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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001032210-01-500085.txt : 20010323
<SEC-HEADER>0001032210-01-500085.hdr.sgml : 20010323
ACCESSION NUMBER: 0001032210-01-500085
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010322
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ITRON INC /WA/
CENTRAL INDEX KEY: 0000780571
STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663]
IRS NUMBER: 911011792
STATE OF INCORPORATION: WA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-22418
FILM NUMBER: 1575495
BUSINESS ADDRESS:
STREET 1: 2818 N SULLIVAN RD
CITY: SPOKANE
STATE: WA
ZIP: 99216
BUSINESS PHONE: 5099249900
MAIL ADDRESS:
STREET 1: 2818 NORTH SULLIVAN ROAD
CITY: SPOKANE
STATE: WA
ZIP: 99216
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR ENDED 12/31/2000
<TEXT>
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to ____________ to _____________
Commission file number 0-22418
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ITRON, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Washington 91-1011792
(State of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>
2818 North Sullivan Road
Spokane, Washington 99216-1897
(509) 924-9900
(Address and telephone number of registrant's principal executive offices)
---------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
Common stock, no par value
---------------
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 2001, there were outstanding 15,386,061 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by non-affiliates of the registrant (based on
the closing price for the common stock on the Nasdaq National Market on
February 28, 2001) was approximately $116,841,747.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the
Company to be held May 16, 2001.
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<PAGE>
PART I
ITEM 1: BUSINESS
OVERVIEW
General
Itron, Inc. was incorporated in Washington State in 1977. For two decades,
Itron's technology, products and services have enabled utilities to transition
from manual meter reading operations to more sophisticated and automated meter
reading systems. In the last few years, Itron has advanced beyond a company
known primarily for handheld computer systems and data acquisition
technologies into a market leading solution provider for collecting,
communicating, analyzing and managing critical data about energy and water
usage. Our hardware, software and communications solutions serve a worldwide
customer base, touching more than $200 billion in energy and water
transactions every year in North America alone.
It is becoming increasingly clear that the costs of generating electricity
and the costs of delivering electricity, natural gas and water will continue
to go up over the next few years. Consequently, utilities and their customers
must find ways to minimize those costs. We believe that the first step in
mitigating rising energy costs is to gather data related to the management of
supply and demand. That is a large part of what Itron does today.
The second step is to turn that data into useful information and knowledge
about when and how consumers use energy. Whether it is time-of-use
information, aggregation of loads or the settlements process, our software
products and systems do that today. With our technology, energy and water
distributors, generators, and marketers are streamlining operations, improving
customer service, simplifying load forecasting, and launching new services.
Energy transmission grid operators are turning to Itron for our software
technology and industry expertise in developing new systems to handle the high
volume of transactions and the complex financial reconciliation and
settlements required for competitive energy markets.
The third step is to then take the knowledge gained from the above and use
it to manage the use of energy and water. Itron's data acquisition and
information provisioning expertise will form the basis for this growth
opportunity. We are focusing our future efforts on the needs of our customers'
customers and helping them mange their energy and water usage. We are creating
an expanded value proposition to the energy and water industries that is
simple. With the addition of data collection, communication, control and
management tools, energy and water providers can:
. Reduce distribution infrastructure and component investment,
. Avoid building peak generation capacity,
. Provide reserve energy for sale,
. Increase the reliability and the quality of the energy offering,
. Provide value-added services to their customers to minimize the high
costs of energy
Itron designs, develops, manufactures, markets, installs and services
hardware, software and integrated systems for use by the energy and water
industries. Our expertise lies in providing communications technologies, data
management products and application software for automated meter reading and
data acquisition systems for the electric, gas and water industries; providing
financial settlements and reconciliation systems for wholesale energy markets;
and marketing and sales to utilities worldwide.
Using an assortment of communications technologies, our systems collect data
from a variety of residential, commercial and industrial meters and deliver it
to our customers and their customers as value-added information. Over 2,000
utilities in more than 45 countries use our systems to capture data from 275
million meters. Our data collection software systems for a utility's
commercial & industrial (C&I) customers are used by more than 500 utilities
throughout the world, including 90% of the largest electric and gas utilities
in the United States and
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Canada. In addition, our highly sophisticated software systems are being used
to manage the critical data management, billing and settlement requirements
for newly deregulating wholesale electric markets in California, Arizona,
Alberta and Ontario, Canada, as well as the more established wholesale energy
markets in the United Kingdom and New Zealand.
We believe there are numerous growth opportunities available to Itron in the
current markets that we serve:
. Of the 270 million electric, gas and water meters in the United States
and Canada, data is collected from approximately 31 million, or 11%,
using automated data collection technologies. Itron is the largest
supplier of these systems having shipped over 17.6 million meter modules
to more than 625 utilities. We believe our large installed base of
existing handheld and automated meter reading systems, at over 2,000
utilities around the world, provides us with an excellent growth
opportunity as energy and water providers continue to automate data
collection from meters.
. Given the industry's heightened focus on enhancing services to and
communications between utilities and large C&I users, our established
base of over 500 utilities using our C&I software systems provides us
with additional growth opportunities for the add-on software
applications we have developed in recent years specifically targeted to
C&I customers. In addition, in late 2000, we introduced a new radio-
based network communications system that provides utilities with a cost-
effective way to gather critical data from large numbers of
geographically dispersed C&I meters.
