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ESCO Technologies Inc. (NYSE:ESE)

Q1 2009 Earnings Call Transcript

February 05, 2009 at 5:00 pm ET

Executives

Pat Moore - Director of Investor Relations

Vic Richey - Chairman and Chief Executive Officer

Gary Muenster - Chief Financial Officer

Analysts

Kevin Maczka - BB&T Capital Markets

Carter Shoop - Deutsche Bank

Richard Eastman - Robert W. Baird & Co., Inc.

Paul Coster - JP Morgan

Steve Sander - Stephens Incorporated

John Quealy - Canaccord Adams

Operator

Good day and welcome to the ESCO first conference call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO, and Gary Muenster, Executive Vice President and CFO. And now I will turn the presentation over for forward-looking statement and for introductions to Ms. Pat Moore, Director of Investor Relations. Please go ahead.

Pat Moore

Good afternoon everyone. Statements made during this call regarding the timing and amounts of fiscal 2009 expected results, sales, cash flow, EPS, future growth prospects, anticipated deliveries to our AMI customers, the success of AMI pilots, success in international markets, impact of the stimulus package, 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 fiscal 2008 results press release issued today, and found on the Company's website at www.escotechnologies.com under the links Investor Relations, Financial Reports, and SEC filings.

I think I said 2008. It is 2009 results press release issued today.

I will now turn the call over to Vic.

Vic Richey

Thanks, Pat. Before giving you the specifics on financials I would like to provide an overview on the quarter, discuss our current outlook for the year and address confidence in holding our earnings guidance in this difficult economy. As you know we have always had a very rigorous and detailed planning process with our operating units that regularly provide us with numerous touch points throughout the year.

As we begin our ’09 planning process we recognized the significant challenges this economy was presenting and as a result we further stop job, our planning and review processes to insure we are continually addressing our changing business environments.

As we close the first quarter which came in a bit below our internal expectations due to a few timing items, we went back to our operating new executives and reviewed in detail the balance of the year expectations as well as any additional risks for opportunities that may have risen since our last planning sessions.

Our January review allowed us to conclude the following. The first quarter shortfall at Doble along with the R&D spending at VACCO and Aclara RF were timely related and should not have a material impact on the year. We have no systemic issues adversely impacting our business in ’09. We continue to expect solid cash generation which allows us to pay our debt.

Our order book remained strong especially as it relates to our three key catalysts for growth in 2009: the gas business of PG&E, New York City Water Project, and the Idaho Power PLS Project which was second half loaded, and are all off to a soft start With this season’s softness in the utility business with the key customers pushing our spending from December and certainly the Boeing strike had a negative impact on our commercial aerospace business at PTI. Lastly our overall business platform remained solid and our corporate assessment, our operating plan while challenging is well understood and appears achievable.

As we look at the full year we continue to face challenges everyday. Based on our current view we expect to meet our full year projections. One advantage we have is we have not assumed any major wins in the year necessarily hit our numbers. A major assumption we did include is that our key projects PG&E, New York and Idaho remain on-track. As I mentioned before they are moving forward as expected.

Obviously, we need to continue to book orders to make ourselves in earnings forecast but not the large orders, so this certainly minimizes our risks. We need to stay reasonably on track and the Doble orders coming in as expected we should be okay for the year. A side notes on Doble, they sponsored an Annual Utility Customer Educational Seminar this week in Florida and based on the oversubscribed attendance at this year’s gathering it certainly appears that several utilities are beginning to free up spending.

Moving on to Aclara’s international market opportunities, I am pleased to report we continue to make solid progress on our targeted opportunities in South and Central America and Asia. Our system performance has been solid and our customer enthusiasm remains high. In addition, we anticipate a couple more projects to be launched this year and while the timings of initial deployments are always variable, we are very pleased with our progress.

Regarding the stimulus package, there is a lot of activity going on and it is moving very fast since we are changing constantly. We are actively engaged in monitoring this process with dedicated internal people and resources and also participate in various industry groups in advancing our agenda. We are also working with other AMI companies on this legislation. We saw this is going to be a positive catalyst for industry over the long term and more clearly define the timing of any near term benefit is a bit unclear.

