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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(mark one)
[X] AMENDMENT NO.1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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___
---
The number of shares outstanding of the registrant's common stock as of April
30, 2001 was 15,505,712.
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This amendment on Form 10-Q of Itron, Inc. incorporates certain revisions to
historical financial data and related descriptions but is not intended to update
other information presented in this report as originally filed, except where
specifically noted. The amendment reflects the restatement of the Registrant's
condensed consolidated financial statements for the three months ended March 31,
2001 and 2000 included in its Form 10-Q for the three months ended March 31,
2001 and 2000, filed on May 15, 2001, related to its accounting for certain
outsourcing contracts under which the Company retains title to the related
equipment. See Note 8 to our condensed consolidated financial statements for
further discussion of the matter.
Itron, Inc.
Table of Contents
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Page
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Part 1: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) (As Restated) 1
Condensed Consolidated Balance Sheets (As Restated) 3
Condensed Consolidated Statements of Cash Flows (As Restated) 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation 5
Note 2: Earnings Per Share and Capital Structure 5
Note 3: Balance Sheet Components 6
Note 4: Segment Information 6
Note 5: Restructuring 7
Note 6: Contingencies 7
Note 7: Impact of New Accounting Standards 8
Note 8: Restatement 8
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW 9
RESULTS OF OPERATIONS 9
Revenues 9
Gross Margin 10
Operating Expense 11
Other Income (Expense) 11
Income Taxes 12
Extraordinary Item 12
Cumulative Effect of a Change in Accounting Principle 12
FINANCIAL CONDITION
Cash Flow Information 12
Business Outlook 13
Certain Forward-looking Statements 13
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 14
MARKET RISK
Part 2: Other Information
Item 1: Legal Proceedings 15
Item 6: Exhibits and Reports on Form 8-K 15
Signature 16
Part 1: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS (UNAUDITED)
ITRON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (AS RESTATED)
(Unaudited, in thousands, except per share data) Three months ended March 31,
Revenues 2001 2000
----------------- ------------------
Sales $ 37,232 $ 36,596
Service 10,239 10,329
----------------- ------------------
Total revenues 47,471 46,925
----------------- ------------------
Cost of revenues
Sales 21,521 21,440
Service 7,269 8,179
----------------- ------------------
Total cost of revenues 28,790 29,619
----------------- ------------------
Gross profit 18,681 17,306
Operating expenses
Sales and marketing 5,585 5,130
Product development 5,739 6,176
General and administrative 3,275 4,516
Amortization of intangibles 366 466
Restructurings - (185)
----------------- ------------------
Total operating expenses 14,965 16,103
----------------- ------------------
Operating income 3,716 1,203
Other income (expense)
Equity in affiliates 23 507
Interest and other, net (1,294) (1,227)
----------------- ------------------
Total other income (expense) (1,271) (720)
----------------- ------------------
Income before income taxes and extraordinary item 2,445 483
Income tax (provision) benefit (956) (181)
----------------- ------------------
Income before extraordinary item and cumulative effect of a change in
accounting principle 1,489 302
Extraordinary gain on early extinguishment of debt, net of income taxes
of $570 - 1,044
Cumulative effect of a change in accounting principle, net of income
taxes of $1,581 - (2,562)
----------------- ------------------
Net income (loss) $ 1,489 $ (1,216)
================= ==================
Other comprehensive income, net of tax:
Foreign currency translation adjustments 24 (42)
Unrealized holding gains 7 -
----------------- ------------------
Other comprehensive income 31 (42)
----------------- ------------------
Comprehensive income (loss) $ 1,520 $ (1,258)
================= ==================
1
ITRON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (AS RESTATED)
(continued)
(Unaudited, in thousands, except per share data) Three months ended March 31,
2001 2000
----------------- ------------------
Earnings per share
Basic
Income before extraordinary item $ .10 $ .02
Extraordinary item - .07
Cumulative effect - (.17)
----------------- ------------------
Basic net income (loss) per share $ .10 $ (.08)
================= ==================
Diluted
Income before extraordinary item $ .09 $ .02
Extraordinary item - .07
Cumulative effect - (.17)
----------------- ------------------
Diluted net income (loss) per share $ .09 $ (.08)
================= ==================
Average number of shares outstanding
Basic 15,383 15,033
Diluted 15,690 15,378
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
ITRON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
ASSETS
March 31, December 31,
2001 2000
(As Restated)
------------------- -----------------
Current assets
Cash and cash equivalents $ 14,812 $ 21,216
Short-term investments 8,278 -
Accounts receivable, net 36,373 49,859
