ESCO Technologies Inc (ESE) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the ESCO Technologies third quarter 2011 earnings 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.

Thank you. Statements made during this call regarding fiscal 2011 and beyond expected results, future growth prospects, the timing of the SoCalGas deployment, success in domestic and international markets, and other statements which are not strictly historical are forward-looking statements within the meaning of the Safe Harbor provisions of the federal securities laws.

These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment including, but not limited to, the risk factors referenced in the Company's press release issued today, which is an exhibit to the Company's Form 8-K filed today. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

In addition, during this call the Company may discuss some non-GAAP financial measures in describing the Company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the third 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.

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

Thanks, Vic. For Q3, our EPS was $0.49 compared to $0.55 in the prior year. And for the nine months, we reported EPS of $1.38 compared to $0.79. Year-to-date EPS increased 75% over prior year with all three operating segments growing significantly in 2011.

As we discussed at the beginning of the year, our quarterly EPS profile in 2011 was much more balanced throughout the year compared to 2010, which was disproportionately backend loaded. Considering the higher incremental smart grid investments being made in the second half of 2011 along with the pull-forward of sales and earnings earlier in the year than originally expected, we fully expected Q3 earnings to be lower than Q3 of 2010.

Regarding our last earnings call, I had previously expected Q3 EPS to be lower than Q2. I'm pleased to report that VACCO, Doble, and Aclara PLS all significantly exceeded our internal expectations, resulting in a much stronger profit contribution during the current quarter.

Q3 consolidated sales increased 12%, with Filtration increasing 39% along with Test being up 33%. USG's sales decreased only $5 million in spite of a $19 million decrease in sales to PG&E and New York City. This decrease was mitigated by a significant increase in Co-op and International sales at Aclara and a 14% increase in sales at Doble.

Filtration sales were up $12 million with every operating unit showing meaningful growth and Crissair adding $7 million in the quarter. Test sales increased $11 million as we continued our solid project execution, which allowed a few sizable projects to be completed ahead of schedule.

In the third quarter, consolidated EBIT decreased $3 million compared to the prior year as a result of the sales runoff at PG&E and New York City coupled with the $5 million of incremental smart grid investments previously mentioned.

Test and Filtration were exceptionally strong performers in Q3, where their combined EBIT dollars increased 50% over the prior year with Filtration delivering a 22% EBIT margin in the quarter.

Year-to-date consolidated EBIT increased $23 million, or 63%, bringing our nine-month EBIT margin to nearly 12%, up from 9% year-to-date in 2010. All three operating segments contributed significantly to this year-over-year increase.

During the quarter, we shipped $3.4 million to PG&E compared to $14.9 million in Q3 of fiscal '10. Cumulative to date, we delivered nearly 4.7 million gas AMI units on the PG&E contract worth nearly $260 million. For New York City, we delivered approximately $100,000 worth of AMI products compared to $7.7 million in the prior year.

We continued our strong entered orders profile as we booked $177 million in new orders in the third quarter. And in addition, I'm very pleased to report that we booked the first $15 million of SoCalGas orders in the quarter.

On the cash flow and balance sheet front, we're very pleased with the $12 million of cash generated by operating activities in the third quarter, as well as our solid capital structure and available liquidity. Our net debt outstanding was approximately $105 million with a comfortable leverage ratio of 1.28.

For the balance of the year, our current outlook remains consistent with the expectations we laid out previously. And as a reminder, this growth is expected despite a significant sales decrease at PG&E and New York City and considering the $10 million of incremental investments in the smart grid within USG. 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 I'll turn it back over to Vic.

Thanks, Gary. I'm very pleased with the third quarter and year-to-date operating results as we again exceeded our internal expectations.

These results are driven by solid project execution and ongoing cost management. Successful project execution is a result of our operating managers across the Company who, on a day-to-day basis, remain focused on the right priorities.

As Gary mentioned, our Filtration and Test businesses continue to make above average sales and profit contributions, and USG has performed very well in spite of the significant headwind caused by the wind down of PG&E and New York City projects. Our Co-op, International, and Doble businesses remain very strong.

I continue to be encouraged by the strength of our orders across the business and the resulting growth in our backlog, particularly in today's challenging environment.

On the M&A front, our most recent acquisitions are performing as expected and each will make a positive contribution to our 2011 results.

I firmly believe the strength of our year-to-date results, the growth in our orders and backlog, along with the SoCalGas contract being signed in May validate our multi segment strategy and provide us with some resiliency in today's economic environment.

I'm excited about the management teams that we now have in place across the organization. While I'm certain we have some of the industry's top performers in place in key management roles throughout the Company, within the last six to nine months we've added several exceptional new hires into senior sales, marketing, engineering, operations, and strategy positions, in particular at Aclara and Doble.

Since we spoke last, we signed a SoCalGas AMI contract and are awaiting final PUC approval. In the meantime, we've received the first orders and work's underway on the project, the initial $15 million orders for software and services that will allow the customer to begin the design and build out of the network architecture along with the initial installation of meter data management software.

The network deployment should begin in 2012 with metering endpoints deployed in earnest in 2013. We have significant growth prospects over the next three to five years across all three of our business segments. My enthusiasm is supported by ongoing strategic planning updates which allow me to be optimistic about the size and number of opportunities in front of us, both domestic and international.

I remain excited about our market leadership positions in nearly all of our end markets, as well as what I see ahead of us in the way of new business opportunities. Within the smart grid area in particular, I remain enthused with the successes of our wide ranging technology offerings and our new product roadmap.

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

With that, I'd be glad to answer any questions you have.

Thank you. The question and answer session will be conducted electronically. (Operator instructions.) Carter Shoop from KeyBanc.

Great. Thanks a lot, guys, and congratulations on a good quarter.

Thanks.

Thank you.