. There are an increasing number of states and regions in the United
States and Canada that are forming regional transmission organizations
(RTOs) as the supply of electricity is opened up to competition. We have
expertise in developing and installing the critical data gathering,
processing, billing and settlement systems needed to run those markets
effectively.
Industry Overview
The electric utility industry is undergoing significant change as we move
away from a regulated industry towards full competition with retail customers
ultimately having access to multiple suppliers and additional services. In
total, thirteen states are open or are completing the transition to an open
market. Ten other states are partially open or expected to be open in one to
two years. The remaining states are in the early stages of deregulation and
have not yet established timelines. The recent problems in California have
prompted some states, such as Nevada and Arkansas, to delay the start of
deregulation. However, for the most part, competitive programs in other states
such as Pennsylvania, New York, Texas, Ohio, Massachusetts and Michigan, have
largely avoided the pitfalls that have beset California, and are moving
forward.
To a large degree, the energy industry as a whole has not yet implemented
the data collection and information management systems, nor has it mastered
the new business processes necessary, to successfully manage a market in which
suppliers and marketers compete to sell commodities to far-away customers
using a common distribution channel. We believe that a key to the successful
transition to full competition in energy markets is to balance supply more
precisely with overall demand. Shoring up the supply side of the equation
represents a long-term strategy as it will take a number of years to build new
capacity.
At Itron, we believe that in the near-term, there are numerous opportunities
to manage the demand side more effectively through automating the acquisition
and communication of energy and water consumption data. Automation enables
deregulated markets to more closely match energy supply and demand through
precision load forecasting, effective load management, demand side management
programs and incentives, development of more dynamic rate structures, and
knowledge-driven conservation programs. In particular, the opportunity is most
immediate with commercial and industrial energy customers that typically
account for two-thirds or more of a utility's total load, and for the
aggregation of residential and small commercial customers.
In addition to electricity deregulation and the move to open markets, there
are additional changes in the industry that will have an impact on how energy
and water providers run their businesses and serve their customers.
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. The growth and development of new energy generation and delivery
technologies, incorporating fuel cells, micro turbines and other
innovations, will create an entirely new type of energy delivery
infrastructure characterized by distributed generation and micro-grids.
Competencies in communications technologies and advanced energy
information management position Itron well to provide solutions that
will help manage this new industry dynamic.
. Energy and water suppliers must find new ways to interact with their
customers or they will risk losing them. The data Itron collects and
turns into information is a part of the vital new link to their
customers. With the rapid deployments of advanced broadband
technologies, we have an even greater opportunity to assist our
customers' abilities to repackage and deliver the data we collect. Our
goal is to become an integral part of changing the way energy and water
suppliers communicate with their customers by collecting data, changing
it into information and delivering knowledge with which they can shape
their future and their customer's futures.
. While utility companies may retain many of their traditional functions,
some functions will be provided by new entities such as Independent
System Operators (ISOs), Regional Transmission Operators and Energy
Service Providers (ESPs). Utilities may turn the operational control of
certain of their transmission facilities over to ISOs and RTOs. ESPs and
aggregators are expected to provide both electricity and natural gas to
commercial, industrial and residential customers and may, in some
places, perform meter reading and customer billing. In addition to ESPs,
a number of new entities will likely emerge to provide metering and data
services. Such companies also may buy and sell electricity and may have
to deal with the frequent changes in prices and costs for the transfer
of power. All of these new market entrants will require meter data
collection expertise provided by Itron. Our Energy Information Systems
(EIS) strategic business unit has developed new products and is already
working with a number of new entities in the wholesale energy markets.
. In the gas industry, we believe deregulation will create many of the
same needs as deregulation of the electric industry, such as ways to
mitigate rapidly increasing prices of natural gas and an increased focus
on customer retention by improving customer service. The ability to
forecast usage requirements more accurately is also a driver. Of the 11
million gas meters being read automatically today, over 90% are being
read with Itron technology and we will continue to enhance our products
for this segment of the market.
. Just as in the electric and gas industries, the water industry is also
experiencing significant price increases which is putting tremendous
pressure on water utilities to reduce operating costs through metering
and technology solutions. Only 60% of the households in North America
are being metered for water usage today. There are approximately 61
million water meters in North America with new construction adding new
meters every year. As metering technology is added or replaced,
automation of data collection and communications technologies is easy
and economical. We are well positioned with a number of the key water
meter manufacturers, including ABB and Badger Meter and will continue to
seek new relationships to maximize delivery of our water products and
services.
DESCRIPTION OF BUSINESS
Itron Solutions and Benefits
Solutions
We have an extensive and cost-effective portfolio of data acquisition,
communication and management solutions providing energy and water utilities
and other industry participants with numerous options for responding to
evolving operational needs, market opportunities and regulatory reform
requirements.
Our solutions integrate a broad array of meter modules, private and public
radio- and telephone-based communications systems, and data management,
storage and delivery applications. Our solutions support electric,
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gas, and water service. Itron's integrated approach provides our customers
with the flexibility needed to apply a cost-effective solution to each of
their situations--rural, suburban, urban; residential, commercial, and
industrial.
