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UNITED STATES
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
June 3, 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 June 3, 2004.
Item 12. Results of Operations and Financial Condition.
On June 3, 2004, Itron, Inc. issued a press release announcing that the
Federal Trade Commission (FTC) has terminated the waiting period required under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with
Itron's purchase of Schlumberger Limited's (Schlumberger) electricity metering
products business (SEM). This favorable decision from the FTC means that Itron
is now able to move ahead with the remaining steps to close the acquisition. The
acquisition is expected to close no later than June 30, 2004.
A copy of this press release and accompanying Q&A are 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: June 3, 2004 By: /s/ DAVID G. REMINGTON
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David G. Remington
Vice President and Chief
Financial Officer
EXHIBIT 99.1
Itron Announces SEM Acquisition Clears FTC Regulatory Review Updates
Expectations for Second Quarter
SPOKANE, Wash.--(BUSINESS WIRE)--June 3, 2004--Itron Inc.
(Nasdaq:ITRI) announced today that the Federal Trade Commission (FTC)
has terminated the waiting period required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 in connection with Itron's purchase
of Schlumberger Limited's (Schlumberger) electricity metering products
business (SEM). This favorable decision from the FTC means that Itron
is now able to move ahead with the remaining steps to close the
acquisition. The acquisition is expected to close no later than June
30, 2004.
The SEM acquisition includes Schlumberger's electricity meter
manufacturing and sales operations in the United States and the
electricity meter operations of certain foreign affiliates of
Schlumberger in Canada, Mexico, Taiwan and France. The purchase price
for SEM has been adjusted down $7 million to $248 million, subject to
post closing working capital adjustments. The purchase price, together
with related fees and expenses, will be financed with proceeds from
Itron's new $240 million senior secured credit facility and from a
recently completed private placement of $125 million in senior
subordinated notes.
"SEM is the market leader in state-of-the art electricity meters,
with a long track record of strong revenue, earnings and cash flow,"
said LeRoy Nosbaum, Itron chairman and CEO. "This acquisition will
enable Itron to capitalize on the increasing demand for electronic
meters with integrated AMR functionality and provides our customers
with a more highly integrated suite of products and a broader, more
attractive array of value propositions."
Nosbaum commented that preliminary estimates indicate the
acquisition of SEM will add between 15 and 25 cents to Itron's
expected pro forma EPS in the second half of 2004 and that the Company
intends to narrow that estimate between now and when it reports second
quarter 2004 results on July 19, 2004. "Now that we have FTC approval,
we can have detailed discussions with SEM about revenue expectations
by customer and other financial matters that until now, we were not
able to have." Pro forma EPS excludes intangible amortization
expenses, restructuring charges and in-process R&D charges.
However, Nosbaum added that the Company would fall short of
analyst expectations for second quarter earnings partially due to
approximately $1.2 million in net interest expense associated with the
$125 million in financing the Company completed in early May, that is
now in escrow, and an $800,000 write-off of the Company's remaining
minority investment in Lanthorn Technologies, which ceased operations
last week.
Nosbaum added that, the Company is likely to see slightly lower
than expected second quarter revenues due to several AMR orders that
have not yet closed. "We knew coming into 2004 that the first half of
the year would be challenging. While our performance in the first six
months is turning out to be less than we had hoped for, much of the
business that has been delayed remains quite active in our pipeline.
SEM is expected to be more accretive than we had initially anticipated
and our preliminary estimates for combined financial results in the
second half of 2004 reflect good, strong growth."
As previously disclosed, part of the FTC clearance process
required Itron to license certain of its existing electric meter
module and other AMR technology to a competing third party. Itron
announced today that the licensee is Hunt Technologies in Pequot
Lakes, MN and that the licensing agreement will become effective upon
closing of the SEM acquisition.
Conference Call
Itron will host a conference call to answer questions on the SEM
acquisition at 11:00 a.m. Eastern Standard Time on June 4, 2004. The
call will be webcast live in a listen only mode, and later archived.
The webcast is also being distributed over CCBN's Investor
Distribution Network to both institutional and individual investors.
Individual investors can listen to the call through CCBN's individual
investor center at www.fulldisclosure.com or by visiting any of the
investor sites in CCBN's Individual Investor Network. Institutional
investors can access the call via CCBN's password-protected event
management site, StreetEvents (www.streetevents.com). Webcast replays
will begin shortly after the conclusion of the call and will be
available for approximately 3 weeks. A telephone replay of the call
will also be available approximately one hour after the conclusion of
the live call, for approximately 48 hours, and is accessible by
dialing 800-428-6051 (Domestic) or 973-709-2089 (International), and
entering passcode #359910.
