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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
n QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
o 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_____
As of April 30, 1997, there were outstanding 13,445,768 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.
ITRON, INC.
INDEX
Part 1: Financial Information Page
Item 1: Financial Statements (Unaudited)
Consolidated Statements of
Operations.................................................................1
Consolidated Balance
Sheets.....................................................................2
Consolidated Statements of Cash
Flows......................................................................3
Notes to Consolidated Financial
Statements.................................................................4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................................5-7
Part 2: Other Information
Item 1: Legal
Proceedings................................................................8
Item 2(c): Changes in
Securities.................................................................8-9
Item 6: Exhibits and Reports on Form
8-K........................................................................9
Signature..................................................................10
Exhibit 11 - Statement re Computation of Per Share
Earnings...................................................................11
Part 1: Financial Information
Item 1: Financial Statements
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended March 31,
1997 1996
------------- -------------
Revenues $ 40,583 $ 48,052
Cost of revenues 26,964 26,550
Gross profit 13,619 21,502
Operating expenses
Sales and marketing 7,525 6,568
Product development 7,329 7,375
General and administrative 2,424 3,002
Amortization of intangibles 537 332
------------- -------------
Total operating expenses 17,815 17,277
Operating income (loss) (4,196) 4,225
Interest and other, net (1,063) 273
------------- -------------
Income (loss) before income taxes (5,259) 4,498
Income tax (provision) benefit 2,000 (1,470)
------------- -------------
Net income (loss) $ (3,259) $ 3,028
============= =============
Net income (loss) per share $ (.24) $ .21
============= =============
The accompanying notes are an integral part of these financial statements.
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
March 31, December 31,
1997 1996
--------------- ----------------
ASSETS
Current assets
Cash and cash equivalents $ 18,922 $ 2,243
Accounts receivable, net 36,862 44,376
Inventories 30,568 33,837
Deferred income tax benefit, net 6,169 4,171
Other 4,868 6,116
--------------- ----------------
Total current assets 97,389 90,743
Property, plant and equipment, net 80,242 71,349
Intangible assets, net 22,495 23,344
Other 7,426 1,985
--------------- ----------------
Total assets $ 207,552 $ 187,421
=============== ================
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Bank line of credit $ - $ 33,062
Accounts payable and accrued expenses 19,188 20,671
Wages and benefits payable 4,148 4,004
Deferred revenue 6,622 6,767
--------------- ----------------
Total current liabilities 29,958 64,504
Noncurrent liabilities
Mortgage notes payable 6,440 6,440
Subordinated notes payable, net 57,800 -
Warranty and other obligations 2,124 2,255
--------------- ----------------
Total noncurrent liabilities 66,364 8,695
Shareholders' equity
Common stock 98,968 98,686
Retained earnings 12,046 15,305
Other 216 231
--------------- ----------------
Total shareholders' equity 111,230 114,222
--------------- ----------------
Total liabilities and shareholders' equity $ 207,552 $ 187,421
=============== ================
The accompanying notes are an integral part of these financial statements.
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three months ended March 31,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ (3,259) $ 3,028
Noncash charges (credits) to income:
Depreciation and amortization 3,774 2,200
Deferred income taxes (1,994) 488
Changes in operating accounts:
Accounts receivable 7,514 (7,805)
Inventories 3,269 (3,598)
Accounts payable and accrued expenses (1,483) 610
Deferred revenue (145) (1,714)
Other, net (3,939) (1,526)
------------- -------------
Cash provided (used) by operating activities 3,737 (8,317)
INVESTING ACTIVITIES
Short-term investments - 16,524
Acquisition of property, plant and equipment (2,894) (6,767)
Equipment used in outsourcing (8,864) (827)
Other, net (73) (101)
------------- -------------
Cash provided (used) by investing activities (11,831) 8,829
------------- -------------
FINANCING ACTIVITIES
Change in bank line of credit, net (33,062) -
Borrowings under subordinated debt, net 57,800 -
Issuance of common stock 52 941
Other, net (17)
(200)
------------- -------------
Cash provided by financing activities 24,773 741
------------- -------------
Increase in cash and equivalents 16,679 1,253
Cash and cash equivalents at beginning of period 2,243 6,473
------------- -------------
Cash and cash equivalents at end of period $ 18,922 $ 7,726
============= =============
The accompanying notes are an integral part of these financial statements.
