Part 1: Financial Information
Item 1: Financial Statements
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues
AMR systems 35,093 24,994 72,387 46,009
Handheld systems 13,102 14,150 23,860 31,256
------ ------ ------ ------
Total revenues 48,195 39,144 96,247 77,265
Cost of revenues 27,201 22,252 53,751 43,568
------ ------ ------ ------
Gross profit 20,994 16,892 42,496 33,697
Operating expenses
Sales and marketing 6,594 4,608 13,162 9,120
Product development 7,686 6,122 15,061 12,230
General and administrative 2,446 1,960 5,448 3,536
Amortization of intangibles 362 563 694 1,129
------ ------ ------ ------
Total operating expenses 17,088 13,253 34,365 26,015
Operating income 3,906 3,639 8,131 7,682
Interest and other, net 9 566 282 1,016
------ ------ ------ ------
Income before income taxes 3,915 4,205 8,413 8,698
Provision for income taxes (1,560) (1,380) (3,030) (2,610)
------ ------ ------ ------
Net income 2,355 2,825 5,383 6,088
====== ====== ====== ======
Net income per common share 0.17 0.20 0.38 0.44
Pro forma information (1)
Income before income taxes 4,205 8,413 8,698
Provision for income taxes (1,470) (3,140) (3,050)
------ ------ ------
Net income 2,735 5,273 5,648
====== ====== ======
Net income per common share 0.20 0.37 0.41
(1) See Note 1 of Notes to Consolidated Financial Statements.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
<S> <C> <C>
1996 1995
ASSETS
Current assets
Cash and equivalents 5,891 6,473
Short-term investments 0 25,074
Accounts receivable, net 47,181 38,015
Inventories 28,218 18,065
Deferred income tax 3,913 4,531
Other 4,464 1,388
------- -------
Total current assets 89,667 93,546
Property, plant and equipment, net 45,562 31,741
Intangible assets, net 22,222 20,230
Other 5,254 4,201
------- -------
Total assets 162,705 149,718
======= =======
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to banks 3,162 0
Accounts payable and accrued expenses 21,920 16,290
Wages and benefits payable 4,152 4,514
Deferred revenue 3,362 8,206
------- -------
Total current liabilities 32,596 29,010
Noncurrent liabilities
Notes payable 6,440 5,600
Warranty and other obligations 2,242 2,160
Deferred income taxes, net 2,163 1,675
------- -------
Total noncurrent liabilities 10,845 9,435
Shareholders' equity
Common stock 97,025 94,108
Retained earnings 22,152 16,969
Other 87 196
------- -------
Total shareholders' equity 119,264 111,273
------- -------
Total liabilities and shareholders' equity 162,705 149,718
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
<S> <C> <C>
1996 1995
OPERATING ACTIVITIES
Net income 5,383 6,088
Noncash charges (credits) to income:
Depreciation and amortization 4,676 4,003
Deferred income taxes 1,106 (324)
Changes in operating accounts:
Accounts receivable (9,166) 4,881
Inventories (10,153) (3,288)
Accounts payable and accrued expenses 5,663 3,688
Deferred revenue (4,844) (1,342)
Other, net (3,664) (523)
------- -------
Cash provided (used) by operating activities (10,999) 13,183
INVESTING ACTIVITIES
Short-term investments 25,074 (10,690)
Acquisition of property and equipment (17,489) (6,078)
Business acquisitions (3,000) 0
Other, net (642) 629
------- -------
Cash provided (used ) by investing activities 3,943 (16,139)
FINANCING ACTIVITIES
Notes payable 4,002 0
Common stock, net 2,709 3,129
Dividends paid to UTS shareholders (200) (450)
Payments of capital lease obligations (37) (285)
------- -------
Cash provided by financing activities 6,474 2,394
------- -------
Decrease in cash and equivalents (582) (562)
Cash and equivalents at beginning of period 6,473 11,000
------- -------
Cash and equivalents at end of period 5,891 10,438
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
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 six month periods ended June 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 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 six month periods ended June 30,
1995 exclude an income tax provision on UTS' 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 six month periods ended
June 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):
June 30, December 31,
<TABLE>
<S> <C> <C>
1996 1995
------ ------
Material 17,855 9,594
Work in process 1,791 555
Finished goods 8,022 7,433
------ ------
Total manufacturing inventories 27,668 17,582
Service 550 483
------ ------
Total inventories 28,218 18,065
====== ======
</TABLE>
Note 3: Acquisition
On June 14, 1996 Itron acquired substantially all of the assets, including
intellectual property rights, of Iris Systems, Inc. (Iris) for $3 million in
cash. Iris is a Canadian-based developer of radio communications technology
for Automatic Meter Reading (AMR). The acquisition was accounted for as a
purchase.
