Itron Announces Third Quarter Results

LIBERTY LAKE, WA. — October 28, 2009 — Itron, Inc. (NASDAQ:ITRI) today reported financial results for the three and nine month periods ended September 30, 2009. Financial results include:

• Quarterly and nine-month revenues of $408 million and $1.2 billion;
• Quarterly and nine-month non-GAAP diluted EPS of $0.45 and $1.28;
• Quarterly and nine-month adjusted EBITDA of $41 million and $131 million; and
• Record twelve-month backlog of $749 million and total backlog of $1.6 billion.

“As we expected, third quarter results reflect continued softness in the market,” said Malcolm Unsworth, president and CEO. “We are still being negatively affected by the economy, foreign currency exchange rates and lower order volumes as our customers await stimulus fund award announcements. On the positive side, we have now shipped more than 400,000 OpenWay units, our AMI deployments are gaining momentum and stimulus awards have been announced. We are confident and excited about the opportunities for growth next year.”

Revenues:

Total Company - Revenues of $408 million for the third quarter and $1.21 billion for the first nine months of 2009 were 16% and 18% lower than respective 2008 revenues of $485 million and $1.48 billion.

North America - Revenues of $137 million for the third quarter and $420 million for the first nine months of 2009 were 22% and 21% lower than respective 2008 revenue of $176 million and $528 million. The lower North America revenues in the 2009 periods were primarily driven by the substantial completion of a number of AMR contracts in 2008 and fewer shipments of electric meters and AMR modules due to the economic downturn and uncertainty surrounding stimulus funds announcements.

International - Revenues of $271 million for the third quarter and $791 million for the first nine months of 2009 were 12% and 17% lower than respective 2008 revenue of $309 million and $949 million. Approximately 65% of the quarterly and 80% of the year-to-date decrease was due to foreign exchange rates while the remainder was primarily due to completion of a smart metering/AMI project in 2008, softening of demand in some markets and economic conditions in certain countries.

Gross Margins:

Total Company - Gross margins of 31.7% for the third quarter and 32.4% for the first nine months of 2009 were lower than 2008 gross margins of 33.6% and 34%.

North America - Gross margins of 31% for the quarter and 34.5% for the first nine months of 2009 were lower than 2008 gross margins of 37.8% and 38%. The decline in gross margins in 2009 was primarily driven by shipments of our first generation AMI meters, which currently have higher costs, fewer AMR meter and module shipments and reduced overhead absorption resulting from lower overall production levels.

International - Gross margins of 32.1% for the quarter and 31.3% for the first nine months compared with 2008 gross margins of 31.2% and 31.7%. The increased margins in the current quarter were primarily due to lower material costs and product mix.

Operating Expenses:

Total Company - Operating expenses of $120 million for the third quarter and $362 million for the first nine months of 2009 were lower than 2008 third quarter and year-to-date operating expenses of $138 million and $413 million.

North America - Operating expenses were $44 million in the third quarter and $132 million in the first nine months of 2009 compared with $49 million and $145 million in the same periods of 2008. The decrease in 2009 was primarily due to lower sales expenses and lower general and administrative expenses.

International - Operating expenses of $70 million in the third quarter and $207 million in the first nine months of 2009 compared with $78 million and $238 million in the same periods of 2008. Decreased amortization of intangibles expense in the 2009 periods and foreign exchange rates accounted for the majority of the decrease.

Corporate Unallocated – Operating expenses were $7 million for the third quarter and $23 million in the first nine months of 2009 compared with $11 million and $31 million in the respective periods of 2008. The decrease in 2009 is due to reductions in compensation expenses and consulting fees related to financial integration and Sarbanes-Oxley compliance.

Interest and Other Income:

Interest - Net interest expense of $20 million in the third quarter and $52 million in the first nine months of 2009 compared with $19 million and $71 million in the same periods of 2008. Amortization of debt placement fees, which is included in net interest expense, of $4.0 million in the third quarter and $6.2 million in the first nine months of 2009 compared with $1.7 million and $7.5 million in the same periods in 2008. Amortization of debt placement fees varies ratably depending on the amount of debt repayments in each period. During the last twelve months, we reduced our debt by approximately $360 million.

Other Expense – Other expense was $4.5 million in the third quarter and $9.4 million in the first nine months of 2009 compared with $281,000 and $1.9 million in the same periods of 2008. Other expense for both periods in 2009 includes foreign exchange losses caused by fluctuations in exchange rates driven by material purchases and associated product sales in differing currencies. Year-to-date 2009 expense includes legal and advisory fees associated with an amendment to our senior debt agreement which was completed in the second quarter.

Loss on Extinguishment - On July 17, 2009, we paid $113.2 million to redeem our 7¾% senior subordinated notes which had a remaining principal value of $109.6 million. We redeemed the notes at 101.938% of the principal amount. This redemption resulted in a net loss on extinguishment of $2.5 million. In the first nine months of 2009, we incurred a total net loss on extinguishment of debt of $12.8 million due to a convertible debt for common stock exchange in January and the redemption of our senior subordinated notes in July. The debt for stock exchange resulted in a net loss of $10.3 million as the value of the shares of Itron’s common stock issued under the exchange agreement differed from the value of the shares used to derive the amount payable under the original conversion agreement.

