<PAGE>
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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, 1999
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, 1999, there were outstanding 14,806,246 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.
===============================================================================
<PAGE>
ITRON, INC.
<TABLE>
<CAPTION>
INDEX
PART 1: FINANCIAL INFORMATION Page
----
<S> <C> <C>
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 . . . . . . . . . . . . . . . . . 4-6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 7-12
PART 2: OTHER INFORMATION
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 13
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE>
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 MARCH 31,
===================================================================================================
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
AMR systems $ 30,919 $ 50,356
Handheld systems 16,347 9,680
Outsourcing 4,679 3,672
-------- --------
Total revenues 51,945 63,708
COST OF REVENUES
AMR systems 19,671 34,768
Handheld systems 9,140 5,125
Outsourcing 3,833 3,020
-------- --------
Total costs of revenues 32,644 42,913
-------- --------
GROSS PROFIT 19,301 20,795
OPERATING EXPENSES
Sales and marketing 6,434 6,595
Product development 6,602 8,923
General and administrative 3,025 3,017
Amortization of intangibles 490 590
Restructuring charges 1,121 -
-------- --------
Total operating expenses 17,672 19,125
-------- --------
OPERATING INCOME (LOSS) 1,629 1,670
OTHER INCOME (EXPENSE)
Equity in affiliates (165) (120)
Interest, net (1,855) (1,297)
-------- --------
Total other income (expense) (2,020) (1,417)
Income (loss) before extraordinary item and income taxes (391) 253
Income tax (provision) benefit 160 (100)
-------- --------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (231) 153
Extraordinary gain on extinguishment of debt, net of income taxes of $1,970 3,660 -
-------- --------
NET INCOME (LOSS) $ 3,429 $ 153
-------- --------
BASIC NET INCOME (LOSS) PER SHARE:
Before extraordinary item $ (0.02) $ 0.01
Extraordinary item .25 -
-------- --------
Basic net income per share $ .23 $ 0.01
DILUTED NET INCOME (LOSS) PER SHARE:
Before extraordinary item $ (0.02) $ 0.01
Extraordinary item .24 -
-------- --------
Diluted net income per share $ .22 $ 0.01
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
<PAGE>
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
==============================================================================================
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,917 $ 2,743
Accounts receivable, net 53,087 62,253
Current portion of long-term contracts receivable 14,673 13,498
Inventories 20,167 20,654
Deferred income taxes, net 5,132 6,938
Other 3,134 2,306
--------- ---------
Total current assets 98,110 108,392
--------- ---------
Property, plant and equipment, net 40,794 42,390
Equipment used in outsourcing, net 52,109 50,746
Intangible assets, net 17,374 18,142
Long-term contracts receivable 24,496 23,712
Other 4,144 4,373
--------- ---------
TOTAL ASSETS $ 237,027 $ 247,755
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 10,370 $ 14,000
Accounts payable and accrued expenses 23,278 25,263
Wages and benefits payable 6,945 6,246
Deferred revenue 5,720 8,653
--------- ---------
Total current liabilities 46,313 54,162
--------- ---------
Convertible subordinated debt 57,234 63,400
Mortgage notes payable 6,202 6,242
Project financing 7,599 7,722
Warranty and other obligations 1,160 1,207
--------- ---------
Total noncurrent liabilities 72,195 78,571
--------- ---------
Shareholders' equity
Common stock 106,415 106,039
Retained earnings 13,519 10,090
Other (1,415) (1,107)
--------- ---------
Total shareholders' equity 118,519 115,022
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 237,027 $ 247,755
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
=========================================================================================
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,429 $ 153
Noncash charges (credits) to income:
Depreciation and amortization 4,668 4,657
Deferred income tax provision (benefit) (166) 160
Equity in affiliates, net 165 120
Extraordinary gain on extinguishment of debt (3,660) -
Changes in operating accounts:
Accounts receivable 9,142 (6,587)
Inventories 487 6,214
Accounts payable and accrued expenses (2,242) (4,942)
Wages and benefits payable 699 (3,196)
Long-term contracts receivable (1,959) (2,334)
Deferred revenue (2,933) (255)
Other, net (1,533) (1,300)
-------- --------
Cash provided (used) by operating activities 6,097 (7,310)
-------- --------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (1,543) (2,737)
Equipment used in outsourcing (2,109) (4,504)
Acquisition of intangibles and patent defense costs (22) (481)
Other, net 221 (287)
-------- --------
Cash used by investing activities (3,453) (8,009)
-------- --------
FINANCING ACTIVITIES
Change in short-term borrowings, net (3,630) 12,939
Project financing (123) -
Issuance of common stock 376 543
Other, net (93) 535
-------- --------
Cash provided (used) by financing activities (3,470) 14,017
-------- --------
Increase in cash and equivalents (826) (1,302)
Cash and cash equivalents at beginning of period 2,743 3,023
-------- --------
Cash and cash equivalents at end of period $ 1,917 $ 1,721
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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, 1999. 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, 1998, as filed with the
Securities and Exchange Commission on March 30, 1999. The results of operations
for the three month period ended March 31, 1999, are not necessarily indicative
of the results expected for the full fiscal year or for any other fiscal period.
