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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 September 30, 2000
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 October 31, 2000, there were outstanding 15,326,361 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.
Table of Contents
Page
Part 1: FINANCIAL INFORMATION
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
Note 1: Basis of Presentation 4
Note 2: Earnings Per Share and Capital Structure 4
Note 3: Restructuring 4
Note 4: Balance Sheet Components 5
Note 5: Segment Information 5
Note 6: Contingencies 7
Note 7: Impact of New Accounting Standards 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Revenues 8
Gross Margin 9
Operating Expense 10
Other Income 10
Income Tax 11
Extraordinary Item 11
Financial Condition
Cash Flow Information 11
Business Outlook 12
Part 2: OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 6: Exhibits and Reports on Form 8-K 14
Signature 15
<PAGE>
Part 1: Financial Information
Item 1: Financial Statements
<TABLE>
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited, in thousands, except per share data) Three months ended Nine months ended
September 30, September 30,
=======================================================================================================================
Revenues 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 32,170 $ 34,893 $102,542 $ 111,690
Service 10,351 13,640 32,451 40,009
------------- ------------- ------------- -------------
Total revenues 42,521 48,533 134,993 151,699
Cost of revenues
Sales 18,914 20,391 61,136 68,221
Service 6,594 10,516 21,595 30,470
------------- ------------- ------------- -------------
Total cost of revenues 25,508 30,907 82,731 98,691
------------- ------------- ------------- -------------
Gross profit 17,013 17,626 52,262 53,008
Operating expenses
Sales and marketing 5,095 6,338 15,318 18,713
Product development 4,632 5,961 16,114 19,516
General and administrative 4,363 3,050 13,046 9,437
Amortization of intangibles 466 453 1,397 1,433
Restructuring charges - 8,828 (185) 9,949
------------- ------------- ------------- -------------
Total operating expenses 14,556 24,630 45,690 59,048
------------- ------------- ------------- -------------
Operating income (loss) 2,457 (7,004) 6,572 (6,040)
Other income (expense)
Equity in affiliates 138 (102) 893 (413)
Interest, net (912) (1,425) (3,453) (4,830)
Other (3) 142 339 249
------------- ------------- ------------- -------------
Total other income (expense) (777) (1,385) (2,221) (4,994)
Income (loss) before income taxes
and extraordinary item 1,680 (8,389) 4,351 (11,034)
Income tax (provision) benefit (640) 2,521 (1,650) 3,351
------------- ------------- ------------- -------------
Income (loss) before extraordinary item 1,040 (5,868) 2,701 (7,683)
Extraordinary gain on early extinguishment of
debt net of income taxes of $570 and $1,970 - - 1,047 3,660
------------- ------------- ------------- -------------
Net income (loss) $ 1,040 $ (5,868) $ 3,748 $(4,023)
------------- ------------- ------------- -------------
Earnings per share
Basic and diluted
Income (loss) before extraordinary item $ 0.07 $ (0.39) $ 0.17 $ (.52)
Extraordinary item - - 0.07 0.25
------------- ------------- ------------- -------------
Net income (loss) $ 0.07 $ (0.39) $ 0.24 $ (.27)
------------- ------------- ------------- -------------
Average number of shares outstanding
Basic 15,237 14,885 15,132 14,817
Diluted 15,512 14,885 15,408 14,817
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited, in thousands) September 30, December 31,
2000 1999
------------------- -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 19,699 $ 1,538
Accounts receivable, net 37,655 46,561
Current portion of long-term contracts receivable 3,050 2,579
Inventories, net 16,009 15,300
Equipment held for sale, net - 32,750
Deferred income tax asset 5,892 8,016
Other 285 1,340
------------------- -----------------
Total current assets 82,590 108,084
------------------- -----------------
Property, plant and equipment, net 26,230 31,627
Equipment used in outsourcing, net 9,881 5,951
Intangible assets, net 13,353 15,196
Deferred income tax asset 25,725 26,922
Long-term contracts receivable 4,152 1,813
Other 3,839 2,486
------------------- -----------------
Total assets $ 165,770 $ 192,079
------------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ - $ 3,646
Accounts payable and accrued expenses 24,519 35,369
