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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, 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 July 31, 2000, there were outstanding 15,242,615 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 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
Revenues 7
Gross Margin 8
Operating Expense 9
Other Income 9
Income Tax 10
Extraordinary Item 10
Cash Flow 10
Part 2: Other Information
Item 1: Legal Proceedings 11
Item 4: Submission of matters to a vote of security holders 12
Item 6: Exhibits and Reports on Form 8-K 12
Signature 13
<PAGE>
Part 1: Financial Information
Item 1: Financial Statements
<TABLE>
ITRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<CAPTION>
Three months ended June 30, Six months ended June 30,
======================================================================================================================
Revenues 2000 1999 2000 1999
<S> <C> <C> <C> <C>
------------ ------------- ------------- ------------
Sales $ 34,706 $ 37,588 $ 70,372 $ 76,797
Service 10,108 13,633 22,100 26,369
------------- ------------- -------------- -------------
Total revenues 44,814 51,221 92,472 103,166
Cost of revenues
Sales 21,332 23,593 42,222 47,830
Service 6,309 10,910 15,001 19,954
------------- ------------- -------------- -------------
Total cost of revenues 27,641 34,503 57,223 67,784
------------- ------------- -------------- -------------
Gross profit 17,173 16,718 35,249 35,382
Operating expenses
Sales and marketing 5,104 6,577 10,223 12,375
Product development 5,306 6,953 11,482 13,555
General and administrative 4,167 3,362 8,683 6,387
Amortization of intangibles 465 490 931 980
Restructuring charges - - (185) 1,121
------------- ------------- -------------- -------------
Total operating expenses 15,042 17,382 31,134 34,418
------------- ------------- -------------- -------------
Operating income (loss) 2,131 (664) 4,115 964
Other income (expense)
Equity in affiliates 248 (146) 755 (311)
Interest, net (974) (1,530) (2,541) (3,405)
Other 1 87 342 107
------------- ------------- -------------- -------------
Total other income (expense) (725) (1,589) (1,444) (3,609)
Income (loss) before income taxes and
extraordinary item 1,406 (2,253) 2,671 (2,645)
Income tax (provision) benefit (530) 670 (1,010) 830
------------- ------------- -------------- -------------
Income (loss) before extraordinary item 876 (1,583) 1,661 (1,815)
Extraordinary gain on early retirement of
debt, net of income taxes of $570 and $1,970 - - 1,047 3,660
------------- ------------- -------------- -------------
Net income (loss) $ 876 $ (1,583) $ 2,708 $ 1,845
------------- ------------- -------------- -------------
Earnings per share
Basic and diluted
Income (loss) before extraordinary item $ 0.06 $ (0.11) $ 0.11 $ (0.12)
Extraordinary item - - 0.07 0.25
------------- ------------- -------------- -------------
Net income (loss) share $ 0.06 $ (0.11) $ 0.18 $ 0.12
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
ITRON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<CAPTION>
June 30, December 31,
==========================================================================================================
2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 30,703 $ 1,538
Accounts receivable, net 35,814 46,561
Current portion of long-term contracts receivable 2,246 2,579
Inventories, net 16,373 15,300
Equipment held for sale, net - 32,750
Deferred income tax asset 6,532 8,016
Other 717 1,340
------------------- -----------------
Total current assets 92,385 108,084
------------------- -----------------
Property, plant and equipment, net 28,939 31,627
Equipment used in outsourcing, net 8,762 5,951
Intangible assets, net 14,005 15,196
Deferred income tax asset 25,726 26,922
Long-term contracts receivable 3,811 1,813
Other 3,167 2,486
------------------- -----------------
Total assets $ 176,795 $ 192,079
------------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ - $ 3,646
Accounts payable and accrued expenses 32,121 35,369
Wages and benefits payable 8,896 16,396
Deferred revenue 7,476 8,413
------------------- -----------------
Total current liabilities 48,493 63,824
------------------- -----------------
Convertible subordinated debt 53,459 57,234
Mortgage notes and leases payable 5,975 6,280
Project financing 6,949 7,216
Warranty and other obligations 10,822 10,000
------------------- -----------------
Total liabilities 125,698 144,554
------------------- -----------------
Shareholders' equity
Common stock 108,732 107,603
Retained deficit (55,798) (58,506)
Accumulated other comprehensive income (1,837) (1,572)
------------------- -----------------
Total shareholders' equity 51,097 47,525
------------------- -----------------
Total liabilities and shareholders' equity $ 176,795 $ 192,079
