Itron Inc (ITRI) 2002 Q1 法說會逐字稿

good afternoon and welcome, ladies and gentlemen, to Itron's first quarter 2002 earnings release conference call. At this time, I would like to inform you that this conference is being recorded for a rebroadcast, and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions-and-answers after the presentation. I will now turn the conference over to Mima Scarpelli, vice president, investor relations and corporate communications. Please go ahead, ma'am.

Thank you. Good afternoon, everyone, thanks for joining us. With me today is LeRoy Nosbaum, Itron's CEO, and Dave Remington, our CFO, both of whom will be presenting comments in today's call. Also joining us for the question-and-answer portion of the call is Rob Neilson, our president and chief operating officer, who has been intimately involved with the LineSoft acquisition over the course of the last quarter.

We'll start our call today with a review of financial results provided by Dave. After that, LeRoy will have some comments on the progress of the LineSoft acquisition, as well as a few other highlights for the quarter. As always, we will have a question-and-answer session at the end of our comments.

Before going to the prepared remarks portion of our call, I do want to point out that our press release includes forward-looking information, in particular, the business outlook section of the press release. In addition, some of our prepared remarks, as well as some of the comments we will make during the question-and-answer session of the call may also forward-looking statements. Please keep in mind that forward-looking information is being provided based on our expectations as of today, April 17, 2002.

The forward-looking information we are providing is subject to a number of risks and uncertainties such as the timing of customer orders, our ability to achieve the synergies and operating targets we have projected for acquisitions, and a number of other factors, which are described in greater detail in our Form 10K for the year ended December 31, 2001, that we just recently filed with the SEC.

Itron does not undertake any obligation to update or revise forward-looking statements, although we may do so and have done so from time to time.

Dave, please go ahead.

Thank you, Mima, and good afternoon, everyone. We are delighted to have you join us today as we go through the financial results for the last quarter, in particular because we had a very good first quarter. Compared to a year ago, we are showing significantly better results in almost every area. Revenue and earnings for the quarter were slightly higher than our most recent guidance as well, and higher than consensus estimates.

You may have noticed from the press release we issued today that we are reporting net income and earnings per share in two ways. First, we are reporting both net income and earnings per share according to GAAP, generally accepted accounting principles, we are required to report and have always reported. Second, we are also reporting pro forma numbers, due to a number of nonrecurring items -- some quite significant -- which make a comparison of quarterly GAAP numbers much less meaningful. In our case a comparison of GAAP numbers does not result in an apples-to-apples comparison and obscures the results of operations.

Those items that make GAAP comparisons less meaningful in our case are, first, a one-time in-process R&D charge associated with our recent LineSoft acquisition; two, increased intangible amortization expense associated with the LineSoft acquisitions; three, our adoption of statement of financial accounting standards Number 142, goodwill and other intangible assets adopted the first of this year, which resulted in a cessation of goodwill amortization; and, four, an extraordinary nonrecurring item involving a gain this quarter from an early extinguishment of debt.

We plan on discussing all of these items in greater detail as we go through the financial results in this call, and please note that we have included a new schedule this quarter with our press release -- one that reconciles GAAP net income and EPS with pro forma net income and EPS. We will continue to report pro forma amounts in the future quarters as well to provide you with a more meaningful basis for comparing and evaluating our financial results, and we will communicate our guidance on this basis as well in addition to normative GAAP guidance.

Now let's discuss the results themselves, comparing in every case 2002 first quarter results to those of the first quarter of last year. We will also compare with fourth quarter 2001 results when meaningful.

Revenue increased 14.6 million, or 31 percent from the first quarter of this year compared to the first quarter of last year. This increase, incidentally, was not substantially driven by LineSoft's revenue for the 18 days we owned them, as LineSoft revenue was a small portion of total revenue at 600,000. Domestic revenue growth was quite strong with over 50-percent growth, or 19.5 million more in first quarter revenue this year versus last, partially offsetting this domestic performance. International revenues were down 4.9 million due to a large handheld system sale in Japan in the first half of last year that was not replaced this year.

Returning now to the domestic market, revenues were up across all market segments. Electric revenues were up 54 percent, natural gas was up 23 percent, and water and public power was up 64 percent, as the number of new water AMR installations announced last year rolled out. One customer accounted for about 40 percent of Electric's increase of about 16 percent total company first quarter revenue. We also shipped approximately 850,000 AMR meter modules in the first quarter, which was 46 percent more than we shipped a year ago.

Comparing to the previous quarter, the fourth quarter of 2001, revenues were down approximately 2 million, or 3 percent, but we typically see a bit of a downturn in the first quarter relative to the fourth quarter, as colder weather and snow slow installations, although as we noted in the release, warmer weather across much of the country this past winter resulted in much less, although seasonally lower first quarter.

Turning now to gross margins, in the first quarter they improved a very significant 4.6 percentage points over the prior year to 44 percent, which was the result of higher international gross margins and lower manufacturing costs, with LineSoft having little impact. Our gross margins continue to benefit from improved efficiencies and the favorable component pricing we experienced during 2001. On a sequential basis, gross margins were approximately 1 percent lower than in the previous quarter, due primarily to higher service costs, which we do not expect to continue for the remainder of this year.