NOTE 2: EARNINGS PER SHARE AND CAPITAL STRUCTURE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
=====================================================================================
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average shares outstanding 14,757 14,631
Effect of dilutive securities:
Stock options 555 221
Convertible debt - -
------ ------
Weighted average shares outstanding assuming conversion 15,312 14,852
------ ------
------ ------
</TABLE>
The Company has granted options to purchase common stock to directors, employees
and other key personnel at fair market value on the date of grant. The dilutive
effect of these options is included for purposes of calculating dilutive
earnings per share ("EPS") using the "treasury stock" method. The Company also
has subordinated convertible notes outstanding. These notes are not included in
the above calculation as the shares are anti-dilutive in all periods when using
the "if converted" method.
NOTE 3: RESTRUCTURING
In 1998, in connection with management's measures to reduce costs and improve
operating efficiencies, the Company recorded a restructuring charge of $3.9
million. During the first quarter of 1999 the Company recorded a further
restructuring charge of $1.1 million as part of its ongoing efforts to improve
operating efficiencies. The restructuring measures primarily involved a
workforce reduction, the write-off of certain of the Company's intangible assets
and the closure and consolidation of facilities. Cumulative restructuring
charges of $5.1 million are as follows:
<TABLE>
<CAPTION>
Reserve
Cash/ Restructuring Balance
(in thousands) Non-Cash Charge Activity 03/31/99
===========================================================================================
<S> <C> <C> <C> <C>
Severance and related charges Cash $2,658 $ 1,830 $ 828
Write-down of intangible assets Non-Cash 1,104 1,104 -
Consolidation of facilities Cash 1,048 - 1,048
Other Non-Cash 241 241 -
------ ------- -------
Total restructuring charge $5,051 $ 3,175 $ 1,876
------ ------- -------
------ ------- -------
</TABLE>
4
<PAGE>
NOTE 4: BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
==========================================================================
(Inventories, in thousands) 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Material $ 7,684 $ 9,041
Work in process 1,704 1,599
Finished goods 6,716 6,947
Field inventories awaiting installation 1,371 -
------- -------
Total manufacturing inventories 17,475 17,587
Service inventories 2,692 3,067
------- -------
Total inventories $20,167 $20,654
------- -------
------- -------
</TABLE>
NOTE 5: SEGMENT INFORMATION
The Company reviews its operations using a variety of matrices, however, the
chief executive officer primarily reviews the Company's manufacturing and sales
operations on a domestic vs. international basis and revenues and cost of sales
are reviewed based on the Company's major product lines of AMR systems, handheld
systems and outsourcing. The Company has outsourcing agreements in which it both
owns and operates the system. These agreements require a large amount of capital
investment and related project and other debt, and are included in the Company's
finance operations. Outsourcing contracts in which the Company operates, but
does not own, the equipment are included in the Company's normal manufacturing
and sales operations. The chief executive officer reviews financing operations
separately from manufacturing and sales operations because they are essentially
different businesses with significantly different operating and leverage
characteristics.
