Part 1: Financial Information
Item 1: Financial Statements
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended Sept. 30, Nine months ended Sept. 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
Revenue
AMR systems $ 28,337 $ 25,079 $ 100,724 $ 71,088
Handheld systems 10,406 14,852 34,266 46,108
------------- ------------- ------------- -------------
Total revenues 38,743 39,931 134,990 117,196
Cost of revenues 24,177 21,973 77,928 65,541
------------- ------------- ------------- -------------
Gross profit 14,566 17,958 57,062 51,655
Operating expenses
Sales and marketing 7,511 5,147 20,673 14,267
Product development 10,351 7,293 25,412 19,523
General and administrative 2,705 1,866 8,153 5,402
Amortization of intangibles 392 579 1,086 1,708
------------- ------------- ------------- -------------
Total operating expenses 20,959 14,885 55,324 40,900
------------- ------------- ------------- -------------
Operating income (loss) (6,393) 3,073 1,738 10,755
Interest and other, net (283) 462 (1) 1,478
------------- ------------- ------------- -------------
Income (loss) before income taxes (6,676) 3,535 1,737 12,233
Benefit (provision) for income taxes 2,130 (1,390) (900) (4,000)
------------- ------------- ------------- -------------
Net income (loss) (4,546) 2,145 837 8,233
============= ============= ============= =============
Net income (loss) per common share $ (0.34) $ 0.16 $ 0.06 $ 0.60
============= ============= ============= =============
Pro forma information (1)
Income before income taxes $ 3,535 $ 1,737 $ 12,233
Provision for income taxes (1,240) (1,010) (4,290)
------------- ------------- -------------
Net income $ 2,295 $ 727 $ 7,943
============= ============= =============
Net income per common share $ 0.17 $ 0.05 $ 0.58
============= ============= =============
- --------------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
September 30, December 31,
1996 1995
----------------- ----------------
ASSETS
Current assets
Cash and equivalents $ 1,565 $ 6,473
Short-term investments 0 25,074
Accounts receivable, net 44,851 38,015
Inventories 37,964 18,065
Other 5,627 5,919
----------------- ----------------
Total current assets 90,007 93,546
Property, plant and equipment, net 57,182 31,741
Intangible assets, net 22,628 20,230
Other 8,242 4,201
----------------- ----------------
Total assets $ 178,059 $ 149,718
================= ================
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 25,511 $
Accounts payable and accrued expenses 19,194 16,290
Wages and benefits payable 5,144 4,514
Deferred revenue 3,972 8,206
----------------- ----------------
Total current liabilities 53,821 29,010
Noncurrent liabilities
Mortgage notes payable 6,440 5,600
Warranty and other obligations 2,289 3,835
----------------- ----------------
Total noncurrent liabilities 8,729 9,435
Shareholders' equity
Common stock 97,797 94,108
Retained earnings 17,606 16,969
Other 106 196
----------------- ----------------
Total shareholders' equity 115,509 111,273
----------------- ----------------
Total liabilities and shareholders' equity $ 178,059 $ 149,718
================= ================
The accompanying notes are an integral part of these financial statements.
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended September 30,
1996 1995
----------------- ----------------
OPERATING ACTIVITIES
Net income $ 837 $ 8,233
Noncash charges (credits) to income:
Depreciation and amortization 7,450 6,128
Deferred income taxes (191) 224
Changes in operating accounts:
Accounts receivable (6,836) 2,242
Inventories (19,899) (6,346)
Accounts payable and accrued expenses 2,904 4,074
Deferred revenue (4,234) (2,737)
Other, net (3,085) 859
----------------- ----------------
Cash provided (used) by operating activities (23,641) 12,677
INVESTING ACTIVITIES
Short-term investments 25,074 (7,181)
Acquisition of property and equipment (31,285) (11,845)
Business acquisitions (4,004) (3,733)
Other, net (498) 715
----------------- ----------------
Cash used by investing activities (10,713) (22,044)
FINANCING ACTIVITIES
Bank line of credit 25,511 0
Mortgage notes payable 840 0
Issuance of common stock 3,256 3,268
Dividends paid to UTS shareholders (200) (750)
Other 38 (284)
----------------- ----------------
Cash provided by financing activities 29,445 2,234
----------------- ----------------
Decrease in cash and equivalents (4,908) (7,133)
Cash and equivalents at beginning of period 6,473 11,000
----------------- ----------------
Cash and equivalents at end of period $ 1,565 $ 3,867
================= ================
The accompanying notes are an integral part of these financial statements.
