ITRI

ITRON, INC. 10-Q Summary: Period Ended September 30, 2005

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Itron, Inc., covering the three and nine months ended September 30, 2005. Itron provides hardware and software solutions for meter data collection and management, primarily serving the utility industry. The reporting period includes nine months of operations for the Electricity Metering business segment, which was acquired on July 1, 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15% for the quarter and 47% year-to-date compared to 2004. This growth is primarily driven by the Electricity Metering segment, which contributed nine months of revenue in 2005 versus only three months in 2004.
• Profitability: Net income surged to $16.1 million for the nine months ended September 30, 2005, compared to $1.8 million in the prior year period. Operating income increased significantly due to higher sales volumes and operating efficiencies.
• Debt Reduction: Total debt decreased substantially from $278.2 million at December 31, 2004, to $155.6 million at September 30, 2005. The company made $121.0 million in optional prepayments on its term loan during the first nine months of 2005, funded in part by a $59.6 million equity offering in May 2005.
• Backlog: Total backlog increased to $325 million at September 30, 2005, up from $177 million at September 30, 2004, reflecting increased utility capital spending on automatic meter reading (AMR).

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth driven by industry-wide utility capital spending on AMR. The company anticipates that existing sources of liquidity will be sufficient to fund operations for at least the next year.
• Tax Benefits: The company recognized a $5.9 million net tax benefit in the second quarter of 2005 from a study of federal research tax credits for years 1997-2004. The estimated 2005 annual effective tax rate is approximately 34%.
• Subsequent Events: In October 2005, the company made an additional $3.0 million prepayment on its term loan. Additionally, an agreement was signed to purchase a new 198,000 square foot headquarters building for approximately $19.8 million, with closing expected by December 31, 2005.
• Risks: Key risks include the rate and timing of customer demand, rescheduling of orders, changes in warranty liabilities, and regulatory changes. The company also faces potential impacts from the adoption of SFAS 123R (Share-Based Payment) effective January 1, 2006, which will materially affect net income.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with consolidated leverage and coverage ratios required by the senior secured credit facility.
• Warranty Accruals: Monitor the sufficiency of warranty provisions, particularly for the Electricity Metering segment, as changes in estimates can materially affect expenses.
• Revenue Recognition: Review the application of revenue recognition criteria for multi-element arrangements and outsourcing services, which can vary based on delivery and acceptance.
• Stock-Based Compensation: Assess the impact of the upcoming adoption of SFAS 123R on future earnings, as the company currently expenses stock-based compensation under APB Opinion No. 25.
• Customer Concentration: Note that while no single customer exceeded 10% of total company revenue, one customer accounted for 13% of Electricity Metering revenues in Q3 2005.