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ESCO Technologies, Inc. (NYSE:ESE)

F4Q07 Earnings Call

November 12, 2007 5:00 pm ET

Executives

Pat Moore - Director of Investor Relations

Vic Richey - Chairman and Chief Executive Officer

Gary Muenster - Senior Vice President and Chief Financial Officer

Analysts

Paul Coster - JPMorgan

Patrick Forkin - Tejas Securities

Richard Eastman - Robert W. Baird

John Quealy - Canaccord Adams

Steve Sanders - Stephens, Inc.

Operator

Good day and welcome to the ESCO Fourth Quarter Year-End 2007 Conference Call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO; and Gary Muenster, Senior Vice President and CFO.

And now, to present the forward-looking statement and for introductions, I’d like to turn the call over to Miss Pat Moore, Director of Investor Relations. Please go ahead.

Pat Moore

Good afternoon, everyone. Statements made during this call regarding fiscal 2008 and subsequent year's expected results, future developments and the timing of revenues in connection with the companies PG&A contracts, the company's TNG software, Hexagram's RF 6 network electric product; the certainty, timing, and impact of the Doble acquisition, 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 and the risk factors referenced in the company's press release issued on November 7, 2007.

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 escotechnologies.com under the links investor relations and press releases.

I’ll now turn the call over to Vic.

Vic Richey

Thanks, Pat. Good afternoon and thank you for joining us today. Before I give you my perspective, I’ll turn it over to Gary to cover a few of the financial highlights.

Gary Muenster

Thanks, Vic. As noted in the release, we reported GAAP earnings of $0.64 a share during the fourth quarter, which does not include the $20 million in actual shipments and cash collections from the DCSI's electric portion of the portion of the PG&E contract, which was worth about $0.20 a share.

On an actual delivery basis, our operational EPS would've been $0.84 in the quarter. For the year, we reported $1.28 a share on a GAAP basis or $1.48 on a delivery basis including these electric products shipments. I also want to remind everyone that are reported results include an additional quarterly charge of approximately $0.06 a share or $0.25 a share for the full year related to the amortization of intangible assets.

As I mentioned on the August call, we were projecting a strong fourth quarter and excluding the accounting related revenue deferral at PG&E; we delivered on our expectations.

The 2007 fourth quarter EPS increased 60% over prior year on a 33% increase in sales. All three operating segments generated significantly higher sales and profit contributions compared to the prior year fourth quarter.

The Filtration segment once again had a very strong quarter as both PTI and VACCO delivered EBIT margins greater than 20%. Sequentially, when comparing the fourth quarter to the third quarter, again, all three operating segments showed very strong growth in sales and profits.

The Test segment generated the most significant improvement during the fourth quarter as sales increased nearly 30% and EBIT increased significantly from the third quarter. The communications segment had an outstanding quarter led by Hexagram's nearly 150% increase in sales over the prior year fourth quarter along with an EBIT margin over 22%.

At DCSI, we continue to be the market leader in product deliveries to the co-op and muni market as we delivered an industry-leading $94 million worth of TWACS products to over 200 customers in North America during 2007. Our balance sheet remains exceptionally strong as we ended the year with nearly $19 million in cash while net cash provided by operating activities was over $45 million for the year.

During the year, we used $18 million of cash, which was consistent with our plan and was driven by ongoing investments in capital equipment, AMI software upgrades and share repurchases. In the fourth quarter, we repurchased approximately $10 million of our stock and we still have an open authorization to repurchase an additional 935,000 shares.

Entered orders were a bright spot for the year as we booked $562 million in new business, bringing our total backlog to $288 million at September 30. This backlog amount reflects an increase of $35 million or 14% from the start of the year.

Our particular interest was the receipt of nearly $50 million of AMI orders received from PG&E at DCSI and Hexagram in the fiscal year. Subsequent to year-end, Hexagram received a purchase order from PG&E for an additional 100,000 gas units worth approximately $6 million.

Moving on to our guidance for '08, which currently does not include the results of the Doble acquisition currently expected to close at the end of this month. We will update or 2008 guidance shortly after closing the transaction. We expect 2008 operational EPS adjusted for certain intangible assets to be within the range of $2.03 to $2.18 a share, with GAAP earnings including amortization to be between $1.75 and $1.90 a share.

