Itron: Fourth Quarter and Full Year Results

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Itron, Inc. reported financial results for its fourth quarter and full year ended December 31, 2008. Financial results for the full year ended December 31, 2008 include Actaris operations for twelve months while results for the same period in 2007 only include Actaris operations from April 18, 2007. Highlights of the quarter and full year ended December 31, 2008 include:

    * Quarterly and full year revenues of $432 million and $1.91 billion;
    * Quarterly and full year non-GAAP diluted EPS of 71 cents and $3.36;
    * Full year cash flow from operations and free cash flow of $193 million and $130 million;
    * Quarterly and full year Adjusted EBITDA of $60 million and $281 million; and
    * Quarterly and full year bookings of $733 million and $2.5 billion.

“As we communicated in January, our fourth quarter revenues and earnings were not as strong as they were in the first nine months,” said LeRoy Nosbaum, chairman and CEO. “Although year-end spending from our customers was lower in the fourth quarter than we had hoped, we still had a very strong 2008 and set records for revenue, non-GAAP EPS and bookings.”

Operations Highlights – Fourth Quarter:

Revenues – Total revenues of $432 million for the fourth quarter of 2008 were $48 million, or 10%, lower than 2007 fourth quarter revenues of $481 million. Itron North America (INA) revenues of $153 million for the fourth quarter of 2008 were $14 million, or 8%, lower than the fourth quarter of 2007, primarily due to lower year-end spending in the US. Actaris revenues of $279 million for the fourth quarter of 2008 were $34 million, or 11%, lower than the fourth quarter of 2007. 2008 Actaris revenue was negatively affected by foreign exchange rates which accounted for the entire decrease. Revenues for the electric, gas and water business units were approximately 38%, 35% and 27% of total Actaris revenue.

Gross Margin – Gross margin for the fourth quarter of 2008 was 34%, which is higher than the 33% in the fourth quarter of 2007. Fourth quarter 2008 INA gross margin of 39% was lower than 2007 gross margin of 40% due primarily to product mix. Actaris gross margin of 30% was higher than the fourth quarter 2007 gross margin of 28% due primarily to increased revenue in regions with higher margins.

Operating Expenses – Total operating expenses for the fourth quarter of 2008 were $124 million, which was comparable with the fourth quarter of 2007. INA operating expenses were $41 million, or 27% of revenue, compared with $44 million, or 26% of revenue, in the fourth quarter of 2007. Actaris operating expenses of $76 million were 27% of revenue, compared with $73 million, or 23% of revenue, in 2007. Actaris operating expenses were higher in all areas due to: increased sales expense; higher spending on product development; higher amortization of intangibles assets; increased personnel costs; and expenses related to Sarbanes-Oxley compliance. Corporate unallocated expenses of $7 million for the fourth quarter of 2008 were $1 million lower than the fourth quarter of 2007 due primarily to decreased compensation expenses.

Interest and Other Income (Loss) – Net interest expense of $14 million in the fourth quarter of 2008 was substantially lower than $25 million of net interest expense in the fourth quarter of 2007 due to lower average debt balances and lower average interest rates. Debt fee amortization expense, which is included in net interest expense, of $1.3 million in the fourth quarter of 2008 was lower than the fourth quarter of 2007. Other expense of $1 million in 2008 compares with $5.6 million in 2007. Other expense in 2007 was comprised primarily of unrealized foreign exchange losses on working capital accounts including intercompany interest balances.

Income Taxes – Our GAAP tax rate was 25% for the fourth quarter of 2008. The fourth quarter of 2007 included a $3.2 million GAAP income tax benefit. The benefit in 2007 was primarily driven by a one-time benefit for acquisition-related tax planning for Actaris and a tax benefit related to our investment in Brazilian operations.

GAAP Net Income/Loss and EPS – Our GAAP net income and fully diluted EPS for the fourth quarter of 2008 was $4.3 million, or 12 cents per share, compared with $4.0 million, or 12 cents per share, in the same period in 2007.

