ITRI

ITRON, INC. - Form 10-Q Summary (Period Ended June 30, 2003)

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for ITRON, INC., a provider of products and services to utilities, covering the three and six months ended June 30, 2003. The company operates through five business units: Electric, Natural Gas, Water and Public Power, International, and End User Solutions. The reporting period includes the impact of the acquisition of Silicon Energy Corp. (Silicon) on March 4, 2003.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11% for the quarter and 15% year-to-date compared to 2002. Sales revenues grew 13% (quarter) and 20% (YTD), driven by increased hardware deliveries of automated meter reading (AMR) modules and handheld computers. Service revenues declined slightly due to warranty-related handheld upgrades and lower outsourcing revenues.
• Profitability: While Net Income decreased 34% for the quarter ($4.2M vs $6.3M), it increased 111% year-to-date ($7.1M vs $3.4M). The YTD increase is largely due to a $7.2M in-process research and development (IPR&D) charge in 2002 that did not recur in 2003.
• Acquisition Impact: The acquisition of Silicon Energy Corp. in March 2003 resulted in a $900,000 IPR&D charge and added $41.7M to Goodwill. It also contributed to higher operating expenses due to amortization of intangibles ($4.7M YTD vs $0.9M in 2002).
• Restructuring: The company incurred $2.2M in restructuring charges YTD 2003, primarily related to workforce reductions in the Energy Information Systems group and European operations.
• Liquidity: Cash and cash equivalents decreased from $32.6M at year-end 2002 to $9.9M at June 30, 2003, primarily due to the $71.1M cash outflow for the Silicon acquisition, partially offset by a new $50M term loan.

Guidance, Outlook, Risks, and Unusual Items

• Subsequent Event (Major Acquisition): On July 16, 2003, Itron announced an agreement to acquire Schlumberger's electricity metering business (SEM) for $255 million. The deal is expected to close in Q3 or Q4 2003 and will be financed primarily with debt.
• Legal Contingency (Benghiat Litigation): A $7.4M liability was accrued in 2002 for patent infringement damages. In June 2003, the court denied a request for enhanced damages but denied the company's motion to shorten the damages period. The company is considering an appeal, which could be costly.
• Earn-outs: Potential earn-out payments of up to $13.5M for LineSoft (unlikely) and $1.0M-$2.0M for Regional Economic Research (likely) may be required based on 2003/2004 revenue targets.
• Customer Concentration: One customer accounted for approximately 11% of total revenues in both the quarter and six months ended June 30, 2003.
• Debt Covenants: The company entered a new $105M credit facility in March 2003. It is currently in compliance with all covenants.

Key Facts for Investor Verification

• Acquisition Financing: Verify the terms and closing conditions of the $255M SEM acquisition announced in July 2003, including the impact on leverage ratios and future interest expense.
• Legal Exposure: Monitor the status of the Benghiat patent litigation appeal and any potential for additional damages or injunctions affecting product sales.
• Working Capital: Assess the sustainability of the reduced working capital ($15.2M) compared to the prior year ($51.0M) given the new debt obligations and upcoming acquisition.
• Amortization Pressure: Review the impact of increased amortization of intangible assets ($4.7M YTD) on future operating margins.
• Customer Concentration: Evaluate the risk associated with the single customer representing 11% of revenues and the projected decrease in their contribution by year-end.