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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 September 30, 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
October 31, 2001 was 15,916,103.
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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 and
nine months ended September 30, 2001 and 2000 included in its Form 10-Q for
the three and nine months ended September 30, 2001 and 2000, filed on
November 8, 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 I: 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 8
Note 7: Recent Accounting Pronouncements 8
Note 8: Restatement 9
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain Forward-Looking Statements 11
OVERVIEW 11
RESULTS OF OPERATIONS 12
Revenues 12
Gross Margin 13
Operating Expenses 13
Other Income (Expense) 14
Income Taxes 14
Extraordinary Item 14
Cumulative effect of a Change in Accounting Principle 14
FINANCIAL CONDITION
Cash Flow Information 15
Business Outlook 15
Item 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 16
MARKET RISK
Part II: Other Information
Item 1: Legal Proceedings 17
Item 6: Exhibits and Reports on Form 8-K 17
Signature 18
Part I: 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 September 30, Nine months ended September 30,
2001 2000 2001 2000
Revenues
Sales $ 50,424 $ 31,468 $ 130,060 $ 103,340
Service 10,431 9,224 31,280 28,847
--------------- -------------- -------------- -------------
Total revenues 60,855 40,692 161,340 132,187
--------------- -------------- -------------- -------------
Cost of revenues
Sales 27,127 18,538 72,232 61,419
Service 6,675 5,825 20,232 19,569
--------------- -------------- --------------- -------------
Total cost of revenues 33,802 24,363 92,464 80,988
--------------- -------------- --------------- -------------
Gross profit 27,053 16,329 68,876 51,199
Operating expenses
Sales and marketing 7,390 5,086 19,461 15,325
Product development 8,210 4,632 21,591 16,114
General and administrative 3,778 4,363 10,656 13,046
Amortization of intangibles 377 465 1,109 1,396
Restructuring - - (807) (185)
--------------- -------------- -------------- -------------
Total operating expenses 19,755 14,546 52,010 45,696
--------------- -------------- -------------- -------------
Operating income 7,298 1,783 16,866 5,503
Other income (expense)
Equity in affiliates (74) 138 (115) 893
Interest and other, net (911) (915) (2,942) (3,114)
--------------- -------------- -------------- -------------
Total other income (expense) (985) (777) (3,057) (2,221)
--------------- -------------- -------------- -------------
Income before income taxes and extraordinary item 6,313 1,006 13,809 3,282
Income tax provision (2,409) (382) (5,258) (1,241)
--------------- -------------- -------------- -------------
Income before extraordinary item and cumulative
effect of a change in accounting principle 3,904 624 8,551 2,041
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 $ 3,904 $ 624 $ 8,551 $ 523
=============== ============== =============== =============
Other comprehensive income, net of tax:
Foreign currency translation adjustments 339 (159) (181) (422)
Unrealized holding gains 45 - 74 -
--------------- -------------- -------------- -----------
Other comprehensive income 384 (159) (107) (422)
--------------- -------------- -------------- -----------
Comprehensive income $ 4,288 $ 465 $ 8,444 $ 101
=============== ============== ============== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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 September 30, Nine months ended September 30,
2001 2000 2001 2000
Earnings per share
Basic
Income before extraordinary item $ 0.25 $ 0.04 $ 0.55 $ 0.13
Extraordinary item - - - 0.07
Cumulative effect - - - (0.17)
----------------- ----------------- ------------------ ------------------
Basic net income per share $ 0.25 $ 0.04 $ 0.55 $ 0.03
================= ================= ================== ==================
Diluted
Income before extraordinary item $ 0.21 $ 0.04 $ 0.49 $ 0.13
Extraordinary item - - - 0.07
Cumulative effect - - - (0.17)
----------------- ----------------- ------------------ ------------------
Diluted net income per share $ 0.21 $ 0.04 $ 0.49 $ 0.03
================= ================= ================== ==================
Average number of shares outstanding
Basic 15,667 15,237 15,522 15,132
Diluted 19,071 15,512 18,414 15,408
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
ITRON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
ASSETS
September 30, December 31,
2001 2000
(As Restated)
------------- ------------
Current assets
Cash and cash equivalents $ 13,043 $ 21,216
Short-term investments 15,675 -
Accounts receivable, net 44,796 49,859
Inventories, net 16,929 17,196
Deferred income taxes 2,909 4,852
Other 906 899
------------- ------------
Total current assets 94,258 94,022
Property, plant and equipment, net 23,715 25,197
Equipment used in outsourcing, net 13,163 14,150
Intangible assets, net 11,412 12,836
Restricted cash 5,100 -
Deferred income taxes 24,189 27,287
