Good day, ladies and gentlemen, and welcome to the Itron Inc. Q2 2011 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks, I'd like to turn the conference over to Ranny Dwiggins. Please go ahead, sir.

Thank you, Keith. Good afternoon, everyone, and thank you for joining us. On the call today, we have Malcolm Unsworth, our President and Chief Executive Officer; and Steve Helmbrecht, our Chief Financial Officer. We issued a press release earlier today announcing our results. The press release includes replay information about today's call. We have prepared slides to accompany our remarks in this call, and these slides are available through the webcast and through our corporate website under the Investor Relations tab. Turn to Slide 2 to see today's agenda. After I complete the introduction, Malcolm will provide a business update. Next, Steve will review the financial results for the quarter and our updated guidance, and then Malcolm will close our prepared remarks, and after that, we'll take your questions. Our earnings release and financial presentation include non-GAAP financial information that we believe enhances your overall understanding of our current and future performance. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation. Now turn to Slide 3 regarding our Safe Harbor statement. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And with that, I will turn the call over to Malcolm Unsworth, Itron's President and Chief Executive Officer.

Thank you, Ranny, and good afternoon, everyone. Itron's growth in the last 7 quarters has been driven largely by smart grid projects in North America. While North America, smart grid projects will continue to be very important to us, we expect that over the next 18 months, other parts of the world will begin to contribute more significantly to our growth. This is the reason for our recent organizational announcement -- alignment into distinct energy and water businesses. In conjunction with this new alignment, we have launched a global cost reduction initiative to improve profitability. Let's turn to Slide 4, as I review the topics I'll cover today. First, I will provide a brief overview of our quarterly results; next, I'll provide a business update; and lastly, I'll give you an update on our cost improvement initiatives. Now, a look at the numbers. Consolidated revenues increased to $612 million, up $48 million dollars in Q1 and up $45 million dollars from Q2 of last year. Top line was good, but was aided by favorable currency exchange rates. I was disappointed by our profitability this quarter, which was impacted by higher-than-expected project and warranty costs. In addition, operating expenses were above plan because we continue to invest in new product development to energy and water and in our relationship with Cisco. We're also building our global smart grid sales and marketing organization. Non-GAAP earnings per share for the quarter was $1.20, including discrete tax benefits of $0.19. And Steve will provide more detail on our results in the conclusion of my remarks. Now the highlights for the quarter. We had very strong gas business in North America. It was up 7.5% over Q2 of 2010. Growth in international, up $24 million, or almost 9% year-over-year on a constant-currency basis. On a…

Thank you, Malcolm, and good afternoon. Please turn to Slide 5. Revenue in the quarter was $612 million, the second best revenue quarter in our history. Revenue grew $45 million over Q2 of 2010, with FX accounting for about $36 million of that growth. We had year-on-year improvement in gross margin to 31.2% from 30.7%. However, higher revenue did not translate into the level of operating margins we would like to see due to higher operating expenses, as well as certain project and warranty expenses. Non-GAAP operating margin fell to 10.8% from 11.8%. Adjusted EBITDA was $80 million, slightly down from last year. We had non-GAAP EPS of $1.20 per share compared with $0.94 a year ago. Non-GAAP EPS included about $0.19 of discrete tax benefits. In addition, we had restructuring charges of $1.9 million or $0.04 per share, which were excluded from non-GAAP results. These initial charges relate primarily to severance for positions that were eliminated during the quarter. As Malcolm discussed, we will provide more specific information in our third quarter earnings call. Total company bookings were $483 million for a book-to-bill ratio of 0.79:1. Turning to Slide 6, I mentioned that our non-GAAP net income was impacted positively from discrete tax benefits of about $8 million or $0.19 per share. These benefits relate primarily to 2 areas: One is the favorable resolution of tax litigation in Hungary during the quarter. The second relates to the finalization of tax accounting, which enabled us to realize certain tax loss carryforwards in the U.K. Our EBITDA margin was 13.1% in the quarter compared with 14.3% a year ago and 14.2% in Q1. What drove the decline in EBITDA margin? I will call out 3 areas: First, we saw some margin pressure in our international water business due to higher materials…

Thank you, Steve. We recognize the challenge we face in North America in 2012. However, with our regional diversification; balanced portfolio of electric, gas, water and heat end-to-end solutions; alignment of global resources; and proven track record of innovation, we believe Itron is very well positioned to succeed. And operator, we're now ready for questions.

