Itron, Inc.

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Itron, Inc.

2818 North Sullivan Road
Spokane, Washington 99216
U.S.A.
Telephone: (509) 924-9900
Toll Free: (800) 635-5461
Fax: (509) 891-3355
Web site: http://www.itron.com

Public Company
Incorporated: 1977
Employees: 1,434
Sales: $317.0 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: ITRI
NAIC: 334519 Other Measuring and Controlling Device Manufacturing; 334290 Other Communication Equipment Manufacturing; 423430 Computer and Computer Peripheral Equipment and Software

Itron, Inc., provides products and services to utility companies, helping its customers to collect, manage, and analyze data gathered from electricity, water, and gas meters. The company designs and manufactures devices that automate meter reading. Itron also offers a range of software and services that provide sophisticated analysis of energy usage and distribution. Itron serves more than 2,000 utilities in more than 40 countries.

Origins

The path of technological progress that charted Itron's development began in 1977 in a garage in northern Idaho. There, a small group engineers started developing computers and software designed to read utility meters and worked on technology that would replace the manual and paper-intensive meter-reading methods employed by virtually every utility company during the late 1970s. Instead of registering meter information on paper, meter readers with an Itron device could enter the information electronically, a leap in technology that made the meter reader's job less cumbersome and one that delivered its greatest rewards at the utility's central offices. No longer forced to wade through thousands of sheets of paper to determine customers' consumption of water, gas, and electricity, the utility company could efficiently organize its data electronically, yielding significant reductions in labor-related costs while substantially enhancing the accessibility and manipulation of the data collected. This new, revolutionary method of collecting meter information became known as Electronic Meter Reading, or EMR, a method of manually collecting, entering, and storing meter-reading data into a handheld computer.

Itron's pioneering engineers achieved success within several years after their first meeting in the Idaho garage. By the beginning of the 1980s, the small company was ready to ship its first EMR systems, a package consisting of handheld computers and software. Over the course of the ensuing decade, the company brokered deals with one utility after another, gradually building its business as the acceptance of EMR equipment became widespread. By the end of the 1980s, Itron had developed into a roughly $50 million-in-sales company, its business entirely dependent on the use of EMR solutions by the utility industry.

By the end of the 1980s, Itron engineers were looking to lessen the company's dependence on EMR. Reviving the pioneering spirit prevalent in the northern Idaho garage roughly a decade earlier, the engineers of Spokane, Washington-based Itron were working on the next technological leap in meter reading. The objective pursued involved eliminating the need for the visual inspection of meters, an advancement that promised to deliver great increases in efficiency and substantial savings in labor costs. Itron engineers focused their efforts on automating the meter-reading process by equipping an electric, gas, or water meter with a meter module. Once in place, the module could transmit the data to a collection system, rendering visual inspection obsolete. The process the engineers were working on became known as Automatic Meter Reading, or AMR, a technology that held great promise for Itron's future growth,

Itron introduced its first AMR systems to the market in 1991, a debut that had the double-edged effect of raising expectations and setting the company up for failure if these expectations were not met. After the unveiling of Itron's AMR meter modules, the company continued to manufacture and market EMR systems, but AMR equipment quickly became the driving force propelling the company's growth. Between 1992 and 1995, the company's sales more than doubled, swelling from $67.8 million to $155.3 million, with much of the growth generated from the sale of encoder, receiver, transmitter (ERT) modules. Itron dominated the emerging AMR market during the first half of the 1990s, taking an almost monopolistic lead over its competitors. In December 1995, less than five years after it first offered AMR capabilities, Itron manufactured its five millionth ERT, delivering the module to Philadelphia Gas Works. An industry research firm, Chartwell Inc., estimated that Itron's five million ERTs in service represented 80 percent of the market share of AMR installations in North America.

When Itron shipped its five-millionth ERT, Philadelphia Gas Works was only one of more than 1,275 utilities located in more than 40 countries that counted itself as an Itron customer. The company's customers were supplied by manufacturing facilities in Spokane and Minnesota, as well as subsidiaries in the United Kingdom, France, and Australia. The company had grown enormously in the 18 years separating its start in a Idaho garage and the symbolic delivery to Philadelphia Gas Works, but its standing as the largest supplier of AMR systems in the world did not breed complacency. Beginning in the mid-1990s, Itron augmented its own research and development activities with the technologies developed by other companies, executing an acquisition program that added to the complexity of its business. Itron evolved from a company trying to aid utilities in reading meters into one that provided comprehensive solutions to utilities, helping them to better manage, gauge, and distribute their energy resources.

Acquistion Campaign Begins in 1995

One of the first significant acquisitions in Itron's history occurred in the fall of 1995. Itron's AMR systems utilized radio-based technology to transmit data, a capability that the company wanted to complement with telephone-based technology, which was particularly useful in rural areas, where deploying a radio network was not cost-effective. Instead of developing the technology itself, Itron acquired the company that pioneered the technology, purchasing Metscan, Inc., a firm with more than 50,000 AMR devices installed in more than 40 major North American utilities.