Other 6,485 3,739
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Total assets $ 178,322 $ 177,231
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 25,611 $ 30,171
Wages and benefits payable 8,984 9,244
Mortgage notes and leases payable 235 242
Deferred revenue 5,757 9,025
------------- ------------
Total current liabilities 40,587 48,682
Convertible subordinated debt 53,429 53,459
Mortgage notes and leases payable 4,945 5,074
Project financing 6,234 6,671
Warranty and other obligations 11,275 11,253
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Total liabilities 116,470 125,139
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Shareholders' equity
Common stock 111,046 109,730
Accumulated other comprehensive loss (1,947) (1,840)
Accumulated deficit (47,247) (55,798)
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Total shareholders' equity 61,852 52,092
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Total liabilities and shareholders' equity $ 178,322 $ 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)
Nine months ended September 30,
(Unaudited, in thousands) 2001 2000
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OPERATING ACTIVITIES
Net income $ 8,551 $ 523
Noncash charges (credits) to income:
Depreciation and amortization 7,548 10,438
Deferred income tax provision 5,041 2,346
Equity in affiliates, net 115 (717)
Extraordinary gain on early extinguishment of debt - (1,044)
Cumulative effect of a change in accounting principle - 2,562
Changes in operating accounts:
Accounts receivable 5,063 9,629
Inventories 267 (427)
Accounts payable and accrued expenses (4,503) (8,726)
Wages and benefits payable (260) (9,265)
Deferred revenue (3,268) (3,697)
Other, net 711 (353)
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Cash provided by operating activities 19,265 1,269
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INVESTING ACTIVITIES
Purchase of short-term investments (15,675) -
Reclassification of restricted cash balance (5,100) -
Acquisition of property, plant and equipment (3,713) (3,636)
Equipment used in outsourcing 2 (6,570)
Proceeds from sale of equipment used in outsourcing, net - 32,750
Proceeds from sale of business interest - 870
Other, net (3,630) (1,608)
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Cash provided (used) by investing activities (28,116) 21,806
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FINANCING ACTIVITIES
Change in short-term borrowings, net - (3,646)
Proceeds from (payments on) project financing, net (437) (405)
Convertible subordinated debt repurchase (30) (2,104)
Issuance of common stock, net of repurchases 1,316 1,789
Other, net (171) (548)
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Cash provided (used) by financing activities 678 (4,914)
----------- -----------
Increase (decrease) in cash and cash equivalents (8,173) 18,161
Cash and cash equivalents at beginning of period 21,216 1,538
----------- -----------
Cash and cash equivalents at end of period $ 13,043 $ 19,699
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ITRON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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- and
nine-month periods ended September 30, 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-
and nine-month periods ended September 30, 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 each 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
The following table sets forth the computation of basic and diluted earnings per
share:
(Unaudited, in thousands except per share data) Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Basic earnings per share:
Net income available to common shareholders $ 3,904 $ 624 $ 8,551 $ 523
Weighted average shares outstanding 15,667 15,237 15,522 15,132
-------- -------- -------- --------
Basic net income per share $ 0.25 $ 0.04 $ 0.55 $ 0.03
======== ======== ======== ========
Diluted earnings per share:
Net income available to common shareholders $ 3,904 $ 624 $ 8,551 $ 523
Non-discretionary adjustment, net of income taxes (7) - (11) -
Interest on convertible debt, net of income taxes 159 - 478 -
-------- -------- -------- --------
Adjusted net income available to common shareholders, assuming
conversion $ 4,056 $ 624 $ 9,018 $ 523
======== ======== ======== ========
Weighted average shares outstanding 15,667 15,237 15,522 15,132
Effect of dilutive securities:
Stock options 1,853 275 1,341 276
Convertible debt 1,551 - 1,551 -
-------- -------- -------- --------
Adjusted weighted average shares and assumed conversions 19,071 15,512 18,414 15,408
======== ======== ======== ========
Diluted net income per share $ 0.21 $ 0.04 $ 0.49 $ 0.03
======== ======== ======== ========
5
We have granted options to purchase shares of our common stock to directors,
employees and other key personnel at fair market value on the date of grant. The
average price of Itron common stock was $19.17 in the third quarter of 2001,
compared to $13.98 in the second quarter of 2001 and $6.60 in the third quarter
of 2000.
