Itron Inc (ITRI) 2003 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Itron, Q2 2003 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded 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 would now like to turn the conference over to Jemima Scarpelli. Please go ahead, madam.

Thank you very much. Good morning everyone. Thank you for joining us. With me here on the call today is LeRoy Nosbaum, our Chairman and CEO; Dave Remington, our CFO and Rob Neilson, our President and Chief Operating Officer. We have a lot of exciting things to talk about today, the acquisition of Schlumberger's Electric Meter business and another good quarter of financial result. However, before we get to those, I do appreciate your patience as we review the Safe Harbor statement and pro forma disclosure. Our press releases* issued yesterday include predictions and estimates about our future results that are forward looking. In addition, on the call today we will be providing additional detail and information that may be considered forward-looking. The forward-looking information we are providing is based on our best judgements* and expectations, as* to what the future holds and is subject to a number of risks and uncertainties such as timing for closing the announced acquisition, rate of* customer demand for our products in particular the timing of large orders, the outcome of the PL, or negotiation effort associated with the Benghiat litigation and the number of other factors. We should review our 10-K for the year ended December 31st 2002 as well as our first quarter 2003 10-Q for a complete disclosure of risk factors. Itron does not undertake any obligation to update or revise forward-looking statements although we may do so from time to time. I also want to point out that our earnings release includes pro forma information and that we will also be discussing pro forma, net income and EPS in our remarks today. We believe these results provide* useful information in terms of enhancing the overall understanding of our current and future performance. Pro forma results are one of the primary indicators that we use for evaluating historical result and for planning for the future. And these* should be viewed in addition to and not in lieu of GAAP results. A schedule reconciling GAAP to pro forma is included as an attachment to this release and is available on our website at "www.itron.com". I'm going to start our call today with a review of financial and operating results for the second quarter. And LeRoy will follow that with some remarks and comments on the acquisition of Schlumberger's Electricity *Meter business. Now, let's* turn to our review of financial results for the quarter. As our financial results reflect for Q2, we have another very good quarter with revenues and earnings coming in at the high-end of our expectations and slightly better than consensus estimates. Revenues for the second quarter were 80.3 million, that's up 11% from Q2 last year and up about 7% over the previous quarter. For the first 6 months of 2003, revenues were just under 155 million reflecting a 15% increase over year-to-date revenues in 2002. A higher revenues in 2003, both for the quarter and year-to-date, are primarily being driven by higher sales of Automatic Meter Reading Systems or AMR and by hand held meter reading system upgrades. Our AMR unit shipments increased 8% during this quarter compared to Q2 last year. Year to date they're up 9%. So far this year, we have shipped a little more than 6,000 new hand-held computers for meter reading systems, about half of those in Q1 and half in Q2 resulting in a nice increase in revenues for both the quarter and year-to-date period this year compared to last year. And many of those hand-held computers were radio equipped which boards well for AMR meter module shipments to those customers in future period. Also contributing to increased revenues in 2003 our software and services revenues from two acquisitions that were not included in the 2002 period. Those being RER, our forecasting and consulting business which we acquired last October and Silicon Energy, our Enterprise Energy Data Management software and services business which we acquired in March of this year. Offsetting those 2003 revenue increases were lower installation revenues for AMR systems due to completing several large orders where the customers had contracted* with Icon to do the installations on their behalf last year and lower sales in 2003 of our commercial and industrial meter data collection software systems. As we indicated in our release, we are lowering our expectations for revenues for 2003, by approximately 10 million and that's primarily to reflect that orders for our Transmission & Distribution Systems business, TDS, are still taking a long time to close. We have seen lower TDS services revenues, so far this year, for the joint call and engineering consulting services that we provide out of that group as a number of utilities have delayed those projects due to budget constraints. Year-to-date TDS software revenues are actually up slightly and we have recently closed to smaller TDS software license orders. However, we have not closed any new sizable deals, as software purchases continue to be pushed out given prevailing economic condition. Now, clearly that's disappointing in the short-term. But we remain very confident about the longer-term opportunities for our TDS software business, given the cost savings that our customers using these products are experiencing and given a very nice pipeline of TDS opportunities. New order bookings were 41 million during the second quarter and that's down slightly from 45 million in the second quarter last year. However, keep in mind we had unusually high new order bookings in the first quarter of this year and as a result year-to-date, new order bookings totaled 101 million, which is up 22% from new order bookings in the first half of last year. This week, we signed a large AMR order with one of our long-term hand-held* systems customer's Cascade Natural Gas, valued at approximately $11 million. And we're also awaiting documentation from the city of Houston for a follow on AMR orders there worth approximately 6-*7 million. The city council* unanimously approved at their June meeting, the continuation of that AMR project but since we don't have the documentation yet, its not yet considered a booking. The timing of just those two orders early in Q3, as opposed to late in Q2*gives you a feel of how bookings in any given quarter, can very significantly depending on the timing of a* large order on one side of the quarter or the other. Total backlog was a 173 million quarter end* down from 203 million at the end of the previous quarter. Total front backlog was 79 million down from 102 million at the end of March. And as many of you know, that trend of lower backlog in the first half of the year is typical of the trend we usually see during the year for backlog, related to our meter reading businesses. Gross margin was 49% sales tax in quarter, comparable with margins in the previous quarter but up from 47% gross margin in Q2 last year. The higher gross margin in 2003, coming primarily, from continued improvements in hardware margins, due to changes in product mix, higher manufacturing volume and lower component prices. Looking at operating expenses, we do see some significant increases in 2003, compared with prior year period. Largely, due to the core acquisitions we have completed since March of 2002, where in the near term incremental spending is higher as a percentage of revenue than what we have been experiencing in our core businesses. In total, sales and marketing, product development in G&A were 36% of revenues for the quarter in year-to-date this year, compared with 34% for the second quarter last year and 32% year-to-date last year. In addition to the acquisition, spending in G&A is up in 2003 by about $800,000 for outside consulting related to Sarbanes-Oxley compliance and due to legal costs associated with the Benghiat patent litigation. Intangible asset amortization expense increased 2.2 million in the second quarter of this year compared to Q2 last year and increased 3.8 million year-to-date this year compared to year-to-date last year again as a result of acquisition. Net interest expense was comparable for the quarter in year-to-date periods in 2003 compared with 2002, but it resulted* from different items. Net interest expense in 2003 was largely due to the 50 million in debt we brought on to finance a* portion of Silicon Energy acquisition in early March. Net interest expense in 2002, came primarily from the 53 million in subordinated debt that was converted to common stock in Q2 of last year. For GAAP purposes, we had net income of 4.2 million during the quarter compared with 6.3 million in Q2 last year. The decrease in GAAP earnings coming primarily from the 2.2 million increase in intangible amortization expenses and partially from the higher operating expending from acquisitions. Year to date, GAAP net income was 7.1 million in 2003, and that compares with 3.4 million last year. And keep in mind the GAAP results* last year included 7.2 million of in-process R&D charges related to an acquisition, while this year in-process R&D is only 900,000. Pro forma net income in the second quarter of 2003, which excludes $43,000 in restructuring charges and 2.8 million in intangible asset amortization, with 6.1 million or 7.6% of revenues. And that's down a bit from 6.5 million or 9% of revenues* in Q2 last year. The decrease as a percentage of revenue coming from operating expenses on acquisitions came higher as a percentage of related acquisition revenues. Pro forma EPS was 28 cents for the quarter compared with* 29 cents in Q2 last year. Year to date pro forma net income of 12.4 million compares to 11.8 million last year and year to date pro forma EPS was 57 cents, which is up from 53 cents in the first six months of 2002. Turning to the balance sheet and cash flows, our operating cash flow for the quarter was 1.5 million, which is down considerably from 15 million in the second quarter of last year. Let me explain the two primary reasons for the difference. During the quarter, we completed negotiations with Duquene Light [ph] on the long-term warranty and maintenance agreement* we have with them related to a network based AMR system. Changes in the scope and services under that agreement resulted in a payment bias to Duquene of $4 million. That payment did not impact operating results as there was charges to an accrued loss that we recorded for that contract back in 1999. However, it did reduce operating cash flow for the quarter by 4 million. The other item impacting cash flow during the quarter was that we had a high amount* of our shipments in June, which resulted in the 9 million increase in accounts* receivable during the month. Year to date, cash flow from operations was just under 10 million compared to 21 million last year. Adjusting for the increase in receivables, which we believe, is temporary and the Ducane payment gets us to a year to date operating cash flow of approximately 23 million, which is very comparable with cash flow in the first six months of last year. With operating, we do believe that operating cash flow on the second half of the year is expected to be much stronger than the first half, particularly from accounts receivable and we believe we're still on track this year to generate annual operating cash flow in excess of 40 million. Property plants and equipment additions were 2.8 million during the quarter and our 5.5 million year to date, which is very comparable with what we spent in the first six months of last year. During the quarter, we made our first quarterly payments on the term loan that we brought on in March to partially fund the Silicon Energy acquisition and that payment was just under $4.2 million. Cash and cash equivalents were 9.9 million at the end of June down about 3 million from the end of March. Accounts receivables days outstanding DSOs was 61 during the quarter, and that compares with 66 last quarter and 57 in the second quarter of last year. Inventory turns increased to 5.7 for the quarter, compared to 5.3 in the March quarter and 4.4 in the second quarter of last year. So in summary we're very pleased with our second quarter financial results, this is the 14th quarter in a row, where we have either met or exceeded estimates. We're on track for a good second half and overall very good year in 2003. Let me now turn the call over to LeRoy Nosbaum for a discussion of our acquisition of Schlumberger Electricity Meter business.

