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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 June 30, 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 July 31, 1998, there were outstanding 14,667,729 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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<PAGE>
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 . . . . . . . . . .4-5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 6-11
Part 2: Other Information
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4: Submission of Matters to a Vote of Security Holders . . . . . 12
Item 5: Other Information . . . . . . . . . . . . . . . . . . . . . . .13
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 13
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
Part 1: Financial Information
Item 1: Financial Statements
<TABLE>
<CAPTION>
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended June 30, Six months ended June 30,
Revenues 1998 1997 1998 1997
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
AMR systems $44,235 $32,644 $ 94,591 $ 57,904
Handheld systems 11,530 13,465 21,210 23,025
Outsourcing 5,004 6,623 8,676 12,386
------------ ------------ ------------- --------------
Total revenues 60,769 52,732 124,477 93,315
Cost of revenues
AMR systems 30,656 19,699 65,424 34,853
Handheld systems 5,991 9,101 11,116 16,070
Outsourcing 4,154 4,641 7,174 9,482
------------ ------------ ------------- --------------
Total costs of revenues 40,801 33,441 83,714 60,405
------------ ------------ ------------- --------------
Gross profit 19,968 19,291 40,763 32,910
Operating expenses
Sales and marketing 6,976 7,060 13,570 14,585
Product development 8,997 8,073 17,920 15,402
General and administrative 3,287 3,277 6,304 5,701
Amortization of intangibles 588 540 1,179 1,077
------------ ------------ ------------- --------------
Total operating expenses 19,848 18,950 38,973 36,765
------------ ------------ ------------- --------------
Operating income (loss) 120 341 1,790 (3,855)
Other expense
Equity in affiliates (230) (130) (350) (155)
Interest, net (1,636) (1,196) (2,933) (2,234)
------------ ------------ ------------- --------------
Total other expense (1,866) (1,326) (3,283) (2,389)
Loss before income taxes (1,746) (985) (1,493) (6,244)
Benefit for income taxes 670 310 570 2,310
------------ ------------ ------------- --------------
Net loss $ (1,076) $ (675) $ (923) $ (3,934)
============ ============ ============= ==============
Basic earnings per share $ (0.07) $ (0.05) $ (0.06) $ (0.28)
=============
============ ============= ==============
Diluted earnings per share $ (0.07) $ (0.05) $ (0.06) $ (0.28)
============= ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
June 30, December 31,
1998 1997
------------------ -------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 5,758 $ 3,023
Accounts receivable, net 60,104 61,442
Current portion of long-term contracts receivable 10,787 8,445
Inventories 24,853 31,985
Deferred income taxes, net 6,242 5,668
Other 2,730 1,888
------------------ -------------------
Total current assets 110,474 112,451
------------------ -------------------
Property and equipment, net 46,837 49,067
Equipment used in outsourcing, net 47,918 42,848
Intangible assets, net 20,502 21,472
Long-term contracts receivable 14,587 11,119
Other 3,399 3,254
------------------ -------------------
Total assets $ 243,717 $ 240,211
================== ===================
Liabilities and shareholders' equity
Current liabilities
Short-term borrowings $ 9,942 $ 1,560
Accounts payable and accrued expenses 21,239 26,644
Wages and benefits payable 5,391 9,181
Deferred revenue 5,967 6,759
------------------ -------------------
Total current liabilities 42,539 44,144
------------------ -------------------
Convertible subordinated debt 63,400 63,400
Mortgage notes payable 6,440 6,440
Project financing 7,961 2,414
Warranty and other obligations 3,843 3,386
------------------ -------------------
Total noncurrent liabilities 81,644 75,640
------------------ -------------------
Shareholders' equity
Common stock 105,485 105,193
Retained earnings 15,392 16,315
Other (1,343) (1,081)
------------------ -------------------
Total shareholders' equity 119,534 120,427
------------------ -------------------
Total liabilities and shareholders' equity $ 243,717 $ 240,211
================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six months ended June 30,
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (923) $ (3,934)
Noncash charges (credits) to income:
Depreciation and amortization 9,291 8,101
Deferred income taxes (513) (2,300)
Changes in operating accounts:
Accounts receivable 1,338 6,193
Inventories 7,132 4,339
Accounts payable and accrued expenses (5,405) 714
Wages and benefits payable (3,790) (820)
Long-term contracts receivable (5,810) (9,475)
Deferred revenue (792) (816)
Other, net (1,092) 2,836
-------------- --------------
Cash provided (used) by operating activities (564) 4,838
-------------- --------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (3,941) (5,452)
Equipment used in outsourcing (6,438) (16,677)
Proceeds from sale of outsourcing equipment - 3,035
Other, net (988) (74)
-------------- --------------
Cash used by investing activities (11,367) (19,168)
-------------- --------------
FINANCING ACTIVITIES
Change in short-term borrowings, net 8,382 (33,062)
Issuance of convertible subordinated debt - 63,400
Debt issuance costs - (2,355)
Project financing 5,547 831
Issuance of common stock 1,495 3,480
Purchase and retirement of common stock (1,203) -
Other, net 445 157
-------------- --------------
Cash provided by financing activities 14,666 32,451
-------------- --------------
Increase in cash and equivalents 2,735 18,121
Cash and cash equivalents at beginning of period 3,023 2,243
-------------- --------------
Cash and cash equivalents at end of period $ 5,758 $ 20,364
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six month
periods ended June 30, 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 may install, own, and operate an AMR system to
provide meter reading and advanced communications services over a period of
time, typically 15 years.