The dilutive effect of options is calculated using the "treasury stock" method.
The dilutive earnings per share impact of the additional 1.9 million shares was
$0.024, or 10%, for the third quarter of 2001.
We also have subordinated convertible debt outstanding with conversion prices of
$9.65, representing 1.5 million shares, and $23.70, representing an additional
1.6 million shares. The dilutive effect of these notes is calculated using the
"if converted" method. Under this method, the after-tax amount of interest
expense related to the convertible debt is added back to net income. In
addition, net income is adjusted for non-discretionary items based on income
that would have been computed differently had interest on the convertible debt
not been recognized. The dilutive earnings per share impact of convertible debt
was $0.012, or 5%, for the third quarter of 2001.
During the third quarter of 2001, we announced a plan to repurchase up to
300,000 shares of our common stock. As of September 30, 2001, we had repurchased
52,000 shares at an average price of $17.58.
Note 3: Balance Sheet Components
(Unaudited, in thousands) September 30, December 31,
2001 2000
------------------ ---------------
Accounts Receivable
Trade (net of allowance for doubtful accounts of $1,544 and $1,144) $ 36,044 $ 42,218
Unbilled revenue 8,752 7,641
------------------ --------------
Total accounts receivable $ 44,796 $ 49,859
================== ==============
Inventories, net
Material $ 4,485 $ 5,721
Work in process 641 737
Finished goods 11,067 9,723
------------------ --------------
Total manufacturing inventories 16,193 16,181
Service inventories 736 1,015
------------------ --------------
Total inventories $ 16,929 $ 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 margin, 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.
6
Segment revenues and operating results for the comparable quarters are detailed
below.
(Unaudited, Three months ended September 30,
In thousands) (in thousands)
Electric Natural Gas Water & PP EIS Internat'l Client Svcs Corporate Total
------------ ------------- -------------- ----------- -------------- ------------- ----------- -----------
2001
Revenues $ 18,760 $ 8,649 $ 16,922 $ 3,651 $ 5,322 $ 7,551 $ - $ 60,855
Cost of sales 10,407 3,844 8,573 1,958 2,930 5,611 479 33,802
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 8,353 4,805 8,349 1,693 2,392 1,940 (479) 27,053
Operating exp. 1,391 696 888 2,200 2,435 97 12,048 19,755
-------- -------- -------- -------- -------- -------- -------- --------
Operating
income/(loss) $ 6,962 $ 4,109 $ 7,461 $ (507) $ (43) $ 1,843 $(12,527) $ 7,298
======== ======== ======== ======== ======== ======== ======== ========
2000
Revenues $ 7,656 $ 8,328 $ 9,815 $ 4,578 $ 3,776 $ 6,539 $ - $ 40,692
Cost of sales 3,524 3,812 5,363 2,551 2,135 5,308 1,670 24,363
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 4,132 4,516 4,452 2,027 1,641 1,231 (1,670) 16,329
Operating exp. 822 560 686 1,494 1,182 218 9,584 14,546
-------- -------- -------- -------- -------- -------- -------- --------
Operating
income/(loss) $ 3,310 $ 3,956 $ 3,766 $ 533 $ 459 $ 1,013 $(11,254) $ 1,783
======== ======== ======== ======== ======== ======== ======== ========
Nine months ended September 30,
(in thousands)
Electric Natural Gas Water & PP EIS Internat'l Client Svcs Corporate Total
------------ ------------- -------------- ----------- -------------- ------------- ----------- -----------
2001
Revenues $ 47,321 $ 23,049 $ 35,787 $ 12,621 $ 20,105 $ 22,457 $ - $161,340
Cost of sales 25,800 10,127 18,322 6,632 12,220 16,653 2,710 92,464
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 21,521 12,922 17,465 5,989 7,885 5,804 (2,710) 68,876
Operating exp. 3,623 1,938 2,478 5,481 5,750 307 32,433 52,010
-------- -------- -------- -------- -------- -------- -------- --------
Operating
income/(loss) $ 17,898 $ 10,984 $ 14,987 $ 508 $ 2,135 $ 5,497 $(35,143) $ 16,866
======== ======== ======== ======== ======== ======== ======== ========
2000
Revenues $ 24,315 $ 28,662 $ 33,353 $ 15,661 $ 9,436 $ 20,760 $ - $132,187
Cost of sales 11,109 12,296 17,640 8,091 5,186 18,382 8,284 80,988
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 13,206 16,366 15,713 7,570 4,250 2,378 (8,284) 51,199
Operating exp. 2,633 1,889 2,100 4,559 4,204 660 29,651 45,696
-------- -------- -------- -------- -------- -------- -------- --------
Operating
income/(loss) $ 10,573 $ 14,477 $ 13,613 $ 3,011 $ 46 $ 1,718 $(37,935) $ 5,503
======== ======== ======== ======== ======== ======== ======== ========
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. In