Wages and benefits payable 7,123 16,396
Deferred revenue 5,384 8,413
------------------- -----------------
Total current liabilities 37,026 63,824
------------------- -----------------
Convertible subordinated debt 53,459 57,234
Mortgage notes and leases payable 5,122 6,280
Project financing 6,811 7,216
Warranty and other obligations 10,712 10,000
------------------- -----------------
Total liabilities 113,130 144,554
------------------- -----------------
Shareholders' equity
Common stock 109,392 107,603
Retained deficit (54,757) (58,506)
Accumulated other comprehensive income (1,995) (1,572)
------------------- -----------------
Total shareholders' equity 52,640 47,525
------------------- -----------------
Total liabilities and shareholders' equity $ 165,770 $ 192,079
------------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited, in thousands) Nine months ended September 30,
2000 1999
------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,748 $(4,023)
Noncash charges (credits) to income:
Depreciation and amortization 10,280 13,929
Deferred income tax provision (benefit) 2,751 (3,360)
Equity in affiliates, net (717) 413
Extraordinary gain on early extinguishment of debt, net of taxes (1,047) (3,660)
Loss on equipment disposal (500) 4,764
Changes in operating accounts:
Accounts receivable 8,837 23,660
Inventories (709) 1,521
Accounts payable and accrued expenses (8,858) (1,339)
Wages and benefits payable (9,273) 2,929
Long-term contracts receivable (2,810) (6,439)
Deferred revenue (3,029) (4,511)
Other, net 138 177
-------------------- ----------------
Cash provided by operating activities (1,189) 24,061
-------------------- ----------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (3,636) (4,558)
Equipment used in outsourcing (4,367) (6,363)
Proceeds from sale of equipment used in outsourcing 33,000 -
Proceeds from sale of business interest 370 -
Other, net (1,109) 326
------------------- -----------------
Cash provided (used) by investing activities 24,258 (10,595)
------------------- -----------------
FINANCING ACTIVITIES
Change in short-term borrowings, net (3,646) (14,000)
Payments on project financing (405) (376)
Issuance of common stock 1,789 1,207
Purchase and retirement of subordinated debt (2,098) -
Other, net (548) (205)
------------------- -----------------
Cash provided (used) by financing activities (4,908) (13,374)
Increase in cash and cash equivalents 18,161 92
Cash and cash equivalents at beginning of period 1,538 2,743
------------------- -----------------
Cash and cash equivalents at end of period $ 19,699 $ 2,835
------------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
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 nine-month
periods ended September 30, 2000. 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 regarding
interim results. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and the
notes thereto included in our Form 10-K for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission on March 30, 2000. The results
of operations for the three and nine-month periods ended September 30, 2000 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 Nine months ended
September 30, September 30,
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Weighted average shares outstanding 15,237 14,885 15,132 14,817
Effect of dilutive securities:
Stock options 275 - 276 -
Convertible debt - - - -
------------ ----------- ------------ -----------
Weighted average shares outstanding assuming
conversion 15,512 14,885 15,408 14,817
------------ ----------- ------------ -----------
</TABLE>
Options to purchase common stock have been granted at fair market value to
directors, employees and other key personnel. These options will dilute the
ownership of our stock if they are exercised. The dilutive effect of these
options is included for purposes of calculating diluted earnings per share using
the "treasury stock" method. We also have 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
We recorded charges totaling $20.6 million in 1998 and 1999 for restructuring
activities that have improved efficiencies and reduced costs. These activities
include workforce reductions, the sale or disposition of assets, the write-off
of certain of our intangible assets and the closure and consolidation of
facilities. In 1999, we aggressively continued our restructuring activities to
further reduce spending and to realign the Company into five market-focused
business units.
