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Form 10-Q for Quarterly Period Ended 9/30/02
Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
For the transition period from                          to                         
 
Commission file number 0-22418
 
 
ITRON, INC.
(Exact name of registrant as specified in its charter)
 
Washington
  
91-1011792
(State of Incorporation)
  
(I.R.S. Employer Identification Number)
 
2818 North Sullivan Road
Spokane, Washington 99216-1897
(509) 924-9900
(Address and telephone number of registrant’s principal executive offices)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨
 
The number of shares outstanding of the registrant’s common stock as of October 31, 2002 was 20,172,777.
 

Table of Contents
Itron, Inc.
 
Table of Contents
 
        
Page
Part 1:  FINANCIAL INFORMATION
     
Item 1:
  
FINANCIAL STATEMENTS (UNAUDITED)
     
      
1
      
2
      
3
      
4
Item 2:
     
11
Item 3:
     
17
Item 4:
     
18
Part 2:  OTHER INFORMATION
     
Item 1:
     
19
Item 4:
     
19
Item 6:
     
19
  
20
  
21

Table of Contents
 
Certain Forward-Looking Statements
 
This discussion contains information about future operating results and other forward-looking statements. When included in this discussion, the words “expects,” “intends,” “anticipates,” “believes,” “plans,” “projects,” “estimates,” “future” and similar expressions are intended to identify forward-looking statements. However, these words are not the exclusive means of identifying such statements. Forward looking statements are inherently subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those reflected in such forward-looking statements. Risks and uncertainties include, among many others, the rate of customer demand for our products, estimations of future revenues and costs on long-term contracts, changes in law and regulation (including FCC licensing actions), changes in the utility regulatory environment, delays or difficulties in introducing new products and acceptance of those products, increased competition, our ability to continue making substantial progress in the development and commercialization of acquired technologies and the significant assumptions underlying the valuation related to IPR&D and other intangible assets, fluctuations in market or general economic conditions, and various other matters, many of which are beyond our control. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q.
 
We expect that company representatives will meet privately during the quarter with investors, analysts and others. At these meetings we may reiterate the Business Outlook published in this document. We do not have any obligation to update or revise forward-looking statements contained in this document to reflect any changes in events, conditions or circumstances on which any such statement is based. However, we have from time to time, published updated guidance through the issuance of a press release and may do so in the future. For a more complete description of risks and other factors that can affect future results, see “Certain Risk Factors” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2002.

Table of Contents
Part 1:  FINANCIAL INFORMATION
 
Item 1:  FINANCIAL STATEMENTS (UNAUDITED)
 
ITRON, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
    
Three months ended September 30,
     
Nine months ended September 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(Unaudited, In thousands, Except per share data)
  
Revenues
                                    
Sales
   
$
62,403
 
   
$
50,424
 
   
$
174,447
 
   
$
130,060
 
Service
   
 
10,654
 
   
 
10,431
 
   
 
33,124
 
   
 
31,280
 
    
  
  
  
Total revenues
   
 
73,057
 
   
 
60,855
 
   
 
207,571
 
   
 
161,340
 
    
  
  
  
Cost of revenues
                                    
Sales
   
 
31,359
 
   
 
27,127
 
   
 
88,482
 
   
 
72,232
 
Service
   
 
7,349
 
   
 
6,675
 
   
 
23,602
 
   
 
20,232
 
    
  
  
  
Total cost of revenues
   
 
38,708
 
   
 
33,802
 
   
 
112,084
 
   
 
92,464
 
    
  
  
  
Gross profit
   
 
34,349
 
   
 
27,053
 
   
 
95,487
 
   
 
68,876
 
Operating expenses
                                    
Sales and marketing
   
 
8,159
 
   
 
7,390
 
   
 
23,436
 
   
 
19,461
 
Product development
   
 
9,963
 
   
 
8,210
 
   
 
27,858
 
   
 
21,591
 
General and administrative
   
 
6,186
 
   
 
3,778
 
   
 
16,272
 
   
 
10,656
 
Amortization of intangibles
   
 
642
 
   
 
377
 
   
 
1,552
 
   
 
1,109
 
Restructurings
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(807
)
In-process research and development
   
 
—  
 
   
 
—  
 
   
 
7,200
 
   
 
—  
 
    
  
  
  
Total operating expenses
   
 
24,950
 
   
 
19,755
 
   
 
76,318
 
   
 
52,010
 
    
  
  
  
Operating income
   
 
9,399
 
   
 
7,298
 
   
 
19,169
 
   
 
16,866
 
Other income (expense)
                                    
Equity in affiliates
   
 
51
 
   
 
(74
)
   
 
97
 
   
 
(115
)
Interest and other, net
   
 
99
 
   
 
(911
)
   
 
(29
)
   
 
(2,942
)
    
  
  
  
Total other income (expense)
   
 
150
 
   
 
(985
)
   
 
68
 
   
 
(3,057
)
    
  
  
  
Income before income taxes
   
 
9,549
 
   
 
6,313
 
   
 
19,237
 
   
 
13,809
 
Income tax provision
   
 
(3,581
)
   
 
(2,409
)
   
 
(9,914
)
   
 
(5,258
)
    
  
  
  
Net income
   
$
5,968
 
   
$
3,904
 
   
$
9,323
 
   
$
8,551
 
    
  
  
  
Earnings per share
                                    
Basic net income per share
   
$
0.29
 
   
$
0.25
 
   
$
0.49
 
   
$
0.55
 
    
  
  
  
Diluted net income per share
   
$
0.27
 
   
$
0.21
 
   
$
0.45
 
   
$
0.49
 
    
  
  
  
Average number of shares outstanding
                                    
Basic
   
 
20,479
 
   
 
15,667
 
   
 
18,955
 
   
 
15,522
 
Diluted
   
 
21,728
 
   
 
19,071
 
   
 
21,247
 
   
 
18,414
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents
 
ITRON, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
    
September 30, 2002
     
December 31, 2001
  
    
(Unaudited, In thousands)
  
ASSETS
Current assets
                  
Cash and cash equivalents
   
$
38,383
 
   
$
20,582
 
Short-term investments, available for sale
   
 
—  
 
   
 
22,199
 
Accounts receivable, net
   
 
47,581
 
   
 
52,345
 
Inventories, net
   
 
19,334
 
   
 
16,281
 
Deferred income taxes, net
   
 
4,353
 
   
 
4,134
 
Other
   
 
3,250
 
   
 
1,192
 
    
  
Total current assets
   
 
112,901
 
   
 
116,733
 
Property, plant and equipment, net
   
 
28,945
 
   
 
25,918
 
Equipment used in outsourcing, net
   
 
11,908
 
   
 
12,918
 
Intangible assets, net
   
 
10,281
 
   
 
4,419
 
Goodwill
   
 
32,870
 
   
 
6,616
 
Restricted cash
   
 
—  
 
   
 
5,100
 
Deferred income taxes, net
   
 
24,972
 
   
 
24,952
 
Other
   
 
7,929
 
   
 
6,035
 
    
  
Total assets
   
$
229,806
 
   
$
202,691
 
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
                  
Accounts payable and accrued expenses
   
$
23,195
 
   
$
24,689
 
Wages and benefits payable
   
 
13,424
 
   
 
11,611
 
Current portion of long-term debt
   
 
672
 
   
 
229
 
Deferred revenue
   
 
11,068
 
   
 
13,558
 
    
  
Total current liabilities
   
 
48,359
 
   
 
50,087
 
    
  
Convertible subordinated debt
   
 
—  
 
   
 
53,313
 
Mortgage notes and leases payable
   
 
—  
 
   
 
4,860
 
Project financing
   
 
4,939
 
   
 
6,082
 
Warranty and other obligations
   
 
16,798
 
   
 
12,297
 
    
  
Total liabilities
   
 
70,096
 
   
 
126,639
 
    
  
Contingencies (Note 8)
                  
Shareholders’ equity
                  
Common stock
   
 
194,193
 
   
 
120,316
 
Accumulated other comprehensive loss
   
 
(1,458
)
   
 
(1,916
)
Accumulated deficit
   
 
(33,025
)
   
 
(42,348
)
    
  
Total shareholders’ equity
   
 
159,710
 
   
 