------------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
ITRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<CAPTION> Six months ended June 30,
===============================================================================================================
2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,708 $ 1,845
Noncash charges (credits) to income:
Depreciation and amortization 7,133 9,347
Deferred income tax provision (benefit) 2,110 (841)
Equity in affiliates, net (564) 311
Extraordinary gain on early extinguishment of debt, net of taxes (1,047) (3,660)
Changes in operating accounts:
Accounts receivable 10,988 15,960
Inventories (1,073) 326
Accounts payable and accrued expenses (2,063) (3,152)
Wages and benefits payable (7,500) 773
Long-term contracts receivable (1,665) (4,570)
Deferred revenue (937) (3,623)
Other, net (475) 251
-------------------- -----------------
Cash provided by operating activities 7,615 12,967
-------------------- -----------------
INVESTING ACTIVITIES
Acquisition of property, plant and equipment (2,490) (3,331)
Equipment used in outsourcing (3,074) (4,751)
Proceeds from sale of equipment used in outsourcing 32,690 -
Proceeds from sale of business interest 431 -
Other, net (739) 153
------------------- ------------------
Cash provided (used) by investing activities 26,818 (7,929)
------------------- ------------------
FINANCING ACTIVITIES
Change in short-term borrowings, net (3,646) (5,176)
Payments on project financing (267) (248)
Issuance of common stock 1,129 744
Purchase and retirement of subordinated debt (2,098) -
Other, net (386) (213)
------------------- ------------------
Cash provided (used) by financing activities (5,268) (4,893)
Increase in cash and cash equivalents 29,165 145
Cash and cash equivalents at beginning of period 1,538 2,743
------------------- ------------------
Cash and cash equivalents at end of period $ 30,703 $ 2,888
------------------- ------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ITRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six-month
periods ended June 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 six-month periods ended June 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 June 30, Six months ended June 30,
(in thousands) 2000 1999 2000 1999
---------------------------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 15,127 14,807 15,080 14,782
Effect of dilutive securities:
Stock options 211 - 280 556
Convertible debt - - - -
------------- ------------- ------------- -------------
Weighted average shares outstanding assuming
conversion 15,338 14,807 15,360 15,338
------------- ------------- ------------- -------------
</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 extended our restructuring activities to
further reduce spending and to realign the Company into six market-focused
business units.
Restructuring reserves and activity for the first half of 2000 are detailed
below (in thousands).
<TABLE>
<CAPTION>
Reserve Reserve
Cash/ Balance Restructuring Balance
Non-Cash 12/31/99 Charge Activity 6/30/00
------------- -------------- ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Severance and related charges Cash $8,988 $315 $7,429 $1,874
Asset impairment Non-cash 3,600 (500) 2,620 480
Consolidation of facilities Cash 2,981 - (108) 3,089
-------------- ------------------ ----------- -----------
Totals $15,569 $(185) $9,941 $5,443
</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 2008.
Note 4: Balance Sheet Components
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------------------------------------------------------------------------- ---------------- --- ----------------
<S> <C> <C>
Inventories (in thousands)
Raw material $ 7,807 $ 6,428
Work in process 580 1,462
Finished goods 6,561 5,702
Field inventories awaiting installation 473 466
---------------- --------------
Total manufacturing inventories 15,421 14,058
Service inventories 952 1,242
---------------- --------------
Total inventories $16,373 $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. As indicated below, our
new business SBU has been merged with Water & Public Power.
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. As of the date of this report,
allocations of such expenses have not been determined. It is management's
intention to finalize these allocations during 2000. Allocation methods may
change over time. Certain amounts in the 1999 financial statements have been
reclassified to conform with the 2000 presentation.
Segment revenues and gross profits for the comparable quarters are detailed
below. In the first quarter Form 10-Q, information was reported in the Segment
Information footnote and Management's Discussion and Analysis as "New
Businesses" and "Other" respectively. This information is now included in the
Water & Public Power segment.