Inventories, net 18,282 17,196
Deferred income taxes 3,946 4,852
Other 1,802 899
------------------- -----------------
Total current assets 83,493 94,022
Property, plant and equipment, net 24,080 25,197
Equipment used in outsourcing, net 13,823 14,150
Intangible assets, net 12,294 12,836
Restricted cash 5,100 -
Deferred income taxes 27,318 27,287
Other 4,790 3,739
------------------- -----------------
Total assets $ 170,898 $ 177,231
=================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 27,708 $ 30,171
Wages and benefits payable 4,665 9,244
Mortgage notes and leases payable 246 242
Deferred revenue 8,150 9,025
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Total current liabilities 40,769 48,682
------------------- -----------------
Convertible subordinated debt 53,459 53,459
Mortgage notes and leases payable 5,026 5,074
Project financing 6,528 6,671
Warranty and other obligations 11,152 11,253
------------------- -----------------
Total liabilities 116,934 125,139
------------------- -----------------
Shareholders' equity
Common stock 110,082 109,730
Accumulated other comprehensive loss (1,809) (1,840)
Accumulated deficit (54,309) (55,798)
------------------- -----------------
Total shareholders' equity 53,964 52,092
------------------- -----------------
Total liabilities and shareholders' equity $ 170,898 $ 177,231
=================== =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ITRON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
Three months ended March 31,
(Unaudited, in thousands) 2001 2000
---------- --------
OPERATING ACTIVITIES
Net income (loss) $ 1,489 $ (1,216)
Noncash charges (credits) to income:
Depreciation and amortization 2,634 4,099
Deferred income tax provision 875 196
Equity in affiliates, net (23) (316)
Extraordinary gain on early extinguishment of debt - (1,044)
Cumulative effect of a change in accounting principle - 2,562
Loss on equipment sale or disposal - (500)
Changes in operating accounts:
Accounts receivable 13,486 6,129
Inventories (1,086) 359
Accounts payable and accrued expenses (2,549) 3,986
Wages and benefits payable (4,579) (5,321)
Deferred revenue (875) (1,419)
Other, net (80) 298
----------- -----------
Cash provided by operating activities 9,292 7,813
INVESTING ACTIVITIES
Purchase of short-term investments (8,278) -
Reclassification of restricted cash balance (5,100)
Acquisition of property, plant and equipment (671) (1,254)
Equipment used in outsourcing (1) (2,225)
Proceeds from sale of equipment used in outsourcing, net - 32,000
Proceeds from sale of business interest - 431
Investment in affiliates (1,000) -
Other, net (796) (582)
----------- -----------
Cash provided (used) by investing activities (15,846) 28,370
FINANCING ACTIVITIES
Change in short-term borrowings, net - 425
Payments on project financing, net (143) (132)
Convertible subordinated debt repurchase - (2,098)
Issuance of common stock 352 334
Other, net (59) (218)
----------- -----------
Cash provided (used) by financing activities 150 (1,689)
----------- -----------
Increase (decrease) in cash and cash equivalents (6,404) 34,494
Cash and cash equivalents at beginning of period 21,216 1,538
----------- -----------
Cash and cash equivalents at end of period $ 14,812 $ 36,032
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ITRON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2000
(Unaudited)
Note 1: Basis of Presentation
The consolidated financial statements presented in this Form 10-Q/A are
unaudited and reflect, in the opinion of management, all normal recurring
adjustments necessary for a fair presentation of operations for the three-month
periods ended March 31, 2001 and 2000. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
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 included in our Form 10-K/A for
the year ended December 31, 2000, as filed with the Securities and Exchange
Commission on March 1, 2002. The results of operations for the three month
period ended March 31, 2001 are not necessarily indicative of the results
expected for the full fiscal year or for any other fiscal period.
During the fourth quarter of 2000, the Company implemented SEC Staff Accounting
Bulletin No. 101 (SAB 101), which outlines the Staff's views on revenue
recognition. As a result, we have changed our revenue recognition for certain
transactions related to customer acceptance and F.O.B destination shipments. The
implementation has been accounted for as a cumulative change in accounting
principle in 2000. We restated our financial results for the first quarter of
2000 to conform revenue recognition to the requirements of SAB 101.
In addition, subsequent to the issuance of our consolidated financial statements
for the year ended December 31, 2000, we changed our revenue recognition
practice retroactively to January 1, 2000 for our two outsourcing contracts
under which we retain title to the related equipment. See Note 8.
We have invested in short-term securities in 2001 and account for these
investments in accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. We consider our short-term securities to be available-for-sale and,
in accordance with SFAS No., 115, the securities are reported at fair value,
with unrealized gains and losses excluded from earnings and recorded net of
deferred taxes directly to stockholders' equity as accumulated other
comprehensive income.