Turning now to operating expenses, we noted in the release that operating expenses were 31 percent of revenues both this year and a year ago, and increased 4.4 million. Looking now at the components, sales and marketing spending increased $1.5 million in the quarter of this year compared to the last, due primarily to higher commission and accrued bonus expenses that declined by half a percentage point of revenues to 11.3 percent. Our spending of about 7 million this quarter was level in terms of dollars spent with Q4 and just slightly higher as a percentage of revenues.

Product development spending went up 1.8 million in the first quarter of this year compared to last year but remained level at 12 percent of revenues. Spending of 7.5 million in the first quarter was actually less than in the previous quarter by about 900,000, and was a full point less as a percentage of revenues due to higher material costs in Q4 and the completion of certain development phases.

Turning now to G&A -- G&A expenses were 4.5 million in the quarter, up 1.2 million compared to the first quarter of last year but comparable with the prior quarter Q4. Importantly, as a percentage of revenue, G&A expenses for all three quarters were approximately the same at 7 percent.

Now we turn to a portion of our operating expenses that we'll spend a little bit more time on, which is amortization of intangibles. For the quarter, it was 337,000, and while that's comparable to the 366,000 in the first quarter of last year and the 377,000 we reported in the last quarter of last year, our basis for calculation has changed significantly. It's changed significantly for two reasons: One, our acquisition of LineSoft and, two, the previously mentioned adoption of statement of Financial Standards Number 142, goodwill and other intangibles, which was effective the first of this year. Let's go into some detail.

First, the statement requires that goodwill should not be amortized but instead tested periodically for impairment. On the other hand, it also states that one should amortize specifically identifiable intangibles with a finite life. Consequently, effective with our adoption of the statement the beginning of this year, we are no longer amortizing goodwill but will instead test it periodically for impairment. That means that we will no longer incur the amount of goodwill amortization that we incurred last year, which was about 650,000. We also do not expect any material impairments when we complete our impairment analysis this quarter.

Another consequence relating to LineSoft on the statement was that approximately $8 million of the purchase price for LineSoft was allocated to specifically identifiable, intangible assets, which we will amortize in which assets are primarily core technology assets. We will write these assets off over lives ranging from one to five years with the great majority over three years. This year that amortization will be approximately 2.8 million and of that 2.8 million we took about 143,000 in the first quarter of this year. Later years will have lower amounts of amortization.

As you will note from the press release, due to these significant changes in amortization of intangibles, we are excluding amortization of goodwill and other intangible amortization in the calculation of pro forma results to provide for a more meaningful comparison of results. In addition during the first quarter, in connection with the acquisition of LineSoft, we also wrote off 7.4 million on the date of acquisition for the fair value of what is called "in-process research and development acquired." Please note that there is no deduction for this charge for tax purposes so that the full 7.4 million hits the bottom line in terms of net income and EPS for GAAP purposes.

For purposes of pro forma net income and EPS, we exclude this charge, again, to provide for more meaningful results. Let us also mention that with respect to this 8 million in LineSoft intangibles that we're amortizing, and the in-process R&D charge, both are now estimates based on outside valuations and are still being reviewed by our auditors.

Turning now to operating income, excluding the in-process R&D charge and intangible amortization, operating income for the first quarter was 8.3 million, or 13.3 percent of revenues compared with 4.1 million, or 8.6 percent of revenues in the first quarter of last year and somewhat less than the 9 million, or 14 percent of revenues, in the previous quarter, Q4 of last year. As we mentioned in the press release, LineSoft operations for the period resulted in approximately $300,000 of operating loss, and we've previously commented on the normal, seasonal Q1 dip.

Turning now to equity and affiliates and interest, there was no significant activity in equity and affiliates and net interest expense was less due to higher cash balances and lower interest expense. Provision for income taxes this year-- for this quarter-- is a little bit more complex. Normally and income tax benefit as opposed to a provision for income tax is as reported when there's a net loss. However, as we stated a moment ago, the 7.4 million in-process R&D charge is not deductible for tax purposes, and therefore there is no benefit provided for incomes taxes to offset this charge for the first quarter. That results in our reflecting an income tax provision or expense for the quarter instead of a benefit, despite the fact that we had a reported loss.

Here's how we calculated the provision -- we added back 7.4 million to the loss before extraordinary items, which was 512,000. We came up with net income for purposes of calculating the provision. A provision of 2.6 million reflects an expected tax rate of 37.5 percent, which is slightly less than the 39 percent rate we used for the first quarter a year ago and slightly higher than the 37 percent tax rate for the full year of 2001.

Let's turn now to the extraordinary item -- during the quarter, we prepaid a mortgage note with a payment amount of 4.9 million, which mortgage note was in connection with our Spokane facility. The after-tax amount of the discount, $125,000, was reported as the extraordinary item.

Turning now to net income and EPS, for the first quarter of 2002, for GAAP purposes, we reported a net loss of just under 3 million, largely as a result of the 7.4 million in-process R&D charge. The GAAP loss was 18 cents. That compares with net income of 1.5 million, or 9 cents per share on a GAAP basis for the first quarter of the previous year.

Turning now to pro forma net income, we'd like to take this in three pieces. First, the net income amount itself, which excludes three things -- in-process R&D charge, the extraordinary item this year, and intangible amortization for this year and last year was 4.6 million, or 7.5 percent of revenues for the first quarter of this year compared with 1.7 million, or 3.6 percent of revenues for the first quarter last year. This represents a doubling of net margin year-to-year.