While it is not our practice to provide quarterly guidance, since we always have several moving parts and certain contracts and the related deliveries can move a month or two around at quarter and, I will tell you that consistent with our 2007 results, the 2008 EPS outlook by quarter is more heavily weighted towards the second half of the year.

With that said, we do expect favorable EPS comparisons during the first half of 2008, when compared to the first half of 2007. On an operating unit basis, the communications segment is leading the expected EPS growth outlook in 2008 by projecting over 35% top line growth and EBIT margins of approximately 15% as all product offerings within this segment are anticipating year-over-year growth.

Hexagram sales, driven by additional product deliveries to PG&E should increase nearly $20 million or 40% in 2008. And Comtrak is expected to deliver over $12 million of product in 2008. Filtration is projecting another solid year in 2008, as sales are expected to increase over 11% and EBIT margins should be around 13%.

Test sales are expected to increase approximately 5% with EBIT margins up significantly over 2007 and are expected to be approximately 12.5%. I'll be happy to address any specific financial questions during the Q&A.

And now I will turn it back over to Vic.

Vic Richey

Thanks, Gary. As Gary mentioned, our results for the fourth quarter and fiscal year were generally in line with our guidance, excluding the deferral of the electric portion of PG&E contract. We encountered a number of issues in '07, which I believe we successfully managed our way through.

Certainly, the slowdown of our deployment at PG&E and their decision to evaluate other alternatives to our PLC solution was a major disappointment. In addition, we had an adverse arbitration ruling in our Test business, related to a legacy contract, which cost us around $0.06 a share.

Despite all the challenges, we were still able to grow sales and profit year-over-year. And, we made significant progress across the company on many fronts, which has positioned us well for significant improvement in fiscal 2008.

Our estimated GAAP EPS range for 2008 is $1.75 to $1.90 a share, which represents an improvement of roughly 40% over 2007. Additionally, we expect sales to increase by approximately 20%. This growth comes from across all operating units but certainly the most significant contribution is coming from the communications segment as the PG&E contract ramps up, and we expect further success with new customers.

Let me now update you on a couple of areas of interest. We continue to make progress at PG&E despite the deployment delays as TWACS NG version 2.0 was delivered in October and we remain on track to complete development and testing of version 3.0 this quarter.

Product installation continues at a fairly low rate but is expected to accelerate significantly after the first of the year. From a forecasting perspective, we have assumed no additional PG&E electric deliveries in '08 either PLC or RF related products. That being said, Hexagram's RF pilot at PG&E continues to perform very well.

The gas portion of the project remains on track, evidenced by the fact that we received additional orders in the first quarter for over 100,000 gas units. My view of the general utility market remains positive and a bit of proposal activity that we are participating in continues to remain high.

On the electric side, it appears there will be several awards and expansions in 2008 so we are seeing a good bit of interest in both are PLC and RF solutions as well as our recently announced Hybrid solution.

We had a great year 2007 with our COOP customers and we anticipate another solid year in 2008. Additionally, we are seeing a significant amount of interest being generated for our AMR, AMI products on the international front. We have added to our sales and marketing staff in this area to address this interest and we are seeing some early successes.

Currently, on the international front, we have three or four pilots underway and we anticipate several additional pilots as well as expansions to the existing ones over the next couple of months. These are customers who appear generally committed to going forward with full deployment in the relative near term. In water utility market, it also appears to be heading toward the growth cycle. Municipal water market remains an area of strength for us and we anticipate several larger city awards to be made this year as well.

On the software front, our Meter Data Management software has gained some market traction with several recent awards. Additionally, in the fourth quarter, we made a small acquisition in this space by acquiring the assets of WR Systems, which is utility asset management software company, which will be integrated into the Nexus product offering and organization.

In our Filtration segment, we see continued strength in aerospace markets and anticipate improved operating performance again in fiscal year 2008. In Test, we see the wireless and Asian markets continuing their positive trends. Since we recently discussed our planned acquisition of Doble Engineering last week, I won't spend too much time on that today except to say we are still targeting an end of November closing and we remain very excited about the opportunities they bring to the Company.