With that wrap of my commentary I am going to point out that why we have confidence in our ability to achieve our financial goals, we are not standing idle. We are aggressively looking at all of our operating cost. We will continue to work on our ongoing contingency plans should this economic situation deteriorate further.

At the start of the year we instituted a broad set of initiatives across our businesses to reduce cost and position ourselves for this downturn. For example, we are taking appropriate cost reductions in the following areas. We regularly monitor our force count to insure we have the appropriate levels of staffing need to effectively manage the business. We are taking appropriate actions on salary increases, hiring freezes, and attrition by not replacing certain open positions, and we are monitoring and reducing all discretionary spending.

From an economic perspective this is certainly an extraordinary time, and as management, we have responded to this with extraordinary actions. We know we will be successful in the long run because we have solid management teams in place across the Company. We have a solid pipeline of new product introductions. We have great products being sold to a diverse set of end market customers.

Now, I will turn over to Gary for some brief financial comments.

Gary Muenster

Thanks, Vic. As noted in the release, the prior year first quarter results included approximately $21 million in sales, $8 million of EBIT and $0.20 a share representing the cumulative effect of deferred revenue recognized on TWACS products deliveries to PG&E associated with our TNG software version 3.0. Since this accounting event was non-operational, my commentary will compare the current quarter to the 2008 first quarter excluding this TNG revenue recognition as we believe this is more representative of the two operating results during the period.

EPS from continuing operations was $0.20 a share in Q1 of ’09 which represents a 120% increase over the prior year first quarter’s operational EPS of $0.10 a share. Of the $0.22 came in below our original expectations laid out in November as Vic noted, a shortfall was primarily due to the timing of Doble hardware deliveries originally expected in December which were pushed to the right due to a couple of customers electing to defer spending out of their calendar year end budgets.

This timing related action was concentrated primarily over two or three large customers and was not a widespread problem across Doble’s customer base. Also impacting the ’09 quarter was our decision to spend additional R&D dollars at VACCO and at Aclara RF earlier in the year than our original plan. The VACCO decision was made to insure that we are in the best position possible to continue to win additional space related products and projects that are currently out for bid. Our bidding proposal activity at VACCO is in an all time high with the majority of the projects centered on Project Constellation which is the shuttle replacement program.

The Aclara RF development costs were incurred on the recently introduced RF electric products to modify the design to further enhance its functionality, reliability, and durability. Although operating in a challenging economic environment in spite of the various timing items outlined in the release, I am pleased to report several operational highlights within the quarter.

Sales increased 30% with utility solutions group growing 50%, test being up over 10%, and filtration sales increased slightly. Cash flows from operating activities generated over $21 million cash in the quarter which enabled us to pay down an additional $19 million of net debt. We enter a $141 million on new orders which represent an 8% increase over the prior year first quarter. The Q1 ’09 order amount included another $31 million of PG&E gas business which brings the cumulative PG&E gas and electric orders to $3.2 million units worth an aggregate value of $200 million.

Additionally, we recorded $8 million in orders representing 12% of the contract on the New York City Water Project and $4 million in orders representing 16% of the Idaho PLS contract.

Regarding the balance sheet, I remain very comfortable with our current capital structure and our available liquidity and we continue to reduce our net debt outstanding which was below $180 million at December 31st resulting in a very comfortable 2.07 leverage ratio.

Moving on to our current outlook for the balance of ’09, we continue to expect 2009 operational EPS which is adjusted for certain intangible asset amortization to be within the range of $2.42 to $2.57 a share. This equates to GAAP earnings which include the intangible amortization as well as the Aclara RF facility exit and move costs which are expected to be around $0.05 a share to be between $2 and $2.15 a share.

As I mentioned during the last call in November it is not our preference to provide quarterly guidance since as we experienced in the first quarter of ’09 we always have several moving parts within our customer base as well as other long term contract deliveries that can move a month or two around the quarter end.

With that said I will reiterate that consistent with our 2008 actual results. Our ’09 EPS outlook by quarter remains more heavily weighted towards the second half of the year. We continue to expect favorable EPS comparisons during the first half of ’09 as compared to the first half of ’08 and based on our current expectations for the second quarter, our expected results should reflect meaningful EPS growth for the first the six months of ’09.

With that I will be happy to address any specific financial questions during the Q&A and I will turn it back over to Vic.

