Itron Inc (ITRI) 2003 Q4 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Itron Q4 and year end 2003 earning 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 the conference up for questions and answers after the presentation.

I would will now turn the conference over to Ms. Scarpelli. Please go ahead, ma'am.

Good afternoon everyone, and welcome to Itron's fourth quarter and year end conference call. With me here in Spokane today is Leroy Nosbaum our Chairman and CEO, Dave Remington our Chief Financial Officer and Rob Neilson, our president and COO.

Before we begin today's call I do appreciate your patience as we review our Safe Harbor statement and pro forma disclosure.

Our fourth quarter earnings release includes predictions and estimates about our future results. In addition on the call today we will be providing additional information that is forward-looking.

This information is being provided based on our best judgments and expectations as to what the future holds and is subject to a number of risks and uncertainties such as, the timing of large customer orders, estimates for product warranty issues, timing for closing on the Schlumberger Electricity Meeting acquisition, and a number of other factors. You should review our 10K for the year ended December 31, 2002, as well as our Form 10Qs for 2003 for a more complete disclosure of risk factors. Itron does not under take 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 we will be discussing pro forma net income and EPS today in the call. We believe our pro forma results provide useful information in terms of enhancing the overall understanding of our current and future performance.

A schedule of reconciling GAAP to pro forma net income and earnings per share is included as an attachment to our press release and is also available on our Investor Relations Web site at www.itron.com, under news releases.

I'm going to start the call today with a review of financial and operating results for the fourth quarter and full year. Leroy Nosbaum will follow that with comments on 2004 and an update on the acquisition of Schlumberger's electricity meter business. At the end of the call, we will take questions from the audience.

Now let's turn to our review of financial results from the quarter starting with the bottom line. We had a net loss of 1.4 million for the quarter, primarily from the three unusual but significant items mentioned in our press release which netted to 9.5 million in pretax charges.

Pro forma net income for the quarter which excludes intangible asset amortization but not the unusual fourth quarter items was 138,000, or one cents per share. And that compares with 6.5 million, or 30 cents per share in the fourth quarter of last year. Full year pro formas earnings per share of 87 cents in 2003 was down about 20% from $1.12 last year.

Now let's take in greater detail about the unusual items in our fourth quarter results that produced those lower earnings numbers. We will start with the product warranty issue which had the largest impact is. In 2003 we began to experience higher than normal field failures for certain of our electric AMR modules. These are modules that had been in the field for well over one years time already.

After extensive testing and analysis we were finally able to trace the problem to a change in resin material from a supplier to our component supplier. The new material was used for approximately a twelve-month time frame before the supplier stopped using it. The product shipments with defective components are isolated primarily at four utilities.

In the fourth quarter we made an increase to our warranty estimates of approximately 8.6 million for this issue and that estimate covers all of what we believe to be our remaining estimated charges, material, labor and other items to go out and proactively replace sales units in the field.

That 8.6 million is approximately $3 million higher than we had estimated in our outlook a few weeks ago. In most of that increase since mid January relates to higher estimates for the field labor portion of the replacement work that we are going to do. That work has already gun and we expect to complete the replacements about midway through 2004.

Also included in the fourth quarter was approximately 2.2 million in costs that were in excess of revenues during the quarter for an AMR installation contract with one large utility. We have experienced very poor productivity on this installation in terms of field labor to perform the installs and we recently switched to a new third party contractor, which is enabling to us complete the project within a time frame that is acceptable to our customer. However, we now anticipate much higher installation costs than were originally budgeted. Included in the 2.2 million of costs in the fourth quarter is a forward loss accrual that covers the cost of the installation work that we will complete this quarter.

I'd like to be able to tell you that the amounts we have just discussed for the warranty and installation contract are final. However, given that we are using estimates for materials and labors costs that will occur over approximately the next six months, there may be some differences between estimates and actual charges. However, we would not expect those difference to be materially different from the numbers we are talking about today.

In addition while we are having good discussions with our components suppliers we have not yet concluded those discussions and we may so a slight adjustment based on the final amount of reimbursement as well as the form of reimbursement that we are able to agree to with our supplier.

Also in the fourth quarter we had a $500,000 right off of a minority investment in one company, and a 1.9 million impairment of our minority investment in another company. These impairments occurred in the fourth quarter due to changes in the business prospects for each of those companies.

Now offsetting the unusual fourth quarter negative charges was the reversal of approximately 3.7 million in management bonus and profit sharing that had been accrued through the first nine months of 2003. As it became apparent that our financial performance overall would be well below the minimum targets for bonus and profit sharing pay out.

In summary, these items netted to approximately 9.5 million in pretax expenses, or approximately 26 cents per share on an after tax pro forma basis. While these items are clearly very disappointing the problems encountered are highly unusual and not fundamental to our future business prospects.

Let's now move on to a review of our normal operating results for the fourth quarter and full year. Revenues for the fourth quarter were just under 80 million. 3% higher than fourth quarter last year with most of that growth coming from acquisitions.

Full year 2003 revenues were 317 million, for a year over year increase of about 11%. Half of the growth coming from acquisitions and the rest coming from increased automatic meter reading or A. M. R. business.

AMR unit shipments increased approximately 10% in 2003 over 2002. We shipped a little more than 4.1 million units compared to 3.7 million units in 2002. However, increased AMR hardware revenues were offset by lower installation revenues for meter reading systems and relatively flat sales for hands held meter reading systems. We did not have any customers that were greater than 10% of revenues in the fourth quarter or the full year 2003. However, by comparison we had one customer in 2002 that was roughly 12% of revenues both for the fourth quarter as well as the full year.

As detailed in our press release we had a very good year in terms of new order bookings in our water and public power market and our international market. However, new order bookings were disappointing in our electric market due primarily to the effects of several instances of extreme weather, a major blackout in the northeast and other utility specific delays related to capital spending.

As we cautioned last quarter our backlog might be down at the end of December depending on which side of the quarter certain business landed on, and in fact it was. Our twelve-month backlog at December 31 was 62 million. That is a decrease of about $7 million from the ends of September.

However, on a more positive note in early January we did close a large order with one electric utility worth approximately 21 million, all for shipment in '04. Now clearly had that order booked in the last week of December as opposed to the first week in January our backlog would have been up.

Gross margin was approximately 35% for the quarter compared to approximately 48% last quarter and 48% in the fourth quarter last year year. Full year gross margin in 2003 was roughly 45% compared to 46% in 2002.

As we saw in the first nine months of 2003 gross margins benefited from higher manufacturing volumes and lower component prices along with some changes in product mix and those benefits continued into the fourth quarter. However, they were overshadowed in the fourth quarter and for the full year by the unusually high warranty estimates and installation costs discussed earlier.

Now slightly offsetting that was approximately 1 million of the bonus and profit sharing reversal. The net impact of the warranty, higher installation costs, and bonus reversal was a decrease in gross margins in 2003 of approximately 12% in the fourth quarter and 3% for the full year.

