Good day, and welcome to the Q2 2013 ESCO Technologies Inc. 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 statements, I'd 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 as-adjusted basis, future sales, orders, backlog, margins, EBIT, EPS, growth, profits, new opportunities, the SoCalGas project schedule, developments in the COOP and water markets, results of recent acquisitions, the schedule, costs, savings and margin improvements resulting from previously announced restructuring and cost reduction initiatives 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 will be included as an exhibit to the company's Form 8-K to be 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 of the non-GAAP financial measures described in 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 turning it over to Gary to review the financials, let me make a few comments. As discussed during our April call, we're seeing some softness in Aclara, primarily in electric COOP and water end markets. Faced with this reality, we have taken action to reduce the infrastructure we have in place to better position us from a cost perspective going in 2014. Going to a full outsource model will Aclara will not only allow us to reduce the cost of the product but also reduce the overhead associated with in-house manufacturing. In a project-related business like Aclara, we see this as a superior business model. On our last call, we talked to you about the COOP market. It's important to remember that we remain the market share leader in this space, and it remains a good market. Historically, we've had revenues between $80 million and $100 million, and we will be in that range again this year, albeit in the lower portion of the range. We are suffering a bit due to comparison with last year, when the COOP sales were an all-time high of $125 million. We recently had a client conference with Aclara with over 550 customers in attendance. I was impressed to see they remain very engaged and loyal to our proven technology. I'm sure that you've seen the news at TEPCO, and their selection of Toshiba for deployment of a Smart Grid solution to their entire service territory. As I've told many of you over the past 12 months or so, I saw any participation by us coming in the out years of the deployment, it became obvious that TEPCO's plan was to deploy product in more densely populated areas first and move to more rural territories later. We felt that given our…

Thanks, Vic. Consistent with the theme of our previous quarterly call, the clear highlight of Q2 and the first 6 months continues to be our ability to win new business as evidenced by the strength of our orders and the growth of our backlog. At the halfway point of fiscal '13, we grew our backlog $58 million or 14% from the start of the year, resulting in a March 31 backlog of $465 million. During Q2, we had a 1.05 book-to-bill, and for the first 6 months, our backlog grew across all 3 operating segments as we reported a 1.19 book-to-bill. The backlog growth includes our largest customer, SoCalGas, as they awarded Aclara an additional $12 million in Q2, bringing the total order value on the project to $151 million through March 31. We continue to expect SoCal to generate the revenues we guided to in the last release. For fiscal '13, our guidance is based on operational EPS, which results from the nonrecurring costs associated with the Test business restructure and the other profit improvement actions noted in our April announcement. For Q2, we reported operational EPS of $0.28 a share, which compared to a GAAP EPS of $0.06. Our operational EPS in Q2 was below our initial quarterly plan, primarily driven by the end market softness Vic noted at Aclara. To recap the nonrecurring adjustments, USG's EBIT reflects the $5 million inventory write-off, which hits cost of sales. Test EBIT reflects $1.4 million of restructuring charges in the quarter and $2.9 million for the 6 months, primarily included in other expenses net, and the $1.8 million Doble-Lemke deferred tax write-off is included in tax expense in the consolidated P&L. Regarding Q2 from an operational basis, Filtration continues to outperform expectations on both sales and profit, and we expect…

Okay, those are our prepared comments. We'd be glad to answer any questions you have now.

[Operator Instructions] And we have Craig Irwin from Wedbush on line with a question.

First question is, can you give us an update on the half dozen major projects that you're targeting? I think you've said before 3 in gas, 3 in water. And could you clarify for us this is calendar '13, not fiscal '13? And maybe any updates you have on commission activity related to these projects, financing activity or any other important gating factors.

Yes, obviously, a lot of specifics. I will say that the market, particularly water market, remains very active. The pipeline, as I mentioned before, is very strong, probably the strongest it's been. It's just a matter of getting people to pull the trigger on some of these things. I mean, the only specific I'll get into, there is -- in one of the larger water projects, there's ongoing discussions between a couple of the parties involved there that have slowed it down and that's what I talked about during the last call. But that's the only one where there's any significant regulatory impediment in place, and I'm not sure I'd even call it regulatory impediments as much as just couple of parties trying to decide the timing and -- that they're going to go forward with it. But other than that, the other ones are moving forward, albeit very slowly.