Relative to your expectations three months ago, can you highlight where you saw the most upside relative to those expectations, and than maybe highlight a few things that maybe turned in below expectations?

I'd say the positives we saw really were the Test business having some projects completed ahead of time and at a little better margin than what we'd anticipated. So, I'd say that was very much a positive. Our PLS business was more positive than we anticipated. We were able to deliver more projects. And the Co-op business, as we mentioned, was much stronger.

I'd say the only weak spot that we've seen, and I've talked about it the last several quarters, is what we've seen with some of the municipal markets. And so, while we'd hoped that that was going to be stronger than it has been, take up even more of the slack that we were able to take up with PG&E and the New York City roll off, that hasn't happened to the extent that we want. We still think the jobs are out there, and it's not like we've been losing jobs. It's just some of them haven't been getting as funded as quickly as what we'd anticipated.

So, really good performance across the business, but I would say the Test business, and also I guess the other thing I would mention is VACCO as well. We had some real concerns going into the year at VACCO because of the Constellation project. And as it turns out, they've really accelerated some of the funding of that project prior to this year.

And then, a lot of the work that we've done on that project is not going to be transferrable to the next generation products that are going to replace the Constellation project, which, as I'm sure a lot of you know, has been defunded in the out years. But, that's been replaced by the Heavy Launch Vehicle and the Orion capsule.

Thanks. That's very helpful. And then, if we look at your guidance, obviously it looks pretty conservative for the implied fourth quarter if you look at what the Company has historically done in the fourth quarter, whether it was in 2010 or the several years prior to that. Can you talk about some of the limiting factors on a sequential basis, why you might not see that normal seasonality? It appears that New York City and PG&E have pretty much fully rolled off. There's not going too much of a headwind there sequentially. So, can you talk about some of the headwind there?

Sure. I mean, see, I knew this was going to be the case. We had to pull out all the stops in the fourth quarter last year and had this great quarter. And so, now we have the comps, and we had a nice kind of steady state this year.

But, I understand your point. And I think a lot of that is the case. Some of those big projects we have already delivered on. We did pull in some things quarter-to-quarter, because if we can make the deliveries early, we make the deliveries early.

So, while it appears conservative, I would say that it's been -- we've been consistent throughout the year and we just see a much flatter profile this year than what we've seen in the past. And even to the extent -- I've mentioned some of the Test projects coming in a little earlier or some of VACCO's projects getting funded earlier. That just happened earlier in the year.

So, while I'd like to say there's huge upside to the fourth quarter, I think we've got it dialed in fairly appropriately.

Carter, I'll add one more thing. If you remember from the last call when we talked about the way the spread of the $10 million of smart grid spending is going, when we were at the end of the second quarter I said it was about 30% and 70% in the second half of the $10 million. So, that obviously equates to $7 million.

We still have about $4 million to spend on that in the fourth quarter. So, I believe sales are going to be up, but I think we're going to have, besides the headwind Vic just mentioned, we have $4 million of what I'd call the incremental cost drag, if you will, relative to some of these initiatives we have in place.

So, that $4 million equates to a reasonably significant amount of EPS drag. So, that's something we had planned at the beginning of the year. But, the weighting moves on that a little bit in the quarter as we hire people and as we spend on some of these new product development initiatives. So, I just want to keep that in front of everybody as well.

That's helpful. I'll get back in the queue.

Chris Wiggins from Oppenheimer.

Hi. Thanks. Good evening.

Hey, Chris.

I was just wondering if you can provide a little bit more color on the opportunities that you're seeing on the USG side. You had mentioned that there's some funding delays on the muni side. Any signs that that's starting to loosen up or do you think that that's going to be an issue kind of even through next year?

Yes, it's really hard to say. I mean, I think it's not going to be like it was two years ago, for instance, as far as when there were some real go--go things there. On the other hand, I mentioned some of the things we had done as far as improving -- augmenting some of the folks we had in place. And I'd say that we have a very strong focus, maybe stronger than we've had in the past, on the sales side of that business.

And so, we're looking at some different avenues to market. And so, I do think that the business that's out there, we're going to get. And I think we have an opportunity to pick up some additional business. But, the one thing we can't control, obviously, is people are actually going to spend money or not. But, I think we're better positioned now, to whatever gets awarded, to be on top of it.

That's helpful. And if I could kind of follow up on that then, any update on the competitive dynamics, I guess particularly in the Co-op market as far as technology goes and how you're -- what you're seeing in that regard?

I'd say we're still leading the pack there. There are some -- competitors kind of come and go. I don't want to talk specifically about those. But, what I would say is we still have obviously, we think, the best solution for that market. And I'd say that the results have been supportive of that.

And we'll -- we foresee doing a good $100 million of Co-op business this year. And that's as strong as what we've had in the past. And so, there's always -- competitors kind of come and go. But, I'd say that, given our track record, the fact that we've got 450 or so customers there, and the fact that we have new products and services that we're taking to that market really puts us in a great position there.

Thanks. And then, one final one, if I can and I'll get back in the queue. Any update on your investment into some of the international markets, I guess particularly Brazil and where you stand with putting some additional feet on the street there and kind of where that -- where we are in that process?

Yes. As you know, we've had folks on the ground there for a number of years. What we've done more recently is opened another office there. And it's actually a joint ESCO office between Doble, Aclara, and our Test business.

So, it's an opportunity for us to have a bigger presence there, more support to the customers. So, we certainly see that as a good opportunity for us going forward and we have added some additional pretty strong people -- very strong people down there to take advantage of it.

Great. Thank you for your time.

Ben Schuman with Pacific Crest Securities.

Hi. Gary, can you maybe give us a little bit of color around the expected Q4 linearity across the three segments?