Our technologies are designed to accommodate the inevitability of change so
that our customers can select solutions that meet their needs today while also
laying the foundation for more advanced solutions to meet their future goals
and objectives. Our radio-based solutions encompass handheld (off-site),
mobile and network reading technology options. Because the same radio-based
meter modules can be used with any of these alternatives, our products
facilitate the migration from one level of systems automation to another by
eliminating the need to replace the meter endpoint. Our telephone-based
solutions offer an economically attractive alternative for low density or
selective deployment situations.
We have developed software solutions with applications that integrate,
manage and store data from various data collection systems which enables our
customers to integrate data from different technologies into a common
database. This allows for the deployment of various collection technologies
within a service territory, tailored to the economic and functional
considerations of different portions of the territory. Itron software
solutions are integrated with the widest array of utility billing systems in
the industry, with our communication protocols, in many respects, representing
the defacto industry standard. In addition, Itron has one of the largest
project management organizations in the industry supporting our products and
services.
Benefits
Traditionally, many of our customers that have deployed our technology have
done so primarily on the basis of reducing costs and improving the efficiency
of their meter reading applications. While this remains a critical piece of
Itron's value proposition, our products, systems and solutions provide a wide
range of benefits to our customers that go far beyond meter reading and
billing. Our customers are finding that Itron's technology and services can be
an integral component of their operational and strategic objectives of
reducing costs, improving customer service, delivering process improvement,
and successfully evolving their businesses to manage the threats and seize the
opportunities presented by an increasingly competitive marketplace. Our
technologies provide our customers with benefits in the areas of:
. Revenue Cycle Services
. Management of Distribution Assets
. Management of Market Change and Customer Choice
. Delivery of New Value-Added Services
Revenue Cycle Services: Automation of the meter reading function results in
a number of benefits for revenue cycle services including reductions in meter
reading staff and meter reading operational support costs, increased accuracy,
improved safety, elimination of estimated reads, elimination of or large
reductions in special reads, reductions in customer complaints and call center
traffic, and reductions in billing adjustments. One of our customers, a large
water utility, reduced its percentage of estimated reads from 70% to less than
1% with the installation of our mobile automated meter reading technology.
That improvement resulted in significant reductions in costs associated with
customer complaints, billing adjustments and back-office administrative
functions. Another customer, a large electric utility, reduced its read-to-
bill period for special reads from nine days to one day resulting in
significant improvements in cash flow. Our technology also provides tamper and
energy theft detection.
Management of Distribution Assets: The use of metering information and load
control technologies to manage local distribution systems more efficiently
applies to electric, gas and water utilities. Our technologies, installed in a
saturated or in a selective deployment basis, increase the number of outage
detection points throughout our customers' distribution systems and increase a
utility's ability to pinpoint where electric system outages have occurred as
well as where power has been restored. By delivering accurate load (electric
and gas) and volume (water) information, our technologies provide utilities
with the information they need to identify,
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locate and replace improperly sized equipment, and to identify potential
equipment failures and leaks. This information helps our customers fine tune
the deployment of their distribution assets and take corrective action before
improperly sized or under rated equipment results in service disruptions,
expensive maintenance, property damage and customer complaints. Optimizing the
use of current distribution assets helps our customers avoid, minimize or
defer expensive investments in additional infrastructure. For example, a mid-
sized water utility customer is using our technology to understand residential
water usage patterns in order to create conservation programs and incentives
they hope will aid their effort to minimize or defer expensive investments in
water purification and treatment facilities as the area's population grows.
Management of Market Change and Customer Choice: Our communications and
energy data management technology and systems provide critical information to
our customers and others to effectively manage how much energy is put into
distribution systems and by whom, and how much is taken out and by whom. Our
technology enables access to critical information necessary for reconciliation
and settlements in a timely manner for a number of market participants. Load
information provided by our technology enables utilities to improve their
forecasting accuracy. In several deregulated states, utilities face a variety
of financial or pricing penalties associated with deviations from scheduled
usage. Our technology has enabled one of our large electric customers to
improve its forecasted use to within one percent of actual usage in a state
that has imposed penalties for deviations greater than 1-1/2%. In many
deregulated states, load profiling, developing patterns of usage for different
customer groups, is becoming increasingly necessary or required. Our
communications and energy data management technology enables our customers to
cost-effectively perform load-profiling functions without the burdensome task
of moving expensive load profile meters from place to place. Our technology
helps utilities receive incentives rather than incur penalties in deregulating
states where performance-based rate making is resulting in new requirements
such as reductions in estimated reads and reductions in the number and
duration of outages.
Delivery of New Value-Added Services: To ensure growth and success in a
competitive marketplace, utilities must develop, market and deliver new
products and services that offer real value to their customers. We believe a
key to successfully developing and marketing new products and services is
getting to know the customer better--who they are, how and when they use
energy and water, and what services deliver value to them. A few of the value-
added new product and service offerings that our technology enables include
new rates structured for specific customer types or classes, aggregated or
disaggregated billing options for customers with multiple meters at multiple
sites, selectable billing dates or frequency, customized billing and
invoicing, outage monitoring and notification services, Internet access to
data, usage management and consulting, and forecasting services.
