28.07.11

Itron Inc: Report on Second Quarter and First Six Months 2011

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Liberty Lake, Washington - Itron Inc. reported financial results for its second quarter and six months ended June 30, 2011. Highlights include:

    * Quarterly and six month revenues of $612 million and $1.2 billion;
    * Quarterly and six month non-GAAP diluted EPS of $1.20 and $2.18, including discrete tax benefits of 19 cents for the quarter;
    * Six month cash flow from operations and free cash flow of $88 million and $59 million;
    * Quarterly and six month adjusted EBITDA of $80 million and $160 million;
    * Twelve-month backlog of $1.0 billion and total backlog of $1.6 billion; and
    * Quarterly bookings of $483 million.

“I am very pleased with the performance of Itron International. We had record gas and water revenue in the quarter further demonstrating the strength of our global footprint and balanced portfolio,” said Malcolm Unsworth, president and CEO. “Our smart metering projects in North America are continuing to drive revenue, but one of the keys to our future growth is to continue to introduce innovative technologies in other parts of the world and to streamline our operations to improve profitability and our time to market.”

Operations Highlights:

Revenues increased $45 million, or 8%, for the quarter and $111 million, or 10%, for the six month period compared to the respective periods last year. Excluding a $36 million favorable effect from changes in foreign currency exchange rates, revenue for the quarter grew 2% over the prior year’s quarter. Record quarterly revenue in International’s gas and water business lines was the primary driver of the increase. The increase in revenues for the six month period was primarily due to higher shipments of smart gas modules in North America and increased gas and water smart metering projects in International. The favorable foreign exchange effect on revenues for the six month period was $40 million.

Gross margin for the quarter was 31.2% which was slightly higher than the prior year second quarter margin of 30.7%. For the first six months of 2011, gross margin was 31.9% compared with 31.1% in 2010. The improvement in margin for both periods was primarily due to decreased warranty expense in our International segment.

Operating expenses, excluding amortization of intangibles of $16.2 million and restructuring charges of $1.9 million, were $124.9 million, or 20.4% of revenue, for the quarter compared to $107.3 million, or 18.9% of revenue, in the prior year. Investments in product research and development for new and enhanced products as well as increased global marketing activity were the primary driver of the increase. In addition, approximately $6.9 million of the increase was due to changes in foreign exchange rates.

Net income and diluted EPS for the second quarter and six month period were $34.4 million, or 84 cents per share, and $61.6 million, or $1.50 per share. This compares with net income of $25.3 million, or 61 cents per share, and $50.6 million, or $1.23 per share, in the same periods in 2010. The increase in 2011 net income for the quarter was primarily due to $8 million, or 19 cents, of discrete tax benefits recognized during the quarter. The increase in net income for the six month period was primarily due to higher operating income in our International segment.

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, 2010 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.

2011 Guidance:

Itron’s guidance for 2011 is as follows:

    * Revenue between $2.3 billion and $2.4 billion
    * Non-GAAP diluted EPS between $4.20 and $4.60

Our guidance assumes a Euro to U.S. dollar exchange rate of $1.40, average shares outstanding of approximately 41.2 million and a non-GAAP effective tax rate between 22% and 25% (inclusive of the discrete tax benefits recognized through June 30, 2011). In addition, the guidance excludes any charges or benefits related to our current restructuring activities.

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 expense, non-GAAP operating income, non-GAAP net income, non-GAAP 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 certain infrequent costs, particularly those associated with acquisitions, in our non-GAAP financial measures as we believe the net result is a measure of our core business. 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 July 27, 2011. The call will be webcast in a listen only mode. Webcast information and conference call materials will be made available in the “Investors/Investor Events” section of Itron’s website (www.itron.com) prior to the start of the call. 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 #6754032.