Now, before mentioning pro forma EPS, we'd like to point out that pro forma shares outstanding, for purposes of calculating diluted EPS were much more this year compared to last year -- 21.6 million versus 17.2, an increase of 4.4 million shares. Three parts to that number -- 1.1 million results from actual shares issued primarily from stock option exercise; about 1.6 from common stock equivalent shares for more options being in the money this year versus last and the higher stock price; and the third part, about another 1.6 million results from common stock equivalent shares arising from our convertible debt. Some may note that the portion of our convertible debt that's converted-- convertible at 23.70 was anti-dilutive last year and therefore is excluded from the EPS calculation last year.

Turning now to what pro forma EPS was, it was 24 cents in the first quarter, more than double the 11 cents pro forma EPS in the first quarter of last year.

Turning now to the balance sheet, cash flow, and ratios -- unrestricted cash and short-term investments decreased by approximately 25 million to 23 million. The largest use of cash during the quarter obviously was for the purchase of LineSoft and was approximately 21.7 million, including deal costs. Other significant uses included the 4.9 million used to pay off the mortgage note we mentioned a moment ago, and approximately 5.5 million for incentive compensation. We also used 2.6 million in cash for fixed-asset additions during the quarter as well.

During the quarter we generated approximately 6.6 million in cash from operations. EBITDA was 10.4 million, up 80 percent compared to 5.8 million a year ago, and our EBITDA-to-debt-service ratio increased to a very healthy 7.1 from 5.5 a year ago as well.

Accounts receivable decreased by 6.2 million during the quarter, and day sales outstanding increased slightly from 69 in Q4 last year to 72 days, mostly due to LineSoft and not a significant change and were, however, much lower than the 83 days we had a year ago.

Inventories increased 3.4 million, due to anticipated orders and the buildup in the handheld inventory while transitioning production from one vendor to another. Turns were 4.1 in the first quarter, up from 4.0 in the first quarter of last year but lower than the 5.1 for the fourth quarter, which often experiences an inventory draw-down.

Preferred taxes increased primarily due to the acquisition of LineSoft NOL carryforwards, and last in this section, annualized pro forma return on equity on beginning equity was 24 percent, up significantly from 13 percent a year ago.

Other highlights -- as we mentioned in the release, we booked 38 million in new orders during the first quarter of 2002. There were no large orders included in bookings for the quarter, and as we mentioned before, bookings and backlog often fluctuate quarter-to-quarter depending on the timing of large orders. Please do not interpret these fluctuations as representing a trend. In particular, first quarter bookings last year of 75 million included a large $40-million order from one customer.

Our total backlog of book orders was 202 million, essentially equal to the 203 million at the end of last year but up from 186 million a year ago. Twelve-month backlog, which is book orders that we will ship and perform services against in the next 12 months, was 112 million, down slightly from 114 million at December 31, 2001, but up significantly from 71 million last year.

Last, as of yesterday, end of day, we achieved a 100-percent conversion of the almost $15 million of convertible subordinate rated notes for which we issued a redemption notice a month ago, which further strengthens our balance sheet to a reduction in debt.

In summary, with our first quarter financial results, we are off to a great start in 2002, building off the momentum of last year. We are slightly ahead of our initial expectations for the year for both revenue and earnings.

Thank you for your interest and support. For our part, we continue to look forward to creating future financial successes and sharing them with you. LeRoy, thank you, over to you.

Dave, thanks for a good job with, this time, some fairly complicated financials. I appreciate that.

OK, everybody, thanks for joining us this afternoon -- pleased to have you with us, as usual. Dave's done a good job on finances, so I'm going to skip over any comments there I might have had, except for a few. I want to spend a couple of minutes talking about the LineSoft integration, which goes well.

Some comments on the rest of the year -- as we stated in our release, we're looking for total Itron revenues between $275 million and $285 million. We've not changed our outlook for LineSoft, and are still looking for that group to contribute somewhere between $16 million to $20 million, which means our revenue growth projections for Itron in '02, without LineSoft, centers around 15 percent. As you may recall, we started out the year talking about a range of 10 percent to 15 percent, so we have gravitated here toward the high end of the range at this point in time.

New order bookings, as Dave mentioned, were down quarter-to-quarter at a level of $38 million, and while, you know, that is down from the previous quarter, because there's no large orders not worried about that. We have, as we've said, numerous occasions lumping the quarter-to-quarter revenue, which is driven largely by the timing of large orders. We're particularly pleased this quarter with the strength of bookings from natural gas and water business units. So far this year, both of those segments are performing slightly better than we expected them to, and both are on track to produce very nice growth in '02.

A number of those orders in those segments came from existing customers, a sign that our strategy is starting seed deployments, which grow into larger pieces of business, is bearing fruit, and we're delighted with that result.

While electric revenues in the quarter were down slightly from last quarter, we're very confident here that our electric business unit will have a good year in '02. Our high level of starting backlog in the electric segment, as well as the growth on sales activity from customers in this segment, result in our continued expectations for another solid growth year. In fact, all of our domestic segments -- electric, natural gas, and water -- are well on their way to producing good growth for Itron in 2002.

Our international business unit had an outstanding year last year with revenues up by over 40 percent. This year, international is starting out a bit slower than we expected with decisions on a number of orders being delayed a quarter or two. We are hopeful that international results will reflect growth in '02. We have revised our expectations down for international somewhat to reflect slower-than-expected growth at the start of this year, although we are delighted to see that margins are a bit better.