Yes. I think we're going to see kind of the similar type ramp in Filtration. We just seem to be doing all the right things there. I think our go to market strategy with a significant amount of distribution is really working favorably. The wild card there is VACCO, as Vic mentioned. It's very difficult to predict how the funding gets released on the defunded Constellation program. So, it looks like it's going to be flattish, but it might have some upside.

So, I think Filtration will be nominally higher. I think the Test business, which we normally get a significant up ramp in the Q4 profile, that will still be there. But, unfortunately, that's not our highest margin business because there's a lot of pass-through content. So, I think sales should step up somewhere in the neighborhood of 5% or 6% over where they are in Q3.

And so, where we'll have kind of the nominal increase is when you look at Q4, because we did about $86 million there and there was still some PG&E business in there, $3.5 million-ish, and that's pretty well going to zero. And we had a substantial quarter with CFV in Mexico, which was about $10 million. So, that's probably going to be in the neighborhood of 5 or 6.

So, I think Doble is going to continue to grow. When you add up all the content in USG, it's probably going to only be up nominally. And then, it has the largest drag with the incremental investments that I mentioned.

So, Filtration is going to continue strong. Test will continue strong. And we'll have a little bit of a dip in USG because the $15 million that we booked at SoCalGas really doesn't start delivering until '12. So, we're not going to get any pop out of that in the next six or seven weeks, whatever we have left here.

And so, I think from the top line, when you add all that together, we will have top line growth. But, with Test being a big pull in that with the 10 to 12 kind of EBIT, it doesn't have the same bang at the bottom that a Filtration or a USG growth has. So, hopefully that helps.

Yes, that was great. And you kind of got in front of my next question, which is about CFV, not just, I guess, the contribution in the quarter but kind of the outlook for the next few quarters and where that project stands right now. Can you guys address that?

Yes. We're in the process of finishing up that delivery here in the next couple quarters. And while they've not committed anything for beyond that, I'd say it's gone well. Our anticipation longer term is that we'll continue -- they'll continue to be a good customer for us. As we've mentioned before, as a result of having 40 million that we'll be delivering down there, we do have the largest AMI deployment in Mexico now.

Okay. Were there any particular lumpy orders within Test that drove the strong bookings there?

No, nothing. It's just been a lot of -- what we didn't get is -- historically, we always get one of these big one-off $13, $15 million things. So, there was nothing like that in there.

What I would say where we're really seeing a lot of strength is in India and in China. But, I would say the India market, which we entered about a year and a half, maybe two years ago, is growing faster than we can staff up our people. And so, it's the law of small numbers, but that business is doubling and it's on track to be kind of a $5 to $8 million business this year, when last year it was hardly anything.

So, that was a nice quarter for us. But, those are $500,000 and $600,000 projects that stack on top of each other. There was a couple things out of China that were in the $1 million or $1.5 million range. But, there really wasn't what we've called out in the past like a quarter or two ago when we had that project in Argentina which was $6 or $7 million. We didn't have any of those, because if we did I would have called those out separate.

So, I'd say the largest order in the quarter was about $2 million. So, it's really positive to see this much momentum in what I call the more standard sized orders. And those are the ones we perform exceptionally well on, because the visibility and when you deliver those things is a lot more concrete than the $15 million ones, which kind of bounce up and down depending on site availability and that sort of thing. So, it was a great quarter for Test.

Yes, if I could just add a few things just to echo what Gary says that, yes, it's much nicer to have $2 million orders and $0.5 million orders, and have a number of those, because I think it is easier to improve margins with those. Because with the very large orders -- and we'll take those, by the way. But, with the very large orders, there is a larger amount of pass-through.

The other interesting thing in India is we had projected doing maybe $0.5 million in MRI enclosures there, and we've done more than twice that this year. And we see growth next year as well. So, that was kind of, I won't say, a totally unexpected surprise, but it was a good upside in that we very quickly were able to take the reputation we have here in the States and some other places to India and been able to secure a good bit of that MRI business.

Great. Thanks, guys.

Sean Hannan from Needham & Company.

Yes, good evening.

Hey, Sean.

So, around the Test and Filtration business, is there a way you can perhaps -- and since they had some decent margin contributions, if there's a way that you can maybe elaborate a little bit more around what some of those contributions were in the quarter. You'd mentioned a little earlier that there were some -- it seemed like some pull-ins from the fourth quarter. Some color would be helpful.

On which part of the business? On Test?

Test and Filtration.

Okay. Yes, I would say when you look at the VACCO business, again, that we delivered -- the Virginia class submarine, the big contract we have there, we deliver a large chunk of that in either Q3 or Q4. Well, this year the way the contract is structured, there's a little different milestone structure. And so, it's going to be a little more constant than it has been in the past where we might have delivered zero and then 3.5 or 4 million in a given quarter.

So, you're going to have a little more stability in VACCO. But, I will tell you the Defense spares, which are the things that go on the airplanes that kind of just come in the aftermarket on a surprise basis, we had an inordinately high third quarter in Defense spares. And I don't know if that was a use it or lose it budget thing, but we don't envision that level of spares business.

So, we think VACCO is going to be slightly up. And again, the upside wild card is what comes in on Constellation before they run out of calendar time and the money goes away September 30th. So, they do need to spend that against existing products that can be used in the, as Vic said, the Heavy Launch Vehicle and things like that.

The Crissair business is pretty steady state. It kind of does $7 million, give or take $100,000, a quarter. So, it's not going to go from $7 million to $9 million in a given quarter.

And then, what's really a nice surprise that we don't really talk about much is the -- what we used to call the Packaging business, TekPackaging, which kind of is just buried in there, the residual business from Filter Tech. That's where that Thermoscan ear thermometer cover is at. And that's really just knocking it out of the park. We got the second machine up and running so that business is delivering about $7 million a quarter and has some decent upside in it as well.