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
Note 1: Basis of Presentation
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 and nine
month periods ended September 30, 1996. 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, 1995 as
filed with the Securities and Exchange Commission on March 31, 1996.
Itron acquired Utility Translation Systems, Inc. (UTS) on March 25, 1996 in a
pooling-of-interests business combination. Accordingly, the accompanying
financial statements insofar as they relate to periods prior to or including
March, 25, 1996, have been restated to include the financial position and
results of operations for the combined companies for all periods presented.
Prior to the acquisition, UTS was treated as an S corporation under the Internal
Revenue Code. The income of an S corporation is taxed directly to the
shareholders, and no federal or state income taxes are paid by the company.
Consequently, the combined results of operations for the first quarter of 1996
and the three and nine month periods ended September 30, 1995 exclude an income
tax provision on UTS's earnings. Pro forma net income per share, which reflects
a provision for income taxes as if UTS was taxed as a C corporation, is provided
in the accompanying statement of operations.
The results of operations for the three month and nine month periods ended
September 30, 1996 are not necessarily indicative of the results expected for
the full fiscal year or for any other fiscal period.
Note 2: Inventories
Inventories consist of the following (unaudited, in thousands):
September 30, December 31,
1996 1995
----------------- ----------------
Material $ 23,153 $ 9,594
Work in process 1,577 555
Finished goods 12,701 7,433
----------------- ----------------
Total manufacturing inventories 37,431 17,582
Service 533 483
----------------- ----------------
Total inventories $ 37,964 $ 18,065
================= ================
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
When used in this discussion the words "expects," "anticipates," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Factors which could affect the
Company's financial results are described below and in the Company's latest
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrences of unanticipated events.
The following table summarizes the major components of and changes in operating
income for the nine months ended September 30, 1996.
Percentage of total revenues Percent
Nine months ended September 30, 1996 1995 change
- -------------------------------- ---------- ---------- -----------
Revenues
AMR systems 75% 61% 41%
Handheld systems 25% 39% (26%)
---------- ---------- -----------
Total revenues 100% 100% 15%
Cost of revenues 58% 56% 19%
---------- ---------- -----------
Gross profit 42% 44% 10%
Operating expenses
Sales and marketing 15% 12% 45%
Product development 19% 17% 30%
General and administrative 6% 5% 51%
Amortization of intangibles 1% 1% (36%)
---------- ---------- -----------
Total operating expenses 41% 35% 35%
---------- ---------- -----------
Operating income 1% 9% (84%)
========== ========== ===========
Revenues
Total revenues for the Company decreased $1.2 million, or 3%, to $38.7 million
in the third quarter of 1996 from $39.9 million in the comparable quarter in
1995. For the nine months ended September 30, 1996, total revenues of $135.0
million were $17.8 million, or 15%, higher than the $117.2 million in the first
three quarters of 1995.
Automatic Meter Reading (AMR) systems revenues grew $3.3 million, or 13%, in the
third quarter of 1996 over the third quarter of 1995. For the nine months ended
September 30, 1996, AMR systems revenues were $100.7 million, or 41%, greater
than the $71.1 million in the nine months ended September 30, 1995. The higher
revenues for both the quarter and year to date periods were primarily driven by
increased shipments of the Company's encoder, receiver, transmitter (ERT(R))
meter modules. The Company shipped approximately 17% more ERT modules in the
current quarter than the same quarter last year and 46% more in the nine months
ended September 30, 1996 than the comparable nine month period in 1995.