<PAGE>
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---------------------------------------------------------------------------------- ---------------- --- ---------------
<S> <C> <C>
(in thousands)
Revenues
Electric $12,780 $12,506
Natural Gas 9,671 16,915
Water & Public Power 13,884 13,901
Energy Information Systems 5,835 3,327
International 2,644 4,572
------------------- ------------------
Total revenues 44,814 51,221
------------------- ------------------
Gross profit
Electric 4,422 (958)
Natural Gas 4,254 9,260
Water & Public Power 4,314 5,284
Energy Information Systems 3,003 1,777
International 1,180 1,355
------------------- ------------------
Total gross profit 17,173 16,718
------------------- ------------------
CORPORATE ITEMS
Operating expenses
Sales and marketing 5,104 6,577
Product development 5,306 6,953
General and administrative 4,167 3,362
Amortization of intangibles 465 490
Restructuring charges - -
------------------- ------------------
Total operating expenses 15,042 17,382
Operating income (loss) 2,131 (664)
Other income (expense)
Equity in affiliates 248 (146)
Interest, net (974) (1,530)
Other 1 87
------------------- ------------------
Total other income (expense) (725) (1,589)
------------------- ------------------
Income (loss) before income taxes and extraordinary item $1,406 $ (2,253)
=================== ==================
</TABLE>
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.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading global provider of integrated systems solutions for utilities
and other customers to collect, communicate, analyze, and manage information
about energy and water usage. We design, develop, manufacture, market, install
and service hardware, software and integrated systems that enable customers to
obtain, analyze and use meter data.
Our solutions integrate a broad array of meter modules, radio and
telephone-based communications systems, and data management, delivery and
storage applications. In addition, we have handheld computers and supporting
products to record visually obtained meter data.
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. We have
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 federal and state regulation of the electric utility
industry and mergers and acquisitions in the utility industry.
<TABLE>
RESULTS OF OPERATIONS
<CAPTION>
Revenues Three months ended June 30, Six months ended June 30,
(in millions) Increase Increase
2000 (Decrease) 1999 2000 (Decrease) 1999
---- ---------- ---- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Electric $ 12.8 2% $ 12.5 $ 28.2 (10%) $ 31.3
Natural Gas 9.7 (43%) 16.9 22.0 (14%) 25.7
Water & Public Power 13.9 0% 13.9 25.5 (19%) 31.6
Energy Information Systems 5.8 76% 3.3 11.1 59% 7.0
International 2.6 (43%) 4.6 5.7 (25%) 7.6
-------- ---------- -------- -------- --------- ---------
Total revenues $ 44.8 (13%) $ 51.2 $ 92.5 (10%) $103.2
======== ========== ======== ======== ========= =========
</TABLE>
Total revenues decreased 13% in the second quarter of 2000 compared to the
second quarter of 1999.
Electric segment revenues in the second quarter were approximately level with
the prior year's quarter. Year-to-date Electric revenues were down 10% from the
same period in 1999. Revenues for the three months and the six months ended June
30, 1999 in this segment were net of a $4.2 million price concession for a
network installation. Second quarter outsourcing revenues in the Electric
segment were $1.2 million compared to $5.1 million in last year's second
quarter. Outsourcing revenues decreased year-over-year due to the sale of our
network installation at Duquesne in the first quarter of 2000. This year's
outsourcing revenues are for a mobile AMR application that is expected to be
fully installed by the first quarter of 2001. Net of the price concession and
outsourcing activities, revenues for the three months and the six months ended
June 30, 2000 were comparable to the same periods in 1999.
Revenues in the Natural Gas segment decreased 43% in the second quarter of 2000
compared to the second quarter of 1999 largely due to unusually high shipments
in 1999 to one customer with a large multi-year contract.
<PAGE>
Second quarter revenues for the Water & Public Power ("WPP") segment were
relatively level in 2000 compared with the comparable quarter in 1999. Revenues
for the six months ended June 30, 2000 were down 19% compared to 1999 because
the installation of equipment for two direct sales to large municipalities was
substantially completed in the second quarter of 1999. Sales to an affiliate
have lowered average selling prices compared with last year. The subsequent
resale by the affiliate to end-customers is reported using the equity method of
accounting (see "Other Income/Expense" below).
