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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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____
As of April 30, 1998, there were outstanding 14,695,476 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.
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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.............6-8
Part 2: Other Information
Item 6: Exhibits and Reports on Form 8-K...........................9
Signature..........................................................10
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,
1998 1997
--------------- -------------
Revenues
AMR systems $50,356 $25,260
Handheld systems 9,680 9,560
Outsourcing 3,672 5,763
--------------- -------------
Total revenues 63,708 40,583
Cost of revenues
AMR systems 34,768 15,154
Handheld systems 5,125 6,969
Outsourcing 3,020 4,841
--------------- -------------
Total cost of revenues 42,913 26,964
Gross profit 20,795 13,619
Operating expenses
Sales and marketing 6,594 7,525
Product development 8,923 7,329
General and administrative 3,017 2,424
Amortization of intangibles 591 537
------------- ---------------
Total operating expenses 19,125 17,815
Operating income (loss) 1,670 (4,196)
Interest and other, net (1,417) (1,063)
--------------- -------------
Income (loss) before income taxes 253 (5,259)
Benefit (provision) for income taxes (100) 2,000
--------------- ------------
Net income (loss) $ 153 $ (3,259)
=============== =============
Basic earnings (loss) per share $ 0.01 $ (0.24)
=============== =============
Diluted earnings (loss) per share $ 0.01 $ (0.24)
=============== =============
Weighted average shares outstanding 14,631 13,419
Diluted shares outstanding 14,852 13,419
The accompanying notes are an integral part of these financial statements.
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
March 31, December 31,
1998 1997
-------------- --------------
Assets
Current assets
Cash and cash equivalents $ 1,721 $ 3,023
Accounts receivable, net 68,029 61,442
Current portion of long-term contracts receivable 9,702 8,445
Inventories 25,771 31,985
Deferred income taxes, net 5,568 5,668
Other 3,050 1,888
-------------- --------------
Total current assets 113,841 112,451
Property and equipment, net 48,745 49,067
Equipment used in outsourcing, net 46,650 42,848
Intangible assets, net 21,057 21,472
Long-term contracts receivable 12,196 11,119
Other 3,488 3,254
-------------- --------------
Total assets $245,977 $240,211
============== ==============
Liabilities and shareholders' equity
Current liabilities
Short-term borrowings $ 14,499 $ 1,560
Accounts payable and accrued expenses 21,822 26,644
Wages & benefits payable 5,985 9,181
Deferred revenue 6,504 6,759
-------------- ---------------
Total current liabilities 48,810 44,144
Convertible subordinated debt 63,400 63,400
Mortgage notes payable 6,440 6,440
Project financing 2,414 2,414
Warranty and other obligations 3,935 3,386
-------------- ---------------
Total noncurrent liabilities 76,189 75,640
Shareholders' equity
Common stock 105,736 105,193
Retained earnings 16,468 16,315
Other (1,226) (1,081)
-------------- ---------------
Total shareholders' equity 120,978 120,427
-------------- --------------
Total liabilities and shareholders' equity $245,977 $240,211
============== ==============
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,
1998 1997
-------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ 153 $ (3,259)
Noncash charges (credits) to income:
Depreciation and amortization 4,657 3,774
Deferred income taxes 160 (1,994)
Changes in operating accounts, net of acquisitions:
Accounts receivable (7,731) 7,514
Long-term contracts receivable (2,334) (5,447)
Inventories 6,214 3,269
Accounts payable and accrued expenses (3,678) (1,339)
Wages and benefits payable (3,196) (144)
Deferred revenue (255) (145)
Other, net (1,300) 1,508
-------------- -------------
Cash provided (used) by operating activities (7,310) 3,737
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (2,737) (2,894)
Acquisition of equipment used in outsourcing (4,504) (8,864)
Acquisitions of intangibles and patent defense costs (481) (60)
Other, net (287) (13)
-------------- -------------
Cash used by investing activities (8,009) (11,831)
FINANCING ACTIVITIES
Short-term borrowings, net 12,939 (33,062)
Convertible subordinated debt - 57,800
Issuance of common stock 543 52
Other, net 535 (17)
-------------- -------------
Cash provided by financing activities 14,017 24,773
-------------- -------------
Increase(decrease)in cash and cash equivalents (1,302) 16,679
Cash and cash equivalents at beginning of period 3,023 2,243
-------------- -------------
Cash and cash equivalents at end of period $ 1,721 $ 18,922
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The accompanying notes are an integral part of these financial statements.