Approximately 62% of the increased volumes for the nine month period resulted
from ERTs shipped to a single customer as part of a large multi-year contract
signed in October of last year. An increase in the cumulative number of AMR
customers accounted for the remainder of the increase. Recently, many utilities
that the Company has been working with have taken much longer to make their AMR
purchase decisions than the Company had anticipated. These delays have impacted
the Company's AMR revenue growth trend. The Company believes that these delays
are caused in part by deregulation issues and merger and acquisition activity,
which are affecting the industry as a whole. The Company believes that many
utilities are in the process of resolving these issues and that the Company's
AMR revenues will continue to grow. However, in the near term, AMR revenues may
not grow or may grow at a different rate than the Company has experienced in the
past.
Outsourcing revenues incorporate a variety of products and services performed by
the Company which include, but are not limited to, AMR products, system
installation, meter reading services and meter shop services. Outsourcing
revenues for the quarter and year to date periods were not material and are
included as a component of AMR revenues in the three and nine month periods
ending September 30, 1996. There were no outsourcing revenues in the 1995
periods. The Company announced a significant outsourcing agreement in January
1996 under which the Company will install, own and operate a fixed network AMR
system and provide meter reading and advanced communications services over a
fifteen year period. Itron began installation efforts for this agreement in the
second quarter of this year. As of the date of this report, the Company has
completed installation and is successfully reading the initial 5,000 meters
required for the first phase of this project. The Company has installed over
60,000 ERTs so far for the project. Contractual system acceptance of the first
phase and production release of the Company's first level fixed network
component, the Cell Control Unit (CCU), are dependent on successful field
testing of a significant software release that is scheduled for late 1996.
System expansion is expected to begin late in the fourth quarter of 1996 or in
the first quarter of 1997 once full system acceptance for the first phase of the
installation has occurred.
Handheld systems revenues of $10.4 million for the third quarter of 1996 were
down $4.4 million, or 30%, from the same quarter in 1995. For the nine months
ended September 30, 1996, handheld systems revenues of $34.3 million were $11.8
million, or 26%, lower than the comparable year to date period in 1995. The
decrease in handheld revenues for both the quarter and nine month periods was
primarily due to unusually large international shipments to two Japanese
utilities in the first nine months of 1995. International revenues were 7% of
total Company revenues in the first nine months of 1996 compared to 17% in the
first nine months of 1995. The Company expects that handheld systems revenues
will continue to decline as a percentage of total revenues. Future handheld
systems revenues are expected to be driven increasingly by sales to new
customers internationally and by upgrade and replacement sales domestically.
Gross Profit
Gross margins of 38% for the current quarter were seven percentage points lower
than the third quarter of 1995. Margins for the nine months ended September 30,
1996 of 42% were two percentage points less than gross margins of 44% in the
comparable nine month period in 1995. The decrease in margins for both the
quarter and year to date period was primarily caused by unabsorbed manufacturing
overhead costs as well as changes in product mix. The Company increased its
manufacturing capacity in anticipation of new AMR business. However, because of
the AMR order delays mentioned above, the Company's factories operated
substantially below capacity in the third quarter. The Company expects that
underutilized manufacturing overhead costs may continue to depress gross profit
margins in the near future.
Operating Expenses
Sales and marketing expenses for the third quarter of 1996 of $7.5 million
increased $2.4 million, or 46%, from the third quarter of 1995, and also
increased from 13% to 19% of revenues. For the nine month period ended September
30, 1996, sales and marketing expenses of $20.7 million increased $6.4 million,
or 45%, over the same period in 1995 and also increased from 12% to 15% of
revenues. The higher expenses resulted from the Company's increased focus on
strengthening and expanding its AMR sales and marketing staff primarily related
to fixed network AMR. The Company expects that sales and marketing expenses may
continue to be higher as a percentage of total revenues than last year.
