ESCO Technologies Inc (ESE) 2013 Q1 法說會逐字稿

Good day, and welcome to the first-quarter 2013 ESCO Technologies Incorporated earnings conference call. Today's call is being recorded.

With us today are Vic Richey, Chairman and CEO; 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 of Investor Relations. Please go ahead.

Thank you. Statements made during this call regarding the timing, amounts and sources of fiscal 2013 and beyond expected results, both on a GAAP and an adjusted basis, future sales, orders, backlog, margins, EBIT, EPS, growth, profit, new opportunities, the SoCalGas project schedule, results of recent acquisitions, the schedule, cost, savings and margin improvements resulting from restructuring efforts, and other statements which are not strictly historical are forward-looking statements within the meaning of the Safe Harbor provisions of the federal security 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 press release issued today and found on the Company's website at www.escotechnologies.com under the link Investor Relations.

Now I'll turn the call over to Vic.

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

Thanks, Vic. Consistent with the theme of our prior-year commentary, the clear highlight of Q1 continued to be our ability to win new business, as evidenced by the strength of our orders and the growth of our backlog. In fiscal 2012, we grew our backlog $64 million over the course of last year. And we continued that trend during the first quarter of fiscal 2013.

Our backlog increased an additional $50 million, or 12%, resulting in a December 31 backlog of $457 million. Our backlog grew across all three operating segments and was led by our largest customer, SoCalGas, as they awarded Aclara an additional $44 million in Q1, bringing the total order value in the project to $139 million through December 31.

Subsequent to quarter-end, SoCal ordered additional -- several million of additional products for their rollout. The early stages of the project are on track with our original plan, and we are pleased with the initial install quantities that SoCal has deployed. We continue to expect SoCal to generate the revenues we guided to in the last release.

For fiscal 2013, we guided to an operational EPS range, which resulted from the nonrecurring costs associated with the Test business restructure. For Q1, we reported operational EPS of $0.05 a share, which compared to our GAAP EPS of $0.01. Our operational EPS was generally consistent with our initial quarterly plan.

Regarding Q1 from an operational basis. Filtration continues to outperform expectations on both sales and EBIT. And we expect our fiscal year sales growth and profit contribution to come in as previously communicated.

Test sales and profitability were generally consistent with their operating plan. And as a reminder, Test's GAAP results include the approximately $1.5 million of cost related to the shutdown of the Glendale Heights facility. And the incremental costs related to the manufacturing inefficiencies resulting from this disruption. Test profit expectations for the balance of fiscal 2013 are on track, and our restructuring is on schedule and on budget, and we continue to expect it to be essentially wrapped up by the end of the second quarter.

Doble continues to perform exceptionally well, as evidenced by their 20% EBIT margin. Q1 sales were consistent with the prior-year, but came in slightly below the plan as several customers delayed their purchases of hardware and services due to the October East Coast storm. A significant portion of Doble's customers east of the Mississippi postponed product shipments and service work as they redirected their maintenance efforts to support the restoration of power to those most affected on the East Coast -- on the Eastern seaboard. Based on customer feedback, this deferral is a timing issue, and we do not expect it to impact Doble's year.

Q1 was generally on plan at Aclara, with the exception of a delayed product shipment to PG&E, as Aclara waited on customer testing and approval of a new extended range AMI product. This added several weeks to the planned delivery schedule. And while the product is now shipping, the product revenue was not recognized in Q1.

Aclara's co-op business was anticipated to be low in Q1, and it came in as planned. The co-op revenues in Q1 were lower than historical first quarters due to the timing of distributor shipments throughout the respective periods. Aclara's RF water business was consistent with their Q1 plan and our earlier communications.

On the cash flow and balance sheet front, during the first quarter we added two new acquisitions and spent approximately $28 million. We expect modest accretion in the second half of the year as we integrate these new partners. We ended the quarter with a strong balance sheet, as our net debt balance was approximately $131 million and our leverage ratio was 1.9, with continued favorable pricing.