Note 2: Earnings Per Share and Capital Structure
(in thousands) Three months ended
March 31,
-------------------------
2001 2000
---- ----
Weighted average shares outstanding 15,383 15,033
Effect of dilutive securities 307 345
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Weighted average shares outstanding assuming conversion 15,690 15,378
========== ===========
We have 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 diluted earnings
per share using the "treasury stock" method. We also have subordinated
convertible notes outstanding with conversion prices of $9.65, representing
1,554K shares, and $23.70, representing an additional 1,623K shares. These notes
are not included in the above calculation as the notes are anti-dilutive in both
periods when using the "if converted" method. The actual average market price of
stock used to calculate dilutive shares in the first quarter was $6.95. The
market price of our stock as of April 30, 2001 was $14.80 and would result in
dilutive shares, from both options and subordinated convertible notes
outstanding, increasing to 18,471K shares in this calculation.
5
Note 3: Balance Sheet Components
March 31, December 31,
(in thousands) 2001 2000
-------------- ---------------
Accounts Receivable
Trade (net of allowance for doubtful accounts of $1,125 and $1,144) $ 29,343 $ 42,218
Unbilled revenue 7,030 7,641
-------------- --------------
Total accounts receivable $ 36,373 $ 49,859
============== ==============
Inventories, net
Material $ 5,083 $ 5,721
Work in process 637 737
Finished goods 11,425 9,723
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Total manufacturing inventories 17,145 16,181
Service inventories 1,137 1,015
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Total inventories $ 18,282 $ 17,196
============== ==============
Note 4: Segment Information
We are internally organized around six strategic business units ("SBUs") focused
on the customer segments that we serve. These SBUs are Electric Systems, Natural
Gas Systems, Water & Public Power Systems, Energy Information Systems ("EIS"),
International Systems, and Client Services.
Revenues for Electric, Natural Gas, and Water & Public Power Systems include
hardware, custom and licensed software, project management, installation and
support activities, and outsourcing services, where we own and operate, or
simply operate, systems for a periodic fee. Client Services revenues include
post-sale support activities, primarily for our Electric, Natural Gas, and Water
& Public Power Systems SBUs. EIS has two main areas of focus: 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. EIS also provides consulting services in these areas as well.
Revenues for EIS and International generally include all of the above types of
revenues. Inter-segment revenues are immaterial.
Management has three primary measures for each of our operating segments:
revenue, gross profit, and operating income. Of these three measures, operating
income is our primary profit and loss measure. It is defined as operating income
after the allocation of basic services (such as floor space and communication
expense), excluding the allocation of corporate product development, marketing,
miscellaneous manufacturing and certain other corporate expenses. Operating
income is calculated as revenue, less direct costs associated with that revenue,
less operating expenses directly incurred by the segment and less the
allocations mentioned above. Operating expenses directly associated with each
segment may include sales, marketing, development, or administrative expenses.
Corporate consists of operating expenses not allocated to the other segments.
Certain amounts in the 2000 financial statements have been reclassified to
conform with the 2001 presentation, including all amounts related to Client
Services, which was newly formed, effective January 1, 2001.
Segment revenues and operating results for the comparable quarters are detailed
below.