Non-GAAP Operating Income, Net Income and Diluted EPS – Non-GAAP operating income, which excludes amortization expense related to intangible assets, was $48 million, or 11.2% of revenues, in the fourth quarter of 2008, compared with $58 million, or 12.0% of revenues, in the fourth quarter of 2007. Non-GAAP net income, which also excludes amortization of debt fees, was $25 million in 2008, compared with $26 million in the 2007 period. Non-GAAP diluted EPS was 71 cents in the 2008 period compared with 81 cents in 2007. Fully diluted shares outstanding in the fourth quarter of 2008 were 2 million shares higher than the same period in 2007 due primarily to the equity offering of 3.4 million shares in the second quarter of 2008. Our non-GAAP tax rates were 27% and 6% for the fourth quarters of 2008 and 2007. The lower 2007 rate was primarily due to the tax benefit related to our investment in Brazilian operations.

Operations Highlights – Full Year:

Revenues – Total revenues of $1.9 billion for the full year ended December 31, 2008 were $446 million, or 30%, higher than 2007 full year revenues of $1.5 billion. INA revenues of $628 million for full year 2008 were $35 million, or 6%, higher than the comparable period in 2007. Actaris revenues were $1.3 billion for the full year 2008 compared with $871 million in the same period of 2007. Actaris revenues for 2008 benefitted from favorable foreign exchange rates as well as including a full twelve months of revenue. Revenues for the electric, gas and water business units were approximately 38%, 33% and 29% of total Actaris revenue for 2008.

Gross Margin – Gross margin for the full year 2008 was 34%, which was comparable with 33% gross margin in 2007. INA gross margin of 39% for the full year 2008 was less than 2007 gross margin of 42% due to product mix and increased services costs. Actaris gross margin of 31% was higher than the full year 2007 gross margin of 28%. Actaris gross margin in 2007 was negatively affected by acquisition related charges.

Operating Expenses – Total operating expenses for the full year 2008 were $537 million, compared with $441 million, for the full year 2007. INA operating expenses of $171 million in 2008 were somewhat lower than full year 2007 operating expenses of $173 million. As a percentage of revenue, 2008 INA operating expenses were 27% compared with 29% in 2007. Actaris operating expenses of $329 million were 26% of revenue, compared with $236 million, or 27% of revenue, for the full year 2007. The increased Actaris 2008 operating expenses were affected by foreign currency exchange rates and the inclusion of a full year expense as 2007 only included expenses from the date of the acquisition. Corporate unallocated expenses of $38 million for the full year 2008 were $5.6 million higher than 2007 due in part to increased compensation, financial integration and consulting expenses.

Interest and Other Income (Loss) – Net interest expense was $75 million for the full year 2008 compared to $79 million in the same period of 2007. The decrease in net interest expense was due to lower average interest rates. Debt fee amortization expense, which is included in net interest expense, was $8.9 million for the full year 2008 compared with $13.5 million in 2007. 2008 included other losses of $3 million compared with other income of $435,000 in 2007.

Income Taxes – Our GAAP tax rate was 12.5% for the full year 2008. Full year 2007 included a $16.4 million GAAP income tax benefit due to a pre-tax GAAP loss, legislative reductions in tax rates in France, Germany and the United Kingdom and tax benefits for acquisition-related tax planning for Actaris and the investment in our Brazilian operations.

GAAP Net Income/Loss and EPS – Our GAAP net income and fully diluted EPS for the full year 2008 was $28.1 million, or 80 cents per share, compared with a net loss of $16.1 million, or 55 cents per share, in the same period in 2007.