76,052
 
    
  
Total liabilities and shareholders’ equity
   
$
229,806
 
   
$
202,691
 
    
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents
 
ITRON, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    
Nine months ended
September 30,
  
    
2002
     
2001
  
    
(Unaudited, In thousands)
  
OPERATING ACTIVITIES
                  
Net income
   
$
9,323
 
   
$
8,551
 
Noncash charges (credits) to income:
                  
Depreciation and amortization
   
 
7,500
 
   
 
7,548
 
Acquired in-process research and development
   
 
7,200
 
   
 
—  
 
Deferred income tax provision
   
 
5,719
 
   
 
5,041
 
Stock option income tax benefits
   
 
4,200
 
   
 
—  
 
Impairment loss
   
 
401
 
   
 
—  
 
Forfeited interest and amortization of discount on invested securities
   
 
283
 
   
 
—  
 
Equity in affiliates, net
   
 
(97
)
   
 
115
 
Gain on early extinguishment of debt
   
 
(200
)
   
 
—  
 
Gain on sale of building
   
 
(841
)
   
 
—  
 
Changes in operating assets and liabilities, net of effects of acquisition:
                  
Accounts receivable
   
 
9,083
 
   
 
5,063
 
Inventories
   
 
(3,053
)
   
 
267
 
Accounts payable and accrued expenses
   
 
(1,838
)
   
 
(4,503
)
Wages and benefits payable
   
 
(87
)
   
 
(260
)
Deferred revenue
   
 
(4,538
)
   
 
(3,268
)
Other, net
   
 
(211
)
   
 
711
 
    
  
Cash provided by operating activities
   
 
32,844
 
   
 
19,265
 
INVESTING ACTIVITIES
                  
Proceeds from sales and maturities of investment securities
   
 
48,980
 
   
 
6,772
 
Purchase of short-term investments
   
 
(26,922
)
   
 
(22,447
)
Reclassification of restricted cash
   
 
5,100
 
   
 
(5,100
)
Proceeds from the sale of property, plant and equipment
   
 
1,896
 
   
 
—  
 
Acquisition of property, plant and equipment
   
 
(7,951
)
   
 
(3,711
)
Issuance of note receivable
   
 
(2,000
)
   
 
(2,250
)
Acquisition of LineSoft, net of cash and cash equivalents
   
 
(21,717
)
   
 
—  
 
Other, net
   
 
1,429
 
   
 
(1,380
)
    
  
Cash used by investing activities
   
 
(1,185
)
   
 
(28,116
)
FINANCING ACTIVITIES
                  
Change in short-term borrowings, net
   
 
(1,973
)
   
 
—  
 
Payments on project financing
   
 
(1,417
)
   
 
(437
)
Issuance of common stock
   
 
6,976
 
   
 
2,200
 
Repurchase of common stock
   
 
(12,555
)
   
 
(914
)
Payments on mortgage notes payable
   
 
(4,853
)
   
 
(146
)
Other, net
   
 
(36
)
   
 
(25
)
    
  
Cash provided (used) by financing activities
   
 
(13,858
)
   
 
678
 
    
  
Increase (decrease) in cash and cash equivalents
   
 
17,801
 
   
 
(8,173
)
Cash and cash equivalents at beginning of period
   
 
20,582
 
   
 
21,216
 
    
  
Cash and cash equivalents at end of period
   
$
38,383
 
   
$
13,043
 
    
  
Non cash transactions:
                  
Acquisition of LineSoft in partial exchange for common stock
   
$
21,801
 
   
$
—  
 
Debt to equity conversion
   
$
53,313
 
   
$
30
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents
 
ITRON, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
 
Note 1:  Summary of Significant Accounting Policies
 
Basis of presentation
 
The condensed consolidated financial statements presented in this Form 10-Q are unaudited and reflect, in the opinion of management, all entries necessary for a fair presentation of operations for the three and nine-month periods ended September 30, 2002 and 2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim results. These condensed consolidated financial statements include the results of LineSoft Corporation (LineSoft) from its acquisition on March 12, 2002 (see Note 5), and should be read in conjunction with the audited consolidated financial statements and the notes included in our Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on March 28, 2002. The results of operations for the three and nine-month periods ended September 30, 2002 are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.
 
Use of estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us, in some instances, to make estimates and assumptions. These estimates and assumptions may affect reported amounts of assets, liabilities, or contingent assets or liabilities at the date of the financial statements, and/or reported amounts of revenues or expenses during the reporting period. Because of various factors affecting future costs and operations, actual results could differ from estimates.
 
Research and development expenses
 
Research and development costs are expensed as incurred. We incurred $7.2 million of in-process research and development (IPR&D) charges in the first nine months of 2002 in connection with the LineSoft acquisition.
 
Note 2:  Short-Term Investments
 
Short-term investments, which are classified as available-for-sale, consist of U.S. government and agency paper, money market funds, repurchase agreements, master notes, and certificates of deposits. We sold $23.8 million of short-term investments, and realized a gain of $26,300 during the third quarter of 2002.
 
Purchases of short-term investments were $8.0 million and $26.9 million for the three months and nine months ended September 30, 2002, respectively. Proceeds from the sales and maturities of investment securities were $31.8 million and $49.0 million, respectively. Year to date, interest income earned on short-term investments was $548,000.

4

Table of Contents

ITRON, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

 
Note 3:  Earnings Per Share and Capital Structure
 
The following table sets forth the computation of basic and diluted earnings per share:
 
    
Three months ended September 30,
   
Nine months ended September 30,
    
2002
   
2001
   
2002
   
2001
    
(In thousands except per share data)
Basic earnings per share:
                            
Net income available to common shareholders
   
$
5,968
   
$
3,904
   
$
9,323
   
$
8,551
Weighted average shares outstanding
   
 
20,479
   
 
15,667
   
 
18,955
   
 
15,522
    
  
  
  
Basic net income per share
   
$
0.29
   
$
0.25
   
$
0.49
   
$
0.55
    
  
  
  
Diluted earnings per share:
                            
Net income available to common shareholders
   
$
5,968
   
$
3,904
   
$
9,323
   
$
8,551
Interest on convertible debt, net of income taxes
   
 
—  
   
 
159
   
 
176
   
 
478
    
  
  
  
Adjusted net income available to common shareholders, assuming conversion
   
$
5,968
   
$
4,063
   
$
9,499
   
$
9,029
    
  
  
  
Weighted average shares outstanding
   
 
20,479
   
 
15,667
   
 
18,955
   
 
15,522
Effect of dilutive securities:
                            
Employee stock options
   
 
1,249
   
 
1,853
   
 
1,720
   
 
1,341
Convertible debt
   
 
—  
   
 
1,551
   
 
572
   
 
1,551
    
  
  
  
Adjusted weighted average shares
   
 
21,728
   
 
19,071
   
 
21,247
   
 
18,414
    
  
  
  
Diluted net income per share
   
$
0.27
   
$
0.21
   
$
0.45
   
$
0.49
    
  
  
  
 
We have granted options to purchase shares of our common stock to directors, employees and other key personnel at fair market value on the date of grant. The average price of Itron common stock was $17.26 in the third quarter of 2002, compared to $30.61 in the second quarter of 2002 and $19.17 in the third quarter of 2001.
 
The dilutive effect of options is calculated using the “treasury stock” method. Under this method, earnings per share data are computed as if the options were exercised at the beginning of the period (or at time of issuance, if later) and as if the funds obtained thereby were used to purchase common stock at the average market price during the period. Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options. At September 30, 2002 and 2001, we had options outstanding of 3.4 million and 4.0 million at an average exercise price of $11.17, and $9.59, respectively. For the third quarter of 2002, approximately 2.2 million of our stock options were excluded from the calculation of diluted earnings per share because they were anti-dilutive. These options could be dilutive in future periods. For the same period in 2001, approximately 2.1 million of our stock options were excluded from the calculation.
 