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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, 1998. 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, 1997, as filed with the
Securities and Exchange Commission on March 31, 1998.
The Company reports revenue in three categories: AMR (automatic meter reading)
systems, Handheld systems (EMR or electronic meter reading), and Outsourcing.
AMR and Handheld systems revenues include all product and other revenue
associated with each business segment. Outsourcing includes revenues for
contracts under which the Company installs, owns, and operates an AMR system to
provide automated meter reading services over a period of time, typically 15
years.
The results of operations for the three month period ended March 31, 1998, 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,
1998 1997
-------------- ------------
Material $13,579 $14,418
Work in process 1,770 3,138
Finished goods 7,246 7,304
Field inventories awaiting installation 927 5,178
-------------- ------------
Total manufacturing inventories 23,522 30,038
Service 2,249 1,947
-------------- ------------
Total inventories $25,771 $31,985
============== ============
Note 3: Impact of Recent Accounting Pronouncements
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, (SFAS 130), "Reporting Comprehensive Income," that
establishes new rules for reporting and display of comprehensive income and its
components. Adoption of SFAS 130 requires unrealized gains or losses on foreign
currency translation adjustments be included in other comprehensive income,
which prior to adoption were reported separately in stockholders' equity. The
components of comprehensive income, net of related tax, are as follows (in
thousands):
Three months ended March 31,
1998 1997
-------------- -------------
Income (loss) attributable to common shareholders $153 $(3,259)
Foreign Currency translation adjustment (87) (10)
-------------- -------------
Comprehensive income $66 $(3,269)
============== =============
Segment Reporting
The Company will adopt Statement of Financial Accounting Standards No. 131,
(SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information," effective December 31, 1998. SFAS 131 relates to the nature and
disclosure of business segment results and financial position and is not
expected to have a significant impact on the Company's financial statements.
Note 4: Contingencies
The Company, together with certain directors and officers, is a defendant in two
shareholder-initiated proposed class actions (one in Federal court and one in
Washington State court), alleging securities and other statutory and common law
violations arising out of alleged misleading disclosures or omissions made by
the Company regarding its business and technology. The Company is also a
defendant in a patent infringement lawsuit filed by CellNet Data Systems. The
Company believes these actions are without merit and intends to vigorously
defend against them. At this time, it is not possible to predict the ultimate
outcome of these proceedings.
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 operating income for the
three months ended March 31, 1998 and 1997, and changes between those two
periods:
Percentage of Total Revenue
---------------------------
Three months ended March 31, 1998 1997 % Change
- ------------------------------------------------------------------ --------------- -------------- --------------
Revenues
AMR systems 79% 62% 99%
Handheld systems 15% 24% 1%
Outsourcing 6% 14% (36%)
--------------- --------------
Total revenues 100% 100% 57%
Cost of revenues
AMR systems 69% 60% 129%
Handheld systems 53% 73% (26%)
Outsourcing 82% 84% (38%)
--------------- --------------
Total cost of revenues 67% 66% 59%
Gross profit 33% 34% 53%
Operating expenses
Sales and marketing 10% 19% (12%)
Product development 14% 18% 22%
General and administrative 5% 6% 24%
Amortization of intangibles 1% 1% 10%
--------------- --------------
Total operating expenses 30% 44% 7%
Operating income 3% (10%) 140%
=============== ==============
Revenues
The Company's total revenues increased $23.1 million, or 57%, to $63.7
million in the first quarter of 1998 from $40.6 million in the first quarter of
1997. AMR systems revenues nearly doubled in the quarter ended March 31, 1998
over the comparable quarter in 1997. Total meter module shipments for the
current quarter exceeded 650,000 units, all of which were shipped under sales
contracts. This compares to approximately 425,000 units shipped under sales
contracts in the prior year's quarter, and 200,000 units shipped under
outsourcing agreements. Equipment shipped and installed under a large fixed
network system contract booked in 1997 generated approximately 60% of the
quarter-to-quarter revenue growth. Shipments and installations of water meter
modules for a single multi-year contract, also awarded in 1997, and slightly
higher international AMR sales, accounted for most of the remaining revenue
growth. The Company expects that AMR sales will grow over the longer term.