As you can see from our release, we're expecting earnings per share to grow faster revenues in '02 although, frankly, nowhere near the pace of earnings growth in '01. Our current expectations for pro forma earnings reflect growth of greater than 30 percent, or roughly twice the rate of revenue growth. The result of continued effort every day to work smarter, save money, and boost productivity.

Let me shift now and say a few words about LineSoft, and we're just delighted about the pace of integration there, and the good work being done by Rob Neilson, our president and chief operating officer, as he is directly heading up the integration of our new LineSoft acquisition. So far in the quarter we've had 18 days' worth of operations in our results, which Dave gave you the details for. Overall, we're very pleased with how the two companies are coming together. Obviously, having the employees located less than a mile away from our headquarters here in Spokane, it's helped the integration process and provided us with some very nice synergies integrating beyond what you would typically see in an acquisition.

From an IT, accounting, and human resources standpoint, we have accomplished a tremendous amount in a really short period of time. LineSoft employees have converted to Itron benefit plans, compensation true outs have occurred where necessary, a number of LineSoft employees have filled open requisitions at Itron, and others have been integrated into the Itron support areas.

Q1 financials were closed out on time and re-budgeting for '02 is almost complete. As well, our communications networks have been successfully linked together, and transition teams are working on plans for further systems integration.

On the product development front, we are re-prioritizing product development programs, training employees at LineSoft on Itron's product development processes and philosophies, evaluating the balance of spending on Legacy products versus new product development as we have talked about previously at the core of Itron activities, and gently infusing the disciplines that have increased efficiency and productivity at Itron. Net-net -- very, very pleased with progress along the development front.

We have already identified several areas for cost savings and improved efficiencies, such as the use of automation tools for data collection for the joint use business of LineSoft.

On the sales fronts, we're making good progress, as well, and building demand and getting close to signing a number of orders. Customers are responding nicely to the combination of Itron's reputation and present utilities combined with the LineSoft subject matter expertise. Itron's stability is being seen as a positive value-add by our customers as they now view LineSoft.

We have been communicating regularly with LineSoft customers on the transition to a single-focused Itron face to the customer, and that communication is being really quite well received. As well, we've been pleased to validate that within the transmission and distribution department, the name Itron has a reputation and very strong brand image and is well regarded. In general, everywhere you look, employees are taking advantage of opportunities for learning and growth, sharing knowledge with each other, sharing knowledge with the original Itron, and becoming one company -- Itron.

As employees learn more about what the combined company does and provides, the light bulbs, frankly, are turning on with regard to current and future synergies and idea creation on new levels of value we can present to our customers in the future, all targeted toward the Itron vision of optimizing the delivery and use of energy and water. Employees are becoming increasingly excited about the expanded value proposition we're providing to our customers as a combined company.

In summary, LineSoft is rapidly becoming an integrated and valuable part of Itron's expanding market position, and helping us live our brand promise with customers -- Knowledge to Shape Your Future.

With that, let me say thank you for your continued interest and support, and we'll open up the call to any questions you may have.

thank you. Ladies and gentlemen, the question-and-answer session will now begin. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press 1 followed by 4 on your pushbutton phone. If you would like to withdraw your question, you may do so by pressing 1, 3. Your questions will be taken in the order they are received. Please stand by for your first question.

Your first question comes from . Please state your affiliation followed by your question.

Davidson Investments Advisors -- thank you. I've got a couple of questions -- first of all, LeRoy, you had mentioned that the lights are starting to come on with-- there internally in terms of some of the synergies with LineSoft. Help us understand, if you would, for those of us who simply have a dim light bulb on at this point, as the businesses are currently structured, not taking into account some of the future vision that you can't share-- as much as you can would be appreciated-- but help us understand those synergies, and then I do have a follow-up question.

, a great quarter. I'll tell you what, since I've got an expert in the room in Rob Neilson, we'll let him take that one.

Hi, Rob.

Hi, Bill. Yeah, that's been one of the exciting pleasures of seeing our technical expertise at Itron in the area of data collection and data analysis for meter reading and consumption purposes coming together with the expertise that LineSoft in the area of designing, transmission, distribution, and substations, and creating software tools to do that.

When you bring those two groups together, what you find out is that, in fact, not only does the whole Itron do in the area of collecting meter-reading information for consumption but, in fact, we are the masters of collecting remote information and power quality information -- something that we probably didn't take as much credit for, or understand the value of, as LineSoft experts do understand, because they can now begin looking at integrating that information as a new set of variables into their design tools to actually set a whole new standard for distribution and transmission line design for the future.

Would you allow me to paraphrase that, just to make sure that I understand -- one of the issues that LineSoft is focused on is helping engineer, if you will, transmission systems, and one of the important components is understanding megawatts that need to be transmitted.

That is correct.

Data, or your products, collect the data that, in fact, allow that calculation to take place?

Correct -- at different clients throughout the transmission and distribution system, from the generator all the way into the customer's home.

Now, Rob, I have, up to this point, thought of Itron as far more focused on the end user, whether that be an industrial user or a home user -- your collection of their consumption. Are you metering somewhere upstream from that, between the-- at the generation all the way down, before you get to the home or the industrial user?

Yes, they are, and the best example of that would be the California ISO, where we actually meter and collect metering information on a very, very granular basis for all the grid delivery points from all the generators in the state of California as well as all the system interties into the transmission system of California.