Vic Richey

Okay. That wraps up our prepared comments. Now, we will open the call up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kevin Maczka - BB&T Capital Market.

Kevin Maczka - BB&T Capital Market

I guess Vic first question on visibility in general, some of your revenue items moved to the right, some of your cost items moved to the left. I am just wondering in general, is that indicative of your normal visibility or something changed there that you have less visibility today on both the revenue and the cost side than you normally do?

Vic Richey

I do not think there is anything significant or what I would say is that with the Doble business in particular which we did as some items moved to the right. I think that was more in this first quarter where budgets were tied up. I think people were very uneasy, unsure of what they should be spending. So, when we projected that business going into the year, the guys looked and said, “Okay here is what we are expecting.” It was what we experienced for hardware deliveries in the first quarter of the year and so we would sense this can be pretty much the same because that is what it has been in the past. And I think the big difference this year is that with everything going on in the economy and people being concerned about that, some of those things just get pushed to the right.

So, that is the first year we have had this for the full first quarter and it was pretty unusual quarter, I would say. As far as the timing of the expenses it was primarily focused at VACCO, and as Gary mentioned that was some IRAD and B&P spending for these projects that we were bidding, and those things sometimes come in before you think they are going to and sometimes afterwards. It just happened to a large number of those, they wanted those responses before calendar year end, and so we had those kinds of costs that we absorbed in the first quarter, which we had not anticipated and that we thought we would be doing that this quarter.

So, I do not think it is a systemic issue. I think it was just a couple of anomalies that happened to hit at the same time.

Kevin Maczka - BB&T Capital Market

Okay. And then in the environment we are in, Vic, and the stressed budgets that most of your customers, I am sure, have. In terms of the domestic and international pilots that you are involved with and your muni and co-op steady business. Can you just talk about how is that change? Is there anything changed in the way these pilots are progressing or the way new pilots are being signed up and is that muni and co-op business still steady today as it was six months ago?

Vic Richey

Okay. I will address two pieces, because the pilots are really more international based. We do not see as much as the pilot activity or we do not from, in our business anyway, domestically. So, from the international pilots as Gary mentioned in his commentary, I believe we assume we get a couple more this year.

So, that is consistent with what we have seen in the past, as far as the co-op and the munis, the first quarter was a little softer than what we had anticipated. It appears to be picking up now in the second quarter and again, the first quarter this year was unlike anything we have seen in quite sometime. So, I think it was an overriding nervousness with some of those customers about making decisions, but we are starting to see some of that free up now and hopefully to pick up. We will know a lot more in the next couple of months whether those guys are going to move forward as they have in the past or not.

Kevin Maczka - BB&T Capital Market

So, you are actually seeing some of that business reaccelerate now?

Vic Richey

Yes.

Operator

Your next question comes from the line of Steve Sanders - Stephen Inc.

Steve Sanders - Stephen Inc.

Vic, there is obviously a lot of buzz out there about the stimulus bill and some large numbers being tossed around in terms of subsidies and potential deployments, could you just share your take on where this is, in terms of kind of a final version and how you are positioned relative to some of the more technical language and requirements around the program?

Vic Richey

Yes, it is an ever moving target right now. We have not had a chance or I have not had a chance to check the data to see what activity has taken place because we have been in a Board Meeting. But I do think that despite a couple of amendments that were introduced yesterday to try to pull out all the smart grid funding, I do think that is going to stick. I think it is one part of package that everybody seems to be buying. So, in my view there is going to be some fund in there. It is a little unclear exactly how that is going to be deployed at this point in time anyway. As far as our position to take advantage of it, I think we are as good in a position as anyone. Currently, the languages in place are opened to all participants which is the way I think it should be. What I would really like, what we are going to spend some more time on is understand there is opportunities for the utilities and some of our customers access, somebody’s fund to purchase the Doble equipment because in my view what we are really trying to do in addition to automating at the distribution network is to make a lot of more robust and make more reliable and sure that it is maintained properly so that you do not have some of the issues we have had in the past and if we are able to get more of our product in the field that does that I think there is a lot to help improve the reliability of the transmission distribution network.

Steve Sanders - Stephen Inc.

Okay. And then you talked a little bit about some of the push outs at Doble, and so is it safe to assume that the weakness you saw in the December quarter, you will be caught up on that in this quarter?