In conclusion, we see fiscal 2008 as the year for significant improvement and growth. I am excited about the opportunities we have ahead of us and I think we are well positioned to take advantage of these opportunities. With that, I would be glad to answer any questions you have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Paul Coster with JPMorgan.

Paul Coster - JPMorgan

A couple of quick questions, if I may. First of all, can you talk about currency effects? Are you seeing any beneficial or otherwise impact from currency fluctuations currently? And are there any assumptions going into your guidance for ‘08?

Gary Muenster

Hey Paul, this is Gary. Relative to ‘07, I would say that the currency impact on the sales growth is pretty insignificant. The majority of our foreign contracts are settled within local currency. We tend to manufacture in Europe, ship in Europe, and that sort of thing. So we're not exposed to a significant amount of currency fluctuation.

And so what we've done for ‘08 is obviously, as we modeled this out we generally held the currency rates the same at the points they are roughly today. So, we didn't, we did not build in currency expectations up or down.

Paul Coster - JPMorgan

Okay, and tax rates for ‘08, what should we be thinking about?

Gary Muenster

The tax rate approximately 38%.

Paul Coster - JPMorgan

Okay. Got it. Now, one of your competitors has talked about how evaluation of AMI is causing some of the AMR programs to slowdown. Are you seeing the same? The other thing they've said is that the AMI projects, when they start to kick in the next year is going to be a year of prototyping and pilots and the really large domestic projects probably skewed towards ‘09, 2010.

Do you concur with that as well?

Gary Muenster

Well, it's always hard to put firm numbers on the timing. But we see the opportunity for a couple of these awards to be made in ‘08 and really deliveries to start in ‘08. One difference with ours maybe that some of the other products that are being sold out there is, utilities really because of the fact that we already have some pretty significant deployments on the PLC side, there's not a requirement for a pilot to take place and least domestically.

We're seeing a little bit more of that internationally. But, we really don't see a need for that or really that utilities are going to be looking for that at least for that technology. And if you hop over to the RF side, although Hexagram or our RF solution isn't widely deployed on the electric side, the facts are they are using the same core technology that we utilize on the gas and the water. So again, there shouldn't be this need for piloting to take place.

We have not seen as much of that in the last couple of years as we did four or five years ago as people have gotten more and more comfortable with the core technology. Now, if we were deploying a brand-new technology then it might be a different case.

Paul Coster - JPMorgan

Got it. And then on the Test and Filtration side, you sound confident and you're not seeing then any signs of a cyclical slowdown at the moment that obviously, the market is worried about? Is that correct?

Vic Richey

Yes, if you look at the end market that we serve, other than the automotive, I would say that's the one exception, now we really don't see a large amount of cyclicality only because if you're looking at medical, you're looking at aerospace which remains strong. You're looking at some consumer appliances. And on the Filtration side and on the Test side, again, that's really being driven by the development of new electronic products, particularly what's going on in Asia and with the wireless products.

And so, we don't see a lot of slowdown in any of those end markets. Again, I would say the one place we have exposure is automotive. We've already kind of built some hedge into that, if you will.

Paul Coster - JPMorgan

Okay and then lastly, I just want to make sure I understood this that you're going to be issuing additional guidance, post the close of Doble to advise us on what impact that has on this guidance, is that correct?

Gary Muenster

That's correct. And if you recall from the last week's conference call relative to our announcement of the planned transaction, we did say that it would be accretive. And relative to the slideshow, we said it would be in the neighborhood of $0.15 to $0.20 per share. Obviously pending the purchase accounting amortization that will be evaluated once the acquisition is complete.

But relative to their historical margins, I think what we had announced is roughly $80 million of sales and roughly $28 million to $30 million of EBITDA as you bring that through the ESCO model and my accretion assumption obviously is net of debt service. So it's accretive after debt. And so really, the only pending item is the amortization. So, on a cash basis, it will be accretive in the $0.15 to $0.20 range.

Paul Coster - JPMorgan

Very good, thanks very much.

Operator

Next is Patrick Forkin with Tejas Securities.

Patrick Forkin - Tejas Securities

Good afternoon. Congratulations on the quarter and on Doble.

Gary Muenster

Thanks Patrick.

Patrick Forkin - Tejas Securities

Gary, there was a statement in the release that RF AMI sales were up 164% for the year. How much of that was related to the Hexagram gas product at PG&E?