Revenues in the Energy Information Systems ("EIS") segment increased 76% and 59%
respectively for the three and six-month periods ended June 30, 2000 over the
comparable periods in 1999. EIS revenues primarily consist of product sales for
commercial and industrial customer energy usage, and product sales to the
wholesale energy market. EIS revenues increased largely as a result of
substantial consulting and software customization activities for a wholesale
energy settlement system in Ontario, Canada. Revenues from wholesale markets
were $2.1 million in the second quarter of 2000 compared to $500,000 in the
second quarter of 1999.
International revenues of $2.6 million in the second quarter of 2000 were 43%
less than the second quarter of 1999. The 1999 quarter included $700,000 of
revenues from a noncore-business subsidiary that was sold in January 2000. Most
of the remaining decrease is due the timing of orders and shipments of handheld
systems to the Asia/Pacific region.
Gross Margin
The following table shows gross margin as a percentage of corresponding revenue
and the percentage change in gross margin by business segment:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
Increase Increase
2000 (Decrease) 1999 2000 (Decrease) 1999
---- ---------- ---- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Electric 35% 43% (8%) 34% 14% 10%
Natural Gas 44% (11%) 55% 45% (8%) 53%
Water and Public Power 31% (7%) 38% 30% (9%) 39%
Energy Information 51% (2%) 53% 50% 9% 59%
International 45% 15% 30% 46% 16% 30%
----- ---------- ----- ----- --------- ----
Total gross margin 38% 4% 34% 38% 4% 34%
===== ========== ===== ===== ========= ====
</TABLE>
Total gross margin was 38% of revenues in the second quarter of 2000 compared
with 34% of revenues in the second quarter of 1999. During the three months and
six months ended June 30, 2000, gross margin benefited from the consolidation of
our high volume manufacturing operations in Minnesota. In an effort intended to
reduce fixed costs and benefit gross margin, the Company also outsourced low
volume manufacturing and service repair operations to Servatron during the
second quarter of 2000. Servatron is an affiliated company formed by a group of
former Company employees (see Exhibit 10.22 in Item 6).
Gross margin for the Electric segment improved to 35% of revenue in the current
quarter compared with (8)% for the second quarter last year. Last year's
negative gross margin was caused by the $4.2 million price concession discussed
above. The 1999 quarter also included significant outsourcing activities for the
Duquesne project which depressed the overall Electric gross margin by 13
percentage points when compared to the 2000 quarter. Year-to-date Electric gross
margins of 34% are much higher than the prior year gross margin of 10% for the
same reasons.
Higher material costs and lower production volume decreased Natural Gas gross
margins in the second quarter and six-month periods of 2000 as compared to the
similar periods in 1999.
Higher material costs and a higher mix of sales through indirect channels in
2000 has has resulted in lower gross margins in the WPP segment.
<PAGE>
<TABLE>
Operating Expenses
<CAPTION>
Three months ended June 30, Six months ended June 30,
(in millions) Increase Increase
2000 (Decrease) 1999 2000 (Decrease) 1999
---- ---------- ---- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $ 5.1 (22%) $ 6.6 $ 10.2 (17%) $ 12.4
Product development 5.2 (24%) 6.9 11.5 (15%) 13.5
General and administrative 4.2 24% 3.4 8.7 36% 6.4
Amortization of intangibles 0.5 (5%) 0.5 0.9 (5%) 1.0
Restructuring charges - 0% - (0.2) (117%) 1.1
-------- --------- -------- -------- ---------- --------
Total operating expenses $15.0 (13%) $17.4 $31.1 (10%) $34.4
======== ========= ======== ======== ========== ========
</TABLE>
As discussed earlier, 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 one-half
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 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>
Other Income (Expense)
<CAPTION>
Three months ended June 30, Six months ended June 30,
(in millions) Increase Increase
2000 (Decrease) 1999 2000 (Decrease) 1999
---- ---------- ---- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Equity in affiliates $ 0.3 270% $(0.2) $ 0.8 343% $(0.3)
Interest, net (1.0) 36% (1.5) (2.5) 25% (3.4)
Other - (100%) 0.1 0.3 220% 0.1
-------- ---------- -------- -------- --------- --------
Total other income (expense) $(0.7) 54% $(1.6) $(1.4) 60% $(3.6)
======== ========== ======== ======== ========= ========
</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 was
$248,000 in the second quarter of 2000 due to increased sales by this affiliate.
Year-to-date equity in affiliates includes a $150,000 net gain on the sale of
our interest in another partially-owned domestic affiliate.