However, much of the expected growth in AMR continues to be dependent upon the
timing and resolution of industry regulatory reform issues in the United States,
mergers and acquisitions in the utility industry, development of international
markets, and various other factors.
Handheld systems revenue was level to the prior year's quarter at $9.7 million.
However, the mix of revenues was quite different in the 1998 quarter. The first
quarter of 1997 included significant handheld shipments to a Korean customer.
Shipments to that customer were completed late in 1997. The absence of similar
international handheld shipments in the 1998 quarter was offset by higher
domestic revenues. The Company believes that handheld systems revenues will
continue to decline as a percentage of total revenues as more utilities adopt
and expand AMR system deployments. Future handheld systems revenues are expected
to be derived primarily from domestic upgrade and replacement business and
further penetration into international markets.
Outsourcing revenues declined 36% from $5.8 million in the 1997 quarter to $3.7
million in the 1998 quarter. Lower installation related expenses at Duquesne
Light Company ("Duquesne"), which is substantially complete, resulted in lower
reported revenues. At March 31, 1998, Itron had installed approximately 550,000
meter modules for this project out of an expected total of 615,000 modules. The
Company's agreement with Duquesne provides for certain one-time monetary
penalties for failure to meet specified milestones, including certain milestones
that are designated as critical. There is one remaining critical milestone. The
maximum penalty, should the Company fail to meet that milestone, is $10 million.
The Company believes it will fully satisfy the future critical milestone. In
addition, there is one remaining non-critical milestone that carries a $2
million penality should the company fail to meet that milestone. (For additional
information see "Amended Duquesne Agreement," an exhibit to the Company's Form
10-Q filed on November 14, 1997, and "Description of Business--Certain Risk
Factors--Dependence on the Installation, Operations and Maintenance of AMR
Systems Pursuant to Outsourcing Contracts" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.) Outsourcing revenues are
expected to decrease in 1998 from the level experienced in 1997, both in terms
of absolute dollars and as a percentage of total revenues, as the Company did
not sign any new outsourcing contracts during 1997.
Cost of Revenues
Gross margin of 33% of revenues for the current quarter was slightly less than
1997's first quarter of 34%. AMR gross margins declined to 31% from 40% in the
prior year's quarter due to a higher mix of fixed network revenues and a higher
level of installation activities instead of product sales. Lower margins on
fixed network products are caused, in part, by the early life cycle status of
those products. Handheld systems gross margin increased to 47% of revenues due
primarily to a lower mix of international business. Outsourcing gross margins
remained approximately level for the comparative quarters. The Company expects
overall gross margins for the full year 1998 may be slightly less than 1997 as a
result of the large fixed network AMR order at below-average margin in 1998.
Future gross margins may be affected by competitive price pressure, the
Company's ability to utilize existing manufacturing capacity, the mix and
volumes of meter modules shipped, the risks inherent in cost estimation for
outsourcing contracts, potential performance-related contractual penalties and
other factors.
Operating Expenses
Sales and marketing expenses of $6.6 million for the three month period ended
March 31, 1998, decreased 12% from the comparable period in 1997 and also
decreased as a percentage of revenue. Last year's first quarter sales and
marketing expenses were unusually high from non-recurring consulting services.
The Company expects that sales and marketing expenses will remain at
approximately 10% to 12% of total revenues for the remainder of the year.
Product development expenses of $8.9 million in the current quarter increased
$1.6 million, or 22%, from the comparable quarter in 1997, but decreased as a
percentage of revenues from 18% to 14%. The increased expenses for the 1998
quarter were due to the acquisition of DCI in 1997, and a higher level of
development activities for products for the commercial and industrial segment of
the utility marketplace. The Company expects that 1998 product development
expenses will remain at approximately 13% to 15% of total revenues for the
remainder of the year.