The results of operations for the three and six month periods ended June 30,
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
<TABLE>
<CAPTION>
Inventories (unaudited, in thousands): June 30, December 31,
1998 1997
----------------- ----------------
<S> <C> <C>
Material $ 12,498 $ 14,418
Work in process 2,339 3,138
Finished goods 7,240 7,308
Field inventories awaiting installation 596 5,178
----------------- ----------------
Total manufacturing inventories 22,673 30,038
Service inventories 2,180 1,947
----------------- ----------------
Total inventories $ 24,853 $ 31,985
================= ================
</TABLE>
Note 3: Impact of Recent Accounting Pronouncements and New Accounting Standards
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 to be included in other comprehensive income,
which prior to adoption were reported separately in shareholders' equity. The
components of comprehensive income, net of related tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Loss attributable to common shareholders $ (923) $ (3,934)
Foreign currency translation adjustment (162) 38
----------------- -----------------
Comprehensive income $ (1,085) $ (3,896)
================= =================
</TABLE>
Derivatives
In June 1998, the Financial Accounting Standard Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires that a company recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Statement is effective for fiscal quarters
of fiscal years beginning after June 15, 1999. The Company believes that the
adoption of this Statement will not have a material effect on the financial
statements or disclosures of the Company.
Note 4: Contingencies
The Company, together with Johnny M. Humphreys has is a defendant in a proposed
class action filed by certain former shareholders in federal court, alleging
violations of the federal securities laws 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.
The Company and certain of its officers, directors and shareholders are
defendants in a proposed class action filed by a shareholder in the Superior
Court of the State of Washington for Spokane County. On July 31, 1998, the Court
issued a Memorandum Decision on the Defendants' Motion to Dismiss the Complaint.
The Court ruled that the Complaint fails to state a cause of action and
requested that the Defendants prepare a proposed order of dismissal. The Company
does not know whether the plaintiff will appeal the Memorandum Decision or any
order of dismissal that might be entered. The Company believes the action is
without merit and in the event of an appeal intends to vigorously defend against
it. If the decision is appealed by the plaintiff, there is no assurance that the
Company will prevail in the appeal or ultimately prevail in the action or that,
even if it does prevail, the costs incurred by the Company in connection
therewith will not have a material adverse effect on the Company's business,
financial condition and results of operations.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS RESULTS OF OPERATIONS
Revenues
Total Company revenues for the quarter ended June 30, 1998 increased $8.0
million, or 15%, from the comparable quarter in 1997. Revenues increased $31.2
million, or 33%, for the six months ended June 30, 1998 from the same year to
date period in 1997.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------------- -------------------------------------------
Increase Increase
Revenues (in millions) 1998 (Decrease) 1997 1998 (Decrease) 1997
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
AMR systems $ 44.3 36% $ 32.6 94.6 63% $ 57.9
Handheld systems 11.5 (14%) 13.5 21.2 (8%) 23.0
Outsourcing 5.0 (24%) 6.6 8.7 (30%) 12.4
------------ ------------ ------------ ------------
Total revenues $ 60.8 15% $ 52.7 $ 124.5 33% $ 93.3
============ ============ ============ ============
</TABLE>
AMR systems revenues increased 36% in the second quarter of 1998 over the second
quarter of 1997. Year to date AMR revenues increased 63%, to $94.6 million, for
the six months ended June 30, 1998 compared to $57.9 million in the comparable
1997 period. The increase for both the quarter and year to date periods was
primarily due to electric meter module shipments related to a fixed network AMR
contract signed in 1997 which is being installed during 1998. Increased
shipments of water meter modules, which were introduced in mid-1997, during the
current quarter more than offset lower shipments of gas meter modules. Gas meter
module shipments declined from last year due to the near completion of a large
turn-key gas contract. Water meter module shipments during the current year
increased due to a large multi-year contract signed in 1997. Average selling
prices for meter modules have decreased somewhat during the year, however, the
decreases have been offset by lower product costs. 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 several other
factors.