Segment debt and interest expense related to the Company's finance and
international operations includes both direct and allocated debt and interest
expense. Segment debt and related interest expense are allocated based on each
segment's funding requirements for capital or operations. Intersegment revenues
include shipments to various Company-owned subsidiaries and are eliminated in
consolidation. EBITDA includes earnings for each segment before interest, taxes,
depreciation and amortization and is used to allow a comparison of each
segment's operating results. Segment Debt/EBITDA is a ratio that is used to
compare segment leverage ratios to comparable industry ratios. The Company does
not allocate income taxes to its operating segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
======================================================================================================================
MANUFACTURING AND SALES
--------------------------------------
(in thousands, except ratios) DOMESTIC INTERNATIONAL TOTAL FINANCE ELIMINATED CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers:
AMR systems $ 30,525 $ 394 $ 30,919 $ - $ - $ 30,919
Handheld systems 13,666 2,681 16,347 - - 16,347
Outsourcing 300 - 300 4,379 - 4,679
Intersegment revenues 379 7 386 - (386) -
------- ------ ------ ------ ------
Total revenues $ 44,870 $ 3,082 $ 47,952 $ 4,379 $ (386) $ 51,945
Segment income (loss) (1) 2,501 (2,264) 237 4,897 105 5,239
Segment assets 171,366 10,655 182,021 91,622 (36,616) 237,027
Segment debt 6,966 20,212 27,178 72,860 (17,843) 82,195
Cash flows:
Operating activities $ 10,989 $ (427) $ 10,562 $ (4,465) $ - $ 6,097
Investing activities (2) (1,426) - (1,426) (2,027) - (3,453)
------- ------ ------ ------ ------
Net operating and investing $ 9,563 $ (427) $ 9,136 $ (6,492) $ 2,644
EBITDA (3) $ 6,023 $ (1,368) $ 4,655 $ 7,107 $ - $ 11,762
Segment debt/annual EBITDA(4) 0.29 * 1.46 2.56 * 1.75
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
======================================================================================================================
MANUFACTURING AND SALES
--------------------------------------
(in thousands, except ratios) DOMESTIC INTERNATIONAL TOTAL FINANCE ELIMINATED CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers:
AMR systems $ 48,121 $ 2,235 $ 50,356 $ - $ - $ 50,356
Handheld systems 7,216 2,464 9,680 - - 9,680
Outsourcing 41 - 41 3,631 - 3,672
Intersegment revenues 729 102 831 - (831) -
--------- -------- -------- -------- -------- --------
Total revenues $ 56,107 $ 4,801 $ 60,908 $ 3,631 $ (831) $ 63,708
Segment income (loss) (1) 1,808 (895) 913 (392) (268) 253
Segment assets 184,106 11,509 195,615 69,135 (18,773) 245,977
Segment debt 16,190 16,720 32,910 54,695 - 87,605
Cash flows:
Operating activities $ (3,986) $ (1,281) $ (5,267) $ (2,043) $ - $ (7,310)
Investing activities (2) (3,354) (166) (3,520) (4,489) - (8,009)
--------- -------- -------- -------- -------- --------
Net operating and investing $ (7,340) $ (1,447) $ (8,787) $ (6,532) - $(15,319)
EBITDA (3) $ 5,092 $ (217) $ 4,875 $ 1,332 $ - $ 6,207
Segment debt/annual EBITDA (4) 0.79 * 1.69 10.27 * 3.53
</TABLE>
(1) SEGMENT INCOME (LOSS) INCLUDES $5.6 MILLION PRE-TAX GAIN ON DEBT
EXTINGUISHMENT IN 1999. ITRON DOES NOT ALLOCATE INCOME TAXES TO ITS
SEGMENTS.
(2) INVESTING ACTIVITIES PRIMARILY CONSIST OF CAPITAL EXPENDITURES FOR EACH
SEGMENT.
(3) EBITDA IS CALCULATED BY ADDING NET INTEREST, DEPRECIATION AND AMORTIZATION
EXPENSE TO PRE-TAX INCOME OR LOSS AFTER EXTRAORDINARY ITEM AND IS PRESENTED
BECAUSE THE COMPANY BELIEVES THAT IT ALLOWS FOR A MORE COMPLETE ANALYSIS OF
THE COMPANY'S RESULTS OF OPERATIONS. THIS INFORMATION SHOULD NOT BE
CONSIDERED AS AN INDICATOR OF THE COMPANY'S OVERALL FINANCIAL PERFORMANCE.