How big a market could taking that beyond California be for Itron? Or is that already largely penetrated, and I've just missed it?

Well, it's kind of-- reshape or actually create a different kind of market -- one which would be virtually impossible to measure at this point. Of course, we're pursuing ISO kinds of opportunities through our EIS business-- or product group-- but as it relates to combining the value of that information, together with the LineSoft software tools, that is something that is-- a light bulb that has gone off that we will now begin investigating.

Thank you. I'll go to the next questioner, since I took a lot of time.

Thanks, Bill.

Your next question comes from . Please state your affiliation followed by your question.

Wachovia Securities -- good afternoon.

Hi, .

Hi, .

How's it goin'? I just had a couple of questions. First, I was wondering if you could give us a little more color on the water and public power side? I get real aggressive revenue growth there. What could we expect, going into the future? Is the current drought situation in much of the country -- is that drumming up interest in automated meter reading for water utilities?

Yeah, -- drought, while bad for all of us as individuals, probably is going to drive some business in the metering area. As I think we've said a couple of times, perhaps, previously, there's a couple of things driving water growth. One of them is the fact that as water becomes more scarce, we're looking at more people, more utilities, either putting in water meters, because there is an awful lot of utilities that don't have water meters -- as much as 40 percent, by some estimates. So that drives the installation of water meters, which most utilities look at that and say, "If we're going to install water meters for the first time, we might as well install automation on it. We have people out there."

Secondly, we see utilities looking at their water meter plants as it exists today and thinking about so many of them, and, for some, actually changing out those water meters, as water meters wear out more quickly, and if you look at water shortages, the whole idea of correct billing and getting all of the money due comes to the forefront.

The other thing that's happening is we do see a couple of large water companies buying up smaller water companies, and that drives automation on the face of it -- just to reduce cost.

So if you look at all of those things and certainly water shortages heighten the level of awareness on water, we think that bodes for a fairly strong market in years to come and in '02 as well.

Now, it's worth saying that most of the water business, except for a couple of instances, are still municipally run, so the gestation period for some of that is a little bit long, because you have to go through not only the operational rigors, but then you get into a city council or some form of government, which does tend to lengthen out the period of time from thinking about it to actually buying something.

Bill, it's Mima. Let me just add, too, that when you're comparing the first quarter this year with first quarter last year, clearly, we had some really nice wins last year in the water and public power side with contracts like Philly Suburban Water, Clark Public Utilities, and a couple of others. So we came into this year with a really nice level of backlog already and are continuing to do lots of nice add-on business with the meter manufacturers and distribution and direct channel in this business unit as well.

Thank you, LeRoy and Mima. I've one additional follow-up question, and then I'll jump back in the queue. Now, you mentioned there's a lot of significant activity out there across all the business lines, and there's a lot of RFPs out there. I wonder if you could give us a feel, or scope, on the amount of RFPs that are out there right now and when might we see some of these big contract wins occur?

Bill, it's Mima. You know, we've been talking for some time now about the fact that our sales and proposal activity has been fairly robust, and I don't know that I can give you any statistics that it has certainly picked up, but it is definitely not leveling off. You know, as you can imagine, on the electric side is where we typically see some of the larger opportunities that are out there. A number of them that we're pursuing-- timing on those is always very difficult to predict. On the gas and water side, we're seeing a nicer mix of more medium-to-smaller size orders that typically tend to book on a relatively shorter timeframe but, you know, we're looking for good order activity across the board, as LeRoy mentioned.

Thank you. I'll jump back into the queue.

Your next question comes from . Please state your affiliation followed by your questions.

Robertson Stephens -- congratulations and good afternoon.

Hi, , thanks.

I just wanted to clarify -- did you say unit shipments were up 46 percent quarter-over-quarter?

Year-to-year, 850,000, 46 percent up from the same quarter .

Yeah, actually, unit shipments were down just a bit from Q4.

Right -- sequentially down, but up very substantially a year ago.

And revenues were up over the same period -- 31 percent?

That's correct.

So is there anything going on in the pricing level between the two quarters?

No, it has to do primarily with the component this quarter of a little bit higher installation project management kinds of revenues, which are obviously not necessarily per unit-- aren't related to per-unit shipments.

OK. Then, in terms of the warmer weather quarter in the first quarter, which had a lot-- it sounded as if that had some significance in your ability to do better than you'd expected. What would you say-- and I know this is probably difficult to quantify-- but how much did that add? I'm assuming we're treating the warmer weather in the first quarter as sort of a one-time item.

Hugh, I don't know that we can measure exactly how much it's added specifically, but, clearly, we were not expecting to see the kind of revenue we had in the first quarter. We have, as we've talked to our operating people in all of our business units, nearly all of them have commented that we've seen more activity by our utilities because they were able to stay out in the field, the weather was largely warm across the country, we had little snow in areas where we would have seen lots of snow. So it has, quite frankly, produced a good Q1 for us.

It's fair to say that may have some effect on the remaining three quarters of the year, although I would say we had some very nice orders that came in in Q1 that were completely unexpected -- so a little uptick in activity as well.

You sort of anticipated the reason for me asking. I was curious if you thought that there would be some pulls on the remaining quarters because of the fact that you got so much done in the first quarter.

We don't feel at this point it's going to be significant. Clearly, we could see some bit of flattening, but not at a significant level.