Three months ended March 31,
(in thousands)
Client
Electric Natural Gas Water & PP EIS Internat'l Services Corporate Total
---------- ----------- ---------- ---------- ------------ ---------- ----------- ---------
2001
Revenues $ 12,748 $ 7,277 $ 6,908 $ 4,998 $ 8,264 $ 7,276 $ - $ 47,471
Cost of sales 6,579 3,211 3,518 2,403 5,734 5,989 1,356 28,790
---------- ----------- ---------- ---------- ------------ ---------- ---------- ----------
Gross profit 6,169 4,066 3,390 2,595 2,530 1,287 (1,356) 18,681
Operating exp. 1,021 618 737 1,338 1,497 99 9,655 14,965
---------- ----------- ---------- ---------- ------------ ---------- ---------- ----------
Operating
income/(loss) $ 5,148 $ 3,448 $ 2,653 $ 1,257 $ 1,033 $ 1,188 $ (11,011) $ 3,716
========== =========== ========== ========== ============ ========== ========== ==========
Three months ended March 31,
(in thousands)
Client
Electric Natural Gas Water & PP EIS Internat'l Services Corporate Total
---------- ------------- ------------ -------- ------------ ---------- ----------- --------
2000
Revenues $ 10,294 $ 10,300 $ 10,368 $ 5,247 $ 3,017 $ 7,699 $ - $ 46,925
Cost of sales 4,495 4,470 5,404 2,708 1,588 7,688 3,266 29,619
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 5,799 5,830 4,964 2,539 1,429 11 (3,266) 17,306
Operating exp 944 669 689 1,484 1,613 228 10,476 16,103
-------- -------- -------- -------- -------- -------- -------- --------
Operating
income/(loss) $ 4,855 $ 5,161 $ 4,275 $ 1,055 $ (184) $ (217) $(13,742) $ 1,203
======== ======== ======== ======== ======== ======== ======== ========
Note 5: Restructuring
We recorded charges totaling $16.3 million in 1999 for restructuring activities
that have improved efficiencies and reduced costs. Our restructuring actions
included the consolidation of high volume manufacturing to our plant in
Minnesota, a reduction of products and software platforms supported by the
Company, consolidation of product development locations, and a reduction in
activities in Europe not related to our core business. The majority of our
restructuring charges were related to a reduction in force of approximately 300
people of which approximately 50% were in manufacturing, 25% in product
development and the remainder throughout the Company. Twenty-five percent of the
reductions were management positions. The remaining charges relate to impairment
of equipment and estimated future lease payments for abandoned facilities. There
were no additional charges recorded in 2000 or 2001. Restructuring reserve
balance adjustments and payments for the first three months of 2001 are detailed
below (in thousands):
Reserve Reserve Reserve
Cash/ Balance Balance Balance
Non-Cash 12/31/00 Adjustments Payments 3/31/01
------------ ------------ --------------- ------------ -----------
Severance and related charges Cash $ 159 $ - $ 43 $ 116
Consolidation of facilities Cash 2,616 - 323 2,293
------------ --------------- ------------ -----------
Totals $2,775 $ - $ 366 $2,409
============ =============== ============ ===========
The reserve balance for severance and related charges is expected to be fully
utilized in 2001. The adequacy of facility consolidation reserves is dependent
on our ability to successfully sublease vacant space, which is leased pursuant
to a non-cancelable operating lease through 2006.
Note 6: Contingencies
We maintain performance and bid bonds for certain customers. The performance
bonds usually cover the installation phase of a contract and may on occasion
cover the operations and maintenance phase of outsourcing contracts. The value
of the bonds in force were $47.9 million and $25.0 million at March 31, 2001 and
2000, respectively. Additionally, we have standby letters of credit to guarantee
our performance under certain contracts. The outstanding amounts of standby
letters of credit were $11.8 million and $11.3 million at March 31, 2001 and
2000, respectively.
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 we have made
adequate provisions for such contingent liabilities. In addition, we are both a
plaintiff and a defendant in litigation concerning potential patent
infringement. While the ultimate outcome and its impact on our financial
statements is undeterminable at this time, if we do not prevail or reach a
favorable settlement in this case, the impact could have a material adverse
affect on our financial condition.
We have a long-term outsourcing contract with Southern California Edison ("SCE")
in which we own, operate and maintain a Mobile Automated Meter Reading System
for approximately 360,000 of their meters, and sell meter reading data to them.
At March 31, 2001, we had trade and contracts receivable totaling $421,000 from
SCE and net capitalized equipment related to this contract of $9.7 million. In
January 2001, in response to the California energy market situation, SCE
announced it was suspending payments on certain debt and purchased power
obligations. SCE has not notified us of any intention to suspend payments on our
contract and has continued to make timely monthly payments. If SCE were to
suspend payments to us, we believe the outsourcing contract provides us with the
right to cease operations, which cessation would mean SCE would not have meter
reading data to use in billing approximately 360,000 customers unless
7
they were to hire more costly manual meter readers. However, if SCE were to
enter into bankruptcy proceedings, such action could result in a full or partial
write-off of the assets and receivables. No loss contingency for this
uncertainty has been accrued in the financial statements as management believes
that events resulting in a full or partial write-off of assets related to SCE
are not probable.
Note 7: Impact of New Accounting Standards
SFAS No. 133
------------
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. We adopted SFAS 133 effective January 1,
2001. The adoption of SFAS 133 did not have a significant impact on the
financial position, results of operations, or cash flows of the Company.