Itron's Vision and Strategies
Itron's growth potential needs to be viewed in two ways. First, we are a
premier supplier of automated meter reading products, systems and services. We
have just completed a significant restructuring and financial turnaround of
the Company and are expecting revenue growth between 5% and 15% in 2001.
Automated data collection and communication technologies are in place on only
11% of the 270 million electric, gas and water meters in the United States and
Canada. Of those, more than 55% use Itron's technology. We will continue to
aggressively pursue the numerous opportunities available for the deployment of
meter reading automation and communication technologies.
Second, we believe that the costs of generating electricity, and the costs
of distributing electricity, natural gas and water will continue to rise. Our
customers and their customers are going to look for ways to reduce those
rising costs. This will stimulate an increasing hunger for data on which to
make evidence-based decisions.
The first step in mitigating rising energy and water costs is to gather
data. We do that today and we do it quite well.
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The second step is to transform the data into useful information--
knowledge--on how and when consumers use energy. We do this today with our
advanced software products that gather large quantities of complex data for
revenue billing, load research, demand-side management, real-time pricing
applications, interruptible rates and gas transportation, and financial
settlements and reconciliations for competitive energy markets. This knowledge
is essential for customers to change their usage patterns or curb their loads,
for utilities to redistribute power during peak loads to avoid blackouts, and
to inform suppliers on what needs to be produced to meet anticipated demand.
The third step is to take that valuable knowledge and use it to shape a
customer's energy needs. It is in this arena where we are planning to become
more active, targeting our customers' customers and helping them manage their
energy usage. We are engaged in discussions to join forces with technology,
service and solutions providers who can benefit from our data gathering and
communications expertise.
Strategic Business Unit ("SBU") Strategies
We believe our extensive customer base, long-term customer relationships,
upgrade and migration capabilities of our current products, multiple systems
integration capabilities, proven interfaces with numerous utility host billing
systems, and new uses of the gathered information (i.e. other departments
within our existing customers/utilities, such as distribution system planning,
engineering and marketing) provide us with a solid foundation upon which we
can expand our product offerings and services to existing utility customers,
as well as new utility customers and other industry participants in each of
the markets that we serve.
Natural Gas Systems: There are approximately 66 million gas meters in North
America, of which 11 million have AMR technology installed. Of those, more
than 90% are using Itron's AMR technology. Our AMR technology is compatible
with more gas meters than any other vendor. Our battery life for our AMR meter
modules is unmatched in the industry. The Natural Gas Systems SBU is focused
on approximately 60 utilities that are primarily natural gas only, which
represent about 36 million gas meters. The vast majority of these meters,
roughly 27 million, do not have AMR technology and are primarily being read
today using our handheld systems. This large base of current customers
represents a strong upgrade opportunity for us in this market segment.
Water and Public Power Systems: There are approximately 60,000 water
utilities and 3,000 municipal electric and gas and rural electric cooperative
utilities in North America that are the focus of this market segment. These
water utilities represent approximately 61 million water meters. Only 60% of
customers/households are currently being metered for water and only 5% of
water meters are currently automated. With utility rate increases for water
averaging two times that of the annual consumer price index in the last few
years, there is tremendous pressure on water utilities to reduce operating
costs through metering and technology solutions. The public power utilities in
this segment represent approximately 30 million electric and gas meters.
Public power utilities are increasingly feeling the effects of deregulation
and the pressure to operate more efficiently and improve customer service. We
will continue to expand our product offerings for this market. Sales in this
SBU are a combination of direct and distributor-based sales, of which we have
approximately 25 indirect sales representatives. We are well positioned with a
number of the key water meter manufacturers, including ABB and Badger Meter.
We will continue to seek new relationships to maximize delivery of our
products and services in this SBU.
Electric Systems: There are approximately 170 operating utilities in this
market segment, primarily large, investor-owned electric only utilities and
electric and gas combination utilities. In total, these customers represent
116 million electric meters and 25 million gas meters. Roughly 11% of electric
meters in the United States and Canada meters have AMR technology installed in
them today, a little over one-third of which have Itron's technology. Close to
95% of these utilities are currently using our handheld meter reading systems
and nearly 100% use our MV-90 software systems to read their large commercial
and industrial meters. Electric utility executives are understanding that AMR
provides immediate near-term benefits in terms of cost reductions and
operating efficiencies, and while also starting them down the path of
increasing communications with and service
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offering to their customers. We will continue to actively pursue additional
AMR opportunities within this market. Additionally, electric utilities are
facing increasing pressure from utility commissions and consumers to maintain
the reliability of their systems without expending large amounts of money on
their infrastructure. This increases the need for more detailed information on
load at various points within the distribution system as well as faster
notification of power outages and restoration of power. We are engaged in
discussions to join forces with technology, service and solutions providers
who can benefit from our data gathering and communications expertise in this
area.
There is an increasing focus on improving data collection and communications
with the largest users of electricity, the C&I consumers. Our C&I Network
became commercially available in the first quarter of 2001. The C&I Network
primarily utilizes our wireless radio communications for local hubs and a
public network (typically telephone) for the wide area to provide a cost-
efficient data collection system for solid-state electric meters. This
flexible, scalable solution helps electricity providers gather the critical
usage information that their C&I customers demand more often, at a lower cost
and with a higher degree of accuracy than ever before.