Thanks, Mima. Good morning everyone. Pleased to have you joining us at this early hour. A good quarter. In the light of what's going on in the utility world, we're well pleased with it. We're not pleased at TDS bookings are still lagging, as Mima talked but we're pleased with the effort at TDS and we're pleased with customer interest. As Mima mentioned earlier, the customers that have implemented our TDS solutions are seeing great results. Before I talk about Schlumberger, I'd like to mention just one example of that. A good example is CenterPoint Energy. We begin implementing our line design software late last year. We began experience benefits just two months after the contract was signed. And so far we've seen 20% material cost savings from their standard design, which is double the 10% target in our business case. Well, as far as CenterPoint is only measuring savings and materials, we anticipate additional labor savings as well, which means if the 20% savings figure is likely conservative. We remain comfortable with our long-term prospects for our TDS lines in business. Utility software spending will turn around. We look for that to begin to happen next year. We have a strong pipeline of interest for our TDS products; and as I've mentioned, we have solid demonstrated cost savings on those products. Just to touch briefly on other acquisitions activity and results for both RER* and silicon energy are tracking to our plans for them for the year. Our workforce management solutions are slightly behind plan, but we are delighted to have just received the large order for our workforce automation software, a 200-seat license with an electric utility in Canada. You'll see more about that in future. Let me emphasize again, in light of what has* been a tough year for utility spending, Itron is having a very good year. Now let's turn to Schlumberger. Like yesterday, as you probably all know, we announced that we are trying to purchase agreement with Schlumberger to purchase their electricity metering business for $255 million. This is an exciting opportunity that we have been working on for sometime. But we see this acquisition as a giant step forward for Itron, for our customers, for our people, for our investors, as we move forward on our vision to help utilities and their customers optimize the delivery of energy and water. This acquisition brings to Itron a steady and growing revenue stream. Great cash flow, a balance to our more variable software business; but it makes Itron even more meaningful in the minds of our utility customers around the world. Itron is now clearly in the business of data creation and knowledge provision for the utility of today and the utility of the future. We now bring together the data, the applications, the management techniques to provide our customers the knowledge they need to run the delivery side of their business right. Little bit about the details. This is an all-cash deal with Bear Sterns acting as financial advisor to Itron and providing the financing needed for the acquisition. We are planning on replacing our existing revolver in term loan with the new revolver in larger-term loan and adding other new debt. We are also considering a modest equity portion but have not made that decision yet. We expect to raise the total of $365 million; 101 million of which will be used to replace our revolver and pay off the current balance of our existing term loan. The 50 million available for additional borrowings or letters of credit. We are comfortable with this level of debt. As it combines, the EBITDA for both companies would have been approximately $80 million in 2002. This acquisition is expected to close as soon as Hart-Scott-Rodino approval is obtained and other customary closing conditions in that. We look forward to closing the transaction in late Q3 or early Q4. Let me now give you some details as to what we're buying; and then when we finish, we'll finish with some comments on the logic of the deal, and how it fits with our overall strategy and vision. Itron will be buying electric meter business of Schlumberger in the US, Canada, Mexico, the Caribbean and a 51-percent joint venture in Taiwan. This includes the large 3*17,000 square foot manufacturing facility and in Okkony [ph] South Carolina; an assembling facility in Three rivers, Quebec;, the service center in Regina, Canada; a small integrated circuit design facility in Mouroge [ph], France; and the joint venture operation in Taiwan. We are acquiring a leading provider of electric meters in North America with approximately 30% of the installed US market. We are also acquiring a leading solid-state residential electricity meter in-production today with over 5 million units sold. Itron will be getting a very steady, modestly growing revenue stream that in '02 was $229 million in '02 with an EBITDA of $33 million. We expect this transaction to be slightly accretive immediately. Itron will be gaining approximately 1,000 very talented and successful people that have built a very successful business. To avoid confusion, let me say a few words about what Itron is not acquiring. Itron is not purchasing the fix network business formerly bought from Cellnet and the Utilinet business formerly bought from Metricom. Both of those businesses will remain with Schlumberger Semi. Itron will however for a transitional period perform for Schlumberger Semi, on track manufacturing and deep over care on both the Cellnet and Utilinet products. This acquisition is strategically synergistic with our mission of optimizing the delivery and use of energy. It extends Itron's position in the data arena from collection, management and application down into data producing, creating a more complete value chain for our customers and a tighter link between meter data and the use of that data across the energy market place when combined with Itron's other knowledge-based software and services solutions. This is particularly important in our electric AMR business. With the advent of solid-state meters, more and more of the fundamental AMR product is being absorbed into the electronics of* the meter. We've talked about this before on other calls. Over time, it's absorbing the AMR into the electronics or the meter will cause the* markets to move away from separate AMR marginals. For several years now, Itron has been evaluating a number of strategic directions in anticipation of that shift* in our electric AMR business. We fundamentally look at two options. Simply continue licensing our technology to electric meter manufacturers or get into the electricity metering manufacturing business. But the shift in our strategic focus Schlumberger decided earlier this year to the best itself of their electric meter business. A business I personally know very well as I had worked there for 20 years. This created an excellent opportunity for Itron given that they are one of the electric -- the leading electric meter manufacturers in North America. Clearly* this acquisition brings us some important market questions, will* Itron continue to do this business with other electric meter manufacturers. And once this deal closes, will our meter group continue to embed other vendors AMR technology into Itron meters? The answer to both is 'yes'. Itron will continue to license our AMR technology and actively do business with other electric meter vendors. As well, we will not only be willing to embed other's AMR technology into our electric meters but very willing. And our customers will want, *a variety of choices to meet their needs and Itron committing to be an open systems provider offering solutions that are right for our customers. This acquisition is also likely to raise another market question. As Itron turning away from its software and services strategy shown by the previous four acquisitions, the answer to that question is an, emphatic 'no'. We still very strongly believe in the long-term growth potential of our software business. Itron's solutions and vision are predicated on a more global application of metering and other data and the knowledge that it can create. Customers take that data and seed it into smart, analytical systems, they can begin to predict load flows and load growth. They can begin to predict load flows and load growth. They can begin to better understand how their delivery systems work now and how to make those systems even more efficient and reliable in the future. They can better design programs that fit their business objectives and meet their customers' need. That's what our software and services businesses are all about and it all begins with data. We are* to say at least very excited about this transaction. This acquisition creates exciting opportunities for our utility customers, for extending the value of energy data to greater integration of data collection management and application. And for our employees and our shareholders, it will immediately enhance revenues, earnings, cash flow and is not dependent upon a complicated risky integration products and people, or there will be some synergies between the organizations and some cost savings we will achieve overtime. In general, the few businesses and organizations are quiet additive. This acquisition clearly takes Itron to a new plateau, about which we are very pleased. With that, I think we are ready to start taking questions either on the transaction or the quarter's results. I would also like to remind everyone that there is a rather lengthy Q&A about the transaction on our website.