[Operator Instructions] We'll take our first question from Steve Sanders, Stephens Inc.

Maybe first, Malcolm, regarding Itron North America in 2012 versus 2011. I know you don't want to talk about specific customers and projects. But can you give a sense, in aggregate, of what the large project comps look like in '12 versus '11? So you have San Diego rolling off, you have BC Hydro coming on, could you give us a little additional detail there?

Sure, Stephen. As I said in my prepared remarks, we're pursuing about 40 million points of smart grid solutions in North America. There's about 20 million -- that's split probably 50-50. 20 million are active right now, and there's about 20 million that's developing, and we're closely watching all of these. But at the same time, let me also stress that as I said in the other areas, that's not the only thing that we have to offer. We've got the smart-ready solution, where we've got 37 million electric-installed AMR meters and modules that we're approaching with our new solution, and also the new features that we've got with the 36 million gas modules that we have installed. And at the same time, we've got a balanced portfolio across the whole world. So it's not just the only thing we're addressing. But obviously, as I said in my prepared remarks, it is an issue.

Okay. And then 2 quick follow-ups. First, can you just provide a little more color and the dollar amount on the warranty issue? And second, are there other suppliers of PLN at this point?

Steve, I'll cover the first. We had some component-related issues in the supply side that we had to replace and take care of, that occurred during the quarter. And it was an impact on the warranty that was not expected. So we've worked through that issue, are working through that issue and taking care of that, overall. So I just wanted to call that out because we did have some warranty in the quarter, and it did have an impact on the results.

And I'll answer the question on Indonesia. As you know, Steve, we do have a very strong factory and presence in Indonesia, and that gives us the confidence that we will win significant market share. We do have 2 competitors. Those 2 competitors are Chinese manufacturers. And we feel very well positioned to win a lot more of that business going forward. And as I said, those 43 million points that we have installed at PLN, that are going to be converted over the next 5 to 7 years. So we compete head-to-head with these 2 companies, and it's split 3 ways and we've got a significant market share.

[Operator Instructions] We'll go next to Steve Milunovich with Bank of America.

Just a follow up on that. Could you give us a little more granularity on the 4 big electric contracts in the U.S.? I think you said San Diego Gas & Electric, is that done? And you said SoCal was down sequentially, or maybe it was down year-over-year? Is that temporary or is that just beginning to roll off? And what about Detroit and the remainder?

Yes, we've got contracts for taking us through, and I believe it's through 2012 and into '13 with the 4 contracts that we have. We know one that is coming to an end, which is San Diego. But BC Hydro is also kicking in. And of course, we've got others in the pipeline as well.

We'll take our next question from John Quealy with Canaccord.

If I could just sandwich my, I guess 2 in here. First of all, North America, when you look at book-to-bill excluding BC Hydro last quarter in the bookings, it looks like bookings are 148 this quarter, last quarter, x BC Hydro was 111. So that book and ship business, can you talk about what you think are the relative strengths or the lack thereof in North America? And do you think this a good level moving forward? And I just have a follow-up.

Let me answer that. First of all, and not just talk about North America, John. I know you want me to cover that, but it's also -- we have a balanced business. Yes, if you take a look and you take out some of these large contracts, we've got a steady business of singles, doubles and triples, which we've had for the last years. And if you look at the $150 million that we have -- $148 million booked this quarter, that's a good indication about the steady business that we've got in North America. But remember, we've also introduced these 2 new products that we've got called Smart Ready that takes advantage of our 37 million electric AMR meters in there and also these new 36 million gas modules that we're seeing significant opportunity for that. So as much as we say that's the book and ship business, we're also creating new opportunities with our install base. And we're seeing that actively people are looking at that today, both in energy and also in water. So, okay? And then internationally, as you know, we've got a significant book-to-bill business there. And the revenue and the bookings that we had in international happens to be the second largest bookings that we've had since we owned Actaris in the first quarter of 2007.