Gary Muenster

I would say, when you look at their delta period over period, I would say about 75% of that delta is PG&E related. And the balance keep in mind we have the Kansas City project that we announced nine or 10 months ago. That’s in full-scale deployment and then Hexagram continues to pick up what I would call small municipal water projects that have been additive year-over-year subsequent to our ownership structure of them.

Patrick Forkin - Tejas Securities

And then Vic, in the guidance for 2008 you said you are assuming no more electric AMI shipments to PG&E during fiscal 2008. They are out publicly saying that they are basically going to continue the existing AMI deployment as they reevaluate this technology and even if they selected a new technology, it wouldn't roll out until sometime late 2008. I'm not sure how to reconcile their statements and your statements. Is it just that you haven't received orders for 2008 yet on the electric side?

Vic Richey

That’s correct. And certainly, our hope is that we will either get some continued deployment of PLC product and/or some deployment of the RF electric product as well. It's just; we haven't modeled that into our forecast because we don't have a firm view of that.

We think there's still a lot of churn going on there. So we felt it was prudent not to include that at this point in time. But certainly, we're out fight for that business right now and I think we have a good opportunity. But that would be seen as offside to this forecast.

Patrick Forkin - Tejas Securities

Okay and then Gary, on Doble, the 35% EBITDA margins that you guys talked about last week, that looks like that might equate to about 30% EBIT margins before amortization. Is that a good way to look at that?

Gary Muenster

Yes, upper 20s to 30% is fair.

Patrick Forkin - Tejas Securities

Okay. And then, the Doble acquisition really looks great from the perspective of a nice addition to AMI and out into the grid. Vic, how are you guys looking at looking to, I mean you are clearly showing a commitment here to the Communication segment. How do you continue that process and how do you continue the process of evaluating your existing portfolio of assets?

Vic Richey

Yes, certainly I would say that we're not done. I mean this is an area of growth for us, we saw this as a way to really further penetrate this utility market with some additional products. Not only are they additive to our AMI business, but I think they are just something separate and apart from that as well.

So, we continue to look for other opportunities to grow, both inside the AMI segment and outside the AMI segment within the utility industry and certainly this international perspective that the folks from Doble have I think is going to be beneficial as well as we both try to take our AMI products international and I think there's some good opportunities either to add to the Doble Company with some international acquisitions as well.

That's basically the approach that they've taken is, they've grown internationally its going to find a strong partner and then have them join the company and we plan to continue that process as well as there are some other test areas where they think that they can build on the base that they already have and we'll be looking there. So, I think there's a tremendous amount of opportunity for us to further grow our Communication segment, both organically and through continuing acquisitions.

Patrick Forkin - Tejas Securities

And last question. Gary, on the delivery of the TWACS NG version 3.0 software, you guys pushed this out so, is it safe to assume this isn't like a December 31st type of event?

Gary Muenster

No, that's not the plan. I’d say based on where we are today and in the release we put out announcing the movement of this time frame, I will say that the testing protocols are clearly in our hands. This is not the delay from the original expected date was not something that was predicated on some problems with the software, nor was it related to PG&E's distress over the system. It was not that at all.

So, I think our rigorous protocols have continued say at the last data point I've seen we're well past the 85% point and so we're shooting for sometime in the last week of November, which gives us sufficient amount of time, once we get it in the field to make sure we put the final dotting the i's and crossing the t's on it. So, we are not charging up to 12-31 as we sit today.

Patrick Forkin - Tejas Securities

Okay. Appreciated, thanks.

Operator

The next question comes from Richard Eastman with Robert W. Baird.

Richard Eastman - Robert W. Baird

Hi Gary, can you just remind me what's the tax rate influence in the fourth quarter this year?

Gary Muenster

I would say it's the final true up relative to the research credits and a couple of the other modest credits that we had there.

Richard Eastman - Robert W. Baird

Okay, should we be expecting that same type of the fourth quarter event next year?

Gary Muenster

No. I mean, the one thing we have to keep in mind is as I mentioned earlier throughout the year, we have been living in a net operating loss carry forward world so it wasn't real beneficial in prior years to go chasing these credits around. So, what we did is, we significantly upgraded our tax group with a lot more intense strategic focus coming out of the NOL world. And I would say the team that we have assembled there has a much more strategic thinking orientation.