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
Note 1: Basis of Presentation
The consolidated financial statements presented in this Form 10-Q are unaudited
and reflect, in the opinion of management, all normal recurring adjustments
necessary for a fair presentation of operations for the three month period ended
March 31, 1997. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Form 10-K for the year ended December 31, 1996 as filed with the
Securities and Exchange Commission on March 5, 1997.
The results of operations for the three month period ended March 31, 1997 are
not necessarily indicative of the results expected for the full fiscal year or
for any other fiscal period.
Note 2: Balance Sheet Components
Inventories (unaudited, in thousands): March 31, December 31,
1997 1996
--------------- ----------------
Material $ 20,353 $ 22,687
Work in process 2,034 1,570
Finished goods 7,711 9,047
--------------- ----------------
Total manufacturing inventories 30,098 33,304
Service 470 533
--------------- ----------------
Total inventories $ 30,568 $ 33,837
=============== ================
Note 3: New Accounting Standard
In February 1997, the Financial Accounting Standard Board issued Statement No.
128, Earnings per Share. This statement specifies the computation, presentation
and disclosure requirements for earnings per share and requires presentation of
basic and dilutive earnings per share by all entities that have common stock or
potential common stock that trades in the public market. The Statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997, and earlier application is not permitted. The Company
believes that the adoption of the Statement will not have a material effect on
the financial statements of the Company.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes the major components of and changes in operating
income for the quarter ended March 31, 1997:
Percentage of total revenue Percentage
--------------------------------
Quarter ended March 31, 1997 1996 Change
- ------------------------------------------------------
------------- ------------ -------------
Revenues
AMR systems 76% 78% (17%)
Handheld systems 24% 22% (11%)
------------- ------------
Total revenues 100% 100% (16%)
Gross profit 34% 45% (37%)
Operating expenses
Sales and marketing 19% 14% 15%
Product development 18% 15% 0%
General and administrative 6% 6% (19%)
Amortization of intangibles 1% 1% 62%
------------- ------------
Total operating expenses 44% 36% 3%
------------- ------------
Operating income (loss) (10)% 9% (199)%
============= ============
Revenues
Total revenues for the Company decreased $7.5 million, or 16%, to $40.6
million in the first quarter of 1997 from $48.1 million in the comparable
quarter in 1996.
AMR systems revenues were down $6.3 million, or 17%, in the current quarter from
the first quarter of 1996. Although the Company shipped approximately 600,000
AMR meter modules in the first quarter of each 1997 and 1996, a much larger
percentage of the 1997 shipments were for outsourcing installations instead of
sales contracts. Revenue for outsourcing installations is recognized over time
rather than upon shipment. Average selling prices changed little from the first
quarter of 1996 to the first quarter of 1997 and did not have a material effect
on total revenues. The Company expects that AMR revenues will grow in the
future, however, growth depends on the timing and resolution of mergers and
acquisitions in the utility industry, industry regulatory reform issues in the
United States, development of international markets and various other factors.
The Company currently has three outsourcing contracts to provide meter reading
services to utilities over 15 year periods. Revenues related to outsourcing
contracts are shown as a component of AMR revenues and were $5.8 million in the
first quarter of 1997 compared to $2.7 million in the first quarter of 1996. The
majority of the increase in outsourcing revenues came from initial revenue
recognition under the Company's outsourcing contract with the Duquesne Light
Company (See "Description of Business -- Certain Risk Factors -- Dependence on
the Installation, Operations and Maintenance of AMR Systems Pursuant to
Outsourcing Contracts" in the Company's most recent Annual Report on Form 10-K).
The Company recognizes revenue for outsourcing agreements using the cost-to-cost
percentage-of-completion method of accounting for long-term contracts. Under
this method, revenue is recognized as project costs are incurred. Revenue
recognition in any given period is equal to: (a) the ratio of actual costs
incurred during the period to total projected costs over the life of the
contract; times (b) total revenue to be received over the life of the contract.
Estimates of future costs will be reviewed periodically. To the extent actual
revenues or actual costs, or the timing of those revenues or costs, differ from
projected revenues and costs, outsourcing revenues and/or margins could be
affected.