Net interest expense decreased 36% from the similar quarter last year due to
lower bank borrowings, a reduction of subordinated debt outstanding, and net
invested cash during the current quarter. We received approximately $32.7
million from the sale of our outsourcing installation at Duquesne through June
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. The gain on the early retirement of subordinated debt for each
period is reflected as an extraordinary item on the statement of operations.
<PAGE>
Income Taxes
The effective income tax rate was approximately 38% for the comparative
quarters. 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>
Three months ended June 30, Six months ended June 30,
(in millions) Increase Increase
Cash flow information: 2000 (Decrease) 1999 2000 (Decrease) 1999
---- ---------- ---- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Operating activities $ 0.4 (94%) $ 6.9 $ 7.6 (41%) $ 12.9
Investing activities (2.1) 53% (4.5) 26.8 439% (7.9)
Financing activities (3.6) (157%) (1.4) (5.2) (6%) (4.9)
-------- --------- -------- -------- ---------- --------
Increase (decrease) in cash $ (5.3) (630%) $ 1.0 $ 29.2 293% $ 0.1
======== ========= ======== ======== ========== ========
</TABLE>
Year-to-date cash flow from operating activities was $7.6 million through June
of 2000 compared to $12.9 million in the same period last year. We used
approximately $2.6 million and $7.5 million of cash for involuntary termination
benefits and other restructuring related costs during the second quarter and
six-month periods ending June 30, 2000, respectively. Additional severance
payments of approximately $1.9 million will be made in the third quarter of
2000.
On March 31, 2000 we received $32.0 million from the sale of our network
installation at Duquesne Light Company to an affiliate of Duquesne, which is
reflected in investing activities. In the second quarter we collected an
additional $700,000 in sales proceeds which had been held in escrow pending
certain post-closing items. Other investing activities used $6 million in the
first half of 2000, consisting of normal 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.
During the first half of 2000, financing activities used $5.2 million in cash,
$3.6 million of which was used to pay down short-term bank borrowings and $2.1
million was used for the repurchase and retirement of subordinated debt.
Management believes that existing cash resources and available borrowings under
the credit facility are more than adequate to meet the Company's needs for the
remainder of 2000.
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
October 2000. Because of pending summary judgement motions, the trial
date will probably be rescheduled 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. The Company believes the non-infringement decision was
incorrect and has filed an appeal. The litigation stay resulting from
CellNet's filing for bankruptcy protection has been lifted. All briefs
have been filed and oral arguments are expected this October. There can
be no assurance that the Company will prevail on appeal in this action.
The Company is not involved in any other material legal proceedings.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on June 28, 2000.
Two directors were elected for a term of one year until 2001, Michael
J. Chesser and LeRoy D. Nosbaum. Three directors were elected for a
term of three years, Michael B. Bracy, Mary Ann Peters, and
Graham M. Wilson. Ted C. DeMerritt, Jon E. Eliassen, Paul A.
Redmond and S. Edward White 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>
Michael J. Chesser 14,245,560 154,181
LeRoy D. Nosbaum 14,270,255 129,486
Michael B. Bracy 14,248,880 150,861
Mary Ann Peters 14,235,864 163,877
Graham M. Wilson 14,251,711 148,030
--------------------------------------- -------------------------- ---------------------------
</TABLE>
<TABLE>
<CAPTION>
Matter 2. Approval of the Company's 2000 Stock Incentive Compensation Plan:
For Against Abstain Broker Non-Votes
---------------------- -------------------- ------------------------- ------------------------
<S> <C> <C> <C>
8,282,903 2,122,349 35,971 3,968,518
---------------------- -------------------- ------------------------- ------------------------
</TABLE>
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.21 - Form of Change of Control Agreement between Registrant
and executive officers Tim Gelvin and Bob Whitney.
(A) (10.1)
Exhibit 10.22 - Contribution Agreement between Itron, Inc. and
Servatron, Inc. dated May 15, 2000.
Exhibit 10.23 - Credit Agreement between Itron, Inc. and Servatron,
Inc. dated June 22, 2000.
Exhibit 27 - Financial Data Schedule
-------------------------------------------------------------------------------
(A) Incorporated by reference to designated exhibit included in the
Company's 1999 Annual Report on Form 10-K dated March 26, 2000.
<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 14, 2000