International Systems: This SBU is focused on sales of products, systems and
services outside of North America. We estimate that outside of North America,
there are two to three times the available number of meters as there are in
North America. The majority of revenues for this SBU consist of sales and
servicing of our handheld meter reading systems and MV-90 data collection
systems. Interest in AMR systems and technology varies widely from country to
country and overall is at a very early penetration level. Our focus is on
establishing new relationships and enhancing existing relationships with a
number of strategic partners, both utility and non-utility, to expand our
International distribution channels and development opportunities.
Energy Information Systems: Our EIS market encompasses a broad range of
customer segments including distribution utilities, energy suppliers, power
generators, and large regional and state independent system operators. EIS
products and systems are currently being used to manage critical market
settlement transactions between the myriad of market participants for the
electric transmission grids in the UK, California, Arizona, Alberta and
Ontario, Canada. In addition to supplying timely and accurate information for
managing the wholesale energy market, EIS products and systems provide value-
added services for data retrieval, analysis and billing from large commercial
and industrial meters, outage and alarm monitoring, data delivery via the
Internet, data warehousing, load profiling and forecasting, and information on
customer switching. Over 90% of the large C&I meters in the U.S. and Canada
are read using our MV-90 software systems. We will focus on selling additional
products and services to this installed base as well as pursuing the growing
number of market participants interested in this information--ISOs, RTOs, end
user customers, ESPs, public utility commissions, and others. We will also
leverage our experience and relationships on the wholesale side to pursue
additional opportunities to participate in state and regional ISO and power
grid market settlement systems.
Automatic Meter Reading Systems and Products
Our AMR product line primarily involves the use of radio and telephone
communications technology to collect and transmit meter data. The Company's
radio-based AMR solutions encompass Off-Site AMR, Mobile AMR and Network AMR.
Due to the geographic features and varying population density of a utility's
service territory, generally no single meter reading solution is
technologically or economically suited to all parts of the utility's service
territory. Our AMR applications are intended to provide flexibility ranging
from selective installation for high cost-to-read meters or geographically
dispersed meters requiring advanced metering functionality, to full
implementation of an AMR system covering a large portion of a utility's
service area. In a deregulated marketplace, target marketing of specific
features will be desirable. We provide technology that can be selectively
deployed to targeted end-use customers. This flexibility enables our customers
to achieve economic and operational benefits from their initial investments in
our AMR systems, while enabling migration to more comprehensive AMR solutions
in the future as the marketplace requires.
Meter Modules: Our AMR product offerings are based on a family of meter
modules. These meter modules, which can be easily attached to utility meters,
encode consumption and tamper information and transmit
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this data to a remote receiver. We began shipping our radio meter modules to
customers in late 1986 and have adapted the radio meter module core technology
to read numerous types of electric, gas and water meters, including the most
common meter types made by major meter manufacturers. Our compact radio meter
modules for gas and water meters are self-contained low-power units, powered
by long-life batteries with an expected minimum life in excess of ten years.
Radio meter modules for electric meters, which are normally integrated under
the glass of standard residential meters, are powered by the electrical
current in the meter and do not require batteries. Radio meter modules can be
installed by the meter manufacturer during the manufacturing process or can
easily be retrofitted in existing meters.
We also offer a separate line of meter modules for use outside of North
America. The primary differences between our meter modules in North America
versus international markets are the radio frequency bands in which they
operate and the physical configurations of the modules.
Off-Site Meter Reading: Our Off-Site AMR solution enables radio-equipped
meters to be read remotely, by a person with a handheld computer equipped with
a radio unit. Off-Site AMR offers a practical and cost-effective way for
utilities to read high cost-to-read meters by eliminating the need for meter
readers to gain visual access to those meters. Customers who have our handheld
computers with radio technology can selectively install meter modules on high
cost-to-read meters. System software automatically identifies radio-equipped
meters within a route. When remote reads are needed, the handheld prompts the
meter reader to initiate a radio read. Meter information is shown on the
handheld display and is automatically recorded in the handheld database,
allowing the meter reader to move on to the next meter on a route. When a
route is completed, data from both visual and radio reads is uploaded from the
handheld computer to the utility host system for customer billing.
Mobile AMR: Our Mobile AMR solution uses a Data Collection Unit (DCU), which
is mounted in a vehicle, or a Datapac which is transportable between vehicles,
to collect and store data transmitted by meter modules as the vehicle passes
module-equipped meters. The DCU or Datapac can receive information transmitted
by multiple meter modules simultaneously. A touch-screen display enables the
operator to observe and operate the equipment. The Mobile AMR application
includes software that manages and moves information to and from a utility's
billing system. The software transfers information from the host system to
create route files for the DCU and Datapac for each route, manages the storage
of the meter data as it is collected and, at the end of the day, uploads the
information to the utility's billing system. A Mobile AMR system enables an
operator to read in an eight-hour day an average of 10,000 to 12,000 meters
with a DCU or roughly half that number of meters with a Datapac. This compares
to an average walking route of 300 to 500 meters per day. Factors affecting
the actual number of reads per day include, among others, route density and
design, speed limits, weather and the environment.