The dilutive effect of our convertible subordinated notes is calculated using the “if converted” method. Under this method, the after-tax amount of interest expense related to the convertible debt is added back to net income. In 2001, and for a portion of 2002, we had subordinated convertible debt outstanding with conversion prices of $9.65, representing 1.5 million shares, and $23.70, representing an additional 1.6 million shares. During April and May of 2002, we exercised our option to redeem our subordinated convertible debt. All holders of the notes chose to convert their notes into common stock as opposed to redeem them. In both 2001 and 2002 periods, certain portions of the convertible debt shares were excluded from the earnings per share calculation, as they were anti-dilutive.
 
In May 1998, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock. Through December 31, 2001 we had repurchased 192,100 shares at an average price of $18.02. In the first half of 2002, we repurchased 9,200 shares at an average price of $24.46. In July 2002, we completed the repurchase of the remaining 798,700 authorized shares at an average price of $15.44.

5

Table of Contents

ITRON, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

 
Note 4:    Balance Sheet Components
 
    
September 30,
2002
   
December 31,
2001
    
(In thousands)
Accounts Receivable
     
Trade (net of allowance for doubtful accounts of $1,858 and $1,427)
   
$
34,407
   
$
38,342
Unbilled revenue
   
 
13,174
   
 
14,003
    
  
Total accounts receivable
   
$
47,581
   
$
52,345
    
  
Inventories, net
              
Material
   
$
5,182
   
$
4,800
Work in process
   
 
1,124
   
 
720
Finished goods
   
 
12,671
   
 
10,382
    
  
Total manufacturing inventories
   
 
18,977
   
 
15,902
Service inventories
   
 
357
   
 
379
    
  
Total inventories, net
   
$
19,334
   
$
16,281
    
  
 
Note 5:    Business Combination
 
In March 2002, we acquired LineSoft, a leading provider of engineering design software applications and consulting services for optimizing the construction or rebuild of utility transmission and distribution systems, in exchange for cash of $21 million and 848,870 shares of our common stock valued at $25.68 per share. In addition, we are required to pay additional amounts to certain LineSoft shareholders of up to $13.5 million in the event that certain defined revenue targets in 2002, 2003 and/or 2004 are exceeded. Any earnout payments will be paid half in cash and half in our common stock. Based on revenues earned to date, management does not believe that there will be an earnout payment for 2002.
 
In connection with the purchase of LineSoft, the Company assumed a pre-existing loan in the amount of $2.0 million to the former CEO of LineSoft by renewing and replacing it with a new non-recourse promissory note, secured with the Company’s stock, in the same amount. The replacement note matures May 11, 2003, and bears interest at an annual rate of 6.0%. As of September 30, 2002, the loan was paid down to $792,395.
 
The purchase consideration, including cash paid, the value of Itron stock issued, and estimated transaction costs, was allocated as follows (in thousands):
 
Purchased IPR&D
   
$
7,200
Goodwill
   
 
26,254
Identified amortizable intangible assets
   
 
7,390
Other assets and liabilities
   
 
2,802
    
Total
   
$
43,646
    
 
The fair value of the IPR&D was determined using the income approach, which discounts expected future cash flows from projects under development to their net present value. Each project was analyzed to determine the technological innovations included; the utilization of core technology; the complexity, cost and time to complete development; any alternative future use or current technological feasibility; and the stage of completion. Future cash flows were estimated taking into account the expected life cycles of the product and the underlying technology, relevant market sizes and industry trends. A discount rate was determined based on an assessment of the weighted average cost of capital of LineSoft, a weighted average return on assets, the internal rate of return of the investment in the acquisition of LineSoft, and venture capital rates of return. The discount rate used in the valuation of all IPR&D was 25 percent.
 
Accounting rules require the disclosure of what our results of operations would have been assuming the acquisition had already occurred as of the beginning of the periods presented. The following pro forma results are based on the individual historical results of Itron, Inc. and LineSoft (prior to acquisition on March 12, 2002) with adjustments to give effect to the combined operations. The adjustments are related to amortization of acquired identified intangible assets, reduction of depreciation expense resulting from adjustments to the value of acquired fixed assets, elimination of interest expense on a line of credit paid in full, and the change in the tax provision. The pro forma results are intended for information purposes, and do not necessarily represent what the combined results of operations or financial position would actually have been had the transaction in fact occurred at an earlier date, nor are they representative of results for any future date or period.

6

Table of Contents

ITRON, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

 
    
Pro forma
  
    
Three Months Ended September 30,
     
Nine Months Ended September 30,
  
    
2002
   
2001
     
2002
   
2001
  
    
(In thousands, except per share data)
  
Revenues
   
$
73,057
   
$
63,803
 
   
$
210,412
   
$
171,642
 
Gross profit
   
 
34,349
   
 
27,149
 
   
 
95,865
   
 
70,616
 
Operating expenses
   
 
24,950
   
 
22,402
 
   
 
80,329
   
 
61,201
 
Other income (expense)
   
 
150
   
 
(949
)
   
 
90
   
 
(2,864
)
Net income
   
$
5,968
   
$
2,345
 
   
$
7,066
   
$
4,051
 
    
  
  
  
Basic net income per common share
   
$
0.29
   
$
0.14
 
   
$
0.37
   
$
0.25
 
Diluted net income per common share
   
$
0.27
   
$
0.13
 
   
$
0.34
   
$
0.23
 
Weighted average shares assumed outstanding
                                
Basic
   
 
20,479
   
 
16,516
 
   
 
19,170
   
 
16,371
 
Diluted
   
 
21,728
   
 
19,920
 
   
 
21,462
   
 
17,712
 
 
Note 6:    Segment Information
 
We are internally organized around four business units focused on the customer segments that we serve. These business units are Electric Systems, Natural Gas Systems, Water & Public Power Systems, and International Systems. Operations related to LineSoft since its acquisition are included in Electric Systems.
 
Revenues for each business unit may include hardware, custom and licensed software, project management, installation and support activities, outsourcing services (where we own and operate, or simply operate, systems for a periodic fee) and post-sale support activities. Inter-segment revenues are immaterial. Within each business unit, product costs associated with revenue are reported using standards, which include materials, direct labor and an overhead allocation based on projected production for the year. Variances from standard costs are reported in corporate costs and are not allocated to the business units. Assets and liabilities are not allocated to the segments for management purposes.
 
Management has two primary measures for each of our operating segments, revenue and operating income. Operating income is defined as revenue, less (a) direct costs associated with that revenue, (b) operating expenses directly incurred by the segment, and (c) allocations of basic services (such as floor space and communications expense), warranty and miscellaneous service related expenses. Operating expenses directly associated with each segment may include sales, marketing, product development or administrative expenses. Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation. Corporate expenses, which include product development, marketing, miscellaneous manufacturing and certain other corporate expenditures, are included in the table below to reconcile segment activity to the consolidated statements of operations.
 
Segment revenues and operating results are detailed below.
 
    
Three months ended September 30,
    
Electric
   
Natural Gas
   
Water & PP
   
International
     
Corporate
     
Total
    
(In thousands)
2002
                                              
Revenues
   
$
32,985
   
$
14,458
   
$
23,685
   
$
1,929
 
   
$
—  
 
   
$
73,057
Cost of revenues
   
 
18,244
   
 
6,187
   
 
13,406
   
 
909
 
   
 
(38
)
   
 
38,708
    
  
  
  
  
  
Gross profit
   
 
14,741
   
 
8,271
   
 
10,279
   
 
1,020
 
   
 
38
 
   
 
34,349
Operating expenses
   
 
2,144
   
 
703
   
 
1,220
   
 
1,573
 
   
 
19,310
 
   
 
24,950
    
  
  
  
  
  
Operating income (loss)
   
$
12,597
   
$
7,568
   
$
9,059
   
$
(553
)
   
$
(19,272
)
   
$
9,399
    
  
  
  
  
  

7

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ITRON, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

 
    
Three months ended September 30,
    
Electric
   
Natural Gas
   
Water & PP
   
International
   
Corporate
     
Total
    
(In thousands)
2001
                                            
Revenues
   
$
25,555
   
$
9,906
   
$
19,945
   
$
5,449
   
$
—  
 
   
$
60,855
Cost of revenues
   
 
15,150
   
 
4,522
   
 
10,771
   
 
2,879
   
 
480
 
   
 
33,802
    
  
  
  
  
  
Gross profit
   
 
10,405
   
 
5,384
   
 
9,174
   
 
2,570
   
 
(480
)
   