Non-GAAP Operating Income, Net Income and Diluted EPS – Non-GAAP operating income, which excludes amortization expense related to intangible assets, was $230 million, or 12.1% of revenues, for the full year 2008, compared with $182 million, or 12.5% of revenues, for the full year 2007. Non-GAAP operating income in 2007 excluded acquisition related charges for In Process Research & Development (IPR&D) and inventory of $52 million in addition to amortization of intangible assets. Non-GAAP net income, which also excludes amortization of debt fees, was $117.6 million in 2008 compared with $87.3 million in the 2007 period. Non-GAAP diluted EPS was $3.36 in the 2008 period compared with $2.81 in 2007. Diluted shares outstanding for the full year 2008 were almost 4 million higher than the same period in 2007 due primarily to the equity offering of 3.4 million shares in the second quarter of 2008. Non-GAAP net income and diluted EPS in 2008 benefitted from results for the entire year for Actaris rather than a partial year in 2007. Our non-GAAP tax rates were 27% and 25% for 2008 and 2007.

Other Financial Highlights:

New Order Bookings and Backlog - New order bookings for the full year 2008 were $2.5 billion, compared with $1.4 billion in 2007, reflecting book-to-bill ratios of 1.3 to 1 and .97 to 1 respectively. New order bookings for 2008 included $480 million related to our Advanced Metering Infrastructure (AMI) contract with Southern California Edison (SCE) and $334 million related to our contract with CenterPoint Energy. The California Public Utility Commission and the Public Utility Commission of Texas approved the respective projects in 2008, which allowed us to book the contract values in our backlog. Total backlog was $1.3 billion at December 31, 2008 compared with $659 million at December 31, 2007. Twelve month backlog of $507 million at December 31, 2008 compares with twelve month backlog at December 31, 2007 of $501 million.

Cash Flows from Operations and Financial Condition – Net cash provided by operating activities during the full year 2008 was $193 million. This compares with $133 million in the same period in 2007. Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) in the fourth quarter of 2008 was $60 million compared with $67 million for the same period in 2007. Adjusted EBITDA for the full year 2008 was $281 million compared with $225 million for the full year 2007. Free cash flow for the full year 2008 was $130 million compared with $93 million for the same period in 2007. Cash and equivalents were $144 million at December 31, 2008 compared with $92 million at December 31, 2007.

Forward Looking Statements:

This release contains forward-looking statements concerning our expectations about operations, financial performance, sales, earnings and cash flows. These statements reflect our current plans and expectations and are based on information currently available. The statements rely on a number of assumptions and estimates, which could be inaccurate, and which are subject to risks and uncertainties that could cause our actual results to vary materially from those anticipated. Risks and uncertainties include the rate and timing of customer demand for our products, rescheduling of current customer orders, changes in estimated liabilities for product warranties, changes in laws and regulations, our dependence on new product development and intellectual property, future acquisitions, changes in estimates for stock-based and bonus compensation, increasing volatility in foreign exchange rates, international business risks and other factors which are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2007 and other reports on file with the Securities and Exchange Commission. Itron undertakes no obligation to update publicly or revise any forward-looking statements, including our business outlook.

Business Outlook:

The outlook information provided below and elsewhere in this release is based on information available today. Itron assumes no obligation to publicly update or revise our business outlook. Our future performance involves risks and uncertainties.

For the full year 2009, we expect:

    * Revenues between $1.78 billion and $1.88 billion;
    * Diluted non-GAAP EPS of between $3.35 and $3.75;
    * Adjusted EBITDA between $270 million and $290 million; and
    * First quarter revenue between $385 million and $415 million.

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 associated with acquisitions. We exclude these expenses in our non-GAAP financial measures as we believe that they are 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. (PST) on February 18, 2009. The call will be webcast in a listen only mode and can be accessed online at www.itron.com, “Investors – Presentations.” The live webcast will begin at 2:00 p.m. (PST). 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 #5350842. You may also view presentation materials related to the earnings call on Itron’s website, www.itron.com / Investors / Presentations.