And just a quick follow-up, so in terms of Q3, it sounds like it's going to be noisy with these charges on at least closing down the put. Number two, it sounds like we're going to get more detail on restructuring. We talked about a lot of macro issues, I think, at the Analyst Day in terms of Transform 2015. Is Q3 the period where we're going to have a lot more detail, you think, about all of these initiatives and your thoughts moving forward? Or how should we think about getting more details here?

Yes, John, this is Steve. And we will have -- we will provide more. And I want to clarify in the financing side, on the put itself, that's not the cause of any kind of charges or the write-off of fees. It's the opportunity significantly lower, our interest rates going forward in the current market given our improved credit rating, and that will just produce a write-off of the remaining unamortized balance in the debt fees. And then we had a swap in place. But we are doing this to lower our overall cost of debt going forward with almost immediate benefits starting in the quarter itself. We're just not prepared since we haven't finalized to provide that. But we will provide that. And then back to the activities that are more important to talk about operationally, yes, we will provide much more detailed information, including specifics in the quarter.

We'll go next to Sanjay Shrestha with Lazard Capital.

My question is also kind of a follow-up on this [indiscernible] outlook. Malcolm, are you -- I hope I'm not putting words into your mouth, but you sound a bit more cautious about sort of the outlook for 2012 on this call than maybe I've sort of heard it in the past. But when we add everything up and given sort of portfolio approach you guys have and the tremendous amount of, sort of, book and ship business, is there anything that's sort of you see here that, maybe regulatory dynamics or push out on some of the large projects, that kind of maybe makes you sound like North American dynamics might be an '13 opportunity with the Cisco relationship and maybe not as being on large projects side in '12. Can you talk about that a little bit? May be give us some more granularity there?

Yes, I will, I will. First of all, the regulatory dynamics that I've talked about earlier, if you think about North America, the stimulus package certainly did generate a lot of interest in our AMI business for everybody. Regulatory dynamics in California, et cetera, and also in Texas drove a lot, but now we have other places, like Pennsylvania, that's still pushing forward. And as you move overseas, one thing that I did talk about was Europe. This is a great opportunity for the regulated, that if approved, the ERDF solutions, that the President and CEO of ERDF just got approved with the Energy, it's on the table for the Energy Minister. So I'm pretty thrilled with that, that's going on right now. So that gives you an idea of the regulatory dynamics that we have.

And we'll go to Paul Coster with JPMorgan. Paul Coster - JP Morgan Chase & Co: Can you just clarify whether or not the guidance that you've issued for the year assumes the cost saves start to kick in this year? And can you just talk us a little bit through the process of getting the details, and why, given the fact that you first announced this it May now, that it's taking such a long time to get the information out to investors?

Yes, I'll take that one, Paul. First of all, we do believe it's going to be, as I said in my prepared remarks, it's going to be substantial. And the cost saving will probably not hit really until next year in 2012 and beyond. But we want to be very -- we want to make sure we give the right message because we've got, as I've said, we're really looking at the purchasing savings. We're looking at consolidating a lot of our purchasing activities. We're also looking at rationalization of facilities. So we want to make sure we get that absolutely correct. And then of course, we're doing a lot of shared services that we've said before, which will have an impact of where we're going in the future. And so it will have an impact on to 2012 -- on our results in 2012, yes.

Paul, this is Ranny. I'll just add that it's on schedule, meaning, the length of time it's taking is what we had planned. It's a big project and that's why it's taking the time. It's a comprehensive review.

We'll take our next question from Patrick Jobin with Crédit Suisse.

First, could you provide, maybe, an update on the pricing environment? It might be helpful if you could break that out, either by meter type and then maybe by geography?

Sure. Obviously, one of the things we don't talk about on the call for competitive reasons is pricing. But we've seen no real degradation of pricing across the whole of our industry across the globe. Fixed pricing is obviously, on the contracts that we currently have. Obviously, these big contracts that you have are fixed prices and they're competitive, the same as everything else. But we're not really seeing significant changes in pricing across the globe, to be honest with you.