About Itron:

At Itron, we’re dedicated to delivering end-to-end smart grid and smart distribution solutions to electric, gas and water utilities around the globe. Our company is the world’s leading provider of smart metering, data collection and utility software systems, with nearly 8,000 utilities worldwide relying on our technology to optimize the delivery and use of energy and water. Our offerings include electricity, gas, water and heat meters; network communication technology; collection systems and related software applications; and professional services. To realize your smarter energy and water future, 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 June 30,                 Six Months Ended June 30,
              2011                     2010                             2011                     2010     
Revenues         $     612,401             $     567,339                     $     1,176,092             $     1,064,962     
Cost of revenues               421,318                     393,283                             800,899                     733,842     
Gross profit             191,083                 174,056                         375,193                 331,120     
                                        
Operating expenses                                         
Sales and marketing             48,845                 40,974                         93,493                 82,511     
Product development             40,931                 33,022                         81,376                 66,062     
General and administrative             35,118                 33,285                         68,449                 66,342     
Amortization of intangible assets             16,197                 16,766                         31,794                 34,577     
Restructuring               1,907                     -                             1,907                     -     
Total operating expenses               142,998                     124,047                             277,019                     249,492     
                                        
Operating income             48,085                 50,009                         98,174                 81,628     
Other income (expense)                                         
Interest income             168                 111                         476                 278     
Interest expense             (11,420     )             (13,965     )                     (23,534     )             (28,888     )
Other income (expense), net               (2,477     )               (425     )                       (4,073     )               (1,017     )
Total other income (expense)               (13,729     )               (14,279     )                       (27,131     )               (29,627     )
                                        
Income before income taxes             34,356                 35,730                         71,043                 52,001     
Income tax (provision) benefit               80                     (10,419     )                       (9,487     )               (1,440     )
Net income         $     34,436               $     25,311                       $     61,556               $     50,561     
                                        
                                        
Earnings per common share - Basic         $     0.85               $     0.63                       $     1.52               $     1.26     
Earnings per common share - Diluted         $     0.84               $     0.61                       $     1.50               $     1.23     
                                        
                                        
Weighted average common shares outstanding - Basic         40,670                 40,329                         40,608                 40,261     
Weighted average common shares outstanding - Diluted         41,077                 41,161                         41,059                 41,011     
                                    

ITRON, INC.
SEGMENT INFORMATION
                                              
(Unaudited, in thousands)
        
        Three Months Ended June 30,             Six Months Ended June 30,
              2011                     2010                         2011                     2010     
Revenues                                     
Itron North America         $     288,224             $     301,143                 $     565,206             $     542,702     
Itron International               324,177                     266,196                         610,886                     522,260     
Total Company         $     612,401               $     567,339                   $     1,176,092               $     1,064,962     
                                    
Gross profit                                     
Itron North America         $     96,958             $     100,972                 $     191,680             $     179,131     
Itron International               94,125                     73,084                         183,513                     151,989     
Total Company         $     191,083               $     174,056                   $     375,193               $     331,120     
                                    
Operating income (loss)                                     
Itron North America         $     42,739             $     55,384                 $     86,532             $     87,420     
Itron International             16,483                 5,017                     32,711                 15,454     
Corporate unallocated               (11,137     )               (10,392     )                   (21,069     )               (21,246     )
Total Company         $     48,085               $     50,009                   $     98,174               $     81,628     
                                    
                                    
METER AND MODULE SUMMARY
(Units in thousands)                                     
        Three Months Ended June 30,             Six Months Ended June 30,
              2011                     2010                         2011                     2010     
Total meters (standard, advanced, and smart)                                     
Itron North America                                     
Electricity             1,570                 1,740                     3,090                 3,190     
Gas             140                 160                     280                 260     
Itron International                                     
Electricity             1,870                 1,930                     3,490                 3,570     
Gas             1,110                 1,020                     2,050                 2,000     
Water               2,420                     2,380                         4,960                     4,670     
Total meters               7,110                     7,230                         13,870                     13,690     
                                    
Additional meter information (Total Company)                                     
Advanced meters             1,130                 1,050                     2,030                 1,720     
Smart meters             910                 1,050                     1,900                 1,860     
Standalone advanced and smart communication modules               1,850                     1,600                         3,280                     2,790     
Advanced and smart meters and communication modules               3,890                     3,700                         7,210                     6,370     
                                    
Meters with other vendors' advanced or smart communication modules               120                     70                         230                     260     

                    
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
                
(Unaudited, in thousands)
        June 30, 2011         December 31, 2010
ASSETS                 
Current assets                 
Cash and cash equivalents         $     168,284         $     169,477     
Accounts receivable, net             377,835             371,662     
Inventories             253,079             208,157     
Deferred tax assets current, net             55,145             55,351     
Other current assets               104,496               77,570     
Total current assets             958,839             882,217     
                