Network AMR: We offer a number of Network AMR products. Our Network
solutions eliminate the need to send meter readers to or near customer
premises through completely automating meter reading in segments of a
utility's service area. We have large-scale Network AMR deployments with two
utilities and smaller scale installations at several utilities covering
approximately one million meters. Our Network AMR technology provides
utilities with daily or more frequent meter reads, time-of-use pricing, on-
request meter reads for final reads or customer inquiries, tamper monitoring
and reporting, high-level outage detection and power restoration reporting,
load profiling and virtual connect/disconnect capabilities.
Saturated Network Deployments: Meter data collected by our radio meter
modules is transmitted to a Cell Control Unit (CCU). The CCU is a neighborhood
concentrator that reads meter modules, processes data into a variety of
applications, stores data temporarily, and transports data to the host
processor when required. Weighing approximately 15 pounds, our CCU can be
easily installed on utility poles, streetlights, or other locations. While the
geographic area covered by each CCU varies depending on local topography,
physical structures, terrain and other factors, in general each CCU serves an
average of 50 homes. Information collected by CCUs is then transmitted to a
Network Control Node (NCN), which is a regional concentrator and routing
device that is installed in radio communications facilities such as leased
towers, substations or other communication facilities. Each NCN typically
supports between 250 to 400 CCUs. NCNs manage information
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routing in the network between CCUs and the system host processor and can
serve as a gateway to other communication networks. Communications between
CCUs and NCNs utilize the Company's nationwide licensed frequencies in the
1427-1432 MHz band.
The final link in our Network AMR solution is from the NCNs to one or more
head-end host processors, known as the Genesis Itron Host Processors (GIHP).
The GIHP manages the collection of data from network devices and facilitates
the download of schedules and other application information to appropriate
network devices. The GIHP also transfers the data to a database for storage
and retrieval. Communications between NCNs and the utility's GIHP typically
utilize radio, telephone, frame relay or other wired communication media.
Drop-In Network Deployments: Our MicroNetwork is a low-cost network meter
reading solution that can be selectively deployed to deliver monthly, weekly,
daily or unscheduled reads from groups of meters in a wide variety of service
environments. It is suited for smaller clusters of meters that require more
frequent reads, but where there are not enough meter points to justify the
cost of saturated network infrastructure. This makes it an ideal data
collection solution for apartment complexes, campuses, small residential
communities, high-rise buildings, strip malls, suburban neighborhoods and
rural communities.
Our MicroNetwork infrastructure consists of a series of Concentrator Units
deployed over radio-based meter modules installed on electric, gas or water
meters that communicate using 900 MHz channels. The locally installed
Concentrator Units collect data from meter modules, temporarily store it, and
then forward the data to the host processor via public network communications
such as telephone and cellular systems.
Itron's Commercial & Industrial Network became commercially available in the
first quarter of 2001, and utilizes public telephone and Itron's 1427-1432 MHz
band wireless radio communications to provide a cost-efficient data collection
system for solid-state electric meters. This flexible, scalable solution helps
electricity providers gather the critical usage information that their C&I
customers demand more often, at a lower cost and with a higher degree of
accuracy than ever before. The C&I Network supports various meter
manufacturers' native protocols.
Itron's C&I Network accomplishes this by transmitting metering data from
radio meter modems installed on solid state electric meters to a network hub
that collects data from a designated population of C&I meters. Using telephone
or cellular communications, the hub then sends all the data collected from the
C&I meters in its area to Itron's MV-90 host processor, where the data is used
for a variety of billing, load forecasting, marketing, load research and
system engineering applications.
Traditionally, advanced metering services have only been offered to the
largest C&I customers, as they required the use of a dedicated phone line.
With Itron's C&I Network, hundreds of meters can share a single phone line
enabling electricity providers to offer these services to a significantly
broader number of C&I customers than they have been able to in the past when
dedicated phone lines to each meter were required. And, because geographically
dispersed metering data can be sent, the C&I Network gives utilities a
powerful tool for managing local, regional and national accounts.
Telephone-Based Technology: We also offer products that allow electric and
gas utilities to implement telephone-based AMR solutions. These systems use
inbound communications in which the meter modules call in to the utility's
central processing computer at pre-scheduled times to report meter reading
information. The devices are connected to and share existing customer
telephone lines. Telephone-based AMR functionality is primarily designed for
selective deployments of direct access customers or for geographically
dispersed customers requiring advanced metering functionality such as regional
or national accounts. Telephone-based technology can provide operational and
system reliability improvements where full saturation networks are difficult
to cost justify. This technology may also be used to automate areas not suited
for cost-effective implementation of radio technologies such as remote or
rural areas.
For residential and commercial applications, our telephone based modules for
electric meters attach under the glass of those meters and collect and report
consumption, demand, time-of-use and load profile data. In
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addition, certain telephone-based modules for electric use report power
outages and restoration of power. For large volume gas meters, our telephone-
based modules collect information that is used to bill transport gas and
interruptible gas customers, as well as critical load survey data for
applications such as peak day forecasting, supply forecasting and assessments,
rate design and marketing. For residential gas applications, modules are
attached to existing or new residential gas meters to provide consumption and
load survey data.