ADDITIONALLY, EBITDA AS REPORTED HEREIN MAY NOT BE COMPARABLE TO SIMILARLY
TITLED MEASURES REPORTED BY OTHER COMPANIES.
(4) TOTAL DEBT TO ANNUALIZED EBITDA IS CALCULATED BY DIVIDING TOTAL SEGMENT
DEBT BY THE PRODUCT OF EBITDA MULTIPLIED BY 4.
* NOT MEANINGFUL.
NOTE 6: CONTINGENCIES
The Company, together with Johnny M. Humphreys, Chairman, President and Chief
Executive Officer, is a defendant in a 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 believes this action
is without merit and intends to vigorously defend against it. At this time, it
is not possible to predict the ultimate outcome of the proceedings.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Itron is a leading global provider of integrated systems solutions for
collecting, communicating, analyzing, and managing information about electric,
gas and water usage. The Company designs, develops, manufactures, markets,
installs and services hardware, software and integrated systems that enable
customers to obtain, analyze and use meter data. The Company's major product
lines include Automatic Meter Reading ("AMR") systems and Electronic Meter
Reading ("EMR") or Handheld systems. The Company both sells its products and
provides outsourcing services.
The Company's AMR solutions primarily utilize radio and telephone technology to
collect meter data and include Off-Site AMR, Mobile AMR and Network AMR
technology reading options. Off-Site AMR utilizes a radio device attached to an
Itron handheld computer that collects data from meters equipped with the
Company's radio meter modules. Mobile AMR uses a transceiver in a vehicle to
collect data from meters equipped with the Company's radio meter modules as the
vehicle passes by. The Company offers a number of Network AMR solutions that
utilize radio, telephone, cellular or a combination of these technologies to
collect and transmit meter information from a variety of fixed locations. The
Company's EMR systems product line includes the sale and service of ruggedized
handheld computers and supporting products that record visually obtained meter
data. Outsourcing services typically involve the installation, operation and/or
maintenance of meter reading systems to provide meter information for billing
and management purposes. Outsourcing contracts usually cover long timeframes and
typically involve contracts in which either a customer owns the equipment and
the Company provides meter information for a specified fee, or the Company both
owns and operates the system.
The Company currently derives substantially all of its revenues from sales of
its products and services to utilities, however, the Company's business may
increasingly consist of sales to other utility industry participants such as
energy service providers, end user customers and others. The Company has
experienced variability of operating results on both an annual and a quarterly
basis due primarily to utility purchasing patterns and delays of purchasing
decisions. In recent years these delays have generally been a result of changes
or potential changes to the federal and state regulatory frameworks within which
the electric utility industry operates and mergers and acquisitions in the
utility industry.
RESULTS OF OPERATIONS
REVENUES
Total Company revenues for the quarter ended March 31, 1999 decreased $11.8
million, or 18%, from the comparable quarter in 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
===============================================================================
INCREASE
Revenues (in millions) 1999 (DECREASE) 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
AMR systems $ 30.9 (39%) $ 50.4
Handheld systems 16.3 69% 9.7
Outsourcing 4.7 27% 3.7
------ ------
Total revenues $ 51.9 (18%) $ 63.7
------ ------
------ ------
</TABLE>
AMR systems revenues decreased $19.4 million, or 39%, in the quarter ended
March 31, 1999 from the comparable quarter one year ago. AMR systems revenues
were lower in 1999 because the Company shipped approximately 35% fewer meter
modules in the current quarter than the same quarter in 1998. The decreased
shipments were largely due to the near completion in 1998 of meter module and
fixed network product shipments under a large contract that the Company had
with Virginia Power Company. Average selling prices increased during the
three months ended March 31, 1999 compared to the comparable period one year
ago, primarily because of a shift in mix from electric meter modules to water
meter modules. The Company expects that AMR systems revenue will grow over
the longer term. However, this growth continues to depend on the timing and
resolution of electric utility industry regulatory reform issues in the
United States, mergers and acquisitions in the utility industry, acceptance
of new products, development of international markets and
7
<PAGE>
other factors. Revenue growth in the near term is expected to depend on
continued penetration and growth of the AMR water market.