the second quarter of 2001, we increased our severance reserve by $0.2 million
for remaining obligations that will be fully realized by the third quarter of
2002, and decreased our consolidation of facilities reserve by $1million based
on our sublease of vacated space and related issues. Restructuring reserve
balance adjustments and payments for the first nine months of 2001 are detailed
below (in thousands):
7
Reserve Reserve Reserve
Cash/ Balance Balance Balance
(Unaudited, in thousands) Non-Cash 12/31/00 Adjustments Payments 9/30/01
------------ ------------- --------------- ------------ -----------
Severance and related charges Cash $ 159 $ 206 $ 197 $ 168
Consolidation of facilities Cash 2,616 (1,013) 591 1,012
------------ ------------ ------ ---------
Totals $ 2,775 $ (807) $ 788 $ 1,180
============ ============ ====== =========
Note 6: Contingencies
We enter into performance and bid bonds for certain customers. Performance bonds
usually cover the installation phase of a contract and may on occasion cover the
operations and maintenance phase of outsourcing contracts. Bonds in force were
$39.7 million and $48.0 million at September 30, 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 $12.3 million and $11.3 million at September 30, 2001 and 2000,
respectively. $5.1 million of cash is restricted and backs a $5.0 million
standby letter of credit.
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.
In addition, we are both a plaintiff and a defendant in litigation concerning
potential patent infringement. We are also both a plaintiff and a defendant in
litigation relating to the sublease of our Lakeville, Minnesota facility. 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 either of these cases, 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 September 30, 2001, we had trade and contracts receivable totaling $393,000
from SCE and net capitalized equipment related to this contract of $9.2 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 they were
to hire 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 our 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: Recent Accounting Pronouncements
In late July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141
requires that all business combinations be accounted for using the purchase
method of accounting; therefore, the pooling-of-interests method of accounting
is prohibited. SFAS No. 141 also requires that intangible assets acquired in a
business combination be recognized apart from goodwill if: (i) the intangible
assets arise from contractual or other legal rights or (ii) the acquired
intangible assets are capable of being separated from the acquired enterprise,
as defined in SFAS No. 141. SFAS No. 141 is effective for all business
combinations completed after June 30, 2001 and accounted for as a purchase and
for all business combinations "initiated" after June 30, 2001.
SFAS No. 142 requires that goodwill should not be amortized but should be tested
for impairment at the "reporting unit level" (Reporting Unit) at least annually
and more frequently upon the occurrence of certain events, as defined by SFAS
No. 142. A Reporting Unit is the same level as or one level below an "operating
segment," as defined by SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. Identifiable intangible assets with a finite
life, as defined in SFAS No. 142, will be amortized.
SFAS No. 142 requires that goodwill be tested for impairment in a two-step
process. First, a company must compare the "estimated fair value" of a Reporting
Unit to its carrying amount, including goodwill, to determine if the fair value
8
of a Reporting Unit to its carrying amount, including goodwill, to determine if
the fair value of the Reporting Unit is less than the carrying amount, which
would indicate that goodwill is impaired. If the company determines that
goodwill is impaired, the Company must compare the "implied fair value" of the
goodwill to its carrying amount to determine if there is an impairment loss. The
"implied fair value" is calculated by allocating the fair value of the Reporting
Unit to all assets and liabilities as if the Reporting Unit had been acquired in
a business combination and accounted for under SFAS No. 141.
For goodwill and intangible assets acquired in business combinations completed
prior to July 1, 2001, SFAS No. 142 is effective on January 1, 2002, the date
the Company is required to adopt SFAS No. 142. Goodwill and intangible assets
acquired in a business combination completed after June 30, 2001 are required to
be accounted for in accordance with the "amortization and nonamortization"
provisions of SFAS No. 142.