On the buyback front, we purchased -- or I'm sorry, we repurchased 150,000 shares through September 30, an additional 270,000 in Q1, bringing the totals to 420,000 shares, spending $15 million through December 31. Considering the strength of our current backlog, coupled with the robust pipeline of identified new business opportunities within our AMI product lines, along with SoCal's deployment ramp over the next several months, 2013 sales and EPS growth is on track with our earlier expectations. We continue to expect a significant second-half contribution to EPS, driven by the timing of our projects.

Regarding our current expectations for Q2, our plan currently reflects EPS as adjusted to be in the mid-30s when excluding the Q2 Test restructuring costs called out earlier. I'll be happy to address any specific financial questions during the Q&A. And now I will turn it back over to Vic.

Thanks, Gary. You know, we continue to see a lot of positive things happen across the Company. With the most significant obviously being the much-anticipated launch and ramp-up of the SoCal project. We've been working diligently for the last couple years to make sure we are well-positioned to provide SoCal with all the necessary products, software and services to make their AMI-authorized project a success.

I am pleased to report the project has begun in earnest, and the results have been positive. SoCal has made its initial installation quantities, and we're delivering products consistent with our plan. Our partnership remains strong, and all parties are focused on making this project the state-of-the-art gas AMI deployment worldwide.

SoCal is not the only project that I'm excited about when we consider the balance of this year, as well as long-term prospects. The continued strength of our new orders and resulting backlog obviously bodes well for the short-term. But I'm also excited about the size and quality of new business opportunities that we are currently addressing.

There are several AMI opportunities in both water and gas markets that give me confidence in our projected growth over the next several years, as a supplement to the SoCal contribution. Our business development teams are fully addressing these opportunities, both domestically and internationally.

Operationally, the strength and stability of our Filtration group continues to exceed expectations. The breadth of our current product offerings, along with our engineering excellence in developing new products, gives me confidence to reaffirm our fiscal 2013 growth outlook. As Gary mentioned, the Test restructure is on track and on budget. And I continue to expect their second-half operating margins to be at or near 13% after the consolidation is completed.

Doble and Aclara are on track to meet our earlier expectations for 2013, despite the low volumes in the first quarter. We continue to see opportunities for Doble's international growth. And I am pleased with their engineering efforts, which have resulted in the development of a number of new products and software solutions being developed and set for market release.

On the M&A front, I previously mentioned that we're continually evaluating our options in this area, and during Q1 we added two new partners. The most significant is Metrum, which we closed on December 31. I'm really excited about what Metrum brings to our AMI product offering, as they are a proven and well-respected cellular AMI vendor, serving over 350 utility customers. Metrum [Mill House] Aclara offer another best-in-class AMI solution, which effectively complements our already robust product and software offering. I am thrilled that we were able to add Metrum to the Aclara family.

Last week I attended the annual AMI Trade Show DistribuTECH in the San Diego. I'm pleased to report that our participation in this event and our new product introductions were well received by our current customers, as well as potential future customers. We had a consistent flow of utility customers stopping by our booth and inquiring about new product offerings, which has allowed us to further demonstrate our solutions and capabilities.

We used this forum to introduce several new Aclara offerings, including our state-of-the-art mobile application platform for utility customers. Doble also participated and introduced several new products, including a new protection test set for use in smart switch distribution system applications. We will continue to introduce new offerings to our utility customers as we constantly strive to be the solutions innovator.

So in summary, we remain in 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. I remain convinced that our three-segment 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.

With that, I would be glad to answer any questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Kevin Maczka with BB&T Capital Markets.

First question on Doble. We have talked about this before, but you have got this multi-year goal to double Doble. And I know you have hit some singles and maybe some doubles there with opening some international offices.

But can you just address that, and where you think you stand in that regard? And how confident you are that you can do that? Because that, of course, involves Doble growing faster than it historically has.

Yes. You know, that is not something that is going to happen in the next couple years, but I think it's a good long-term goal for us. And what's really going to drive that is a couple of things.