In general expenses for sales and marketing, product development, and G&A increased throughout 2003, primarily as a result of the acquisition of two companies in the fourth quarter of 2002 and one company in the first quarter of 2003. G&A was also up in 2003 as a result of Sarbanes-Oxley compliance and the [inaudible] patent litigation costs. The reversal of bonus and profit sharing resulted in a decrease in fourth quarter and full year operating expenses of approximately 2.7 million.

Increases in intangible asset amortization expense for both the fourth quarter and the full year in 2003 was the result of acquisition. Interest expense in the fourth quarter and full year 2003 compared to 2002 also detailed in our statement of operations result from the increased debt associated with the acquisition of Silicon Energy that we brought on in March of 2003.

Other net expenses were 2.4 million for the fourth quarter and 3.8 million for the year, and that compares to other net income for the same periods in 2002 with the swing resulting primarily from the 2.4 million in impairment charges related to the minority investments in two companies.

Turning to our balance sheet and cash flows. Let's first look at significant changes in the balance for 2002 to 2003. Accounts receivable increased by about 23% primarily due to timing of shipments late in December of this year as opposed to sales occurring more evenly throughout fourth quarter of last year.

Our DSOs, day sales outstanding, increased from 60 to 69 and as we talked about in prior calls in general we experienced utilities taking a little longer to pay in 2003. Increases in intangibles, goodwill and noncurrent deferred income tax were all due to the acquisition of Silicon Energy in March of this year.

The 14.6 million increase in accounts payable and accrued expenses is caused by a number of factors but can largely be explained by the increased warranty and installation accrual. The 7.5 million decrease in wages and benefits payable is primarily due to payment of 2002 bonus and profit sharing with no offsetting accruals in 2003.

We had a 10 million balance on the line of credit at quarter end which is reflected in short term borrowings. However, we have since paid down the line and there are no amounts outstanding on the line of credit today.

Current debt consists primarily of the current portion of the term loan balance brought on when we acquired Silicon Energy. The original amount was 50 million when issued in March of 2003. Total principal payments in 2003 were 12.5 million, leaving a total remaining balance of 37.5 million at the end of December. 16.7 million of which is current and 20.8 million long-term.

The 6.3 million decline in long-term warranty and other obligations is primarily due to a $4 million payment to a customer in the second quarter of 2003 related to a contract amendment.

One other items to note before moving on to cash flows. At the end of December we had a technical default on our credit agreement as our fixed charge coverage ratio was somewhat below the minimum requirement of 1.5, and that's driven down primarily by the additional warranty charges. We have a verbal agreement from our lenders for a waiver of the technical default. And we are in the process of gathering signatures on that waiver agreement that has been cent to all of our lenders and we expect to have those signatures shortly.

Turning to cash flow. Operating cash flow was a negative $6 million for the fourth quarter compared with a positive cash generation of 16.4 million in the fourth quarter of 2002. Operating cash flow in the fourth quarter of 2003 was negatively impacted by the $7.9 million cash payment we made to settle the BANGIT patent infringement suit, the majority of which had previously been reserved for in 2002.

Full year operating cash flow was a little more than 10 million, compared to about 49 million in 2002. And in addition to the patent litigation payment, operating cash flow during 2003 was reduced by the 4 million payment in the second quarter associated with the long-term contract amendment. These two payments together resulted in almost 12 million less in cash from operations in 2003.

Also driving lower operating cash flow in 2003 were the $7.5 million in payments for bonus and profit sharing that had been accrued in 2002, with no offsetting accrual in 2003. And as just discussed a few minutes ago, the 13.2 million increase in accounts receivable at the end of December also contributed to the lower 2003 operating cash flow. And again on a more positive note we did receive a little more than $32 million in cash in January of 2004 which is one of our best months ever for cash collections.

Property, plant, equipment investments were 2.2 million in the fourth quarter, compared to 2.6 million in the fourth quarter of last year. In full year capital spending was 9.6 million in 2003, compared to 10.5 million last year.

In summary, we are far from satisfied with our fourth quarter results, particularly after 15 quarters in a row of either meeting or exceeding expectations. The three unusual but significant issues resulted in a fourth quarter loss in what otherwise had been a pretty good year. And in addition a push out of a couple of big orders from the fourth quarter exacerbated the problem and contributed to lower than expected revenues and bookings.

We are looking for a much improved top line and bottom line performance as we head into 2004 and I'd now like to turn the call over to Leroy Nosbaum to tell you more about that.

Thank you. Good afternoon, everyone.

Today I would like to focus on three things, first I'd like to spend just a moment on 2003. Second, I'd like to give you some context for 2004, both the guidance we have given and a closer look at our pipeline for sales. And I will close with where we are on Schlumberger and the Federal Trade Commission.

Looking back on 2003, one thought comes to minds. It was a challenge. We started the year with a $10 million push out from DUKE caused by an ice storm and finished the year with another $10 million in push out in Q4 along with a corresponding push out in this quarter caused by a combination of a blackout and a hurricane reaking disaster on the East Coast. That's the bad report.

The good report is that none of the business went away, it just pushed out. The ice storm push out just came back with a $21 million order in Q1 of this year. The blackout push out shows back up in our pipeline for '04 and the hurricane damage has been repaired, the utility affected is regaining its financial health and the project that is highly justified will get back on track in '05 if not sooner.

If those three disasters weren't enough, one of our component suppliers had their supplier change a resin formulation for a limited period of time. That resulted in components randomly failing in the field over a year after installation. A hit to our fourth quarter that we talk about in our earnings release and [inaudible] has just described.

While we are adding some quality process to avoid this same sort of issue in the future the root cause of this greater than $8 million hit was pretty far a way from Itron. Here again that's the bad side of the report.

On the plus side the problem was limited in date range and product, isolate to do a few customers who now think Itron has responded admirably to that problem. Certainly these events of '03 would have been enough to challenge any company, but as you all know we were closing on a large acquisition, Silicon Energy, and absorbing three other software companies during a period of time when software spending was down and particularly so with utilities.

Clearly our software acquisitions were in the investment mode during all of '03. That didn't help our earnings. Our timing on this acquisition can certainly be called into question. However, in general we are pleased with the acquisitions. Our customers at the most senior level are confirming that our strategy is correct. We have talked about that on previous calls.

The pipeline is growing. We have over $220 million in the software pipeline through our acquisitions as we head into '04. Not all of that will close but we are closing business, domestically and internationally. We should not forget the we did sell over $27 million of software in '03. We are coming off the bottom here.

Also helpful, we have just restructured the company into a hardware product group and a software product group which will provide more focus on software, enable synergies across software platforms and people, and it has allowed us to take some people out of the software group to better balance expenses with revenue.

Were the acquisitions were the right thing to do? Yes, if we wanted to position Itron to grow over the course of the next five years. Was our timing bad? Absolutely. Did we spend too much? We would have gladly spent less if we could have developed ourselves the same capabilities. We don't think that was possible.

Okay. On to '04 and providing some context with regard to our expectations. We are looking for revenue growth in '04 between eight and 10%. Which implies that our AMR business seems to grow faster than the 6% growth rate experienced in '03. As well, we need to see greater than 10% growth in our software and services business in '04.