Restructuring reserves and activity for the first nine months of 2000 are
detailed below (in thousands):
<TABLE>
<CAPTION>
Reserve Reserve
Cash/ Balance Restructuring Balance
Non-Cash 12/31/99 Charge Activity 9/30/00
------------- -------------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Severance and related charges Cash $ 8,988 $ 315 $ 9,051 $ 252
Asset impairment Non-cash 3,600 (500) 3,100 -
Consolidation of facilities Cash 2,981 - 331 2,650
------------- --------------- ------------- ------------
Totals $ 15,569 $ (185) $ 12,482 $2,902
</TABLE>
The reserve balances for severance and related charges and asset impairment are
expected to be fully utilized in 2000. Facility consolidation reserves are
dependent on our ability to sublease vacant space, which is under a
non-cancelable operating lease through 2006.
<PAGE>
Note 4: Balance Sheet Components
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 2000 1999
------------------ -----------------
<S> <C> <C>
Inventories
Raw material $ 5,970 $ 6,428
Work in process 1,252 1,462
Finished goods 7,726 5,702
Field inventories awaiting installation - 466
------------------ --------------
Total manufacturing inventories 14,948 14,058
Service inventories 1,061 1,242
------------------ --------------
Total inventories $16,009 $15,300
------------------ --------------
</TABLE>
Note 5: Segment Information
Effective January 2000, we reorganized internally around strategic business
units ("SBUs") focused on the customer segments that we serve. These SBUs
include Electric Systems, Natural Gas Systems, Water & Public Power Systems,
Energy Information Systems, and International Systems. Our Energy Information
Systems SBU has two main areas of focus today, advanced software solutions for
commercial and industrial users of energy, and advanced software systems for
financial settlements, load analysis and billing for wholesale energy markets.
Sales for these SBUs include hardware, custom and licensed software, consulting,
project management, and installation and support activities. Service revenues
are derived from post-sale maintenance support and outsourcing services, where
we own and operate, or simply operate systems for a periodic fee. Intersegment
revenues are immaterial.
Management intends to review the operating results of each segment both before
and after allocations of corporate expenses. Allocation methods may change over
time. Certain amounts in the 1999 financial statements have been reclassified to
conform with the 2000 presentation.
<PAGE>
Segment revenues and gross profits for the comparable third quarter and
nine-month periods are detailed below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands) September 30, September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Electric $ 11,993 $ 16,594 $ 40,238 $ 47,938
Natural Gas 9,995 10,885 31,986 36,534
Water & Public Power 12,177 11,075 37,672 42,625
Energy Information Systems 4,578 4,347 15,661 11,325
International 3,778 5,632 9,436 13,278
---------------- --------------- ---------------- ---------------
Total revenues 42,521 48,533 134,993 151,699
Gross Profit
Electric 3,933 3,652 13,437 6,786
Natural Gas 4,929 5,315 14,731 18,905
Water & Public Power 4,481 3,840 12,274 16,102
Energy Information Systems 2,027 2,535 7,570 6,670
International 1,643 2,284 4,250 4,545
---------------- --------------- ---------------- ---------------
Total gross profit 17,013 17,626 52,262 53,008
CORPORATE ITEMS
Operating expenses
Sales and marketing 5,095 6,338 15,318 18,713
Product development 4,632 5,961 16,114 19,516
General and administrative 4,363 3,050 13,046 9,437
Amortization of intangibles 466 453 1,397 1,433
Restructuring charges - 8,828 (185) 9,949
---------------- --------------- ---------------- ---------------
Total operating expenses 14,556 24,630 45,690 59,048
---------------- --------------- ---------------- ---------------
Operating income (loss) 2,457 (7,004) 6,572 (6,040)
Other income (expense)
Equity in affiliates 138 (102) 893 (413)
Interest, net (912) (1,425) (3,453) (4,830)
Other (3) 142 339 249
---------------- --------------- ---------------- ---------------
Total other income (expense) (777) (1,385) (2,221) (4,994)
---------------- --------------- ---------------- ---------------
Income (loss) before income taxes and
extraordinary item $ 1,680 $ (8,389) $ 4,351 $(11,034)
================ =============== ================ ===============
</TABLE>
<PAGE>
Note 6: Contingencies
We are a party to various lawsuits and claims, both as plaintiff and defendant,
and have contingent liabilities arising from the conduct of business, none of
which, in the opinion of management, is expected to have a material effect on
our financial position or results of operations. We believe that we have made
adequate provisions for such contingent liabilities.