Property, plant, and equipment, net             301,458             299,242     
Deferred tax assets noncurrent, net             12,714             35,050     
Other long-term assets             68,967             28,242     
Intangible assets, net             292,930             291,670     
Goodwill               1,311,771               1,209,376     
Total assets         $     2,946,679         $     2,745,797     
                
LIABILITIES AND SHAREHOLDERS' EQUITY                 
Current liabilities                 
Accounts payable         $     268,462         $     241,949     
Other current liabilities             41,630             49,690     
Wages and benefits payable             94,855             110,479     
Taxes payable             27,976             19,725     
Current portion of debt             234,449             228,721     
Current portion of warranty             29,999             24,912     
Unearned revenue               49,722               28,258     
Total current liabilities             747,093             703,734     
                
Long-term debt             341,121             382,220     
Long-term warranty             32,839             26,371     
Pension plan benefit liability             69,675             61,450     
Deferred tax liabilities noncurrent, net             51,539             54,412     
Other long-term obligations               86,942               89,315     
Total liabilities             1,329,209             1,317,502     
                
Commitments and contingencies                 
                
Shareholders' equity                 
Preferred stock             -             -     
Common stock             1,339,504             1,328,249     
Accumulated other comprehensive income (loss), net             81,390             (34,974     )
Retained earnings               196,576               135,020     
Total shareholders' equity               1,617,470               1,428,295     
Total liabilities and shareholders' equity         $     2,946,679         $     2,745,797     
                

                    
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                
(Unaudited, in thousands)
        Six Months Ended June 30,
              2011                     2010     
Operating activities                 
Net income         $     61,556             $     50,561     
Adjustments to reconcile net income to net cash provided by operating activities:                 
Depreciation and amortization             64,299                 65,071     
Stock-based compensation             9,518                 9,121     
Amortization of prepaid debt fees             2,265                 2,762     
Amortization of convertible debt discount             5,336                 4,957     
Deferred taxes, net             6,081                 (8,132     )
Other adjustments, net             285                 3,306     
Changes in operating assets and liabilities, net of acquisition:                 
Accounts receivable             (12,106     )             (52,124     )
Inventories             (36,668     )             (40,930     )
Other current assets             (21,268     )             8,375     
Other long-term assets             (22,993     )             (763     )
Accounts payables, other current liabilities, and taxes payable             16,523                 42,463     
Wages and benefits payable             (21,531     )             19,648     
Unearned revenue             24,159                 2,365     
Warranty             9,510                 14,355     
Other operating, net               2,726                     (3,949     )
Net cash provided by operating activities             87,692                 117,086     
                
Investing activities                 
Acquisitions of property, plant, and equipment             (28,712     )             (27,716     )
Business acquisition, net of cash equivalents acquired             (14,635     )             -     
Other investing, net               513                     4,495     
Net cash used in investing activities             (42,834     )             (23,221     )
                
Financing activities                 
Payments on debt             (55,630     )             (73,881     )
Issuance of common stock             2,553                 6,812     
Other financing, net               (319     )               (2,237     )
Net cash used in financing activities             (53,396     )             (69,306     )
                
Effect of foreign exchange rate changes on cash and cash equivalents               7,345                     (9,081     )
Increase (decrease) in cash and cash equivalents             (1,193     )             15,478     
Cash and cash equivalents at beginning of period               169,477                     121,893     
Cash and cash equivalents at end of period         $     168,284               $     137,371     
                

Itron, Inc.

About Non-GAAP Financial Measures

The accompanying press release 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 expense, non-GAAP operating income, non-GAAP net income, non-GAAP diluted 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. These non-GAAP financial measures facilitate management’s internal comparisons to our historical performance as well as comparisons to our competitors’ 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 purchase accounting adjustments, extinguishment of debt gains and losses or restructuring charges. 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. We believe these non-GAAP financial measures are useful to investors because they provide 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 expense and non-GAAP operating income – We define non-GAAP operating expense as operating expense excluding the expenses related to the amortization of intangible assets and restructuring. We define non-GAAP operating income as operating income excluding the expenses related to the amortization of intangible assets and restructuring. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of expenses that are related to previous acquisitions and restructurings. By excluding these expenses we believe that it is easier for management and investors to compare our financial results over multiple periods and analyze trends in our operations. For example, expenses related to amortization of intangible assets are now decreasing, which is improving GAAP operating margins, yet the improvement in GAAP operating margins due to this lower expense is not necessarily reflective of an improvement in our core business. There are some limitations related to the use of non-GAAP operating expense and non-GAAP operating income versus operating expense and operating income calculated in accordance with GAAP. Non-GAAP operating expense and non-GAAP operating income exclude some costs that are recurring. Additionally, the expenses that we exclude in our calculation of non-GAAP operating expense and 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 expense and non-GAAP operating income and evaluating non-GAAP operating expense and non-GAAP operating income together with GAAP operating expense and GAAP operating income.

