ESCO Technologies Inc (ESE) 2012 Q3 法說會逐字稿

Good day, and welcome to the Esco third-quarter 2012 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 statements, I would like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead.

Thank you.

Statements made during this call regarding the timing and amounts of fiscal 2012, 2013, and beyond expected results, including sales, SG&A, cash flow, EBIT, EPS, and profits, the timing and certainty of developments in connection with the SoCalGas project, success of cost reduction efforts, future growth opportunities, 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 operation 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 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 of fiscal 2012 results press release issued today and found on the Company's website at www.escotechnologies.com under the link Investor Relations.

And now I'll turn the call over to Vic.

Thanks, Kate. Before I give my perspective of the quarter, I'll let Gary provide a few financial highlights.

Thanks, Vic. The clear highlight of the quarter in year-to-date is the significantly higher than expected order book.

During Q3, we entered $195 million of new business with a resulting book-to-bill of 115%, as all three operating segments provided positive ratios. Of special note in Q3, our largest customer, SoCalGas, awarded Aclara $30 million in orders, which includes 355,000-meter modules in preparation of their AMI metering rollout beginning later this calendar year. Contract to date through June 30, we are pleased to report that SoCal has ordered $83 million of products and services from Aclara. Orders received year-to-date total $584 million with a book-to-bill of 118% resulting in an all-time high record backlog of $431 million.

As noted in the release, we reported GAAP EPS of $0.51 in Q3, compared to $0.49 in Q3 of the prior year. Relative to Q3 sales and earnings, I would like to share some color related to the guidance that I provided for Q3 during the last call.

Filtration significantly outperformed our expectations on both sales and EBIT, and we expect this exceptional performance to continue for the foreseeable future. Filtrations EBIT was 22%, which came in 200 basis points better than earlier expectations. Test sales were generally on plan, but EBIT was approximately $1 million below plan, as a couple of higher margin chamber projects slid to the right and we experienced installation cost over runs on a couple of large complex domestic chambers.

The projects that moved out of the quarter in the year are timing related and the future revenue expectations from these projects are still solid. As is the case with some of the foreign jobs, estimating the exact completion period on large international projects is challenging. Tests lower than expected performance resulting from cost over runs has been addressed through changes in program management and improved processes which will enhance project execution going forward.

In our German operation, we lost some key personnel which impacted our short-term performance. But we are confident that our new leadership there has this business heading in the right direction.

Doble was generally on plan in sales and came in better than expected on EBIT. The EBIT improvement was a result of a favorable sales mix as higher than expected service related revenues were recognized in the quarter. The service business tends to carry higher margins than standard hardware sales.

Aclara came in lighter than expected in both sales and EBIT for Q3 compared to our earlier expectations. While COOP sales continue to significantly outperform expectations. As we are having the best COOP sales year in history, RF water business was softer than expected, as several customer procurements which were identified moved to the right.

As these water sales moved out of the quarter, obviously the associated EBIT contribution did as well. We firmly believe this is timing related and this confidence is based on the fact that our pipeline of identified and qualified new business opportunities in this area is at an all-time high.

On the SG&A front, I had expected the cost to decrease in the second half of the year. And during Q3, we realized nearly a $2 million decrease in SG&A when compared to Q2, and a $1.5 million decrease from Q3 of the prior year. The effective tax rate of 28% was consistent with our earlier plan.

So moving on to a few of the operating highlights, Filtration continues to be exceptionally strong as sales increased $7 million, or 17% in Q3 with every operating unit within this segment showing significant growth. Year-to-date filtration sales have increased $24 million, or 20% over last year. We expect continued strength in Filtration for the balance of the year and into the future as the current up cycle in our served markets continues to yield favorable growth prospects. The groups EBIT margin as I noted earlier is at an all-time high of 22%.

While USG sales decreased compared to prior year, we did have a few bright spots in the group as COOP sales increased 6% in Q3, and 24% year-to-date. COOP sales were $85 million for the first nine months of 2012 and we expect a record year when we close September.