<PAGE>
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 publicly release 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 six months ended June 30, 1996.
<TABLE>
<CAPTION>
Percentage of total revenues Percent
Six months ended June 30, 1996 1995 change
<S> <C> <C> <C>
Revenues
AMR systems 75% 60% 57%
Handheld systems 25% 40% (24%)
Total revenues 100% 100% 25%
Cost of revenues 56% 56% 23%
Gross profit 44% 44% 26%
Operating expenses
Sales and marketing 14% 12% 44%
Product development 16% 16% 23%
General and administrative 6% 5% 54%
Amortization of intangibles 1% 1% (39%)
Total operating expenses 36% 34% 32%
Operating income 8% 10% 6%
</TABLE>
Revenues
Total revenues for the Company increased $9.1 million, or 23%, to $48.2
million in the second quarter of 1996 from $39.1 million in the comparable
quarter in 1995. For the six months ended June 30, 1996, total revenues of
$96.2 million were $19.0 million, or 25%, higher than the $77.3 million in
the first half of 1995.
AMR systems revenues grew $10.0 million, or 40%, in the second quarter of
1996 over the second quarter of 1995. For the six months ended June 30,
1996, AMR systems revenues were $72.4 million, or 57%, greater than the
$46.0 million in the six months ended June 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) meter modules.
The Company shipped 46% more ERT modules in the current quarter than the
same quarter last year and 62% more in the six months ended June 30, 1996
than the comparable six month period in 1995. The increased volumes resulted
from a substantial amount of ERTs shipped as part of a large multi-year
contract signed in October of last year as well as an increase in the
cumulative number of customers the Company has shipped AMR products to.
During the current quarter the Company shipped and installed newly-designed
CCUs to a number of utilities for testing. The tests are progressing and the
results overall have been favorable and useful. These tests are primarily
the basis for final adjustments to the hardware and associated software
design. The Company is currently producing CCUs, and high volume production
will commence when the final adjustments to the design are made. The Company
expects to produce approximately 7,000 CCUs this year.
The Company expects to be awarded several significant AMR contracts in 1996
and has increasedmanufacturing capacity as well as sales and general and
administrative staff to support such contracts. The timing of large AMR
orders, however, is difficult to predict, and several of the utilities with
whom the Company expects to enter into AMR contracts in the future have not
finalized their analysis and decision relating to whether they will buy or
outsource their AMR systems. As a result of the increased investment in AMR,
the Company's near term revenue and earnings performance could be
significantly affected by delays of large AMR purchase decisions and
outsource versus purchase decisions related to large AMR
contracts.
Outsourcing revenues incorporate a variety of sales and services performed
by the Company which include, but are not limited to, AMR product sales,
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
six month periods ending June 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 current quarter. The Company expects that
outsourcing revenues may become a larger percentage of total Company revenues
in the future depending on the decisions made by the Company's customers
regarding purchase of AMR systems versus outsourcing.
Handheld systems revenues of $13.1 million for the second quarter of 1996
were down $1.0 million, or 7%, from the same quarter in 1995. For the six
months ended June 30 1996, handheld systems revenues of $23.9 million were
$7.4 million, or 24%, lower than the comparable year to date period in 1995.
The decrease in handheld revenues for both the quarter and six month periods
was primarily due to unusually large international shipments to two Japanese
utilities in the first six months of 1995. International revenues were 7%
of total Company revenues in the first six months of 1996 compared to 20% in
the comparable six months of 1995. Handheld systems revenues have
historically been nonlinear and are expected to continue to be so in the
future. 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 by sales to new customers internationally and by
upgrade and replacement sales domestically.