Product development expenses of $10.4 million in the current quarter increased
$3.1 million, or 42%, over the same period in 1995. For the nine months ended
September 30, 1996, product development increased $5.9 million, or 30%, over the
comparable period in 1995, and also increased as a percentage of revenues from
17% to 19%. The increase for the quarter was primarily due to a non-recurring
materials charge of approximately $2.1 million which resulted from design
improvements to both the Company's CCU and new handheld computer, the GPC. The
increase in product development expenses for the year to date period is due to
the materials charge, development of fixed network components and related
software and AMR cost reduction programs. The Company expects that the higher
level of development expenses, excluding the non-recurring charges, will
continue in the foreseeable future.
General and administrative expenses of $2.7 million in the third quarter of 1996
increased $839,000, or 45%, over the third quarter of 1995 and also increased
from 5% to 7% as a percentage of revenues. For the nine months ended September
30, 1996, general and administrative charges were $2.8 million, or 51%, higher
than the first nine months of 1995. The increase was due to several factors,
including UTS acquisition costs, salaries and related employment costs for new
management personnel, increased expenses from the expansion of the Company's
facilities and patent litigation fees relating to enforcement of the Company's
patents. (See Item 3: Legal Proceedings.) In addition, the Company had
approximately $800,000 of expenses in the third quarter related to
reorganization charges. These charges were offset to a large degree by a
one-time reduction in the Company's incentive compensation. The Company expects
that general and administrative expenses will continue to be approximately 5% to
6% of total revenues.
Interest and Other, Net
The Company had net interest expense of $283,000 for the quarter and $1,000 for
the year to date period ended September 30, 1996. Net interest expense for the
quarter and year to date period has been reduced by $90,000 of capitalized
interest costs related to the construction of a new facility in Spokane and
equipment for one of the Company's outsourcing projects. The Company incurred
interest expense primarily as a result of borrowing against the Company's
revolving line of credit. The Company expects to incur further interest expense
in the future from continued short-term borrowings under the Company's line of
credit. In the quarter and year to date periods ended September 30, 1995 the
Company had $462,000 and $1.5 million, respectively, in net interest income from
the investment of approximately $45 million of cash on hand in the 1995 periods.
Income Taxes
The income tax benefit in the third quarter of 1996 was 32% of pre-tax loss. The
third quarter of 1995 contained an income tax provision of approximately 39% of
pre-tax income. For the nine month periods ending 1996 and 1995 the Company had
income tax provisions of 52% and 33% of pre-tax income, respectively. The higher
1996 rate is primarily due to two aspects of the Company's acquisition of UTS.
One aspect involved state taxation and the other involved a change in tax
accounting methods that accelerated net income recognition.
FINANCIAL CONDITION
Operating activities consumed $23.6 million in cash in the first nine months of
1996 compared to generating $12.7 million in cash during the same period in
1995. The decrease in cash flow from operations was caused by several factors
including increased inventory levels which were built in anticipation of
expected new contracts that have been delayed, initial expenses for a large
outsourcing contract and higher accounts receivable. Accounts receivable at
September 30, 1996 include $15.9 million in accrued or unbilled receivables from
a significant customer for which the Company recognizes revenue upon unit
shipment and invoices upon installation of those units. At December 31, 1995,
the unbilled receivable from this same customer was $7.5 million.