Doble sales were relatively consistent in Q3, and the EBIT margin remains above average in spite of our increased investments. Test had lower Q3 revenues compared to the prior year, but sales increased year-to-date. Test Sales and EBIT margins were exceptionally high in Q3 and for the nine months of last year, primarily due to a large and highly profitable satellite chamber project in Florida, which was completed during 2011. As I noted earlier, our Test segment execution issues have been addressed.

On the cash flow and balance sheet front, we generated over $24 million in cash from operations in the third quarter. And through the end of July, we are on track with our cash flow projections year-to-date as well as our outlook for the remainder of the year.

Since our last call, we completed our credit facility refinancing, which resulted in a much higher level of availability liquidity than our expiring arrangement. In total, we secured $700 million of committed capacity, comprised of a $450 million revolver and a $250 million expansion feature. The syndication was very successful as we essentially locked this in at investment grade pricing levels. The upside option in the favorable pricing showed our that bank group is very comfortable with our business outlook as well as our strategic plans.

As noted in the release, we tempered our outlook for fiscal 2012, but reiterated our commitment of significant growth for 2013. We adjusted our 2012 outlook since we expect some softness in Q4 in the same areas as we experienced in Q3.

To summarize, 2012 is expected to be generally consistent with 2011, despite a significant sales decrease at Aclara related to PG&E, New York City, and the CFE in Mexico. Considering the strength of our current back log, coupled with our robust pipeline of identified new business opportunities across all 3 of our AMI product lines, along with SoCal's expected acceleration in metering end points over the next 12 months, 2013 sales and EPS growth is expected to be significant when compared to 2012.

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

Thanks, Gary. I think Gary covered most of the operating highlights. So I'll be brief in my commentary about the quarter and my focus will be on the outlook for the future.

I'll start by saying I'm reasonably pleased with our third quarter operating results. Obviously, we have some mixed results, but when taken as a whole I a lot more positives than negatives in 2012. I'm certainly excited about the growth opportunities going forward.

The strength in our orders and resulting backlog, along with the size of our identified and qualified new business pipelines, gives me confidence in our projected growth over the next several years. The $83 million of SoCal orders recorded to date provides significant embedded growth. Obviously, we are excited about the metering end point deployments as it begins to ramp up in early 13. But I'm most pleased with the outstanding relationship between the Aclara team and SoCal. I'm convinced this relationship will be mutually beneficial as this project accelerates.

Operationally, Filtration is a clear winner in the quarter and the year. All 4 units within the segment are performing above expectations on sales and EBIT. Filtration's results again validate my belief that our multi segment approach is the correct strategy to create long-term shareholder value.

Doble continues to perform exceptionally well despite the European slowdown. Their new product introductions, especially in the asset management area, have been well received. We are excited about our future at Doble as the state of the art products and software applications such as our arm solution redefine proactive grid monitoring and predictive diagnostics.

In the third quarter, as Gary mentioned, we had some soft spots in Test and at Aclara. While this is disappointing, I will say that I'm happy with what our management teams are doing across the Company to mitigate this.

Our leadership teams are working hard to balance the global economic headwinds, the development of new products and solutions to create additional growth opportunities, while identifying opportunities to improve our competitive position in our respective end markets. Additionally, in consistent with our culture of striving to be a best cost producer, we have undertaken a comprehensive review of our operating cost structure to see where we can improve our efficiency. As we address these opportunities, I'm confident that we can protect and expand our operating margins and therefore supplement our suspected EPS growth in the future.

We recently competed our on-site operating meetings, and as part of this, we reviewed our market positions and updated our preliminary outlook of 2013. I came out confident of our growth opportunities in 2013 and beyond. I'll take a moment to share a few of the takeaway from these meetings.

Filtration continues to experience a strong and sustainable up tick in its end markets, led by the strength of our aerospace and space businesses, where we are seeing growth coming from several areas. Our global leadership position at Test will continue to serve as a solid foundation for growth across the world, especially in Asia. And most significantly, I'm pleased to reiterate that our qualified AMI pipeline in USG is the largest and most clearly defined in our history.