And can you maybe frame up for us what the size ranges for each of these projects? I mean, are we talking a couple hundred thousand units up to a million-plus units, or does the average size tend to be a little bit smaller than that?

Well, I mean, the things that we're actively pursuing now, I think you got it calibrated about right. I mean, some of them are a couple hundred thousand endpoints and then at least one of them is well over -- is over 1 million endpoints.

And we have John Quealy from Canaccord on line with a question.

It's Chip Moore for John. For Doble, I was just wondering if you could talk a little bit more about what you're seeing here in the Northeast 6 months or so past Sandy? How do things look versus the past couple of years? Are rental rates returning to normal, et cetera?

Yes, well, and the rental rates really never did change. So one of the great things -- one of the many great things about Doble is half of their business is kind of, I won't say in the bag -- is in the bag -- well, is already signed up as we enter the year. So the rental business remains very strong. So really, what we're talking about is the purchases of the equipment, and as Gary mentioned, the first 6 months were a little soft because of some of those things. We're seeing that start to pick up now and got a lot of activity both in North America and really starting to see some traction internationally. So that business is -- looks very solid going forward.

Great, that's helpful. And then one more. Just as you get past restructuring on the growth side, what are you thinking M&A, inorganic?

Yes, we're currently looking at a number of things. They never seem to happen quite as quickly as we want, but there are some opportunities out there that have presented themselves. And it seems like the M&A market is picking up a bit versus, say, certainly 12 months ago.

And we have Sean Hannan from Needham & Company on line with a question. Sean K.F. Hannan - Needham & Company, LLC, Research Division: So just a question for you in terms of the guidance, I realize you're not specifically providing that around the top line. But if I were to assume that you get some of these efficiencies that help within the margin and kind of bottom line, at the midpoint, you're really kind of looking for a flattish year. Do we have a real potential this year, where revenues could be down year-over-year, or could you help provide a little perspective around that?

I mean, I think the revenue, obviously, drives the bottom line. I think as we look at revenue, I think we're still going to have an increase over the prior year. But I just want to remind everyone on the mix change. When we talk about COOPs and water being a little softer this year, in order, the COOPs are the largest profit contributor. They're in the low to mid-50s, and then incremental margin in water isn't too far behind. So we're swapping that off for SoCalGas, which -- when we signed that up, obviously, on the quantities and volumes they have, they're not pulling that kind of incremental margin through because that was expected to be more of an overlay project that we build off of. So you're swapping off revenue from, let's just call it, a blended 48% incremental margin for something that's closer to 38%. So you are going to see revenue growth, but to your point, Sean, you're probably going to see flattish EPS because that mix change doesn't pull as much profitability through post-restructuring. And that's kind of like -- when Vic was talking about the operational things we're doing to improve the efficiency there, that's where we're trying to mitigate some of that impact should COOPs and water maintain a lower volume.

I mean, if you think about it, that's exactly -- Gary's point is exactly why we're taking some of the actions that we have. I mean, it's very simply that we've got to get the cost out of the product. We have more flexibility by having the manufacturing in place, but that came in at a pretty big cost. So by reducing the cost, it's going to help offset some of this mix change that we have. Sean K.F. Hannan - Needham & Company, LLC, Research Division: That's helpful. And Gary, that's a great reminder as a perspective to keep in mind, so thanks for that. Now in terms of the water softness you're seeing, do you sense today that this issue is really quite pervasive within the industry in North America as kind of a broader issue, or is there a factor where it's just the way that the ball bounced on the projects that you're specifically working on that have pushed a little bit more?

Yes, and that's a good point. I mean, the reality is, I mean, you guys see the same releases that I do, and I'd say the overall market's been soft. And so it has not been a matter of us losing a bunch of jobs and that's the reason it's moved away from us. It's just a matter of people aren't making the decisions in the time frame that we had anticipated. Sean K.F. Hannan - Needham & Company, LLC, Research Division: That's great. And then last question for the moment, if I can. Could we get a breakdown on the trends that you're seeing within that Filtration group, the strengths that you're seeing in the different businesses right now? I'd assume that there's some pretty decent consistency of what we've seen the last few quarters, but an update would be helpful.