With regard-- you mentioned that the 12-month backlog and bookings tend to be lumpy. I'm just curious -- just from your feeling of how the bookings and the backlog feels now as opposed to a quarter ago or two quarters ago -- is it the same sense that you're getting that you're going to accelerate the bookings and the backlog as you go throughout the year?

Well, clearly, I think the fact that we're projecting nice revenue growth, that's not all going to come from backlog. So, yes, we do expect to see some continued nice bookings throughout the year. Whether or not we start next year with the same percentage level of backlog that we started this year again is really tough to call nine months out, but, yeah, we're looking for good order activity.

And then, just lastly, and then I'll get off -- the big customer that I think you said represented 16 percent of revenues this quarter --

Right.

Does that contract expire this year, and is there a replacement for that contract?

That contract runs out roughly at the end of the second quarter. It might dribble into the third quarter a bit, and, yes, we have other opportunities to replace that, but certainly nothing that we've announced at this point in terms of a major booking.

So your forecasts for the year, take fully into account the fact that that customer runs out the second quarter?

Yes, the forecast that we've given takes into the account that that contract completes, you know, roughly first half.

OK, great. Thanks very much, I appreciate it. Great quarter.

Thanks.

Your next question comes from Patrick Forkin. Please state your affiliation followed by your question.

Hi -- Wunderlich Research. Congratulations on a good quarter. On that National Grid contract, is there a possibility for an extension with National Grid?

Well, in terms of the number of meters under National Grid, as many of you probably know, they have just recently acquired Niagara Mohawk. We do not have any follow-on orders at this point for expanding beyond what Grid was prior to that acquisition. I don't think we were 100-percent covered on National Grid but very close to it in terms of the meters under them. So, clearly, we would certainly hope to continue to expand that order with Niagara Mohawk, but you, to some degree, do go through the sales cycle -- not necessarily starting all over, but it is a sales cycle that you have to go through.

OK. On the electric utility side of the business, I just saw a report that came out in January from the AMRA, and they talked about 88 installations being in place, 63 of which were using PLC technology. You guys haven't talked too much about that in any of your filings. I was wondering if I could get your thoughts on that?

Yeah, let me just start. I'm not sure which report in particular you are referring to. I do know that there was an industry report that just very recently came out called the Scott Report on AMRA deployments, and what that does project is that out of all of the AMR deployments done cumulatively in North America, which are roughly about 39 million end points, somewhere around 5 percent or less are based on power line carrier technology.

Now, clearly, there's some stuff going on with in Italy on power line carrier, and I'll let LeRoy add any other comments that he'd like to.

Yeah, Patrick, your statement is correct. We do not do power line carrier at Itron -- we watch it, we have looked at it. In a couple of previous lives, I've spent an enormous amount of money developing power line carrier systems. We are seeing a number of power line carrier installations in the U.S. in the rural-- what I'll call "less dense" suburban applications. The two big players there are . In the rural electric world, they were a company sponsored largely by co-ops, and the other one is DCSI, owned by , who has had some success in a couple of locations -- Pennsylvania Power and Light, in particular, recently-- you know, less dense suburban kind of applications -- a fair application for PLC. We are, by and large, a radio company and augment that with telephone and are happy with that from a technology perspective.

If you're asking -- are we going to get into the power line carrier business, I would say at this point we have no intention of doing so.

OK, thank you.

Your next question comes from . Please state your affiliation followed by your question.

Adams Harkness and Hill -- a very solid quarter, guys.

Thanks, .

Thanks, .

A couple of quick financial questions -- first of all, do you notice that the warranty and other on the balance sheet had a nice little pop -- kind of unusual historically. What was driving that? Did that have something to do with the LineSoft acquisition?

Yes, it did -- about 3 million of the 5 million pop was because of LineSoft and about 2 million was due to primarily some re-classes from short-term to long-term warranty that had to do with Itron exclusively.

OK, great, thank you. A couple of other quick ones -- on the product development expense, though up year-over-year, actually dropped about 900,000 sequentially off the December quarter. Was the drop in the anticipation of the increase in product development expense you'd be acquiring from LineSoft or was a project you were working on-- kind of-- roll off? Could you kind of give the drivers behind that drop, please?

Sure, it had nothing to do with anticipation of LineSoft. There were two causes that I mentioned in the comments. One had to do with high material costs in Q4 that were not repeated in Q1 pertaining to product development, and the second had to do with completing certain phases of product development in the fourth quarter, which meant that they weren't continued in the first quarter of this year.

So kind of apples-to-apples basis, not including the additional product development expense from LineSoft, that 7.5 could be looked at as kind of a run rate from there and not an artificially low number?

I actually think it probably is a little on the low side, , because we've talked a number of times for the past couple of quarters -- R&D, as a percentage of revenue, was 12 percent. We really target that closer to 13 percent.

Yeah, , LeRoy here -- a little color on that. That expense sort of lays out in three categories -- people that are Itron employees, as Dave alluded to, it is material expense, and every once in a while, we will have a big material expense in the quarter for R&D if we're having to acquire some materials to build prototypes, and the like, with. The third one is something we try to do as a matter of policy, which is contractors, so that we can flex our technology workforce as much as possible without having to have too much permanent staff sitting here.

Sure, great, and final question -- the international business -- would you give an estimate on when that might be able to turn operationally profitable?