On the international front, our Utility business prospects remain solid as we continue to make measurable progress in our targeted markets of Central and South America, as well as China and Japan. We believe we are well positioned to capitalize on these opportunities when they hit the market, as we've been investing a significant amount of time and resources over the last few years preparing us to capitalize on these large projects.

Domestically, we continue to see solid growth in our COOP market. And we see several good growth opportunities in gas and water, based on the current level of bid proposal and piling activities. All of this bodes well for our future growth.

As we put the wraps on fiscal 2012, I remind that you 2012 was defined as a transitional year for us on a tail of completing PG&E and New York City Water projects in fiscal 2011. Looking forward our projections for significant growth in 2013 remain solid. We are in a fortunate position to be able to project significant growth over the next several years across all 3 business segments with USG leading the way. I continue to be enthusiastic and optimistic about the opportunities ahead of us.

I'm convinced that our 3 segments strategy and end market diversity remains a strength that differentiates us in the market and provides multiple paths to grow and weather economic uncertainties today and in the future. On the M&A front we continue to see some opportunities to supplement our organic growth by acquisition. And while our primary focus remains in USG, we continue to evaluate options across the Company. So in summary, we remain a solid operating position across the Company with ample opportunities for significant growth. And we will continue to prudently invest in the business to ensure our long-term success.

Just one more thing before I move to answer questions, I'm sure a lot of you like myself have watched with a great deal of interest the Mars landing. And I just want to take a minute and tell you that one of our Companies, VACCO Industries, which has been having a great year and a great couple of years, we do not talk a lot about them, but they have a number of products that were key to the success of that mission.

In fact, we had filters on the launch vehicle. We had valves and filters and fill and drain valves on the cruise stage. We had pressure regulators, filters and fill and drain valves on the descent module. In fact, we currently have product on Mars in that we have fill and drain valves that are on the Curiosity rover. So I want to take a minute and just say congratulations to that team that had a key part in such a fascinating and important project for NASA.

So with that, I'll be glad to answer any questions you have.

(Operator Instructions)

Zack Larkin; Stevens.

First question on the water orders that were getting pushed out or pushed to the right, can you give us a sense for how far out do you expect them to come back as we move into Q4? Or is the timing still a little bit uncertain on those orders you were expecting to see?

Well, as we mentioned, I think in the press release, those kind of got pushed out of the quarter and therefore the sales for those would get pushed out of the year. You know, our view is that it is going to pick up probably going into next calendar year. The pipeline, it is amazing how big the pipeline is. It is the biggest it's been in the last few years and I think a lot of it was we were better focused on that. And so those -- I would say there is a lot of smaller projects taking place. But if you look at the water and gas markets together, there is probably about half a dozen pretty significant projects that we think have a good chance of landing this next year.

I would say that as we look at the water market, where we've been very successful is with some of the larger projects like New York City, like San Francisco, and Toronto. So we're encouraged by the fact that there are a number of these projects, or larger projects, where we've been very successful. And at the same time, I think the sales team has done a good job of working to better access those smaller projects that will become available.

Thanks for that. And now with the sizable amount of bookings coming from SoCalGas, do you have a sense on maybe what the expectations might be for shipments and how we might think about that, as that project begins to ramp up?

Yes, it will be much more significant next year than it is this year. I would say that sales are going to be somewhere over $50 million next year and then ramping on beyond that, on years after that. So that is a project that, assuming it stays on track and we do not see any indication that it would not -- we really start the big ramp up of the end points which is where the real dollars start to happen. That is scheduled to start significant ramp in January of this year.

Okay.

And the other thing I think is key to remember not only are you going to see more sales to that customer next year, but this year we are investing in that. So we're making a lot of investment on a pretty small amount of sales, and next year that amount of investment, it doesn't go away because there are costs associated with running that project obviously, but really the product development piece of that will essentially be done this year.

