting growth over last year. So what's really fortunate is typically the orders in this business are kind of backend loaded, so getting some of this in the first part of the year really gives us more confidence in that business throughout the year.

But I'd say the overall market is really solid. And I mentioned the Brazil office once already, but I think we're doing that because we are seeing a lot of opportunity in South America for the Test business. And historically we've done some work down there but not a lot. We had one large chamber in Brazil a couple years ago, but the market really seems to be heating up and we're actually sending one of our top sales folks down to live in Brazil for the next three years. And so obviously we have a lot of confidence that's worthwhile or we wouldn't be doing that.

Yes, no, that's great. And then just my final couple questions here. Can you give us an update on the Electric AMI product, where that sits in terms of alpha, beta, or ready to launch?

Yes, we have it in Test with one of our major customers, wringing it out. We still have some firmware updates that we'll be doing throughout probably the rest of this fiscal year, but I would say going out of this fiscal year we should have a product that we can take to a customer and say here's the product, it's been tested, it's been wrung-out and it's ready to be deployed.

As I've told some folks, I think that what we'll probably see is this next year we'll be selling a good number of those to municipals to get some stick time on the product, if you will, and then be in a position probably the year after to really go after the [OUs] in a bigger way. And I think that the thing that people need to understand, as well, is we think there'll be a role for that product internationally, as well, so the development of this really is going to really service three very important markets, municipals, investor and utilities, and then the international market. So we'll be able to do an international market just like we do here where we can go to the customer and determine whether the TLS product or the RF product or a combination thereof is the best solution for them.

And then my last one. Just in terms of the guidance, I think when we talked last quarter or at least my impression was it was going to be more of a nine type of year where you had that steep hockey stick, like we had the last two years. What was it in the last quarter or so, was it just the sales book was so strong to make you guys get a little bit more even with the guidance, or can you just sort of reconcile last quarter sort of viewpoint to what you guys delivered here? Thanks, again.

Yes, well, I think we did say last time that it was going to be flat or it's going to be obviously second half loaded but not as steep. I will say that the first quarter was stronger than we anticipated, I would say, just because of the timing of some of the things that we thought were going to happen either in the second or third quarter which got pulled into the first quarter. Some of these things just because of the types of contracts they are very difficult to predict. Unfortunately, typically they get pushed out instead of getting pulled in, but we did have some good fortune this quarter, some of those things got pulled into the year or into the quarter.

Great. Nice job. Thanks, guys.

Thanks.

Our next question will come from Kevin Maczka from BB&T Capital Markets.

Thanks. Great quarter, guys.

Thanks, Kev.

Gary, so my first question, how should we be thinking now about incremental margins in the utility space? I think before we were kind of talking about 25% to 30% for the year on whatever revenue growth we have, and then of course you back-off that $10 million of additional investment. It looks like this quarter we came in much better than that, so should we change our view on that now?

No, I think it's still -- I think that's still the right way to think about it. We did have a couple things happen in the quarter that a couple million dollars' worth of revenue that generally was expected in the second quarter that moved in. So I think as the sales volume moves up the gross margin in the Utility Solutions within this first quarter was around 43%, and I think -- and that's at the 92ish kind of sales.

So I think as the sales ramp-up the mix and the contributions of the four entities that add to the 92 I think is going to stay generally the same as far as a percentage of the total of the 92, you know, as the 92 ramps up. So I think keeping that -- the gross margin in the 43, 44 for Utility Solutions, ramp the volumes up sequentially over the four quarters. G&A, as I did say the incremental piece is about $1.5 million. That's going to be a little bit steeper in Q2 to get to the 10 for the year, since obviously we have, you know, we didn't do 2.5 so we have a million to absorb as we ratably go across.

So I think if you just kind of stair step-up the EBIT margins off of, kind of keeping generally the gross margins the same, adding some G&A for that $10 million incremental investment I think you should be able to model yourself out. So when you step back and look at it on an annual basis we are going to show, excluding that $10 million we are going to show reasonable growth in the EBIT. Back the $10 million off of that and hopefully that allows you to model it out with a reasonably favorable looking EBIT contribution.

Okay, great. And it sounds like there was maybe some pull ahead of at least a few million dollars on the revenue side from Q2 that actually hit in Q1, is that right? And you are still expecting sequential revenue growth throughout the year, did I hear that part correctly?