Forward Looking Statements
Statements in this release that are not historical facts and that
relate to future plans are "forward looking statements." These
statements include, but are not limited to, Itron's expectations for
financial results, including the impact of the SEM acquisition. A
number of risks and uncertainties exist that may cause Itron's actual
results to differ materially from those indicated or implied by
forward looking statements. These risks and uncertainties include
timing of when the acquisition of SEM closes, potential disruptions in
operations associated with integrating the acquisition, the rate and
timing of customer demand for the Company's products, rescheduling of
current customer orders, changes in estimated liabilities for product
warranties, changes in law and regulation (including FCC licensing
actions) and other factors which are more fully described in our
Annual Report on Form 10K for the year ended December 31, 2003 and our
Quarterly Report on Form 10Q for the quarter ended March 31, 2004.
Itron does not undertake any obligation to update forward looking
statements as a result of new information, future events, changed
expectations or otherwise.
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, C&I customer care,
enterprise and residential energy management. To know more, start
here: www.itron.com.
For additional information, please refer to the attached or
contact
Mima Scarpelli
Vice President, Investor Relations and Corporate Communications
509-891-3565
mima.scarpelli@itron.com
Schlumberger Electricity Metering Acquisition
June 3, 2004 Press Release Q&A
GENERAL ACQUISITION
1) What operations or assets are included in the acquisition of SEM?
a) We are acquiring all of the outstanding stock of Schlumberger
Electricity, Inc., which conducts electricity meter
manufacturing and sales operations in the U.S., and certain
assets of or stock in foreign affiliates of Schlumberger that
conduct electricity metering operations in Canada, Mexico,
Taiwan and France.
2) Are there operations of SEM that Itron is not acquiring?
a) SEM has historically sold meters and provided manufacturing
services to an affiliate, SchlumbergerSema, now part of ATOS
Origin (ATOS), related to its fixed network AMR business.
Itron will compete with other electricity meter manufacturers
for the sale of meters to ATOS. The manufacturing services
currently provided by SEM will be transitioned to ATOS over a
short period of time, but no later than December 31, 2004. In
2003, SEM had approximately $18 million in meter sales and $49
million in service revenues from sales to SchlumbergerSema.
See "Financial" section for additional details
3) General information about SEM?
a) SEM has been making electricity meters for over one hundred
years.
b) SEM's primary facility is in West Union (Oconee County), South
Carolina.
i) They have been manufacturing there since 1961.
ii) With headquarters located there since 1995.
c) SEM has approximately 1,000 employees worldwide.
i) With a little more than 85% of them in North America.
d) SEM estimates they have an installed base of approximately 37
million meters in the U.S., representing approximately 32% of
all installed electricity meters in this market.
i) More than 3,200 customers in the U.S.
4) What are the major reasons for this acquisition?
a) The acquisition enables Itron to capitalize on the increasing
demand for electronic meters with integrated AMR
functionality.
b) It provides our customers with a more highly integrated suite
of products and a broader, more attractive array of value
propositions.
c) The acquisition of SEM substantially increases our size and
adds diversification. SEM's purchase order based sales provide
a nice balance to Itron's project-based sales.
5) Now that Itron is in the electricity meter business, will it
continue to license its AMR technology to other electricity meter
manufacturers?
a) Itron will continue to cooperate with all electricity meter
manufacturers to embed Itron AMR inside their electric meter
products, both mechanical as well as electronic. Our customers
today buy meters from a variety of meter manufacturers and we
will work hard to maintain the good relationships we have with
all of them in order to continue to provide our customers with
a variety of choices to meet their needs.
b) In terms of electronic meters, we have licensing agreements
with several companies and expect to have additional
agreements with other electricity meter manufacturers in the
future.
6) Will Itron continue to embed other AMR vendor's technology in its
electricity meters?
a) Of course. Certain SEM customers do not use Itron's AMR
technology but do use, and will continue to buy SEM's
electricity meters.
b) In addition to Itron AMR technology, SEM is currently
embedding a number of other AMR vendors' technologies in their
electricity meters and we would expect that to continue (DCSI,
ATOS and a few others).
7) Why did Itron license its AMR technology to Hunt and what are the
details of the arrangement?
a) Itron entered into the licensing agreement with Hunt
Technologies, an AMR vendor located in Pequot Lakes, MN, as an
accommodation to concerns raised by the Federal Trade
Commission (FTC) regarding the impact our acquisition of SEM
would have on competition.
b) The license is perpetual and becomes effective upon the
closing of the SEM acquisition.
c) Itron is licensing to Hunt its existing electric encoder,
receiver, transmitter (ERT) technology for use in electric
meters only.
i) In addition, Itron will license to Hunt required software
application programming interfaces and protocols in order
to enable Hunt to develop reading technology in the form
of handheld or mobile collection units.
ii) As well, Itron will sell handheld and mobile reading
products to Hunt for resale.
d) To facilitate and assist Hunt's expansion into this business
as they establish supply channels, Itron will supply Hunt with
ERT modules for resale.