Got it. And then one final question. Gary, the tax rate was a fair bit lower than what we've seen in recent quarters. What should we think about as we look going forward for a tax rate?

I think if you keep it on an annual rate this year, we had a unusually high rate in Q3, and an unusually rate expected in -- I'm sorry, in Q2 we had a high rate and the rate in Q3 came in at expectation. So when you average that over the course of the year, it should come in at around 34.5% which is the standardized run rate. And so what happened in this quarter is obviously you set up provisions for uncertain tax positions, you come through the IRS audit and that sort of thing. And basically, the positions we had taken were adequate.

So there was about $1.5 million worth of what I would call statue of limitation things expiring as we came out the back end of audit. And that was expected to happen. We knew we had a good position. So this quarter is a little unique. But it was planned. And when you neutralize this over the course of the year, I think 34.5% is our generalized run rate as you go forward into '13, absent these discrete items.

Carter Schoop; KeyBanc Capital.

Good afternoon. I wanted to touch base on guidance for a second. For fiscal '12 we are talking about that being roughly flat year-over-year. That would imply the normalized tax rate of 33% to 34%. And then assuming a repeat on the other income side of about a doubling of operating income sequentially, do you feel comfortable with that? Or should we be talking about maybe fiscal year '12 being a little bit lower than fiscal year '11?

Well, obviously, we only have a couple of months left so we have pretty decent insight into that. There are things that have to happen this year. And we said generally flat to last year. So it is somewhere in a pretty tight band around that. But we have a lot of insight into what's happening. And our fourth quarter is always big. Last year was a little bit of an exception. It was a little flatter. But if you go back to the year prior, I think our projection for the fourth quarter isn't even as high as it was that year. So the vast majority of that is in backlog, ready to be delivered. It is just a matter of getting it out the door. But there is always some minor amount of risk around that.

Okay. And then for '13, you can quantify your outlook again? Remind us what you are looking for there and if you are still comfortable with those exact numbers?

Yes, what we've talked about before essentially 25% higher than what we were going to do this year. We're still very confident that it will be somewhere in that range. Obviously, with some of the pervasions that we've had this year, we're going to look at that again and we'll obviously give you a full update at the end of the year. But I would say that we are not seeing any significant changes to what we are projecting. Because if you think about why we have confidence going from '12 to '13 with significant improvement, the biggest piece of it, but not the only piece, but the biggest piece is what I just talked about with SoCal.

So with a significant uptick at SoCal from a sales perspective and a profitability perspective, that is number one. And then also I mentioned some of the significant projects we have on water and gas side, which we'll get those to happen in the first half of this next year, then we'll have some sales associated with that. Also with Doble, we've been making those investments and starting to get some traction with the new product development. New product developments that we've done as well as some of the international expansion.

And then we talked about some of the issues we've had at the Test business. And we'll get improved margins next year in Test, I can assure you of that. If you look at our Filtration business, it remains very robust. We're projecting some growth, even over what we've been able to do this year. So it is not -- we're hoping for something. We really have concrete insight into why we're going to have significant growth next year over this year. Is it going to be 25%? Is it going to be a little more than that, a little less than that? That piece we have to refine, but it is going to be in that general area.

Sean Hannan; Needham & Company.

Yes, thank you. So if I could get a little bit more color around what occurred within the Test business. So the chamber projects will be completed by the end of June, just get a better understanding of what exactly happened? How did they slip out? Did the customers say stop? Just a little bit more clarity would be helpful.

Yes, I would say there was two issues that we had. Two general issues. The first one was just some of the delays and primarily in Europe. So we had a couple that said do not have the ability. And we go through this from time to time and it has been a while, but a couple of customers just said, we're not ready for this to be done. The parent building is not done, so you cannot complete the project. We cannot start the project in the time frame we talked about. So that has been the biggest issue that we had. And those, as I mentioned, are primarily in Europe. It's not that they've gone away, or that we are not going to perform on them, it is just the timing.