Thank you, sir. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. And be sure to speak clearly into your conference room system. Did you have a question, please press "*" "1" on your push button telephone. If you wish to withdraw that question, please press "*" "2." Your questions will be taken in the order that they are received. Please standby for your first question.

Our first question in queue comes from Steve Sanders of Stephens, Inc. Please state your question sir.

Good morning. Couple of questions on the Schlumberger deal. I know you are not giving detailed financial information, but I just wonder if you could talk a little bit -- I'll ask these kind of together if you don't mind. About the historical growth* and margins for the Schlumberger side related to Itron. I know you made in industry comment but I wasn't sure that that was specific to the company, sort of a little bit of background on the history of the deal, the due *diligence. And then, what does the solid state meter business represent of their total, so that's kind of on the Schlumberger deal and then just on the silicon side of, I think 4.4, what was silicon and I think their backlog in 331 with 8, where do you stand on that now? And then I will get back in queue.

Steve, good morning. Thanks for the question I will start with the Schlumberger question, and let* others* add in. Historical growth -- historically the meter business drop back some years growth* at pretty odd percent a year or something like that. But if you look at the last 2 or 3 years, what you see is the growth rate is more like 7% and that has been driven some by AMR, some by - frankly, they had that the solid state meters and utilities or sort of moving forward technologically and we think that will continue for a bid at least.

History of the deal -- I'll try to answer that and I'm not quite sure what's your aimed at. I mean, we have off and on for a long time than familiar with Schlumberger, my own personnel involvement having worked there for 20 years. But in the last 5 or 6 years -- as all of you know, we do license technology, AMR technology, Schlumberger, we have worked with them in various ways in other capacities. So we know the people well, we know the company well. But we certainly know the product line exceptionally well.

We began a number of months ago now as it came clear, Schlumberger was going to or at least rumored* to sell Electric Meter Group which was fairly obvious giving the selling of the water and gas group before that. Thinking about what would happen if they came for sale, whether or not that would fit into the two strategies, I had mentioned of either getting into the meter business or in fact simply licensing technologies. This was an auction process. We participated in when it became formal and were aggressive in pursuing the deal realizing that this would be an excellent opportunity for Itron, not only to grow revenues but to grow bottom line results as well and very, very synergistic.

As we look at Schlumberger in general and we're going to be some cautious not only on these numbers but others Schlumberger numbers, as they are confidential and at this point at least we are precluded from releasing their data. We would hope to open up some data between now enclosed and for sure as we close this deal, we'll do a premier on both the solid-state Itron industry and Schlumberger some portion there. But if you look at Schlumberger's meter revenues, over* the last several years, they have gradually moved from being fundamentally based on Electro mechanical meters, to being largely based on solid-state meter production. And they have been very open in the market place about -- talking about the gradual lining down of their solid-state or of their Electro mechanical production in favor of our solid-state production to -where* if you look at last year and you look again at this year, you will see them largely, a solid-state meter producer. And I think, we have some --

Steve, let me answer your last question of 4.4 million we referenced for Q2 coming from RER and Silicon Energy. It's about 2/3rd Silicon Energy, about 1/3rd RER. We did sign some Silicon Energy orders during the quarter but nothing substantial. So their backlog is probably down a couple million, but again the pipeline there looks good and we are counting* on a good second half from Silicon Energy.

You also asked about the due diligence and we did, what we've done in other four acquisitions for legal reviews [indiscernible] out of Seattle. For accounting we've used a specialized group that is San Francisco, DNT M&A services. For environmental, we used a combination of Perkins ] and a specialized environmental consulting firm, where HR, our internal resources as well as Perkins CUE [ph]. For IT the same, with DNT as well, in pro-taxes, Perkins CUE and DNT M&A services. As we did extensive due diligence, we had a number of visits with management in Okoni [ph], South Carolina. We have spent a lot of time and I'm not looking forward to getting the bills.

