ITRI

ITRON, INC. 10-Q Summary: Period Ended June 30, 1999

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 1999. Itron, Inc. is a global provider of integrated systems for collecting and managing utility meter data (electric, gas, and water). The company operates through three primary lines: Automatic Meter Reading (AMR) systems, Handheld systems (Electronic Meter Reading), and Outsourcing services. The reporting period reflects the impact of utility industry deregulation, Year 2000 compliance upgrades, and significant contract adjustments.

Key Financial Metrics

Note: Net income for the six months ended June 30, 1999, includes a one-time extraordinary gain of $3.66 million (after-tax) from the extinguishment of debt. Excluding this gain, the company reported a net loss of $1.815 million for the period.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 16% for the quarter and 17% year-to-date compared to 1998. This was primarily driven by a 37% drop in AMR systems revenue due to the completion of a large fixed-network contract with Virginia Power in 1998 and a $4.2 million price concession on that contract in 1999.
• Handheld Growth: Handheld systems revenue increased 42% for the quarter and 54% year-to-date, driven by customer upgrades for Year 2000 compliance and the introduction of a new portable network card.
• Margin Expansion: Despite revenue declines, overall gross margins improved slightly (34% vs. 33% for the quarter). AMR margins improved significantly due to the absence of the low-margin Virginia contract, while Handheld margins compressed due to warranty costs on upgrades.
• Cost Reduction: Operating expenses decreased 10% for the quarter and 9% year-to-date, aided by restructuring charges totaling $1.1 million in Q1 1999 (part of a cumulative $5.1 million effort) and reduced product development spending.
• Debt Reduction: Total debt decreased significantly from $87.6 million to $66.1 million, largely due to the debt exchange offer in March 1999.

Guidance, Outlook, and Risks

• Revenue Outlook: Management expects total revenues in the second half of 1999 to be flat or slightly lower than the first half.
• Margin Outlook: Gross margins are expected to remain higher in 1999 than 1998, though manufacturing over-capacity may impact margins in the second half.
• Liquidity: The company holds $2.9 million in cash and has $20 million available under a revolving credit facility. Management believes this is sufficient to fund operations through 2000, excluding new large outsourcing deals.
• Legal Contingency: A class-action lawsuit regarding alleged securities fraud was settled for $12 million, fully covered by insurance. No admission of liability was made.
• Regulatory Risk (FCC): A new FCC moratorium on new license applications for specific radio frequencies (MAS) could delay revenue from smaller utilities. Management estimates up to $5 million in second-half revenue could be impacted.
• Year 2000 Compliance: The company is largely compliant, with total estimated costs of $1.5 million ($1.3 million spent to date). Risks remain regarding third-party infrastructure failures.

Investor Verification Checklist

• Virginia Power Contract Impact: Verify the long-term implications of the $4.2 million price concession and the absence of the large 1998 installation volume on future AMR revenue stability.
• FCC Moratorium Exposure: Assess the specific customer base affected by the FCC frequency moratorium and the likelihood of the emergency petition succeeding to avoid the estimated $5 million revenue delay.
• Debt Structure: Review the terms of the new convertible subordinated notes issued in the March 1999 exchange offer and their impact on future interest expenses and dilution.
• Handheld Margin Sustainability: Determine if the margin compression in the handheld segment (due to warranty periods on Y2K upgrades) is temporary or indicative of a structural shift in service revenue.
• Outsourcing Capital Needs: Confirm the timeline and financing requirements for the new outsourcing system installation for Southern California Edison expected in late 1999/2000.