Vic Richey

I do not think we will get it all caught up in this quarter, no. I think that a couple of the larger things that got pushed out, I think we will get some of those but I do not think we will recover that all in the second quarter, no. And honestly, as we have looked at the business, I do not mean to interrupt, but as we have looked at the business we have taken a little discount on that business in case it does not come back fully and I should make a point that if you look at the Doble business. It is really two pieces and it is consolidated service business which is about half of the business and then you have got the hardware deliveries.

The recurring part of the business, service part of the business has not been impacted at all. So, that is the very steady part of the business. That is going very well and then the hardware business is a piece where we saw some softness but I also would remind everybody that even with this the EBIT margins we are seeing in that business even in the first quarter are really the best we have across the business. So they are in the hot 20s. So, I do not want to give anybody the impression that there is an issue at Doble, it is just that the order inputs have been a little slower what we have initially anticipated

Steve Sanders - Stephen Inc.

Okay. Thanks for that. And then on the pilot activity for some of the larger project, project’s progress, from moving through the pilots and making decisions and if you could differentiate between North America and whether the stimulus is having an impact on that versus various other regions to the world, that would be helpful.

Vic Richey

Well, I do not think we can measure what the impact of the stimulus package is going to be until it really gets the fund and funded. So, I am not sure I could comment on that. If we look at the power activity internationally though, I would say that they are very active in the ones we have out there as I mentioned before. We are pretty confident that we are going to have a couple of additional ones within the fiscal year.

Steve Sanders - Stephen Inc.

Okay, I guess just more specifically, there is some large North American projects that are out there that have been in the pilot stage for a while so relative to a few months ago, are they still on a similar timeline in terms of making decisions or do they seem to be moving to the right as well?

Vic Richey

Well, I am really confused maybe you can help me, I mean we do not have any pilots in North America so if you are talking about any pilots that have taken place, probably I am not the best guy qualified to answer the question. But the things, I have read all the same information everybody else does. I guess, one, PG&E is something where we are involved and I think they can put that on-hold for a while and there had been some talk about, again reengaging later in the year.

Steve Sanders - Stephen Inc.

Okay, that was along the lines of what I was looking for. And then Gary, I think you have obviously given us some good detail on the first half as you see the business playing out over the second half of the year. Does it feel like it is another heavily fourth quarter loaded year or does the turn in fourth quarters look fairly comparable?

Gary Muenster

Well the fourth is going to be higher than the third but it is not going to be tilted the way it was in 2008 because if you remember in 2008, we had a “big bet down” on the test business because we had about 40 projects in process in the second half of the year that obviously the majority of those needed to be completed and we did complete those but we are not going to see that same tilting in the test business so that will help normalize part of it. The filtration will generally be flat and now that PG&E gas is stabilized at a good run rate, we will see, the real tilting will come from the likes of New York and Idaho but again, as we have talked, those are three-year projects that are starting in that period so you really going to be looking at $2 million, $3 million and $5 million kind of things and not the $10 million and $12 million that we had in 2008. Delta is in the fourth quarter. So fourth is still going to be higher than third but it is not going at the increment increase that we had in 2008. I have flattened it out a little bit, tilted it a little bit flatter.

Operator

Your next question comes from the line of Carter Shoop from Deutsche Bank

Carter Shoop - Deutsche Bank

Hi. One of the follow-up in regards to the ramp here particular in the Aclara business line so that if it sounds like PG&E gas is that are pretty steady run rate here this quarter and I just to make sure I am understanding it correctly that we expect that to flat line at current levels. When you add Idaho power in New York City together how much of an increase are we going to see half over half in regards to second half or nine versus first half or nine for those 2 projects in Idaho power and New York combined?

Gary Muenster

The kind of the way we are seeing it play out obviously with the order book in place we have a little more visibility than we did obviously in November before those orders came in and so the way it is currently projected is they are starting that both projects are taking infrastructure right now on the New York job. They are putting the antennas and data collection units in place and at Idaho they are taking care of the substation equipment in all the core infrastructure items and so those are not the high runners or the high dollars so once they get that stage or the point or the endpoints start getting put in, we have looked at this and basically said and I think the map will be the same that the dollars will be different.