And so, the big projects that they undertook at the start of last year relative to these research credits really related to roughly fiscal 2000 up through 2007 to get all the cumulative credits basically rolled through between last year and this year and so, we have captured the majority of them.

I would say if we do have any residual or trickling effect in 2008, it will be nominal, but the magnitude and the significant amount of the credits that have come through in the last 18 months, I wish they could be repeated but unfortunately, we're at pretty well at the end of the line on those.

Richard Eastman - Robert W. Baird

Okay. And then, I have a question on the EBIT contribution in the fourth quarter from the Comm business. 15.7% was kind of the EBIT margin, if I look at that versus the third quarter or year-over-year, the incremental margin is not very good and I'm curious, why weren't we able to deliver a bit more margin in the fourth quarter on the Comm revenue number?

Gary Muenster

Let's say the amortization was a little part of that and then I think as the sales mix and as Vic had mentioned, we're staffing up some of this international marketing group. So, we have an increase in headcount during the fourth quarter both sequentially and year-over-year. So, that's a big part of it.

Richard Eastman - Robert W. Baird

Its in when we look out to 2008, the EBIT guidance of 14.8% to 15.2% and again looking at the sales guidance I'm still a bit surprised that the incremental margin wouldn't be better than say 25% on that type of sales growth year-over-year.

Gary Muenster

Well, and again, the amortization really steps up once we deliver 3.0. So, I think as I noted in the release, that normalizing if you will for TWACS NG amortization, that the EBIT margin is 19% or so. So you do see some of the delta there if you normalize for some of the TNG.

Richard Eastman - Robert W. Baird

And that amortization number is still expected to be around $9 million?

Gary Muenster

I think it's going to be a little higher than that. It's going to be in the neighborhood of $10 million to $10.5 million.

Richard Eastman - Robert W. Baird

Okay, because then the base business with that kind of volume, you're not getting 25% to 30%. You need more volume than the 268 to 270 number to get those kind of margins back, is that fair?

Gary Muenster

Right.

Richard Eastman - Robert W. Baird

And then on the Filtration business, is the growth rate in the guidance seems a bit high. Is there something in there from VACCO or the defense side that gives you good visibility on a double-digit growth rate into in the Filtration business?

Vic Richey

I would say it's across-the-board. I would say at PTI this will be the third or fourth year in a row of significant upticks in the commercial aerospace. One thing I would add in that arena is, in that portion of the business a reasonably high percentage of that business is priced under long-term agreements with the OEM suppliers.

And those long-term agreements range from a short one would be two years, a mid-level one would be five and a long-term would be 10. And I’d say relative to 2008, we're sitting in a nice spot where several of those LTAs expired and the new pricing arrangement going forward is indicative of the changes in the cost where you basically get to add the additional margin on top.

So, the pricing structure is changing at PTI in a pretty meaningful way. And I would say that's probably 50% of the net delta you are seeing in the profits at PTI. So, there volumes, their unit volumes are going up but the pricing the positive pricing trends off of the expiration of the Legacy LTA certainly is helping them.

At VACCO, I think some of the mix changes are helping with some of that. And then, at Filtertek, I think we've talked in the past about some of their commercial projects. This deal they are doing with Moore Energy where we purchased the equipment this year and are ramping up the product deliveries as we go into 2008, I think that is helpful as well as a few of the other medical applications that Filtertek is planning.

Lastly, the Tek Packaging Group of Filtertek is having a meaningful increase in 2008 versus 2007 as well, as they have been able to develop several new customers within their core functional delivery groups that I think are going to provide a very meaningful up tick in the profit contribution as well. So, it really is I’d say it is hitting on all three cylinders if you will.

Gary Muenster

Well, the other thing too that we called on our press release and we really hadn't talked about before today was this acquisition of Wintec for VACCO and that's essentially all additive. We add them in there for a couple of months in '07 but that will all roll into 2008 and I think we had about $6 million of sales. So, that is additive is well.