Okay. Thank you.

Next question please.

Our next question comes from Paul Coster of JP Morgan. Please state your question.

Yes. I have a couple of quick questions, please. First of all the licensing revenues that you were previously realizing from, Schlumberger, how much were they and what happens to those moving forwardly right?

That the licensing revenues, Paul have been about $1 million year to date. Excuse me, about a $1 million per quarter, you know, clearly once we own Schlumberger's Electric Meter business, those licensing revenues will no longer be there.

Okay.

[indiscernible] will no longer be in expense to them either.

Right. What is the -- what do you see the impacts on pricing here moving forward. I mean seems to me that you've got some potential pricing power going into the back of this year and into 2004?

Hey Paul, one of the wonderful things about dealing with utilities is, generally you don't have a lot of pricing power. They are big enough to beat you up terribly though we are not anticipating or planning for any pricing changes at all.*

But nor are you obviously going to see any production synergies, since the overlap isn't that great, for gross margins?

[indiscernible]. Yes, let me answer that, we won't* see early on production synergies, because quite* frankly, both factory operations are very full* up nicely now. One place *that I am hopeful we can make eke *out some synergies in parts* purchases. If you look at the few electronics manufacturing facility, many of the parts are common, so we probably have already with this acquisition, established a little bit more leverage on our vendors, from the parts perspective.

Okay. So one last question, than I will get back in queue. But* really why not* the fixed network, why did you sort of, restrict the scope or was it restricted for you in terms of what was [indiscernible] -- I guess it relates that is why Schlumberger selling.

Okay. Let me trying to answer both of those, first of all Schlumberger did not offer for sale any of the fixed network business and *were quite adamit in there position, because they believe they have a long term business interest in what I'll call general system integration and providing in the broadest terms IT services for the energy industry, which includes electric and electric gas utilities. So just not offered, not sure, we would have been interested had it been offered but that sort of where it is. As to why is to Schlumberger selling the electric meter business, clearly that's a focus issue for them that has actually a couple of years track record now, they got out of the water business worldwide, they got out of the gas meter business worldwide. They got out of the electric business everywhere except in the United States and now they are getting out of the electric meter business and I think, you can find public statements by Schlumberger they are going to focus more and more on there [inaudible], oil field and gas field services *which they are also include IT infrastructure and so it makes sense if viewed from that* perspective.

Great. Thank you very much.

Thank you. Our question comes from Jarett Carson of RBC Capital Markets. Please state your question.

Hi, good morning. I want to get back to the current business hand in the international area was like it continuing to improve at least from a operating profit standpoint. Can you give us some details there as we know we started restructuring there late last year?

Last year. We're going to let Rob Neilson take that question.

Hi Jarett. Good morning. Let see international as you recall about nine months ago we started to restructuring effort that involved closing down some offices and changing some headquarter locations in Europe. And resetting ourselves in Central and South America and changing the* leadership of the group to Steve Helmbrecht. And I think, what you see now is* some of the payout from that investment. We got our spending in line we're starting to make attraction now on sales of the new products, the acquired products and we had a recent sale in Spain of TDS product, which was a big win for us, because of this their next generation and new generation technology. And we were seeing* a lot of us prospect activity in Australia, in Asia and in Central America, Mexico and in Europe on both software and our hand held businesses.

Going on to Schlumberger you touched on it a little bit cost energy is do* we see there the opportunity from a certainly this probably little back office opportunity but from a sales and marketing standpoint a particularly if your* into the utility is there the opportunity to extract some synergy's there in terms of consolidating debt on the sales force perspective?

Jarrett let me talked to that an obvious and good question for answer, to ask *. Let me start* with* marketing little bit this guys run very lean and one of those nice things about this acquisition is we're buying people who know how to make money and who know how to chase costs* on continuous basis. So we were very pleased with that. Their* marketing group is very thin* and so others is no obvious synergy their to question about whether and out we can find some synergies some sales forces. The frankly when we look at a lot and if you think about all of the acquisitions we've done over time, we've begun to seriously to load up our sales forces. So frankly as we look at Schlumberger, who has a very qualified group of sales people, who are well experience in the industry, we look at adding them as a very natural addition to our sales force calling on people, yes they do some what call on the same customers and in some locations the very same people. However, our guys have been spread quite thin, so we don't look for any particular level of consolidation here, although we might very well manage the group as a total. We do not believe, that we'll end up with too many salespeople.

Okay. On gross margins continue to impress its mix and is that in throughput higher* utilization, especially I guess since we're still in a headwind on the software side a bit. Can that continue to get better?

Yes. Jarett, this is Jemima. It's a combination of all of those things clearly* the volumes and the factor during the quarter were very nice. We continue to see great progress out of our Wasica Group in terms of getting cost out of the product, so those things combined contributed in very nice gross margins for the quarter, as well as some product mix. You know, as we've talked about before, we really don't think there is a whole lot more eke out on the hardware side. We continue to manage the eke a little here and there, but high 40% range -- 49% range is probably, we're not going improve too much upon that further.

Thanks. Finally, Dave do you have a range? Could you give us bit of range on where you think, say, the terms on the debt would be *from an interest expense standpoint?

No not at this point. We think it's premature do that. We talked about the possibility of a modest amount of equity, and to the extent that we have some equity, the other terms and conditions ratings on the debt will change. So we will share that with you at a later point in time. The overall borrowing will be about 315 million. LeRoy mentioned 365. He also mentioned that they're be $#50 million that would be UN-borrowed or available for later credit. We've mentioned $80 plus million of combined EBITDA for 2002 that obliviously gets better in '03, and as we go forward, so you can take the ratio of 315# to 80 plus million of EBITDA and get a ratio of debt to EBITDA, but beyond * with no equity I should add, and that comes down with equity. Beyond that, we'd like not to talk about terms and conditions because at this point there's still some speculative.

Okay. Thank you.

Thank you; our next question in queue comes from Bill Bezlam [ph] of David Investment Advisors. Please go-ahead sir.

Thank you. I have a group of questions. First of all, to the Itron business, when you say TDS is it correct to think of that as being the line soft acquisition?

Yes, Bill it's correct.

Okay. Great. Thank you. And then lets jump to Schlumberger. The price versus the book value or the assets that you're purchasing?

That would be confidential information at this point. I've shared with you the 2002 EBITDA of 33 million and the price is 255. So you get into mid-seven times of* price to EBITDA. And you may have seen already in the prepared* Q&A that is towards the bottom end of the range of comparables. The comparables being those comparable M&A transactions and comparable trading statistics of comparable public companies.