Handheld systems revenues for the quarter and year to date periods ended June
30, 1998 decreased approximately $2.0 million. The Company had much higher
international handheld shipments in the 1997 periods to a Korean utility,
however, the shipments are now substantially complete. The Company expects that
Handheld Systems revenues may decline further as a percentage of total revenues
over time as utilities adopt more advanced meter reading technologies. The
Company expects future Handheld systems revenues to be driven by sales to new
customers internationally and by conversion to Year 2000 software and normal
upgrade and replacement sales domestically.
Outsourcing revenues decreased $1.6 million in the second quarter of 1998 versus
the second quarter of 1997 and decreased $3.7 million for the six months ended
June 30, 1998 from the comparable period in 1997. The lower revenues in the 1998
periods are because the Company is nearing completion of the installation phase
of its outsourcing contract with the Duquesne Light Company. Revenue from
outsourcing contracts is expected to decrease as a percentage of revenue in the
foreseeable future as the Company has not signed any new outsourcing agreements.
The Company's agreement with Duquesne provides for certain one-time monetary
penalties for failure to meet specific milestones, including certain milestones
designated as critical. During the quarter, Duquesne notified the Company that
it has substantially met certain milestones, which were due in May 1998. There
is one remaining Critical milestone remaining under the agreement. By September
30, 1998 the Company must have its Fixed Network AMR system at Duquesne fully
operational, including all billing and other interfaces defined in the Contract.
As already defined in the Contract, should the Company fail to meet the
remaining Critical milestone, Duquesne would be entitled to monetary penalties
of up to $10 million. The Company believes it will fully satisfy the remaining
Critical milestone. (For additional information see the Company's Form 8-K filed
June 8, 1998, "Amended Duquesne Agreement" filed as an exhibit with the
Company's 10-Q filed November 13, 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 most recent
Annual Report on Form 10-K.)
Gross Margin
Overall gross margin was 33% of revenues for the current quarter and six month
period ended June 30, 1998, compared to gross margin of 37% and 35% for each of
the same periods in 1997. The percentages for 1998 and 1997 in the table below
reflect cost of revenues as a percentage of corresponding revenues.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------------------- -------------------------------------------
Margin Margin
Cost of revenues 1998 Inc.(Dec) 1997 1998 Inc.(Dec) 1997
----------- ------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
AMR systems 69% (9%) 60% 69% (9%) 60%
Handheld systems 52% 16% 68% 52% 18% 70%
Outsourcing 83% (13%) 70% 83% (6%) 77%
Total cost of revenues 67% (4%) 63% 67% (2%) 65%
Gross margin 33% (4%) 37% 33% (2%) 35%
</TABLE>
AMR cost of revenues for the quarter and year to date 1998 periods was 69% of
AMR systems sales compared to 60% in 1997. This margin decline is primarily the
result of the Company's turn-key contract with Virginia Power and a higher level
of installation activities in the current year. The lower margin contract with
Virginia Power results from the early life cycle status of the Company's fixed
network products and installation activities. As a percentage of revenues, AMR
costs are expected to remain fairly level through the remainder of 1998 and
decline somewhat once the contract with Virginia Power is substantially
completed which is expected late in 1998. AMR margins have historically
fluctuated with the mix of meter module shipments and installation activities.