About Itron:

Itron is a leading technology provider and critical source of knowledge to the global energy and water industries. Itron operates in two divisions: as Itron in North America and as Actaris outside of North America. Our company is the world’s leading provider of metering, data collection and software solutions, with nearly 8,000 utilities worldwide relying on our technology to optimize the delivery and use of energy and water. Itron delivers industry leading solutions for electric, gas and water utilities by offering meters; data collection and communication systems, including automated meter reading (AMR) and advanced metering infrastructure (AMI); meter data management and utility software applications; as well as comprehensive project management, installation and consulting services. To know more, start here: www.itron.com.

Statements of operations, segment information, balance sheets, cash flow statements and reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures follow.

ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

                Three Months Ended December 31,         Twelve Months Ended December 31,
                2008         2007         2008         2007

Revenues         $     432,388             $     480,544             $     1,909,613             $     1,464,048     
Cost of revenues               287,260                     324,106                     1,262,756                     976,761     
Gross profit             145,128                 156,438                 646,857                 487,287     
Operating expenses                                 
    Sales and marketing             39,923                 40,852                 167,457                 125,842     
    Product development             28,416                 27,089                 120,699                 94,926     
    General and administrative             28,515                 30,937                 128,515                 100,071     
    Amortization of intangible assets             27,250                 25,873                 120,364                 84,000     
    In-process research and development               -                     155                     -                     35,975     
        Total operating expenses               124,104                     124,906                     537,035                     440,814     

Operating income             21,024                 31,532                 109,822                 46,473     
Other income (expense)                                 
    Interest income             1,124                 1,587                 5,970                 10,477     
    Interest expense             (15,368     )             (26,689     )             (80,735     )             (89,965     )
    Other income (expense), net               (1,046     )               (5,633     )               (2,984     )               435     
        Total other income (expense)               (15,290     )               (30,735     )               (77,749     )               (79,053     )

Income (loss) before income taxes             5,734                 797                 32,073                 (32,580     )
Income tax (provision) benefit               (1,428     )               3,205                     (4,014     )               16,436     

Net income (loss)         $     4,306               $     4,002               $     28,059               $     (16,144     )

Earnings (loss) per common share                                 
    Basic         $     0.12               $     0.13               $     0.85               $     (0.55     )
    Diluted         $     0.12               $     0.12               $     0.80               $     (0.55     )

Weighted average common shares outstanding                             
    Basic             34,478                 30,608                 33,096                 29,584     
    Diluted             34,823                 32,725                 34,951                 29,584     
ITRON, INC.
SEGMENT INFORMATION

(Unaudited, in thousands)     
                    Three Months Ended December 31,         Twelve Months Ended December 31,
                    2008         2007         2008         2007
Revenues                                 
    Itron North America         $     153,291             $     167,152             $     628,247             $     593,526     
    Actaris               279,097                     313,392                     1,281,366                     870,522     
        Total Company         $     432,388               $     480,544               $     1,909,613               $     1,464,048     


Gross profit                                 
    Itron North America         $     60,244             $     67,582             $     247,755             $     247,250     
    Actaris               84,884                     88,856                     399,102                     240,037     
        Total Company         $     145,128               $     156,438               $     646,857               $     487,287     


Operating income (loss)                                 
    Itron North America         $     19,387             $     23,676             $     77,074             $     74,394     
    Actaris             8,748                 16,134                 70,430                 4,115     
    Corporate unallocated               (7,111     )     


          (8,278     )               (37,682     )               (32,036     )
        Total Company         $     21,024               $     31,532               $     109,822               $     46,473     


                    Three Months Ended December 31,         Twelve Months Ended December 31,
                    2008         2007         2008         2007
Unit Shipments         (units in thousands)
    Total meters (with or without AMR)                                 
        Electricity - Itron North America             930                 1,600                 4,800                 5,075     
        Electricity - Actaris             2,080                 1,950                 7,840                 5,400     
        Gas             1,060                 925                 4,080                 2,600     
        Water               1,880                     1,950                     8,440                     5,575     
            Total meters               5,950                     6,425                     25,160                     18,650     