General and administrative expenses of $3 million for the three months ended
March 31, 1998, increased approximately $600,000, or 24%, over the first quarter
of 1997, but decreased as a percentage of total revenues from 6% to 5%. The
higher level of expenses resulted from the inclusion of DCI for the full quarter
in 1998 and increased investments in corporate support functions. General and
administrative expenses are expected to remain at 5% to 6% of total revenues for
the remainder of the year.
Amortization of intangibles increased slightly in the 1998 quarter and are
expected to remain approximately level over the remainder of the year.
Interest and Other, Net
Net interest expense increased to $1.3 million for the first quarter of 1998 as
compared to $1.0 million in the 1997 quarter from the full quarter affect of the
$63.4 million subordinated debt offering completed in March and April of 1997,
and from the project financing initially received in mid-1997. Interest
capitalized in the first quarter of 1998 was $270,000 compared to $217,000
capitalized in the first quarter of 1997. Capitalized interest relates to
construction costs for outsourcing agreements. The Company expects net interest
expense to gradually increase over the course of the year, as outsourcing
installations near completion, resulting in lower interest capitalization, and
from expected additional drawings on the project financing facility.
Income Taxes
The income tax provision for the current quarter was slightly less than 40% of
pre-tax income compared to a tax benefit percentage of 38% in the first quarter
of 1997. The Company's tax rate may vary because of varying foreign operating
results, changes in tax jurisdictions in which the Company operates, and changes
in tax legislation.
FINANCIAL CONDITION
Cash required for operating activities was $7.3 million for the first quarter of
1998 compared to cash provided from operating activities of $3.7 million in last
year's first quarter. The shift in operating cash for the comparative quarters
resulted primarily from increased accounts receivable. Most of this increase was
due to a higher level of current year turnkey installations, which typically
have deferred billing terms. The increase in the current portion of long-term
contracts receivable caused by an excess of revenue recognition for outsourcing
contracts over actual billings. Outsourcing revenues are recognized using the
percentage-of-completion method of accounting while billing occurs when meters
are read. Payment of 1997 performance incentives were also made in the first
quarter of 1998.
Investments totaled $8.0 million during the 1998 quarter, down from $11.8
million in the prior year's quarter due to a slowing of equipment needed for
outsourcing installations. Overall 1998 investments are expected to be less than
the full year 1997 as outsourcing installations near completion.
Financing activities for the first quarter of 1998 consisted mostly of drawings
on the Company's bank line of credit. Financing sources in the 1997 quarter
included proceeds from the initial sale of the Company's $63.4 million
subordinated debt.
Existing sources of liquidity at March 31, 1998 include $1.7 million of existing
cash and cash equivalents and approximately $35 million of available borrowings
under the Company's bank line of credit. The Company expects to renew this
agreement upon its expiration on May 31, 1998. Cash requirements for the
remainder of 1998 are expected to be provided from the bank line of credit, from
operations, and from an existing project financing facility. The Company
believes these sources of liquidity are sufficient to fund its operations for
the next twelve months.
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 6: Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 11 - Statement re Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the quarter
ended March 31, 1998.
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: /s/ DAVID G. REMINGTON
--------------------------------
David G. Remington
Vice President and Chief Financial Officer
(Authorized Officer and Principal Financial
Officer)
Date: May 15, 1998
ITRON, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands)
Three Months Ending March 31,
-------------------------------
1998 1997
-------------- --------------
Weighted average number of common shares outstanding 14,631 13,419
============== ==============
EPS based on average market price $0.01 ($0.24)
1998 1997
-------------- --------------
Weighted average number of common shares outstanding 14,631 13,419
Dilutive effect of outstanding common stock options and warrants at average market price 221 -
-------------- --------------
Weighted average shares outstanding based on ending market price 14,852 13,419
============== ==============
Diluted EPS based on average market price $0.01 ($0.24)
5
3-MOS
DEC-31-1998
MAR-31-1998
1,721
0
68,765
(736)
25,771
113,841
140,488
(45,093)
245,977
48,810
0
0
0
105,736
(1,226)
245,977
63,708
63,708
42,913
42,913
19,125
0
(1,417)
253
(100)
153
0
0
0
153
.01
.01