So, when you add all that together, like I said, we should see an uptick in Q4. And then, on the Test side, generally when you look at the pieces of it the big KBR project in Florida is just a steady state business. And as Vic said, it's great to have these $1 million and $2 million businesses that kind of just block and tackle themselves to the promised land so that we're not going to get a big NATRIP kind of $5 million pop in a quarter like we've had in the past. So, the steady state is ramping in the right direction.

But, I think to Sean's point, I think he was asking a little bit about what was different in third quarter. And I do think that the KBR project is one project we have at Test is well ahead of schedule. And so, that's the biggest contributor for the Test business.

That's a tough project. I mean, we can't go into a lot of detail just because of who the customer is. But, it's a big project and the installation piece of it is going a lot smoother than we thought it was going to. So, it allowed us to accelerate that project some within the third and fourth quarter.

And it sounds like from a margin standpoint that we should at least be in position to, if not match, but improve on margins within those two businesses, or what could take place that would derail that?

I think the only thing that could -- I think Test is exactly right, because, as that volume goes up, the margin goes up. So, we're not worried about the Test business. I believe the margin will be higher in Q4 than Q3.

In Filtration, I think really the only wild card is that Constellation business, which is really high margin stuff. So, depending on the mix between that and some of the other things, we did over 30% EBIT in VACCO this quarter. And I don't think we're going to do 30% in Q4.

So, we're probably not going to have a 22% EBIT in Filtration in Q4, but it'll be certainly close to 20%. And so, I think as the volume ramps and you get 20% off of a slightly higher number, I think we're not going to give back a whole bunch of EBIT dollars. I think in Test you'll have sales up and EBIT up, obviously with the positive percentage. And then, really the delta on the sales side comes from USG where last year in Q4 we did $23 million on PG&E Gas. And we expect that to be probably $1 million or so.

So, covering that $22 million delta, I think we're going to be able to do that with some things at Doble and with some things at the PLS side of the business. But, getting it to where you fight to a tie there is a huge accomplishment when you got the headwind at PG&E.

Okay, that's very helpful. Thank you.

Jeremy Hellman with Divine Capital Markets.

Hi, everybody. How are you?

Hey, Jeremy.

Good.

I wanted to kind of touch on something that we're hearing from people in the field with respect to utilities, and that's that they're really refocusing on core operations and the liability sort of investment relative to anything customer facing. I want to see are you guys seeing that and, if so, how that is affecting what's going on with Aclara.

Yes, I don't -- I can't say that I've seen that. I mean, we have seen obviously increased interest in reliability. And that's good for us from -- to a Doble perspective.

But, I would say that we've seen a little bit maybe in the opposite direction on customer facing. I mean, certainly what SoCal is doing as far as interfacing with their customers and using our product is key. We're seeing more water and gas utilities are interested in providing that kind of information, and that's good for our software business.

So, certainly utilities are thinking every day about how they're going to spend their capital dollars. But, we've not seen a shift that troubles us at this point.

Okay. And then, going to Filtration, looking at some of the earnings reports from some other companies in the aerospace arena, there has been some positive commentary particularly with Boeing and Airbus and that big American order. Looking over a multiyear time horizon, are you -- is that giving you any added optimism in that area?

I think that it's going to be a good business. In fact, our Filtration business or Fluid Control business, as they like to call it, had their first booth at the Paris Air Show this year. And it was a joint booth. And we historically had gone but always had been in some of our distributors' booths.

So, we had our own booth this year. And I can tell you I was very impressed with the traffic we had in the booth and very impressed with the -- just the size of that show. It continues -- I've been going to that show off and on for 25 years and it's as big and active as I've ever seen it this past year.

So, I do think that's a good market for us. It's a market that we've focused our Filtration business on. And so, the areas that we play are niche markets. I'd say we're number one in our niche markets. And so, that's good, and that allows us, as this industry grows, to really have a seat at the table. So, I think that's a good business for us and I think it's going to continue to be a good business going forward.

And I'll just add to that with the -- for the longer term, the A350 project that we won a few years back begins ramping up into small scale production in the next, I don't know, two years or so. So, two years to 20 years from now, that A350 wide body platform for us is going to be a significant contributor to the mid and long term view of the aerospace business.

Okay, great. One last one from me and then I'll jump out. Going back to the Packaging business that rarely gets much coverage on these calls, given the strength you're seeing in it, does that leave you thinking that you might want to try and sell it while the getting's good at this point, or what are your strategic thoughts on the business?

Right now, we're not interested in giving up EPS. It's a nice business. It's a business that has good growth potential. It's not a huge business. And so, yes, I mean, certainly it's a business we could sell.

Let me just be very honest. I think we could sell it for a good multiple, but your reality is it's still a small business. And so, we're not in a position where we need the cash and we are in a position where we like the earnings. And it's a nice business. It's a well run business. And so, we don't anticipate any changes as far as -- we don't anticipate taking away any of the businesses or selling the businesses that are currently part of our portfolio.

Looking at it the other direction, though, could you conceivably try and make some small acquisitions that would beef up that business?

We'll always consider that with any of our businesses. I don't know that that's a business that -- we don't have an opportunity to do a drop in acquisition there. I mean, if the plans play out the way they -- we think they will over the next three to five years, the plant's fully utilized.

And so, for us to increase that business would require us having another standalone business. And I would say that our opportunities, our focus is really more on the other business as far as adding to those, because I think we can do that on a drop in basis or something that's going to have more of an incremental positive to ESCO's overall business by working in those three main areas that we participate in.

Okay. Thanks, guys.

Steve Sanders from Stephens Incorporated.

Hey, good afternoon, guys. Good quarter.

Thanks, Steve.