Handheld systems revenues for the three months ended March 31, 1999 increased
$6.7 million, or 69%, from the same three month period in 1998. The largest
increase was due to shipments of the Company's newest Portable Network ("PN")
card, which was released in late 1998, and upgrades to Year 2000 compliant
systems. The Company expects handheld systems revenue to increase somewhat in
1999 over the previous year, however, handheld systems revenues are expected to
decline as a percentage of total revenues over time. Future handheld systems
revenues are expected to be derived primarily from upgrade and replacement
business domestically and penetration into international markets.
Outsourcing revenues increased $1.0 million, or 27%, in the first quarter of
1999 over the comparable quarter of 1998. The higher revenues were due to
increased installation of multi-function meters in connection with the Company's
contract with the Duquesne Light Company ("Duquesne"). The Company is now in the
operations phase of its contract with Duquesne, which allows for increased
billings, according to the terms of the contract. While such increased billings
will not affect the Company's reported revenues, increased cash payments from
Duquesne should continue to improve the Company's cash flows. Outsourcing
revenues are expected to decrease somewhat in 1999 from the level experienced in
1998 unless the Company signs additional outsourcing contracts.
GROSS MARGIN
Overall gross margins for the quarter ended March 31, 1999 of 37% of revenues
were four percentage points higher than the 33% in the same period in 1998. The
percentages for 1999 and 1998 in the table below reflect gross margins as a
percentage of corresponding revenues and the percentage point change from the
prior year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
=================================================================
INCREASE
Gross Margin 1999 (DECREASE) 1998
- -----------------------------------------------------------------
<S> <C> <C> <C>
AMR systems 36% 5% 31%
Handheld systems 44% (3%) 47%
Outsourcing 18% 0% 18%
Total gross margin 37% 4% 33%
</TABLE>
AMR systems gross margin of 36% increased five percentage points in the first
quarter of 1999 over the comparable quarter in 1998. The margin improvement
reflects the substantial completion of shipments and installation of meter
modules and fixed network products relating to the Company's lower margin
contract with Virginia Power in the fourth quarter of 1998. This contract had
a low margin due to the early life cycle status of the Company's network
products and related installation activities. Additional improvements in 1999
margin result from a lower proportion of installation activities, which tend
to have lower margins, in 1999 than in 1998. The Company expects AMR systems
margins to be higher in 1999 than 1998 primarily because of a higher
proportion of water meter module shipments than electric meter modules.
Handheld systems margin decreased slightly in the first three months of 1999
compared to the first three months of 1998. The lower margin in the current
period was primarily due to somewhat lower service margins caused by new
warranty periods (during which the Company does not receive service revenues)
that the Company provides for customer upgrades. The Company expects that
handheld systems margin may decrease somewhat in 1999 from the level experienced
in 1998 due to the large number of system upgrades expected in the 1999 period
as a result of Year 2000 system upgrade requirements.
Outsourcing margin was level at 18% of revenues in both the 1999 and 1998
periods. The low margin in both periods is a result of the Company's contract
with Duquesne. The gross margin on the Duquesne contract is low because it was
the Company's first large sale Network AMR system. The Company expects
outsourcing costs as a percentage of revenues in 1999 to be comparable to those
in 1998, unless the Company signs additional outsourcing agreements.
8
<PAGE>
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 1999 were $17.7
million, significantly lower than the $19.1 million of operating expenses in the
first quarter of 1998. Additionally, the 1999 period included $1.1 million of
restructuring charges principally for severance and other expenses related to
the closure of the Company's Saratoga, California product development office.
The development activities from this office will be consolidated into the
Company's other product development locations. Without this restructuring
charge, the Company would have had total operating expenses of $16.6 million,
which reflects a $2.6 million, or 13%, decrease from the comparable quarter in
1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
===============================================================================
INCREASE
Operating expenses (in millions) 1999 (DECREASE) 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and marketing $ 6.5 (2%) $ 6.6
Product development 6.6 (26%) 8.9
General and administrative 3.0 0% 3.0
Amortization of intangibles 0.5 (17%) 0.6
Restructuring charge 1.1 N/A -
------ ------
Total operating expenses $ 17.7 (8%) $ 19.1
------ ------
------ ------
</TABLE>
Sales and marketing expenses of $6.5 million for the three months ended March
31, 1999 remained fairly level with the $6.6 million in the same period in 1998.
