ITRI

ITRON, INC. - Form 10-Q Summary (Period Ended June 30, 2002)

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for ITRON, INC., covering the three and six months ended June 30, 2002. Itron provides automated meter reading (AMR) systems and software for electric, natural gas, water, and public power utilities. A significant event during this period was the acquisition of LineSoft Corporation on March 12, 2002, a provider of engineering design software for utility transmission and distribution systems.

Key Financial Metrics

Note: The six-month net income was significantly impacted by a $7.2 million non-cash charge for purchased In-Process Research and Development (IPR&D) related to the LineSoft acquisition.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 37% in Q2 2002 and 34% for the six-month period compared to 2001. Growth was driven primarily by a 70% increase in AMR meter module shipments and the inclusion of LineSoft revenues ($3.7 million in Q2).
• Segment Performance: Electric Systems revenue grew 59% and Natural Gas Systems grew 56%. Conversely, International Systems revenue declined 47% due to the absence of a large handheld system sale made in 2001.
• Debt Reduction: The company redeemed $53.3 million in convertible subordinated debt in Q2 2002. All holders elected to convert the debt into approximately 3.1 million shares of common stock, eliminating this liability without a cash outflow.
• Acquisition Impact: The LineSoft acquisition added $26.2 million to goodwill and $7.4 million to identified intangible assets. It also resulted in a $7.2 million IPR&D charge in the first half of 2002.

Guidance, Outlook, and Risks

• 2002 Guidance: Management anticipates full-year 2002 revenues between $275 million and $285 million. Reported diluted EPS is expected to range from $0.79 to $0.83. Pro forma diluted EPS (excluding IPR&D, amortization, and restructuring) is expected to range from $1.06 to $1.10.
• 2003 Outlook: Preliminary expectations indicate revenue growth of 11% to 17% and pro forma diluted EPS growth of 15% to 25% relative to 2002.
• Regulatory Update: The FCC adopted rules on May 24, 2002, reserving spectrum in the 1427-1432 MHz band for utility telemetry, which management believes secures future spectrum access.
• Legal Contingencies: The company is involved in patent litigation with Ralph Benghiat regarding handheld meter reading devices. Trial is scheduled for November 2002. While management believes it will prevail, an unfavorable outcome could have a material adverse effect.
• Accounting Changes: The company adopted SFAS No. 142, ceasing goodwill amortization and testing for impairment instead. No impairment was found in the initial Q2 2002 test.

Investor Verification Checklist

• LineSoft Integration: Verify the realization of the projected $16-$20 million in TDS (LineSoft) revenue for 2002 and the status of the $13.5 million potential earn-out payment.
• International Recovery: Monitor the International Systems segment for recovery from the 53% year-to-date revenue decline and margin improvements following the completion of low-margin contracts.
• Patent Litigation: Track the Benghiat patent infringement case scheduled for trial in November 2002 for potential financial impact.
• Inventory Levels: Review inventory turns, which dropped to 4.4 in Q2 from 5.1 at year-end 2001 due to intentional build-up for anticipated Q3/Q4 demand.
• Stock Repurchases: Note that the company completed the repurchase of 798,700 authorized shares in July 2002 (post-period) at an average price of $15.44.