Handheld systems costs as a percentage of revenues have declined from 68% and
70% in the 1997 three and six month periods, to 52% of revenues in the
corresponding 1998 periods, mostly as a result of a shift in mix from
international sales. Handheld business in 1997 included a large international
order with lower than usual margins. Handheld costs are expected to remain
fairly level as a percentage of revenues for the remainder of the year.
Outsourcing costs were 83% of revenues for the second quarter and first six
months of 1998 compared to 70% and 77% in the comparable periods of 1997. The
higher costs in 1998 are due to the higher mix of revenue in the 1998 periods
generated from the Company's contract with Duquesne Light Company. This contract
is the Company's first, large scale, fixed network installation involving the
integration of several meter reading technologies and consequently has higher
estimated costs. Outsourcing gross profit in the second quarter of 1997 had a
one-time benefit from a customer's decision to convert its outsourcing contract
to a system purchase. The Company expects outsourcing cost of revenues to remain
fairly consistent on a percentage basis in the near future.
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses
Three months ended June 30, Six months ended June 30,
---------------------------------------- ---------------------------------------
(in millions) Increase Increase
Operating expenses 1998 (Decrease) 1997 1998 (Decrease) 1997
----------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $ 7.0 (1%) $ 7.1 $ 13.6 (7%) $ 14.6
Product development 9.0 11% 8.1 17.9 16% 15.4
General and administrative 3.3 0% 3.3 6.3 11% 5.7
Amortization of intangibles 0.6 9% 0.5 1.2 9% 1.1
----------- ---------- ----------- -----------
Total operating expenses $ 19.8 5% $ 19.0 $ 39.0 6% $ 36.8
=========== ========== =========== ===========
</TABLE>
Sales and marketing expenses of $7.0 million for the three months ended June 30,
1998 remained fairly level with the $7.1 million in the same period in 1997. For
the year to date period ended June 30, 1998, sales and marketing expenses were
$13.6 million, or 7%, lower than the $14.6 million in the comparable six months
of 1997 and decreased as a percentage of revenues from 39% to 31%. The increased
expenses in 1997 were primarily due to unusually high consulting charges. As a
percentage of revenues, sales and marketing expenses declined from approximately
13% and 15% for quarter and year-to-date periods in 1997 to approximately 11% in
the 1998 periods. The Company expects that sales and marketing expenses will
remain at approximately the same percentage of total revenues for the remainder
of the year as in the first half of the year.
Product development expenses of $9.0 million in the current quarter
increased $900,000, or 11%, over the comparable quarter ended June 30, 1997, but
remained level as a percentage of revenues at 15%. For the year to date period
ended June 30, 1998, product development expenses of $17.9 million were up $2.5
million, or 16%, from $15.4 million in the same period in 1997. However, as a
percentage of revenues product development expenses declined from 16% in 1997 to
14% in 1998. The increased spending for both the quarter and year to date
periods was primarily related to fixed network AMR products, expansion of meter
coverage, development of new models of water and electric meter modules,
commercial and industrial software and systems integration. The Company is in
the process of implementing a number of restructuring steps intended to improve
efficiency and financial performance. On July 22, 1998 the Company began its
restructuring process with a reduction in the size of its workforce, the
majority of which involved product development personnel. The Company expects to
generate annual savings of approximately $6 million to $8 million once all of
the restructuring actions are implemented over the next two quarters. As most of
the savings are expected to come from product development, product development
expenses are expected to decrease somewhat during the remainder of the year both
in terms of actual spending and as a percentage of revenues. The Company
estimates it will incur a pre-tax charge in the third quarter of approximately
$2 million to $3 million related to the restructuring steps. The Company is also
considering other steps to further reduce operating expense.
General and administrative expenses of $3.3 million in the second three months
of 1998 were level with the same three months in 1997, but decreased slightly as
a percentage of total revenues from 6% to 5%. For the year to date periods,
general and administrative expenses increased $603,000, or 11%, yet still
decreased slightly as a percentage of revenues. The increase for the year to
date period was primarily due to a corporate reorganization in 1997 and related
reclassification of certain expenses. General and administrative expenses are
expected to remain at approximately 5% to 6% of total revenues in the
foreseeable future.