At the end of December we had approximately $62 million in twelve-month backlog versus 100 million at the end of December last year. Given that and in light of all our bookings in 2003 you should all ask, where would the growth come. Let me give you some speaker spec advertise behind our expectations.

In most of our market segments bookings and backlog were actually up or down only slightly in 2003 with one major exception, our electric market. So let's start there. I've already talked about three large utilities with AMR projects got delayed or put on hold. Those orders would have totaled $60 million with 20 million occurring in the second half of '03 and 40 million showing up in '04.

We were able make up some of the shortfall with small orders in '03 but certainly not all. As I mentioned one of those orders is likely to move out to at least 2005 due to a company-wide capital spending constraint. On the blackout order I mentioned, we are again actively working both the order and the business case and anticipate some business with this utility starting in Q2.

Business with the third utility has since gotten back on track. We booked a $21 million order with them in early January, all of which is scheduled for delivery in '04. So far a good start for the five to 6% growth in our electric market we expect to see this year.

Obviously we need to close some additional AMR orders and we also need to close some orders for software and services. So let me give you a feel for what the pipeline looks like, the sales pipeline for each of those in our electric market. Pipeline data is new on these calls. But we are giving it this time in an attempt to give you some comfort in our ability to hit the growth numbers we are looking for in 2004.

In our electric market we are actively working many deals. The top 12 of which total up to about a half a billion dollars worth of AMR business. Not all of that business will occur in 2004, not all of it will close, and some of what does close will likely occur over a multi-year time frame.

In addition to the top dozen deals there is approximately another half billion dollars identified with other utilities that are currently in our site. The good news is we are far enough along with the sales and business case process with many of those customers that we have confidence in our ability to close a few sizeable orders in the ten to $20 million range and higher and we also expect to continue to be awarded small to medium-size orders with many other utilities.

Turning to software and services. Throughout '03 and on into '04 we have been building momentum. We are now working a total pipeline with approximately $220 million worth of potential business which is more than three times the potential we had identified coming into 2003.

As we mentioned last quarter we believe we are seeing a loosening of utility spending in the software and service areas, projects coming on the table versus coming off the table as they were at this time last year. Clearly some challenges remain for our customers in the electric market. But we feel quite good about a return to electric market growth in 2004 both in AMR and software and services. That's electric.

Now let's turn to our gas markets. We had a very nice year in 2003 in our gas market as we grew revenues buy about 11% following the year of 40% plus growth in '02.

New order bookings in '03 were down about 5% compared with bookings in '02 and accordingly we come into '04 projecting relatively flat revenues for our gas market this year. We look for steady, predictable performance from this market as we complete and expand contracts from existing customers and as we get new customers to begin to move forward. There are still a number of large gas utilities that have not yet implemented AMR. Several of whom we are in active discussions with. One sizeable win here would result in very nice growth in this market for '04.

Looking at water and public power, we are projecting growth of about 10% in 2004. The backlog is up only slightly in this market as we enter the year. However, new order bookings were up by 18% in 2003. Keep in mind here that sales in water and public power are through our indirect channel and typically look and ship within the quarter and often don't show up in backlog.

If you analyze growth in water prior to this year you would see that much of it has been driven by large municipalities such as Philadelphia, Houston, Denver and utilities such as Philadelphia suburban water. In 2003 our water and power recognize ever revenues grew by 11% fueled primarily by higher indirect sales channel sales growth.

Indirect sales channels grew by 45% during the year and generated approximately two thirds of our sales in the water and public power market compared to approximately half of our sales in 2002. Growth in indirect channel is a result of the 40,000 plus small to medium-size utilities seeing the good results achieved by the larger water utilities I just mentioned.

This is why for the past two years we have put tremendous efforts into expanding and strengthening our indirect sales channel. Today we have over 30 independent business associates selling Itron products across the country.

We also have very good relationships with a number of top water meter manufacturers, American meter, [inaudible] and Percy. We enter 2004 very well-positioned to further grow business from our indirect channels.

In addition to the small to medium-size utilities, three of the top ten cities in North America are actively evaluating deployment of water AMR. We are already in at one of those cities with the new Itron hand held meter reading system, and a small AMR trial and we are actively working the RFP process for AMR at the other two. This would have almost no new business with large utilities built into our old [inaudible] growth expectations for water and public power, landing just one of those orders would provide us with very nice upside over the year.

In our past our international market has not been the growth engine we knew it could be. However, that is changing. Let's talk about that for a moment. In 2003 international was about 5% of our overall revenues. Our efforts were not focused on growth but instead on transformation of our international marketing team. That job is largely done. We are looking for greater than 50% growth from our international market in 2004.

New order bookings in international were up over 60% in '03 and we come into '04 with momentum to start delivering on our growth expectations. We invested a lot of time in '03 in building a pipeline of opportunities for transmission and distribution solutions, work force management, forecasting software, and energy management software. And we were delighted to close on our first sales for some of those software and services products, a transition and distribution software sale through electrica in Spain and several forecasting sales through [inaudible] in Belgium.

Coming into 2004 we have good prospects for additional sales in those products in Europe, Australia, Mexico and South America. In Europe and Australia we also have good opportunities for hands held system sales and in the Caribbean we are having very good success with our existing AMR products.

We won an order with Bahamas electric company in Q4 of '03 and have begun an Islands wide deployment of AMR in the Bahamas. Building on that success we expect to close additional business in the Caribbean and possibly Mexico as well. Where are existing domestic products fits the majority of meter types and meet radio frequency and other standards.

One of the best thing about the growth we are projecting for international is that it comes with modest increases in operating expenses which will help improve Itron's bottom line performance in 2004. On average in our AMR business we look for annual growth between ten and 15%. We've said that on calls for a number of years now. Some years we'll be above that and some years will be below. Our view is that coming into 2004 as a result of the issues that have affected large utilities in our electric market we will be below the normal growth range.

In fact in Q1 we look for revenues to be down from a years ago, perhaps by as much as ten to 15%. However our view is that by the second half of '04, the large electric utilities will get past the issues that plagued them in 2003, Q2 will be much better as orders rebounds and by Q3 and Q4 we will re-establish more normal patterns of growth.

A few words on spending adjustments before we move on to the Schlumberger acquisition. We recently internally announced a new organizational structure. In the new organization we are moving from P&L responsibility and reporting along market lines to P&L responsibility reporting focused on two primary operations groups, hardware and software.

The new organization will give us the ability to more accurately measure and monitor operational group and specific product profitability and viability. In looking at the new organization structure we also look for ways to capitalize on and provide clear incentives for cost savings synergies.

Popularly recognize and take advantage of hardware synergies both in development and in manufacturing. How can we effectively look for and take advantage of software synergies in common platform development and people skills.

In the process of developing the new organization we identified a number of areas where we were able to take people out of the organization or at least put them to better use in more important functions. As well we took a critical look at expenditures versus revenue potential for the coming year in our new acquisitions and made appropriate reduction. That has resulted in a reduction of approximately 70 jobs throughout Itron, or roughly 5% of the work force.