Well, we're certainly not pleased that it turned unprofitable in Q1, and all of the good folks in the international group are completely understanding of that. We have routinely a higher level of tolerance for international, as their area revenue depends-- those revenues can be incredibly lumpy. We had a couple of big orders that we were looking for to push out, and we think into the latter half of this year. So we certainly look for the second half of this year to turn back positive, and are working that issue real hard, both with , our vice president and general manager of international and all of his people.

Great, and just one final one -- any comment on the competitive landscape out there? There's been a few changes at Schlumberger and maybe some comments on some of the smaller competitors, whether you're seeing them a little bit more out there in the market?

Well, I'll start with Schlumberger -- yeah, lots of competitive stuff going on-- or lots of change going on at Schlumberger -- that's sort of a way of life there. Frankly, they've been some quiet, probably trying to choke down the absorption of and other acquisitions that they've done. So we still feel them in the marketplace, but they haven't-- certainly they haven't been too much of a factor of late. I think they're sort of changing direction a bit. We're watching that with interest. There's a lot of activity in small players in the market. Whether it's ones we've talked about before -- Nexus, Hexagram, , in other words an announcement recently on the C&I front by a company called . There's just-- you know, a lot of people are looking at the marketplace, they're looking at what appears to be a higher level of activity, and it's interesting. You know, as the energy scene gets more press and becomes more topical, the whole idea of better metering and looking at meter reading in order to get the information people need is very much on a lot of people's minds. We're seeing a lot of activity in the landscape right now.

Great, thanks a lot.

Your next question comes from . State your affiliation followed by your question.

Credit Suisse First Boston -- good afternoon, and I'll apologize if my voice fades out here. Just a few quick questions on the numbers -- $2.6 million in capex in the quarter -- can you update us what your expectations are for capital spend this year?

Roughly four times that.

OK. Secondly, the cash flow from operations that you cited -- is that before or after the impact of working capital changes?

That's inclusive of working capital changes.

OK, and the last one, I just want to probe a little bit further -- just to revisit the question about margins and particularly in the electric systems business and also in your water and public power business. Both of those revenues from those businesses were down substantially versus the fourth quarter, yet you did post significant increases in electric systems, but, conversely, it did drop in watt power, and I'm just trying to get some further insight into what trends might be accounting for those .

, this is Mima. In water and public power, in particular, as a number of those new contracts just started up, there's a heavy component of installation and project management revenues associated with those, and clearly we earn much less margins on that piece of the business, and so that is what's impacting the water and public power margins. To be honest, on electric, I'm not aware of anything in particular. I'm assuming we just had some mix changes in business during the quarter, depending on customers and volumes, as we do from time to time.

And let me emphasize that. , you used the word "trend," and because of the fluctuations that we have quarter-to-quarter, one can deduce trends when there are really not trends but merely fluctuations and primarily in mix, which is what Mima mentioned. There can be mix changes as to customer-to-customer or, more importantly, from product-to-product or type of endeavor -- hardware versus software versus installation and implementation. So we have to be careful ourselves, as we stare at the numbers, not to think that there are trends when there really aren't trends but just changes in the mix of business.

OK. Do you have a-- is there any change with respect to the products that you may outsource from manufacturing from what you're doing currently?

, LeRoy here. No, not really -- we, by policy, outsource all of our low-volume stuff. We'll continue to do that. We are currently not outsourcing any high-volume products, but we are continuing to look at that toward the latter half of this year, if our volume needs growth and, as well, to just begin that process as a learning process.

Great.

That's about it.

Let me mention one thing that is a trend. We referred to it in our comments this quarter as well as last quarter, and that has to do with increased manufacturing efficiencies. As we produce more, we've gotten more efficient, and so, in general, there has been that trend, and, indeed, we do have lower standard cost this year than we had last year.

OK. Just a final question -- with respect to your suppliers, have the quoted prices that they've been showing you shown any change for the last few months?

Yeah, we're beginning to see a bit of firm-up on pricing and extension on deliveries. So, frankly, our supply chain is having to pound even harder than they have been for the last year or so, but we're feeling OK for this year but, clearly, as we go into next year, we're going to see some higher component prices, no question.

Great. Thanks very much.

And we wish you a speedy return to health.

Our next question comes from . Please state your affiliation followed by your question.

JP Morgan, good afternoon. I have a follow-up on earlier question about water and natural gas revenue growth. How do you see the revenue contribution from the different business segments trending over the next couple of years?

Well, clearly, even though water and natural gas is tilted upwards, , we're going to continue to see, for at least a couple of years, I think, the electric business unit dominating our revenue line. As we look out farther, I think that will continue as a trend. From a business unit perspective, as I've said a couple of times, we do look for international to become more significant because it's a big world out there, but I think for the foreseeable future, electric will lead the way -- just sure of that.

Then, can you talk about your manufacturing capacity utilization? Are you beginning to bump into the maximums?

We did some work this year, which is ongoing now, to put about another 20 percent capacity in our factory in Waseca, Minnesota. So we are not worried about capacity at this point. We are good, well into next year from a capacity perspective. Again, frankly, a nice part of our production, particularly on the electric side, which is nice, is outsourceable, should we want to do that.

And then, I guess, the last question that I really have is can you talk briefly about what kind of role you see acquisitions playing in your long-term growth strategy?