Gross Profit
Gross margins of 44% for the current quarter and first half of 1996 improved
one percentage point over gross margins of 43% in the comparable periods in
1995. The improvement was due to higher margins on handheld systems in 1996
as the shipments to the Japanese utilities in 1995 had lower than usual
margins. The improved margins in handheld systems were partially offset by
a slight decline in AMR gross margins in the current periods compared to 1995
due to the Company's aggressive pricing strategies.
Operating Expenses
Sales and marketing expenses for the second quarter of 1996 of $6.6 million
increased $2.0 million, or 43%, from the second quarter of 1995, and also
increased from 12% to 14% of revenues. For the six month period ended
June 30, 1996 sales and marketing expenses of $13.2 million increased $4.0
million, or 44%, over the same period in 1995 and also increased from 12% to
14% of revenues. The higher expenses resulted from the Company's increased
focus on strengthening and expanding its AMR sales and marketing staff in
order to effectively market and sell fixed network AMR systems. The Company
expects that sales and marketing expenses will continue to increase in total
in the future as the Company's business increases and may also continue to
be higher as a percentage of revenues than in 1995.
Product development expenses of $7.7 million in the current quarter increased
$1.6 million, or 26%, over the same period in 1995. For the six months ended
June 30 1996, product development has increased $2.8 million, or 23%, over
the comparable period in 1995, yet has remained level as a percentage of
revenues at 16%. The increases for both the quarter and year to date periods
are primarily due to development of fixed network components and AMR cost
reduction programs. The Company expects that the increased level of
development will continue, but may begin to gradually decrease as a
percentage of revenues over the long-term.
General and administrative expenses of $2.4 million in the second quarter of
1996 increased $486,000, or 25%, over the second quarter of 1995 but remained
level as a percentage of revenues. The increase for the quarter is primarily
due to salaries and other expenses for new corporate employees. For the six
months ended June 30, 1996, general and administrative expenses of $5.4
million are $1.9 million, or 54%, higher than the first six months of 1995.
The increase was due to several factors, including UTS acquisition costs;
salaries and related employment costs for new personnel including the Chief
Operating Officer; and increased legal and other expenses related to
outsourcing agreements. The Company expects that general and administrative
expenses will continue to be approximately 5% to 6% of total
revenues.
Interest and Other, Net
Net interest income for the three and six month periods ended June 30, 1996
decreased $273,000 and $450,000 respectively from the comparable three and
six month periods in 1995 due to much lower short-term investments in the
1996 periods. The Company expects to incur net interest expense in the
future from short-term borrowings under the Company's line of credit agreement.
Income Taxes
Income taxes for the second quarter and year to date periods of 1996 were 40%
and 36% of pre-tax income compared to 33% and 30% in the corresponding
periods of 1995. There was no income tax provision for UTS' results of
operations in the three and six month periods of 1995 or the first quarter
of 1996 because UTS was taxed as an S Corporation and was not subject
to corporate income taxes. The higher 1996 rate is primarily due to two
aspects of the Company's acquisition of UTS involving state taxation and a
change in tax accounting methods that accelerated net income recognition.
The Company expects the full year 1996 tax rate will be approximately 38% of
pre-tax income, although a tax rate anywhere in the range of 36% to 40% is
possible due to the interaction of a number of factors.
FINANCIAL CONDITION
Operating activities consumed $11.0 million in cash in the first six months
of 1996 compared to generating $13.2 million in cash during the same period
in 1995. The decrease was caused by several factors including increased
inventory levels needed to respond to expected new contracts, prepaid
expenses for a large outsourcing contract and international meter module
supplies and a higher accounts receivable balance. Accounts receivable in
the second quarter of 1996 include $14.4 million in unbilled receivables
from a significant customer for which the Company recognizes revenue upon
unit shipment and invoices upon installations of those units.