Maybe a follow up on USG. You've obviously got some headwinds with PG&E and New York, the muni business is still soft, but Doble and the Co-op business clearly have some momentum. I just wanted to see if you could talk a little bit about the sustainability of that, not necessarily in the fourth quarter but kind of looking out over the intermediate term.

And then, a related question. If we sort of throw CFE into a broad international USG bucket, how do we think about the outlook there in terms of growth? And maybe work a China update into that comment.

Okay. You asked a lot of questions, so if I forget one of them just remind me.

But, I think that the sustainability with Doble absolutely is there. I mean, we were up there -- Gary and I were up there a couple weeks ago. And I'd say they have some very aggressive growth plans over the next three to five years. And they're not just -- a lot of people just put a growth rate on it, and that's not what they have.

I mean, there's very substantive plans behind each of those initiatives. And we've got some new products that we're introducing. We've got our old products that we've updated or are in the process of updating. We've got some additional services we're going after. And then, this international expansion, I think, is key.

So, being in a market -- being in the position that we're at, the market share position we're at in the US really gives us a lot of strength. And I'd say our customers trust us and look for us to bring new products to them, and we're doing that. And that's what a lot of investments that we're making this year are for.

The PLS business, it really feels like it's going to continue to grow or to continue to maintain, I should say, at least. The Co-op business has really been solid. We've got a good teammate with HD Supply, who is our primary distributor. We have some others as well that support us. But, we're really putting a lot of that with them, and they've done a good job of getting product in the field as we're able to introduce new products, the demand response and distribution automation products that the co-ops want just like the investor and utilities want.

So, we think that's a good business for us. And the reality is some of their products have been in the field for a long time. And so, at some point they're going to be replaced. And I think having the positive relationship we have with those customers is key and is going to serve us well going forward.

As far as the International business and CFE in particular, as I mentioned earlier, we've got the largest deployment in Mexico now with our product. I think there's more opportunities for us there, really trying to beef up that International operation so that we can take advantage of the position that we have there in Mexico and in Brazil and in Central America.

So, the international market is, as you know, a bigger market than what we have domestically. I think it's always going to take longer to get there, and I think deployments are going to be slower. But, I think we're doing a decent job of being in the right places for us. As we mentioned before, we've focused on South America and on Asia in particular.

So, that kind of gives me an opportunity to segue into China. We do have that deployment, a small deployment there. I guess the thing I would say there is the technology works and works very well, and we're getting a very high read rate with our product. And so, now we've got to take advantage of that and work with the partner that we have in China to make sure that we're able to move that into a larger scale deployment.

That's going to take some time. But, again, I think the key thing was to get the product in the field, show the customer that it works, and we've done that.

Okay. Thanks for that.

Did that answer all your questions or not?

And then, the follow up would be in the Test business you had a lot of singles this quarter. How does the larger project pipeline look there? And if you've got some big projects out there, could you just comment about which end markets or geographies beyond your early comment on India?

Yes, I would say we don't have any project that we're pursuing that's over $5 million. Now, there's a lot that we're pursuing, particularly in India and China, a couple in South America, that are in the $3 to $5 million range.

And so, those are out there. I don't want to talk specifically about any of those, obviously. But, there is not a big -- there's not a $15 million or $20 million project out there today. But, there are a lot of those size opportunities that are available to us.

And I talked a couple quarters ago about our move from just selling the hardware to selling systems. And that's the reason we're -- have some of these kind of midsize opportunities that we maybe wouldn't have had before, because we are providing not only the hardware but now the software and the services that go along with that.

Okay. And then, actually one more. Can you just talk a little bit about your domestic AMI pipeline, water, gas, electric, whatever color you can shed on that?

Sure. Well, I think we've talked about the electric, so I think that's good and solid. The gas, without going into a lot of detail, I think with the new sales executive we have in place there and some of the focus that she has with that sales team, there are some good gas opportunities. We've got some specific opportunities we're pursuing to try to get them to get started on that.

And certainly, utilizing our very positive experience at PG&E and now our one at SoCal, I think our opportunity to have success at some of those midsize gas utilities is very much enhanced. I mean, certainly I think it'd be tough for somebody -- people can make other decisions, but the fact that we've delivered almost five million endpoints to PG&E says a lot. The fact that SoCal is committing to the level they are says a lot. So, I think we're well positioned there.

On the water side, we're looking for opportunities to go to some of the larger players that -- some of the larger water IOUs to try to get into those guys and to sell into the smaller utilities. As you know, that's a very, very fragmented end market. So, we're trying to play it that way as well as looking for some ways to get to those end markets through distribution.

It is very difficult for a non-water meter vendor to touch all of those guys. But, we have seen more and more people interested in a fixed network system. And we're one of a couple of companies that really have proven the ability to do that.

Okay. Thanks very much.

You bet.

Richard Eastman from Robert W. Baird.

Yes. Good afternoon. Gary, what was the municipal Co-op muni revenue in the quarter? Would it be 25 or seven?

No. Co-ops was about 35, and then the muni is obviously a little bit lower than that. So, we did -- you take the PG&E and New York out, we did about 7 million on the munis, which is obviously the water stuff.

Yes, okay. And is -- just out of curiosity, I mean, the number that you tossed out for the New York City water, you said about $100,000 in the quarter.

Yes.

Is that project finished, or is there some delay there?

Oh, no. It's essentially finished.

Yes, that's the end of it.

Yes, we've delivered 877,000 units so far at about $68 million. So, we're, give or take, a $0.5 million away from what the original contract value was.

Huh, okay. All right. And then also, you had mentioned on CFE that that was about 10 in the quarter alone.

Yes.

Yes, okay. And is [M. Collie], is that project billing out kind of steady state? Is that still on track?

Well, it's steady state but it's -- it rolls out very small. It's less than $100,000 a quarter right now.