Note 7: Impact of New Accounting Standards
SFAS No. 133 and 138
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 2000, the FASB issued SFAS No. 138,
which amends certain provisions of SFAS 133. We have been reviewing the
implementation of SFAS 133 on a global basis for the Company. We will adopt SFAS
133 and the corresponding amendments under SFAS 138 on January 1, 2001. SFAS
133, as amended by SFAS 138, is not expected to have a material impact on
Itron's consolidated results of operations, financial position or cash flows.
SAB No. 101
Effective October 1, 2000, the Company adopted SEC Staff Accounting Bulletin No.
101, as amended, Revenue Recognition in Financial Statements (SAB No. 101),
which provides the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. Under SAB No. 101, certain of
our revenues that had been recognized in prior quarters of 2000 prior to
adoption, must be deferred until future quarters. While we have not completed
our analysis, we estimate that approximately $2.5 million of revenues previously
recognized are impacted by the adoption of SAB No. 101. In the fourth quarter,
we will recognize the effect of the adoption of SAB No. 101 as a charge of
approximately $700,000, net of taxes. This will be presented as a cumulative
effect of change in accounting principle, similar to the reporting of
extraordinary items. We anticipate that the $2.5 million in deferred revenues
will be recognized in the fourth quarter.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
Itron is a leading provider of data collection and management solutions for
electric, gas and water utilities throughout the world. Itron technology is used
by more than 2,000 utilities in over 45 countries around the world to collect
data from 275 million electric, gas and water meters. Of those, more than 650
customers are using our radio and telephone-based technology to automatically
collect and process information from nearly 17 million meters. In addition, our
technology is being used by a number of the newly created wholesale energy
markets in the US and Canada to provide critical billing and settlement systems
for deregulated markets. Our systems touch more than $200 billion in energy and
water transactions every year in North America alone.
Only 10% of the electric, gas and water meters in North America are read using
automated meter data collection and communication systems. While we are
aggressively pursuing the numerous opportunities remaining for advanced metering
and billing systems, we also intend to use our core technology and industry
knowledge to move beyond meter reading and open up new opportunities for growth.
These new opportunities are centered around supplying systems, technology and
services to help electric, gas and water utilities:
Run their distribution systems more efficiently,
Automate the data and information requirements of deregulation and
performance based ratemaking, and
Outsource services utilities no longer want to or no longer have the
people or expertise to perform.
We design, develop, manufacture, market, install and service hardware, software
and integrated systems. Sales include hardware, custom and licensed software,
consulting, project management and installation and sales support activities.
Services include post-sale maintenance support and outsourcing services where we
own and operate, or simply operate systems for a periodic fee.
We currently derive the majority of our revenues from sales of products and
services to utilities. However, our business may increasingly consist of sales
to other energy and water industry participants such as energy service
providers, end user customers, wholesale power markets, and others.
<TABLE>
RESULTS OF OPERATIONS
<CAPTION>
Revenues Three months ended September 30, Nine months ended September 30,
($'s in millions) -------------------------------- -------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Electric $ 12.0 $ 16.6 (28%) $ 40.2 $ 47.9 (16%)
Natural Gas 10.0 10.9 (8%) 32.0 36.6 (13%)
Water & Public Power 12.1 11.1 9% 37.7 42.6 (12%)
Energy Information Systems 4.6 4.3 7% 15.7 11.3 39%
International 3.8 5.6 (32%) 9.4 13.3 (29%)
-------- --------- ---------- --------- -------- ----------
Total revenues $ 42.5 $ 48.5 (12%) $135.0 $151.7 (11%)
======== ========= ========== ========= ======== ==========
</TABLE>
Segment revenues can vary from quarter to quarter due to the timing and size of
large customer contracts. Quarter-to-quarter variations are not necessarily
indications of overall segment trends.