Sales and marketing expenses are expected to remain at approximately 12% to 13%
of total revenues for the remainder of the year.
Product development expenses of $6.6 million in the current quarter are
significantly lower than the $8.9 million in the same quarter last year. The
lower expenses are primarily the result of management's restructuring measures,
which the Company began to implement in the third quarter of 1998 (see
restructuring charge discussed below). Product development expenses are expected
to remain at approximately 12% to 14% of total revenues for the remainder of the
year.
General and administrative expenses of $3.0 million in the first quarter of 1999
were level with the comparable three months of 1998. General and administrative
expenses are expected to remain at approximately 5% to 6% of total revenues for
the remainder of the year.
Amortization of intangibles decreased slightly in the first three months of 1999
over the first three months of 1998, yet remained at 1% of total revenues.
Amortization expenses are lower in the current period because the Company wrote
off certain intangible assets as part of its restructuring measures in the third
quarter of 1998.
In the third quarter of 1998 the Company announced, and began the implementation
of, restructuring measures to reduce costs and improve operating efficiencies.
These measures resulted in a $3.9 million restructuring charge in 1998.
Additionally, in the first quarter of 1999 the Company announced the closure of
its product development facility in Saratoga, California, resulting in an
additional restructuring charge of $1.1 million. Restructuring measures involved
a workforce reduction - primarily in product development, the write-off of
certain intangible assets due to a reduction in the scope of planned technology
development, closure of some of the Company's facilities and discontinuation of
a jointly owned entity. (See Note 3 of the accompanying financial statements.)
The Company believes that its comparatively high product development spending in
the prior years has expanded the number of meter modules produced, enhanced
module functionality, and expanded network capabilities and products. As a
result of product expansion and lower bookings than had been anticipated, the
Company scaled back its product development spending to lower levels. The
Company expects that operating expenses will be reduced in 1999 because of the
restructuring measures. Although the Company has expensed all known
restructuring charges as of March 31, 1999, additional charges may be incurred
in the future if other measures to increase operating efficiencies are
identified.
INTEREST AND OTHER, NET
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
====================================================================================
INCREASE
Other income (expense) (in millions) 1999 (DECREASE) 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in affiliates loss $ (0.2) 38% $ (0.1)
Net interest income (expense) (1.8) 43% (1.3)
------ ------
Total other income (expense) $ (2.0) 43% $ (1.4)
------ ------
------ ------
</TABLE>
The Company had net interest expense of $1.8 million for the first quarter of
1999 compared to net interest expense of $1.3 million in the same period of
1998. The Company capitalized interest related to outsourcing installations of
$260,000 in the first quarter of 1998. No interest was capitalized in the 1999
period. Interest expense was higher in the 1999 period due to a higher level of
borrowing for both project financing and line of credit during the 1999 period.
INCOME TAXES
The Company had an income tax benefit of approximately 42% of pre-tax earnings
from continuing operations for the three months ended March 31, 1999 compared to
a benefit of 38% for the full year 1998. The higher comparative tax rate in 1999
primarily results from a concentration of state tax obligations and lower
expected R&D tax credits. To the extent pre-tax earnings from continuing
operations, or the components of those earnings, differ from expectations, the
effective tax rate for the year could change.
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
In March 1999 the Company completed its offer ("Exchange Offer") to exchange up
to $15.8 million principal amount of its 6 3/4% Convertible Subordinated Notes
due 2004 ("Exchange Notes"), for up to $22.0 million principal amount of its
6 3/4% Convertible Subordinated Notes due 2004 ("Original Notes"). The Exchange
Offer was made on the basis of $720 principal amount of Exchange Notes for
$1,000 principal amount of Original Notes. A total of $15.8 million aggregate
principal amount of Exchange Notes was issued as of March 12, 1999, with $6,000
in cash paid in lieu of fractional interests to tendering noteholders pursuant
to the terms of the Exchange Offer. The Exchange Notes have the same terms and
conditions as the Original Notes except for a reduction in the conversion price
for converting the Exchange Notes into Common Stock to $9.65, an extension of
the date before which the Company may not call the Exchange Notes to March 12,
2002, and the removal of the redemption premium. The principal purpose of the
exchange was to reduce the Company's long-term debt and debt service obligations
by taking advantage of market discounts. The Company generated a pre-tax gain on
extinguishment of debt, net of debt issuance expenses, of $5.6 million in the
first quarter of 1999 related to the exchange. The after-tax effect of the gain
on extinguishment was $3.7 million.