8) What fees will Itron receive for the license?
a) Itron will receive a flat fee for the license, to be paid in
increments from 2004 through 2007. The amount of the license
fee is not material to Itron's overall financial results.
9) What impact will the Hunt licensing arrangement have on Itron's
business in the short and long-term?
a) Given the length of the sales process with utilities, and the
fact that it will take some initial period of time for Hunt to
begin to actively market our technology, we would not expect
the arrangement to have a material impact on our business in
2004.
b) It is more difficult to predict the impact this licensing
arrangement will have on our business in the long-term. We
believe the benefits of the SEM acquisition will more than
offset any increased competition as a result of the licensing
arrangement with Hunt.
10) Will Itron continue to sell electromechanical meters along with
electric ERTs and SEM's "ERT like (R300)" units?
a) Itron will continue selling electro-mechanical meters and AMR
devices to satisfy customer demand.
11) Is Itron going to get into the gas and water meter manufacturing
businesses as well?
a) We have no current plans to do so.
FINANCIAL
12) What was the acquisition price and how will Itron finance the
acquisition?
a) We initially agreed to a purchase price of $255 million. The
purchase price was lowered to $248 million, to reflect changes
in terms related to manufacturing support services that Itron
will perform for the fixed network AMR business that was sold
to ATOS Origin, along with other factors.
b) We have a new $240 million senior secured credit facility and
$125 million in senior subordinated notes.
c) Proceeds from the debt will be used to finance the
acquisition, pay related fees and expenses, and repay
approximately $41 million of outstanding debt.
d) The terms of the new debt are as follows:
i) Revolving Credit Line -- $55 million
(1) Annual interest rates will vary depending on market
rates and coverage ratios.
(2) Initial rate of LIBOR plus 2.75%
ii) Term Loan -- $185 million, 7-year term
(1) Annual interest rates will vary depending on market
rates and coverage ratios.
(2) Initial rate of LIBOR plus 2.25%
iii) 7 3/4% Subordinated Notes - $125 million, 8-year term, 4
year non call
(1) Issued at 99.625%
(2) Effective interest rate of 7.875%
(3) Closed into escrow and therefore, interest expense has
been accruing on the full amount of the debt
outstanding since May 10, 2004, offset by some
intersest income.
13) Why is Itron financing the transaction with debt?
a) Debt has the lowest cost of capital.
b) Debt rates are the lowest they have been in years, which makes
using debt to grow the company very attractive.
c) The aggregate cash flow of the combined companies is expected
to be strong and relatively stable which should enable Itron
to repay the debt before maturity.
d) Our initial debt to capitalization ratio will be slightly
more than 60% and is expected to decline quickly thereafter.
14) What is the expected growth rate for Itron's electricity meter
business and the electricity meter market in general?
a) Over a long period of time, historical industry-wide growth in
new electricity meters averaged about 3% per year, driven by
housing starts and meter replacement activity.
b) However, from 2000 through 2002, the average industry growth
rate jumped to approximately 6%. In 2003, we estimate industry
growth was a little more than 25%.
c) The accelerated growth rate over the last few years has been
largely driven by utilities implementing AMR. In general, when
implementing AMR, utilities tend to replace or change out
meters at a faster rate then normal.
d) In 2003, SEM had a very large contract with one customer that
resulted in significant growth for SEM as well as the
industry.
e) Going forward, we believe a 6% to 7% growth rate per year for
the industry is sustainable given that interest in AMR is
expected to remain strong.
15) Can you provide historical information on SEM's revenues, profits
and cash flow?
a) On April 27, 2004, we filed a Form 8K with the SEC that
contains historical financial information for SEM for the
years ended December 31, 2001 through 2003.
16) Please provide details on the portion of SEM revenues that will be
transitioned to ATOS Origin?
a) SEM has historically sold meters and provided manufacturing
services to its affiliate SchlumbergerSema, now part of ATOS
Origin (ATOS), related to its fixed network AMR business.
b) The manufacturing services will be transitioned to ATOS over a
short period of time, but not later than December 31, 2004. In
2003, SEM had approximately $49 million in services revenues
from sales to SchlumbergerSema. The gross margin associated
with these revenues was less than $3 million. As a result, the
loss of these revenues is not expected to materially impact
our future earnings.
c) In 2003, approximately 6% of SEM's revenues, $18 million,
resulted from sales of meters to SchlumbergerSema. To the
extent ATOS purchases meters in the future, for new AMR
systems, or for meter replacements under their existing AMR
systems, we expect to be able to compete effectively with
other electricity meter manufacturers for that business.