The Company does not expect the adoption of SFAS No. 141 and SFAS No. 142 to
have a significant impact on the Company's financial position and results of
operations, absent possible future business combinations that might give rise to
either significant amortization expense from the acquisition of intangible
assets with a finite life or goodwill with significant impairment risk.
The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, that supercedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in
August, 2001. Statement No. 144 requires that long-lived assets be measured at
the lower of carrying amount or fair-value less cost to sell, whether reported
in continuing operations or in discontinued operations, to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of Statement 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001. Management does not expect the adoption of SFAS 144 to have a significant
impact on the financial position or results of operations of the Company,
relative to its existing assets.
Note 8: Restatement
During February 2002, subsequent to the issuance of the Company's financial
statements for the nine months ended September 30, 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 and nine months ended September 30, 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 September 30, 2001:
Accounts receivable, net $ 44,662 $ 44,796
Current portion of long-term contracts receivable 3,168 -
Equipment used in outsourcing, net 9,039 13,163
Long-term contracts receivable 2,262 -
Deferred income taxes 22,999 24,189
Deferred revenue 5,166 5,757
Warranty and other obligations 9,908 11,275
Accumulated deficit $ (45,307) $ (47,247)
For the three months ended September 30:
Service revenues $ 10,281 $ 10,431 $ 10,351 $ 9,224
Service cost of revenues 6,580 6,675 6,580 5,825
Income tax provision (2,389) (2,409) (524) (382)
Income before extraordinary item and cumulative
effect of change in accounting principle 3,870 3,904 853 624
Net income $ 3,870 $ 3,904 $ 853 $ 624
9
2001 2000
As previously As previously
Reported As Restated Reported As Restated
-------- ----------- -------- -----------
Basic
Income before extraordinary item .06 .04
Basic net income per share .06 .04
Diluted
Income before extraordinary item .06 .04
Diluted net income per share .06 .04
For the nine months ended September 30:
Service revenues $ 30,997 $ 31,280 $ 32,451 $ 28,847
Service cost of revenues 19,966 20,232 21,609 19,569
Income tax provision (5,252) (5,258) (1,836) (1,241)
Income before extraordinary item and cumulative
effect of change in accounting principle 8,540 8,551 3,010 2,041
Cumulative effect of change in accounting principle (1,646) (2,562)
Net income $ 8,540 $ 8,551 $ 2,408 $ 523
Basic
Income before extraordinary item .20 .13
Cumulative effect (.11) (.17)
Basic net income per share .16 .03
Diluted
Income before extraordinary item .20 .13
Cumulative effect (.11) (.17)
Diluted net income per share .16 .03
10
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
September 30, 2000 has been reclassified to conform to the 2001 presentation.
Certain Forward-Looking Statements
This discussion and analysis should be read in conjunction with our unaudited
condensed financial statements and accompanying notes included in this document
and the 2000 audited financial statements and notes thereto included in our
Annual Report on Form 10-K/A, which was filed with the Securities and Exchange
Commission on March 1, 2002.
The following discussion of our financial condition and results of operations
contains forward-looking statements that involve risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. When
included in this discussion, the words "expects," "intends," "anticipates,"
"believes," "plans," "projects," "estimates," "future" and similar expressions
are intended to identify forward-looking statements. However, these words are
not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are 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,
increased competition and various other matters, many of which are beyond our
control. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of the Form 10-Q filed November 8,
2001. The Company expressly disclaims any obligation or undertaking to update or
revise 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, as filed with the Securities and Exchange Commission on March 1, 2002.
OVERVIEW
Itron Inc. is a leading technology provider and source of knowledge to the
energy and water industry for collecting, analyzing, and applying critical data
about electric, gas and water usage. 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.
Itron technology touches more than $200 billion in energy and water transactions
annually. Today, Itron systems are installed at approximately 2,000 utilities in
over 45 countries around the world and are being used to collect data from 275
million electric, gas, and water meters. Of those, more than 700 customers use
Itron's radio and telephone-based technology to automatically collect
information from more than 19 million of those meters. Itron technology is also
in use at a number of the newly created wholesale energy markets in the U.S. and
Canada to provide critical billing and settlement systems for the power flowing
into and out of those deregulating markets.
Only about 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 to penetrate 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.
11
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 percentage change from the prior year
by sales or service and by segment.