Huh, okay. Can you just walk -- maybe Vic here, maybe just give a little bit of color on the orders. The book to bill here in Q3 for USG was again below one. And I'm kind of looking out to the first half of fiscal '12. And where's the growth driver here for the first half of fiscal '12? I mean, do you expect you can book and ship enough business to generate some growth?

Well, a couple things. The majority of that will come from what we have on international side, on the Co-op side, and Doble. And so, I think Doble will see a pretty significant ramp going into next year.

We also do have these initial SoCal orders, and most of that won't get delivered until 2012. So, I think those are the primary things.

Yes, okay. And then, the out profit that you showed there, the 14.4% in the quarter in USG, Gary, you mentioned that absorbed $3 million of growth investments?

Yes, I'd say $3.5 million is probably a better number.

Okay. And it'll be around $6.5 million, then, in Q4?

No, because it's $10 million for the year and we did about $3 million or so in the first half. Then we did between $3 million and $3.5 million. That gets you to $6 million. So, I was kind of using a round number of $4 million in Q4.

I see. Okay. I see. Great. All right. And then, just the last question on Doble. Kind of given the math here that I did, is that business run kind of up mid teens, then, into next year? Is that a good target for that business, mid teens as in growth rate?

I think for next year that might be a little high. I think 10 to 12 is probably the better way to think of the top line, because these new products that we're launching, they're in beta test right now. And so, I don't know exactly when they'll all come out.

But, I think the ramp longer term is going to be significant. I think the longer term view is going to be what you just mentioned. But, I think for the first year coming out of beta, I don't know that we're going to get 15% top line growth. That might be a little aggressive. But, certainly 10 to 13, low teens certainly looks achievable based on the international expansion, because we talked earlier about getting the feet on the ground to converting those folks to revenue in six to nine months.

So, we're almost through that window, so we do get some ramp up there for the international contribution. And let's say we wrap up beta on most of these things in December. You get some uptick in the Q2 through 4. But, I think going to 15 would be a little aggressive.

Okay. No, I understand how that phases in. That's fine. And then, just one last tack on question. Gary, can you share a currency number with us at the top line? Did currency add -- can you give us a dollar amount?

Yes, it was less than $1 million, because we really aren't exposed too much other than the Test business. And we buy and sell and we manufacture in the countries we sell in. So, the exposure at the top line and the bottom line kind of gets lost in rounding. I'd say in the quarter it's less than $1 million of sales.

Okay, that's fine. Okay, very good. Thank you.

Craig Irwin with Wedbush.

Thank you. Good evening, gentlemen. I wanted to ask a couple questions about the growth investments in the third and fourth quarters and as you look out over the next 12 months, 18 months. Obviously you're making a voluntary decision to invest and constrain the operating margins of USG right now for longer term potential, $4 million in the fourth quarter, $3 million, $3.5 million in the third quarter. Should we expect the relative investment to taper back as we look forward, or is this something that you think that you will maintain, given that these projects are probably long term in nature?

Yes, the dollars we talked about, the investment for the most part have been incremental. And we haven't finalized our plans for next year, obviously, but we're not going to invest at that level on an incremental basis next year at least, and probably not going forward.

Obviously we have to continue to invest in new product development, and we will do that. I'd say that that's one reason we've continued to be successful even in these kind of difficult times is we have made some of those investments, both in people -- and I mentioned that in my opening comments.

We have really brought on some very key people that are going to help us. We've made some investments in the new product development and product enhancement. And so, there will be incremental investment probably next year, but not to the extent that we're seeing this year.

Great. And then, one of the key projects in there you've discussed in the past is SoCalGas. Great project to have. Now with the $15 million in bookings in the quarter, is it fair for us to think that the majority of the investment for that project is behind you and that now we're going to move into an execution phase there as we start the implementation, looking beyond the commission approval?

Yes. I mean, that's a project that's still going to soak up a lot of resources, both on -- just working the project itself. The project team is going to be out there as well as, while the majority of the gas modules that we're going to be producing, I think, are for three specific meter types, there are a lot of other meter types.

And I forget the exact number, but it would be amazing, I think, to you to say, I mean, there are dozens and dozens of different meters themselves that we have to interface with. So, there is going to be that type of refinement that has to take place. Small part of the contract, but it's part of the contract. And they're not inexpensive to do.

But, this is not a major development cycle that we have underway for SoCalGas. But, there is investment to be made.

Great. Then another question I just wanted to follow up on. Doble, growth plans there are something that obviously can have some pretty nice implications for investors, given the significant EBIT margins. Previously you seemed pretty excited about the international growth opportunity for Doble. Can you update us on progress there and any specific actions you're taking in the short-term that will facilitate the growth of Doble?

Yes, a couple things. As I mentioned earlier, we did open a joint ESCO office in Brazil, and Doble is one of the major players there. They've not had an on the ground presence there before, so we think that's going to be a good opportunity for us to continue that growth. And so, that's one piece of it. If you look in -- we're also looking to open an office in the Middle East later this year. I think that will give us some opportunity, as well as increasing the number of conferences that we have internationally.

And really, with that business, that's the way you kind of get started in that you go on the ground, you do education, you have conferences, you get the test engineers to come and to understand the benefits of actually doing the testing. And then, obviously we're there doing it with our equipment. And so, they go away and, as they start making those decisions, they re-contact us and want to buy our equipment.

So, I'd say we've increased the focus on the international business over the past six months and I think we're starting to see some of the results of that. The other piece of it is we're doing more services business outside the US than we've done historically. And that's obviously a good way to be in front of the customers, getting them comfortable with who you are and your capabilities. And so -- but what that really requires is you have people on the ground, local engineers, local employees to do that.

And I would say in a lot of the areas that we're in, if we could find more folks -- employees, and we're hiring them as fast as we can find qualified individuals, but we can really put those people to work on the services, because we see the same thing outside the US as we see in the US in that so many of the engineers with the utilities are retiring.