Yes. Yes on both fronts. We did have a few things, as Vic said some of these what's called MIMO chambers, M-I-M-O, which is multiple input, multiple output. A couple of those things were scheduled later in the year. And, as we've said in the past, the Test business is the hardest one to predict on a quarterly basis because there's so many outside influences that can straddle at quarter end. And in the past we've talked about things slipping out for one reason or the other, and this quarter it went the other way. I think relative to our internal plan we were up about $2.5 million or $3 million, and it was a couple things -- the four MIMO chambers that Vic referred to, as well as that project that we announced down in Florida last year on that large chamber down at Cape Canaveral we got about a half million dollars' worth of revenue in this quarter above what we thought.

So we still are going to show incremental growth throughout. The filtration business kind of stair steps up a little bit because what you see there at 35, you know, that's not going to bounce up to 45, it's not that kind of thing. So you're going to just have kind of a half million or a million dollar step-up there.

And then Test is kind of the wildcard because of the size of these large projects. And, as I said, Utility Solutions as we continue to implement the international strategy the COOP is a big set of rock solid, Doble is having a fantastic year. So if you just kind of step that up a little bit to get to your 10% to 15% aggregate growth I think you should be able to pull through the right margin contributions off of that information. We will see each quarter beyond this one will be somewhat higher than we're starting at 40, and it's going to move-up from there.

Okay, and then finally, Gary, on Crissair, the $6 million this quarter, how seasonal is that business? Is that a decent run rate going forward or should that ramp-up, as well? And can you just talk in Filtration about what's driving 20% or better organic growth excluding that acquisition?

Yes, Crissair is not seasonal. It is going to grow a little bit mainly because of pricing later in the year, but I think last year when we bought the Company I think I called it a $25 million business. So if you annualize at 6 you're kind of at 24, so you might have a couple hundred thousand here and there but it's not going to go from 6 to 9 and then back to 6. So it's going to be hundreds of thousand dollar kind of movements within a quarter, but it's relatively consistent with this quarter's view.

I'll point out one thing, with the quarter being in Filtration at 15% EBIT keep in mind the purchase accounting rules work a little bit against you, so Crissair comes out at a high single-digit EBIT in the first quarter, kind of like 8 ish and that's because it's influenced by some short-term purchase accounting things that I won't bore everyone with the specifics on. But that goes away in the next quarter, so you should see that margin contribution get up to what we said it would look like last year, which is in the low teens. And then ultimately our goal with that is the PTI folks, that's the model we're trying to duplicate, so as we get some of these LTAs, the long-term agreements re-priced over time that thing should move itself up over a 24 to 30-month period to look something like PTI does today.

Kevin, the other thing -- I mean you asked about the growth in the Filtration business, the other piece of it that we probably haven't talked about as much is just our packaging business. And, as we've talked about before, they got that very large contract with Thermoscan and that's delivering at full rate now. So pretty significant year-over-year comparison in the packaging business. Now in the grand scheme of things it's not that large of a number but it certainly is contributing in a large way to that growth.

Yes.

Okay, guys. Thank you.

You bet.

Our next question will come from Carter Shoop from Deutsche Bank.

Good evening. Thanks for the time. So first question just following up with the pull-ins, I mean it sounds like -- I just want to make sure I'm understanding this correctly, it looks like you guys beat by almost $20 million in the first quarter and maybe about $2 million, $3 million or so business got pulled in, is that kind of the right way to think about the magnitude of the pull-in?

Yes, I would say on Test it was about $3 million and in Utility Solutions it was probably $3 million to $4 million. Doble came in about $2 million ahead of plan on sales and Aclara came in about $2 million ahead of plan. So you take the -- Filtration is pretty well spot on. The things I talked about in Test, let's call that $3 million. And then Utility Solutions, let's call that $4 million.

Great, that's helpful. In regards to PG&E can you talk about your expectations for shipments for the rest of the year?

Yes, I think it'll be somewhat similar to what we did here in the first quarter. We delivered roughly $7 million, and I think that's going to be generally consistent. Maybe it has a little bit of up side in Q4 but we keep saying we're at the end of that project and then we turn-around and we get another order. I don't want to say we're totally surprised but we might have been surprised by the quantity being another $7 million. So I would say we're kind of thinking of that, somewhere in the neighborhood of $25 million to $28 million, which is consistent with annualizing the $7 million we did in Q1. I don't see any -- because we're so late in the project I don't see any big spiking up or down relative to that as it winds out this year.

Okay, and then going into fiscal year '12, that's going to be more like $2 million to $3 million in recurring revenue, is that the right way to think about it?

Yes, that's probably about right. It may be a little bit more than that but that's probably a good way to think about it.

