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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
January 20, 2004
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(Date of Report)
ITRON, INC.
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(Exact Name of Registrant as Specified in Charter)
Washington 000-22418 91-1011792
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(State or Other Jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
2818 N. Sullivan Road, Spokane, WA 99216
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(Address of Principal Executive Offices, including Zip Code)
(509) 924-9900
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(Registrant's Telephone Number, Including Area Code)
None
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(Former Name or Former Address, if Changed Since Last Report)
Item 7. Financial Statements and Exhibits. The following item is attached
as an exhibit hereto:
(c) Exhibits.
Exhibit No. 99.1 Press Release dated January 20, 2004
Item 12. Results of Operations and Financial Condition.
On January 20, 2004, Itron, Inc. issued a press release titled,
"Itron Updates 2003 Outlook and Provides Preliminary Outlook for 2004." A copy
of this press release and accompanying Q&A is attached as Exhibit 99.1.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
ITRON, INC.
Dated: January 20, 2004 By: /s/ DAVID G. REMINGTON
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David G. Remington
Vice President and Chief Financial Officer
Exhibit No. 99.1
Itron Updates 2003 Outlook and Provides Preliminary Outlook for 2004
SPOKANE, Wash.--(BUSINESS WIRE)--Jan. 20, 2004--Itron, Inc.
(Nasdaq:ITRI), today issued this update to its business outlook for
2003, and provided a preliminary outlook for 2004. The outlook for
2004 does not include results for the acquisition of Schlumberger's
electricity metering business (SEM). The SEM acquisition is expected
to close at the end of the first quarter of 2004 and is expected to be
accretive to 2004 revenues and earnings.
The Company said that revenues for the full year 2003 are expected
to slightly exceed consensus estimates of $314 million, resulting in
revenue growth of approximately 12% in 2003 over 2002. However,
fourth-quarter and full year 2003 earnings are expected to fall short
of consensus estimates primarily due to charges the Company expects to
incur in the fourth quarter of 2003 relating to:
-- Adjustments to previous warranty estimates for higher than
expected electric meter module product failures that are
resulting from a defective component provided by a supplier.
The defective products are isolated at primarily four
customers.
-- Labor cost overruns on an automatic meter reading (AMR)
installation contract with one large utility, resulting from
considerably lower than expected productivity of third-party
contractors. The installation is expected to be completed
shortly.
-- A write-off of an investment in a company developing gateway
and other metering related products, and an impairment of an
investment in a company that is developing energy management
software.
-- The above charges were partially offset by a reversal of all
previously accrued management bonus and employee profit
sharing for 2003.
The First Call consensus estimate for Itron's fourth quarter 2003
EPS is 25 cents. The above items net to approximately $5.5 million in
additional pre-tax expenses in the fourth quarter. Itron expects that
fourth quarter EPS will be approximately 10 cents, subject to
completion of analyses related to the above items and any final
year-end audit adjustments.
"In a difficult economic year when we have been able to grow
revenues profitably, it is quite unfortunate to end the year with a
major product problem and an unforeseen installation expense," said
LeRoy Nosbaum, chairman and CEO. "Ultimately we are responsible for
performance, but it is particularly disheartening when defective
electronic components and installation contractor productivity issues
cause the year to fall short of expectations. While disappointing, the
problems encountered are highly unusual and not fundamental to our
business, and are large isolated exceptions to otherwise good
performance. We remain very confident about Itron's growth prospects
given the opportunities that are in front of us."
For 2004, excluding the acquisition of SEM, the Company's outlook
is for revenue growth of 8% to 10% and EPS in the range of $1.25 to
$1.30. Itron expects to provide additional details on the quarter and
its outlook for 2004 when it reports fourth quarter and full year 2003
results on February 5, 2004.
Commenting on 2004, Nosbaum added, "Our current revenue
expectation is just below the low end of the normal 10% to 15% growth
range that we look for in AMR and reflects lower than expected
bookings during 2003 in our electric market due to large order
pushouts from several utilities. Despite some delays, we are
encouraged about the growth prospects for our electric business in
2004 having booked a $21 million order with an electric utility the
first week in January."
Nosbaum also commented that given lower second half bookings in
2003, most of the growth in 2004 is expected to occur in the second
half of the year. "We do not expect to see growth in our electric
business in the first quarter of 2004 and we have begun some
corrective actions to hold down and reduce expenses. We expect to see
revenues rebound in Q2 as orders we are currently working close and
begin to contribute."
EPS within this release, including EPS from First Call, refers to
proforma earnings per share. Pro forma results are adjusted from
GAAP-based results to exclude certain costs, expenses and expense
reversals that we believe are not indicative of our core operating
results. Reconciling items include amortization of intangible assets,
restructurings, litigation accrual and in-process R&D.
Forward-Looking Statements:
This release contains forward-looking statements concerning
Itron's operations, economic performance, sales, earnings growth and
cost reduction programs. These statements reflect our current plans
and expectations and are based on information currently available.
They 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 1) FTC clearance and the
timing of the SEM acquisition including completion of or satisfactory
credit arrangements for that acquisition, 2) the rate and timing of
customer demand for the Company's products, 3) rescheduling of current
customer orders, 4) changes in estimated liabilities for product
warranties 5) changes in law and regulation (including FCC licensing
actions), 6) and other factors which are more fully described in our
Annual Report on Form 10-K for the year ended December 31, 2002 and
2003 Form 10-Qs on file with the Securities and Exchange Commission.
Itron undertakes no obligation to update publicly or revise any
forward-looking statements.