Number one, us being able to accelerate our ability to penetrate the international market, as well as some of the new products that we're developing to be able to deploy here in the US. I'd say the third piece of it is, you know, we have this fee-for-service business within Doble. And I would tell you that today we probably could grow that about as fast as we want. And that really kind of a limiting factor there is being able to find the people to man that.

So we've talked in the past about the fact that so many utilities are losing engineering talent just to retirement. And so they are looking more and more for people to outsource to. And we are looking very aggressively at adding people to that part of the business to be able to grow that. So there's about three different things that we are pushing to try to make that happen.

Okay. Vic, shifting over to orders. Strong orders, of course, in the quarter. If you look at USG, it looks like nearly half of the orders were SoCal-related. So can you just address the non-SoCal part of the business? How you feel about the incoming order cadence and the trajectory of that business?

Yes. You know, we have spent some time the last couple of weeks looking at that again. And what I would say is, it looks pretty solid. We've had a good pipeline. SoCal obviously is a big driver, it's not the big driver. We are starting to see the water market pick up, and we think we will have a solid year in order entry in the water market, as well.

And so then kind of the wild card, as we have talked about in the press releases, we had a pretty soft first quarter in the co-ops, which we expected. And so it's really how we are going to be able to work with the distribution network to pick that up a little bit in the second half of the year. But I would say that the pipelines feel as good as they have for the last couple years.

Okay, thank you.

Zach Larkin with Stephens.

Vic, I wonder first off maybe if you could talk about the AMI pipeline. I know on recent calls, you have talked a lot about different kind of water and gas opportunities. But I wondered if you could give us an update on your sense for what the size and timing of these awards might be. And how we should think about them in terms of kind of the 2013 year. And also maybe a little color around ESCO's positioning on them.

Sure. I just mentioned that I would say the pipeline feels pretty solid now. We've got several water opportunities that look like they're going to happen this year, where I think we're very well-positioned. You know, I think given the fact that we've had as much success as we have with some of the larger water utilities like New York and San Francisco and Toronto. I think that positions us well to have some success.

You know, we are not looking for anything that's going to contribute more than $10 million or $12 million to $15 million this year. So it's not like we're looking for something that's going to be a $30 million or $40 million that are going to turn in to sales this year. So I think we are well-positioned in those. And it looks like those are set to happen in the next couple quarters.

But I will tell you the biggest concern I have is just the timing of some of these orders. I'm not concerned about orders happening this year, our ability to be able to win it. It's just that they do continue to get delayed somewhat. So my hope is that we will get some traction now after the first of the year.

Thanks for that. And then if SoCal is starting to ramp and with -- I think there has been some indications that they might want to increase their ramp speed. Are there any issues on capacity or anything on that kind of front from your guys vantage point, if they were to accelerate any of their ramp, now that we've got some of the initial phases done?

Yes, I would say probably that's one of the things I worry about the least. And we're really got good manufacturing partners.

In fact, we've just recently been able to expand our production capability with subcontractor manufacturers doing that. So we significantly increased our ability to deliver product. So I'm not at all concerned about that, should SoCal decide that they want to accelerate the deployment later in the year.

Okay, thanks very much.

Sean Hannan with Needham & Company.

Yes, thanks. Vic, if I could just follow up on some of the comments you made on the water market, some of the strength that you're seeing there. Is there any opportunity that you could see some perhaps upside to the expectations in fiscal 2013, you know, if some of the timing of that kind of falls out there? Any color around that would be helpful. Thanks.

Sure. There's always that possibility. I would say that the concern I have, again, is just the timing of some of these orders. And so if -- what we're doing is we're preparing to make significant deliveries in the second half of the year. So if somebody would come in and want to do something quicker than what we currently anticipate, we are building inventory to be in a position to be able to meet those deliveries.

And also I think that gives us competitive advantage. So that if a utility is saying -- well, we really want to go with you guys, but we want to start right now -- we're going to be in a position, we're going to make sure we're in a position to have the product on hand to do that.