Revenues Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(Unaudited, in millions) Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ---- ---- ----------
Sales $ 50.4 $ 31.5 60% $130.1 $ 103.3 26%
Service 10.4 9.2 13% 31.2 28.8 8%
----------- ----------- ----------- ----------- 22%
Total revenues $ 60.8 $ 40.7 49% $161.3 $ 132.1
=========== =========== =========== ===========
Segment Revenues Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(Unaudited, in millions) Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ---- ---- ----------
Electric $ 18.7 $ 7.7 143% $ 47.3 $ 24.3 95%
Natural Gas 8.6 8.3 4% 23.0 28.6 (20%)
Water & Public Power 16.9 9.8 72% 35.8 33.4 7%
Energy Information Systems 3.7 4.6 (20%) 12.6 15.7 (20%)
International 5.3 3.8 39% 20.1 9.4 114%
Client Services 7.6 6.5 17% 22.5 20.7 9%
----------- ----------- ----------- -----------
Total revenues $ 60.8 $ 40.7 49% $161.3 $ 132.1 22%
=========== =========== =========== ===========
Electric revenues are higher in 2001, both for the quarter and year to date,
primarily as a result of the sale of a Mobile Automated Meter Reading System to
a large electric utility. This customer accounted for 52% of Electric revenues
during the third quarter of 2001 and 16% of total Itron revenues for the third
quarter. We have a multi-year contract with this utility, with shipments
currently scheduled to run into the third quarter of 2002. We expect continued
strong revenue growth in this segment for the remainder of 2001.
Natural Gas Systems revenue increased slightly in the third quarter of 2001
primarily due to the initial deployment of a 10,000 unit automated meter reading
system to a new customer and the expansion of a system for an existing customer.
We expect that revenues in this segment for 2001 will be lower than 2000 as
several large projects were completed in 2000.
Water and Public Power revenues are higher in the third quarter of 2001 compared
to last year primarily due to the initial deployment of a 150,000 unit
installation for a mobile AMR system to a public utility in Washington state and
increasing demand from water meter manufacturers. Third quarter revenues
increased $5 million, or 41%, from the second quarter of this year. We expect
continued strong revenue performance in this segment for the remainder of 2001.
Revenues in our Energy Information Systems segment decreased by 20% from the
third quarter last year. Revenues in this segment can fluctuate on a quarterly
basis due primarily to customized development work for wholesale energy systems,
which has been at a much lower level in 2001 than in 2000. We expect revenues in
this segment to be lower in 2001 compared with 2000.
International revenues increased 39% over the third quarter of 2000, due to
increased meter module sales in France and a large hardware install in
Australia. Revenues in this segment are expected to be lower in the fourth
quarter but higher for the full year 2001 compared with 2000.
Client Services revenue increased 17% in the third quarter of 2001 compared with
the third quarter of 2000, from increased hardware and software maintenance
contracts, as well as higher billable repair activity.
We do not place any particular significance on quarter-to-quarter variations
reported in revenue by segment, except as noted.
12
Gross Margin Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(as a % of corresponding revenue) Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- --------- ---- ---- ---------
Electric 45% 54% (9%) 45% 54% (9%)
Natural Gas 56% 54% 2% 56% 57% (1%)
Water & Public Power 49% 45% 4% 49% 47% 2%
Energy Information Systems 46% 44% 2% 47% 48% (1%)
International 45% 43% 2% 39% 45% (6%)
Client Services 26% 19% 7% 26% 11% 15%
Corporate /(1)/ (1%) (4%) 3% (2%) (6%) 4%
----------- ---------- ----------- ----------
Total gross margin 44% 40% 4% 43% 39% 4%
=========== ========== =========== ==========
(1) Percent of total company revenue.
Total gross margin was 44% for the third quarter, up from 40% a year ago. We
continue to realize increased domestic manufacturing efficiencies from the
consolidation of our high volume manufacturing operations, the spin-off of our
low-volume manufacturing operations, and increased production volumes in our
electric product. In addition, we are benefiting from lower material costs, due
in part to favorable pricing in the general market for electronic components.
Gross margin for the Electric segment decreased 9% due to a change in the mix of
customers and products from the first three quarters of 2000 to 2001. Gross
margins can vary from period-to-period depending on the component mix and
committed volumes.
Water and Public Power margins have improved 4% primarily due to the replacement
of a high cost component with a less expensive solution effective late last
year.
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 third quarter of 2000 was negatively impacted by a large number of
outside contractors temporarily hired to complete work on a large project that
was active last year.