Okay, one last question for you. When we look at M&A activity right now your net debt balance is pretty low relative to where you've been over the past three years. Can you talk a little bit about the pipeline, which areas are you seeing the pipeline build-up most aggressively?

Yes, certainly our primary focus is on the Utility Solutions Group, and we have looked and continue to look at things both for the AMI business, for Aclara, and for Doble, both domestic and international. I'd say there's a number of things out there, and I can't say that we're really close on anything other than we are looking at a number of things. And I think there will be more, it appears that there's going to be more things available over the 12 months. Because I think some people are getting to the point where they're ready to have a transaction rather than trying to run on their own.

And then we do continue to look in the other two businesses, though, and we would not hesitate to make another acquisition like Crissair. I mean Crissair was a really good acquisition. We're going to keep those two businesses, the Filtration and the Test business healthy, and so that's -- that means we're going to invest in an organic growth as well as looking for opportunities to enhance their capabilities through acquisitions, as well.

Is there any benchmark on the Utility Solutions Group in regards to accretion levels? Would you be willing to do a deal that wouldn't be accretive in the first 12 months? If so, what about the first 24 months?

I think 24 months is probably getting a little long. I think we would potentially do something if it was just kind of not really dilutive but didn't have to be wildly accretive in the first year if it made sense. I mean all these things we have to look at and say is this the technology we need, is this the market we need to get into?

So I would say that we would have to look at anything like that. We're not going to take something that's losing money and figure we're going to be able to fix it. I don't think that's the approach that we're going to take. But I think anything in this space these days, you know, the multiple is pretty high. And so I think we'd have to take a hard look at the right opportunity even if it was kind of a breakeven the first year from an accretion perspective.

Okay, thank you very much.

You bet.

We'll now go to Walter Nasdeo with Ardour Capital.

Good evening, gentlemen. It's [John O'Connor] on behalf of Walter. I just had one quick question about the SG&A for the next three coming quarters and if you can give any visibility on 2012? Thank you.

Yes, I don't think we're ready to talk about '12 yet in that regard, but for the balance of '11 I think really the only thing that will be influentially different than what you see in Q1 is when we talk about this $10 million incremental investment within Utility Solutions Group for the new products and some of that expenditure levels will be, like I said if we spend $1.5 million against that $10 million we have $8.5 million to $9 million yet to spend, so you will see some incremental G&A in Q2, 3, and 4 as we hire the additional engineers who are doing some of that work, spend some of the new product development cost on outside costs.

And as we, as Vic said, as we continue to open international sales or field offices and there's some incremental costs there ahead of the revenue, obviously this Middle East office we're talking about you put the people in and the revenue follows. It doesn't happen day one. So all that investment that we've called out there's still, like I said, roughly $9 million yet to spend and that'll be kind of spread over the next three quarters.

Okay, great. Thank you.

Our next question will come from Rob Mason with Robert W. Baird.

Yes, good afternoon, Vic, Gary. On CFE, so the two POs that we have today I guess 180,000 units we've talked about, how much of that is shipped today?

Yes, we did about 5 in fiscal '10, and we did about 19 ish in the first quarter between the two obviously, so a little bit of this starts and a little bit goes back and forth. So of the 40 we can call it 24, 25, so there's still quite a bit to ship. CFE is the biggest piece of it. There's a little bit at [Prepa] still that comes through. So kind of keeping it in that range I think would be fair as we go across.

Okay, so $19 million that -- are you speaking units or dollars?

Dollars.

Millions of dollars.

Okay, for -- and $19 million was CFE or international?

Nineteen was the international and then the predominant piece of that was CFE, so I think if you put $15 million to $16 million of that as CFE with the balance being, you know, we're still shipping to Puerto Rico. We still have a little bit at [MCALI] in Columbia there and some little piloting activity. So I think if you peg CFE at, like I said $5 million last year, and let's call it $15 million for the first quarter I think that'll get you the majority of what you're looking for.

Is the $15 million or so -- that, you wouldn't expect that to be the run rate going forward, would you?

No, no, we only have -- I mean we to date have only entered $40 million, and so we've shipped almost $20 million, and so we have another $20 million roughly to ship through this year, unless we get another order. And I think if we do get another order that's probably going to be later in the year and probably wouldn't result in additional sales.

Okay, but your expectation is the balance will ship in 2011?

Yes, yes.

Okay, just on Filtration, to skip around, have you seen much recovery just in the commercial aerospace side on the spare side?

Yes, actually, in fact we just had our Board meeting this morning and we specifically called that out because we are seeing a good pick-up in the commercial aftermarket.

Was that visible in the December quarter or you just now are starting to see that business?