Essentially three year projects that will be starting probably midway through our third quarter and so you can basically divide that by the three years and take roughly half of one year and then put post around that base on some things that could influence it and so doing the map on that if you use $70 million for New York and take a third of that for the three year project, take a half of that for this year I think you will be in the ball park of the kind of numbers we are talking about. So if you add the two together you should get in to a kind of data of $10 to $12 million.

Carter Shoop - Deutsche Bank

Okay and then to get to the four year guidance it looks like will finally see a pretty soon it will again snap back in the testing and filtration business is also, is that your expectation?

Gary Muenster

Well in filtration, the magnitude of these project constellation deliveries is pretty substantial. We have quite a few of them in the hand already where we have been selected, contracts have been negotiated. So you are going to see a ramp up in the VACCO portion of it. I would tell you the risk profile we are dealing with filtration is how is the commercial aerospace business going to play out at PTI or comfortable in the fact that the strength of VACCO right now is offsetting.

The softness in commercial aero and what we saw in the first quarter with the Boeing strike and the implications it had on us on the OEM side of the business it is not going to be in the situation where Boeing is going to play catch up and try to make up for lost time and the lost product that we had in the first three months. So essentially at PTI on the OEM side of the commercial aero it is really going to be representative of essentially nine months of product deliveries so that is not going to come back. PTL will be relatively flat line across the next three quarters.

So the real strength comes from VACCO where we always have the backup for the year. Where we have the Virginia class submarine valve system that we deliver to electric boat, that is a $3 or $4 million Delta second half to the first and then you will see the 4 or 5 of this project constellation components units that we will be developing for delivery to our customer that will probably be in the neighborhood of $5 million, in the aggregate, in the second half of the year that is not present in the first half.

Vic Richey

And then you also asked about the test. The one that I would say is the test was where were we expected them to be in the first quarter and they ramped up last year. They are not going to ramp up severely this year as they did last year. They are actually also pretty solid starts. What we are seeing with the test business is the domestic business is fairly flat year over year. The European businesses is down a little bit but the Asian business is really picking it up and so we are looking for some pretty solid growth year over year from the test business and I would say right now it feels very good.

Carter Shoop - Deutsche Bank

Okay that it very helpful. Thanks. In regards to the stimulus, I know that it is still pretty early to tell exactly how you guys will be in the position to benefit, but if it were to pass similar to what we are talking about now with the house version, do you think that Aclara will benefit more from IOUs merging more towards the smarter grid or adopting the smarter grid or do you think your coop and muni business will benefit more on a dollar basis?

Gary Muenster

Yes. That is going to be hard to answer until we get into the details of exactly how is it going to be administered. I guess I would think about this way I would say obviously are POS business is better positioned to take advantage of the coop business and if you look at some of the things that they are doing in the stimulus package have outside the smart grid side that really looking at improving some of the service in the rural environments. I think there is a concentration there so I think their maybe a good bit of money going there which we would be our access with our coop business and then on the munis side the investor on utilities it is a matter of getting positioned right with our RF business side.

So I think we have a couple of opportunities to play here in both of coop and munis and the investor in utilities and as I said earlier I think the wild card here is if we can access on that money for our grid reliability utilizing our Double product.

Last question for you two. In regards to the gas solution at Aclara can you talk a little bit about the pipeline there and in what you see obviously there is a pretty large contract in Southern California but beside to that are you seeing any other multi-million point deals that could be signed over the next 12 to 18 months?

Vic Richey

They are very large and are fairly few and far between. All those softer gas today about one I would say I can not talk about where it is because it just came on the radar screen but I think there are at least other two other pretty good sized gas only opportunities that will be available to us within that time frame or whether they are actually going to contract on that time frame or not yet is yet to be saying but there are couple more of pop and up and I think that is indicative of what we are going to see on the gas side and on the water side. And I think given our experience of PG&E and what we are seeing in New York city and in Boston and in all side of thing I think we are very well positioned to take advantage of those.

Operator

(Operator Instruction) Your next question comes from the line of John Quealy - Canaccord Adams

John Quealy - Canaccord Adams

On utility margins, can you just talk about the moving pieces? Vic, I think you said Double hank steady in the high 20’s there if I understood it right from an EBIT perspective but whether the lack of DCSI at PG&E that herded in Q1?