Itron's next strike on the acquisition front took place within months of the Metscan acquisition. In the spring of 1996, the company announced it had agreed to acquire Raleigh, North Carolina-based Utility Translation Systems, Inc. (UTI). UTI, which supplied software to more than 70 percent of the major electric utilities and a substantial number of gas utilities in the United States, excelled at linking large commercial and industrial customers to utilities' computing systems. The company's single most important achievement was solving the protocol problem for communicating with the complex meters installed at the buildings used by large commercial and industrial energy users. By virtue of this success, UTI's software was capable of communicating with virtually all commercial and industrial gas and electric meters.

As Itron neared its 20th anniversary, the company held a commanding lead in its market. Its EMR systems, which accounted for 25 percent of the company's revenues at the end of 1996, were installed at 80 percent of the largest 25 utilities in North America. Itron's AMR systems, which accounted for 75 percent of sales, were installed at 269 utilities. In 1996, the company shipped nearly 3.5 million AMR meter modules, widening its lead as world's largest supplier of AMR systems. The company's progress was encouraging, but a source of greater encouragement could be found in what the company had yet to achieve. Itron's dominance of the AMR market represented only a fraction of the market's potential. The company estimated there were 268 million meters in North America during the mid-1990s. Of this total, only 12 million, or 5 percent, had installed AMR technology. Outside North America, Itron officials estimated there were roughly 800 million meters in existence, with only a fraction possessing AMR technology.

Despite Itron's commanding market share and the enormous growth potential of the AMR market, the company's financial results were less than scintillating. In 1996, the company's revenues increased to $177.6 million, but it lost $1.5 million. The company was plagued by delays in orders for its products, excess manufacturing capacity, and the high costs incurred by product development. Itron exuded sufficient strength to win the support of industry pundits and investors, however. Observers were convinced that Itron was a company destined for great things. One analyst, in an interview with the Puget Sound Business Journal, offered his perception of Itron. "The company has a huge customer base, and excellent reputation among conservative utilities, and has added key financial and marketing talent," the analyst noted. "Once utilities more fully embrace AMR systems, we believe Itron will be the leader in a very large market."

Itron pressed ahead with enhancing its capabilities in the face of declining profitability. In May 1997, the company augmented the capabilities gained with the acquisition of Metscan by announcing its had agreed to acquire Boise, Idaho-based Design Concepts Inc. in an all-stock acquisition valued at $16.7 million. Design Concepts, with 1996 revenues of $2 million, supplied telephone-based devices for remote meter reading for nearly 100 electric utilities worldwide. Unlike Metscan, Design Concepts' systems provided outage detection and power quality monitoring capabilities, adding to the menu of services Itron was able to offer to utilities.

Company Perspectives:

Our idea is pretty simple: In today's increasingly competitive marketplace, energy and water providers that are able to leverage the value of information will enjoy a significant competitive advantage over those that do not. Itron delivers value to its clients by collecting data and transforming it into valuable knowledge. Our clients use this knowledge to run their businesses more efficiently, optimize energy and water delivery, strengthen their connection to their customers, manage competition and customer choice, enable new business development and increase shareholder value.

Roughly one year after the Design Concepts acquisition, Itron could no longer wait for market conditions to improve its anemic financial performance. In July 1998, the company announced it was eliminating 100 workers from its payroll, a 10 percent reduction in its workforce. The announcement, which coincided with the acknowledgment of a $1.1 million loss for the company's second fiscal quarter, was prompted by a prolonged slowdown in orders for Itron's AMR equipment. "We continue to win most of the AMR business out there," Mima Scarpelli, Itron's Vice-President of Investor Relations, said to Knight Ridder/Tribune Business News in a July 23, 1998 interview. "It's just that the AMR business is very slow," she explained, voicing the company's frustration about its lack-luster financial performance. Half of the job cuts affected employees in Spokane, while approximately 25 Minnesota-based employees lost their jobs. The remaining reductions affected various U.S. and foreign offices.

Although the layoffs announced in mid-1998 projected a negative image of Itron's fortunes, the reductions marked the beginning of the company's road to recovery. Beginning with its moves to streamline its operations, Itron began to take the shape of a company capable of producing a profit and living up to the high expectations that had followed it since its introduction of AMR technology in 1991. The individual credited for Itron's transformation into a moneymaker arrived at the company a year after Itron trimmed its workforce in July 1998, taking the changes begun and shaping them into a blueprint for financial success.

Turnaround Begins in 1999

Michael Chesser was appointed Itron's president and chief executive officer in May 1999, replacing Johnny Humphreys, who had held identical posts since 1987. Chesser possessed a wealth of experience in the utility industry, having spent 23 years at Baltimore Gas and Electric, where he held various executive positions. After his tenure at Baltimore Gas, Chesser served as president and chief operating officer of Atlantic Energy, Inc., holding the posts from 1994 to 1998.