Yes, all 3 of those businesses -- and just as a way of reminder, we have 3 businesses involved in the Fluid Flow and Filtration group. In all 3, we've seen good growth this year both from a sales and profitability standpoint. But certainly, the leader of the pack is VACCO, primarily driven by the space program and by spares from the Navy. So that's where we've seen that kind of the outsized growth much more than we'd anticipated, you got to say, about a year or 18 months ago. And it really -- as I mentioned, I think, either in the release or in my comments, we have very good visibility in that Filtration business, and it looks like it's going to continue some good, solid growth over the next couple of years.

And we have Ben Schuman from Pacific Crest Securities on line with a question.

Just a quick one on TEPCO. Were you guys involved in that bid with any other consortiums besides the Toshiba consortium or Toshiba itself that you thought could have led to some of that rural business?

We were not with this Toshiba group. We were with GE and Sumitomo.

Okay, great. And then we've heard about readiness being a source of maybe some cuts on the defense side with the sequestration and everything. Are you pretty comfortable with the Navy spares business and everything else on the Filtration side as we hear chatter about federal budgets?

Yes, I think we're in a pretty good shape. In fact, we were just out there gearing up last month and spent some time. And obviously, that was a question we ask a lot about. Our view, and I'd say supported by most people, if you're on some of the newer projects that have an opportunity to get cut, I think there's a bigger opportunity to get cut. Most of what we do on the Navy side and then the airframes that we're on don't seem nearly susceptible. So we don't think that that's going to have an impact on us at least in the foreseeable future.

Okay, great. And then on the COOP side, that's just market weakness, there's no competitive impact or competitive change there?

I would say that certainly, we've talked before. I mean, there is more competition there. We are continuing to win our share. More than half of the business is out there. A little more than half of the business is out there. I'd say what's happened with some of the competition is people come out and say, we can do that, too, and people will take time to try to try it out. And we've had several instances where utilities have tried out a competing technology, figured out it did not work in their service territory as anticipated or as promoted. And then they've come back and bought with us. But then that's slowed things down as a result of that. So as you look at the investor and utility electric market in the U.S., it's slowed down as a result of some of the larger projects being completed. So now those folks that were in that market are now trying to compete in the COOP market. So that has slowed some things down. I will say that for the most part, those technologies don't work the way ours do. I mean, being on a power line in a rural territory is really hard to beat, because then if you've got electricity in your house, we can read your meter. And you're trying to set up a RF approach there. Well, I won't say it's not doable because it's doable, but most -- quite often, it becomes too expensive because of the infrastructure you have to put in place to read that.

Okay, great. And then, Gary, could you just repeat the SoCal revenue and the Doble revenue? I missed that earlier.

, Yes, the Doble revenue in the quarter was about $25 million, and SoCal revenue as part of Aclara was around $12 million.

And we have Richard Eastman from Robert Baird on line with a question. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Gary, what do you expect Aclara's revenue to come in at for '13 at this point?

Yes, I'd say somewhere between $215 million and $225 million. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then, obviously, Doble on top of that, and then Metrum is in the numbers at this point?

Yes, that's embedded in Aclara. And just as a ballpark range, that's approximately $5 million in the second half of the year. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And that's in the $215 million?

Correct. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just a question on -- Vic, do you -- given where Aclara's business has come in, and I know we just went through this cost restructuring announcement, but it still strikes me that the cost structure at Aclara is too high, and it's not necessarily -- well, it's partially the manufacturing. Like you said, there's a cost to the flexibility on the manufacturing side. But are costs in line when it comes to more of the back office, the bidding, the support, those costs? Because our hit rate on some of these projects hasn't proven to be as high as I would think that you had supported. How do you view the cost structure there?