From an orders perspective we saw it in our first quarter.

Okay. Okay, and then just on Toronto I did see the order there, when do you think you'll hit steady state on the shipments there?

I think it's probably going to be -- that's a very long-term project. When I say long-term, I mean they've got a fairly extended delivery rate so you're not going to see a $10 million, $15 million quarter. So I think that was going to deliver over time but I mean I think we get into full production in the second half of this year.

Okay, maybe just one last question? On the COOP business you called out the large order, how much of -- did all of that ship in the quarter or is that -- you carry some of that into the balance of the year?

Some of it goes into the balance of the year because what typically will happen is we'll get the order, and particularly if it's like a full COOP order I mean that may deliver over 12 months, in some cases it delivers over 24 months.

Okay, Gary, do you have a number for COOP shipments in the quarter?

Yes, I'll give you the orders first. It was right at $30 million, and then if you back-off the $20 million international we did about $40 million total on PLS with $20 million being international, so the balance of the COOP's would have been $20 million of domestic/COOPs and $20 million international gets you the $40 million PLS product sales.

Very good. Okay. Thank you.

You bet.

We'll now go to Craig Irwin with Wedbush Securities.

Evening, gentlemen. Congratulations on the solid quarter.

Thanks, Craig.

First question, I just wanted to ask a high level question about the backlog. Was wondering if you might be able to share with us the portion of the total backlog that's going to be shippable in the current fiscal year approximately?

Yes, I would say it's probably helpful if I give it to you by segment because I think it'll make it a little easier to understand. So when you look at the backlog in filtration at about 132 of backlog at the December end, you know, we kind of called out the year at roughly 145 to 150 and we just delivered, what -- 35 of it or so.

So the majority of that, you know, there is book and bill quick time stuff that comes through, so I would say within Filtration probably half of that will ship and why I call out the other half is that's the long stuff that we had at VACCO that we announced the [Virginia class] submarine multiyear program, as well as the [T700], the helicopter [valve] program, which is multiyear. So if you took the 132 we have in backlog and used 50% of that as shippable, sitting here at 12-31 I think is the right way to think about it.

Within Test it's a little bit higher. Of the 90 we have in Test I'd say 75% of that is shippable in the next -- certainly within the next 12 months, but I'd say almost 75% -- almost all of that will get out before September 30th.

And then the Utility Solutions that's probably 80% to 85% because that's obviously a lot. We don't get a contract, and I use PG&E as the example, 250 million came in quarterly in increments of 25 millionish. And so that 163 I would say probably 80% of that will turn this year, so as we continue to replenish backlog, and while those percentages are certainly high we'll also add that they're the highest at least in our last five years, sitting here at February having this much in backlog that's shippable that's not the historical percentages we've had, and that's why I think we feel pretty good about the -- reaffirming the guidance we put out from November because we have so much shippable backlog in hand today.

Great, that's a really encouraging trend. So then one of the things I know you monitor very closely internally is shippable new orders, a metric that I guess gives us a good window of visibility on things like PTI that are faster book and burn. Can you share with us what the recent trends have been on your SNO?

Especially at PTI, as Vic said, the first quarter on the order book was again probably the highest first quarter we had, and so that shippable new order business generally kind of vacillates within about a 10% window, and I'd say we're at the highest end of that variable range we've had at this point in the year. So very encouraging with the aftermarket, and our distribution channels historically had kept pretty low inventory and so we kind of had to back away a little bit. And now they're restocking to their, what I'd call their pre whatever we call the last two years, kind of their carrying levels they had before, so that's been helping us. It's helping us to rationalize what we're going to sell but not having to manage around the variability of our distributors' inventory.

So when the distributors take more inventory that's certainly a telling sign for us, and when they pass that through to us it incrementally stair steps up, we feel very, very good about where we're at on that side. And, as Vic said, in the Test business booking $50 million in the first quarter is a historical high and so the visibility for the balance of the year there is certainly probably the highest it's been at this point relative to at least the five years.

And I'd say in Utility Solutions the behavior of our distribution network there, it used to be a little bit lumpy when you'd see two or three years ago you'd get a big order from our biggest distributor, then you wouldn't get anything the next quarter. And now I think they're rationalizing their inventory a little bit better and it's allowing us to have a higher level of comfort in our predictive model there.

So I'd say across all three segments we're in a very good spot relative to what we have in backlog and also what we see as shippable new orders coming in in the next six or seven months. Obviously, you know, there's some stuff that'll come in in September, that ships in September, but we look at the SNO as being something that's -- gives us six to nine months of visibility and we're very comfortable relative to our historical levels.