And then the other thing we mentioned is we did have some performance issues on some of the chambers that we were completing and those were primarily in the US. So those were the ones I feel a lot worse about than the ones that got delayed because we cannot control that. And there is no excuse when we have projects in house not to perform on them. So those are things we are working hard to make sure they do not repeat themselves.

That's helpful, Vic. And then, if I can go back and revisit some of your comments on USG. The business certainly came in well below where I was thinking. The water scenario really sounds like two underlying scenarios in that actual shipments were pushed as well as the orders, which would not have necessarily materialized in the quarter any way. And I got a better understanding from your comments earlier, that the orders-- then we should see that as revs in '13. But I wasn't clear on what was happening with the shipments that we were expecting within the quarter and where those have moved?

And just to be clear. It is not an inability to ship product. That was not our problem. We typically, with particularly the smaller water projects, which are the ones that we thought were going to happen, that didn't. Those typically are book and ship. So we can book and ship those in a very short period of time. We keep inventory available to satisfy those. And so it was a matter of we thought things were going to happen, first part of the quarter, we'd be able to ship those, and they didn't happen. So it is not a matter of inability to ship. That is never a problem for us. It is really that the book and ship orders that we thought were going to happen, didn't happen.

Okay. That's helpful. And then just one last question. The efforts around the cost structure, any specific focus around the different businesses? Obviously, I think that Test is on the table there and more clarity and I'll jump back in the queue. Thanks.

Just to be clear, I don't want to overplay this because I think those of you that followed us know this is something we do on an ongoing basis. And so we are not coming in and talking about doing a big restructure of the business or anything like that. It's just that I want to make sure that people understand that we understand we have a few issues, we're going to address those like we always do. I just felt compelled to say something specific about this so that you knew that our attention was clearly focused on that.

So what we are really doing is looking at the Test business because we want to make sure we are making products at the right places, to be most cost effective. Because it is a very complex business. We have a lot of locations and product gets shipped from location to location just because that is the way the business is set up. So we want to make sure we are doing that properly and making it as easy for those guys as we can to be successful.

Then we'll look at other places around the business. And we don't have any significant areas where we've got big issues other than that. But certainly it warrants us going back and looking because we are committed for this big, significant growth next year. Obviously, most of that will come through organic growth of the business. But we also have to make sure we have the right cost structure in place to give us some protection for that.

Craig Irwin; Web Bush Securities.

Congratulations on the incremental orders out of SoCal. So, in the filings related to SoCal, they've disclosed at a project meeting that they've ordered about 100,000 units from you. Can you discuss whether or not any of the units were delivered in the June quarter? Or if this is part of the contribution to sequential growth at USG in the fourth quarter?

We really haven't delivered, other than qualification units, we've not delivered a mass delivery yet. So that is yet to come. So the 100,000 that they ordered as well as the 355,000 that they have ordered have yet to be delivered. So we're in the ramp up phase with our subcontract manufacturers and those deliveries will start at the end of the first quarter of '13.

Okay, so then they had said previously they were going to do 10,000 units in your first fiscal quarter. Given that they themselves announced 101,000 unit order, can we infer that will have multiple delivery dates as far as the original order? Or would you be more likely to deliver that at one point in time?

No, I mean the way that happens, it is a pretty complex supply chain, if you will. So we'll be delivering product on a weekly basis once we get ramped up. Certainly they'll have the 10,000 that they are going to put in the field in our fiscal first quarter, to test out the system. Once we start ramping up we'll be making weekly deliveries to the customer.

Craig, just to help you reconcile that, when they put out their technical filing, they had ordered about 100,000 but through June 30 they purchased another 250,000. So they are up to 355,000 modules that they have under firm commitments through today. As Vic said, the 10,000 will go in the fourth calendar quarter of this year. They are on track for a January 1 launch at a high rate of installation. I think that 100,000 in the technical filing is probably two months old of data. In the last couple of months, as I said, they ordered another 250,000 to bring the total to 355,000.