Okay. And then just as a follow-up, could you maybe provide a little more color on BC Hydro and Cisco? How should we see that progressing throughout the year? And have meter installs started with the Cisco product today? I was slightly confused by the comments. I just want some clarity there.

Sorry if I confused the listeners, and I apologize about that. The BC Hydro plan to start this quarter, and we've started with our shipments of our first OpenWay Hardware 3.0 solution that's going in as we speak. And at the same time, with our relationship with Cisco, and as I said in my prepared remarks, we have now got the field router that we're preparing to install this quarter. And so there will be revenue with BC Hydro this year in the second half.

We'll take our next question from Carter Shoop with KeyBanc.

Just as a quick follow-up on the BC Hydro contract, at what point, do you think you'll be at a full volume deployment at BC Hydro? Will it be sometime in kind of mid-4Q?

Carter, we have contractual obligations that we work too. And when did you say for -- I'm sorry.

Q4.

Q4? I do believe so, that will be the case, yes.

Okay. As a follow-up question, can you talk about the mix implications to margins in the second half of 2011 and 2012 in North America as we start to see electricity business decline on a year-over-year basis and the gas and water business really increase? Historically, we've seen better margins in the AMR business and the AMI business. Do you think that will play out in the second half of 2011 and 2012?

We don't give specific guidance on margins for individual products. But we know, as we've said before, we have a very good gas and water business, both in North America and outside North America, where our margins are better than our electric business. So yes, we do reflect that in our numbers. Steve?

And in addition -- Carter, it's Steve. Related to '11 and the guidance, yes, improvement -- some improvement in margin. Part of that is just a recurrence issue on some warranty or other costs. But mix does play some role on that as well.

We'll take our next question from Sean Hannan, Needham & Company. Sean Hannan - Needham & Company, LLC: Malcolm, I wanted to try go at this one more time. For the 4 major deployments we had here in the U.S., is there a way, if, at least, if you can give us a sense, where you stand today, contractually you have an obligation around certain numbers of meters for each of those projects. Can you give us a sense where do we stand today, say for Detroit Energy, are we 15% or 20% complete? San Diego Gas & Electric, are we 90% complete? Is there a way to just kind of walk through those 4 and give us a general sense?

Let me get -- let me let Steve take that call, Sean.

So and this is kind of a build on the other question, as well as the rollout. I'm not going give the specific percentages there, but in terms of overall, where we are, clearly, San Diego is the farthest along. We've talked about that. We're continuing on Southern Cal through this year and into next year. As Malcolm said, Detroit and each has their own schedule, and that's really their decision and we'll follow through that. But in terms of rolling that up in macro with the rollup of BC Hydro, we think into next year. And it's reflected really in the 12-month backlog, which has increased some actually year-on-year. So that it's, I think, is indicative of the continued execution on these contracts rolling out in the next year. In terms of how that rolls out, overall, I think it's the latter half of '12 where you start to see that impact starting to roll off. And that's why Malcolm talked about the need to focus on executing these new contracts now, continue to build that. That's something we've always focused on doing. So we roll those forward. We're very pleased with the progress of these projects, but we do start to see that in terms of the impact in the second half of next year, which is where we will be focusing on building that next set of bookings going forward.

And then just to comment a little bit further, if you take a look at our balanced portfolio of products, one of the things we've talked about is not just North America, we've got all of these projects that are going on in emerging countries, and we've seen a 31% increase quarter-over-quarter on some of these emerging markets. We've also seen good gas activity across the whole globe and across the water industry, in general. So it's not just about this, the backlog in North America. We've got opportunities for significant book and ship business in the next 12 months in our international arena. And also, as I talked earlier, with the discussion on book and ship in North America. So we're pretty pleased with what we have there and the growth that we're seeing internationally. Sean Hannan - Needham & Company, LLC: Agreed on the balanced portfolio. Just a quick follow-up on those 4 North American projects. Can you also share with us whether any of those utilities have given you an indication whether the scope may be expanding slightly? Could you, perhaps, see a little bit of a tail to those products incrementally added? Or is it too early in order to tell?

