ITRI

ITRON, INC. - 10-Q Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, for Itron, Inc., a provider of products and services to utilities and energy industry participants. 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 March 4, 2003, acquisition of Silicon Energy Corp. for approximately $71.2 million.

Key Financial Metrics

Note: Operating cash flow for the three-month period is not explicitly isolated in the text, but the nine-month figure is provided.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12% for the quarter and 14% year-to-date compared to 2002, driven by a 13% increase in sales revenues and contributions from recent acquisitions.
• Profitability: Net income decreased 16% for the quarter ($5.0M vs $6.0M) and increased 30% year-to-date ($12.1M vs $9.3M). The quarterly decline was influenced by higher operating expenses and a $0.5 million litigation accrual.
• Operating Expenses: Total operating expenses rose to $31.3 million for the quarter (38% of revenue) from $25.0 million (34% of revenue) in the prior year quarter. Increases were driven by amortization of intangibles ($2.4M vs $0.6M) and higher sales/marketing and product development costs related to acquisitions.
• Liquidity: Cash and cash equivalents decreased significantly from $32.6 million at year-end 2002 to $10.5 million at September 30, 2003, primarily due to the $71.1 million cash outflow for the Silicon acquisition.
• Debt: The company entered a new $105 million credit facility in March 2003, including a $50 million term loan. Outstanding term loan debt was approximately $41.7 million as of September 30, 2003.

Guidance, Outlook, and Risks

• Acquisition Update: Itron announced an agreement to acquire Schlumberger's electricity metering business for $255 million. The deal is subject to FTC approval and is expected to close in early 2004. Financing is expected to be debt-funded.
• Legal Settlement: On October 14, 2003 (subsequent to the period end), the company settled the Benghiat patent infringement litigation for $7.9 million. This settlement released $20 million of the revolving credit line previously restricted for an appeals bond.
• Restructuring: The company completed a restructuring of its Energy Information Systems group and European operations, incurring charges of approximately $2.0 million and $3.1 million respectively in 2003.
• Risks: Key risks include the timing of the Schlumberger acquisition, customer demand fluctuations, rescheduling of large orders, and exposure to foreign currency exchange rates (though sensitivity analysis indicated no material impact from a 10% fluctuation).
• Backlog: Total backlog was $169 million as of September 30, 2003, with a 12-month backlog of $69 million.

Investor Verification Checklist

• Schlumberger Acquisition Status: Verify the current status of the FTC review and the expected closing date for the $255 million acquisition.
• Debt Covenants: Confirm continued compliance with the new $105 million credit facility covenants, particularly given the reduction in cash reserves.
• Warranty Accruals: Review the $12.4 million warranty accrual balance and the impact of reclassifications from Corporate to specific business units (Natural Gas and Water).
• Amortization Impact: Assess the sustainability of earnings given the significant increase in amortization of intangibles ($7.0M YTD 2003 vs $1.6M YTD 2002) driven by the Silicon acquisition.
• Legal Contingencies: Monitor the finalization of the $7.9 million Benghiat settlement payment and any remaining litigation risks.