Commercial and Industrial Data Collection and Management Software
Commercial and industrial (C&I) meters have much more sophisticated
measurement capabilities than residential meters and more data that must be
conveyed back to energy providers from the meter. There are a wide variety of
these meters with no uniform communications standards by the multiple meter
vendors. We are the leading worldwide provider of software systems for
metering data acquisition and analysis for the large C&I customers of electric
and gas utilities. We believe that competition in the utility industry will
drive metering technology and systems toward enhancing and facilitating
communications between large C&I customers and their power suppliers and we
have released a number of new products in the last few years aimed at this
critical customer group.
Our MV-90 product gathers, processes and analyzes large quantities of
complex data for revenue billing, load research and demand-side management and
is used by approximately 90% of the major utilities in the United States and
Canada and most of the electric and gas utilities in Canada, Europe, the
Middle East, Australia, Central America and South America. MV-90 supports all
methods of data retrieval from large C&I meters (handheld readers, radio,
telephone and other communication technologies) and was designed with a full
range of applications software to support data collection from meters, data
validation and editing, and analysis of energy usage data. MV-90 software can
be licensed for use on single computers or local/wide area networks. In
addition to the base system, there are layered application packages that
support applications such as load research, real-time pricing (hourly price
transmission to C&I customers), gas transportation, outage and alarm
monitoring, and data aggregation. MV-90 software allows C&I customers to read
the energy provider's delivery point meters (both electric and gas) on a
frequent basis to analyze their own energy consumption and can provide hourly
pricing data from energy suppliers for customers who purchase power on a real-
time pricing basis (price varies by the hour).
Our MV-PBS billing and settlement solution provides a client server-based
billing application that produces customized bills and invoices for
commercial, industrial and wholesale energy users. The application interfaces
to MV-90 and MV-STAR and supports billing on demand, energy rates, real-time
pricing applications, interruptible rates, gas transportation, multi-site
customers, and settlement charges. With MV-PBS, a bill can be tailored to meet
specific customer requirements. Prior to MV-PBS, these key customers were
often billed manually due to the expense associated with modifying traditional
billing systems for complex customer rates and contracts. MV-PBS is capable of
generating and sending invoices directly to customers via email or the
Internet. The system also supports financial settlement and reconciliation for
the state and regional competitive markets.
In order to manage high volumes of C&I meters, we developed MV-COMM, a
communications front-end processor for the base MV-90 platform that greatly
enhances speed, performance and communication between meters and the host
processor. MV-COMM supports many different communication formats--TCP/IP,
CDPD, PSTN, ARDIS, RF, etc. Initially developed for the ISO in California, MV-
COMM enabled the Company to meet the ISO's requirement to read a minimum of
3,000 electronic meters with five-minute interval data within two-minute time
periods at the end of each hour. MV-COMM has now been installed at several
other locations, including in the UK, where more than 80,000 electronic meters
with 1/2 hourly data are read each night. MV-COMM enables energy providers to
transition from operating systems serving low volumes of C&I customers to
successfully managing large-scale, advanced data collection systems for high
volumes of widely-dispersed C&I customers.
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We have distribution rights in North America for the STAR Data Management
System (MV-STAR). MV-STAR was originally developed to support the competitive
electricity supply market in England and Wales and has now been modified by us
for the North America competitive energy markets. When integrated with MV-90,
MV-STAR is a data warehouse solution that manages and stores extremely large
volumes of load profile data gathered from C&I meters, wholesale delivery
points, and major entity grid points. This data is processed in a very short
time period and delivered, via batch or interactive mode to the system users
and data subscribers in industry standard data formats. MV-STAR also provides
the ability to retain data history as it changes over time, preserving all
versions of the data and tagging the data to show how it has been used in the
reporting process. In ISO environments, MV-STAR supports contract management
of ISO/ESP end-customer relationships, including historical storage of
contract changes. The system also supports data aggregation and load profile
inputs into the settlements process.
Large energy users are increasingly looking for easy access to load data.
They need to forecast energy costs, adjust usage, react to rate changes and
manage their energy consumption and bottom-line. By using the Internet to
deliver load data, customers can use proven, cost-effective communications
infrastructure that is already in place to access their detailed interval-load
data. Our MV-WEB product interfaces to the MV-90 base platform and to MV-STAR.
Designed to work with standard web browsers, MV-WEB provides a secure Internet
connection for C&I customers to view and graph recorded quantities of interval
load data, as well as calculated quantities. MV-Web also provides a flexible
method of data delivery to energy market participants.
Handheld Systems and Products
Almost all utilities in the U.S. and Canada, and utilities in numerous other
countries around the world, use handheld meter reading systems for a
substantial portion of their meter reading and billing functions.
Approximately 75% of the largest utilities (those with 50,000 or more meters),
in the United States and Canada, use our handheld systems. We provide several
models of handheld computers to meet the varying requirements of our
customers. Each model is designed for use in harsh environments with standard
text and graphics, back-lit displays, several memory sizes, multiple
communications options, interface devices for electronic meters and easy to
use keyboards that can be customized to the needs of the our customers.
Handheld systems are used as follows: (1) key customer data is downloaded
from the utility's host processor to our handheld computers prior to
commencement of a meter reader's daily route; (2) a meter reader visually
reads meters along a route and enters the readings into a handheld computer;
and (3) after a meter reader's daily route has been completed, collected data
is uploaded directly into the utility's host billing system. Our family of
software systems provides data consolidation and storage, reformatting,
linkage to a utility's host billing system, meter reading route management,
route downloading and time-of-use and interval data recording data management
and distribution.