While we will have approximately 3 million in restructuring charges in Q1 '04 we estimate reduction in our annual spend rate associated with those headcount reductions is in excess of $6 million. We will contribute to improve the profitability with Itron in 2004.

With that let me now make a few comments on the status of our pending acquisition were of Schlumberger electricity meter business. Both Schlumberger and Itron have certified that we are in substantial compliance in terms of the Federal Trade Commission, or FTC, second request for information. Which means that we are now done with document production, depositions and the like, and are moving closer to receiving HSR, or heart Scott RADINO clearance.

Certainly this H. S. R. clearance has taken much more than any of us had anticipated. Primarily because of the FTCs opinion that the acquisition would reduce competition in the mobile AMR electric market.

Since it's concern was raised we have worked closely with the FTC to craft a remedy that would restore the competition in this market. In order to work through that remedy and to allow the FTC time to consider we have had to provide additional time to the FTC before granting HSR clearance. We have a remedy in hand which is reflected in the term sheet between Itron and another company that has us licensing certain of our existing AMR technology to that company.

The term sheet has been reviewed by the FTC and we now are entering into negotiations for a license agreement with this company according to the details included in that term sheet. We believe we will complete the licensing negotiations and the remaining process with the FTC which will result in our receiving HSR clearance and closing on the acquisition around the end of the first quarter.

The acquisition of Slumburger electricity metering will be accretive to our current 2004 expectations and brings many other good things to Itron. We look forward to telling you much more about that once the acquisition is closed.

We have great appreciation for the support and interest that many of you have shown in Itron. Despite the unplanned surprises late in 2003 and our overall weak financial performance for the fourth quarter, we are confident that we head into 2004 with many of the unpleasant issues largely behind us.

With that let's open up for questions, please, operator.

Thank you. The question and answer session will begin at this time. [Caller Instructions].

Our first question comes from Alan Robinson of Delafield Hambrecht. Please state your question.

Good afternoon.

Could you just touch on what kind of recourse do you have regarding the product failures and specifically what kind of form of reimbursement you can expect from the negotiations you are in the at the moment?

Alan, it's Leroy, I will touch on that, if you will.

We have been in a series of conversations with our component suppliers asking them for a number of forms of reimbursement.

One is to replace some of the product, if not all of the product, that has failed or potentially failed.

Two is to take a look at part of the labor that we are having to use to replace product that we have manufactured and will replace for our customer. So far frankly those discussions have gone fairly well. As you can imagine this is a pretty touchy situation for that supplier. We are not the only customer that they sell suspect product to and so they are being quite careful.

I won't mention them today but they are a substantial supplier and one quite frankly that is well known around the world. So we are working the issue, Alan. We are very confident that we will get some compensation. The exact form and the exact amount of that are slightly up in the air but we are quite frankly feeling pretty good and we as recently as this week have had some very good discussions with them.

Okay. And I don't know if you touched on this but what specifically caused the cost to increase from the original pre-warning amounts $5.5 million to 8.5 million.

The majority of the increase relates to what we now have as higher field labor installation cost related to our going out and replacing those failed units.

When we put together our estimates, or since we put together our estimates in mid January we have been actively talking to one customer in particular about the type of labor and the location of the labor that we would use to do that rework. Unfortunately our discussions did not go as well as we had hoped and so therefore we have built in higher costs for that field labor.

Okay. And one last question.

Regarding the pipeline for water AMRs, the three municipalities you referred to earlier, what kind of size contracts should I be looking at there in terms of our models?

Probably a little too early to be talking about the size of the contracts but if you think about some of the large municipalities we've already done such as the city of Philadelphia which is about a half a million modules, city of Houston which is 400,000 modules, they are very similar size types of contracts.

Okay. Thanks. I will step back in line.

Next question comes from Sanjay Shrestha with First Albany Corporation. Please state your question.

Can you talk a little bit more about some of the postponement on the electric AMR side of your business. Does it have anything to do with the client holding off really placing an order pending the acquisition of Schlumberger's electricity metering division.

Sanjay, we have had a small handful of customers that talk to us in terms that would lead you to believe they are waiting. I can't say that we have actually had an order push out yet but I do think that we have a small handful of customers that are saying, I'd rather be negotiating this order with you after you have acquired Schlumberger. So I think your question there has some merit.

Okay. That's great.

In terms of the warranty reserves that you guys have recognized here, the level of comfort associated with that in terms of whether you might have revised that number upwards, since the estimate versus the actual cost when you were eventually going out there and fixing some of these units, how comfortable do you feel at this point after having revised it due to the number that we have right now?

Sanjay, it's Jemima.

I would say our comfort level is high as you can imagine since the amount of the change since mid January since we first talked about this issue we have scrubbed the numbers quite a bit. Clearly it's always difficult to estimate what your actual charges are going to be, but we are fairly confident with those numbers at this point. That's not to say we may not have a small adjustment here or there but overall we are pretty comfortable.

Okay, that's great.

Also while we all understand the acquisition hasn't been closed yet, but if LeRoy, maybe if you could talk a little bit more along the lines of some of the benefits that [inaudible] it bring to the table, some of the feedback that you've got from your clients, and the remedy that you put in place which is being reviewed right now, how that might impact the potential overall growth rate that you are anticipating before having to put a remedy like that in place versus after the remedy being in place and looking out once the acquisition has been closed?

Sure, Sanjay. Certainly in the point that you've been making for some time, that meter is actual ultimately going to be the meter of choice in the electric utility business and as such it absorbs AMR quite nicely. If we acquire Schlumberger we not only pink up a meter business but I think we firm up the electric AMR business for Itron.

So certainly tow good factors there, and as we look at the solid state electric meter business we are very pleased with the technology Schlumberger brings to the market. We think it's exceptionally cost-effective and exceptionally competitive in the marketplace. So a good note on that front as well.

Customers have, I won't say universally, but almost universally applauded the acquisition is now putting us in a position that we have a data value chain that extends all the way from the meter to application software to interfacing with other parts and pieces of the utilities to provide real value in the information we are gathering and then managing. So to that points a big plus for us.

The remedy that we have some in hands with the FTC essentially means that we are going to license our existing [inaudible] technology to a neutral third party.

Okay.

To being a meter company, which was a particular matter of sort of irritation for the FTC.

We have as we give guidance on '04 included what will be a modest impact from that. '05 will be a bit bigger impact just because of timing. But we think that that license agreement could in fact help bolster the market for Itron products. So we are not the least bit problemed by it.

Right. And one last question if I may on the cash flow front.

You have given the cash generation this year, one, where do you guys see the cash generation into 2004, and user given somewhat lower cash generation during 2003, if that would that have any impact at all in terms of the rate that you might actual will be able to get on the debt that is necessary to actually close the metering acquisition from Schlumberger?

Sanjay, Dave.

We expect in 2004 very healthy cash flow generation. We mentioned already the cash flow collections that we've had in January. It was quite a build up. e are late in the fourth quarter, collections have been very good to bring our AR down.