About Itron:
Itron is a leading technology provider and critical source of
knowledge to the global energy and water industries. More than 2,800
utilities worldwide rely on Itron technology to deliver the knowledge
they require to optimize the delivery and use of energy and water.
Itron delivers value to its clients by providing industry-leading
solutions for meter data collection, energy information management,
demand side management and response, load forecasting, analysis and
consulting services, transmission and distribution system design and
optimization, Web-based workforce automation, commercial and
industrial customer care and residential energy management.
For additional information, see the following "January 20, 2004
Q&A," or contact:
Mima Scarpelli
Vice-president, Investor Relations and Corporate Communications
509-891-3565
mima.scarpelli@itron.com
Q: Can you individually quantify the impact of each of the
unplanned items mentioned in the release (i.e.: how much is
the warranty issue vs. the installation cost overrun, etc.)?
A: As mentioned in the release, they total approximately $5.5
million of added expense. We intend to provide more detail on
the various items in our upcoming earnings report at which
time we will have completed additional analyses and outside
audit reviews.
Q: Why are you just finding out about these now?
A: While we were aware there were higher than normal field
failures for certain electric modules, it took some time to
complete the identification of the root cause of the failure.
Once we were able to isolate that, we had to determine the
applicable date ranges and customers with defective products.
Throughout all that, we have been working with customers and
our component supplier to determine what remedies would be
appropriate. All of those activities took some time but were
necessary before we could adequately assess the cause of the
failures and the financial impact to the company.
The AMR cost overruns resulted from a change to a new third
party contractor, which happened late in Q4. While the new
contractor is enabling us to complete the project within a
timeframe acceptable to the customer, their costs are
significantly higher. While the cost overrun on the labor
portion of this contract is disappointing, this is a very
large customer and completing this installation in a timely
manner, gives us good positioning for follow-on product sales
with this customer.
We are taking a write-off (down) of our investments in two
other companies due to changes to the future business
prospects for each of those companies.
Q: Could anything have been done to prevent the product failures?
A: This was a component failure caused by very slow degradation
of an encapsulation material under certain high humidity
conditions that was not picked up by our normal accelerated
life testing processes. The encapsulation problem was also
experienced by other companies using similar integrated
circuits and did not appear to have been caught by their
testing procedures either.
We will take steps going forward to increase the amount of
life testing that is done on production units. As well, we are
in the process of reassessing how we monitor and track
material changes by our suppliers, the ultimate cause of this
issue.
Q: Are you able to recoup any expenses from the supplier?
A: We have had preliminary discussions with our supplier and have
built in some minor cost recovery into our estimates of our
net liability. The amount we expect to be reimbursed for is
far less than the material and labor costs we will incur to
replace defective units. Since the problem was first caused by
suppliers of encapsulation materials to our supplier, it is
unclear what rights we might have against those encapsulation
suppliers.
Q: Have you have adequately identified Itron's exposure for the
product failures?
A: Our assessment of the financial exposure of all of these items
involves estimates and assumptions and the impact we recorded
in Q4 is based on the information available to us today. While
we believe we have adequately reserved for these issues based
on what we know and expect, predictions, assumptions and
estimates are obviously subject to change and we can't give
assurance that there is no additional exposure. However, we
expect that changes to the product failure issues, if any,
will be minimal.
Q: How comfortable are you with your guidance for 2004? How much
visibility or backlog do you have?
A: We have for a long time, talked about a normal growth rate for
our business of 10% to 15% on average. At this time, we are
guiding to a slightly lower growth number for 2004 primarily
based on slower growth expectations for our electric business,
particularly in the first half of the year. We had one large
electric customer postpone their installation until their
credit ratings improve -- we had counted on some business with
that customer in Q1. On the flip side, we received an order
from another electric utility, worth approximately $21 million
-- all for shipment in 2004.
Backlog at the end of December is down compared to where we
were at the end of last year, due to lower bookings in our
electric business as orders got pushed out or delayed. Gas,
W&PP and International bookings and backlog point to a solid
2004. One or two big orders could push the growth rate higher
in 2004 as could AMR momentum on the International front.
Q: What does Q1 look like?
A: We will talk more specifically about Q1 when we report in
February. It is clear however that push outs that affected Q4
also affect Q1.
Q: What are you looking for in 2004 from the software
acquisitions?
A: We expect good growth -- something a little more than what we
are looking for Itron to do in total. The growth is largely
second half driven and some of the growth comes from
International markets.
Q: What are the corrective actions to hold down and reduce
expenses that you mentioned in the release?
A: It is important to point out that Itron's financial situation
remains very strong and the actions we are taking, while not
major, will enable us to sustain that strong performance on a
going forward basis. Last week, we announced some internal
organization changes, and as we finalize roles and
responsibilities, we expect to take some small number of
people out of the organization (less than 5%).
The outlook for the 2004 is good, but it is largely
second-half driven. Given that, we will be very cautious with
all new hiring and discretionary expenses and we will look
hard at some programs. For example, we took some action
already last week in our joint use business where the level of
revenue was not strong enough to support the headcount we had.
Q: Should we expect restructuring charges in Q1?
A: Yes. But, we need to complete our analysis of expected actions
and headcount reductions before we can give you a good
estimate as to how much.
Q: When do you expect to get clearance from the FTC to proceed
with the SEM acquisition?
A: We made a lot of progress with the FTC in Q4 and at this time,
we expect to get clearance for this acquisition in time to
close on the acquisition around the end of Q1.
CONTACT: Itron, Inc.
Mima Scarpelli, 509-891-3565
mima.scarpelli@itron.com
www.itron.com