Note 8: Restatement
-------------------
During February 2002, subsequent to the issuance of the Company's financial
statements for the three months ended March 31, 2001, the Company determined
that in our adoption of SAB 101 we should have adopted service contract
accounting for certain of our outsourcing contracts where we retain title to the
related equipment. Accordingly, the Company changed its method of accounting for
these contracts from the percentage of completion method under SOP 81-1 to
service contract accounting. As a result, the accompanying consolidated
financial statements for the three months ended March 31, 2001 and 2000 have
been restated to give effect to the changes as of January 1, 2000. A summary of
the significant effects of the restatement is as follows:
2001 2000
As previously As previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
At March 31, 2001:
Accounts receivable, net $ 36,215 $ 36,373
Current portion of long-term contracts receivable 3,250 -
Equipment used in outsourcing, net 9,507 13,823
Long-term contracts receivable 2,754 -
Deferred income taxes 26,091 27,318
Deferred revenue 7,675 8,150
Warranty and other obligations 9,928 11,152
Accumulated deficit $ (52,308) $ (54,309)
For the three months ended March 31:
Service revenues $ 10,246 $ 10,239 $ 11,991 $ 10,329
Service cost of revenues 7,194 7,269 8,710 8,179
Income tax (provision) benefit (986) (956) (610) (181)
Income before extraordinary item and cumulative
effect of change in accounting principle 1,540 1,489 1,004 302
Cumulative effect of change in accounting principle (1,646) (2,562)
Net income (loss) $ 1,540 $ 1,489 $ 402 $ (1,216)
Basic
Income before extraordinary item .07 .02
Cumulative effect (.11) (.17)
Basic net income (loss per share) .03 (.08)
Diluted
Income before extraordinary item .10 .09 .07 .02
Cumulative effect (.11) (.17)
Diluted net income (loss) per share .10 .09 .03 (.08)
8
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below reflects certain restatements to our previously
reported results of operations for these periods. See Note 8 to the condensed
consolidated financial statements for a discussion of this matter. Also, as
discussed in Note 4 to the condensed consolidated financial statements, we
realigned our business segments in 2001. Information for the quarter ended March
31, 2000 has been reclassified to conform to the 2001 presentation.
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 over 18 million meters. In addition, our
technology is being used by a number of the newly created wholesale energy
markets in the U.S. and Canada to provide critical billing and settlement
systems for deregulated markets. Our systems touch more than $200 billion in
energy and water transactions every year in North America alone.
Only 11% of the electric, gas and water meters in North America are read using
automated meter data collection and communication systems from all suppliers.
While we are aggressively pursuing numerous opportunities remaining for advanced
metering and billing systems by penetrating beyond 11%, we also intend to use
our core technology and industry knowledge to move beyond meter reading into
other opportunities for optimizing the delivery and use of energy and water.
We design, develop, manufacture, market, install and service hardware, software
and integrated systems. Sales include hardware, custom and licensed software,
consulting, project management, and installation and sales support activities.
Services include post-sale maintenance support and outsourcing services where we
own and operate, or simply operate systems for a periodic fee.
We currently derive the majority of our revenues from sales of products and
services to utilities. However, our business may increasingly consist of sales
to other energy and water industry participants such as energy service
providers, end user customers, wholesale power markets, and others.
RESULTS OF OPERATIONS
The following tables show our revenue and percent change from the prior year by
sales or service and by segment.
Revenues Three months ended March 31,
----------------------------
($'s in millions) Increase
2001 2000 (Decrease)
---- ---- ----------
Sales $ 37.2 $ 36.6 2%
Service 10.3 10.3 0%
-------- ---------
Total revenues $ 47.5 $ 46.9 1%
======== =========
Segment Revenues Three months ended March 31,
----------------------------
($'s in millions) Increase
2001 2000 (Decrease)
---- ---- ----------
Electric $ 12.7 $ 10.3 23%
Natural Gas 7.3 10.3 (29%)
Water & Public Power 6.9 10.4 (34%)
Energy Information Systems 5.0 5.2 (4%)
International 8.3 3.0 177%
Client Services 7.3 7.7 (5%)
-------- ---------
Total revenues $ 47.5 $ 46.9 1%
======== =========
9
Revenues of $47.5 million for the quarter were up slightly from revenues of
$46.9 million in the first quarter of last year. Included in last year's first
quarter service revenues were $1.8 million in outsourcing revenues related to
our Duquesne Light Company fixed network project, that we sold at the end of the
first quarter of 2000. No customer represented more than 10% of total revenue
during the first quarter of this year or last year.
Electric revenues were higher primarily as a result of a mobile automated meter
reading system order from a large electric utility. This customer accounted for
32% of Electric revenues during the first quarter of 2001. We have a multi-year
contract with this utility through next year.
Natural Gas Systems revenue declined in the first quarter primarily due to
completion of large contracts in 2000. We expect that revenues in this segment
will be at a lower level in 2001 than we experienced last year.
Water and Public Power revenues were lower in the first quarter of 2001 due to a
large project active in the first quarter of 2000 that was completed. Our water
business is expected to grow through the rest of the year.