Okay. And then in terms of the business over at Doble, the deferral that you had referenced. How do you expect that to come back? Is that addressed fully in the quarter? Or does that kind of spread out a little bit as we move through the year?

It will be through the year. As Gary mentioned, I mean, we are not going to have a huge step up in the second quarter over the first quarter. So we are pretty heavily back-end loaded this year, as we typically are. So I think that will be something to be spread out over the year.

Okay, thanks. And then lastly, in terms of the ARMS product.

Can you talk a little bit about the progression of the data efforts with the utilities today? And how do you see that picking up some more activity with those customers? And how and when that starts to translate to a little bit more momentum. I realize there is a longer-term vision there, but further insight would be helpful.

Sure. What I think -- we will be spending this year in working with our beta customers and, you know, proving out the product, adding additional capability, additional sensors, those types of things that software build interface with. So I think for -- it's probably going to be next year before we have any significant sales on that product. So we really want to make sure we have it wrung out properly before we launch it on a broader basis.

But we don't have any assumption that we've got any big sales in that dish, or any sales, really, this year other than what we already have with our beta customers. But we do think it's a long-term great opportunity for us. And I would say it's really meeting the expectations that we had for the product and that of the customer as well.

Great. Thanks, Vic, for all the color.

Craig Irwin with Wedbush.

So one of the things we haven't spoken about yet is the international opportunity. So over the past couple of years there's been differing levels of excitement about some of the projects that could potentially materialize out there. Can you give us some color on where things stand with your customers at the moment? And whether or not you include them in the specific set of high-probability customers for customer awards for 2014, 2013?

Yes, I would say that we don't put any international customers, except for the ones we already have, in the high-probability, just because it's international business. And we've been talking about it for years, as a lot of the other venders have. And these things seem to take a life of their own in some cases.

Having said that, we're in a very strong position in Central and South America. We continue to have good sales there. I would say a little bit of the wild card now is when Mexico is going to move forward. CFE is going to go forward with additional orders.

You know, but we think we are going through the timing of that's a little up in the air now. And it's a little frustrating, honestly, because they probably have the best business case out there. It's a compelling business case. We've got a product in the field. It's working very well.

So I think they will be making additional orders, hopefully in the not-too-distant future. The longer-term issues that -- or opportunities we're looking at obviously remain Japan, and China as well. And we're active in both of those markets. And I think we will be positioned to get some of those projects as they go forward.

We don't have a lot in 2013 as far as anticipated sales. There is some opportunities, I think, beyond what we have in there. So I think we have a little upside potential in 2013. But it's not a huge amount of what we are anticipating. We think that's a little longer-term project. But again, I'd say Central-South America and in Asia are probably the best opportunities for us.

Great, thank you. Changing subjects to your recent acquisition of Metrum Technologies. Can you give us a little bit of color around the approximate size and financial profile of this business? And maybe if you could share some details on potential synergies or customer overlap, or customer expansion opportunities that this asset brings.

Sure. Well, I think Metrum is really a good opportunity for us, and it's going to be a good addition to what we do. And just a little background for those of you that aren't familiar with it. Basically, they use a cellular connection to communicate with the meters. So as you know, one of the issues that the power line system has is the amount of bandwidth that's there.

Let's say, if you look at some of the investor-run utilities and certainly the co-ops that we deal with, it's ample bandwidth to do most everything they want to do. Having said that, you know, many of our customers want to have more bandwidth for the CNI users. And so what this allows us to do is go back into some of our current customers, as well as new customers, and provide them with an upgrade, if you will, for their CNI customers. Where they will be able to bring back a tremendous amount of bandwidth.

So that's kind of application number one, as you look at CNI customers. And this is for -- really we can go back to our co-op customers now, some of our other customers as well. I mean, PTL already used Metrum, so I think that is a good supportive -- it's a view of why we thought this was a good thing, because it's one of our major customers. One of our great customers had already been using them.