Sure, great question. As we look at Itron's growth strategy, we continue to spend a lot of money -- 13 percent of revenues -- on product development with about 60 percent of that aimed toward future products that no customer has seen today. So we look for organic growth in that regard, but, as well, if we're to grow at the rates we want to, we're going to have to do non-organic growth and acquisition jumps right into that. So we are actively, as we have been for over a year now, looking at acquisition candidates. LineSoft was the first major one, but it certainly will not be the last one as we continue to try and build the stream of value we bring to our customers and to our shareholders.

Thanks a lot. Thank you.

Yup.

Your next question comes again from .

Thank you. Just one follow-up question -- I was just wondering if you could give us an update on-- I know there's some AMR legislation that was floating out there. I was just wondering if it made any progress? Is it still offering tax credits or incentives and what the status of that is?

, the legislation is still out there, and it has gotten really embroiled in the entire energy legislation package. I won't hesitate to guess whether or not that's going to continue to go forward, but right now it is clearly bottled up, and largely over the brouhaha about whether or not the drill in the Alaskan Frontier. It's still there, it's still being considered, it may be brought back up if it doesn't pass in its current embodiment, which is sort of bundled wrong with a bunch of other stuff. Your guess is as good as mine if that's going to pass.

Thank you for the update, LeRoy.

Sure, .

Your final question comes again from .

Thank you. I believe, roughly, a year ago, one of the things you folks mentioned on the conference call was-- and I may not be terming this correctly-- but the gateway to the home. Could you bring us up to speed where that stands?

You bet, -- great notes. Gateway has been an active program on a number of fronts with Itron for over a year now. Some of that is a silicon-based development and other of it is development that is more, let's say, interface-based to consumers. We have a couple of ongoing trials out in the field. We look to put about another handful of trials out into the field this year. In many ways, that is paying dues and growing potential, probably, for the '03 and '04 timeframe. We think that having a gateway in the house that allows the consumer to receive, over the Internet, information about how their using energy is going to be important for some utilities. Utilities are telling us that, so we are doing work in that area. We don't expect any significant amount of revenue from that front for this year, for certain, and, likely, only a minor amount of revenue next year as well. Certainly, it's a futures prospect for us, and we're guarding that future well.

LeRoy, if I may, ask you to follow up or to follow up on the acquisition front -- there was a question asked, and you certainly have made the LineSoft acquisition, and, Rob, you're embroiled in that integration -- are you folks of the opinion that you can proceed with an additional acquisition right now? Or are you simply saying you can proceed with discussions and you still need more time to integrate LineSoft before you would execute upon a transaction?

Bill, let me say that one of the things we haven't talked a lot about on conference calls is people development. We have spent a good two years now not only turning the organization around but, as well, putting structure and people in place so that we can begin to build a management team and a breadth of, I think, talented managerial people that could pick up a gauntlet of an acquisition thrown down. One of the reasons we put in Rob in at LineSoft is because it was close and so he could bifurcate his time in two directions, but we've got a number of people within the scope of LineSoft-- or within the scope of Itron, and some people within the scope of our newly acquired LineSoft that could pick up the work of an acquisition.

So -- to answer your question -- would I hesitate to do another acquisition quickly? No, I would not. It has to fit the filter of being able to be profitable quickly if not immediately. It has to fit the filter of being vision-consistent, optimizing the delivery and use of energy and water. We have to be able to manage the enterprise, but I wouldn't hesitate, and there's about a half a dozen people around the room that aren't strolling out, so I think we're OK.

And, finally, did I hear earlier that some of the LineSoft-- I'm changing to LineSoft now, the financial side -- the amortization of intangibles that the average life is about three years-- did I hear that there is accelerated amortization being more in year one than there will be year two and year three?

Yes, that's the effect of it. What we're doing is amortizing the pieces according to the after-tax cash flows, and they're more front-loaded pertaining to the pieces. So there's 2.8 million this year, and there will be a lesser amount next year and a lesser amount the year after that.

And so when we talk about LineSoft being slightly dilutive this year, and I haven't heard you folks change that guidance, so I'm just going to roll with that assumption, part of the reason that change is to an accretive next year, it is simply the bookkeeping aspect that amortization will go down next year?

No, , when we're talking about LineSoft being, you know, breakeven to slightly dilutive this year and accretive into next year, we are ignoring, clearly, the in-process R&D charge as well as any amortization of intangibles. We're talking on a pro forma basis.

OK, and I'm actually thinking about excluding the in-process R&D also, but including the month-to-month amortization of intangibles that will take place this year -- the 2.8 million and the smaller numbers next year and the year after. Am I looking at this differently than you folks?

Yeah, no, we are-- you are looking at it differently. We're talking about LineSoft being a breakeven this year, not counting the software amortization, and in all the conversations I've had with First Call, they are looking at basically reporting at least the estimates by the analysts, not counting amortization as well, to provide for comparability for all those companies out there that have had to adopt FAS Number 142.

Thank you.

At this time, ladies and gentlemen, if there are no further questions, I will turn the conference back to Ms. Scarpelli to conclude.

Great, thank you, everyone, for joining us -- lots of interest, lots of good questions, and we look forward to talking to you all soon.

Ladies and gentlemen, that concludes your conference call for today. If you wish to access the rebroadcast of this conference, you may do so by dialing 1-800-428-6051 and for international callers, the number is 973-709-2089, with a passcode ID of 236630. Thank you all for participating and have a nice day. All parties may now disconnect.