GAAP Measures:

GAAP Income Taxes – We had a tax benefit of $15.1 million in the third quarter and $37.5 million in the first nine months of 2009 compared with a tax expense of $377,000 in the third quarter and a tax benefit of $1.3 million in the first nine months of 2008. The 2009 tax benefits are primarily due to pre-tax losses, the benefit for claiming foreign taxes as credits rather than deductions and expected lower income in higher tax jurisdictions.

GAAP Net Income/Loss and Diluted EPS – Our GAAP net loss and diluted EPS for the third quarter and first nine months of 2009 was $3.0 million, or 7 cents per share, and $7.4 million, or 19 cents per share. This compares with net income of $5.6 million, or 15 cents per share and $17.6 million, or 50 cents per share, in the same periods in 2008. The net loss in 2009 was due to lower revenue, contraction of gross margins and foreign exchange losses.

Non-GAAP Measures:

Non-GAAP Operating Income - Non-GAAP operating income excludes amortization expense related to intangible assets and was $34 million, or 8.4% of revenues, in the third quarter and $102 million, or 8.5% of revenues in the first nine months of 2009. This compares with $56 million, or 11.5% of revenues and $182 million, or 12.3% of revenues, in the third quarter and first nine months of 2008. The decreased operating income and margin was primarily due to the combination of lower revenues and gross margins in 2009.

Non-GAAP Income Taxes - We had a non-GAAP tax benefit in the third quarter of 2009 and our year-to-date 2009 non-GAAP tax rate was 4.5%. This compares with 28% for the third quarter and 27% for the first nine months of 2008. The lower non-GAAP tax rate in 2009 is due to projected lower income in higher tax jurisdictions, and the benefit for claiming foreign taxes as credits rather than deductions.

Non-GAAP Net Income and Diluted EPS – Non-GAAP net income, which excludes amortization expenses related to intangibles assets, amortization of debt placement fees, the additional non-cash interest expense related to the adoption of FSP 14-1 and the non-cash net loss associated with the convertible debt for stock exchange, was $18 million for the third quarter and $49 million for the first nine months of 2009. This compares with $30 million and $93 million in the same periods in 2008. Non-GAAP diluted EPS was 45 cents and $1.28 in the third quarter and first nine months of 2009 compared with 81 cents and $2.65 in the same periods of 2008. The lower net income and diluted EPS was primarily due to lower revenues and a decline in gross margin in 2009. Diluted weighted average shares outstanding in 2009 were approximately 3.6 million and 3.4 million shares higher than the same periods in 2008 primarily due to the convertible debt for stock exchange in the first quarter of 2009 and the equity offering in the second quarter of 2009.

Other Financial Highlights:

Backlog and New Order Bookings – Total backlog was $1.6 billion at September 30, 2009 compared with $1 billion at September 30, 2008. Twelve month backlog of $749 million at September 30, 2009 was higher than the $436 million at September 30, 2008 due to the inclusion of Q3 2010 AMI shipments in the current twelve month backlog. New order bookings for the third quarter of 2009 were $400 million, compared with $894 million in the third quarter of 2008. Our book-to-bill ratios were .98 to 1 and 1.9 to 1 for the third quarter of 2009 and 2008, respectively. New order bookings for the first nine months of 2009 were $1.5 billion compared with $1.8 billion in the same nine months of 2008. New order bookings for the three and nine month periods of 2008 included $470 million related to an AMI contract with Southern California Edison (SCE).

Cash Flows – Net cash provided by operating activities during the first nine months of 2009 was $87 million, compared with $156 million in the same period in 2008. Adjusted earnings before interest, taxes, depreciation and amortization and the non-cash net loss on extinguishment of debt (adjusted EBITDA) in the third quarter of 2009 was $41 million compared with $69 million for the same period in 2008. Adjusted EBITDA for the first nine months of 2009 was $131 million compared with $220 million in the first nine months of 2008. Free cash flow in the first nine months of 2009 was $49 million compared with $115 million in the same period of 2008.

Non-GAAP Financial Information:
To supplement our consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP net income and diluted EPS, adjusted EBITDA and free cash flow. We provide these non-GAAP financial measures because we believe they provide greater transparency and represent supplemental information used by management in its financial and operational decision making. Specifically, these non-GAAP financial measures are provided to enhance investors’ overall understanding of our current financial performance and our future anticipated performance by excluding infrequent costs, particularly those associated with acquisitions. We exclude these expenses in our non-GAAP financial measures as we believe the net result is a measure of our core business that is not subject to the variations of expenses associated with these infrequently occurring items. Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP. Finally, our non-GAAP financial measures may be different from those reported by other companies. A more detailed discussion of why we use non-GAAP financial measures, the limitations of using such measures and reconciliations between non-GAAP and the nearest GAAP financial measures are included in this press release.

Earnings Conference Call:
Itron will host a conference call to discuss the financial results contained in this release at 2:00 p.m. (PDT) on October 28, 2009. The call will be webcast in a listen only mode and can be accessed online at www.itron.com, “Investors/Investor Events.” The live webcast will begin at 2:00 p.m. (PDT). The webcast replay will begin after the conclusion of the live call and will be available for two weeks. A telephone replay of the call will also be available approximately one hour after the conclusion of the live call, for 48 hours, and is accessible by dialing (888) 203-1112 (Domestic) or (719) 457-0820 (International), entering passcode #5642738. You may also view presentation materials related to the earnings call on Itron’s website, / Investors / Presentations.