Amortization of intangibles increased slightly in the three and six month
periods of 1998 over the same periods in 1997, yet remained at 1% of total
revenues. The increased expenses were due to amortization of an exclusive
marketing agreement for distribution of STAR software, which was acquired during
the last half of 1997. STAR software is used to support half-hourly metering
data for customers above 100kw who purchase power competitively. The software is
currently being used in the United Kingdom to retrieve and manage half-hourly
data from more than 60,000 meters and has also been installed in California as
part of the metering system.
<PAGE>
<TABLE>
<CAPTION>
Interest and Other, Net
Three months ended June 30, Six months ended June 30,
-------------------------------------- ---------------------------------------
(in millions) Increase Increase
Other expense 1998 (Decrease) 1997 1998 (Decrease) 1997
---------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Equity in affiliates loss $ (0.2) 77% $ (0.1) $ (0.4) 126% $ (0.2)
Net interest expense (1.7) 37% (1.2) (2.9) 31% (2.2)
---------- ---------- ----------- -----------
Total other expense $ (1.9) 41% $ (1.3) $ (3.3) 37% $ (2.4)
========== ========== =========== ===========
</TABLE>
The Company had net interest expense of $1.6 million and $2.9 million for the
second quarter and year to date periods of 1998, respectively, compared to net
interest expense of $1.2 million and $2.2 million in the same periods of 1997.
The Company capitalized interest related to outsourcing installations in 1998 of
$260,000, none of which was in the second quarter. Capitalized interest during
the quarter and year to date periods of 1997 was $190,000 and $407,000,
respectively. Interest expense was higher in the 1998 periods due to inclusion
of a full six months of interest related to the $63.4 million 6 3/4% Convertible
Subordinated Notes placement, which the Company completed in March of 1997.
Equity in affiliates loss was driven by the Company's investments in several
joint ventures. The Company expects to phase out of the remaining business
activities of a number of jointly-owned entities in the third quarter of 1998.
Income Taxes
The Company had an income tax benefit of 38% of pre-tax earnings for the six
months ended 1998, which is comparable to the 38% benefit for the same period in
1997. To the extent pre-tax earnings, or the components of those earnings,
differ from expectations, the effective tax rate for the year could change from
the current year-to-date rate.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION
Three months ended June 30, Six months ended June 30,
--------------------------------------- ----------------------------------------
(in millions) Increase Increase
Cash flows information 1998 (Decrease) 1997 1998 (Decrease) 1997
----------- ------------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Operating activities $ 6.8 (563%) $ 1.0 $ (0.6) 112% $ 4.8
Investing activities (3.4) 52% (7.0) (11.4) 41% (19.2)
Financing activities 0.6 (91%) 7.4 14.7 (55%) 32.5
----------- ---------- ---------- -----------
Net increase (dec.) in cash $ 4.0 180% $ 1.4 $ 2.7 (85%) $ 18.1
=========== ========== ========== ===========
</TABLE>
Operating activities generated $6.8 million in cash during the second quarter of
1998, but consumed $564,000 during the first six months of the year. Operating
activities generated $4.8 million during the same six month period one year ago.
The unfavorable turn in operating activities was primarily caused by lower
accounts payable balances and bonus payments during the 1998 periods.
Investing activities consumed $11.4 million in the first six months of 1998
compared to $19.2 million in the comparable period in 1997. The Company is
beginning to invest less cash in equipment used in outsourcing as installation
at the Company's outsourcing project with the Duquesne Light Company is nearing
completion. During the first six months of 1998 Itron invested $6.4 million for
outsourcing equipment compared to $16.7 million in the previous year. During the
six months ended June 30, 1997 the Company received $3.0 million from a customer
converting it's outsourcing contract to a sale. Costs of capital acquisitions in
the last half of the year are expected to be relatively similar to the first
half.
Financing activities in the first six months of 1998 provided $14.7 million in
cash, which is substantially lower than the $32.5 generated in the same period
of 1997. Financing activities in the 1998 period consisted primarily of
borrowings under the Company's bank line of credit and cash received from a
project financing facility for an outsourcing agreement. The Company received
$1.5 million from the issuance of common stock and has repurchased $1.2 million
of common stock. Financing activities in the 1997 six month period generated
$61.2 million in cash from the Convertible Subordinated Note offering in March
and April of 1997. $33.1 million of the net proceeds from the offering were used
to pay off the Company's bank line of credit.