 
27,053
Operating expenses
   
 
1,391
   
 
695
   
 
888
   
 
2,429
   
 
14,352
 
   
 
19,755
    
  
  
  
  
  
Operating income (loss)
   
$
9,014
   
$
4,689
   
$
8,286
   
$
141
   
$
(14,832
)
   
$
7,298
    
  
  
  
  
  
 
    
Nine months ended September 30,
    
Electric
   
Natural Gas
   
Water & PP
   
International
     
Corporate
     
Total
    
(In thousands)
2002
                                              
Revenues
   
$
100,286
   
$
37,920
   
$
60,347
   
$
9,018
 
   
$
—  
 
   
$
207,571
Cost of revenues
   
 
53,926
   
 
16,267
   
 
35,057
   
 
5,327
 
   
 
1,507
 
   
 
112,084
    
  
  
  
  
  
Gross profit
   
 
46,360
   
 
21,653
   
 
25,290
   
 
3,691
 
   
 
(1,507
)
   
 
95,487
Operating expenses
   
 
5,909
   
 
1,792
   
 
3,137
   
 
5,415
 
   
 
52,865
 
   
 
69,118
IPR&D
   
 
—  
   
 
—  
   
 
—  
   
 
—  
 
   
 
7,200
 
   
 
7,200
    
  
  
  
  
  
Total operating expenses
   
 
5,909
   
 
1,792
   
 
3,137
   
 
5,415
 
   
 
60,065
 
   
 
76,318
    
  
  
  
  
  
Operating income (loss)
   
$
40,451
   
$
19,861
   
$
22,153
   
$
(1,724
)
   
$
(61,572
)
   
$
19,169
    
  
  
  
  
  
2001
                                              
Revenues
   
$
68,457
   
$
26,759
   
$
45,412
   
$
20,712
 
   
$
—  
 
   
$
161,340
Cost of revenues
   
 
39,792
   
 
12,132
   
 
24,981
   
 
12,840
 
   
 
2,719
 
   
 
92,464
    
  
  
  
  
  
Gross profit
   
 
28,665
   
 
14,627
   
 
20,431
   
 
7,872
 
   
 
(2,719
)
   
 
68,876
Operating expenses
   
 
3,624
   
 
1,937
   
 
2,478
   
 
5,743
 
   
 
38,228
 
   
 
52,010
    
  
  
  
  
  
Operating income (loss)
   
$
25,041
   
$
12,690
   
$
17,953
   
$
2,129
 
   
$
(40,947
)
   
$
16,866
    
  
  
  
  
  
 
Note 7:    Restructuring
 
In 1999, we recorded charges totaling $16.3 million for restructuring activities, including facility consolidations, scaling back of products offered, and a number of other actions in order to improved efficiencies and reduced costs. The majority of our restructuring charges were related to a reduction in our workforce. Remaining charges were related to impairment of equipment and estimated future lease payments for abandoned facilities. Restructuring activities for the first nine months of 2002 were as follows:
 
    
Reserve Balance 12/31/01
     
Adjustments
   
Payments
   
Reserve Balance 9/30/02
    
(In thousands)
Severance and related charges
   
$
131
     
$
—  
   
$
111
   
$
20
Consolidation of facilities
   
 
447
     
 
—  
   
 
167
   
 
280
    
    
  
  
Total restructurings
   
$
578
     
$
—  
   
$
278
   
$
300
    
    
  
  
 
We expect to fully utilize the remaining reserve balances for severance and related charges in 2002. Facility consolidation reserves are dependent on our continued ability to sublease vacant space under a non-cancelable operating lease through 2006.

8

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ITRON, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

 
Note 8:  Contingencies
 
We maintain performance and bid bonds for certain customers. Performance bonds usually cover the installation phase of a contract and may on occasion cover the operations and maintenance phase of outsourcing contracts. Bonds in force were $40.3 million and $39.7 million at September 30, 2002 and 2001, respectively, certain of which are guaranteed by standby letters of credit. The outstanding amounts of standby letters of credit were $15.0 million and $12.3 million at September 30, 2002 and 2001, respectively. In addition, we guarantee lease payments for certain equipment leased by an affiliated company. The guaranteed future lease obligation at September 30, 2002 was $700,000.
 
We are a party to various lawsuits and claims, both as plaintiff and defendant. In our opinion, none of the various lawsuits and claims, either individually or in the aggregate, is expected to have a material adverse effect on our financial position or results of operations. We believe that we have made adequate provisions for such contingent liabilities.
 
On April 3, 1999, the Company served Ralph Benghiat, an individual, with a complaint seeking a declaratory judgment that a patent owned by Benghiat is invalid and not infringed by Itron’s handheld meter reading devices. Benghiat has filed a counterclaim alleging patent infringement by the same devices. Both lawsuits were filed in the United States District Court for the District of Minnesota (Civil Case No. 99-cv-501). On April 2, 2001, the district court denied the motions for summary judgment filed by Itron. On June 29, 2001, and again on September 24, 2002, court-ordered settlement hearings were held, which did not result in a settlement of the case. The case is scheduled to go to trial December 9, 2002. While we believe that our products do not infringe the Benghiat patent, there can be no assurance that we will prevail in this matter, in which case a decision or settlement of this case may have a material adverse effect on our financial condition. Any litigation, regardless of its outcome, would probably be costly and require significant time and attention of our key management and technical personnel.
 
Note 9:  Comprehensive Income
 
Comprehensive income adjustments are reflected as an increase or (decrease) to shareholders’ equity, and are not reflected in results of operations. Operating results, adjusted to reflect comprehensive income items during the period, net of tax, were as follows (in thousands):
 
    
Three months ended September 30,
   
Nine months ended September, 30,
  
    
2002
     
2001
   
2002
     
2001
  
Net income
   
$
5,968
 
   
$
3,904
   
$
9,323
 
   
$
8,551
 
Change in foreign currency translation adjustments
   
 
(97
)
   
 
339
   
 
496
 
   
 
(181
)
Change in net unrealized holding gain (loss)
   
 
(24
)
   
 
45
   
 
(38
)
   
 
74
 
    
  
  
  
Total comprehensive income
   
$
5,847
 
   
$
4,288
   
$
9,781
 
   
$
8,444
 
    
  
  
  
 
The components of accumulated other comprehensive income (loss) net of tax, which are reflected in shareholders’ equity, were as follows (in thousands):
 
    
September 30,
2002
     
December 31,
2001
  
Accumulated foreign currency translation adjustments
   
$
(1,458
)
   
$
(1,954
)
Accumulated net unrealized gain on short-term investments
   
 
—  
 
   
 
38
 
    
  
Total accumulated other comprehensive loss
   
$
(1,458
)
   
$
(1,916
)
    
  
 
Note 10:  Goodwill
 
On July 1, 2001, we adopted Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations,” and on January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations and that certain acquired intangible assets be recognized as assets apart from goodwill. SFAS No. 142 provides that goodwill should not be amortized but instead be tested for impairment annually at the reporting unit level. We completed our initial impairment test of goodwill during the second quarter of fiscal 2002 and concluded that no impairment adjustment was required.
 