For the third quarter and nine months ended September 30, the largest decrease
in revenues in 2000, compared with 1999, is in our Electric segment. In 1999, we
had a fee-for-service outsourcing contract with Duquesne Light that resulted in
$4.3 million in revenues in the third quarter and $13.3 million in the
nine-months ended September 30. In 2000, that contract produced $2.7 million in
revenues in the first quarter. At the end of the first quarter of 2000, we sold
our system to an affiliate of Duquesne, and as a result, no longer have those
outsourcing revenues. Excluding revenues from the Duquesne contract in both
years, revenues in our Electric segment were actually 8% higher in 2000 compared
with 1999 primarily as a result of increased electric meter module shipments.
In 1999, a single customer accounted for approximately $10.6 million, or 30% of
year-to-date revenues in our Natural Gas segment. Shipments under this large
multi-year contract began to wind down in 2000 as the contract is nearly
completed, and accounted for only $5.9 million, or 18% of year-to-date revenues
in 2000. Excluding activity for that customer, revenues increased 12% in 2000
compared with 1999, as a result of increased gas meter module shipments.
The lower revenues in 2000, compared with 1999, in our Water & Public Power
segment result primarily from lower handheld electronic meter reading system
revenues in 2000. Handheld sales in 1999 were higher than normal due to customer
upgrades to handheld systems that were Y2K compliant. The number of water meter
modules shipped in the first nine months of 2000 was comparable with the first
nine months of 1999.
Revenues in our Energy Information Systems ("EIS") segment have increased in
2000 compared with 1999, primarily as a result of substantial consulting, energy
settlement systems, and software customization activities in the wholesale
energy market in Ontario, Canada. The start-up of operations for the Ontario
wholesale market was delayed in the third quarter of 2000 by approximately 6
months. This resulted in slower revenue growth in the third quarter for EIS
compared to EIS's revenue growth rates for the previous two quarters of this
year.
International revenues in both 2000 and 1999 are primarily derived from sales of
handheld systems. Handheld system sales in 1999 were higher as a result of
customer upgrades to Y2K compliant systems.
<TABLE>
<CAPTION>
Gross Margin Three months ended September 30, Nine months ended September 30,
(as a % of corresponding revenue) -------------------------------- -------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
---------- -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Electric 33% 22% 11% 33% 14% 19%
Natural Gas 49% 49% - 46% 52% (6%)
Water & Public Power 37% 35% 2% 33% 38% (5%)
Energy Information Systems 44% 58% (14%) 48% 59% (11%)
International 43% 41% 2% 45% 34% 11%
---------- -------- ------------ ----------- --------- ----------
Total Revenues 40% 36% 4% 39% 35% 4%
</TABLE>
As discussed under revenues above, we had a substantial amount of revenues in
the third quarter and first nine months of 1999 in our Electric segment related
to our outsourcing contract with Duquesne Light that were at a very low gross
margin. In addition, in the second quarter of 1999, gross margins in our
Electric segment were impacted by a $4.2 million price concession to a customer
for a large network installation.
The lower gross margins for our Natural Gas segment for the first nine months of
2000 compared with 1999 results from lower average selling prices in the 2000
period. Average selling prices in this segment vary per customer primarily as a
result of volume commitments.
The lower gross margins in our Water & Public Power segment in 2000 result from
lower average selling prices due to a higher proportion of business in 2000 sold
through indirect selling channels as well as higher service costs in 2000.
A substantial portion of revenues in our EIS segment come from custom software
and development activities related to wholesale energy systems. Margins can vary
from period to period depending on the mix of license revenues verses custom
development activities, but are typically much higher than in our other business
segments. Margins in the third quarter of 2000 were negatively impacted by the
delay in the start-up of operations for the Ontario wholesale market.
Higher margins for International in 2000 reflect a shift in product mix towards
more profitable handheld systems and away from lower margin development systems
in Europe.