And then relative to your goodwill, I'm assuming that there will be some goodwill that will come on the books?

Yes, there will be.

Okay. And then, LeRoy let me ask a little different direction of the question. For those of us who think of the meter as just being a clunky piece of equipment that hangs on the side of a home, walks us through your vision of what the meter will look like and do in a few years rather than just what it does today.

Bill, good question. The bulk of the meters that are sitting on the side of the houses today do nothing more than record consumption on a continuos basis. And the key to that is if you walk up to a meter in any given period of time all you know is the total consumption since the meter was put into service. And if you read the meter once a month, you can subtract the first reading from the second reading and come up with the monthly consumption.

You have, quite frankly no idea, when the bulk of the energy was used. You have quite frankly no idea about patterns and further more, if you want to read the meter you have to go up to it you have to walk* up to it. AMR has been helpful over time in that it has produced in a variety of forms whether it's hand-held their mobile or fix network the ability to read meters more frequently. As we look forward in time now, with that base line what you begin to see is electronics doing, what electronics has done virtually in every industry. It has provided* more data and more useful forms it has embedded applications to one kind or another along with the data collection. And in this particular business, it is also begun to make communication that much more easier and economical. So, if you jump up five years in time I think you're going to see all meters that are purchased being at least in* US, Canada* more advanced countries in the world. Solid state orientation* they will be able to tell you, how much energy was used everyday when it was used during those periods of time and will typically be communicating in one form and another whether something like a [indiscernible]* based mobile system as we sell or perhaps Fixed Network System perhaps connected to broad band if it's dragged in to your home in some form or fashion so more of a communication element. And the reason for that is very fundamental. As we moved forward in time our energy is being used generally energy prices are rising, as energy prices rise and consumers use more energy whether they are residential, commercial or industrial, we're going to *begin to control those costs. In order to do that, we have to begin to look at, how and when the energy is used, so that you can look at moving usage patterns, you can look at the famous [indiscernible]*, if we don't measure it how can we control it and then gross measurement of once a month is not sufficient. So all of those things become come into play. In this specific of this acquisition, it gets rather interesting and has for a couple of years now that the electronics of AMR has begun to be absorb into the electronic of the solid state meter. So instead of having two power supplies, there is one. It's better to two circuit boards. There is one, instead of two Microprocessors *there is one. So as we move forward in time, we will not only see those kinds of reductions, we'll as well see, Silicon integration which were all quite familiar with. That's the reason why we have laptops now instead of room full of* the Univac[ph]. I think that answered your question.

And then, let me shift to one additional question relative to Schlumberger, once this acquisition has been completed, where will you still compete in addition to the old* cell net the [indiscernible] businesses?

With Schlumberger, we will -- on rare occasions at least now compete in that fixed network business, nowhere else was Schlumberger, as a corporate entity.*

Thank you.

Thank you. Our next question in queue comes from Gary Lanhoff [ph] of [indiscernible]. Please state your question.

Yes. Can you tell us with respect to Schlumberger, first half 2003, are revenues and* EBITDA ahead of or trailing last year.

I don't think, we should be answering that question at this point Gary, but let me say we're pleased.

Okay.

And it tends to be a very stable business that tends to grow a population growth with AMR demand on top of normal population growth.

Can you with respect to the last acquisitions of Silicon Energy, can you tell us where it is relative to the guidance that you laid out, when you made that acquisition?

Sure, Silicon Energy so far this year, we're seeing revenues from them of right around $4 million, our guidance for them for this year is 15, which leaves* about a 11 million for us to recognize between Q3 and Q4. You know, as we said last quarter, we had about $8 million in backlog, we worked that down a little bit this quarter, but we're still very confident with that $15 million from that group this year.

Okay. And last question is the timing of this acquisition related at all to slowness that you've seen, you talked about the economy in the particularly the utility slowing their* spending. Does that environment that hastened your decision to look at this business, and the opportunity that you've described and make that acquisition at this point of time, is it simply a function of Schlumberger strategic thinking?

Gary, no to the first part of your question that economic slow down nor the utility general mélange in terms of capital spending, either* one of those has caused *us to do this now. I think there's two things timing wise, one, as we've talked on this call and previous calls, the absorption of AMR technology into electric solid-state meters has been in our thoughts for some years now, actually three to be precise and Schlumberger timing here, I think, is more a matter of their* own internal refocus on oil and gas field businesses not an* economic issue at all in terms of the economic status of the world.

Okay. Thank you very much.

Okay.

Thank you. Our next question comes from Sanjay Shrestha of First Albany. Please state your question.

Great. Thanks a lot. Just a couple of quick questions here guys, you're talking about the Schlumberger acquisition to be slightly accretive immediately are you talking about that on the pro forma basis or the GAAP basis?

I will be talk -- its on a pro forma basis and obviously that as soon as the *acquisition closes.

Okay. Okay. Great and another quick question kind of follow up of the previous question about, you know, you guys have previously talked about kind of growing your sales through the software angles seems like now we're getting into hardware side of the business obviously a bit of deviance from your previous strategy and also - to the electric side of business, its up only moderately. Can you actually talk a little bit more about that what's really kind of resolve that in the change of that strategy with the company?

Sanjay, that's a reasonable question. Let me make a couple of comments about it.

Great.

If you look at us* over time clearly in the last couple of years we have been focusing on software acquisition. And the focus on those software acquisition is driven by.

Yes.

What we think is very clear, utility move to being able to better control our operations and take data and can drive new applications and knowledge. As we look back towards now the Schlumberger acquisition, your general thesis is correct. We have focus in this acquisition toward hardware, so* data creation. So we think that data creation is sort of the start of data applications and knowledge provision. For us, the synergy with our existing business is one of the things that drive that. The other thing is the two really pull each other. If you look at the hardware side as we begin in meters to develop more and more information in a more timely manner, we create a lot of data.

I agree with* that.

That data has to be used, has to be applied, has to be manage and that drives the software side of our business. So as we began to see meters pushing out more and more data, we drive software applications, which is the other side of our business. So we think them very -- not only very synergistic but they also drive each other. I mean as we look at our business in general, we look at the hardware business, both the business we're in the AMR business the business we're acquiring, the* meter business is being very much generators of cash flow, very much businesses that are profitable today. As we look at software businesses we look very much at businesses that are growing businesses, businesses that are going to produce a revenue growth and earnings in the future much like our today's hardware businesses do. We also look at them pulling each other along in the synergies between.

Okay. That's fair. Now one other* follow-up again, kind of staying with the Schlumberger thing here. You guys are obviously not getting the fixed network from them. So, can you give us some update in terms of what's going to be the level of customer inquiry for your fixed network 2.0?