And I forget the exact number, but they're thinking about, in the US at least, about 40% of the engineers at utilities retiring over the next five years. And obviously that's a huge hole. It's very difficult to replace. And so, what we're doing is trying to make sure that we have people in place to help pick up some of that slack. We're starting to see some of the things -- some of the same things happen internationally. And so, we want to be in a position to take advantage of that as well.

Great. And then, last question, if I may. Historically you've been pretty active on the acquisition front, opportunistic snapping up businesses that have a natural fit. Can you discuss with us the basic criteria that you might be looking for for an acquisition and whether or not you consider yourselves more active or less active than your typical past levels of activity right now?

Yes, I'd say we're as active as we've ever been. I will say that it's a little tougher right now. There's a lot of money out there. A lot of the nonstrategics are more aggressive than maybe they have been in the past.

Having said that, we've got a decent track record of finding businesses and going after them. And typically, if we can get to a private business, for instance, before it kind of gets into an auction process and we can help them understand the benefits of being part of our business, we have been successful with bringing those kind of companies on board.

So, we are constantly looking for opportunities to add to our business. I would say we're fairly disciplined about the approach that we take. We really want to stick to the three major product segments that we're involved in and look for good businesses. I mean, I'd say with us, if you want to look at criteria, it's got to be a good solid fit within one of the three segments that we have, and we're not looking for fixer-uppers.

I mean, the way we're structured and as lean as the organization is, we're looking for successful companies that we think can add to the technology that we have in-house or that can add to the regions in which we participate in. And so, if we can find those kind of businesses with good management teams and people that can fit into the culture of ESCO, then I think that's the primary criteria.

Great. Thanks for taking my questions, and congratulations on the strong quarter.

Thanks.

(Operator instructions.) John Quealy from Canaccord Genuity.

Hi, good afternoon. This is Mark Segal for John. SoCalGas recently commented publicly that their initial meter installations will kick off in the back half of '12 with a pretty significantly aggressive ramp in '13. Is this consistent with your expectations?

Yes. Yes, as I had mentioned in my opening comments, I mean, really the meter deployments don't begin in earnest until 2013. So, really '12 is really about the system design, starting to get the infrastructure in place. But, then it's really going to be late in 2012 before we start any real meter deployments. And then, yes, their anticipated ramp is pretty significant in '13.

Okay. And then, just a follow up on the prior question on M&A. Given the scale of the AMI opportunity that's approaching quite quickly, can you talk about your comfort level with the current product portfolio, your footprint, and then any areas that you've specifically identified in USG for incremental investment in fiscal year '12?

Yes. I mean, I think the ramp looks good. I like our position. Again, we've got two technologies to take to the market, both the RF and the power line. So, I'm comfortable with the mix of the product that we have as these things start to ramp up.

As far as specific investments for next year, I don't think there's any huge product development that we have underway. It's really taking advantage of what we have, flushing some of those things out.

I would say, I guess, the one area that's not a specific piece of it, but I do think you will see our software investment -- our investment in software, I should say, enhanced next year. Obviously, the software is key and will always be key. But, what a lot of the customers are wanting more and more of is how to take advantage of the information that they're getting, or actually the data they're getting, because they get a lot of data. But, for it to be useful, it needs to be turned into information. And that's what our software businesses do.

So, we made some structural changes to our software business within Aclara to make sure that they're all focused on the same thing. We have it under one senior leader. And I think that's going to work very well for us to ensure that, as we do the software developments across Aclara for all our products, that we have consistency in look and feel of the products.

Great. Thanks a lot.

Matthew Crews from Noble Financial.

Good afternoon, everyone. A question, what was the revenue for the New York City contract on fiscal fourth quarter last year?

Can you say that again, Matt?

Your fourth quarter for New York.

Fourth quarter revenue for the New York City contract.

It was about $11.3 million.

About $11.3 million.

Okay. You said earlier in the call the TekPackaging revenue run rate. Was that quarterly or annually?

No, that's quarterly. They're on track to do about $28 million or so in sales with a mid teens kind of EBIT.

Okay. I originally thought that was, say, a $40 to $50 million contract. Is that scope expanding?

Yes, but that's over five years, though.

It's about $10 million a year on that ear thermometer cover.

Okay. So, the 10 -- that Thermoscan is $10 million, but the TekPackaging overall is around $28 million for the year?

Correct.

Yes.

Okay, got it. On the muni side, it's obviously -- you've talked about it in the past. But, with the battery lives what they are, is there an expectation that while spending is weak near term, is there a potential rebound in that market so you'd see some upside if people have to replace these things regardless of whether they want to?

Well, I think the ones that will probably replaced as soon as there's some of the drive by systems, and it's partially because of the battery life. And as you know, some of the older generation products that were put in the field didn't have the advantage of the battery technology that's available today. And we're seeing 20 year battery life, and some of the older systems just didn't have those kind of batteries. So, I think there will be, at some point, some uptick from that.

The other thing is just those systems eventually will be replaced just because the gas utilities and water utilities are able to see the benefit and achieve the benefit of having a fixed network system, which I don't think was that visible to them historically.

So, the muni market, I've said several times now, is weak right now, or softer than what we'd anticipated. But, I think it'll pick up going forward. I mean, the economics are there. The business cases are there. They just got to have a little more access to some money.

Okay. And then lastly, could you just -- we've been talking about technology. Could you just talk about where the current development of the Ascendant network is?

Yes, it's going well. We think you have to -- we have that in four different locations. It's working well. We're still making some modifications for SoCal. That gets delivered, I think, in the first part of the year.