Investing activities generated $3.9 million in the six month period ended
June 30, 1996 compared to consuming $16.1 million in the comparable period in
1995. The Company generated cash by liquidating $25.1 million of short-term
investments in the first six months of this year. The cash was used to fund
$17.5 million of property and equipment additions in the first half of 1996
compared to $6.1 million for the first half of 1995. Additions in 1996 were
primarily equipment and facilities for expansion of manufacturing capacity
and equipment for use in outsourcing agreements. Itron anticipates spending
equally as much and possibly more on capital additions during the remainder
of the year primarily for additional equipment to be installed under
long-term outsourcing contracts and remaining manufacturing expansion costs.
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.
Financing activities in the first six months of 1996 provided $6.5 million
compared to $2.4 million in the comparable period in 1995. Financing
activities during the 1996 period consisted of borrowing $3.2 million under
the Company's bank line of credit and $840,000 for a note due in connection
with a building purchase. Cash of $2.7 million was generated from the
exercise of stock options during the six months ended June 30, 1996. The
Company generated $3.1 million in the comparable six months of 1995 for 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 nor does the Company anticipate paying dividends to common
shareholders in the foreseeable future.
Existing sources of liquidity at June 30, 1996 include approximately $5.9
million of cash and $46.8 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 last
through the remainder of the year. The Company expects to need a
substantial amount of cash in the future because of outsourcing agreements
and plans to obtain additional financing through structured project financing,
public offerings of equity or debt securities , additional bank borrowings or
any combination thereof.
<PAGE>
Part 2: Other Information
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 30, 1996. Two
directors were elected at the meeting, Ted C. DeMerritt and Jon E. Eliassen,
both of whose terms are for three years. Michael B. Bracy, Johnny M.
Humphreys, Paul A. Redmond and Graham M. Wilson continued their terms as
Directors. Subsequent to the annual meeting of shareholders, Stuart Edward
White was appointed as a Director by the Board of Directors for a term
expiring at the next annual meeting of shareholders. The following
summarizes all matters voted on at the meeting:
Item 1. Election of Directors:
For Withheld
Ted C. DeMerritt 10,530,486 8,552
Jon E. Eliassen 10,530,141 8,897
Item 2. Approval of Employee Stock Purchase Plan:
For Against Abstain Non-votes
10,108,895 331,393 14,408 0
Item 3. Ratify Deloitte & Touche LLP as Independent Auditors:
For Against Abstain Non-votes
10,522,263 3,555 13,220 0
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 25, 1996, was filed during the quarter
ended June 30, 1996 and related to the UTS acquisition. The report was
filed pursuant to Item 5 of Form 8-K and included restated quarterly
financial information for 1995.
<PAGE>
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: August 14, 1996
EXHIBIT 11
ITRON, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(Unaudited, shares in thousands)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
<S> <C> <C> <C> <C>
Primary Shares (Based on Average Price): 1996 1995 1996 1995
------ ------ ------ ------
Weighted average number of common
shares outstanding 13,282 13,088 13,242 13,049
Dilutive effect of outstanding stock
options and warrants 903 790 911 804
------ ------ ------ ------
Primary weighted average shares outstanding 14,185 13,878 14,153 13,853
Fully Diluted Shares (Based on Ending Price): 1996 1995 1996 1995
------ ------ ------ ------
Weighted average number of common
shares outstanding 13,282 13,088 13,242 13,049
Dilutive effect of outstanding stock
options and warrants 599 729 626 729
------ ------ ------ ------
Fully diluted weighted average
shares outstanding 13,881 13,817 13,868 13,778
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 5,891
<SECURITIES> 0
<RECEIVABLES> 47,363
<ALLOWANCES> (181)
<INVENTORY> 28,218
<CURRENT-ASSETS> 89,667
<PP&E> 71,597
<DEPRECIATION> (26,025)
<TOTAL-ASSETS> 162,705
<CURRENT-LIABILITIES> 32,596
<BONDS> 0
0
0
<COMMON> 97,026
<OTHER-SE> 87
<TOTAL-LIABILITY-AND-EQUITY> 162,705
<SALES> 96,247
<TOTAL-REVENUES> 96,247
<CGS> 53,751
<TOTAL-COSTS> 53,751
<OTHER-EXPENSES> 34,365
<LOSS-PROVISION> 082
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> 8,413
<INCOME-TAX> 3,030
<INCOME-CONTINUING> 5,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,383
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