Gary Muenster

Yes. I will address that John real quick as Vic alluded to the Double statement at high 20’s, it is at 28% to refine a little bit, the RF business continues in the low 20’s but the former DCSI business, the power line business obviously is a little bit challenged because of the absence of that PG&E revenue pulling that out in the comparable period impacts it pretty dramatically but two things are working against the PLS business when the volumes are this low. The fix amortization on the T&G software obviously remains constant so the absorption of that gets a bit challenging and the magnitude of the additional expenditures that we have for our international business development group.

We stepped it up roughly half way through last year so there really is not. Their essentially was zero in the first quarter of last year and that set at a run rate of a couple million dollars a year based on the number of people we have, the countries we are addressing with specific dedicated resources on the ground. Until that revenue starts coming through you are not going to have a favorable comp probably until the third quarter or at least a normalized comp and so when you add those two things together on the cost side and you take out the $8 million of EBIT that was contributed from the accounting event last year you get a bit of an awkward EBIT percentage there .So the software business was profitable, the video security business was essentially broke even so really the only Delta that presents an adverse comp is the power line side of the business and its volume related with the items I talked about.

John Quealy – Canaccord Adams

What about on the RF product that I think in the release it was $800,000. How that is going the trend moving forward similar number per quarter or what is the Delta should we look for there?

Gary Muenster

I do not know that the investment that we made in that redesigned worker additional enhancement design work is going to be repeated. This was kind of done with the bit of sense of urgency for some opportunities we are looking at in and also to keep us engaged with PG&E with the trial that they are doing there so it was really… you never want to call it a one off thing but it was a little earlier in the year we kind of have a little more ratable program with that.

We accelerated it to try to get some additional enhancements into some people’s hands to allow them to see how we are moving with this thing. I do not see an additional 800 thousand popping in the second quarter on the Delta prospective.

John Quealy - Canaccord Adams

On EBITDA, I think last quarter you are talking about $120 million. Your guidance is basically the same, you had a good Q1. Is that roughly what you folks or thinking or you going to address the EBITDA guidance later?

Gary Muenster

We will probably address it later. We did not want to refine it that type but because we held the EPS guidance and the tax rate and interest net sort of thing did not change in the variable side. The EBITDA was generally consistent within couple of million dollars of the number we disclosed last time so we did not see a big deterioration in the aggregate or the annual level of EBITDA for the year.

John Quealy – Canaccord Adams

On M&A, given the cash profile in all the moving pieces in smart grid right now can you just give us an update what your thoughts are there?

Vic Richey

Yes. I was able to keep our eyes open I mean we are more focused on executing the business today. I would say that we are in a deep position to make acquisitions. We have people actively looking for things and if there are opportunities represent themselves I would say in the second half of the year it would add product, if you will. If the were smart grid offerings that is something we would certainly be interested in doing.

John Quealy – Canaccord Adams

And this is some bit of a subjective question but when you look at execution risk in the back half of the year for you folks on your AMI related projects, do you feel like you are fully in control of your destiny rolling out some of this AMI projects or at least when I was at the show you get sense of everyone is looking around to see how whether how I turn dozen San Diego or ShowCal. How some other things start rolling out? How do you feel that you can control your destiny on the AMI side versus all these buzz in the market place?

Gary Muenster

That is one where I have a great deal of confidence. I think we have proven product. We have a lot in the field that works well. We do not know how to get it out there and so the execution piece of getting this project, there is always hiccups but I do not have a concern about our product network.

We can go to… You guys have all heard the same story but I tell you again I mean go to three different places and see a million end points operating at a very high read rated 99 plus percent read rare. You can go to 300 or 250 coops and see the same thing and you can go to New York City before long and see that work. You can go a lot of our other current customers and see our RF product working as well. So that is an area where I have a tremendous amount of confidence.

Operator

Your next question comes from the line of Paul Coster - JP Morgan

Paul Coster - JP Morgan

Couple of quick questions on the housekeeping side, Gary, can you first of all provide us with some tax rate moving forward, why it has come down relative to our expectations and perhaps how it will shape half moving forward?