Investing activities consumed $10.7 million in the nine month period ended
September 30, 1996 compared to consuming $22.0 million in the comparable period
in 1995. The Company generated cash by liquidating $25.1 million of short-term
investments in the first half of 1996 and used the cash to partially fund $31.3
million of property and equipment additions and $4.0 million in business
acquisitions. Property and equipment additions in 1996 were primarily for
equipment and facilities related to the expansion of manufacturing capacity, and
secondarily for equipment for use in outsourcing agreements. Long-term
outsourcing contracts require substantial cash because the agreements
necessitate upfront investments by the Company for both equipment and
installation costs while receipts under the contracts are collected by the
Company ratably over the life of the contract. Because the manufacturing
capacity expansion is substantially complete, Itron anticipates spending less on
capital additions during the remainder of the year than it did in the first nine
months. In the nine month period ended September 30, 1995, the Company invested
$7.2 million of cash in short-term investments, $11.8 million in property and
equipment additions and $3.7 million in business acquisitions.
Financing activities in the first nine months of 1996 provided $29.5 million
compared to $2.2 million in the comparable period in 1995. Sources of cash from
financing activities during the 1996 period consisted of borrowing approximately
$25.5 million under the Company's bank line of credit, $840,000 from a note due
in connection with a building purchase and receiving $3.3 million from the
exercise of stock options. The Company generated $3.3 million in the comparable
nine months of 1995 from the exercise of stock options and the exercise of the
overallotment of 75,000 shares related to the Company's follow-on offering in
December 1994. Dividends paid to UTS shareholders for both periods relate to
distributions prior to the acquisition. Itron has never paid dividends to its
common shareholders and the Company does not anticipate paying dividends to
common shareholders in the foreseeable future.
Existing sources of liquidity at September 30, 1996 include approximately $1.6
million of cash on hand and $24.5 million of available borrowings under the
Company's bank line of credit agreement. The Company believes that it has enough
cash and available borrowings under its current line of credit agreement to fund
operations through the remainder of the year and is currently in discussions to
expand its existing line of credit. Because the Company expects to need a
substantial amount of cash in the future for outsourcing agreements, Itron plans
to obtain additional financing for these agreements through a separate bank
warehousing facility, structured project financings, or offerings of equity or
debt securities.
Part 2: Other Information
Item 3: Legal Proceedings
On October 3, 1996, Itron filed a patent infringement suit against CellNet Data
Systems ("CellNet"), a California corporation. The suit, filed in the United
States District Court of Minnesota, claims that CellNet is infringing on the
Company's United States Patent No. 5,553,094, entitled "Radio Communication
Network for Remote Data Generating Stations," issued on September 3, 1996. The
Company is seeking injunctive relief as well as monetary damages, costs and
attorneys' fees.
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
One report on Form 8-K, dated October 3, 1996, was filed subsequent to
the quarter ended September 30, 1996 and related to a patent
infringement suit filed against CellNet Data Systems. The report was
filed pursuant to Item 5 of Form 8-K and did not include any financial
information.
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: November 13, 1996
ITRON, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(Unaudited, shares in thousands)
Three months Nine months
ended September 30, ended September 30,
-------------------------- --------------------------
Primary Shares: 1996 1995 1996 1995
----------- ------------ ----------- ------------
Weighted average number of common shares outstanding 13,336 13,129 13,274 13,076
Dilutive effect of outstanding stock options and warrants 0 635 835 672
----------- ------------ ----------- ------------
Primary weighted average shares outstanding 13,336 13,764 14,109 13,748
=========== ============ =========== ============
Three months Nine months
ended September 30, ended September 30,
-------------------------- --------------------------
Fully Diluted Shares: 1996 1995 1996 1995
----------- ------------ ----------- ------------
Weighted average number of common shares outstanding 13,336 13,129 13,274 13,076
Dilutive effect of outstanding stock options and warrants 0 700 835 723
----------- ------------ ----------- ------------
Fully diluted weighted average shares outstanding 13,336 13,829 14,109 13,799
=========== ============ =========== ============
5
1000
9-MOS
DEC-31-1995
SEP-30-1995
1,565
0
45,294
(443)
37,964
90,007
85,102
(27,920)
178,059
53,821
0
0
0
97,797
106
178,059
134,990
134,990
77,928
77,928
55,324
1,738
(1)
1,737
(900)
837
0
0
0
837
.06
.06