To ballpark it, Jemima talked about cash flow generation from operations in 2003 versus 2002, we would expect '04 to be higher than 2002. So a very good year in terms of cash flow generation.

In terms of financing for the acquisitions, we think the numbers are well behaved for both Schlumberger and ourselves in 2004 compared to the way we were looking at the numbers last year. And in most cases the numbers that matter are within a few percent of the numbers that we calculated last year.

Okay. That's great. Thank you so much.

The next question comes from John Quealy with Adams Harkness Hill. Please state your question.

Hi, good afternoon folks. A couple of quick questions other '03 results then I will move to '04.

Just some math in terms of the one time charges. I'm looking at gross margin, SG&A and other, is that really where the charges and credits go?

Yes.

Okay. I can do the math for the individual pieces but those are the buckets.

Second question on '03, with regard to the third party contractor issues, can you elaborate a little bit more, was this a newer third party contractor that you used or was there turnover on the subcontractor base for their employees or can you give us a little more detail on what was going on there?

You bet John, this is LeRoy.

Essentially we had entered in a a contract using a subcontractor to do installation and that subcontractor had two problems. One, he felt garishly behind the work schedule so that put us in trouble with our utility customer, and secondly probably because he was falling behind he wasn't able to do the job for the price he had quoted. On this particular job we had actually padded this thing a lot because we assumed it was going to be some problematic. Well, as it turned out it was very problematic.

We ended up having to fire the first contractor and hire a second contractor. And unfortunately that second contractor was well aware of all of the previous history and so as we had to re-engage with that second contractor our costs simply grew well beyond our original bid for the utility.

While we did go back to that utility, I won't say they weren't willing to talk about it but they weren't willing to budge and so we ended up with a loss on the project unfortunately which we reported. Some unfortunate in this whole thing is that it occurred right at the beginning of January and that it was rather sudden. So we are reporting it post our earlier release.

Okay. Fair enough. Moving to '04, LeRoy, you actually gave some pretty good detail on the water pipeline with regards to RFPs and existing customers. Could you give us an indication on the electric AMR side? It looks like there's 12 deals 500 million over a multi-year period? Could you give us a little bit more detail on that with regard to some of those metrics if possible?

John, I can't give you much more detail. What I will tell you is that the places that those things are percolating you would recognize well as being substantial utilities around the country. These are in places where we have driven by and said, big utility, lots of opportunities.

These are places where we've got business cases well done and we have executive champions trying to get things pushed through their utilities and in many cases even further along than that to the point of being in negotiations. So these things are all, the 12 we spoke of, these are all very much down the sales process and coming to conclusion.

Okay. Maybe more to the point of my question, in terms of existing customers, are these all new customers or a mixture or can you give us any characterization on that?

Sure thing. Some of both. There are some of both, there are some customers that are already AMR customers of Itron, and so this is a dually expand, is the cost justifiable. These are new customers that, might have done a tiny bit of AMR in one place or another, surely have deployed Itron equipment in terms of hand helds and software, so literally, I don't know any if any of them are brand new Itron customers, certainly new to AMR, so a mixture of both.

And fair to add that clearly a number of those are active from a competition standpoint.

Absolutely.

Okay. Great. Thanks very much.

The next question comes from Patrick Forkin with [inaudible] Research. Please state your question.

Good afternoon. Leroy you mentioned the FTC remedy for the Schlumberger deal involved licensing the [inaudible] technology, I think you used the terminology, a neutral third party. Is that a company that's in the metering business or the AMR business now?

Patrick I will answer one of those two questions.

They are not in the metering business. That was a fundamental issue for the FTC. They wanted to make sure that our technology was available for somebody who wasn't tied, if you will, to a metering vendor.

Beyond that, Patrick, I'd love to answer that question for you because I think would you make you feel good but the fact of the matter is we are in such touchy negotiations both with the party and the FTC I think the less said on this call the better off we are going to be.

I appreciate that. And would you anticipate announcing that at the time you get the FTC approval?

Absolutely.

Okay.

I will give you an add there. The deal is contingent upon that FTC approval.

Okay. I appreciate that. The issue, I notice the operating margins in the water business were down pretty substantially in the quarter. Was it a water customer where you had the installation labor issues?

No, Patrick, the warranty issue that we talked about for some of our electric product is partially in our electric business unit and partially related to a customer in our water and public power business units. So that is clearly a factor of the increased warranty.

Okay.

Well, let me just add, not everybody is familiar with what public power means but that can be electric, water or gas, small municipal utility.

Okay. Let me just ask it another way.

The operating income margin for the quarter for water and public power was about 27%, which historically it looks like it's been running in the mid to high 30s. Was that impacted by, I mean, is that the reason that that's down?

Yes.

Okay. All right.

Last question, just sort of the logistics on the resin issue with the supplier and the calculation of the warranty reserve to take care of it. Does your calculation of the warranty and reserve sort of provide for every unit that was produced in that twelve-month period, or just the units of that that have gone bad here?

No it's got them all in it, Patrick.

The good news is if there's any good news in this miserable situation at all, is that the date range is quite well known, the product date range as well is quite well known and we know where all that stuff is. So we are pretty buttoned up on this thing in terms of that which is likely to fail.

Okay. So what you will do is you will proactively go out and try to replace those before they go a bad or do you have to wait until they go bad?

No we will proactively go after them. One of the nasties of this problem is it grows slowly over time and so we will be proactive.

Okay. You mentioned that the supplier was well known. I guess my question would be, do they have substantial resources to back up these types of problems?

More than sufficient.

Okay. Thank you.

The next question comes from Jarrett Carson of RBC Capital Markets. Please state your question.

Good afternoon. A couple questions.

First one around the pipeline that you described which seems to be quite substantial on the software services side, you said 220 million. I think you gave that under the context of the electric market. Does that include international as well?

I mean because you are obviously selling some software that belongs to electric utilities but internationally, or what is there a separate pipeline if you would that you are looking at on the international side for software and services?

The latter Jarrett.

It would have been electric and some public power on the 220 million, the national would be in addition to that.

Okay.

Roughly because this number is potentially higher, what do you think in your view started to turn for you in terms of the pipeline rolling if you will and the broadening out and maybe a little more color on what it is that you think is driving that? Is it just spending across the board or is it particular traction with some of your unique products that you kind of hold under your umbrella.

Jarrett, great question and I think some hinges on the definition of turning so let me given you a few pieces of color. I think no question that we bought some of the acquisitions that we were not as effective selling them on day one as we are now. And that effectivity was both familiarization with product. It was also the way we were structured in our sales force. Where we have now put in place and they have been there for some time, specialists in various areas of our software product offerings.

So some of this has been a learning curve. As well some of it has been product getting to the point where it actually met customer expectations in terms of form and function. And so I think our suite of products in general is better than it has been.