Existing sources of liquidity at June 30, 1998, include approximately $5.8
million of existing cash and cash equivalents and the Company's $50 million bank
line of credit which expires on August 31, 1998. The amount and pricing of
borrowings under the line of credit are based on certain financial covenants and
ratios. The Company is currently in negotiations to renew its bank line of
credit. If the Company is able to renew its line of credit under current or
substantially similar terms, then the Company believes that existing cash and
available borrowings will be sufficient to fund operations for the remainder of
1998 and into 1999, assuming the Company achieves its proposed reduction in
operating activities. Failure to renew the line of credit under substantially
similar terms could have a material adverse affect on the Company's business,
financial condition and results of operations.
Year 2000 Compliance
In general, the "year 2000 problem" concerns software programs that contain only
a two-digit year value (99 to 00) rather than a four-digit year value (1999 to
2000) to indicate a change from 1999 to 2000. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Company instituted a year 2000 program in 1997 to address year 2000 issues
by identifying potential risks that the Company had and has developed solutions
to mitigate those risks. The Company believes that it will be successful in
implementing the identified solutions in a timely manner in order to mitigate
potential year 2000 problems.
The Company has potential risks related to the year 2000 problem in three
areas; 1) suppliers, 2) internally developed software and hardware the Company
sells, and 3) the Company's internal software and hardware systems. The
following addresses each of these potential risk areas.
1) Suppliers: The Company has mailed letters to it's key suppliers from which
it purchases the majority of its materials and has received replies back
from almost 90% of such suppliers indicating that they will be year 2000
compliant by December 1998. The Company is pursuing the issue with those
suppliers who have not yet responded to determine if an alternate course of
action is required.
2) Internally developed software and hardware for sale to customers: The
Company is in the process of ensuring that products available for sale to
customers are year 2000 compliant. A small number of software platforms
will not be upgraded and all customers affected have been notified and
alternatives, including upgrading their systems, have been developed for
them. The process for upgrading the remaining software and hardware began
in late 1997 and the Company intends to have all major applications updated
by December 1998. This process is on schedule and approximately 75%
complete.
3) Internal software and hardware systems: The Company upgraded its financial
software including general ledger, manufacturing and sales order processing
to be year 2000 compliant during the second quarter of 1998 for domestic
and Australian operations. Subsidiaries in the United Kingdom and France
are expected to be upgraded by mid-1999. The Company also has a variety of
other software and hardware, including personal computer software and
software used in engineering functions, whose year 2000 compliance is in
the process of being ensured. All internal software is expected to be
compliant within the same time frame as concerns European operations.
The Company does not anticipate that it will incur significant operating
expenses or be required to invest heavily in computer systems improvements to be
year 2000 compliant. Total costs for the year 2000 issue are estimated to be $1
million to $2 million. However, as the compliance process is not yet complete,
unavoidable uncertainty exists concerning the costs associated with year 2000
compliance. Any year 2000 compliance problem of either the Company or its
collaborative partners could have a material adverse effect on the Company's
business, financial condition and results of operations.
Certain Forward-Looking Statements
When included in this Quarterly Report on Form 10-Q, the words "expects,"
"believes," "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, the Company's ability
to implement and estimate the cost impact of proposed cost restructuring
actions, the cost and timing of year 2000 issues, changes in the utility
industry 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.
<PAGE>
Part 2: Other Information
Item 1: Legal Proceedings
Haub vs. Itron, Inc., Johnny M. Humphreys, Paul A. Redmond, Jon E. Eliassen, and
Washington Water Power Company. On September 3, 1997, Itron and its Chief
Executive Officer, Johnny M. Humphreys, agreed to accept service of a complaint
filed in the Superior Court of the State of Washington, County of Spokane (Civil
Action No. 97204889-8). The complaint, which purports to be brought on behalf of
plaintiff Katya M. Haub and a class of all similarly situated, asserts claims
against defendants Itron, Inc., Johnny M. Humphreys, Paul A. Redmond, Jon E.