<PAGE>
<TABLE>
Operating Expenses
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(%'s are of total revenue)
($'s in millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and marketing $5.1 12% $6.3 13% $15.3 11% $18.7 12%
Product development 4.6 11% 6.0 12% 16.1 12% 19.5 13%
General and administrative 4.4 10% 3.0 6% 13.0 10% 9.4 6%
Amortization of intangibles 0.5 1% 0.5 1% 1.4 1% 1.4 1%
Restructuring charges - 8.8 18% (0.2) - 9.9 7%
----------- --------- ----------- ----------
Total operating expenses $14.6 34% $24.6 51% $45.7 34% $59.0 39%
=========== ========= =========== ==========
</TABLE>
Effective January 1, 2000 we reorganized into strategic business units. With the
reorganization, certain personnel related to management and sales support that
had been classified as sales and marketing in previous years are now classified
as general and administrative. Approximately $1.6 million of the year-to-date
decrease in sales and marketing is due to this reclassification. The remaining
decrease results from a reduction in international staff, fewer domestic
salespeople for the comparative periods, and lower commission expense from lower
revenues.
The decrease in product development expenses in 2000 compared with 1999 results
primarily from restructuring measures in 1999 which included the closure of
several product development locations and associated staff reductions.
The increased general and administrative expenses in 2000 compared with 1999
result from: the reclassification of personnel previously included in sales and
marketing; expenses for executive recruiting and relocation; and increased legal
and consulting costs. Higher legal costs in the current year are mostly the
result of increased litigation expenses, and patent and FCC licensing activity.
Amortization of intangibles remained relatively constant for the comparative
periods.
Restructuring charges in the first half of 2000 were slightly negative due to
the partial reversal of expected losses for equipment to be sold or disposed.
Restructuring measures are substantially complete.
<TABLE>
<CAPTION>
Other Income (Expense) Three months ended September 30, Nine months ended September 30,
($'s in millions) -------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Equity in affiliates $ .1 $ (.1) $ .9 $ (.4)
Interest, net (.9) (1.4) (3.4) (4.8)
Other - 0.1 0.3 .2
------------- ------------- ------------- -------------
Total other income (expense) $ (0.8) $ (1.4) $ (2.2) $ (5.0)
============= ============= ============= =============
</TABLE>
We have a 50% ownership interest in an affiliate, which acts as a distributor
for our products in specific regions of the U.S. Equity in affiliates in 2000
largely results from increased sales by this affiliate. In addition,
year-to-date equity in affiliates in 2000 includes a $150,000 net gain on the
sale of our interest in another partially owned domestic affiliate.
Net interest expense decreased 36% and 29% for the quarter and year-to-date
periods in 2000 compared with 1999 due to lower bank borrowings, a reduction of
subordinated debt outstanding, and net invested cash during 2000. We received
approximately $32.7 million from the sale of our outsourcing installation at
Duquesne in the first half of this year and used the proceeds to pay down
short-term bank borrowings. Excess cash is invested in short-term investment
grade securities. The reduction in subordinated debt resulted from a debt
repurchase transaction in the first quarter of 2000.
<PAGE>
Income Taxes
The effective income tax rate was approximately 38% in 2000 compared with 30% in
1999. Our effective income tax rate can vary from period to period because of
fluctuations in foreign operating results, changes in the valuation allowances
for deferred tax assets, new or revised tax legislation, and changes in the
level of business performed in differing tax jurisdictions.
Extraordinary Item - Gain on Early Retirement of Debt
In the first quarter of 2000 we repurchased $3.8 million principal amount of
subordinated debt for $2.1 million in cash. The gain on this early retirement of
debt, net of expenses and income taxes, was $1.0 million. In March 1999 we
completed an offer to exchange $15.8 million principal amount of new
subordinated debt for $22.0 million principal amount of original subordinated
debt. The after-tax effect of the transaction, net of expenses, was a gain of
$3.7 million.