But, we've got a very strong partnership with Firetide. Teams are working well together. We just hired a new senior guy to kind of head the team for Aclara. So, I think that's going to be very successful for us. We'll get that rolled out at SoCal, I think people will be able to see the benefits that they're able to achieve from a private network, and it will help us going forward.

Okay. Thank you very much.

You bet.

Carter Shoop from KeyBanc.

Hi. Thanks. Just a couple of quick follow ups. Can you talk a little bit about bookings thus far in the September quarter? And then, the second question is, can you talk about the OpEx spend in the fourth quarter at the corporate level? Are there going to be any bonus catch up accruals that we wouldn't be expecting?

This early in the month, I haven't seen the July actuals yet because it takes about five or six days after the month end before I get any decent visibility. So, for lack of a number, I'll say I didn't hear anything bad. No one called me and said July looked lousy. But, that's really the only data point I have is the absence of data. It doesn't feel -- the profile looks good for the year. But, I can't really comment with anything specific on July because I haven't seen anything.

And then, are you anticipating any bonus accrual catch ups in the fourth quarter at the corporate level?

No. I mean, I think we've been accruing like we always do on our bonuses. So, I mean, that's something that's done on a monthly basis. I don't anticipate any kind of catch up. If you want to recommend one, I'll take it. But --.

Last question. SoCalGas for 2012, should we think about that being in the $20 to $30 million range for fiscal year '12?

That's probably about right. I mean, we don't have full visibility in that. But, again, as I've mentioned a couple times now, the big ramp doesn't really start until '13.

Great. Thank you.

You bet.

Sean Hannan from Needham & Company.

Yes, thanks for the follow up. So, just kind of diving into Doble again very quickly, when you look at -- the leasing side of the business there is pretty important, I think, to model, at least specifically within the Doble business. Is there any change in direction that you're seeing either for buying or for leasing either here or -- domestically or internationally? If there is some insight, if you can provide there, that'd be helpful.

I don't think there's any significant change. And we've had a few customers that have historically leased that decided to buy the product. Short-term, that's really good because typically they're buying equipment they've already been leasing. And so, it's nice pick up on the margin.

I would say the things that we're doing, though, I would say to try to enhance that market, because it is a good market. Typically there's only a couple of products that are the big runners, but just a couple of products that we lease. And so, we're looking to take more of the products that we have into the leasing market and to make those available.

It's just something historically we haven't done just because it's complicated. There's a lot of things to track out there. And I think we've got a system in place to be able to that. So, we're going to go after more of the leasing market than we have historically.

You don't see as much of the leasing internationally as you do domestically. So, typically those customers are more interested in buying, but it's something that we make available to them. But, that's not a big -- been a big piece of the international market.

But, I would say overall that market -- I mean, even in the big downturn in 2008, the leasing market was rock solid for us. And so, it's remained about 50% of our business, and we anticipate that probably being the case going forward.

That's great. Thanks, Vic.

You bet.

Walter Nasdeo from Ardour Capital.

Good evening. This is Francesco Citro for Walter Nasdeo. Congratulations on a very strong quarter. And I have two quick questions. One is a follow up on the backlog. You gave us some color on the SoCal order for $15 million. I was wondering if you could also elaborate and give us more color about the rest of the backlog, what is the timing for that.

I'd say within Filtration, I'd say 75% of the backlog in Filtration turns pretty quick. The other 25% tends to be these long term projects like the Virginia class submarine where they do multiyear buys and the T700 Black Hawk valve that we do where they buy them five years at a time.

So, if you set Virginia class and Black Hawk to the side, the majority of the Filtration business, primarily aerospace, is a quick turn business. So, the orders come in and the products go out. So, I think the strength of that backlog is reflective of the recent wins on those two big projects I just mentioned.

On the Test side, what happens relative to the individual projects getting smaller is they turn quicker. And generally, a $1 million project usually goes somewhere from three to six months. A $3 million project might go an entire year to 18 months. So, we have a tremendous amount of visibility in that business.

So, the backlog that we're sitting on in Test gives us a tremendous amount of confidence in the first half of next year. To Rick's question earlier on the softness in USG, it's the opposite in Test. We have a tremendous amount of visibility in what the first half of '12 looks like.

On USG, the Doble business, the backlog turns monthly. So, what comes in goes out. So, backlog's not really important, if you will, at Doble. And so, what we're doing on the rest of the business is just trying to maintain as close to 1.0 relationship, which is a little challenging when you're running off the last of New York and PG&E.

So, I think if you looked at USG in total, it's a relatively quick turn business. So, taking the backlog number where it is today in the aggregate, I think we have a tremendous amount of confidence for the next three quarters, and then we expect to replenish that with new orders over those same next three quarters. And SoCalGas is only in there at $15 million. We don't have any anticipated things relative to the contract we signed. We only book into backlog what we get firm purchase orders for, not contract value.

That helps a lot. And I have another quick one on cost management. You were mentioning in your remarks that that was one of the drivers for your strong results in the quarter, if you can tell us more about that and how you see costs going into 2012 and the effect on gross margin.

I just -- that's part of the DNA of the business, I guess. As you may know, we were part of Emerson years ago. And so, I think we learned the value of good cost management. So, it's not a matter of us going in and shutting down plants or having massive layoffs. It's more of a day to day how do we control cost, add the people that we need, don't add people that we don't need. And so, this is something I think all of our management teams across the Company take very seriously and do a good job of.

Going into next year, I mean, I don't anticipate a lot of additional investments. I mean, I think we've done a lot this year to add to the staffs that we needed, to add to the technical teams that we needed. So, I don't see a lot of incremental SG&A in 2012 versus what we have this year.

Thank you very much, and congratulations again.

Thank you.

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

Okay. Well, I don't have any further comments. I appreciate everybody's interest, and we'll talk to you next quarter.

Thank you.

And that does concludes today's presentation. Thank you for your participation.