One thing that we always find, and we do a lot of these projects, and I'm not just going to talk about these 4, I'm talking specifically in general. When you win some of these large contracts, what they trying to do is accelerate. That's what they do to try and get the savings. There's a lot in the pipeline and this is the kind of business case that you -- but because you've now got no stimulus packages that's there, it's about a business case. And when you get business cases, the utility is going to save money. That's what we do for a living. That's what we've been doing for 10 years, and this is exactly what we're pushing forward with our new products across -- whether it's water, gas or electric. That's why we're doing this to fill the pipeline and accelerate projects that, today we don't have, in 2012 and bring those forward because that's what utilities do.

We'll take our next question from Jason Feldman, UBS.

Regarding the cost reduction initiatives, it sounds like most of those are focused on the cost of goods line, factory rationalizations, purchasing, et cetera. But you're also kind of talking at some areas and we've seen over the last couple of quarters, upward pressure on operating expenses, specifically product development and sales and marketing. Are you envisioning a net savings? Or are the cost-reduction initiatives going to be as primarily to essentially fund growth initiatives as you expand internationally and can ramp up product developments elsewhere?

For model purposes, our -- we've said that our product development expenses across the globe are primarily for investments in energy and water solutions, of course. And I see that, that's going to continue. In the OpEx line, we are obviously, looking at shared services across the globe, which is why we put this organization in place the way we have. So we do see this -- the change -- significant change will take place in cost of goods sold. You're absolutely correct, there's no question about that. And it will fund some of the other things that we have in there. Steve, you want to add a comment?

I just want to add that on a net basis, so it's not intended solely to fund the increased level. It's beyond that. It's to reduce the overall cost and improve the overall profitability, net of these investment decisions we'll continue to make in these areas.

Next question is from Craig Irwin with Wedbush Securities.

This is actually David Giesecke. Craig's stuck on a plane right now. For your customers in procurement of meters at this time, the roughly 40 million that you mentioned. Can you share some of the gating factors that they would facing in front of their commissions? For instance, that they definitely need the business case with the positive ROIs. What else might be helping or hindering getting these by their commissions?

Let me just talk a little bit about what's going on with the commissions. First of all, in the states that we've talked about with regards to Pennsylvania, very favorable with some of those solutions, and I think they'll going to have the support of the Public Service Commission. And in the other states, it's just the business as usual. It's a business case. Do they put it on the rate base? Do they put it -- give it to the shareholder? Do they put it on their own balance sheet? It's just one of those back to normalcy business with the utility industry. And that's exactly what we're used to. So I think there's a lot of positive movement that's taking place with Public Service Commissions. Now that you've got a lot more of these benefits that are taking place in Texas and California, you're seeing that there are benefits to these rollouts of smart solutions. In particular, you're seeing some the things that are going on in Texas. And BC Hydro now, there's 500,000 in what we call in-home devices that's going to drive that. So yes, you are seeing favorable acknowledgment of these solutions with the Public Service Commission.

We'll take our next question from Benj Schuman with Pacific Crest Securities.

We've seen some pretty granular schedules for AMI deployment published by the regulators in France and England with some real volumes kind of kicking in around 2013, 2014. When do you guys expecting things to clear up in terms of market share and average selling prices, assuming that those timelines stay firm? And then to follow up on that for France, do you expect to see large awards for the duration of the deployments or framework agreements with orders each year? How come we kind of think about that?

Yes. Ben, it is very different than what's going on over in the U.S. So let me just put that straight, as I said many times. And I'll address each particular country. The regulator in France has approved that solution, and it's going through to the Energy Minister. Their rollout is to start -- and they now got the RFQ in place to be put out and there's 3 of us there. There's 2 of our competitors and us. So on the pilots, there's just the 3. We're doing very well. It's working extremely well, so I see France absolutely moving forward. In the U.K. -- 2014 in the U.K., that still looks like it's on plan. I don't see any major issues. There are a number -- 6 DRE [ph] Utilities there, and they're all moving forward. Albeit a little slower, but by 2014, with the installations, that's what they plan on doing. And looking at other areas, we do see -- that will be done as a -- I think, as a book and ship business. This because you've got full interoperability, for example, with France or with ERDF. I don't believe we will make a full booking unless you get scheduled deliveries like what we've just done with PLN in Indonesia. Because of interoperability, we've got a good market share there, and they released their quantities every few months. I think the same thing will happen in France and in the U.K. So the model of -- our model of this large backlog that we have, and I've said this many, many times, may change moving forward of more of a book and ship business, especially in the European countries with interoperability and book and ship business.