Handheld systems revenues were down $1.2 million, or 11%, in the current quarter
from the same quarter in 1996 primarily due to lower domestic shipments. The
first quarter of 1996 included initial shipments of the next generation
Premierplus software systems. The Company expects that handheld systems revenues
will continue to decline as a percentage of total revenues over time. Future
handheld systems revenues are expected to be driven by sales to new customers
internationally and by upgrade and replacement sales domestically.
Gross Profit
Gross margin of 34% for the current quarter was 11 percentage points less than
gross margin of 45% in the same quarter in 1996, but only three percentage
points lower than the fourth quarter of 1996. The decreased margin was caused by
outsourcing revenues being a higher percentage of total revenues than in the
past. Outsourcing revenues currently have a lower margin than historical AMR
sales for a significant customer. Continued higher costs resulting from excess
manufacturing capacity also contributed to the lower margin. In the future, the
Company's gross margin may continue to be affected by excess manufacturing
capacity costs and changes in revenue mix.
Operating Expenses
Sales and marketing expenses for the three months ended March 31, 1997 of $7.5
million increased $1.0 million, or 15%, from the first three months of 1996 and
also increased from 14% to 19% of revenues. The higher expenses primarily
resulted from consulting charges for the sales and marketing organization. The
Company expects that sales and marketing expenses for the remainder of the year
will be approximately the same as 1996 levels.
Product development expenses of $7.3 million in the current quarter were level
with the first quarter one year ago. The Company expects that 1997 product
development expenses will remain fairly level with 1996 and gradually begin to
decrease as a percentage of revenues over the long term.
General and administrative expenses of $2.4 million decreased $578,000, or 19%,
in the first quarter of 1997 from the first quarter of 1996, yet remained level
as a percentage of total revenues. The decrease was due to several factors
including UTS acquisition costs and legal and other expenses for outsourcing
agreements in the 1996 quarter. General and administrative expenses are expected
to remain at approximately 5% to 6% of total revenues in the foreseeable future.
Amortization of intangibles in the first quarter of 1997 increased $205,000, or
62%, over the same quarter of 1996, yet remained approximately level as a
percentage of revenues. The increased expenses were due to amortization of
patents and licenses acquired during 1996.
Interest and Other, Net
The Company had net interest expense for the three months ended March 31, 1997
of $1.1 million. Interest expense during the quarter has been reduced by
$217,000 of capitalized interest related to outsourcing. Interest expense in the
current quarter was caused primarily by borrowings under the Company's bank line
of credit. The Company completed a $60 million private placement of 6 3/4%
Convertible Subordinated Notes in March 1997 and used approximately $40 million
of the net proceeds to pay down amounts outstanding under the bank line. In the
first quarter of 1996 the Company generated net interest income of $273,000 from
the investment of approximately $22 million in cash equivalents and short-term
investments.
Income Taxes
The Company had an income tax benefit of 38% of pre-tax earnings for the first
quarter of 1997 compared to an income tax provision of 33% for the same quarter
in 1996. The first quarter 1996 effective tax rate was reduced due to tax exempt
interest and excluded a tax provision for UTS earnings. UTS was acquired on
March 25, 1996. Prior to the merger, UTS was taxed as an S corporation and no
federal income tax was paid by the Company. To the extent pre-tax earnings, or
the components of those earnings, differ from expectations, the effective tax
rate for the year could change.
FINANCIAL CONDITION
Operating activities generated $3.7 million in cash during the first quarter of
1997 compared to consuming $8.3 million during the same quarter one year ago.
The favorable turn in operating activities was caused to a large degree by
reductions in inventory and accounts receivable balances during the first
quarter of 1997 from year-end levels. Inventory levels have decreased since the
Company implemented a "build to order" production schedule in the fourth quarter
of 1996. During the first three quarters of 1996 the Company was operating under
a "build to expectation" production schedule. The Company collected a large
portion of an unbilled account receivable during the current quarter. Accounts
receivable balances grew in the 1996 quarter due to unusually large unbilled
receivables balances for a single customer. The Company's long-term contracts
receivable balance increased $5.4 million during the 1997 quarter. Long-term
contracts receivable will continue to grow for the remainder of the year as
revenue for the Company's outsourcing agreements is recognized in advance of
cash receipts.