The change in the amount of goodwill for the nine months ended September 30, 2002 is as follows (in thousands):
 
Balance at December 31, 2001
   
$
6,616
LineSoft goodwill acquired during the period
   
 
26,254
    
Balance at September 30, 2002
   
$
32,870
    
 

9

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ITRON, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

 
The following table reflects adjustments to our consolidated results had the adoption of SFAS No. 142 occurred at the beginning of 2001 (in thousands):
 
    
Three months ended September 30,
   
Nine months ended September 30,
    
2002
   
2001
   
2002
   
2001
Net income, as reported
   
$
5,968
   
$
3,904
   
$
9,323
   
$
8,551
Goodwill amortization, net of tax effect
   
 
—  
   
 
120
   
 
—  
   
 
345
    
  
  
  
Adjusted net income
   
$
5,968
   
$
4,024
   
$
9,323
   
$
8,896
    
  
  
  
Basic net income per share, as reported
   
$
0.29
   
$
0.25
   
$
0.49
   
$
0.55
Goodwill amortization, net of tax effect
   
 
—  
   
 
0.01
   
 
—  
   
 
0.02
    
  
  
  
Adjusted basic net income per share
   
$
0.29
   
$
0.26
   
$
0.49
   
$
0.57
    
  
  
  
Diluted net income per share, as reported
   
$
0.27
   
$
0.21
   
$
0.45
   
$
0.49
Goodwill amortization, net of tax effect
   
 
—  
   
 
0.01
   
 
—  
   
 
0.02
    
  
  
  
Adjusted diluted net income per share
   
$
0.27
   
$
0.22
   
$
0.45
   
$
0.51
    
  
  
  
 
Note 11:  Identified Intangible Assets
 
No acquisition-related intangibles were acquired, impaired, or written off during the three months ended September 30, 2002. Identified intangible assets as of September 30, 2002 consisted of the following (in thousands):
 
      
Weighted Average Useful Life
(in months)
   
Gross
Assets
   
Accumulated
Amortization
     
Net
Acquisition-related developed technology
     
25
   
$
5,600
   
$
(545
)
   
$
5,055
Acquisition-related customer contracts
     
28
   
 
1,250
   
 
(212
)
   
 
1,038
Other acquisition-related intangibles
     
22
   
 
582
   
 
(235
)
   
 
347
Intellectual property assets
     
27
   
 
8,588
   
 
(4,747
)
   
 
3,841
      
  
  
  
Total identified intangible assets
     
26
   
$
16,020
   
$
(5,739
)
   
$
10,281
      
  
  
  
 
The aggregate amortization expense on identified intangible assets was $1,552,000 for the nine months ended September 30, 2002. Estimated amortization expense is as follows (in thousands):
 
Fiscal years ending December 31,
   
Estimated Amortization
                        2002
   
$2,144                        
                        2003
   
2,740                        
                        2004
   
2,362                        
                        2005
   
1,955                        
                        2006
   
510                        
                        Beyond 2006
   
2,122                        
 
Note 12:  New Accounting Pronouncements
 
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 covers a variety of technical issues that will not have a material effect on our financial statements except for the rescission of SFAS No. 4, which required extinguishment of debt be treated as an extraordinary item. This rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. We adopted SFAS No. 145 effective January 1, 2002 and have reflected the $200,000 gain on extinguishment of debt recorded in the period ended March 31, 2002 in interest and other, net, as opposed to classifying it as an extraordinary item as was previously required.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 may have a significant impact on the timing of the recognition of costs associated with restructuring activities, as compared to current GAAP reporting requirements.
 
Note 13:  Subsequent Events
 
On October 1, 2002, we acquired Regional Economic Research, Inc. (RER), a San Diego, California based company specializing in energy consulting, analysis and forecasting services and software, for $14 million in cash. In addition, we have potential earnout payments of $2 million in each of 2003 and 2004 subject to achievement of certain revenue targets.
 
On October 1, 2002, we acquired all of the outstanding shares of eMobile Data Corporation, a public company incorporated in British Columbia, Canada, for $6.2 million in cash. eMobile Data is a leading provider of wireless, web-based workforce management solutions for the utility industry. In 2001, we loaned eMobile Data $2.0 million, in the form of a convertible note receivable, which would have represented approximately 19% ownership upon conversion.
 

10

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Item 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes included in this report, and with the 2001 audited financial statements and notes included in our Annual Report on Form 10-K, which we filed with the Securities and Exchange Commission on March 28, 2002.
 
RESULTS OF OPERATIONS
 
Revenues and Gross Margin
 
    
Three months ended September 30,
  
    
Revenues
     
Gross Margin %
  
    
2002
   
2001
     
Increase
(Decrease)
     
2002
     
2001
  
    
(In millions)
  
Electric Systems
   
$
33.0
   
$
25.5
     
29
%
   
45
%
   
41
%
Natural Gas Systems
   
 
14.4
   
 
9.9
     
45
%
   
57
%
   
54
%
Water & Public Power Systems
   
 
23.8
   
 
19.9
     
20
%
   
43
%
   
46
%
International Systems
   
 
1.9
   
 
5.5
     
(65
)%
   
53
%
   
47
%
Corporate
   
 
—  
   
 
—  
     
—  
 
   
—  
 
   
(1
)%
    
  
           
  
Total
   
$
73.1
   
$
60.8
     
20
%
   
47
%
   
44
%
    
  
           
  
 
Revenues and Gross Margin
 
    
Nine months ended September 30,
  
    
Revenues
     
Gross Margin %
  
    
2002
   
2001
     
Increase
(Decrease)
     
2002
     
2001
  
    
(In millions)
  
Electric Systems
   
$
100.3
   
$
68.4
     
47
%
   
46
%
   
42
%
Natural Gas Systems
   
 
37.9
   
 
26.8
     
41
%
   
57
%
   
55
%
Water & Public Power Systems
   
 
60.4
   
 
45.4
     
33
%
   
42
%
   
45
%
International Systems
   
 
9.0
   
 
20.7
     
(57
)%
   
41
%
   
38
%
Corporate
   
 
—  
   
 
—  
     
—  
 
   
(1
)%
   
(2
)%
    
  
           
  
Total
   
$
207.6
   
$
161.3
     
29
%
   
46
%
   
43
%
    
  
           
  
 
Our revenues for the three months ended September 30, 2002 increased by 20% compared to the third quarter of last year, and by 29% for the first nine months of 2002 compared to the same period in 2001. The increase in revenues came primarily from our Automated Meter Reading (“AMR”) business in the U.S. We shipped nearly 900,000 radio-based AMR meter modules during the quarter, an increase of 11% from the third quarter of last year. Year-to-date, AMR meter module shipments were up 35% over last year. There were no customers in the third quarter of 2002 representing more than 10% of revenues. By comparison, in the third quarter of 2001, one customer represented 16% of total revenues.
 
Also contributing to higher domestic revenues in 2002 compared with 2001, were revenues from our transmission and distribution systems (“TDS,” previously LineSoft) product line, which we acquired in March 2002. Those revenues were $2.3 million for the quarter and $6.7 million year-to-date. Partially offsetting the increase in hardware revenues in our domestic business were lower revenues from our international operations and from our commercial and industrial meter data collection and analysis software. We are actively evaluating alternatives to improve performance in these areas.
 
Our gross margin percentage increased to 47% in the third quarter of 2002 from 44% in the third quarter of 2001 and to 46% for the first nine months of 2002 compared to 43% for the same period last year. The improved margins resulted from a combination of factors, including improved manufacturing efficiencies from higher production volumes and changes in product mix, specific cost reduction efforts, lower general market prices for electronic components and other supply-chain management initiatives. These factors benefited margins in all of our domestic segments. Margins may decrease slightly in the fourth quarter of 2002 from the 47% level we had in the third quarter of 2002, as a result of higher International revenues at lower margins.
 
Quarter-to-quarter variations reported in revenue or gross margin by segment are not unusual. This is typically due to the mix of products sold or distribution channels. The following discussion highlights significant changes in trends or components of revenue and gross margin for each segment.
 
Electric Systems Net revenues increased by $7.5 million, or 29%, in the third quarter of 2002 compared to the third quarter of 2001. Year to date 2002, net revenues are up by $31.9 million, or 47% compared to 2001. The majority of the increase results from higher hardware shipments. Also contributing to increased Electric Systems revenues were the TDS

11

Table of Contents
product line revenues discussed above. Excluding the TDS revenue, revenue growth was 20% for the quarter and 37% year-to-date. One customer represented 19% of total electric revenues for the quarter compared to 38% in the third quarter last year. Year-to-date, that customer was 24% of total electric revenues compared with 50% last year.
 
The improved Electric segment margins resulted primarily from lower standard costs caused by higher production volumes and other manufacturing efficiencies discussed above, as well as a shift in the mix of products and services.
 
Natural Gas Systems Net revenues increased by $4.5 million, or 45%, in the third quarter of 2002 compared to the third quarter of 2001 and $11.1 million, or 41%, in the first nine months of 2002 compared to the same period in 2001. This was due to accelerated hardware shipments against a contract signed in early 2002.
 
The improved Natural Gas segment margins resulted primarily from lower standard costs caused by higher production volumes and other manufacturing efficiencies discussed above.
 