Okay, great. And then do you guys ship any meters to [indiscernible] for BC Hydro in Q2?

I don't think we did. I think we started that in July.

[Operator Instructions] We'll go next to Chris Kovacs, with Robert Baird. Christopher Kovacs - Robert W. Baird & Co. Incorporated: Can you guys, maybe, speak to the activity you're seeing in Latin America or South America? And then maybe address any types of differences you're seeing in the characteristics of deployments, like, for example, how in Europe you're typically bring in multiple vendors versus the kind of lone vendor mentality in the U.S., timeline, that type of thing?

Yes, absolutely. First of all, South America is a big place, but the majority of it is in Brazil. There's 195 million people in Brazil, and they are looking at mandating smart metering. What they do is slightly different because they got a very high degree of nontechnical losses that's there, especially on the electric side. And what they're looking at this what we call centralized metering solutions, where you put 12 meters on a pole, which are -- can be prepayment or interruptible through an in-home device. We're very well positioned there. We've got a good strong market share, and we're working very closely with the regulators and also the place where they do all of the approvals of their solutions. So it's moving forward quite well.

We'll take our next question from Ryan Connors, Janney Montgomery Scott.

You talked a couple of questions ago about the issue of regulatory commissions kind of embracing smart grid increasingly. But also in your prepared remarks, you talked about a shift in decision-making post-stimulus to a more, I think, the word you used was incremental-type decision-making process. So there's a little bit of disconnect there. And my question is, is it your belief that maybe the macroeconomic situation, and in particular, unemployment, et cetera, may be making PUCs somewhat less willing to approve the very large contracts because they're more sensitive to rate shock in this environment than they were a few years ago. I'm just interested to get your take on that.

Yes. It's hard to always predict what the Public Service Commissions are actually going to do. What I'm really trying to say is that it's going back to no -- there's no more stimulus money that's going to be available. There's a limited number -- amount. So you go back to the business case solutions that you put forward to the Public Service Commission, and they've looked favorably at these locations, I'll just say, like Texas. So they'll use those as a reference, I believe. And looking at them, seeing how they're doing, and we've seen that, as I say, in Texas with Barry Smitherman, who is now moving over to the transport section. But will it be rate shock because they've got to put a higher number in there? That's one of the reasons we developed our Smart Ready solution because it's not as big as an impact to the utility and to the rate payer when you pay a less amount for your AMR ready solution, and then when you want to move it to AMI, what you do is that you install an infrastructure there and that adds a bit more cost to the whole of this solution that this -- that a utility would have. So a lot easier business case to get the approval on with solutions that are Smart Ready. And then you layer over the top of the network in place there. And that protects our install base of, as I said, 37 million electric meters. So we're in good position there.

We'll take a question from Colin Rusch, ThinkEquity LLC.

This is Eric, calling in for Colin, also plane issues. I wanted to follow up on your discussion about South America. There and other developing economies, I think, are clearly steps to turn as a major driver for sales. Can you talk a little bit about product development in this area and some of the functionalities you expect could be done going forward?

Certainly. The thing I talked about earlier about theft was -- the definition of the nice word for theft is nontechnical losses. And that's the driver, especially they have up to 40% of theft in certain parts of South America. So regulatory decisions or legislation decisions are being made down there, and they're not there yet today. And when it comes to product development, we have a global footprint of R&D, especially on the electric side. We put these solutions in various parts of the world, and we're taking advantage of our R&D expertise in the U.S. and also in South Africa and also in Latin America. So because we now have this global footprint with R&D, managed by our new CTO that's going to help coordinate all of these. We have this ability to develop products much faster for time-to-market. So we'll take full advantage of what's going on down there. And as I say, theft is the nice -- nontechnical losses is a nice word for theft.