Investing activities consumed $11.8 million in the first three months of 1997
compared to generating $8.8 million in the comparable period in 1996. The
Company generated cash in the 1996 quarter by liquidating $16.5 million in
short-term investments. Cash was used in the current quarter to fund $2.9
million of property and equipment acquisitions and $8.9 million of product costs
for the Company's outsourcing installations. In the first quarter of 1996 the
Company invested $6.8 million, the majority of which was for additional
equipment at both of the Company's manufacturing locations and $827,000 of which
was for product costs related to outsourcing installations. Itron anticipates
spending approximately the same amount on outsourcing equipment in 1997 as it
did in 1996. Property and equipment additions for the Company are expected to be
approximately one-half of the 1996 level.
Financing activities in the first quarter of 1997 provided $24.8 million. The
Company generated cash from the $60 million convertible subordinated note
offering in March 1997. Net proceeds from the offering of $57.8 million were
used to pay off the Company's bank line of credit and fund operations. The
remainder of the proceeds is invested in short-term cash equivalents. The
Company generated $741,000 in cash in the comparable quarter in 1996 from the
exercise of stock options. Dividends paid to UTS shareholders in 1996 were
distributions prior to the acquisition.
Existing sources of liquidity at March 31, 1997 include approximately $18.9
million of existing cash and cash equivalents and $75 million of available
borrowings under the Company's bank line of credit agreement. Itron expects to
have substantial cash requirements during the year for outsourcing installations
and intends to seek project financing for future outsourcing agreements. The
Company believes that existing cash and available borrowings are sufficient to
fund operations for the remainder of 1997 and into 1998.
Certain Forward-Looking Statements
When included in this Quarterly Report on Form 10-Q, the words "expects,"
"intends," "anticipates," "plans," "projects" and "estimates," and analogous or
similar expressions are intended to identify forward-looking statements. Such
statements, which include, but are not limited to, statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are inherently subject to a variety of risks and uncertainties that
could cause actual results to differ materially from those reflected in such
forward-looking statements. Such risks and uncertainties include, among others,
changes in the utility regulatory environment, delays or difficulties in
introducing new products, increased competition and various other matters, many
of which are beyond the Company's control. These and other risks are described
in more detail in "Description of Business -- Certain Risk Factors" in the
Company's most recent Annual Report on Form 10-K, and such description is hereby
incorporated herein by reference. These forward-looking statements speak only as
of the date of this report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained herein to reflect any change on the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
Part 2: Other Information
Item 1: Legal Proceedings
On April 29, 1997, Itron was served with a complaint for patent infringement by
CellNet in the United States District Court for the Northern District of
California. Itron's management has reviewed the complaint and believes it to be
without merit. The patent in question was issued in 1988. Itron's management is
unaware of any previous assertion by CellNet of any claim of patent infringement
by Itron. Itron intends to vigorously defend this suit. The complaint seeks
injunctive relief as well as monetary damages, costs and attorneys' fees.
Item 2(c): Changes in Securities
On March 18, 1997 and April 15, 1997, Itron sold $63,400,000 aggregate principal
amount of 6-3/4% Convertible Subordinated Notes due 2004 (the "Notes"). The
Notes mature on March 31, 2004. Interest on the Notes is payable in cash
semiannually on March 31 and September 30 of each year, commencing on September
30, 1997. The Notes are convertible, in whole or in part, into shares of Common
Stock of Itron at a conversion price of $23.70 per share (equivalent to a
conversion rate of 42.194 shares per $1,000 principal amount of Notes) at any
time at the option of the holder beginning 60 days following the closing of the
offering (i.e. May 17, 1997), subject to adjustment in certain circumstances.
The Notes are redeemable, in whole or in part, at the option of the Company on
or after April 4, 2000 at the following redemption prices (expressed as
percentages of principal amount) if redeemed during the 12-month period
beginning on April 4 of the years set forth below:
Year Percentage
2000 103.375%
2001 102.250%
2002 101.125%
Thereafter the Notes are redeemable at 100% of the principal amount thereof, in
each case together with accrued and unpaid interest to (but not including) the
redemption date.