Great. And then, Gary, just looking at the fourth fiscal quarter, can you help us understand the sequential revenue progression in the three different segments? It is pretty clear that Test, some things were pushed and there is good potential to help the fourth quarter. But can you maybe discuss USG and Filtration in a little bit more detail?

On Filtration you'll see another incremental step up from Q3. We did roughly $50 million-ish there in Q3 and I think you'll see another additional nominal step-up there. In Test, if you remember, on the last call or the last couple of calls, I said this year is going to be bouncing around. In the first quarter we did $40 million. In the second quarter, we did $50 million. In the third quarter we $40 million and then in the fourth quarter we're going to do $50 million again. And that comes down to the size of some of -- the individual size of these international contracts that are on track that were passed critical milestones as Vic said.

On the ones that get pushed out, and not using this as an excuse, but when the parent building that our work is going inside of is not done, that is a critical milestone that determines when you launch. So the ones that are going to be completed here in Q4 are well past initial installation and on track. So we should be up to about $50 million again in the Test business. Coming back to Doble, they should be sequentially higher than where we were in Q3. And what that relates to, as Vic said, there are several new projects that came out. The ARMS initiative which you saw a press release issued by one of our customers, S&C Electric a week or two ago. And there are other software releases that are incrementally positive that fall into the new bucket as well. So if you put that up at $27 million, $28 million off of the $25 million, I think you would be fair there.

And then the other side of it is in the fourth quarter as we do at Aclara, this is the largest COOP delivery quarter we have every year. So when you look at what we delivered in Q3 at Aclara, which is about $52 million or so, that should step up to above $70 million. Well you say that is a big step-up and you have this water softness, we tempered that back. Where we really see the significant sales is coming out of the COOPs from a combination of things, direct sales as well as distributor restocking through the HD supply network where they ramp up their inventory for installations that they have scheduled beyond when we ship to them. So we are extremely confident on the COOP side. We think we have dialed back the same level of softness on the water. So if you put the Aclara business in the aggregate, in the low $70 millions on revenue, I think you'll be okay there.

John Quealy; Canaccord.

On the SG&A, or cost of sales side, I know through the quarters this is year we talked about technology enhancements on the AMI system for SoCal. I think the expectation was those would wind down this year. Can you comment, have they wound down? How much were they? And how much can we potentially save moving in to '13 on that type of development work?

Do you want to take that, Vic?

I think they have already started to ramp down. If you look at what we've been spending for new product development, it is probably somewhere in the neighborhood of over $5 million this year just on new product development for SoCal. We think that the majority of that spending is going to be done this year. Again, at the same time, we're having to ramp up the SG&A support on-site for SoCal but it is not going to be at the same level.

Okay. And then also on the water side, I know you guys launched, it might have been post-quarter, a product update on two-way, on I think it was the old Hex architecture. Did that factor into any of the water delays? Where customers were looking for a revamped product or was it just mutually exclusive?

I would say it is really mutually exclusive. I don't think that had an impact on that. It was just people not making decisions in a timely matter. I'd like to lay it on something like that but it is not it.

And that's fine. And my last question, just math. So $30 million SoCalGas in USG bookings. So that gives you a stripped number of $59 million. Is that right, excluding SoCal bookings in the quarter for USG?

Yes.

So book-to-bill, about 0.8 in the differential here is water push-outs, is that right?

That is correct.

(Operator Instructions)

Richard Eastman; Robert W. Baird.

Hello, just a couple of things. Was there any revenue in the quarter to SoCalGas?

Yes. It was about $2.5 million to $3 million.

Is that -- why, again, the thought process was we might book $6 million to $7 million in the quarter. Was that the delay on their end that had to do with the collector issue?

Yes, that's part of it. Because we are still building out the infrastructure. And so as SoCal is going out, we've done the propagation maps several times for them. And as they identify the sites where they are going to put these antennas, In some cases they have to reassign the sites because either there is a technical issue or a site issue -- meaning they couldn't lease the side of a building or there wasn't a pole to attach it to in the right spot.