The gross margin in the International segment during the third quarter of 2001
improved over the third quarter of 2000 due primarily to a larger proportion of
higher margin software sales in 2001. Year to date, the lower gross margin is
the result of large sales of handheld equipment to customers in Japan at lower
margins.
In the Client Services segment, gross margin increased by 7% in the third
quarter of 2001 compared with the third quarter of 2000. Year to date, the gross
margin improved 15%. The primary driver of the margin improvement is an increase
in service contract revenues without a corresponding increase in costs to
support those revenues. In addition, we are experiencing lower field service
depot repair costs as a result of our outsourcing those services beginning in
the second quarter of 2000.
Unallocated corporate cost of sales was lower in 2001, compared to 2000,
primarily due to efficiencies gained through the consolidation of our
manufacturing facilities. Also, purchase price variances, which are reflected in
unallocated corporate cost of sales, were favorable in 2001, due in part to
lower market prices for many electronic components.
Operating Expenses Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(Unaudited, in millions) Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ---- ---- ----------
Sales and marketing $ 7.4 $ 5.1 45% $ 19.5 $ 15.3 27%
Product development 8.2 4.6 78% 21.6 16.1 34%
General and administrative 3.8 4.3 (12%) 10.6 13.1 (19%)
Amortization of intangibles 0.4 0.5 (20%) 1.1 1.4 (21%)
Restructurings - - - (0.8) (0.2) (300%)
----------- ---------- ----------- ----------
Total operating expenses $ 19.8 $ 14.5 37% $ 52.0 $ 45.7 14%
=========== ========== =========== ==========
Sales and marketing expenses were 12.1% of revenues for the three and nine
months ended September 30, 2001, compared to 12.5% and 11.6% for the three and
nine months ended September 30, 2000, respectively. The increase year
13
to year was due to investments in marketing programs and systems, primarily a
new eCRM (internet-based Customer Relationship Management) system, International
bad debt reserves (as a component of sales expense), additional spending related
to strategy and business development activities, and increased commissions due
to higher revenues.
Product development expenses were 13.5% and 13.4% of revenues for the three
months and nine months ended September 30, 2001, respectively, compared to 11.4%
and 12.2% for the three and nine months ended September 30, 2000, respectively.
The majority of the increase is due to a number of new products under
development, which fall into a general description of next generation
communication technology, and associated increased staffing. Longer-term, we
believe product development will range between 11% and 13% of revenues, but we
expect to exceed this range for the remainder of 2001.
General and administrative costs were 6.2% and 6.6% of revenues for the three
and nine months ended September 30, 2001, respectively, compared to 10.7% and
9.9% for the three months and nine months ended September 30, 2000,
respectively. The primary drivers for the decrease in both periods in 2001 were
the favorable negotiation of a new communications contract, reduced legal fees
for patent and FCC matters, and increased allocations for distributing
support-related expenses to internal departments.
Restructuring reserve adjustments for the nine months ended September 30, 2001
reflect a net credit. In the second quarter of 2001, based on the sublease of
office space, we reversed $1.0 million of loss reserves previously accrued in
1999 for non-cancelable operating lease charges for closed facilities. We also
accrued an additional $0.2 million in severance charges related to our 1999
restructuring in the second quarter of 2001.
Other Income (Expense) Three months ended September 30 Nine months ended September 30,
------------------------------- -------------------------------
(Unaudited, in millions) Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ---- ---- ----------
Equity in affiliates $(0.1) $ 0.1 (200%) $ (0.1) $ 0.9 (111%)
Interest and other, net (0.9) (0.9) - (3.0) (3.1) 3%
----------- ---------- ---------- ------------
Total other income (expense) $(1.0) $(0.8) (25%) $ (3.1) $(2.2) (41%)
=========== ========== ========== ============
For the three months ended September 30, 2001, we recognized an expense of
$112,000 for our portion of net losses incurred by two joint ventures in which
we hold an equity position. For the comparable period in 2000, we recognized
income from equity in affiliates related to a water segment marketing joint
venture whose activities have declined. Also in 2000, we realized a $150,000 net
gain on the sale of an interest in a partially owned venture.
On a three-month basis, net interest and other was approximately the same. On a
nine-month basis, net interest and other decreased slightly in 2001 year to date
due to higher interest income from higher levels of cash and investments in
2001.
Income Taxes
Our effective income tax rate was 38% in 2001 and 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 different
domestic tax jurisdictions.