If a "Change in Control" (as defined in the Indenture for the Notes) of the
Company were to occur, each holder of Notes would be entitled to require the
Company to purchase its Notes, in whole or in part, at a purchase price equal to
100% of the principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase. No sinking fund is provided for the Notes,
which are general unsecured obligations of the Company. The payment of the
principal and premium, if any, and interest on the Notes will, to the extent set
forth in the Indenture, be subordinated in right of payment to the prior payment
in full of all "Senior Indebtedness" (as defined in the Indenture for the Notes)
of the Company and effectively subordinated in right of payment to the prior
payment in full of all indebtedness and other liabilities of the Company's
subsidiaries. The Indenture does not restrict the Company's ability to incur
Senior Indebtedness.
The Notes were sold by the Company to Credit Suisse First Boston Corporation and
Hambrecht & Quist LLC, as initial purchasers (together, the "Initial
Purchasers"), in reliance on the exemption set forth in Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Purchase Agreement between the Company and the Initial Purchasers dated March
12, 1997. The consideration received by the Initial Purchasers was 3% of the
aggregate offering price of $63,400,000, or $1,902,000. Of the total amount of
Notes sold, $3,400,000 aggregate principal amount was sold to the Initial
Purchasers pursuant to an over-allotment option.
The Company has been advised that the Initial Purchasers subsequently resold the
Notes in the United States to "qualified institutional buyers" in reliance on
Rule 144A under the Securities Act and outside of the United States in offshore
transactions to investors in reliance on Regulation S under the Securities Act.
Of the total amount of Notes sold, $59,050,000 were sold under Rule 144A and
$4,350,000 were sold in reliance on the exemption from registration provided by
Regulation S.
The Company has agreed pursuant to a Registration Rights Agreement to (i) file a
Shelf Registration Statement with respect to the Notes and the Common Stock
issuable upon the conversion thereof within 90 days following the first date of
initial issuance of the Notes, (ii) to use its best efforts to cause the Shelf
Registration Statement to be declared effective within 120 days after the first
date of initial issuance of the Notes, and (iii) keep the Shelf Registration
Statement effective after its effective date for as long as shall be required
under Rule 144(k) under the Securities Act or any successor rule or regulation
thereto. Upon the failure by the Company to comply with these obligations,
interest payable on the Notes will be increased by 50 basis points.
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 11 - Statement re Computation of Earnings per Share
b) Reports on Form 8-K
One report on Form 8-K, dated March 18, 1997, was filed during the
quarter ended March 31, 1997, pursuant to Items 7 and 9 of that form.
The report related to the offering of convertible subordinated notes.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Commission Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITRON, INC.
(Registrant)
By: DAVID G. REMINGTON
David G. Remington
Vice President and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
Date: May 14, 1997
EXHIBIT 11
ITRON, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(Unaudited, shares in thousands)
Three months ended March 31,
Primary EPS Computation 1997 * 1996
--------------- --------------
Weighted average number of common shares outstanding 13,419 13,202
Dilutive effect of outstanding common stock options and warrants based on - 908
average price --------------- --------------
Primary weighted average shares outstanding based on average market price 13,419 14,110
=============== ==============
Primary EPS based on average market price ($0.24) $0.21
Fully Diluted EPS Computation
1997 * 1996
--------------- --------------
Weighted average number of common shares outstanding 13,419 13,202
Dilutive effect of outstanding common stock options and warrants based on - 962
ending price --------------- --------------
Fully dilutive weighted average shares outstanding based on ending market 13,419 14,164
price =============== ==============
Fully Diluted EPS based on ending market price ($0.24) $0.21
* Dilutive effect of outstatnding common stock options and warrants is not used
in the 1997 EPS calculation as the shares are antidilutive because the Company
reported a net loss.
5
3-MOS
DEC-31-1997
MAR-31-1997
18,922
0
38,080
(1,218)
30,568
97,389
112,663
(32,421)
207,552
29,958
0
0
0
98,968
12,262
111,230
40,583
40,583
26,964
26,964
17,815
(4,196)
(1,063)
(5,259)
2,000
(3,259)
0
0
0
(3,259)
(.24)
(.24)