Richard Eastman - Robert W. Baird

Good point. Okay and then just the last question I have. Again, just doing the straight math, the co-op and muni business had a very good year in '07 and we've about $94 million. And we talked a little bit in the past about that business maybe being a steadier business but maybe not as growthy and I'm curious, are you expecting that business to grow from the '07 base into '08?

Gary Muenster

Well, our current assessment has it kind of staying steady with '07 which, given the penetration level I think would be a good outcome. As we mentioned in the couple of releases ago, we did reorganize the sales and marketing group within the Communications group and what we've done is gotten more people focused on the co-op business as well as more people focused on the gas and water municipal. So, that's one reason why we have some confidence we'll be able to maintain those levels in ‘08.

Richard Eastman - Robert W. Baird

Okay. Very good, thank you.

Gary Muenster

Thanks.

Operator

(Operator Instructions) Next question come from John Quealy, with Canaccord Adams.

John Quealy - Canaccord Adams

Hey good afternoon guys. Gary, coming back to you on cash flow; I asked last week on Doble, can you give us an outlook here on what we're looking by the moving pieces in ‘08 in terms of operating and free cash for next year?

Gary Muenster

Consolidated or just the Doble piece?

John Quealy - Canaccord Adams

Consolidated, yes.

Gary Muenster

Yes, I think just so everyone understands clearly because some people have different definitions of free cash flow, what I'm looking at is cash available for debt service will be north of $75 million.

So, as I said, we become a taxpayer in 2008. So, just focusing on pure cash deltas, we should be able to generate $75 million in cash. And so, if you look at the investment levels we've made here in CapEx and TNG and acquisitions, we don't anticipate outside of the Doble acquisition of course, we don't expect next year to be spending $19 million in CapEx.

And we certainly as we come to the end of 3.0 delivery, the TNG expenditures going forward will be much more rationalized, kind of in the $3 million to $5 million range for maintenance and true ups and things like that. So, we are projecting for debt service levels north of $75 million and that's before you put Doble on top.

And so, if you assume that their EBITDA at roughly $30 million it's probably 75% of that manifests itself into cash to help pay down debt service. So, we feel like we are in pretty good shape relative to our operating cash flows to be able to take this $300 million of debt down pretty significantly within 12 months.

John Quealy - Canaccord Adams

Okay. The risk of putting the cart before the horse, in terms of inventory step-ups when you close Doble, anything major day that we should expect as we get into the end of this quarter?

Gary Muenster

No, the nice part of Doble is because about 30 or 40% of their businesses service oriented, they really don't maintain a significant amount of inventory at any given point in time. So, you should not see you should not see a meaningful step-up in inventory at all.

John Quealy - Canaccord Adams

Okay, then in more strategically, Vic, can you comment on the AMI pipeline, how you folks feel you are positioned? Obviously there's been a lot of wireless talk lately. But can you give your thoughts on DCSI and how you are positioned to some new opportunities here moving into 2008 and into 2009?

Vic Richey

Well, I think there's going to be a mix. And I think that's yet to play out and fortunately we have now two approaches to take to the market, both at the power line as well as the RF, as well as the Hybrid solution. So, I think that's going to play out over the next 12 months.

Certainly if the DCI or the power line DCSI's power line system has a tremendous amount of capability, is well proven and if you look at what's going on at PPL for instance and all the data they are able to bring back and how rapidly they've been able to pay for their system, there's some people I'm convinced that are very interested in having that solution. Also, we see that as the major play internationally.

But certainly we understand that there are some people that want to have an RF solution and that's one reason we've committed the resources that we have to get Hexagram solutions out there and working. I think again, the trial that we have ongoing at PG&E has proven that it is going to work well.

And again, just to reiterate a point I made earlier, it's important to understand, that the core technology that's being used for that is the same one that we have in large deployments on the gas and water side in a number of places.

John Quealy - Canaccord Adams

And my last question, a housekeeping question, with regard to Hexagram, what sort of visibility do we have into the ‘08 guidance for Hexagram right now? You mentioned another 6 million in orders in the near-term but can you give us some visibility on that?

Vic Richey

I think pretty solid. I mean you always go into at least with that business we have a pretty good understanding of what we think PG&E is going to do. And that's certainly the biggest piece of their business and certainly the biggest piece of the growth. We also have made some assumptions on the rate of adoption in the municipal market and our success in some of these other cities.