Yes, again, I would just add a few things. I mean obviously with our backlog being where it is and that reduces the need for SNO, but the one area just to reiterate that we are seeing some softness is the municipal side.

Right.

But it appears some of the other businesses are performing better so we should be fine there.

Great. The second question I had was around Firetide in your potential introduction of a mesh product. Can you update us on the progress with Firetide and really what we should look for there over the course of the year?

Yes, just so -- it is a mesh product but, again, it's [not] to the meter. I mean it's a backhaul system, so I just want to make sure I remind everybody of that. The product is in Test. Again, at a major customer. We continue to make good progress with it. Really the technology, itself, the core technology is really unchanged from what's already been used, so the work we've been doing is to kind of optimize it for our application and some packaging so it's robust enough to use in our application, as well. So we'll be delivering that product to customers later this year, so I'd say very good progress there. It's never as fast as you want it to be but I think for the commitments that we have out there we'll be in good shape.

Great. And then you mentioned the office in Brazil, the fact that you're opening up an office there. It's pretty encouraging news. Can you update us on the approximate number of utilities where you're doing trials today and where you expect to do trials throughout the course of the year?

Yes, well, today I think we've had trials or have trials, product in the field I think at four different utilities in Brazil. I would anticipate that with kind of -- no, I wouldn't say renewed focus, we always had a focus there but having some more people on the ground calling on utilities. And our hope would be to start doing some more of that at several other utilities within the next 12 months or so.

And, again, it's somewhat dependent on how these Government mandates and the timing of the Government mandates for them to do that. I mean I would think that most likely they're going to wait for those circumstances to clarify, understanding where the funding is going to come from, and then they would move forward with some of this.

Great. And then one geography we're starting to hear a lot more from these days regarding AMI and sort of the ability to reduce nontechnical losses is Asia. And I was wondering if you're starting to see more customer interest out of the Asian utilities and whether or not this is something that could potentially offer an opportunity for you over the next few years?

Yes, just to kind of bring everyone back up-to-date on what we are actively doing, and we have had a test underway with TEPCO for several years, and I think we're nearing the end of that test and then we'll see if they're going to go forward or how they're going to go forward to the next step.

In China we've been working with two major manufacturers over the past couple of years. We've co-developed a meter with our module integrated into that. We're currently selling some of that product outside of China. And then recently this past quarter we started a small trial with one of those partners with a Chinese utility. So, again, it's a small trial but the encouraging thing is the product works, you know, we put it in the field and it does what we say it's going to do. So we see good opportunity there with a major partner that we've been working with in Asia. They've identified some other opportunities in some other countries, and very early stages there but we do think there's good opportunities longer term in other parts of Asia.

I think our, you know, the caution we always give ourselves is not to try to do too many things at once, and I think the key again is getting product in the field so that a customer can see it working. And if it's working in China then I think some of these other countries in Asia could come and see that in action and see that we have a solid technology that's going to do what they need it to do.

Great. Congratulations, again, on the quarter, and thank you for taking my questions. Thank you.

You bet.

(Operator instructions.)

And our next question will come from Ben Schuman from Pacific Crest Securities.

Hi, guys. Great quarter.

Thanks, Ben.

Can you guys give us a quick update on the competitive environment in the municipal or COOP or municipal and COOP market? Have there been any changes there? I've just heard some of the vendors that are more traditionally selling into [IOUs] direct talking about going into some of the distributors, like [HD Supply] and some of the guys you use to serve those markets, and I'm wondering if you're seeing any change there?

We haven't seen a lot yet. I mean I would say that our traditional PLS competitor, [Hunt], is still out there, and I don't think we see them quite as much as we have historically but certainly they're still active. And then [Census] is probably the one company that's gotten more active, both in the municipal and the COOP markets. I think that technology certainly would work in the municipal environment. I think being an RF solution it's going to have a little more difficulty in our traditional COOP market.

So I think the biggest advantage we have is we've got good relationships, good history, proven technology. I mean they can go look at our technology work in about 400 utilities on the PLS side and a couple hundred utilities on the RF water side. So I think there's always going to be competition. I think people see that the COOP and municipal markets is a good market. I mean I think the opportunities are good there but we've got such I think a strong position there and strong history there and history of delivering product that works really well that I think we'll be fine in that market.

Great. Thanks.

At this time we have no further questions in the queue so I'll turn the call back over to Mr. Vic Richey.

Okay, well, appreciate everybody's interest today, and if you have any follow-up questions feel free to give us a yell. Thank you.

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

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