10
<PAGE>
FINANCIAL CONDITION
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
===========================================================================
INCREASE
Cash flows information (in millions) 1999 (DECREASE) 1998
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities $ 6.1 183% $ (7.3)
Investing activities (3.4) 57% (8.0)
Financing activities (3.5) (125%) 14.0
------ -------
Net increase (decrease) in cash $ (0.8) (37%) $ (1.3)
------ -------
------ -------
</TABLE>
Operating activities generated $6.1 million of cash in the first quarter of 1999
compared to a usage of $7.3 million in cash in the first quarter of 1998. The
$13.4 million improvement of cash flow for the first quarter of 1999 compared to
the first quarter of 1998 was primarily driven by increased collections of
accounts receivable and a reduction in the Company's unbilled receivables.
Unbilled receivables were higher in the 1998 period because of a high level of
turnkey installations, which typically have deferred billing terms. The 1998
quarter also included cash used for payment of 1997 performance incentives.
Investments totaled $3.4 million during the 1999 quarter, down from $8.0 million
in the prior year's quarter due primarily to a slowing of equipment needed for
outsourcing installations and lower capital acquisitions for internal use.
Unless the Company enters into additional outsourcing agreements, the Company
expects to spend less in 1999 on equipment used for outsourcing installations
than it did in 1998 because outsourcing installations are nearing completion.
The Company expects to spend somewhat more on capital assets for internal use
during 1999 than it did in 1998.
Financing activities used $3.5 million in the first three months of 1999
compared to generating $14.0 million during the first three months of 1998.
Financing activities in the 1999 quarter primarily consisted of paying down the
Company's bank line of credit. During the 1998 quarter the Company primarily
generated cash from financing activities by borrowing against the bank line of
credit.
Existing sources of liquidity at March 31, 1999 include approximately $1.9
million of existing cash and cash equivalents and $24 million of available
borrowings under the revolving credit facility. The Company believes that
existing cash, together with available borrowings and cash generated from
operations, will be sufficient to fund operations, exclusive of any new
outsourcing arrangements, for the remainder of 1999 and into 2000. The Company
expects to fund the majority of future outsourcing contracts with project
financing.
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 and non-information technology systems, such as embedded
micro-controllers, 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 identify potential risks and to develop 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) internal software and hardware systems. The following discussion
addresses each of these potential risk areas.
SUPPLIERS: The Company identified its key suppliers from which it purchases the
majority of its materials and has received confirmation that approximately 90%
of such suppliers expected to be Year 2000 compliant by April 1999. The Company
is pursuing the issue with suppliers who have not yet responded.
INTERNALLY DEVELOPED SOFTWARE AND HARDWARE FOR SALE TO CUSTOMERS: The Company
has completed the process of identifying which of its products available for
sale to customers were not Year 2000 compliant. The Company began the process of
upgrading software and hardware in late 1997 and completed all major standard
applications updates by December 1998. A small number of hardware and software
11
<PAGE>
platforms will not be upgraded and all customers affected have been notified.
Alternatives, including upgrading systems, have been developed for them.
Substantially all of the customers with maintenance contracts with the Company
have had their systems upgraded.
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 and during the fourth quarter of 1998 for the Company's
United Kingdom operations. The Company's subsidiary in France is schedule to be
upgraded by the end of the second quarter of 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 by
mid-1999.
The Company believes that the reasonably most likely worst-case scenario it
might confront with respect to Year 2000 issues has to do with the possible
failure of third party systems over which the Company has no control. These
systems may include, but are not limited to, power and telecommunications
services. The Company is in the process of developing contingency plans for any
unforeseen critical business systems issues arising from the Year 2000 problem.