Third, I would offer that our ability to go out and talk to customers and talk about not single point software application but the broad range of applications we have and how they glue together and provide a larger value proposition has begun to resignate with our utility customers and we have since about mid '03 been out on the road with a very large executive level campaign that quite frankly our sales guys will freely admit open more doors for them than they could ever do themselves.

I think some of this is good pick and shovel work. It's learning about products much it's positioning them appropriately. It's doing very effective campaigns at the most senior level. And lastly I'd say it's just time. It's taken us time to get geared up properly and frankly it has taken time for utilities to begin looking at software and software services products again; and all of that has been, I think mostly in the last six months and so, yeah, you begin to look as a gestation period for these products. This is not buying software at CompuServe. It's a very long sales cycle by comparison.

Thanks.

In the international markets if I'm looking here correctly at the segment of information, it looks to me like you finally turned an operating income which is the first time since I think late 2001, if my prior data is correct. And the outlook seems to be building there.

Is software and hardware in equivalents, or is it something that's starting to, to use your word, resignating more, in particular and then maybe finally a little color around, you did mention Bahamas and the Caribbean, are there other places where the AMR side is starting to, maybe you are getting some particular pilots?

A little bit of all of the above. First of all let me hit software.

One of the things about our international group is we have reached sort of contoured them over the past year and a half or so. They looked at our software acquisitions and said, that's sellable stuff no matter what the frequency is and no matter what the rules surrounding radio.

So they really have perhaps focused sooner from a sales perspective on those software products. So we've gotten good traction there and that is starting to come home. And good reference. As we sold product to [inaudible] electric in Spain we automatically got some good press around Europe and I think we will see some other nice orders which have out that. Clearly I mentioned two orders in Belgium and one fed on the other.

We've got an awful lot of activity going on in software in Australia which we think will come to fruition. So there it was product that was easier for our international people to sell. It got focus on it and built some momentum.

On the hardware side we have done very well in the last year building momentum in the Caribbean, and starting to build momentum in Mexico as well. Where we fortunately can sell the product we build from the United States in most places.

The Bahamas, frankly, we think the first island wide deployment of AMR our product, we think there's some good stepping off of that one on to some other opportunities in that region. We've got some interesting activity working in Mexico these days and certainly in that area, the Schlumberger acquisition would be helpful because they have some good standing down there as well.

Not only are our sales efforts more focused and we are producing results, we also think that those will in themselves help to us build some momentum in particular areas of the world which I mentioned.

Okay. Thank you.

The next question comes from Damon David of ONT Capital. Please state your question.

The first was on orders, in your outlook section you comment that you don't expect order activity to begin to rebound until the second quarter but yet you've mentioned that you already signed a big deal in the beginning of January. Can you talk a little bit about that, more color?

Yeah, I think, Damon, the reality of it is as we had a lot of orders shoved out of Q4 for various reasons we opened up some fairly large holes not only in Q4 but Q1 as well. Q1 is never a great orders production month for us. You have lots of utilities covered up with snow and historically we certainly had a bigger second half than first. So it's some of that hangover as well.

On a $21 million order we will begin to ship off immediately, it certainly is not making that much of a dent in what would be normal quarter for us. So we are being somewhat cautious, no question about it, about Q1. And we are hoping it's a bit better than we think it is, but right now we think that amount of cautious is appropriate coming through a fourth quarter as we have and utilities still fighting our problems as they are.

The Q4 hole and orders leads to a Q1 hole in revenues I understand but it also leads to a Q1 hole in orders?

Some of things that shoved orders out of Q4 shoved corresponding orders out of Q1 as well.

Okay. I think I understand.

Can you just assuming you get everything through the FTC and the acquisition closes, what can you, make us a little more comfortable that integrating the Schlumberger acquisition which is a lot bigger will go more smoothly and seamlessly than the software acquisition?

I am going to give you a come couple perspective there.

First of all you can look at all the software company's we bought, every one of them or three of the four were fundamentally start up companies. And start up companies that were not yet break even or had just begun to touch break even from a cash flow perspective, the exception to that is RER who was making money six to $8 million revenue line. And they did fine in '03. We were nicely, and contributed.

The difference between those four and Schlumberger, Schlumberger is a going concern, it is almost a thousand people, round numbers, it is a company which has been in existence for over 100 years. So this isn't a company where we have to go in and build leadership, we have to build scalability, we have to get products suitable to sell. On a scale up basis rather than just a few customers. So it's a very different situation.

This is also a company that's got in excess of 20 or 25 sales guys that are out today beating the streets because they know if they don't sell they are not going to eat. I can assure you those same people are going to be out beating the street post acquisitions because they still know, if they don't sill, they don't eat. And we have been restrictive some in how we can plan marketing and sales activities until after FTC approval, we do expect to keep Schlumberger and their marketing and sales group largely intact so we don't upset the apple cart and so I think in awful those kinds of prospectives, we should be in pretty good shape.

The other thing I would say to you is we will not sort of absorb Schlumberger into the fabric of Itron like we have the four acquisitions. While this will not be a stand alone division or subsidiary, we will bolt on to Itron rather than be absorbed by Itron. They are generating great revenues. They are generating great EBITDA. They are generating great earnings.

We can't tell you exactly what that is yet but, trust me, they are an ongoing concern and if you look at some of Slumberger's most recent press releases you will see that, this is going to be a great acquisition.

Okay.

Just lastly can you remind me kind of where they are in their product cycle? It seemed like revenues were growing very fast but maybe not week as fast as they had been growing in the year and also what you just said about it, what's the motivation for Schlumberger to sell it?

It's two questions, I'll give you two answers. They have been growing above what would be consider normal which is about three or so percent year on year. They've been running more like five to seven.

And in 2003 in particular they were coming off some very large contracts plus in 2003, in fact, was an extraordinarily big growth year for them. They've calmed down a little bit in 2004. One of the reasons Schlumberger is the leader in the industry right now they are far and a way the leader in solid state meter technology which is certainly their dominant product right now.

They have outpaced all of the competition in that regard, not only in product sales but in what I will call competitive nature feature function costs. So that's put them until very, very nice territory; on that subject.

Your second question slipped my mind.

Why do they want to sell?

Why are they selling it? If you look at Schlumberger five years ago they were the largest electric, gas and water meter manufacturer in the world. They have steadily chosen to sell all of that off in what I would term an effort to get back to being an oiled field services company and a company involved in generally those kinds of activities. So it is a corporate strategy shift on their part which they've been at now for some years.

Great. Thanks.

The next question comes from Brad Adams with Chilton company. Please state your question.

Hi, guys.

Last year at this time or early last year, the beginning of last year you were suggesting sort of the second half would be stronger. Given the twelve-month backlog down about 38%, I think your bookings level are about what you booked in June of 2001, despite several acquisitions, can you just give me a little bit of comfort that this year maybe I don't know in terms of qualitatively that this year will be a little bit different, that you can gives you a little bit more comfort on the second half of this year?

Yeah, Brad, let me bifurcate that into two answers. First of all, the acquisitions certainly as we look back to '03 were not as productive as we had hoped they would be, part of that is because the utilities just frankly stopped buying software. But part of it was probably we weren't as effective as we might should have been which I talked about a bit earlier.