<TABLE>
FINANCIAL CONDITION
<CAPTION>
Cash Flow Information Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
($'s in millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating activities $ (8.8) $ 11.1 $ (1.2) $24.1
Investing activities (2.6) (2.7) 24.3 (10.6)
Financing activities .4 (8.5) (4.9) (13.4)
------------ ------------ ------------ ------------
Increase (decrease) in cash $ (11.0) $ (.1) 18.2 $ 0.1
============ ============ ============ ============
</TABLE>
Operating activities:
We used cash in the third quarter of 2000 as a result of an increase in accounts
receivable due to a high proportion of revenues occurring late in the quarter.
During the quarter, we made a change in our water pit meter module so that it
would be easier for field personnel to install. We chose not to ship product
until the change was complete which was late in the third quarter. Also
contributing to the use of cash during the quarter was the pay-down of accounts
payable due to a last time buy of inventory related to a change in the component
for future builds.
During the first nine months of 2000, we used $9.1 million in cash to pay
amounts related to severance, facility closures, and other actions related to
our major restructuring in late 1999. Without those cash payments, cash flow
from operations would have been $7.9 million positive for the first nine months
of 2000. The positive cash flow in the first nine months of 1999 reflected the
collection of receivables from several completed or substantially completed
large projects.
Investing activities:
In the first nine months of 2000, we received $33 million from the sale of our
network installation at Duquesne Light Company to an affiliate of Duquesne,
which is reflected in investing activities. We used an additional $8.0 million
in the first nine months of 2000, primarily for capital additions and the
acquisition of equipment for our outsourcing contract with Southern California
Edison. Total capital additions for 2000, including outsourcing equipment
requirements, are expected to be approximately $10 million.
Financing activities:
We used $3.6 million in cash to pay down short-term bank borrowings and $2.1
million to repurchase and retire subordinated debt in the first quarter of 2000.
We used cash in the first nine months of 1999 principally to pay down short-term
bank borrowings.
We believe that existing cash resources and available borrowings under our
credit facility are more than adequate to meet our cash needs through 2001.
<PAGE>
BUSINESS OUTLOOK
In light of the recent adoption by the SEC of Regulation Fair Disclosure, we are
including the following outlook information. Throughout the quarter, we will
continue our current practice of having corporate representatives meet privately
with investors, analysts and others. To the extent those discussions pertain to
earnings related information, we will continue to provide additional commentary
and discussion on details of the financial statements and outlook as long as we
are providing information that we believe is already publicly available or
clearly non-material. As the quarter progresses, we will refrain from commenting
on previously issued guidance from the standpoint of confirming it, or
indicating we have revised expectations, either better or worse, unless we
choose to provide updated guidance in the form of a press release or other
public documents.
The following statements are based on current expectations. These statements are
forward-looking, and actual results may differ materially. Itron undertakes no
obligation to update publicly or revise any forward-looking statements.
We believe that fourth quarter revenues could be as much as 10% higher than
third quarter revenues of $42.5 million. This expectation is primarily a result
of potential business in our Electric and International business segments, a
portion of which is not yet booked.
We expect gross margin and operating expenses in the fourth quarter to be
similar to the levels we have experienced over the last few quarters.
We expect to have neutral cash flow from operations for the year, which reflects
the use of approximately $10 million in cash in 2000 for 1999 restructuring
actions.
Based on our preliminary outlook, we believe revenues from our current business
in 2001 could be 5% to 10% higher than in 2000. Our estimate is based upon
several major utilities, with whom we are in discussions, moving forward with
their planned projects. As we have sometimes experienced in the past, customer
delays in planned projects can occur as a result of industry or customer
specific operational issues.
Certain Forward-Looking Statements
When included in this discussion, the words "expects," "intends," "believes,"
"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 laws or regulations (including FCC licensing actions), the
rate of customer demand for our products, the effectiveness of our cost
reductions programs, our ability to effect additional initiatives for growth
and profitability, 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 "FCC Regulations"
section in this document and "Certain Risk Factors" and "Description of
Business - FCC Regulation" included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999. 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
Benghiat Patent Litigation
On April 3, 1999, the Company served Ralph Benghiat, an individual,
with a complaint seeking a declaratory judgement that a patent owned by
Benghiat is invalid and not infringed by Itron's handheld meter reading
devices. Benghiat has filed a counterclaim alleging patent infringement
by the same devices. Both lawsuits were filed in the United States
District Court for the District of Minnesota. The lawsuit is currently
in the motion and discovery stage with a tentative trial date in 2001.