And that's something we continue to look at. We have taken some actions, not obviously to the extent we do on the manufacturing side, but what we've been trying to do is make sure that Aclara operates as one business. And then as we've told Metrum, and I think that's a good example, I mean, we integrated Metrum in day 1 so that they got in all of our systems rather than have a redundant set of processes out there. So we're continuing to consolidate as much as we can between the Cleveland facility and the St. Louis facility and the facility we have in Boston. So we're doing some of that, but, I mean, obviously, as the business develops or doesn't develop, we have to continue to look at that. And if you look at the number of employees that are out there, the important thing that a lot of people forget is we have 450,500 customers at Aclara, and you have to support them. And one reason, I mean, that we have been successful and continue to be successful, particularly in COOPs and with our other water and gas customers, is that they get really good customer support. And we have to do that because if we don't do that, then we're going to really struggle gaining new business because, obviously, utilities talk to each other. So as look at the overall force count there, it's probably -- there's a lot there that you wouldn't typically understand being there just because of the customer support both on-site and then what we have in-house to answer questions and troubleshoot things. So we'll continue to look at that because, I mean, obviously, if the business doesn't pick back up, the cost structure is too big. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And when you look at the water business at Aclara, is there any risk here that the water business is increasingly moving through distribution versus direct sale? We seem to sit on expectations for wins and projects, whereas if you look at what's going on in the water industry in the March quarter and probably in the December quarter as well, we're seeing distribution sales in the water industry up and up generally double digit. So I'm trying to understand. I mean, you guys are more project-related direct sale, but is there a risk that the market is moving through distribution for local support or whatever? Again, I'm just -- if you could you just respond to that maybe?

Sure. No, it's a good point. It's a very good question. It's something that our VP of Sales has spent a lot of time this past year working on is to get a distribution network. And as we've talked about on previous calls, part of the fight we've had is so many of the distributors are tied up with the meter manufacturers, and so they're not to go sell the Aclara product and give up their meter line because they make a lot of money on it. So it's taken longer than we hoped to get a good distribution network in place, but we feel more confident now that we've got a good distribution network in place. We'll continue to work to improve it, but that has been a longer process than what we'd anticipated. But certainly -- and the place where that really impacts you is on the smaller utilities. I mean, our direct sales force does a good job of interfacing with the larger cities and some of the larger municipalities. But where we've struggled is with a lot of smaller utilities. And so by getting a distribution network in place, we're starting to see some benefit of that, but it's just taking longer than we'd anticipated. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just one last question. I just want to jump back for a second to the COOP market. Is your agreement on the PLC -- with the PLC product, is your agreement with HD Supply an exclusive agreement, or can they sell somebody else's PLC technology?

I'm trying to remember exactly how that side of it's written up. I thought you were going to ask about if we were exclusive with them, and what we do is we set it up by different territories. But I'd say for the most part, they sell just our product.

And Jim Giannakouros is on the line with a question from Oppenheimer. James Giannakouros - Oppenheimer & Co. Inc., Research Division: On Test, can you put some finer points on the trends you're seeing and I guess the outlook there, what projects are driving sales in the second half of this year and what, I guess, longer-term end markets are potentially greater contributors to growth going forward?

Sure. And as we've spoken so much on the Test market and the restructuring and the cost structure in place, and that is important. It's good. That's the right thing to do. But I think what's lost here is, I think, our backlogs at 10% or so since the 1st of the year. So we are seeing some good trends in those end markets. And one of the good things about that businesses is the end markets are so varied both from the markets you go to and as far -- and as well as the geographic location. So it's kind of hard to say here specifically the things that are driving it because it is such a broad base of customers. And some of the trends we're seeing, certainly, is more companies drive the development of new products into different areas, different countries, that necessitates the installation of additional chambers or upgrading chambers that they have. We've also, as we've talked about more recently, developed a few new end markets, particularly the EMP market for data centers, for utilities, for those types of things, as well as some new standards that are driving the development, particularly in the wireless market. The development of these standards is driving additional sales through that business as well. So I'd say overall, the end markets there are stronger than we saw a year ago. And again, Gary and I were down there last month and spent a good time with these guys. And that seems to be a multi-year trend that we're seeing for that market. So we'll be well positioned now that we've got a better cost structure in place to get the margins up in that business. James Giannakouros - Oppenheimer & Co. Inc., Research Division: Okay, that's helpful. And can you remind us if we should be thinking about 13% as a run rate going forward, or are there opportunities to expand that in your fiscal '14 and beyond?

I think going forward, I mean, we should be able to see expansion above that. I mean, it's not going to be a 20% EBIT business, but we certainly think there's opportunity, because of the way we're structured now, to get above 13%.