Eliassen, and Washington Water Power Company under the Washington State
Securities Act, the Washington State Consumer Protection Act, and the common law
of negligent misrepresentation. The complaint seeks monetary damages, costs and
attorneys' fees and unspecified equitable or injunctive relief. On July 31,
1998, the Court issued a Memorandum Decision on the Defendants' Motion to
Dismiss the Complaint. The Court ruled that the Complaint fails to state a cause
of action and requested that the Defendants prepare a proposed order of
dismissal. The Company does not know whether the plaintiff will appeal the
Memorandum Decision or any order of dismissal that might be entered. The Company
believes the action is without merit and in the event of an appeal intends to
vigorously defend against it. If the decision is appealed by the plaintiff,
there is no assurance that the Company will prevail in the appeal or ultimately
prevail in the action or that, even if it does prevail, the costs incurred by
the Company in connection therewith will not have a material adverse effect on
the Company's business, financial condition and results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 6, 1998. Two
directors were elected at the meeting, Paul A. Redmond and Johnny M. Humphreys,
both of whose terms are for three years. S. Edward White, Mary Ann Peters,
Michael B. Bracy, Graham M. Wilson, Ted C. DeMerritt and Jon E. Eliassen
continued their terms as Directors. The following summarizes all matters voted
on at the meeting:
<TABLE>
<CAPTION>
Matter 1. Election of Directors:
Nominee In Favor Withheld
- -------------------------------- ----------------- ------------------
<S> <C> <C>
Paul A. Redmond 13,776,096 397,742
Johnny M. Humphreys 13,768,669 405,169
</TABLE>
<TABLE>
<CAPTION>
Matter 2. Amendment of the Company's 1996 Employee Stock Purchase Plan:
For Against Abstain Broker Non-Votes
- ------------------- ------------------ ----------------- ----------------------
<S> <C> <C> <C>
13,575,605 213,000 385,233 -
</TABLE>
<TABLE>
<CAPTION>
Matter 3. Ratify Deloitte & Touche LLP as Independent Auditors:
For Against Abstain Broker Non-Votes
- ------------------- ------------------ ----------------- ----------------------
<S> <C> <C> <C>
13,812,900 26,904 334,034 -
</TABLE>
Item 5: Other Information
In accordance with the Company's Bylaws, a shareholder proposing to transact
business at the Company's annual meeting must provide written notice of such
proposal, in the manner provided by the Company's Bylaws, not fewer than 60 nor
more than 90 days prior to the date of such annual meeting (or, if the Company
provides less than 60 days notice of such meeting, no later than 10 days after
the date of the Company's notice). In addition, if the Company receives notice
of a shareholder proposal after February 14, 1999, the persons named as proxies
in such proxy statement and proxy will have discretionary authority to vote on
such shareholder proposal.
<PAGE>
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 May 1, 1998, was filed during the quarter
ended June 30, 1998, pursuant to Item 5 of that form. The report
related to the successful completion of two significant milestones
contained in the contract with the Duquesne Light Company.
<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: /s/ DAVID G. REMINGTON
------------------------------
David G. Remington
Vice President and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
Date: August 13, 1998
EXHIBIT 11
ITRON, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(Unaudited, shares in thousands)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------------------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 14,686 14,256 14,658 13,838
Basic earnings per share $ (0.07) $ (0.05) $ (0.06) $ (0.28)
============== ============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------------------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 14,686 14,256 14,658 13,838
Dilutive effect of outstanding stock options and warrants
at average marke- price - - - -
-------------- ------------- -------------- -------------
Weighted average shares outstanding based on average
market price 14,686 14,256 14,658 13,838
============== ============= ============== =============
Diluted EPS based on average market price $ (0.07) $ (0.05) $ (0.06) $ (0.28)
============== ============= ============== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,758
<SECURITIES> 0
<RECEIVABLES> 71,630
<ALLOWANCES> (739)
<INVENTORY> 24,853
<CURRENT-ASSETS> 110,474
<PP&E> 143,510
<DEPRECIATION> (48,755)
<TOTAL-ASSETS> 243,717
<CURRENT-LIABILITIES> 42,539
<BONDS> 0
0
0
<COMMON> 105,485
<OTHER-SE> 14,049
<TOTAL-LIABILITY-AND-EQUITY> 243,717
<SALES> 124,477
<TOTAL-REVENUES> 124,477
<CGS> 83,714
<TOTAL-COSTS> 83,714
<OTHER-EXPENSES> 39,323
<LOSS-PROVISION> 1,440
<INTEREST-EXPENSE> (2,933)
<INCOME-PRETAX> (1,493)
<INCOME-TAX> 570
<INCOME-CONTINUING> (923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (923)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