Frankly the level of customer increase generally for fixed networks is low.

Compared to other AMR activity. We have a couple of things going on fixed networks looking at -- we'll ill call surgical deployments.

Total deployments and that's about the level of activity.

Okay. Okay. Great. And one more thing if I may -- I don't know if you guys can break this down or not at this point. But, you know, out of the revenue run rate from the Schlumberger meter side, do you know what is the ball park contribution from the solid state needed for that?

We do but we are precluded from saying given the confidentiality agreement that we have with Schlumberger.

Got it. Fair enough. Fair enough. One last question that I need to be hogging the* call here and you know Mima you actually mentioned that you guys are pretty comfortable with the $15 million coming out of the Silicon Energy here and your backlog seems to be below $8 million and 1. 20 to 1. 25 on that pro forma, I guess is contingent upon you getting that $15 million from Silicon Energy for the year correct?

Well not necessarily I mean, obviously our business doesn't is a mix of several different business. So we're very confident that our earnings projections through the year. You know if for example, we were not to hit that $15 million Silicon Energy acquisition, we're confident that we'll make it up somewhere else.

Okay. Now with the decline in the software projections of about $10 million for the year you guys actually reaffirmed your pro forma guidance. Does that have any impact on your GAAP guidance for 2003?

No, it really doesn't. The GAAP guidance is still for somewhere more in the mid-80's that range.

Great. Thanks a lot guys. Really appreciated the time.

Well Sanjay this Dave Remington let me return your first question.

Yes sir.

The way you phrased your question whether there is a change in strategy from software services to hardware. I'm not sure I would say it in that way. We already mentioned that metering* has been in last strategic eye for three years or so.

Yes.

And all of the software and services that we had acquired over the last year plus [ph] has similarly been in our vision and our strategy for three years or so as well. And there has been a fair amount of serendipity with regards to each of our acquisitions LineSoft became available when it became available and Schlumberger as well. History could have unfolded up in the opposite direction. Schlumberger could have become available before LineSoft etceteras. And then people would tell you now you're switching from the hardware strategy to a software strategy. In truth* all of the above have been elements of the strategy to serve our customers with the data* value chain. And so we don't so much think of our strategies in terms of software and hardware but what is necessary to provide a full compliment of products and services that our.

Better connection.

Our customers *need on an end to end basis. Now we just happened to be hardware and software but that distinction is not a fundamental driver of our strategy.

You know that's fair enough. I appreciate that clarification. Thanks guys.

Welcome.

Yes.

Thank you. Our next question comes from Steven Colbert of JMP Securities. Please state your question.

Thank you. Good morning. First of all the company reported a number for hardware revenues in the first quarter. I didn't see that reported in the second quarter. Do you have that data point for us?

Yes. I think that our hardware revenues were about 72% of revenues for Q2.

And that was compared that's - that was in the first quarter. So --.

Actually it was 72% in Q1 it was 77% in Q2.

77% and what were they a year ago?

I don't have that off hand but I can get that to you later.

Okay. Thank you. Second of all in terms of the balance sheet. You said that there could be an equity component of this deal. But you were doing with Schlumberger what's your focus, what's your target since in terms of debt to capital to figure out how much equity *you had to make a part of this deal.

We don't tend to think of the capital structure -- the appropriate capital structure in terms of debt to capitalization obviously. That is a statistic that people use. We think more important is cash flow coverage and all debt is not created equal. For example right now we have a $50 million three year term loan in connection of the Silicon acquisition that has level principle payments over three years. That's a lot different than say seven year loan that has only interest only or has minimal principle amortization on a mandatory basis for the rest of the amortization been transfer to cash sweep. So the fundamental basis upon which we are proceeding in making our decision as to equity or not we'll have to be with the prudent level of cash flow coverage is given the variability of cash flow in our business. I can assure you as we approach that question we will be conservative *and not push the envelope we will do everything to manage the capital structure in appropriate manner.

Is there a target or range that you look at in terms of those cash flow coverage* that you want to maintain?

Yes. I would like to share it now because it has to do also with perceived variability and cash flows. And so we will in an appropriate time share the outlines of what we are planning in doing in a way of financing and what the perspective coverage's are connected with them.

Okay. And in terms of these numbers they have that you are acquiring [ph], can you comment in terms of what type of free cash flow or what type of capital needs to business might require?

What we said, in 2002, 33 million of EBITDA when we said that it is that fairly steady business that grows with the population growth plus because of AMR demand, we can extrapolate some from that. As to the capital needs I suppose at this point all we can say is they are not substantial.

Yes Steve. I think if you look at their business versus our existing business the capital needs from our plant manufacturing capacities all of that kind of things are actually quiet similar.

And the IT infrastructure is quiet similar, which is another big cash leader. And so the pictures do not changed much.

Okay.

And our CAPEX recently have been modest, it was $2.8 million in the second quarter.

That's been very modest. Just a last question here if I might. In terms of these software, cyber-house you said that [indiscernible] to a $4.4 million in software revenues roughly, two third to do with [indiscernible] energy, one third to do with RER, what about the team being in the removable site, is said that included in your software revenue numbers?

I no the two numbers that we put in the press release were just for TDS excuse me just for RER and* [ph] Silicon Energy. We are trying to get people comparative with what was not there previously. The revenues for work force management had just been minimal so far. As LeRoy mentioned the good news there is, we just signed* a very nice large* orders that we'll start to pick up in the third quarter, *but those have just been minimal.

And could you give us - maybe I missed the revenue number for line software for comparison.

*

We didn't but I can tell you that was very comparable with what we did in the quarter last year in this year we are actually a little bit ahead of where we were last joined to year to date basis.

Okay. Thank you very much.

Thank you our next question comes from Patrick Forkin of RockHouse Research. Please state your question.

Good morning. As part of the Schlumberger deal as I recollect Schlumberger had a license to either manufacture or license your urged technology. Did you purchase that back as part of this transaction?

Patrick, its LeRoy. Yes. They had a* license to embed our AMR technology in their electric meters and that comes with the deal.

Okay. so that...

provide in the business.

That's not an issue any longer.

That is correct.

Okay.

They will -- they will no longer be in the metering business *once the acquisition closes.

And they can't transfer those rights to anybody else?

That is correct.

Okay. On the - I am little confused on the state and about the deal being slightly accretive. I think you mentioned based on a question that was on a pro forma basis, my first question is pro forma for what intangibles or are* interest cost included in that and what are your expectations as* to the impact on a GAAP basis?

On a pro forma would be excluding intangible amortization only. So on a GAAP basis, we believe we will be slightly accretive, including absorption of all the interest costs.

Okay.