And we have Kevin Maczka from BB&T Capital Markets on line with a question. Kevin R. Maczka - BB&T Capital Markets, Research Division: Most of my questions have been asked. But Vic, I just wanted to clarify on this TEPCO situation and the decision to go to Toshiba. So they're planning to do the more densely populated areas first, which you didn't really plan to play in that market anyway. So is there still some potential that longer term down the road, you can be a player in that more rural area? Or is that just not a potential customer anymore?

Well, I would say that the reality is today, that Toshiba is not going to call and say "Hey, how about helping us out in these rural areas?" I mean, it just happened. Having said that, I'm not sure what solution they plan to use in some of those areas. So that's the reason, as I mentioned in my prepared comments, that we're going to stay involved with TEPCO, with our teammates, so that if that opportunity arises, we're well positioned to take advantage of it. And again, as we've mentioned for the past couple of years, unfortunately, we are qualified to sell our product in Japan. So it would be an easy thing to do if they got to an area and said, "Okay, we probably don't have the right solution for this. Who does? Okay, here's Aclara. They're already qualified, so maybe we should use them." So I'm not holding out a high percentage of that happening. We're certainly going to stay involved with them so that if they reach that point, we'll be well positioned to help them out. Kevin R. Maczka - BB&T Capital Markets, Research Division: Right. And you've been piloting and doing other things to get qualified there for a couple of years now. So those activities are still all continuing, it sounds like, is what you're saying.

Well, we've completed -- I mean, essentially, we've completed the test, and we've been qualified. So it's not going to -- there's not really an investment for us to continue to be involved other than support the team that we have in place there.

And we have Sean Hannan from Needham & Company on line with a question. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Gary, just to clarify something, the SoCal revenue that you mentioned, I thought you said $12 million, and yet the orders were also $12 million. So we have the same number?

Right. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Okay. I Just wanted to ensure that.

For the quarter.

And the orders, they're like $150 million, right?

Yes. In the year, we've done $56 million in orders for the 6 months and about $21 million of revenue. And then so the $151 million represents last year, and this year cumulative orders are $151 million. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Right, great. Okay. And then in terms of -- you had mentioned in the release the traction that you're making within EMP. Just wanted to see if you could maybe elaborate on that a little bit for us in terms of specific traction, how you're viewing that market in size today and how you expect that could grow for you there.

Yes, it's a little bit hard to really put size around other than we've won a couple of projects, and they're good-size projects. I mean, they're $4 million, $5 million, $6 million projects. And the need is there. In fact, I mentioned the Doble conference earlier, and we had -- the Chairman of FERC was the speaker there. I think on the second slide, as they were talking about areas of concern for utilities as far as security, EMP was listed front and center. So it's a real issue. And so we're working hard to make sure that we identify the right markets to go after, but our view, at least today, is this could be a significant market. I mean, if you only have to win -- if you win 4 or 5 of those a year, I mean, they can easily turn into a $25 million annual market. And that's just talking domestic. And I think we're well positioned because of our footprint to kind of take that internationally because they have the same concerns there as we do here.

[Operator Instructions] And we have Richard Eastman from Robert Baird on line with a question. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Gary, what was the underlying tax rate that you used to do to get to the adjusted $0.28?

Well, for the adjusted items, the 2 items that are not tax-related, I just used 35%, just a normalized rate for those 2 items. So the Test-adjusted item, which is about $1.4 million, and the inventory write-off I tax affected at 35%. Obviously, the $1.8 million of the DTA goes straight through tax, so that's 100% because it's a tax item. And I just want to remind you as you kind of go back through what the rate would have been if we wouldn't have this -- if you remember from the last call after January 1, when Congress extended the several tax benefits, primarily for research credit and things like that, the core rate would have been in the upper 20s, 27% or 28%, had we not had all the sort of noise because when you got that congressional extension put through, you had a cumulative catch-up for past R&D credit. So that's probably where you're wrestling with the math. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So it'd be more like the 27%, 28% number, okay, to get to the adjusted $0.28.

Yes. Just use 35% for the 2 adjusted items, and then as it kind of crosses apart, you'll see the EPS impact of those individual items. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And then do we bounce to 33%, 32%, 33% then for the second half?

Probably not that low. I'd say 34% to 35%. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just other question, what was the exact amount of the Test restructuring taken in the quarter?

$1,423,000.

We have no further questions at this time.

Okay. Well, that concludes our conference, and we'll talk to you next quarter.

Thank you.