So that does cause delay on their end, which makes the revenue side of it a little bit slower. But the way they are ramping up, expectations for the metering end points, I don't think that will influence when they start taking delivery on the metering end points. But I would say on the network architecture, meaning the collectors, or the antennas, they are a little bit behind schedule there.

Is fourth quarter maybe a similar number, $2 million to $3 million?

No, it should be considerably higher than that.

Okay.

I think they've addressed the majority of the site issues they are looking at. And they have work-arounds on the locations where they couldn't lease appropriate space on buildings. I think they have their end of it resolved in that fashion. So we should be on track by the end of the year relative to SoCal.

And then, Gary, what was the other gain in the quarter?

It is a piece of the extensible earn-out relative to the new accounting rules on how you handle earn-outs relative to expectations. When we bought the Company, there is an expected liability of what we'll pay them in the earn-out structure. As time passes you have to adjust that relative to future expectations. It was about $3.5 million of a non-cash gain that comes through from the accounting adjustment relative to purchase accounting.

We had the same thing last year because you have to look at it every quarter. At the end of our third quarter each year we take a reevaluation of that relative to expectations. If you look last year in the third quarter, we had, I believe it was $1.5 million of this same type of adjustment. There's only a little bit of that left so you are not see that come through again. I think there is only $400,000 or so of the remaining liability that material with what's remaining.

And also, Vic, did you guys sell a Test business in Germany in the quarter?

No.

What that relates to, Rick, what we are doing as part of the consolidation of costs. We have a Test business over there, that is the EMV business, and then we have a Doble business over there. And so what we did during the quarter, and this is part of merging the whole international structures, we basically set it up under a single legal entity. And the reason for that is from a cash management perspective, as we move money around the world, and from a tax perspective on the international basis, it was a very complicated structure to maintain two separate legal entities within the German structure. So what we did is, we merged them legally.

Again, it was done to eliminate some costs, because we had duplicate overheads. But mainly it was done to facilitate cash management. Because it would be odd if EMV had positive cash and Doble Germany needed cash. In the old structure, we had to bring it over from the United States and invest it there. It was complicated even though they are only miles apart. So when you merge the entities legally, an internal document was created in the German governmental structure that said EMV went away.

Because several folks called me subsequent to that and there was a German notification with the official name of the German entity -- which is beyond my ability to speak German, it published that the EMV entity no longer existed. What it was related to is, technically it doesn't exist as a stand-alone entity because of the legal structure is now merged into a common entity. So we did not sell the Company. It is a complicated answer. But the best way to think about it is administratively we roll them into a single legal entity to better manage international cash and better manage international tax.

Taxes. Okay. Great. And then a last question. Vic, I just got a question, and maybe you can explain this a little bit better, but our previous guidance had a mid point for this year of $2.10 in EPS. Now, we're talking about maybe a $1.95, plus or minus $0.05. When you reiterate fiscal '13 EPS guidance of being up 25% or so. Off of that smaller base, we are talking about basically, and I know this isn't guidance, this is your thoughts. We're losing $8 million of pretax out of '13 because we are talking about percentages off a lower base here.

With the very strong backlog, and good bookings, where is the weakness? Why don't we still have the prospects of having the same year next year? Where is the leakage in revenue and profitability from your vantage point?

Well, I'm glad you asked the question because I was afraid it wouldn't be clear enough. Our view, and again it is not guidance, but our view is that the increase we are looking at next year, which is really based on our original directional guidance and not where we are going to end the year. So we are not saying it will be 25% over where we end this year, we are really looking for significant growth over where we had projected 2012 to end up.

Okay. So, just mathematically then, it should certainly be up more like 40% year-over-year?

Yes, mathematically.

I don't have my calculator in front of me. We are talking about -- we are not retreating and saying it is 25% over where we'll end up this year. We really going to be the growth -- we really still anticipate 2013 to be where we thought it was going to be three or four months ago.