Yes, exactly. And can you just give us a little more color on that trend in meters sales coupled with third-party communications module and talk about how that trend you expect to go going forward?

Yes. We developed a solution or a product called the CENTRON about 10 years ago. And we have always been proud of the fact that we can have other communication technology providers on to that device. That was a one-way solution that we developed those years ago. And that was a driver. And it's still the driver for our AMR solution that we still produce a lot of those CENTRONs with radio products on to do AMR. What this new CENTRON II does is it takes the new OpenWay design solution with reference to call the C12.19 solution. And what we do is to we put on the -- a disconnect switch, so we allow the utility to use other people's network -- one of our competitors who doesn't have a meter, use ours and it gives them the ability to put their communication technology on our meter and then that gives the ability to communicate to 2 ways, and also with their communication module into the home. But it does have a disconnect switch, and that what's gives it the opportunity to participate in a lot of those other solutions that we have.

And ladies and gentlemen, due to time constraints, our final question is from John Quealy with Canaccord Genuity.

Steve, just going to the balance sheet, inventories are up 20% year-on-year. I realized there might be some commodity inflation in that. But can you give us a little bit of a walk on the cash flow and just give us a range, if you could, about what you think the new bank debt terms could say from a cash perspective? And then also, if you just could touch on what we should expect on the balance sheet moving forward for working capital?

Okay. Yes, the inventory has grown, John, and that was, as I mentioned, increase in raw materials and some work in progress, but a lot of it is for actually, development of finished goods for future delivery. And then I also mentioned supply chain continuity, one in particular related to a critical component that where there were post-earthquake shortages and we wanted to sure we have the right amount in place to help secure deliveries in Indonesia in the prepayment meters. We expect that to -- that ratio to improve, and therefore to -- in addition, on the AR side, as projects reach milestones and so forth and receive payments against that, those are the 2 periods where we're going to see some cash released out of working capital that has grown to a more elevated level than what we typically see and want to see. And so we'd expect the second half, on a cash flow perspective, to be improved on that basis. To your point about the debt, we had an exploration of -- irrespective of this change, we had a $200 million swap, fixed rate swap on our U.S. dollar debt, which expired at the end of June 30 at no cost. Our average rate on our debt as of 3/31 was about 5%, and with the expiration of swap alone, that's dropped down to about 4.2% of total average rate. With this refinancing, that will go lower than that number. Not specific yet in terms of the amount, but our current credit agreements of LIBOR plus 350 on a current remaining bank debt and market is lower than that. And we have about $350 million in that bank debt today. So the variable is on the converged 2.5% coupon, and it will depend on how much is put back to us this week. But any outstanding put to the very low rate at 2.5%. So to summarize, with the expiration of swap alone, our rates dropped from about 5% down to 4.2%. With the completion of refinancing, we expect that to drop again because of the improved rate environment and then kind of the variable is the amount of the put that's converted back to us and we'll have to see. I will know that at the end of the week.

And then just in terms of the cash flow, when we go through the restructuring in Q3, free cash in the back half will be impacted by what you payout, whether it's severance or whatever, is that right?

Yes, that's right, and the timing of those payouts, the charges used generally predate the cash outflows as those are taken out will depend, again, specifically on that. But we will provide, in addition to the charge information, we give a sense of the rollout of that, the implications on the cash flow going forward. We expect some impact on free cash flow second half of the year -- yes, this year, but not in the full amount of the charges itself. Some of that will push into '12 from a cash perspective.

Okay. Operator, this is Ranny. I'd like to thank everyone for joining us today. And if anyone has any further questions, they can certainly give me a call. But let's go ahead and close out the call today, please.

Thank you. Ladies and gentlemen, there will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1 (888) 203-1112 or 1 (719) 457-0820, with the pass code of 6754032, or go to the company's website, www.itron.com. This concludes today's presentation. We appreciate your participation.