The other thing it does is, it helps us in the distribution automation area. Because, again, one of the things about the Thwack system, it's a great system, but you have to have the system in a place to be able to do distribution automation. Metrum can kind of do this on a surgical basis, if you will, because you really are able to communicate across that cellular network without having to build a network like we do either with our Thwacks system or with our STAR system. So it allows that as well.

The other thing that it would allow us to do is if there are areas within a deployment, whether it be ours or really somebody else's where the technology -- used in cellular technology is better suited to bring that back, rather than some of the mesh networks or some of the point-to-point networks. And we would be able to go in and do a fill-in of somebody else's or our own deployment. So I think there's a number of things that really helps.

They also can go and -- in some cases they've gone into investor-owned utilities and done surgical deployments where the utility was only interested in doing CNI. Obviously we don't have the capability to do that because, again, we have to put a full infrastructure in place to do that. So it really has kind of filled out our portfolio, if you will, and allowed us to get into some customers that maybe we wouldn't be able to. And also to satisfy our current customer base in a way that we haven't been able to in the past.

Great. Thank you for taking my questions.

Ben Schuman with Pacific Crest Securities.

Congrats on the nice bookings this quarter. Gary, maybe could you just walk through your view of some of the swing factors within the segment in terms of upside or downside this year? And do you see any significant changes to the segment-by-segment growth projections that you guys gave on the November call?

I'll answer the last part of that first, because that's easy one. (laughter) The answer is, we're still on track. We feel pretty good about it. We just had last week some lengthy meetings with all the subsidiary management teams and re-confirmed our comfort level there that the guidance that we put out by segment was still applicable and achievable. So that's the easy part of the question.

The next part is, you know, the filtration profile is always relatively simple. It deviates very little on a quarter-to-quarter basis. So the growth that you're going to see there -- in the first quarter, we're up about $4 million. And we talked about that increasing $15 million to $20 million. So we're well on track to that, 2013 versus 2012.

So I would say just a modest step up from the Q1 levels throughout the year will get us to the finish line that we've indicated is achievable, keeping the margins about where they are at. So we're really lean and mean there, so we are not going to -- you are not going to see 25% margins there, based on the cost profile we have.

Filtration gives us very little concern. We can kind of sleep on those numbers, they are so consistent.

On the Test side of the business, that's where you get the quarterly volatility based on the size of these projects that we have. So you start the year at a $36 million level, and then it kind of bounces around relative to the size of these chambers that we have. So coming up to Q2 you can put yourself in the mid-$40 million there, low to mid-$40 million. And so you see a step up from $36 million to $42 million or $43 million. And that's really driven by three large projects that are on line to complete in that period.

Obviously you are going to still have one more quarter of noise on the channel, because we took a $1.5 million restructuring charge in the first quarter. We've indicated $3.5 million for the year. So you have about $2 million of EBIT noise that's going to hit in Q2. So if you back that out, you know, the margin should step up a little bit on an operational basis from their historical levels.

So you get that behind you and then you look at a Q3, and it steps up into the high-$40 million. And again, several big projects are completing in Q3. And then you are generally noise-free. And so as Vic indicated, you know, we're looking at 13% EBIT on a straight-up basis, because we are not going to have any of the restructuring impact sitting there. So if you held a placeholder there at 13% EBIT on that type of volumes, you'll see a substantial contribution there.

And then it bounces up into the low-$50 million in Q4. Where some of these strong orders that we booked both in Q4, and Test in Q1, come rolling through. And then that's where you're going to see the leverage coming off of the combination of the one less facility, and also the -- just at that sales volume, at $50 million-something, you cover a lot of your overhead. So you can get yourself up to kind of a 16%-type EBIT margin contribution.

So that's one of the simplest to explain, relative to how it goes from $36 million to $50 million. It's really project orientation and the large ones that come through. Large being defined as $2 million a piece.

So Doble, I think as Vic indicated -- some of these slip out of Q1 as the other utilities were helping each other out. They will probably be more back-half loaded. So to get our growth, you're gong to have a little step up in Q2. And then a big step up in Q3 and Q4, relative to the catch-up of expectations. So we feel pretty good about that.

