Itron - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

 

 

 

Washington		91-1011792
(State of Incorporation)		(I.R.S. Employer Identification Number)

 

 

 

 

 

 

 

				Page
Part 1:  FINANCIAL INFORMATION
Item 1:		FINANCIAL STATEMENTS (UNAUDITED)
		Condensed Consolidated Statements of Operations		1
		Condensed Consolidated Balance Sheets		2
		Condensed Consolidated Statements of Cash Flows		3
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		4
Item 2:		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		11
Item 3:		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		17
Item 4:		CONTROLS AND PROCEDURES		18
Part 2:  OTHER INFORMATION
Item 1:		LEGAL PROCEEDINGS AND FCC REGULATION		19
Item 4:		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		19
Item 6:		EXHIBITS AND REPORTS ON FORM 8-K		19
Signature				20
CEO/CFO Certification per Section 302 of Sarbanes-Oxley				21

 

 

 

 

 

 

 

		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.

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		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.

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		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.

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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.

 

 

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 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.

 

 

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.

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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.

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		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

 

 

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.

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		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

 

 

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

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		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

 

 

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.

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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.

 

 

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	)

 

 

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

 

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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

 

 

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

 

 

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.

 

 

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

 

 

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.

 

 

 

		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	%