From a dollar perspective. And we were trying to be a little cautious there, Rick, so we didn't just put out a number because we are not at that point yet. But the simplest way to think about it is, of course we can say that the percentage has gone up significantly because the numerator has dropped and that is not a fair thing to say. I think the best way to think of '13 is the dollars of revenue and the dollars of pretax and the resulting EPS that we had communicated throughout this year are still very similar to where they've been for the last nine months.

You could say some of the things had slipped from this year into next year should provide you with upside. But the best way to think of those is, that provides you with a nice amount of protection for the down-side of what we don't know in the back half of '13. So if we were to pick a point estimate, which we'll do in November, I would say that the dollar amount today is consistent with the dollar amount three, six, and nine months ago. And I don't want to get caught up in percentages. We had this written a little awkwardly because we didn't want to say EPS will increase 40%. I think we're all in the same spot.

Okay. Thank you.

I guess one comment I'll make. I think it is important that we make it. This whole industry, I think everybody knows, it is slipping around a little bit. And I think a lot of folks are saying, hey, we're not going to see growth until 2014 or beyond. And the one thing I'm excited about, our perspective, is we have the capability and the opportunities to do that next year. So it is not a matter of waiting 18 months for something good to happen. We have the backlog to make it happen next year.

Ben Schuman; Pacific Crest Securities.

I think most of my questions have been asked. But can you maybe comment on the Europe softness. How much of that was related to the personnel changes in Germany? And how much was macro driven and maybe a little bit more in terms of specifics about who you lost in Germany, just what their role was?

As far as just a personnel issue, specifically, and that was really related to our Test business. We had turnover at the top of that business. We were able to bring in a very senior person from Siemens to take care of that. And beyond that, it was a number of people more on the service side of the business that left. And they basically started their own business, and so that set us back a little bit. We've got that better organized now. We have a very strong individual to run that business. I think we'll be okay there.

The softness really was more related to across the board at Doble in particular, it was softer than anticipated. The Test business across Europe, not just Germany, but across Europe was a lot softer than anticipated. So those are the two companies that had the biggest impact. Fortunately, Asia has gone better than we had anticipated. But we need that to keep happening because honestly, I'm glad that we have the smaller amount of exposure to Europe that we do. But if you look Company-wide, it is around 12% of our business is dependent on Europe. And so that is not obviously the same impact, if we were hoping that we were going to be getting a tremendous amount of growth in Europe. It is really a matter of keeping that in check and not having too much more slippage there.

Okay. Great. Yes, I agree. Less Europe is better these days. Then maybe an update on Brazil. My understanding is that there has been some movement there in terms of determining the standards for AMI. Maybe we could finally see some movement there soon. What are you thinking about that market?

I would say that it is still being defined. We have done some trials down there. Our view is that it is still going to take some time for people to get serious about that. We've got a good partner down there that is monitoring that for us. We have some people down there as well. Where we really have an opportunity I think to participate there is more in some of the rural and suburban areas rather than the urban areas. I think there is some likelihood that those won't happen as quickly as some of the denser populated areas. But that is yet to be determined. Fortunately, we do not have any projections in the next couple of years that it's going to move forward. I see some of the other international opportunities where we are very well positioned, I think have an opportunity to move forward a little bit faster.

And then along those lines, with Japan, I-Tronic is expecting a tender in April and maybe shipments in 2014. Is that in line with how you guys see the opportunity in Japan?

Yes, I think it has been pretty consistent. I think Pepco is finally being a little more public about what their plans are, going more to international standards, which I think is good for US-based companies. But they will probably do something in that time frame, if not before. But once product gets on the ground, they are probably going to test it for years. So I would agree with what they said as far as the timing of at least significant deliveries into Japan.

We have no further questions at this time. I will now turn the call over to Vic Richey for closing remarks.

Okay, well again, I appreciate everybody's interest. I think that we've got a really good opportunity going forward. We are going to see significant growth in 2013 for the reasons that I outlined earlier in the call. And again, we are excited by the fact that we're going to be able to do that in the near term, we have the backlog. We have the opportunities in place to make that happen in 2013. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.