Extraordinary Item - Gain on Early Retirement of Debt
In the first quarter of 2000 we repurchased $3.8 million of 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 the 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 each quarter
of 2000 to conform revenue recognition to the requirements of SAB 101.
14
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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
(Unaudited, in millions) Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ---- ---- ----------
Operating activities $ 0.3 $ (8.0) 104% $ 19.2 $ 1.3 1,377%
Investing activities (5.0) (3.4) (47%) (28.1) 21.8 (229%)
Financing activities (0.1) 0.4 (125%) 0.7 (4.9) 114%
-------------- ------------ ----------- ----------
Increase (decrease) in cash $(4.8) $(11.0) 56% $ (8.2) $18.2 (145%)
============== ============ =========== ==========
Operating activities:
Cash flow from operating activities was significantly higher in the 2001
periods. Operating cash flow in the first three quarters of 2000 was negatively
impacted by the use of $9.1 million of cash for restructuring related payments.
Without those payments, normalized cash flow in the first three quarters of
2000, would have been $10.4 million, compared to $19.2 million in 2001.
Increased earnings is the primary factor driving the improved cash flow from
operations in 2001. Cash flow from operations was lower in the third quarter of
2001 compared to the first half. Of note is the fact that we received
approximately $6 million from one customer two days after September 30, 2001.
Investing activities:
The primary investing activity in the third quarter of 2001 was the purchase of
$2.1 in investments with maturities, not exceeding 13 months. Year to date,
$15.7 million of short-term investments have been purchased in order to achieve
higher interest rates. In the first quarter of 2001, we reclassified $5.1
million into restricted cash for a collateralized letter of credit. Included in
other investing activities are investments in and loans made to three private
companies - a web-based wireless workforce management company, a provider of
meter reading services to energy service providers and end user customers, and a
developer of in home energy gateway communication technology.
In the second and third quarters of 2000, our investments primarily consisted of
equipment installed for outsourcing contracts and internal capital acquisitions.
In the first half of 2000 we received $33 million from the sale of our network
project at Duquesne Light Company to an affiliate of Duquesne.
Financing activities:
Financing activities in the third quarter of 2001 included the open-market buy
back of 52,000 shares of our common stock for $913,950, which is netted against
$1 million received from our employee stock purchase plan and option exercises
during the quarter. Activity 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 three quarters of
2001.
At September 30, 2001, we had $28.7 million in cash, cash equivalents, and
short-term investments. In addition, 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
2002.
We have $53.4 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 premium. The remaining $38.4 million of notes
have a conversion price of $23.70 and have been callable with declining premiums
since March 2000. We anticipate that we 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 November 8, 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.
15
We expect revenues for the full year 2001 will be approximately 20% higher than
in 2000. Diluted earnings per share for the full year 2001 are expected to be
between $0.70 and $0.72. We anticipate that revenue growth in 2002 will be at
least 10% to 15% higher relative to 2001, with EPS growth approximately twice
the revenue growth rate.
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 12%
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 United States 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% increase in the value of the dollar
relative to the currencies in which our transactions are denominated. As of
September 30, 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 the
results of the analysis for the third 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 may seek to institute hedging alternatives as business
dictates.
16
Part II: 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. On June 29, 2001, a court-ordered settlement hearing was
held, which did not result in a settlement of the case. The case is
currently scheduled to go to trial January 7, 2002. 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. Any litigation, regardless of its outcome, would
probably be costly and require significant time and attention of our key
management and technical personnel.
Northfield Communications Sublease Litigation
On April 24, 2001, pursuant to an amended complaint, plaintiff
Northfield Communications, Inc. brought an action against us in the
United States District Court for the District of Minnesota (CF No.
01-117 JMR/FLN). Plaintiff is a sub-lessee of property leased by Itron
in Lakeville, Minnesota and has asked the court to make a determination
of its rights under its sublease and such other relief as is
appropriate. We have denied the substantive allegations of the complaint
and have filed a counterclaim against the plaintiff. The lawsuit is in
the discovery phase with a trial date expected sometime after December
1, 2001. While we believe that we have meritorious defenses to the
plaintiff's claims, there can be no assurance that we will prevail in
this matter. If we do not prevail or reach a favorable settlement, the
impact could be material to our earnings in the fiscal quarter in which
the matter is settled.
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 legal
proceedings.
Item 6: Exhibits and Reports on Form 8-K
a) No exhibits were filed this quarter.
b) No 8-Ks were filed this quarter.
------------------------------------------------------------------------
17
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
18