We've not however done the evaluation of which is an exercise in and of itself. So we don't know what the good will is what the intangible amortization will be, we don't know the size of the intangible assets, at this point we've can* ballpark it but the actual work is not been done.

Okay. Dave, the warranty reserve went down quite a bit since the beginning of the year. And I know there was some mention of a payment I assume that was to Duquene (ph) but is all of that decrease related to that cash payment or did any of that reserve make its way into the income statement?

Yes. Though the decrease in the reserve is related to the *Duquene payment.

Okay. Okay. And then last question kind of overall strategy with respect to the Schlumberger deal and I know there are a number of dynamics that you are dealing with here but LeRoy I think when we talk may be a year or so ago, you had characterized the need of business having lot of characteristics of being a commodity type business and your decision to* move forward here in relation to what looks to be slowing growth in the total backlog now as a 173 million and it looks like it hasn't been that low since probably the year 2000. And, you know, the software acquisitions LineSoft and Silicon Energy, it looks like for 2003 the growth there or meeting expectations is back end loaded in to 2003. How much does that decrease in the growth profile impact* your decision to buy the Schlumberger assets here?

Quick answer and lots to follow-up not at all. First of all let me go to the front end of your question, Patrick. Historically, I think meters have been relatively a commodity. They tend to be that for a couple of reason. Meters are not purchased on a project basis generally. They are purchased on a routine basis because new houses get built, old meters get replaced. And so the nature of the business, as always the most of what we have participated in the project businesses for a regular purchase business. So utility goes out maybe by 100,000 to 200,000 meters a year on a pretty routine bases.

So it has been much of commodity. That changed a little bit, as we started look more and more at AMR and that utilities began replacing older meters on a larger scale and doing a little project buy on meters. At AMR component, meter business is actually driven AMR -- meters growth for last several year as I mentioned early on from what had been like 3% growth rate in the industry overall something more like 7. So commodity, yes when you combine fundamental meters with AMR little bit more project buying than* what I called traditional commodity buying and certainly a little higher growth rate. As we look at the reason for buying Schlumberger the base question was that is that a function of slow down generally in our software* revenue and answer to that no. I mean we seriously have been disappointed with some of our software revenues from the acquisition I said that three or four calls now. You know there are something we can control and some things we can't. The general economic down turn and facility stopping of buying IT in general software specifically has really been into fore front in late '02 and all of '03. We project it will be here to rest of this year. So it's a tough year at software. We however, are very confident* in the software business and a general direction of our acquisition as we look towards the future in '04 and beyond, we begin to see some signs of that already. We see people such as the META group Cambridge Energy Research, underscoring our comments. We have quite an association with what I'll calls the large consultants IBM Global Services, [indiscernible] Accenture. They also are quite enthusiastic about our general vision and strategy. And we have as I briefly alluded to in our last conference call, undertaken a very large campaign or senior most executive level of utilities across the country.

Talking about our vision and strategy, and how it fits in with the utility of the future. I'm just delighted to say that we're now in front of* serious executives across the length and breadth of the US, talking about our vision, including our software frankly driven a lot by our software, and the applications we begin to bring the utilities today, and we will bring the utilities tomorrow, all of which stem* from individual parts and pieces of our software acquisitions but more importantly, the combining of those parts and pieces into some very special management capabilities and operational capabilities for utility. So Schlumberger was not a purchase* that was on the heels of all my God software is going where we thought it was. Schlumberger was completely complementary to that and, and I thought Dave made an excellent point. If you were inside us, and you looked at our vision diagrams and our strategy diagrams, you would always have seen a place holder for metering time just became right at this instant of time.

Okay, I appreciate that answer. One last question, what roughly, what percentage of the market for solid-state meters does this Schlumberger have, and are they still manufacturing their electric bill -- Electro- mechanical meters as well.

Last question first. Yes they are still manufacturing small amount of Electro-mechanical meters. I'm going to give you some counter - some numbers we're comfortable with largely derived on our own as Dave, and I think I said as well. We have some confidentiality* agreements that are somewhat limiting to this and I'll answer this a bit more broadly than* you asked. If you look at the meter market in general, last year they were something over all around 5.5 million meters purchased that's best we can estimate. There are sketchy industry details at best* from this we have to do some sort of gathering of facts from a variety of places. So 5.5 million electric meters in the US that were shipped. We have said previously that Schlumberger has a aggregate market share of 30% as on a year-by-year basis. We thinks that that's probably and have thought that that's probably where they end up. Relative to whether they are shipping solid state or Electromechanical they have been shipping more and more solid state meters over time and less and less electromechanical to where the solid state are certainly the lion's share of what they are shipping. That's sort of let's* you narrow in on the question, which we are precluded from answering directly.

Okay. Thank you.

Thank you. Our next question comes from Brain Adams of Children Investment Company. Please state your question.

Hi. I just wondering on the gross margins. It look like if you take Electric Natural Gas, water and international gross margins dropped quarter-to-quarter basis from 50% to 46%. So one I was wondering why it did drop of what does the corporate represent [indiscernible] kind of a swing factor. Thanks.

The corporate represent a number of things. It represents variances from standard. And we had some favorable variances from standard due to high manufacturing volumes, engineering change order, reduction in cost and purchase price variances that were favorable. But most importantly out of the roughly 2.6 million that's shown as gross profit on the corporate line a very large portion, a majority of that has to do* with the corporate warranty accrual that was moved from corporate to two of the business units primarily are water and gas. And so it looks like as preventive there was a year-to-year margin decline in gas and water but if you back out that movement of corporate* warranty to the business units, those two business units actually had an increase in margin on a year-to-year basis. We are thinking of changing the way we do that by the way because there is so* confusing. We do believe that accounting numbers inside and outside should follow the natural flow of the business. So we apologize that that may some confusing but behind it seems we actually had gas and water go up on the margin basis year-to-year.

Can you just give a little color than just to be able to do it on a apples to apples bases from a quarter-to-quarter movement on [indiscernible] electric natural gas, water.

I don't have that prepared right now. So I can't do that. There have --

Is there any material change in pricing.

No I guess that lead to something that we often say, which is quarter to quarter changes in margin reflect mix change customer like us to be more importantly product mix, with a particular customer we can therefore fall in to the trap of thinking that there are trends and margin that really not trends and margins that just happen* to be mix shift, that's particularly true, we can look quarter to quarter, we've to look at quarters over some long period of time to see trends.

Okay. So, for a new order, then that you're receiving, the pricing the pricing metrics* pretty consistent* out of prior year?

Since nothing fundamental going on behind those quarter to quarter variation in margins, we're not seeing any kind of shift in product pricing.

The only fundamental shift in terms of margins, as what we already talked about, which is better margins because of higher manufacturing volumes and some cost reductions through change in the design and lower purchase price, this where raw materials.

Thanks, a lot.