Revenues in our Energy Information Systems segment decreased slightly from the
first quarter last year. Revenues in this segment can fluctuate on a quarterly
basis due primarily to customized development work for wholesale energy systems.
We expect to see growth in this unit for the year.
International revenues increased 177% over the first quarter of 2000 due to
significant handheld sales to customers in Japan. Sales to these customers were
approximately one half of the International segment's revenue in the first
quarter of 2001, and sales to these customers will continue into the second
quarter of 2001, but at a reduced level.
Client Services segment revenues decreased 5% in the first quarter of 2001
compared with the first quarter of 2000 due to the aforementioned sale of our
Duquesne Light Company project. Partially offsetting the Duquesne revenue loss
were increased revenues from hardware maintenance contracts, time and material
maintenance, and software maintenance contracts during the first quarter of
2001.
We do not place any particular significance on the quarter-to-quarter variations
in SBU revenue, and expect the year's revenue in aggregate to show growth
relative to last year in the range of 10% to 15%.
Gross Margin Three months ended March 31,
----------------------------
(as a % of corresponding revenue) Increase
2001 2000 (Decrease)
------------ ------------ ----------
Electric 48% 56% (8%)
Natural Gas 56% 57% (1%)
Water & Public Power 49% 48% 1%
Energy Information Systems 52% 48% 4%
International 31% 47% (16%)
Client Services 18% 0% 18%
Corporate /(1)/ (3%) (7%) 4%
------------ ------------
Total gross margin 39% 37% 2%
============ ============
(1) Percent of total company revenue.
Total gross margin was 39% for the first quarter, up from 37% a year ago. We
continue to realize increased domestic manufacturing efficiencies due in part to
higher production volumes, a benefit from having substantially spun-off our
low-volume manufacturing operations, and a continued attentiveness to margins
and pricing.
Gross margin for the Electric segment decreased 8% and the Natural Gas segment
decreased 1% due to a change in the mix of customers and products from the first
quarter of 2000 to 2001.
The gross margin in the Water and Public Power segment was slightly higher in
the first quarter of 2001 than in the first quarter of 2000 due to a slightly
lower average cost on the mix of water products shipped in 2001. Average selling
prices in this segment can also vary with changes in relative sales between our
direct sales force and our indirect channel, which is comprised of outside
distributors.
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EIS segment revenue is primarily related to custom software development
activities and licenses. Gross margins can vary from period to period depending
on the mix of license revenues versus custom development activities. The gross
margin in the first quarter of 2001 was positively impacted by a higher
percentage of license revenues compared to the first quarter of 2000.
The decline in the 2001 International gross margin is the result of the large
sale of handheld equipment to customers in Japan at lower margins.
In the Client Services segment, gross margin increased by 18% in 2001 compared
with the first quarter of 2000. As discussed under revenues above, we had a
substantial amount of revenue at a very low margin in the 2000 quarter, related
to our outsourcing contract with Duquesne Light, that was absent in the 2001
quarter.
The favorable impact of unallocated Corporate cost of sales on total gross
margin in 2001, compared to 2000, is primarily due to efficiencies gained
through the consolidation of our domestic manufacturing facilities. In addition,
unallocated Corporate cost of sales in the first quarter of 2000 was higher than
2001 because production volumes were higher in 2001 which resulted in the
absorption of more manufacturing costs in excess of standard costs in 2001
compared to 2000.
Operating Expenses Three months ended March 31,
--------------------------------------------
($'s in millions) Increase
2001 2000 (Decrease)
------------ ------------ ------------
Sales and marketing $ 5.6 $ 5.1 9%
Product development 5.7 6.2 (7%)
General and administrative 3.3 4.5 (27%)
Amortization of intangibles 0.4 0.5 (21%)
Restructurings - (0.2) 100%
------------ ------------
Total operating expenses $ 15.0 $ 16.1 (7%)
============ ============
Sales and Marketing expenses were 11.8% of revenues in the first quarter of
2001, compared to 10.9% in the first quarter of the prior year. The increase
year to year was due to investments in marketing programs and systems, primarily
a new eCRM (internet-based Customer Relationship Management) system.
Product development expenses decreased 7% from the first quarter of the prior
year to $5.7 million, driven by the absence of personnel and other costs present
a year ago, which were phased out during the first and second quarters of 2000
as part of our restructuring.
The 27% decrease in general and administrative costs was due primarily to the
favorable negotiation of a new communications contract, reduced legal fees for
patent and FCC matters, and the absence of other charges present a year ago that
were phased out in conjunction with our restructuring.
