Itron, Inc. (Itron), a US-based technology provider to the energy and water industries, has reported revenues of $388.5 million for the first quarter of 2009, down 19%, compared with the revenues of $478.5 million in the year-ago quarter. It has also reported a net loss of $19.7 million, or $0.55 loss per share, for the first quarter of 2009, compared with the net income of $953,000, or $0.03 per share, in the year-ago quarter.

Business was soft in the first quarter, stated Malcolm Unsworth, president and chief executive officer. We are seeing effects of the slowdown in the U.S. economy and our International results have been affected by a stronger dollar. Nonetheless, we had very strong bookings and our total backlog is at record levels, which gives us confidence in the longer term.

Operations Highlights:

Realignment and New Accounting Pronouncement:

As of January 1, 2009, the company’s operating segments were realigned to more accurately reflect geographic operations. Itron North America (INA) now includes sales of gas and water meters in North America, which were previously part of Actaris. Results in all periods presented reflect this realignment. As well, the Actaris brand name has been discontinued and the company is now operating under the Itron name and brand on a worldwide basis. Therefore the company’s operating segments are now INA and Itron International (International). International consists of Actaris operations without North American gas and water meter sales. In addition, as of January 1, 2009 Itron adopted FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (FSP 14-1), which requires retroactive restatement of increased interest expense and an allocation of the convertible subordinated notes obligation between debt and equity. This change is reflected in the following discussion and financial statements.

Revenues:

INA revenues of $139 million for the first quarter of 2009 were $30 million, or 18%, lower than the first quarter of 2008. The lower revenue in 2009 was primarily driven by fewer electric meters shipped during the quarter due to the completion of a number of AMR contracts in 2008 and related to the economic downturn. International revenues were $249 million for the first quarter of 2009, which were $60 million, or 19%, lower than first quarter 2008. Nearly 90% of the decrease in International revenue was due to foreign exchange rates while the remainder was due to product mix. Shipments of products to electric, gas and water utilities comprised about 37%, 28% and 35% of total International revenue in 2009 compared with 40%, 27% and 33% in 2008.

Gross Margin:

Gross margin for the first quarter of 2009 was 33.4%. This compares with 34.0% in the first quarter of 2008. First quarter 2009 INA gross margin of 37.5% was comparable to 2008 gross margin of 37.8%. International gross margin of 31.0% was lower than first quarter 2008 gross margin of 31.9% primarily due to the completion of a smart metering project in Sweden and a higher mix of service revenue with lower margins in South America.

Operating Expenses:

Total operating expenses for the first quarter of 2009 were $121 million compared with 2008 first quarter operating expenses of $135 million. INA operating expenses of $44.5 million in the first quarter of 2009 were somewhat lower than 2008 first quarter operating expenses of $46.0 million due to lower sales expenses. International operating expenses in the first quarter of 2009 of $67.5 million were $12 million lower than the $79.5 million in the first quarter of 2008, due in large part to decreased amortization of intangibles expense in the 2009 period, as well as foreign exchange rates. Corporate unallocated expenses of $8.6 million for the first quarter of 2009 were $1.2 million lower than the first quarter of 2008 due to lower compensation and consulting fees for Sarbanes-Oxley compliance.

Interest and Other Income:

Net interest expense of $16 million in the first quarter of 2009 was substantially lower than the $27 million in the comparable period in 2008, due to lower average debt balances and lower interest rates. Debt fee amortization expense, which is included in net interest expense, of $1.8 million in the first quarter of 2009, was comparable to the same period in 2008. Other expense was $2 million in the first quarter of 2009 compared with other income of $188,000 in 2008. The other expense in the current period is primarily due to consulting and legal fees associated with an amendment to the company’s senior debt agreement and losses on transactions caused by volatility in foreign exchange rates. The first quarter of 2009 also included a $10.3 million net loss on the extinguishment of debt related to a convertible debt for common stock exchange. The difference in the value of the shares of Itron’s common stock issued under the exchange agreement and the value of the shares used to derive the amount payable under the original conversion agreement resulted in a net loss on extinguishment of debt.

Income Taxes:

The company had an income tax benefit of $6,000 in the first quarter of 2009 compared with $591,000 in the same quarter of 2008. The income tax benefit in 2009 was due primarily to a lower effective tax rate for the year driven by lower income in high tax jurisdictions. The tax benefit in 2008 was primarily due to a one-time net tax benefit related to subsidiary interest expense.

Non-GAAP Operating Income, Net Income and Diluted EPS:

Non-GAAP operating income, which excludes amortization expense related to intangible assets, was $32.4 million, or 8.3% of revenues in the first quarter of 2009. This was lower than the $58.5 million, or 12.2% of revenues, in the first quarter of 2008 primarily due to the lower revenue. Non-GAAP net income, which also excludes amortization of debt fees, the additional non-cash interest expense related to the adoption of FSP 14-1 and the non-cash loss associated with the convertible debt for stock exchange, was $12.2 million compared with $26.9 million in the 2008 period. Non-GAAP diluted EPS was 33 cents in 2009 compared with 82 cents in 2008. The lower net income and EPS was primarily due to lower revenues in 2009. Fully diluted shares outstanding in the first quarter of 2009 were about 3.8 million higher than the same period in 2008 primarily due to the equity offering of 3.4 million shares in the second quarter of 2008 and the convertible debt for stock exchange in the first quarter of 2009. The company’s non-GAAP tax rates were 32% and 27% for the first quarter of 2009 and 2008. The higher non-GAAP tax rate in the first quarter of 2009 was driven primarily by the tax effect of certain foreign subsidiary interest expense.

Other Financial Highlights:

New Order Bookings and Backlog:

New order bookings for the first quarter of 2009 were $625 million, compared with $484 million in the first quarter of 2008. The company’s book-to-bill ratios were 1.6 to 1 and 1.02 to 1 for the first quarter of 2009 and 2008, respectively. New order bookings for 2009 included $260 million related to the company’s AMI contract with San Diego Gas and Electric (SDG&E). The first phase of the project was accepted by SDG&E during the quarter. Total backlog was $1.5 billion at March 31, 2009 compared with $683 million at March 31, 2008. Twelve month backlog of $471 million at March 31, 2009 was lower than the $552 million at March 31, 2008 due to the completion of a number of contracts in 2008 and the expected timing of future AMI shipments.

Cash Flows:

Net cash provided by operating activities during the first quarter of 2009 was $43 million, compared with $56 million in the same period in 2008. Adjusted earnings before interest, taxes, depreciation and amortization and non-cash loss on extinguishment of debt (Adjusted EBITDA) in the first quarter of 2009 was $43 million compared with $72 million for the same period in 2008. Free cash flow in the first quarter of 2009 was $29 million compared with $43 million in the first quarter of 2008.