One of the reasons I gave you the pipeline there and gave you the pipeline in general is because I quite understand your wanting some qualitative information to explain why we think '04 is going to be better. $220 million of pipeline domestically is something over three times what we were looking for, looking at coming into '03, and it's probably more solid pipeline at that. So we are feeling good that we are going to have good software growth and the nice part about that is that margins tend to be very attractive on a comparative basis.

On the hardware side of our business clearly '03 was a struggle all year long and I must confess as we stood in front of '03 we certainly weren't predicting the ice storm, the blackout and the hurricane you got hit with. You might ask and reasonably so, what happens if you have another ice storm, another blackout and another hurricane in '04. I tell you what, if '03 happens, I think am going to look for something else to do, because my luck has certainly gone bad. I don't think that's going to happen.

There again I related something akin to a billion dollars worth of pipe, strong pipe particularly the first half million of it, so we are really looking for a good '04 although I will quite admittedly say it is backend loaded, way more than we would like. To that end, you know, we took a rather draconian action here, this week in fact, I am sitting at a table with a bunch of people with real long faces as we took 70 people out of the organization and something north of $6 million of expenses.

We are trying to make sure that our expense number is commensurate with a bit weaker first half and if we get that second half that we've alluded to we should be in very fine shape.

Brad, let me add to that some analytical thoughts if I can.

We talked about pipeline for the first. We think that's a very useful measure because we are in the soft ware business increasingly. Backlog is a manufacturing concept when you get to software, it's primarily a book and ship business. Backlog is not a measure of what we are going to do. So the 220 million that was mentioned I think is a valuable thing to focus on. In addition, $90 plus million of public power that Jemima talk about of two-thirds of that comming from the indirect channel of 45% increase and that business is book and ship business. It doesn't show up on the backlog.

So that's become an increasingly bigger part of our business. So backlog can be down and yet because of the bigger portion of our business that's coming from our indirect channel and from software business nonetheless can look good, be good, be better in spite of the backlog numbers. So well increasingly be talking about pipeline in discussions.

That's very helpful. Thank you.

Just one follow up. I didn't hear it and I may have just missed it, the software this quarter as revenue?

I apologize. It was 27 million for the year.

Okay.

I'd have to look up the quarter number and you can certainly call me later with that.

Would you care to think about a percentage of revenue or the impact that software could have next year?

I think as LeRoy mentioned earlier we are looking for greater than 10% growth from that software and services portion.

Okay. Thanks a lot.

The next question comes from Bill [inaudible] with Davidson Investment Advisors. Please state your question.

Thank you. I had a group of questions.

First of all, relative to Schlumberger, LeRoy you mentioned some things that may be partially answered this, but what changes have taken place to the Schlumberger business since the announcement given that that was quite awhile ago now?

Not much if anything? Bill, I would say that certainly they've had an exciting '03 which in many ways has caused them to generate not only a lot of revenue but a lot of bottom line. They are operating at very high levels. They have been able to continue to move more and more production to solid state where they have better margins less and less of it electro-mechanical leaders where the margins are not so good. I think that bodes well for the future.

They have continued to spend a lot of effort on improving continually improving their cost structure on those solid state meters so I think we are looking forward to that as well. But other than that, pretty much same company as it was before.

LeRoy, do the solid results that they achieved in 2003 cash generation imply that you will be getting a bigger cash bank account with the acquisition for the same price?

Bill, would you ask that question a different way because we are all staring at each other not quite sure how to answer?

No problem. My hope is that because of the cash generation if that will stay with the Schlumberger electric meter business as cash on the balance sheet that you acquire rather than going to the parent company.

There is a working capital adjustment mechanism that adjusts the price based upon cash as a component of working capital. So we are going to be ending up neutral with regards to that.

Okay. Fair enough.

Then relative to the integration which you did discuss a little bit, given that it is not a business that will be integrated under the Itron umbrella but really next to, what integration will be required if any?

Bill, let me answer that question and then I will touch on the previous question you asked, too , because I think there's an interesting side to it.

The integration here is going to be certainly a bit in the G&A area. We will have IT integrated. We will have HR pretty well integrated. We will have certainly finance and accounting well integrated. Those things.

On the marketing side we will do some integration of marketing because quite frankly Schlumberger does not do nor do they have to do a lot of marketing. Well pick up some of the support for them. Well hold their sales force largely intact as they are today and sort out any channel conflicts where they are selling AMR and we are selling AMR, but that will be easy enough to do.

Their development group will continue to operate fairly independently although we will begin to bring together resource in terms of we are both looking at RF development activities. We will have two big manufacturing centers and quite frankly the biggest plus coming out of those is going to be our ability to lever our component suppliers in total components and everything else we will have in excess of $400 million worth of purchasing power. So we are looking forward to being able to stare across the table at our suppliers with a little bit bigger picture and a little bit stronger hand. But we will run those two factories at least for a year or so pretty much as they are being run today.

There is a, how shall I say, there is a great appreciation here, for the fact that we are acquiring a bit of a battleship and we do not want that battleship to stop dead in the water. We want it to continue on its journey through what it's supposed to do which is making a lot of money.

I'd like to go back to the question that Dave answered and just make one point. The good cash generation during '03 has allowed them to do a number of things in the factory, do a number of things in terms of upgrading some things that would probably not have been upgraded including property, plant and equipment, and other things. So we will get some benefit from that, Bill, just because they've spent the money.

That's helpful. I have two additional questions not related to Schlumberger.

The first Jemima had alluded to the fact, that yes there is competition. Could you walk us through what are the competitive issues there and challenges that you will have from the competition and then relative to the supplier problem, given that the supplier does have, the ultimate supplier, that is, does have more than enough resources, why should Itron have any cost at all, anything above zero, for this?

You bet. Let me talk about that one first and then I'll go back to competition. Whether we like it or not we live in a very uncomfortable world at times where we are in between giants. Where we have on one hand utilities which are giants in the marketplace and have huge amounts of market power. We have, on the other hand, people with buy things from compounded suppliers, software suppliers on the software side we buy a tremendous amount of stuff, for instance, from Microsoft.

On the supplier side, not only are suppliers big but oftentimes when they have a problem they have very wide and potentially large issues they have to deal with. So they look at us and say, frankly with don't care whether you by anything from us or not. We are not much of a blip on their radar screen.

It gets better with Schlumberger and frankly as we have had these discussions with the supplier in question, the fact that we are about to buy Schlumberger has not missed notice on their part. And so it is a little bit of a problem with market power.

We have had immediately had people ask us at the board level, why don't you have contracts that arrival these people for these kinds of failures, liable, you wouldn't be able to by any parts if you tried to do that because nobody would give you that contract so you'd be stuck. So fundamental issue there is one of market power. It isn't whether or not these people have enough money to make good. I can assure you of that. On the competition side, competition lately, certainly the power line carrier guys, DCSI, and hunt, have been doing well. DCSI both in the co-op and in the IOU market hunt mostly in the co-op market.