Other Income (Expense) Three months ended March 31,
----------------------------
($'s in millions) Increase
2001 2000 Decrease
---- ---- --------
Equity in affiliates /(1)/ $ - $ 0.5 (95%)
Interest and other, net (1.3) (1.2) (6%)
------------ ------------
Total other income (expense) $ (1.3) $ (0.7) (77%)
============ ============
(1) $23,168 in 2001
Equity in affiliates was higher in 2000 due to shipments for a large water
contract through a marketing joint venture in which we have a 50% ownership
interest. Also in 2000, we realized a $150,000 net gain on the sale of an
interest in a partially owned venture.
Interest and other increased slightly year to year. Net interest expense was
$1.1 million in the first quarter of 2001 compared with $1.6 million in 2000.
The 31.3% decrease in 2001 was due primarily to a reduction of subordinated debt
outstanding and an increase in invested cash. The reduction in subordinated debt
resulted from a debt repurchase transaction in the first quarter of 2000. Other
expenses increased $490,000 in the first quarter of 2001 compared to the
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first quarter of 2000. This is due primarily to the absence of a gain from the
sale of a company forming part of our International SBU.
Income Taxes
The effective income tax rate is 39% in 2001 compared with 38% in 2000. Our
effective income tax rate can vary from period to period because of fluctuations
in foreign operating results, changes in valuation allowances for deferred tax
assets, new or revised tax legislation, and changes in the level of business
performed in differing domestic 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 $1.0 million.
Cumulative effect of a Change in Accounting Principle
During the fourth quarter of 2000, the Company implemented SEC Staff
Accounting Bulletin No. 101 (SAB 101), which outlines the Staff's views on
revenue recognition. As a result, we have changed our revenue recognition for
certain transactions related to customer acceptance and F.O.B. destination
shipments. The implementation has been accounted for as a cumulative change in
accounting principle in 2000. We restated our financial results for the first
quarter of 2000 to conform revenue recognition to the requirements of SAB 101.
In addition, subsequent to the issuance of our consolidated financial
statements for the year ended December 31, 2000, we changed our revenue
recognition practice retroactively to January 1, 2000 for our two outsourcing
contracts under which we retain title to the related equipment. See Note 8 to
the condensed consolidated financial statements.
FINANCIAL CONDITION
Cash Flow Information Three months ended March 31,
----------------------------
($'s in millions)
Increase
2001 2000 Decrease
---- ---- --------
Operating activities $ 9.2 $ 7.8 18%
Investing activities (15.8) 28.4 (156%)
Financing activities 0.2 (1.7) 112%
------------ ------------
Increase (decrease) in cash $ (6.4) $ 34.5 (119%)
============ ============
Operating activities:
Cash flow from operating activities was 18% higher in the first quarter of 2001
compared to the first quarter last year. This is due primarily to collections of
receivables from shipments that occurred late in the prior quarter. Operating
cash flow for 2001 is expected to be roughly twice last year's normalized cash
flow which was $13.1 million excluding cash used in 2000 for restructuring.
Investing activities:
The primary investing activity in the first quarter of 2001 was the purchase of
$8.3 million of investments with maturities not more than 13 months, to obtain
higher interest yields. In addition we made investments of $500,000 each in two
private companies. One company is a provider of meter reading services to energy
service providers and end user customers, and the other is in the early stages
of developing an in-home gateway communication technology. In the first quarter
of 2000 we received $32 million from the sale of our network project at Duquesne
Light Company to an affiliate of Duquesne. Finally, we reclassified $5.1 million
into restricted cash for a collateralized letter of credit that has been
outstanding since March 2000.
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Financing activities:
Financing activities in the first quarter of 2000 included a $2.1 million
repurchase and retirement of subordinated debt. No comparably significant
financing transaction occurred during the first quarter of 2001.
At March 31, 2001, we had $23.1 million in cash, cash equivalents, and
short-term investments. We also had $5.1 million of restricted cash that secures
a $5.0 million letter of credit related to a long-term services contract. We
believe existing cash resources and available borrowings under our credit
facility are more than adequate to meet our operating cash needs through 2001
and 2002.
We have $53.5 million of convertible subordinated debentures that mature in
March 2004, $15.0 million of which have a conversion price of $9.65 and are
callable in April 2002 without premiums. The remaining $38.5 million of notes
have a conversion price of $23.70 and have been callable with declining premiums
since March 2000. The company anticipates that it will have sufficient cash
generated from operations to repurchase the notes at maturity if they are not
converted earlier.