But I think it's fairly consistent with what we've seen in the past. So, I don't think we have any wild assumptions in there on what's going to happen with their product.

John Quealy - Canaccord Adams

Great. Thank you.

Vic Richey

Thanks.

Operator

Next question come from Richard Eastman with Robert Baird.

Richard Eastman - Robert W. Baird

Just as a follow-up one, Vic. When we look at the first quarter, I presume just generally speaking that $2.03 to $2.18 guidance presumably includes the PG&E electric recognition in the first quarter?

Gary Muenster

Correct.

Richard Eastman - Robert W. Baird

And, if I look at the first quarter without that PG&E contribution, are we profitable?

Gary Muenster

Yes.

Richard Eastman - Robert W. Baird

Okay. All right. Thank you.

Operator

Your next question comes from Steve Sanders with Stephens, Inc.

Steve Sanders - Stephens, Inc.

Good afternoon.

Vic Richey

Hey Steve.

Gary Muenster

Hey, Steve.

Steve Sanders - Stephens, Inc.

Just a follow-up on PG&E. Where did we come out in ‘07 on total revenues for PG&E? And then, based on the orders you have, how does that look for ‘08 today?

Vic Richey

Obviously, on the electric side, we basically had zero because we have to defer all of it and on the Hexagram side, it's in the low 20s.

Steve Sanders - Stephens, Inc.

Low 20s for ‘07?

Vic Richey

Yes.

Steve Sanders - Stephens, Inc.

And then ‘08 is $20 million for the electric and then roughly what for the gas?

Vic Richey

I don't think it is appropriate for us to break that out at this point. We're still in the process of getting a firm delivery schedule from those guys. We've made some assumptions, but I don't think it's appropriate that we go into what those are.

Steve Sanders - Stephens, Inc.

Okay. And then on the Hybrid solution, from a capital investment perspective, technology integration, what do you need to do at this point to really have that as an option for the customers?

Vic Richey

Well, we're out talking to customers about it right now. And the reality is, you can make the case that we have our Hybrid solution in place at WPS. We have a Hybrid solution in place at PG&E.

The thing that we have to do to really make it very commercially viable I would say is, we need to bring the interfaces to the customer on onto one system so that as they go to their console to query the system whether it be for the gas or electric or whether it before RF Electric our PLC Electric, they go to one operating system to that.

So, we currently have that underway. We're taking advantage of the expertise we have at Nexus to help us do that. And so, that's just a matter of developing that level of better phase at the customer level. So, that's not a huge investment if you will.

Steve Sanders - Stephens, Inc.

Okay. And then TXU just where do we stand on that one going into 2008? I think you guys were getting pretty close to filling your backlog with them, but can you give us an update on that project?

Vic Richey

Yes, that's one is a little bit up in the air right now I would say in that their PUC has come out with some specific requirements that have to be met. We're in the process of incorporating those into our product.

We will have those delivered and verified to the customer by January. And so, it would be at least then before we see what their next step with us is going to be.

Steve Sanders - Stephens, Inc.

Okay. And could you just provide a little more color on some of the international pilots you have going? Anything there would be helpful, potential size, timeline, we might find out whatever you could add.

Vic Richey

Well, I'm not going to give a lot more information just because every time I talk about a pilot I seem to get burned on it. But, we do have several pilots in Central and South America is where they’re at.

What we've found is the size of the utilities are pretty significant so, I'm really happy that we've made the investment that we have at TNG because that will be required going forward.

As far as the timing, I would say, somewhere between the next six to 12 months we could see some significant progress on a couple of these. But, it is just very difficult to assess the timing of these. But the pilots thus far are going well and there seems to be a real interest in moving forward.

Steve Sanders - Stephens, Inc.

Okay. Thank you very much.

Operator

That concludes today's question. And now I’d like to turn the call back over to Mr. Vic Richey.

Vic Richey

Okay. Well, thank you again for your interest in ESCO. And as Gary mentioned earlier, once we get the Doble acquisition closed we'll be back to give you an update on the impact to ‘08. So, thank you very much.

Operator

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

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Source: ESCO Technologies F4Q07 (Qtr End 9/30/07) Earnings Call Transcript
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