    AMR units (Itron North America and Actaris)                             
        Meters with AMR             830                 1,350                 4,700                 3,600     
        AMR modules               1,340                     1,175                     4,890                     4,675     
            Total AMR units               2,170                     2,525                     9,590                     8,275     

    Meters with other vendors' AMR               220                     275                     840                     925     

We changed our management structure with the acquisition of Actaris on April 18, 2007 to reflect two operating segments. On January 1, 2008, we made additional refinements to these two operating segments as we continue to integrate the Actaris acquisition and realign our operations. The information presented for the three and twelve month periods ended December 31, 2007 reflects the restatement of our segment operating results based on this realignment.
ITRON, INC.
CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)             
            At December 31,
            2008         2007
        ASSETS             
Current assets             
    Cash and cash equivalents     $     144,390         $     91,988
    Accounts receivable, net         321,278             339,018
    Inventories         164,210             169,238
    Deferred income taxes, net         31,807             10,733
    Other               56,032               42,459
        Total current assets         717,717             653,436

Property, plant and equipment, net         307,717             323,003
Prepaid debt fees         12,943             21,616
Deferred income taxes, net         45,783             75,243
Other             19,315             15,235
Intangible assets, net         481,886             695,900
Goodwill               1,285,853               1,266,133
        Total assets     $     2,871,214         $     3,050,566

        LIABILITIES AND SHAREHOLDERS' EQUITY             
Current liabilities             
    Accounts payable     $     200,725         $     198,997
    Other current liabilities         66,365             57,275
    Wages and benefits payable         78,336             70,486
    Taxes payable         18,595             17,493
    Current portion of long-term debt         10,769             11,980
    Current portion of warranty         23,375             21,277
    Unearned revenue         24,329             20,912
    Deferred income taxes, net           1,927               5,437
        Total current liabilities         424,421             403,857

Long-term debt         1,179,249             1,578,561
Warranty             14,880             11,564
Pension plan benefits         55,810             60,623
Deferred income taxes, net         102,720             173,500
Other obligations           58,743               63,659
        Total liabilities         1,835,823             2,291,764

Commitments and contingencies             

Shareholders' equity             
    Preferred stock         -             -
    Common stock         951,007             609,902
    Accumulated other comprehensive income, net         34,093             126,668
    Retained earnings           50,291               22,232
        Total shareholders' equity           1,035,391               758,802
        Total liabilities and shareholders' equity     $     2,871,214         $     3,050,566
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)             
            Twelve Months Ended December 31,
            2008         2007

Operating activities             
    Net income (loss)     $     28,059             $     (16,144     )
    Adjustments to reconcile net income (loss) to net cash provided by operating activities:             
        Depreciation and amortization         173,673                 126,440     
        In-process research and development         -                 35,975     


Employee stock plans income tax provision
        -                 (389     )
        Stock-based compensation         16,582                 11,656     
        Amortization of prepaid debt fees         8,917                 13,526     
        Deferred income taxes, net         (38,074     )             (36,373     )
        Other, net         (2,226     )             1,326     
Changes in operating assets and liabilities, net of acquisitions:             
    Accounts receivable         19,864                 (40,718     )
    Inventories         4,914                 19,419     
    Accounts payables, other current liabilities and taxes payable         (6,549     )             10,033     
    Wages and benefits payable         7,708                 198     
    Unearned revenue         3,936                 2,660     
    Warranty         (2,242     )             1,761     
    Effect of foreign exchange rate changes         (9,688     )             4,168     
    Other, net           (11,728     )               (211     )
        Net cash provided by operating activities         193,146                 133,327     