The level of competition from the smaller people has quieted some in the marketplace. In the water area we certainly are seeing competition from our normal [inaudible] of hexagram, a little bit of nexus here and about, normal cast of characters, Bill.

Thank you.

The next question comes from [inaudible] from John Hancock Advisors. Please state your question.

Yes, hi. The questions have been answered honestly, but I'd like to go back to the acquisitions there was inference in one of the questions earlier that some customers are holding off until they see what's happening with the acquisition when it closes, if it closes. Could you walk me through the rationale as to why they should hold off? Is there any benefit to them holding off? Do they expect perhaps a better deal from you guides or perhaps better margin for them? I just don't understand what the rationale would be there.

Well, this is a bit of supposition on my part but I doubt that it strays far from reality. What we think we are seeing is a number of customers who are saying, well, if you are going to by Schlumberger, rather than giving you a big order and giving Schlumberger a big order from an AMR project we would get retrofit software from Schlumberger we would get new meters with compatible AMR technology, I will wait until you actually by them, I will place one order with you and we'll have you been responsible for the entire think and I suspect that some of those customers think because of the magnitude of the order that they will be able to beat us up on price a bit. I think Rob Neilson, our president has some commentary there as well.

Also a supposition on my part but I think the other issue just centers around the word uncertainty. Because of where we are in the HSR process, we are really not allowed to talk to a customer about anything related to a sale of a Schlumberger product. And I think that some of our customers may be sitting there saying, hum, I wonder if they would be proposing today than what they are proposing today and of course, we can't comment on that and that leaves them in uncertain terms at this point and time.

Okay. I have no more questions. Thank you very much I recollect thank you.

The next question comes from Peter Louis with Lou Capital Management. Please state your question.

Hi. I'm fascinated by a couple of things. I think your normalized cash flow is around 40 to $50 million per year but looking forward given the very disappointing cash flow performance this past year I think investors are going to wonder, how are you going to come up with $250 million to pay for that, and I guess that depends a lot on the EBITDA that's going to be conceived as you absorb Schlumberger.

So I'd like you to give us a little perspective on how big the revenues might be? You can give us a pretty wide range. What is the incremental revenues, say, upon execution of the agreement, assuming that it does go through, and what are some cost benefits if you can translate that into operating margin as you absorb Schlumberger.

Peter, it's Jemima.

As we have talked we are unfortunately not able to give projections about Schlumberger in terms of what we expect them to do in 2004. We have talked openly many times in prior calls that their baseline performance in 2002 is a good baseline performance from which to project growth from. And in 2002 they did revenues of about 229 million, and their EBITDA was about 33 million. You combine that with, as Dave mentioned earlier, the fact that our baseline performance of 40 to 50 we ought to be able to do a little bit better than that in 2004, and so you are looking at an EBITDA number on a combined basis in excess of $80 million.

Okay.

I'm also curious, obviously there's a tug of war between the bulls and the bears in the after market your stock has dropped to $18 per share. And I don't know that Bloomberg is correct but it indicates that there's a rather substantial short interest. What kind of questions are you getting that suggest that from that not so good thing are going to happen to you because your message here is pretty constructive?

Peter I will start and my colleagues can add. First of all we fundamentally have had a lot of people doubting whether we can get the Schlumberger acquisition done. We have for a good reason not been able to get through HSR as quickly as we had hoped. The Federal Trade Commission took attack that quite frankly astounded us and astounded many in the industry. We are going to get through that. It's taken us a long time to do it. But I think that is raised in the minds of many the possibility that we don't get the acquisition closed.

We'll get the acquisition closed. Beyond that we routinely run a fairly high short level and I think some of that is, we have had some years in the past when we we weren't very pretty and people have long memories. I don't know if Jemima or Dave want to comment beyond that.

The only other thing I would add to that, LeRoy, is clearly this is a third quarter in a row where we have seen our backlog go down and go have a lot of investors out there that plays a great amount of significant in what that backlog number is. And, again, that's one of the reasons we wanted to talk about pipeline today.

We wanted to talk about thing like the success we are having in international markets and in our indirect channel in water and public power because, as Dave mentioned, some people do focus on backlog but that is only one indicator of the business.

Well, Jemima, given the disappointments in the past I think that your forward-looking statement are probably on the conservative side because you don't want to disappoint again, and on the stands alone basis without the Schlumberger acquisition you are indicating maybe 8% top line growth next year. And a restoration to a much more positive cash flow. So that sounds to me pretty constructive. And I'd like to maybe just state again the level of your confidence, one, in your ability to close the transaction with S.O.B. at the end of the first quarter and, two, are you as conservative as I hope you are in your forward thinking?

Yeah, I mean clearly we have certainly tried to put together reasonable and somewhat conservative estimates. I think Leroy talked about a number of situations where one or two large orders could clearly cause our results to be better than the results we are forecasting. We also cautioned that should we have another major ice storm or major blackout, something to that effect, obviously we have not projected any of those kinds of unusual events in our 2004 results.

And again we are obviously very confident that we will be able to get through the HSR clearance process in order to close this transaction right around the end of the first quarter. With would certainly all love to have it happen on this side of the quarter as opposed to the order side and there's a lot of work and effort going into make that happen.

I have to commends the management of Itron for adjusting their income to corresponds to the disappointing financial performance in this world of very questionable management responsibility where managers with terrible results pay themselves tons of money, it's very, very heartening to see that you guys are responsible to the shareholders and have taken some punishment in the past year.

Peter, thank you for those kind words. We do take this seriously and we are not happy with the performance of the fourth quarter.

Thank you. Good luck.

Thank you.

Ladies and gentlemen, as a final reminder, [Caller Instructions]. The next question comes from Paul Coster with JP Morgan please state your question.

Yeah, Leroy I'm sorry I missed much of the call, I will have to look back to it so this may be a repeat, the technical default on the credit line, does that have any bearing upon how you are going to, the and the flexibility you have on financing the SEM acquisition? I apologize if it's a repeat.

No, we don't belief so. That was driven by the warranty and installation situation.

We have three covenants right now, leveraged covenant, a fixed charge and tangible net worth, two of them were just fine, if you back out the warranty situation that happened in Q4 we would have been twice as much above the 1.5 that Jemima mentioned as we are now below it because of the warranty situation, so it is for the moment in time the cash flow from the combined entities that lenders care about, we -- the financing for the acquisition is very strong going forward. So we do not believe that this will impact the financing or the acquisition.

The question has not been asked so good question.

Have there been any developments in your thoughts as to how you are going to finance the acquisition? Is it going to be debt equity, a examine narrowed thereof, anything you can elaborate on that?

It will be all debt finance to go close the acquisition.

Great. Thanks very much.

If there are no further questions I will turn the conference back to Ms. Scarpelli.

Thank you, everyone. We appreciate your patience in what has been a little bit longer than normal call. As always please feel free to call myself, Leroy or Dave with any follow up questions. Thank you.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dial 1(800)428-6051, or 973-709-2089, with an I.D. number of 329306.

This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.