And then Aclara becomes a real wild card. So you know, we had planned for that to be relatively low just because of the timing of the co-op distribution network. Several of our distributors have fiscal year-ends at either December 31 or January 31. So they do a little balance sheet window dressing, and don't necessarily take the annual profile on a pro rata basis.

So after January 31, we expect a meaningful step up in the co-op business that kind of ramps that thing up pretty steeply, obviously, moving it up from the level we are at in the $60 millions here on total USG, stepping up into nearly $80 million in Q2. And then a further step up in Q3 as SoCal becomes fully engaged in the learning curve process of getting the installs done.

So you've got a meaningful step up then in Q3, and then an additional meaningful step up in Q4. And that's where Vic indicated some of these larger water projects, that we have reasonable expectations -- but certainly we're optimistic on our participation, where we get a little bit of contribution in that. So as Vic said, we are not counting on $15 million of revenue to have to make our year on one of these large water projects. We will get orders of a meaningful level, but just based on where they come in in the year, you might get $3 million, $4 million or $5 million in this fiscal year. And then the real step up is in 2014.

So that was a lot of color. Hopefully it makes sense to you. That kind of supports the step up from this low first quarter to a substantial fourth quarter. And then gets us to our guidance range that we indicated.

That was extremely helpful. And then, quickly, can you just talk about why the expected tax rate is going to 33% from the 35% from last year and on the previous guidance?

It's because of Congress extending the -- when the -- after the first of the year, as part of all the fiscal cliff, whatever you want to call it, when Congress extended the research credit. And some bonus or accelerated depreciation that had been delayed. You know, Congress kind of sat on it for about 18 months. And so the way the tax and accounting rules work is we knew, or everybody knows -- you should see this across your entire universe of companies. Anybody that has meaningful R&D spending.

You really couldn't take any in fiscal '12 because it had expired. And so what happens is, it basically sat dormant for everybody in calendar 2012. And then when Congress signed all this stuff on January 3rd or 4th, whatever that was, as part of the revised tax thing, what happens is they go back retro to 2011 and, basically, you're allowed to do a catch-up.

So you get about a $1 million cumulative catch-up as a discrete item, relative to the calendar 2012 R&D spending credits that you get. And so that has about a 1%, 1.5% favorable benefit impact to our tax rate. So it's really just a congressional timing of extending what should have been extended. You know, it's kind of a two-year rolling extension, but sometimes Congress goes to sleep on that for a little bit. But we're back. It's extended for the next two years, so you should see a consistent application of that benefit in 2013 and 2014 as a result of the current standing.

Okay, great. And then, do you expect the general cadence of the SoCalGas orders going forward to look like what we've seen to date? And with $140 million booked, how can we think about revenue timing in the context of these order announcements?

I think the orders -- I mean, we have orders that really would get us through this year. And even some into next year. And then we've got one piece of it that delivers over the entire piece. So I don't anticipate significant additional orders from SoCal this year, because we are ready have that backlog built up for the remainder of this year.

Okay, great. Thanks a lot guys.

Richard Eastman with Robert W. Baird.

Yes, thank you. Gary, the -- how much was the restructuring charge pretax?

$1.5 million.

It was $1.5 million, okay. So then -- all right. That will probably get us there. Because -- do you have to get to a nickel on an adjusted basis? Are you applying the 17% tax rate?

No. I'm applying the 35%. And the reason it's 17%, Rick, it's the -- as I call it, the lost small numbers.

You know, when you only deliver GAAP pretax of $300,000, 35% of that is roughly $100,000. And we had a $50,000 discrete item that normally would fall into the an immaterial noise level. But when it's against a $300,00 pretax, it makes the tax rate look artificially -- well, not -- it's mathematically 17%, but it makes it look a little bit unique because of the lost small numbers. So that discrete item really has nothing to do with restructuring. In the spirit of being reasonable, we just hit the $1.5 million at the statutory 35%. We just thought that is probably the best way for us to --

I know you had referenced in the press releases the net impact of the charge.