Gary Muenster

Yes. We are still holding to our 36% for the year and as I noted in the press release, that the lower than 36% rate that we realized was in our guidance and the reason that we expected it at beginning of the year, it really relates to the research credit that obviously we get every year and Congress normally does this in the session usually in the summer but with all the other fund stuff they are dealing with, the decision to extend the research credit for all the U.S. Companies was deferred until November and so the way the accounting works on that you are really not allowed to take that research credit deduction into your rate reconciliation until Congress officially extends it. So that is why it was a first quarter event, in fact it was in our plan. It did not influence and it does not change anything real to its original expectations because it came in within $2000 relative to where we thought.

While it may look low it was totally expected so when you go in to Q2, Q3 and Q4 you are obviously going to be a little North of 36% because for the aggregate to get the 36% starting with something below that you have to be a little north to that so I do not anticipate any anomalies in the tax rate in Q3 and Q4 going forward.

We are not looking obviously that is money and its cash and our tax department clearly is focused on making sure that they treat their cost no different than our operating guidance treat their cost so we are always trying to harvest opportunities in there.

Paul Coster – JP Morgan

What percentage of revenue came from outside the U.S. this last quarter and how will that change and in the end how does that have any impacts in tax rate?

Gary Muenster

Obviously it does have an impact based on the country where the income is sourced but we do not see any spiking throughout the quarter that is influencing that. The test business has the most exposure to the foreign content. It’s a little bit over 50/50 right now and it is about 55% of the test business for the year should come internationally and then stratifying that further it is primarily coming out of Asia so if you do get a little favorable impact there but again that is dialed into the plan. On the Aclara and Doble side of it, Doble has continued to increase its international content but it is still not a significant percentage of Doble in total. It is kind of in the 10% to 20% of Doble total. Aclara is pretty nominal at the moment and that is where our focus is on growth. As we jump ahead we start to get more revenue out of Brazil or in Mexico or Japan or something like that in the future years out that will impact long term rates but not today.

Paul Coster – JP Morgan

You came back from Asia. I am pretty encouraged by what you saw in the pipeline success. Can you just share with everyone what the composition of that pipeline is in terms of the type of customers?

Vic Richey

Yes a lot of that, and the reason that I came back pretty positive about this is a lot of the, you would not expect that a lot of the electronic manufacturers that are over there maybe pulling in their horns sort of little bit and certainly in the manufacturing side, they are, I would just remind everybody, our test equipments are only used in new product development phase so it is a little different. The thing I am most encouraged about is the vast majority or the larger projects that we have in China and India in particular are really government-funded projects. So, it is not really a matter of an electronics company going out and putting in a new system. It is really like with the India or the nature of the job we have in India, that is a government-funded project and then we have a number of Chinese opportunities and actually a couple of hundred backlogs already as well that are government-funded projects. So that helps from that perspective that we do not have the same level of risk of those being cancelled or pushed out.

Operator

Your last question comes from the line of Richard Baxter - Ardour Capital.

Richard Baxter - Ardour Capital

Just a question on the outer flow for utility customers during the downturn, you talked a little bit about the change in order timing but can you talk a little bit more about the change in the product or service mix that you are seeing if any, as your customers watch their purchasing?

Vic Richey

I see the only change in the mix as far as the mix itself, I mean some things for a slower bid as far as the mix itself, it was really more at Doble where we did not have as much as the hardware sales as we would anticipate it while the service revenue remained stick.

Gary Muenster

Let me add one more comment to the service side of Doble. The nice part, if somebody in Australia relative to visibility, the majority of the service contracts that we are engaged with at Doble are on the cycle of January first renewals and so obviously we are a month pass that and the majority of the customers renewed. So we do have visibility on the service side of the business as Vic alluded to because the attrition where customers cancel their service contract was very, very nominal so the visibility on that half of the business gives us a pretty good level of confidence for the next 12 months.

Operator

And there are no further questions at this time. Mr. Richey, I will turn the things back to you for any additional or closing remarks.

Vic Richey

Okay, well again, I appreciate everybody's interest. We will be talking with you throughout the quarter. So by then, we will have our next call this time next quarter. Thank you very much.

Operator

And that does conclude today's conference call. Thank you for your participation. Have a wonderful day.

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Source: ESCO Technologies Inc. Q1 2009 Earnings Call Transcript
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