Water and Public Power Systems Net revenues increased by $3.9 million, or 20%, in the third quarter of 2002 compared to 2001 primarily due to higher hardware and installation revenues. Year to date, the net revenue increase of $15.0 million, or 33%, in 2002 compared to 2001 resulted from both higher AMR meter module shipments and higher installation revenues. .
 
In 2002, there has been a shift in the mix of customers with slightly more product shipments coming through meter manufacturers and other indirect sales channels. These shipments principally go to smaller utilities and municipalities. Third quarter gross margin decreased to 43% in 2002 from 46% in 2001. For the nine months ended September 30, 2002 gross margin was 42% compared to 45% for the same period in 2001. The higher component of low margin installation revenues in 2002 compared with 2001 and increased sales through our lower margin indirect sales channel were the primary reasons for the decrease in gross margins for this segment. Lower margin sales were partially offset by lower component costs.
 
International Systems Net revenues decreased by $3.6 million, or 65%, in the third quarter of 2002 compared to the third quarter of 2001 and by $11.7 million, or 57%, in the first nine months of 2002 compared to 2001. This decrease is primarily due to a large handheld meter reading system sale made to a customer in Japan in 2001, which has not been replaced with a comparable size order this year.
 
Third quarter gross margin increased to 53% in 2002 compared to 47% in 2001. Year-to-date 2002 gross margin was 41% compared to 38% in 2001. Margins are higher due to a shift in product mix this year, and the absence of the large handheld meter reading system sale made to Japan in 2001, which was at a lower margin.
 
Bookings and Backlog
 
We enter into short-term and long-term contracts to supply hardware, software and services to our customers. Long-term (multi-year or annual) contracts are subject to rescheduling or cancellation by our customers. Bookings and backlog can be highly variable from period to period primarily due to the nature and timing of larger orders.
 
We do not include annual maintenance contracts, which renew periodically throughout the year, in either bookings or backlog. We currently estimate the value of those contracts to be approximately $40 million on an annual basis.
 
Bookings for a reported period represent the revenue value of contracts signed during a specified period, excluding annual maintenance contracts. Also excluded from bookings for a reported period are contract signings for joint use (utility pole surveys) and engineering services. Instead, revenues from those contracts are included in bookings during the quarter in which the revenues are earned. At September 30, 2002, the value of signed joint use and engineering services contracts, for which we had not yet recognized revenues, was approximately $5 million.
 
Total backlog represents the revenue value of undelivered contractual orders, excluding annual maintenance, joint use and engineering services contracts. Twelve-month backlog represents the estimated portion of total backlog that will be earned over the next twelve months.

12

Table of Contents
 
Historical information for bookings and backlog are as follows (in millions):
 
    
Quarter Bookings
   
Quarter Ended
Quarter Ended
      
Total Backlog
     
12-month
Backlog
September 30, 2002
   
$
87
   
$
200
     
$
109
June 30, 2002
   
 
45
   
 
179
     
 
95
March 31, 2002
   
 
38
   
 
202
     
 
112
December 31, 2001
   
 
63
   
 
203
     
 
115
September 30, 2001
   
 
61
   
 
195
     
 
98
June 30, 2001
   
 
45
   
 
184
     
 
79
March 31, 2001
   
 
75
   
 
188
     
 
71
 
Three customers accounted for $57 million, or 66% of the September 30, 2002 total bookings of $87 million.
 
NOTE: Beginning total backlog, plus current quarter bookings, less current quarter sales and certain service revenues will not always equal ending quarter total backlog due to miscellaneous contract adjustments and other factors.
 
Operating Expenses, excluding IPR&D and Restructurings, as a percentage of revenues
 
    
Three months ended September 30,
     
Nine months ended September, 30,
  
    
2002
     
2001
     
2002
     
2001
  
Sales and marketing
   
11.2
%
   
12.1
%
   
11.3
%
   
12.1
%
Product development
   
13.6
%
   
13.5
%
   
13.4
%
   
13.4
%
General and administrative
   
8.5
%
   
6.2
%
   
7.8
%
   
6.6
%
Amortization of intangibles
   
0.9
%
   
0.6
%
   
0.7
%
   
0.7
%
Total
   
34.2
%
   
32.5
%
   
33.3
%
   
32.7
%
 
Operating expenses for the third quarter, excluding restructuring charges, increased $5.2 million in 2002 compared with 2001. Over fifty percent, or $3.0 million, of the increase came from our TDS operation, which we acquired late in March 2002. As a percentage of revenues, operating expenses were 34.2% for the third quarter of 2002, slightly higher than the third quarter of last year, but comparable with the second quarter of 2002. Most of the increase was due to higher operating expenses for our TDS operation without correspondingly higher revenues, and severance costs.
 
Sales and marketing expenses increased $769,000 and $4.0 million for the three months ended and nine months ended September 30, 2002, respectively, in comparison to the same periods in 2001. The increases were a result of additional product marketing, product management, and sales staffing related to the LineSoft acquisition. Although the sales and marketing expenses increased compared to 2001, as a percentage of revenue the expenses decreased for the three months and nine months ended September 30, 2002.
 
Product development expenses as a percentage of revenue remained consistent both for the quarter and year to date for 2002 in comparison to 2001. Product development expenses increased $1.8 million and $6.3 million for the three months ended and nine months ended September 30, 2002, respectively, in comparison to the same periods in 2001. The change was primarily due to increased development spending related to the LineSoft acquisition, and increased staffing levels.
 
General and Administrative expenses increased $2.4 million and $5.6 million for the three months ended and nine months ended September 30, 2002, respectively, in comparison to the same periods in 2001. The increases were a result of additional staffing resources and related expenses, partially related to the LineSoft acquisition, information technology costs, severance costs, legal fees and consulting services related to merger and acquisition activity.
 
Amortization of intangibles was $642,000 in the third quarter of 2002 and $1.6 million in the first nine months of 2002, compared with $377,000 in the third quarter of 2001 and $1.1 million year-to-date 2001. In 2002, increased amortization expenses related to identified intangible assets acquired with our TDS operation were partially offset by the discontinuance of goodwill amortization in 2002 due to the implementation of SFAS No. 142 as of January 1, 2002. We expect amortization expense will increase in the fourth quarter and in 2003 as a result of the acquisitions of eMobile Data and RER on October 1. In the second quarter of 2002, we completed our initial assessment of goodwill resulting from the adoption of SFAS No. 142 and identified no impairments. Management plans to complete an annual test of goodwill in association with SFAS No. 142 during the fourth quarter of 2002.

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Purchased In-Process Research and Development (IPR&D)
 
In the first nine months of 2002, we recorded $7.2 million in charges for IPR&D related to the acquisition of our TDS product line as follows:
 
    
IPR&D
     
Estimated cost to complete technology
     
Discount Rate applied to IPR&D
     
LineSoft’s weighted average cost of capital
    
(Dollars in millions)
LineSoft Corporation
   
$7.2
     
$3.3
     
25%
     
20%
 
At the time of acquisition, LineSoft had five IPR&D projects, each contributing from 3% to 64% of the total IPR&D value. These projects were new versions of existing software products currently being sold, but not subject to capitalization because they had not yet reached technological feasibility and had no alternative future use. The material risks associated with the successful completion of IPR&D projects concern our ability to successfully finish software development. We expect to benefit from the IPR&D projects as products that contain in-process technology are marketed and sold to end-users.
 
Other Income (Expense) and Income Taxes
 
Equity in affiliates increased by $125,000 and $212,000, for the third quarter and first nine months, respectively, of 2002 compared 2001, and change from a loss to a profit. The relative increases are due primarily to the absence of losses incurred by a company in which we had an investment in 2001. We wrote the value of this investment to zero by the end of 2001.
 
Interest and other income (expense), net declined by $1.0 million in the third quarter of 2002 compared to the third quarter of 2001 and by $2.9 million year to date in 2002 compared to 2001. Included in 2002 was an $841,000 pretax gain from the sale of our Raleigh, NC facility. Also included in 2002, was a $200,000 pretax gain from the early payoff of the mortgage on our Spokane facility. Net interest income was $89,000 in the third quarter of 2002 compared to net interest expense of $981,000 in the third quarter of 2001. Lower net interest expense in 2002 resulted from the conversion of convertible debt to equity in the second quarter of 2002 and the early payoff of mortgage debt on our Spokane facility in the first quarter of 2002.
 