Well, the total spending was $1.5 million. And what the $1 million that we're referring to, and that is -- that's kind of the -- related to the facility lease buyout. That's what the $1 million is. And there's some other things like relocation and severance, and things like that that kind of all bang through there.

Okay. And that's all -- the lease, everything is in kind of the SG&A number? On a GAAP basis?

No. It would be in the other income OID bucket, other income, other expense, other income net.

Okay. I'll make sure I get that. And then, can I just -- you know, I was just kind of trying to sift through USG sales, and you had mentioned -- Doble, you said, was flat. So I presume Doble was around $28 million in revs?

Yes.

And at a 20% out-margin, or EBIT contribution, you know, that's $5.7 million. And so basically, it leaves Aclara $34.6 million. And on that $34.6 million in revs, it lost about $8 million. So --

Yes, within round terms, in the $7 millions. Obviously at that volume level, you know, it's hard to absorb your fixed overhead. When you're set up at $35 million, that's $140 million annualized run rate. And that's obviously not what that company is sized for.

Sure.

And so it's really an aberration relative to the sales volumes. So if you just kind of think of a fixed cost concept, and you hit it with that low of revenue, that's not anywhere near, obviously, break-even. Because the annualized Cleveland -- the run rate at the annualized level on the Cleveland facility is substantially better than that, which is where the SoCal revenue gets recognized through.

So it's really a function of $35 million of revenue. Which is not what the footprint and the headcount and the engineering expenditures are built around. So you really can't cover your fixed costs in that volume level.

Which, as you run through the back of the year and you step that up significantly, you'll see that margin in -- you know, kind of in the Q4 volume levels be back in the low $20 millions. Because, again, we are not growing the fixed cost to get the revenue volumes necessary to meet our objectives. And so the fixed costs are the fixed costs. And then you knock it out of the park when you get the volumes up two or three times that.

And again, I -- you know, just -- this is really rough math. But the $8 million, then, lost there -- at a 50% gross margin, suggests that maybe the break-even level for Aclara is about $50 million a quarter? And is that -- are we going to handily, comfortably exceed that in the second quarter?

Yes. I mean, I think you might be a little high, relative to the break-even level. But, yes. If you're running at $50 million at Aclara, you'll be above break-even. You'll be kind of in the 8% to 10% EBIT contribution.

Okay.

And then when you, you know -- if you moved it up to -- when you get yourself up to the $70 millions or $80 millions, you get yourself to the 20% EBIT level. So it's really a volume orientation. And so if you just double -- excuse me -- double the $35 million, just for math purposes.

And said -- we're going to do $70 million in the quarter -- the G&A doesn't change. And that's about $13 million a quarter. And then that's where you see the significant gross margin contribution that covers the $13 million in G&A. So if you just kind of backed into that, you would get yourself into the 20%s on EBIT, at $70 million-ish in revenue.

Yes, okay. And then just the other question I have. When I look at the USG orders in the quarter, and I'm just trying to compare them year-over-year. And if I pull out SoCalGas at $44 million, I'm going to assume you had very little in the way of co-op orders, right? Since you had little sales?

Correct.

A little over $10 million.

Okay. But if I do the same math and kind of pull out last year in the first quarter, I mean you had $33 million of SoCalGas orders. In co-op you had a monster $32 million of orders in Q1 of 2011. But just kind of doing that math, it looks like the orders, adjusting for SoCalGas and adjusting for the co-op business, were up like double-digit. Is that -- does that feel right?

Yes. Because there is -- believe it or not, we still get a decent level of IOU orders that come through. You know, that Florida Power & Light load control system we have is a gift that keeps giving. We booked over $3 million there.

We booked almost $3 million at Pennsylvania Power & Light, versus nothing last year. And FPL was nothing last year. So those kind of things incrementally -- there is $6 million there, compared to zero.