Non-GAAP net income and non-GAAP diluted EPS – We define non-GAAP net income as net income excluding the expenses associated with amortization of intangible assets, amortization of debt placement fees, amortization of convertible debt discount, and restructuring. We define non-GAAP diluted EPS as non-GAAP net income divided by the weighted average shares, on a 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 diluted EPS. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP measures and evaluating non-GAAP net income and non-GAAP diluted EPS together with GAAP net income and GAAP diluted EPS.

Adjusted EBITDA – We define adjusted EBITDA as net income (a) minus interest income, (b) plus interest expense, depreciation and amortization of intangible asset expenses, and restructuring, and (c) exclude the tax expense or benefit. We believe 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 items that we exclude in our calculation of adjusted EBITDA may differ from the items 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 cash used for 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 reconciling 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 June 30,         Six Months Ended June 30,
              2011                     2010                     2011                     2010     
Non-GAAP operating expense:                                 
GAAP operating expense - Itron North America         $     54,219             $     45,588             $     105,148             $     91,711     
Amortization of intangible assets - Itron North America               (3,512     )               (4,085     )               (7,024     )               (8,170     )
Non-GAAP operating expense - Itron North America         $     50,707               $     41,503               $     98,124               $     83,541     
                                
GAAP operating expense - Itron International         $     77,642             $     68,067             $     150,802             $     136,535     
Amortization of intangible assets - Itron International             (12,685     )             (12,681     )             (24,770     )             (26,407     )
Restructuring - Itron International               (1,406     )               -                     (1,406     )               -     
Non-GAAP operating expense - Itron International         $     63,551               $     55,386               $     124,626               $     110,128     
                                
Non-GAAP operating income:                                 
GAAP operating income         $     48,085             $     50,009             $     98,174             $     81,628     
Amortization of intangible assets             16,197                 16,766                 31,794                 34,577     
Restructuring               1,907                     -                     1,907                     -     
Non-GAAP operating income         $     66,189               $     66,775               $     131,875               $     116,205     
                                
Non-GAAP net income:                                 
GAAP net income         $     34,436             $     25,311             $     61,556             $     50,561     
Amortization of intangible assets             16,197                 16,766                 31,794                 34,577     
Amortization of debt placement fees             908                 1,458                 2,162                 2,659     
Amortization of convertible debt discount             2,693                 2,501                 5,336                 4,957     
Restructuring             1,907                 -                 1,907                 -     
Income tax effect of non-GAAP adjustments               (6,995     )               (7,184     )               (13,091     )               (13,973     )
Non-GAAP net income         $     49,146               $     38,852               $     89,664               $     78,781     
                                      
Non-GAAP diluted EPS         $     1.20               $     0.94               $     2.18               $     1.92     
                                
Weighted average common shares outstanding - Diluted               41,077                     41,161                     41,059                     41,011     
                                
Adjusted EBITDA:                                 
GAAP net income         $     34,436             $     25,311             $     61,556             $     50,561     
Interest income             (168     )             (111     )             (476     )             (278     )
Interest expense             11,420                 13,965                 23,534                 28,888     
Income tax (benefit) provision             (80     )             10,419                 9,487                 1,440     
Depreciation and amortization             32,768                 31,794                 64,299                 65,071     
Restructuring               1,907                     -                     1,907                     -     
Adjusted EBITDA         $     80,283               $     81,378               $     160,307               $     145,682     
                                
Free Cash Flow:                                 
Net cash provided by operating activities         $     51,679             $     51,307             $     87,692             $     117,086     
Acquisitions of property, plant, and equipment               (17,462     )               (11,565     )               (28,712     )               (27,716     )
Free Cash Flow         $     34,217               $     39,742               $     58,980               $     89,370     
                                                                

Contact:

Itron, Inc.
Ranny Dwiggins, 509-891-3443
Vice President, Investor Relations
ranny.dwiggins@itron.com
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