Investing activities             
    Proceeds from the maturities of investments, held to maturity         -                 35,000     
    Acquisitions of property, plant and equipment         (63,430     )             (40,602     )
    Business acquisitions & contingent consideration, net of cash & cash equivalents acquired         (6,897     )             (1,716,253     )
    Other, net           3,252                     7,439     
        Net cash used in investing activities         (67,075     )             (1,714,416     )

Financing activities             
    Proceeds from borrowings         -                 1,159,023     
    Payments on debt         (388,371     )             (76,099     )
    Issuance of common stock         324,494                 247,617     
    Prepaid debt fees         (214     )             (22,083     )
    Other, net           715                     1,902     
        Net cash (used in) provided by financing activities         (63,376     )             1,310,360     

Effect of exchange rate changes on cash and cash equivalents           (10,293     )               1,312     
Increase (decrease) in cash and cash equivalents         52,402                 (269,417     )
Cash and cash equivalents at beginning of period           91,988                     361,405     
Cash and cash equivalents at end of period     $     144,390               $     91,988     

Itron, Inc.

About Non-GAAP Financial Measures

The accompanying press release dated February 18, 2009 contains non-GAAP financial measures. To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP net income and EPS, Adjusted EBITDA and free cash flow. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures please see the table captioned “Reconciliations of Non-GAAP Financial Measures to Most Directly Comparable GAAP Financial Measures.”

We use these non-GAAP financial measures for financial and operational decision making and as a means for determining executive compensation. Management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and ability to service debt by excluding certain expenses that may not be indicative of our recurring core operating results. Our executive compensation plans exclude non-cash charges related to amortization of intangibles and non-recurring discrete cash and non-cash charges that are infrequent in nature such as in-process research and development (IPR&D) or purchase accounting adjustments. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to our historical performance and ability to service debt as well as comparisons to our competitors' operating results. We believe these non-GAAP financial measures are useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and because they are used by our institutional investors and the analyst community to help them analyze the health of our business.

Non-GAAP operating income – We define non-GAAP operating income as operating income minus amortization of intangible assets, business combination accounting for inventory revaluation and IPR&D. We consider this non-GAAP financial measure to be a useful metric for management and investors because it excludes the effects of expenses that are related to current and previous acquisitions. By excluding these expenses we believe that it is easier for management and investors to compare our financial results over multiple periods. We believe that excluding amortization of intangible assets enables management and investors to analyze trends in our operations. For example, expenses related to amortization of intangible assets were decreasing prior to the Actaris acquisition, which was improving GAAP operating margins, yet the improvement in GAAP operating margins due to this lower expense was not reflective of an improvement in our core business. Additionally we exclude the effects of inventory revaluation and IPR&D to provide investors gross and operating margins that are not impacted by purchase accounting adjustments. There are some limitations related to the use of non-GAAP operating income versus operating income calculated in accordance with GAAP. Non-GAAP operating income excludes some costs that are recurring. Additionally, the expenses that we exclude in our calculation of non-GAAP operating income may differ from the expenses that our peer companies exclude when they report the results of their operations. We compensate for these limitations by providing specific information about the GAAP amounts we have excluded from our non-GAAP operating income and evaluating non-GAAP operating income together with GAAP operating income.

Non-GAAP net income and non-GAAP EPS – We define non-GAAP net income as net income minus the expenses associated with amortization of intangible assets and amortization of debt fees, expenses related to business combination accounting for inventory revaluation and expenses for IPR&D as well as the tax effects of each item. We define non-GAAP EPS as non-GAAP net income divided by the weighted average shares, on a fully diluted basis, outstanding during each period. We consider these financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income. The same limitations described above regarding our use of non-GAAP operating income apply to our use of non-GAAP net income and non-GAAP EPS. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income and non-GAAP EPS and evaluating non-GAAP net income and non-GAAP EPS together with GAAP net income and EPS.