Some problems, however, may remain uncorrected, and could materially adversely
affect the Company's business, financial condition and operating results. The
Company may also experience reduced sales of its products as potential current
customers reduce their budgets for meter-reading and data management solutions
because of increased expenditures on their own Year 2000 compliance efforts. The
Company does not anticipate that it will incur further 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
approximately $1.5 million, of which approximately $1.2 million has been spent
to date. However, as the compliance process is not yet complete, uncertainty
exists concerning total 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 DISCUSSION, THE WORDS "EXPECTS," "INTENDS,"
"ANTICIPATES," "PLANS," "PROJECTS" AND "ESTIMATES," AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS, 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 AND ACCEPTANCE OF THOSE PRODUCTS, ABILITY TO
OBTAIN PROJECT FINANCING IN AMOUNTS NECESSARY TO FUND FUTURE OUTSOURCING
AGREEMENTS, INCREASED COMPETITION AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE
BEYOND THE COMPANY'S CONTROL. FOR A MORE COMPLETE DESCRIPTION OF THESE AND
OTHER RISKS, SEE "CERTAIN RISK FACTORS" INCLUDED IN THE COMPANY'S ANNUAL
REPORT OF FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998. 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.
12
<PAGE>
PART 2: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On May 29, 1997, Itron and its President and Chief Executive Officer, Johnny M.
Humphreys, were served with a complaint alleging securities fraud filed by Mark
G. Epstein (EPSTEIN V ITRON, ET AL.) on his own behalf and alleged to be on
behalf of a class of all others similarly situated, in the U.S. District Court
for the Eastern District of Washington (Civil Action No. CS-97-214 RHW). The
complaint alleges, among other matters, that Itron and Mr. Humphreys violated
Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
thereunder by making allegedly false statements regarding the development
status, performance and technological capabilities of Itron's Fixed Network AMR
system and regarding the suitability of Itron's encoder receiver transmitter
devices for use with an advanced Fixed Network AMR system. The complaint seeks
monetary damages, costs and attorneys' fees and unspecified equitable or
injunctive relief. On March 10, 1999, the Court certified this action as a class
action on behalf of all purchasers of Itron Common Stock between September 11,
1995 and October 22, 1996 except for the Defendants and persons or entities
having a relationship with the Defendants. The discovery phase of this lawsuit
is continuing and the case is set for trial on November 1, 1999. The Company
believes it has good defenses to the claims alleged and intends to defend itself
vigorously against this action.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
Exhibit 27 - Financial Data Schedule
b) REPORTS ON FORM 8-K
A report on Form 8-K, dated January 28, 1999, was filed during the
quarter ended March 31, 1999, pursuant to Item 5 of that form. The
report related to a decision by the United States District Court
for the District of Minnesota granting the Company's motion on the
issue of validity of its Patent and granting CellNet's motion on
the issue of non-infringement of the patent.
A report on Form 8-K, dated February 11, 1999, was filed during the
quarter ended March 31, 1999, pursuant to Item 5 of that form. The
report was filed in connection with the commencement of the
Company's exchange offer relating to its 6 3/4% Convertible
Subordinated Notes.
A report on Form 8-K, dated March 18, 1999, was filed during the
quarter ended March 31, 1999, pursuant to Item 5 of that form. The
report stated that the Exchange Offer terminated on Friday, March
12, 1999, and that the Company accepted $22,000,000 aggregate
principal amount of its original its 6 3/4% Convertible
Subordinated Notes for exchange, and issued $15,834,000 aggregate
principal amount of exchange notes.
13
<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: May 11, 1999
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,917
<SECURITIES> 0
<RECEIVABLES> 54,575
<ALLOWANCES> (1,488)
<INVENTORY> 20,167
<CURRENT-ASSETS> 98,110
<PP&E> 151,660
<DEPRECIATION> (58,757)
<TOTAL-ASSETS> 237,027
<CURRENT-LIABILITIES> 46,313
<BONDS> 0
0
0
<COMMON> 106,415
<OTHER-SE> 12,104
<TOTAL-LIABILITY-AND-EQUITY> 237,027
<SALES> 51,945
<TOTAL-REVENUES> 51,945
<CGS> 32,644
<TOTAL-COSTS> 32,644
<OTHER-EXPENSES> 17,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,020)
<INCOME-PRETAX> (391)
<INCOME-TAX> 160
<INCOME-CONTINUING> (231)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,660
<CHANGES> 0
<NET-INCOME> 3,429
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