In the third quarter of 2002 our estimated effective income tax rate was 37.5%, compared to 38.2% in 2001. Year to date 2002, our effective income tax rate was 51.5%, compared to 38.1% in 2001. Excluding the impact of non-tax deductible IPR&D charges in 2002, our adjusted effective rate was 37.5% for the quarter and year to date. The adjusted effective rate for the third quarter of 2002 reflects current expected income for 2002 and the expected distribution of income in various tax jurisdictions. Our effective income tax rate can vary from period to period because of fluctuations in foreign operating results, changes in the valuation allowances for deferred tax assets (which represent discounts to the value of the tax assets, based on our assessment of our ability to realize the value of the assets), new or revised tax legislation, and changes in the level of business performed in different tax jurisdictions.
 
FINANCIAL CONDITION
 
Cash Flow Information
 
    
Three months ended
September 30,
     
Nine months ended
September 30,
  
    
2002
     
2001
     
Increase
Decrease
     
2002
     
2001
     
Increase
Decrease
  
    
(In millions)
  
Operating activities
   
$
11.0
 
   
$
0.3
 
   
$
10.7
 
   
$
32.8
 
   
$
19.2
 
   
$
13.6
 
Investing activities
   
 
21.2
 
   
 
(5.0
)
   
 
26.2
 
   
 
(1.2
)
   
 
(28.1
)
   
 
26.9
 
Financing activities
   
 
(12.4
)
   
 
(0.1
)
   
 
(12.3
)
   
 
(13.8
)
   
 
0.7
 
   
 
(14.5
)
    
  
  
  
  
  
Increase (decrease) in cash
   
$
19.8
 
   
$
(4.8
)
   
$
24.6
 
   
$
17.8
 
   
$
(8.2
)
   
$
26.0
 
    
  
  
  
  
  
 
At September 30, 2002, cash and cash equivalents totaled $38.4 million. Total short and long-term debt consisted of $5.6 million in project finance debt. On October 1, 2002, we used $20.2 million of our cash to complete the acquisitions of RER and eMobile Data.
 
Operating activities:
 
We generated $11.0 million in cash from operations in the third quarter of 2002. Year-to-date cash generated from operations was $32.8 million, a 71% increase over 2001. Inventory levels increased approximately $3 million from December 31, 2001, generally in line with increased revenues. As a consequence, inventory turns were 4.5 compared to 5.1

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at December 31, 2001, and 4.4 in the second quarter of this year – all within a tolerable range given the nature and mix of our products. Accounts receivable decreased $9.1 million from December balances and days’ sales outstanding has dropped from 69 days at December 31, 2001 to 58 days at September 30, 2002 as previously accrued unbilled receivables were invoiced and collected, and other receivables were collected.
 
Investing activities:
 
During the third quarter of 2002, we liquidated our short-term investments in anticipation of funding the RER and eMobile Data acquisitions, which closed on October 1, 2002 and used $20.2 million in cash. Short-term investments provided net proceeds of $23.8 million in the third quarter, and $22.1 million year to date. The largest investing activity in the first nine months of 2002 was the purchase of LineSoft in exchange for stock and $21.7 million in cash. In the first quarter of 2002 we reclassified $5.1 million from restricted cash for a collateralized letter of credit into cash as a result of a new credit agreement. In the first nine months of 2001 we reclassified the same $5.1 million into restricted cash and had net investments in short-term securities of $15.7 million.
 
In connection with the purchase of LineSoft on March 12, 2002, the Company assumed a pre-existing loan in the amount of $2.0 million to the former CEO of LineSoft by renewing and replacing it with a new non-recourse promissory note, secured with the Company’s stock, in the same amount. The replacement note matures May 11, 2003, and bears interest at an annual rate of 6.0%. As of September 30, 2002, the loan was paid down to $792,395.
 
Financing activities:
 
During the third quarter of 2002 we used $12.3 million to repurchase 798,700 shares of our common stock. During the first nine months of 2002 we used $12.6 million to repurchase common stock, $4.9 million for the extinguishment of debt from our prepayment of a mortgage loan and $2.9 million to repay a line of credit and long-term debt for LineSoft, which we acquired in March 2002. Offsetting these uses of cash were proceeds of $7.0 million from the issuance of common stock in connection with stock option exercises. No comparably significant financing transactions occurred during the first nine months of 2001.
 
Investments:
 
In March 2002 we invested just under $2 million in an early stage startup firm that is developing internet-based energy monitoring and management software and services. The firm has not yet produced any significant revenue. The form of the investment is a secured convertible note with a term of five years that is senior to all other indebtedness of the firm except for a $500,000 line of credit. We may convert the note at any time into the common stock of the firm. If we had converted our note into equity as of September 30, 2002, it would have been converted into 19% of the firm’s common stock assuming that all granted stock options and other convertible debt of the firm were exercised or converted. We have also entered into a distribution and licensing agreement with the firm, which gives us non-exclusive distribution and licensing rights.
 
Liquidity, Sources and Uses of Capital:
 
At September 30, 2002, we had $38.4 million in cash and cash equivalents. As mentioned above, on October 1, 2002, we used $20.2 million of our cash to complete the acquisitions of RER and eMobile Data. We have historically funded our operations and growth with cash flow from operations, borrowings and sales of our stock. We are exposed to changes in interest rates on cash equivalents and our short-term investments, which are rated A or better by Standard & Poor’s or Moody’s and which have market interest rates. Availability under our current $35 million revolving line of credit was reduced only by outstanding letters of credit of $15.0 million. We do not have plans to borrow under this credit facility at this time. We believe existing cash resources and available borrowings under our credit facility are more than adequate to meet our operating cash needs through 2002.
 
During the second quarter of 2002, we exercised our option to redeem all of our subordinated convertible debt totaling $53.3 million. All holders of the notes chose to convert their notes into common stock rather than have their notes redeemed, resulting in the issuance of approximately 3.1 million shares of our common stock. There was a minimal cash impact as a result of this conversion.
 
As mentioned previously, we maintain performance and bid bonds for certain customers. The performance bonds usually cover the installation phase of a contract and may on occasion cover the operations and maintenance phase of outsourcing contracts. Bonds in force were $40.3 million and $39.7 million at September 30, 2002 and 2001, respectively, certain of which are guaranteed by standby letters of credit. The outstanding amounts of standby letters of credit were $15.0 million and $12.3 million at September 30, 2002 and 2001, respectively. In addition, we guarantee lease payments for certain equipment leased by an affiliated company. The guaranteed future lease obligation at September 30, 2002 was $700,000.

15

Table of Contents
 
Working capital as of September 30, 2002 was $64.5 million, compared to $66.6 million at December 31, 2001.
 
As mentioned previously, during the first quarter of 2002, we acquired LineSoft, a privately held company, for $43.6 million, including transaction expenses, which consisted of $21.7 million paid in cash and the issuance of 848,870 shares of Itron common stock (see Note 5 to our unaudited consolidated financial statements). In addition, we are required to pay additional amounts to certain LineSoft shareholders of up to $13.5 million in the event that certain defined revenue targets in 2002, 2003 and/or 2004 are exceeded. Any earnout payments will be paid half in cash and half in our common stock. Based on revenues earned to date, management does not believe that there will be an earnout payment for 2002. On October 1, 2002, we completed the acquisitions of Regional Economic Research, Inc., a company specializing in energy consulting, analysis, and forecasting services and software, and eMobile Data Corporation, a provider of web-based workforce management solutions for utilities, with cash payments totaling $20.2 million at closing (see Note 13 to our unaudited consolidated financial statements). The acquisitions continue to expand our products and services to provide additional solutions for our customers.
 
We expect to continue to expand our operations and grow our business through a combination of internal new product development, licensing technology from or to others, distribution agreements, partnership arrangements and acquisitions of technology or other companies. We expect these additional activities to be funded from existing cash, cash flow from operations, borrowings, and the issuance of common stock or other securities. We believe existing sources of liquidity will be sufficient to fund our existing operations for the foreseeable future, but offer no assurances; however, our liquidity requirements could be affected by our dependence on the stability of the energy industry, competitive pressures, international risks, intellectual property claims, as well as other factors described under “Certain Risk Factors” and “Qualitative and Quantitative Disclosures About Market Risk”, included in our Form 10-K filed with the Securities and Exchange Commission on March 28, 2002.
 