Adjusted EBITDA – We define Adjusted EBITDA as net income minus interest income, plus interest expense, tax expense and depreciation and amortization of intangible asset expenses plus non-cash expenses for business combination accounting for inventory revaluation and IPR&D. We feel that providing this financial measure is important for management and investors to understand our ability to service our debt as it is a measure of the cash generated by our core business. Management uses Adjusted EBITDA as a performance measure for executive compensation. A limitation to using Adjusted EBITDA is that it does not represent the total increase or decrease in the cash balance for the period and the measure includes some non-cash items and excludes other non-cash items. Additionally, the expenses that we exclude in our calculation of Adjusted EBITDA may differ from the expenses that our peer companies exclude when they report their results. Management compensates for this limitation by providing a reconciliation of this measure to GAAP net income.

Free Cash Flow – We define free cash flow as net cash provided by operating activities less acquisitions of property, plant and equipment. We believe free cash flow provides investors with a relevant measure of liquidity and a useful basis for assessing our ability to fund our operations and repay our debt. The same limitations described above regarding our use of non-GAAP operating income apply to our use of free cash flow. We compensate for these limitations by providing specific information regarding the GAAP amounts and a reconciliation to free cash flow.

The accompanying tables have more detail on the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and the related reconciliations between these financial measures.

ITRON, INC.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES
TO MOST DIRECTLY COMPARABLE GAAP FINANCIAL MEASURES

(Unaudited, in thousands, except per share data)

            Three Months Ended December 31,         Twelve Months Ended December 31,
            2008         2007         2008         2007
Non-GAAP operating income:                             
    GAAP operating income     $     21,024             $     31,532             $     109,822             $     46,473     
        Amortization of intangible assets         27,250                 25,873                 120,364                 84,000     
        In-process research and development         -                 155                 -                 35,975     
        Purchase accounting adjustment - inventory           -                     -                     -                     16,023     
    Non-GAAP operating income     $     48,274               $     57,560               $     230,186               $     182,471     


Non-GAAP net income:                             
    GAAP net income (loss)     $     4,306             $     4,002             $     28,059             $     (16,144     )
        Amortization of intangible assets         27,250                 25,873                 120,364                 84,000     
        Amortization of debt placement fees         1,199                 1,412                 8,674                 13,262     
        In-process research and development         -                 155                 -                 35,975     
        Purchase accounting adjustment - inventory         -                 -                 -                 16,023     
        Income tax effect of non-GAAP adjustments           (7,910     )               (4,952     )               (39,518     )               (45,804     )
    Non-GAAP net income     $     24,845               $     26,490               $     117,579               $     87,312     


    Non-GAAP diluted EPS     $     0.71               $     0.81               $     3.36               $     2.81     

    Weighted average common shares outstanding - Diluted           34,823                     32,725                     34,951                     31,093     


Adjusted EBITDA:                             
    GAAP net income (loss)     $     4,306             $     4,002             $     28,059             $     (16,144     )
        Interest income         (1,124     )             (1,587     )             (5,970     )             (10,477     )
        Interest expense         15,368                 26,689                 80,735                 89,965     
        Income tax provision (benefit)         1,428                 (3,205     )             4,014                 (16,436     )
        Depreciation and amortization         40,378                 41,111                 173,673                 126,440     
        In-process research and development         -                 155                 -                 35,975     
        Purchase accounting adjustment - inventory           -                     -                     -                     16,023     
    Adjusted EBITDA     $     60,356               $     67,165               $     280,511               $     225,346     

            Twelve Months Ended December 31,             
            2008         2007                 
Free Cash Flow:                             
        Net cash provided by operating activities     $     193,146             $     133,327                     
        Acquisitions of property, plant and equipment           (63,430     )               (40,602     )                 
    Free Cash Flow     $     129,716               $     92,725                       


Contact:
Itron, Inc.
Deloris Duquette
Vice President, Investor Relations and Corporate Communications
509-891-3523
deloris.duquette@itron.com

Source: Itron, Inc.
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