17) Does SEM have recurring revenues?
a) There is no significant recurring revenue component.
18) Does SEM have any backlog?
a) Yes, however, meter sales are a mix of project sales and
routine sales.
b) Routine sales typically occur on a yearly basis, particularly
at large utilities. Utilities seek annual or multi year bids
for their projected meter purchases. Once the contract is
awarded, which is often split between two or more vendors,
releases against that contract are given on a monthly or
quarterly basis. SEM includes orders in bookings and backlog
at the time the PO/release is received, not at the time of
contract award.
19) What effect will the SEM acquisition have on Itron's financial
outlook for 2004 and beyond?
a) As mentioned in the press release, the acquisition of SEM is
expected to be accretive to Itron's financial results in the
second half of 2004.
b) While we have a preliminary range of estimates for that
accretion of 15 to 25 cents, we are not yet in a position to
give specific earnings expectations for the combined
operations in the second half of 2004. Now that we have FTC
approval, we can get into the specific customer detail of
SEM's forecast and compare that with our own to eliminate
revenue projections that overlap (if any) and to make other
adjustments that are necessary.
c) In addition, with purchase price accounting, we will be
writing up the value of SEM's inventory to market. That means
that items in finished goods inventory at closing will not
generate any margin when those items are sold in future
periods. We need to evaluate how much finished goods inventory
SEM has and how that will affect expected results.
d) We intend to have those initial discussions and review
completed by the time we release second quarter 2004 results,
which will enable us to give more specific guidance on
financial expectations for the rest of the year on a combined
basis.
CUSTOMER
20) Who are SEM's customers and is there overlap with Itron?
a) SEM has over 3,400 utility customers. This includes a mix of
Investor Owned Utilities (IOUs), Municipalities, and Rural
Electric Cooperatives, the majority of which are located in
North America.
b) Yes -- there is a great deal of overlap. Many of Itron's
customers have some SEM meters installed and continue to buy
meters from SEM as well as other electric meter manufacturers.
INTEGRATION / ORGANIZATION
21) What will happen to SEM's name?
a) The electricity meter business will be branded as Itron and we
will cease using the Schlumberger name in a very short period
of time.
22) How does Itron intend to integrate SEM and how will they fit
within Itron's organizational structure?
a) We have two major operating groups at Itron -- Hardware
Solutions and Software Solutions. The electricity meter
business will become a sub-group under Hardware Solutions.
b) We have made significant progress in planning to bring the two
companies together in terms of IT, HR, accounting and finance,
and other administrative areas.
c) We have high level plans for integrating sales and marketing
and product development, and the detail work for bringing
these areas together can begin, now that the FTC approval is
behind us.
23) Will there be any headcount reductions or facility closures at
either Itron or SEM as a result of this transaction?
a) There will be some headcount reductions in SEM manufacturing
with the transition of manufacturing support services to ATOS.
Most of that should be contract employees but a small number
of salaried employees may be impacted as well.
b) Over time, we would anticipate a reduction in force in part of
the Canadian operations due to manufacturing efficiencies.
c) Overall, the changes are not expected to be material to
combined headcount.
24) Will this transaction result in any changes to Itron's
manufacturing operations in Waseca?
a) Our Waseca, Minnesota operation is very efficient, profitable
and very ably run.
b) We would not anticipate any change in Waseca, early-on, from
this acquisition. Over time, we will evaluate the Waseca and
South Carolina operations and look to rationalize with any
minor changes that might be useful.
c) Fortunately, both facilities are operating at attractive
levels of production leading to high efficiencies and
attractive capacity utilizations.
INTERNATIONAL IMPLICATIONS
25) Does SEM sell products outside of the US and Canada?
a) SEM sells products in the US, Mexico, Canada, the Caribbean
and Taiwan and other countries.
b) Business in Taiwan has been conducted through a 51% owned
joint venture. At the close of the acquisition, Itron will buy
the 51% previously owned by Schlumberger and the other 49% of
the operation shortly thereafter.
c) Until April 2004, SEM was restricted from selling outside of
those locations as a result of an agreement SEM had with a
former affiliate.
d) Now that those restrictions have elapsed, Itron will evaluate
where else in the world it will begin to market electric
meters.
i) Much of the world uses an IEC standard for electric meters
versus an American ANSI standard. Accordingly, moving to
those parts of the world where IEC standards are prevalent
would require product design changes.
CONTACT: Itron
Mima Scarpelli, 509-891-3565
mima.scarpelli@itron.com