New Accounting Pronouncements
 
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 covers a variety of technical issues that will not have an effect on our financial statements except for the rescission of SFAS No. 4, which required extinguishment of debt be treated as an extraordinary item. This rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. We adopted SFAS No. 145 effective January 1, 2002 and have reflected the $200,000 gain on extinguishment of debt recorded in the period ended March 31, 2002 in interest and other, net, as opposed to classifying it as an extraordinary item as was previously required.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 may have a significant impact on the timing of the recognition of costs associated with restructuring activities, as compared to current GAAP reporting requirements.

16

Table of Contents
 
Item 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk:  We are not subject to market risk exposure to changes in interest rates on our debt because our rates are fixed. At September 30, 2002, we had $5.6 million of project financing debt.
 
Foreign Currency Exchange Rate Risk:  We conduct business in a number of foreign countries and, therefore, face exposure to adverse movements in foreign currency exchange rates. International revenue was 4% of total revenue for the nine months ended September 30, 2002. Since we do not use derivative instruments to manage all foreign currency exchange rate risks, the consolidated results of operations in U.S. dollars are subject to fluctuation as foreign exchange rates change. In addition, our foreign currency exchange rate exposures may change over time as business practices evolve and could have a material impact on our financial results.
 
Our primary exposure relates to non-dollar denominated sales, cost of sales and operating expenses in our subsidiary operations in France, the United Kingdom, and Australia. This means we are subject to changes in the consolidated results of operations expressed in U.S. dollars. Other international business, consisting primarily of shipments from the United States to international distributors and customers in the Pacific Rim and Latin America, is predominantly denominated in U.S. dollars, which reduces our exposure to fluctuations in foreign currency exchange rates. In some cases where sales from the United States are not denominated in U.S. dollars, we have and may hedge our foreign exchange risk by selling the expected foreign currency receipts forward. There have been and there may continue to be large period-to-period fluctuations in the relative portions of international revenue that are denominated in foreign currencies.
 
Risk-sensitive financial instruments in the form of inter-company trade receivables are mostly denominated in U.S. dollars, while inter-company notes are denominated in local foreign currencies. As foreign currency exchange rates change, inter-company trade receivables impact current earnings, while inter-company notes are re-valued and result in translation gains or losses that are reported in other comprehensive income.
 
Because our earnings are affected by fluctuations in the value of the U.S. dollar against foreign currencies, we have performed a sensitivity analysis assuming a hypothetical 10% increase in the value of the dollar relative to the currencies in which our transactions are denominated. As of September 30, 2002, the analysis indicated that such market movements would not have had a material effect on our consolidated results of operations or on the fair value of any risk-sensitive financial instruments. The model assumes foreign currency exchange rates will shift in the same direction and relative amount. However, exchange rates rarely move in the same direction. This assumption may result in the overstatement or understatement of the impact of changing exchange rates on assets and liabilities denominated in a foreign currency. Consequently, the actual effects on operations in the future may differ materially from results of the analysis for the third quarter. We may, in the future, experience greater fluctuations in U.S. dollar earnings from fluctuations in foreign currency exchange rates. We will continue to monitor and assess the impact of currency fluctuations and may institute more hedging alternatives.

17

Table of Contents
 
Item 4:  CONTROLS AND PROCEDURES
 
(a)
 
Evaluation of disclosure controls and procedures.    Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) within 90 days of the filing date of this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective.
 
(b)
 
Changes in internal controls.    There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

18

Table of Contents
 
Part 2:  OTHER INFORMATION
 
Item 1:  LEGAL PROCEEDINGS AND FCC REGULATION
 
Benghiat Patent Litigation
 
On April 3, 1999, the Company served Ralph Benghiat, an individual, with a complaint seeking a declaratory judgment that a patent owned by Benghiat is invalid and not infringed upon by Itron’s handheld meter reading devices. Benghiat has filed a counterclaim alleging patent infringement by the same devices. Both lawsuits were filed in the United States District Court for the District of Minnesota (Civil Case No. 99-cv-501). On April 2, 2001, the district court denied the motions for summary judgment filed by Itron. On June 29, 2001, and again on September 24, 2002, court-ordered settlement hearings were held, which did not result in a settlement of the case. The case is scheduled to go to trial December 9, 2002. While we believe that our products do not infringe upon the Benghiat patent, there can be no assurance that we will prevail in this matter, in which case a decision or settlement of this case may have a material adverse effect on our financial condition and results of operations. Any litigation, regardless of its outcome, would probably be costly and require significant time and attention of our key management and technical personnel.
 
FCC Regulation and Allocation of Radio Frequencies
 
On May 24, 2002, the FCC adopted rules governing the use of the 1427-1432 MHz band. With the exception of communications to and from some of our ERT modules, our network products operate in parts of this band. The new rules follow substantially the recommendations of Itron and the American Hospital Association. Among other things, the new rules reserve the upper 2.5 MHz of the band for telemetry, including utility telemetry, and provide that licenses will be issued in accordance with Part 90 rules and the recommendations of frequency coordinators. Telemetry licensees must comply with power limits and out-of-band emission requirements that are designed to avoid interference with the use of the lower part of the band by hospitals. Although the FCC will issue licenses on a non-exclusive basis, and it is possible that the demand for spectrum will exceed supply, we believe that the Company will continue to have access to spectrum in the 1429.5-1432 MHz band under favorable conditions, which will be sufficient for our future requirements. Active installations in the lower 2.5 MHz are required to reapply for use of those frequencies, but, having done so, will have primary status in the band indefinitely.
 
Item 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
The Company held a special meeting of shareholders on July 26, 2002. Shareholders voted to approve the adoption of the Amendment and Restatement of Itron, Inc. 2000 Stock Incentive Plan. The vote was as follows:
 
IN FAVOR
     
AGAINST
     
ABSTAIN
     
BROKER NON-VOTES
13,762,534
     
3,362,842
     
16,623
     
—  
 
Item 6:  EXHIBITS AND REPORTS ON FORM 8-K
 
a)
 
Exhibits
 
Exhibit 99.1  -
   
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2  -
   
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
b)
 
No reports on Form 8-K were filed this quarter

19

Table of Contents
 
SIGNATURE
 
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Spokane, State of Washington, on the 8th day of November 2002.
 
ITRON, INC.
(Registrant)
By:
  
/S/    DAVID G. REMINGTON
   
David G. Remington
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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Table of Contents
 
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, LeRoy D. Nosbaum, certify that:
 
1.        I have reviewed this quarterly report on Form 10-Q of Itron, Inc.;
 
2.        Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.        Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.        The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
            a)        designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
            b)        evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
            c)        presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.        The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
            a)        all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
            b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.        The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date: November 8, 2002
 
/s/    LEROY D. NOSBAUM
LeRoy D. Nosbaum
Chairman of the Board and
Chief Executive Officer

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Table of Contents
 
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, David G. Remington, certify that:
 
1.        I have reviewed this quarterly report on Form 10-Q of Itron, Inc.;
 
2.        Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.        Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.        The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
            a)        designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
            b)        evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
            c)        presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.        The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
            a)        all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
            b)         any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6.         The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date: November 8, 2002
 
/s/    DAVID G. REMINGTON
David G. Remington
Vice President and Chief Financial Officer

22
Certification of LeRoy D. Nosbaum, CEO
 
Exhibit 99.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Itron, Inc. (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, LeRoy D. Nosbaum, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
 
(1)
 
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
(2)
 
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
/s/    LEROY D. NOSBAUM        
LeRoy D. Nosbaum
Chairman of the Board and Chief Executive Officer
November 8, 2002
Certification of David G. Remington, CFO
Exhibit 99.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Itron, Inc. (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David G. Remington, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
 
(1)
 
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
(2)
 
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
/s/    DAVID G. REMINGTON        
David G. Remington
Vice President and Chief Financial Officer
November 8, 2002