Business Outlook
The following statements are based on management's current expectations. These
statements are forward-looking, and are made as of the date of the Form 10-Q
filed May 15, 2001. Actual results may differ materially due to a number of
risks and uncertainties. Itron undertakes no obligation to update publicly or
revise any forward-looking statements.
We expect that revenues in 2001 will be 10% to 15% higher than in 2000, and net
income after tax is expected to grow by at least 30%. Second quarter revenues
are expected to be up 5% to 10% from the first quarter. We expect our operating
margin will improve throughout 2001 based on additional improvements in gross
margins offset partially by slightly higher investments in product development.
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 our actual results to differ
materially from those reflected in such forward-looking statements. Such risks
and uncertainties include, among others, the rate of customer demand for our
products, forecast future revenues and costs on long-term contracts, changes in
law and regulation (including FCC licensing actions), 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, our ability to accurately
forecast future revenues and costs on long-term contracts, increased competition
and various other matters, many of which are beyond our control. These
forward-looking statements speak only as of the date of the 10-Q filed May 15,
2001. 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. For a more complete description of these and other risks, see "Certain
Risk Factors" included in our Annual Report on Form 10-K/A for the year ended
December 31, 2000.
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Item 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk: As a global concern, we conduct business in
a number of foreign countries and therefore face exposure to adverse movements
in foreign currency exchange rates. Total International revenue approximates 10%
of total revenue. As we currently do not use derivative instruments to manage
foreign currency exchange rate risk, the consolidated results of operations in
U.S. Dollars are subject to fluctuation as foreign exchange rates change. In
addition, our foreign currency exchange rate exposures may change over time as
business practices evolve and could have a material impact on our financial
results.
Our primary exposure relates to non-dollar denominated sales, cost of sales and
operating expenses in our subsidiary operations in France, the United Kingdom,
and Australia, which means we are subject to changes in the consolidated results
of operations expressed in U.S. Dollars. Other international business,
consisting primarily of shipments from the U.S. to international distributors
and customers in the Pacific Rim and Latin America, is predominantly denominated
in U.S. Dollars, which reduces our exposure to fluctuations in foreign currency
exchange rates. There has been and there may continue to be large
period-to-period fluctuations in the relative portions of International revenue
that are denominated in foreign currencies versus the U.S. Dollar.
Risk-sensitive financial instruments in the form of inter-company trade
receivables are mostly denominated in U.S. Dollars, while inter-company notes
are denominated in local foreign currencies. As foreign currency exchange rates
change, inter-company trade receivables impact current earnings, while
inter-company notes are re-valued and result in translation gains or losses that
are reported in the comprehensive income portion of shareholders equity in our
balance sheet.
Because our earnings are affected by fluctuations in the value of the U.S.
dollar as compared to foreign currencies, we have performed a sensitivity
analysis assuming a hypothetical 10% strengthening in the value of the dollar
relative to the currencies in which our transactions are denominated. As of
March 31, 2001, the analysis indicated that such market movements would not have
had a material effect on our consolidated results of operations or on the fair
value of any risk-sensitive financial instruments. The model assumes a parallel
shift in the foreign currency exchange rates. Exchange rates rarely move in the
same direction. The assumption that exchange rates change in a parallel fashion
may overstate or understate the impact of changing exchange rates on assets and
liabilities denominated in a foreign currency. Consequently, the actual effects
on operations in the future may differ materially from results of the analysis
for the first quarter. We may, in the future, experience greater fluctuations in
U.S. dollar earnings from fluctuations in foreign currency exchange rates. We
will continue to monitor and assess the impact of currency fluctuations and will
seek to institute hedging alternatives as business dictates.
14
Part 2: Other Information
Item 1: Legal Proceedings
Benghiat Patent Litigation
On April 3, 1999, we served Ralph Benghiat, an individual, with a
complaint seeking a declaratory judgment 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 (Civil Case No. 99-cv-501).
On April 2, 2001, the district court denied the motions for summary
judgment filed by Itron. A tentative trial date has been set for June
18, 2001. While we believe that our products do not infringe the
Benghiat patent, there can be no assurance that we will prevail in this
matter, in which case a decision or settlement of this case may have a
material adverse effect on our financial condition. If we do prevail,
there can be no assurance that legal costs incurred in connection
therewith will not have a material adverse effect on our financial
condition.
There have been no significant changes to any other legal proceedings in
which we are currently involved. See our annual report on Form 10-K/A
for the year ended December 31, 2000, as filed with the Securities and
Exchange Commission on March 1, 2002, for a complete list of active
issues.
Item 6: Exhibits and Reports on Form 8-K
a) No exhibits were filed this quarter
b) No 8-Ks were filed this quarter
________________________________________________________________________
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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: March 11, 2002
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