International orders were $1 million or $2 million. And then when you get into -- in my commentary, where I talked about the water business there -- and again, it's not gigantic numbers. But we booked a pretty fair amount of small water customers across the platform. So when you get into that, you do see favorable comps on the non-big contract customers.

Okay. And then just last kind of related question. Was SoCalGas -- did we have some revenue in the quarter? Or what was that number?

About $9 million.

$9 million? Okay.

Yes.

And all of RF -- Aclara RF was how much?

Bear with me a second. About $16 million.

Okay. All right, thanks much.

The next question comes from Jim Giannakouros with Oppenheimer & Company.

Just to clarify on the SoCal, the $48 million in additional orders -- well, adding that $4 million that you had in January. Is that all end-point deployment? Or is there any service support up front software or other items that are material contributors to that order number?

That's really hardware. We entered the majority of the software and services earlier on. So this is new hardware.

Okay. And sticking within USG. I know you mentioned Doble is running at about 20%.

Is that a blip-down, given Sandy-related deferral? Or related to the continued hires of sales engineers you have mentioned in the past? Or am I just thinking that -- I had a 23% number or so for Doble. Is that a longer-term type of goal there?

It's not so much longer-term. It's volume-oriented as well. Obviously as we built the model for 2013, we obviously didn't anticipate the impact of Sandy there for $2 million. But as we migrate these new products from development into the market, we have obviously hired some additional sales folks domestically, as well as internationally.

So as the sales gets off of 28% and moves itself throughout the year back up to the levels that we had anticipated, which is in the low to mid-30%s, then you'll see the EBIT margins in the 23%s and 24%s. That just -- that little bit of incremental sales. Because they generally run at the nearly 60% gross margin level. So as they lever up from a 28%-type level to a 32% or 33%, that incremental margin falls right to the bottom line.

Okay, thanks for that. And on the Metrum acquisition -- I apologize if you did mention it -- but can you outline revenue contribution? What EBIT it runs at and affects on D&A that we should be factoring for going forward?

Yes, we really haven't disclosed that yet. I will say that it's profitable business. And, you know, we will give more information as we get further into later in the year.

Thank you very much.

John Quealy with Canaccord.

So, sorry the first one is a remedial question. It looks like $3 million in potential charges for Tests realignment. Is that right in 2013?

$3 million to $3.5 million, yes.

And Gary, is that embedded in the $230 million to $250 million EPS guidance? Or is that carved out?

It's added back to it.

Okay.

So it's the -- excluding Test restructuring would be -- that's what our guidance, is absent that.

Correct. Okay. And then, just in terms of the Doble movement with Sandy, and obviously all the hype here on the East Coast about the winter storm and all that sort of thing. You know, do you feel pretty confident that that business is going to come back? I mean, you know, based on that type of business, you could see it just get pushed out a quarter or two. How comfortable are you? Did something else -- any other part of the business come up to make up for maybe a little bit more margin of safety you need on Doble right now?

From where we are sitting today, John, and we would reach back out to those customers and push some of those things out. And you know, they're saying that things are going to happen this year. So we haven't seen anything that gives us any pause on that pushing out of the year.

Okay. And then last. You know, a lot of is talked about Elster closing down the mechanical water meter business. And you guys have been very good at the com side. Given that there is a good handful of water business coming, does the shutdown of that potential partner impact your strategy at all? Does it make other partnerships more valuable? How do you rate it right now [say core] or is it a non-event for you?

I would say for the most part, it's a non-event. We have some current deployments with Elster, but those are on go-forward. And I would think that whatever opportunities there were will get absorbed by the other players, which we have a good relationship with. So as we approach water customers, we sometimes do it on our own and sometimes do it with the partners. And so, as you know, they weren't a big player. They were good player, but weren't a big player. So we don't think it's going to have a big impact on us one way or the other.

All right, thanks, guys.

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

Okay, well appreciate everybody's interest. And we will be in contact next quarter. Thank you.

Thank you, ladies and gentlemen. This concludes the first-quarter 2013 ESCO Technologies Incorporated earnings conference call. Thank you for participating. You may now disconnect.