While the Company believes that its products do not infringe the
Benghiat patent, there can be no assurance that it will prevail in this
matter, or that if it does prevail, that legal costs incurred in
connection therewith will not have a material adverse effect on its
financial condition.
FCC Regulation
In 1994 the Company was issued a non-exclusive nationwide Federal
Communications Commission (FCC) license to operate in the 1427-1432 MHz
band. With the exception of meter modules that operate in MAS bands and
the 910-920 MHz band, our network products operate in parts of this
band. At the time our license was issued, the 1427-1432 MHz band was
allocated primarily for use by the federal government, which consented
to our use of the band on a secondary, non-interference basis. Current
government use of the band is limited to a discrete number of
well-defined locations, and we did not expect the fact that we were
secondary to federal government operations to have either a present or
future material impact on our business.
The 1427-1432 MHz band is among 235 MHz of spectrum that has been
earmarked for reallocation from federal government users to private
sector users (to be licensed by the FCC). The band is subject to
continuing federal government use in specified areas through 2004. The
FCC initially decided to include the 1427-1432 MHz band in a spectrum
reserve that would not be reallocated and assigned until 2006. In July
1999, however, the FCC proposed to accelerate this timetable and
allocate the upper portion of the band to wireless medical telemetry
operations. We filed a petition with the FCC for rulemaking proposing
instead that the band be allocated for automatic meter reading and
utility telemetry operations.
On June 8, 2000, the FCC issued a Report and Order allocating three MHz
of the band (1429-1432MHz) on a primary basis for use by wireless
medical telemetry. Use of the remaining two MHz (1427-1429MHz) will be
the subject of further rulemaking proceedings by the FCC, which may or
may not grant Itron the right to use that band. Until that time, we may
continue operating in the 1427-1429MHz band. We have had discussions
with the FCC and the medical telemetry community concerning the sharing
of the entire five MHz of the band. In addition, we are working with
our congressional delegations in Washington, Minnesota and North
Carolina to provide a legislative solution that would permit Itron to
use the entire 5 MHz of the band on a co-primary basis with wireless
medical telemetry. While we believe we will reach an acceptable
solution for use of the band, there can be no assurance that there will
be an allocation for the band that is compatible with Itron's business.
If we are not successful in our efforts to continue operations in the
1427-1432 MHz band, we believe that current installations will be
permitted to continue under a grandfathering provision. However, there
can be no assurance that such grandfathering will be permitted or that
we will have any rights whatsoever in the band after final rulemaking
by the FCC. In such event, our network products (other than modules)
would have to be redesigned to operate at a different frequency
spectrum, which could have a material adverse effect on our business.
For further discussion, please see "FCC Regulation Intellectual
Property" and "Certain Risk Factors - Availability and Regulation of
Radio Spectrum" in our Annual Report on Form 10K on file with the SEC.
<PAGE>
CellNet Patent Litigation
On October 3, 1996, the Company filed a patent infringement suit
against CellNet Data Systems ("CellNet") in the United States District
Court for the District of Minnesota. The suit alleges that CellNet is
infringing on its United States Patent No. 5,553,094 entitled "Radio
Communication Network for Remote Data Generating Stations," issued on
September 3, 1996. The Company is seeking injunctive relief as well as
monetary damages, costs and attorneys' fees. On January 28, 1999, the
Court issued its decision on motions and cross motions for summary
judgement that had previously been filed by the Company and CellNet. In
its decision, the Court held the Company's patent valid, but not
infringed. Both parties appealed the decision to the federal Circuit
Court of Appeals. Oral arguments were heard on the appeal in October
2000 and the appellate court upheld the lower court decision in all
respects.
The Company is not involved in any other material legal proceedings.
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
10.24 Third Amendment to Credit Agreement
Exhibit 27 - Financial Data Schedule
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<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: November 14, 2000