Chesser made sweeping changes that steered Itron toward profitability. The company's manufacturing operations were consolidated, with activities from plants in Washington and Idaho organized into one facility in Waseca, Minnesota. Chesser cut back on the company's European operations and its research and development activities, while trimming the company's workforce by 200. After making the reductions aimed at increasing efficiency and cutting costs, Chesser reorganized Itron into what the company referred to as "customer-focused business units." The reorganization, according to Scarpelli in a March 23, 2001 interview with Puget Sound Business Journal, "really gave us a better feel for each individual market. In the past," she added, "we spent a lot of time focusing on really big orders—home runs. But over the past year we really got back to basics and focused on hitting just singles and doubles." By the end of 2000, there was evidence that the changes initiated by Chesser had worked. The company generated $184 million in sales for the year and, most significantly, it posted a profit of nearly $5 million.

By the time the financial results for 2000 were made public, Chesser had already vacated his leadership posts at Itron. In April 2000, just three months after being named Itron's chairman of the board, Chesser left the company to become president and chief executive officer of GPU Energy. S. Edward White, an Itron executive vice-president, was appointed chairman and LeRoy Nosbaum, the company's chief operating officer, was promoted to president and chief operating officer.

Acquisitions in the 21st Century

As Itron plotted its course under new leadership, the company continued to acquire companies that expanded the capabilities it was able to offer to utilities. In 2002, Itron acquired three companies, beginning with the announcement made in March that it had purchased Linesoft Corporation for $41.4 million. Based in Spokane, Linesoft provided software and consulting services to more than 130 utilities, generating $14 million in sales in 2001. In September, Itron announced it had agreed to acquire eMobile Data Corporation for $6.2 million. A publicly traded Canadian company, eMobile provided wireless, Web-based workforce management products for the utility industry. The company's most important product, Service-Link, enabled utilities to streamline and automate many of the processes associated with field service. The deal to acquire eMobile was completed in October, the same month Itron acquired Regional Economic Research, Inc., a San Diego, California-based company that provided forecasting services and software products designed to improve scheduling, risk management, and system operation.

Key Dates:

1977:
Itron is founded in northern Idaho.: 1980:
Itron begins shipping its first systems.: 1991:
Itron introduces its first Automatic Meter Reading (AMR) system.: 1995:
Itron ships its five-millionth ERT meter module, making the company the largest supplier of AMR systems in the world.: 1999:
Michael Chesser is appointed chief executive officer and leads Itron toward profitability.: 2001:
Itron ships its twenty-millionth ERT module.: 2003:
Itron acquires Silicon Energy Corporation and announces the acquisition of Schlumberger Limited's electricity metering business.

Itron's acquisitive activities intensified in 2003, as the company achieved great strides in increasing its stature. In March, the company completed the acquisition of Silicon Energy Corporation for $71.2 million, an investment that gave Itron entry in the energy-services market. Silicon specialized in energy and asset management, providing customers with energy consumption data and tools. The company's next purchase was by far the biggest acquisition in its 26-year history. In July, Itron announced it had agreed to acquire the electricity metering business belonging to Schlumberger Limited, one of the largest oil-field services companies in the world. According to the terms of the agreement, Itron agreed to pay $255 million for Schlumberger's electricity metering business, which was based in Oconee, South Carolina, and served roughly 3,400 utility customers. The company served customers in the United States, Canada, Mexico, and the Caribbean and sold electricity meters in Taiwan.

The deal to acquire Schlumberger's electricity meter business was expected to close in 2004. As Itron prepared for its future, considerable attention was begin paid to integrating the Schlumberger acquisition into its fold. After years of recording disappointing financial results, the company was enjoying financial success in the early years of the decade, recording consistent growth that fueled justifiable optimism for the future. As Itron pressed forward with plans to dominate as a provider of comprehensive products and services to the utility industry, its financial totals for 2003 offered a source of encouragement. That year, the company reported an 11 percent increase in revenues to $317 million and a net income of $10.5 million, a gain of nearly $3 million over the previous year. The company's shipments of AMR equipment increased 10 percent, led by a 44 percent increase in water unit shipments. In the years ahead, Itron hoped to continue the trend established early in the decade and to position itself as the premier competitor in its field.

Principal Subsidiaries

Itron Connecticut Finance, Inc.; Itron Spectrum Holdings, Inc.; Itron International, Inc.; Itron Finance, Inc.; EMD Holding, Inc.; Itron S.A. (France); Itron France SARL; Itron Ltd. (United Kingdom); SLCN Ltd.; Itron Australasia Party Ltd.; Itron Australasia Technologies Pty. Ltd. (Australia); Itron Australasia Holdings Pty. Ltd. (Australia); Itron Canada, Inc.; Itron B.C. Corporation (Canada); Itron Guam, Inc.; Itron de Mexico, S.A. de C.V.; Electricity Metering Distribucion, S.A. DE C.V.; Electricity Metering Servicios, S.A. DE C.V.; Silicon Energy Corporation (BVI), Ltd.; SLCN Netherlands B.V. (Netherlands).