Thank you our next questions come from Eric Prouty of Adams, Harkness. Please state your question.

Great. Thanks. Could you guys a little visibility may be on some end market demand, what are obliviously performed incredibly well this quarter, any difference going forward, or is water going to *continue to perform a better than the other end markets?

Yes, Eric we continued to see great results out of both side of water and public power business unit we think, this is going to continue on the trends but in fact, we spent a quite a bit of time building up our distribution channel working with either manufacture in that group, and we're clearly studying to see the results so that we've -- that's new product releases over the last year that make it easier for smaller utilities to implement our products and again we think that trends going to keep on in that part of our business.

Great. And Jemima was there anything from Houston in the June quarter.

No. There wasn't as allot of you saw the city council* where in Houston did approve like June to go ahead, of them continuing the AMR projects that they have with us in Badger [ph]. But we didn't have much in terms of revenue from them in Q2 and we had nothing in Q2 from them in terms booking. We clearly expect to get a nice booking from them here shortly.

Great. And then a final question could you go through the economics maybe historically what's the price point of the solid state meter and then kind of going forward when you have that combine solid state meter, with the AMR functionality built in. Can you go through difference between that and, what an electrical mechanical meter, plus a AMR unit, would price out at*?

Eric, let me - somewhat reservedly answer that question at this point in time.

Sure.

Generally speaking, over *time solid* meter costs to build and prices had come down. They are not generally the same as electromechanical meters yet, I mean it look at electromechanical meter, haven't changed much in a 100 years. So you have long, long history of cost reductions and manufacturing automation, which quite frankly, probably in recent years has begun to turn around in terms of cost going up rather than going down as raw materials. Labor have gone up.

And having said that, generally speaking you don't see in the marketplace solid state meters and are going to adjust until a lot hours [ph] at the same price levels for Electromechanical. Over a time those two will converge. The real gain in the solid-state meter is when you put more functionality into it. Whether its time to use to demand or AMR, but at the end of the day you can exercise to look in for what so looking silicon is good for. Lots of functions integrated together on a piece of silicon and that cost less then doing it discretely where you will see the higher functionality product become less expensive because of that integration, and that has shown play out* really well in the area of commercial industrial meters where virtually no one produces in US today, electromechanical commercial industrial meter. And that the cost curve and the price curve on those were shown exactly that kind of trend. They were expensive solid state renditions to begin with they have got cheaper and cheaper over time and displaced the electromechanical product. So without giving you specific number and will come to a point in time when we're willing to give you some ranges something's like that. * We just can't do it today.

Alright. And just one final question as a follow up. Do you feel the utility industry is comfortable with the adoption of the solid state meter technology? Is it generally accepted out there or there is still some utilities on the side line that may be evaluating the long-term durability in costs of the meters?

Is that - great question easy to answer. The utility is most valuable customer no question is our commercial industrial customer, they now use almost exclusively on the on the new [indiscernible] basis or may be exclusive solid state meters. So relative to the worth of* product, the reliability of the product. I think utilities are very, very comfortable with solid state. Utilities by their very nature are slow to adopt new things. They deploy literally millions of devices every year, so they take a wait see and go slower. I think one of the great comforts that we have and that you all should have is a number I quoted* it in prepared remarks, 5 million solid state residential meters being shipped* by Schlumberger. That is badge* that no one else in the industry wears. They have shipped 5 million units, and they're out in the field, working well. Their customers are very happy with the going forward and buying solid-state product as BI-standard to the market we have seen growing confidence in solid state and we expect that to go forward.

Great. Thanks a lot.

Thank you, if there are any further question at this time, please press "*" "1" on your push button telephones. Our last question comes from Paul Coster of JP Morgan. Please state your question.

Yes, a couple of very quick question, what's the latest status on* Benghiat litigation and Jemima if you could remind me because I forgotten, why did the backlog, one why did you expect the come down?

Paul I will take the Benghiat and we'll let Jemima do at the backlog. A Benghiat is continuing obviously. Some of you may have noticed that, our motion to reduce damages was denied. Benghiat's claim for enhanced damages was denied. We have both put other motions in front of the judge, which he is looking at. Reply briefs are due by the end of this month on those new motion. I mean in general we're both positioning to narrow the issue on our side that the broaden it on theirs *. We look for this judge to move forward on this and in our option here Paul, are as they always have been. We expect the courts final judgment get this damn thing behind this and, we were anxious to do that if the judgment is a reasonable judgment.

Right.

If its not we'll appeal the thing and in parallel with that we are really our council is engaged with trying to settle the damn thing with Benghiat directly. And so its still goes on. Stay tuned. Wed would hope that the judge would bring this matter to law. At least the next level conclusion before much longer.

Well Paul in your question on backlog, we have historically booked more business in the second half of the year than in the first half of the year and that a trend that we seen for number of years now. Its quite honestly largely tight utility purchasing cycles and budgets patterns for them so again we do expect very much to see a similar trend this year on last couple of years backlog has gone down in the first couple of quarters and than it's come back up in the last half of the year.

Great. Thank you. A good conference call.

Thank you.

Guys let me give you a summary of the market and turn it to Mima to close.

As I said in my prepared remarks; we're delighted with the opportunity this Schlumberger presents to us. And frankly we delighted with the year. In the year in which economy has not been great as you're well aware. In the year in which utilities quite frankly have constricted capital expending the likes of which I haven't seen, maybe in my entire career, I'm an old guy. We done incredibly well, we're proud of what our people have been able to do and we're really looking forward to what this Schlumberger acquisition adds to us. You have been rightly so ask this for some specific details our numbers read electric meter market place in Schlumberger positioning there and well I don't apologies for not been able to give them to you today, it is a fact of non-disclosure. We clearly understand you going to need those kinds of details going forward so you can better look at us and judge I don't know the acquisition but our position in the electric meter market when this acquisition closes. We will prepare those. We will get them to you just as soon as we can do that. You've asked us some questions about financing clearly a big issue on this acquisition - it's large as soon as we can get that it's up to you we've off course understand why you looking forward and we'll prepare that as well. So we want to thank you today for some great call prepare some great questions and interest in re guides west coast thanks for the early on that [indiscernible].

Hi, yes thank you very much everyone we're appreciate your patience in indulging us for now an half through this morning, again there is a lot of to discuss to talked about today, but the call took little bit longer than the normal. I just a remind you both press release this as well as that pretty extensive Q and A on the acquisition or [indiscernible] on our website so thank you again for joining us we're look-forward to talking with you in the near future.

Thank you ladies and gentlemen if you just access the replay of this call may be do so by dialing 1800-428-6051 or 973-709-2089 with ID number of 299-315. This concludes your conference call for today. Thank you for participating and have a great day. All participants are now disconnect.

END