In late 2000, we launched the Itron G5, a new technology designed to set a
new standard for handheld meter reading performance and ergonomics. The G5
brings together the latest handheld component technology and functionality to
provide a rugged platform and feature rich architecture for delivering
improved meter reading performance and processing speed in a smaller-than-ever
package. The G5 has a new power management system that allows the operator to
choose from several processing modes--including low speed, high speed, doze
mode, suspend mode, and critical mode. This power management system allows the
operator to read more meters for a longer period without having to recharge
the battery. The G5's full-duplex radio utilizes the latest in digital
signaling and correlation technology to slice through radio noise levels and
enhance radio reading performance. We also provide a full suite of peripheral
products to support the G5.
Customers
Our handheld systems are installed at over 2,000 electric, gas, water and
combination utilities in more than 45 countries and are being used to read
approximately 258 million meters worldwide. Approximately 75% of the largest
utilities (those with 50,000 or more meters) in the United States and Canada
use our handheld systems.
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As a result of the high market penetration we have already achieved in the
domestic market, additional handheld sales are expected to be predominantly
system upgrades and replacements. We estimate that the number of available
meters outside of the domestic market is approximately two to three times the
number of meters within that market. We believe that international markets
represent a growth opportunity for new sales of our handheld systems and new
AMR systems where penetration of these systems is substantially less than that
of our domestic market.
We have established ourselves as the world's largest supplier of meter
modules for the expanding AMR market as a result of having shipped over 17.6
million meter modules as of December 31, 2000 to more than 625 customers
around the world. In total our shipments represent more than 55% of all AMR
meter module shipments.
We have installed most of the world's largest AMR systems for electric, gas
and water utilities. The largest AMR system is at New Century Energies
(formerly Public Service Company of Colorado) and is comprised of over 1.5
million electric and gas meter modules. One of the largest gas installations
is at Minnegasco, representing just over 900,000 endpoints. The largest water
AMR system is installed with the City of Philadelphia Water Department
covering approximately 430,000 water meters.
We also have more than 500 energy providers and wholesalers using our C&I
data collection and management systems. In our EIS customer segment, we have a
number of large systems installed or currently being installed for the
competitive wholesale energy data markets such as systems in the UK, the ISO
for the state of California, Tucson Electric Power, Enmax in Alberta and the
Independent Market Operator (IMO) in Ontario, Canada.
Sales and Distribution
In our Electric Systems SBU, Natural Gas Systems SBU, and Energy Information
Systems SBU, we primarily utilize direct sales, and technical and
administrative support teams to serve the needs of our customers. In our Water
and Public Power SBU, we conduct sales and technical support activities
through direct sales and numerous business associates and manufacturer
representatives, including several major meter manufacturers.
To serve international customers, we have subsidiary operations located in
Reading, England; Vienne, France; and Sydney, Australia. While we utilize a
direct sales approach in some areas, we use a distributor-based model in most
areas outside of North America.
We also sell electric and water meter modules through original equipment
manufacturer arrangements with several major meter manufacturers, in which the
manufacturers incorporate our meter modules at their own facilities into new
meters and then offer them for sale. In addition to direct sales, we also
offer products and services through long-term outsourcing arrangements, which
include AMR products, project management and installation services, on going
meter reading services, meter shop services and other services. Outsourcing
contracts usually cover long timeframes and typically involve contracts in
which either a customer owns the equipment and we provide services for a fee,
or where we both own and operate the system for a fee.
Marketing
Marketing activities include product marketing, industry marketing, and
marketing communications. Our marketing efforts focus on product and company
awareness principally through trade shows, symposiums, published papers,
advertising and direct mail. These marketing efforts include brochures,
newsletters, exhibits, conferences, an annual user's forum, industry standards
committee representation and regulatory support. Several major industry
conferences are keystones in the Company's marketing program, including the
Distributech Conference held in February 2001, two Annual Users Conferences,
one specifically for MV-90 users, both of which will be held in October 2001,
and the Automatic Meter Reading Association conference which will be
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held in September 2001. The Company maintains communications with its
customers through its Users Advisory Board and a program of regular mailings,
newsletters and new customer announcements.
Global Service and Support
We provide our customers with implementation services that include among
other things, system design, installation, training and project management.
Each of these services is tailored to meet a particular customer's needs. In
addition, for Network AMR systems, we offer network design, propagation
analysis, mapping support, centralized operation, disaster recovery/backup and
system support. We offer system maintenance and support services to each of
our customers. Service contract prices are based on a number of factors,
including system size and complexity and the expected degree of service
support required. Our system maintenance and support services include 24-hour,
toll-free hot line support, customer service representatives, consulting
services, regional training programs, equipment repair and preventative
maintenance, software support and maintenance, system troubleshooting and
network management services.
Product Development
We have maintained our leadership position in part because of our commitment
to developing new products and continued enhancement of existing products. Our
product development efforts have been focused on expanding and upgrading our
communications and energy data collection product offerings, particularly for
C&I customers, and developing new hardware and software platforms for handheld
systems. In 1998 and 1999, we undertook major restructuring measures which
included the consolidation of development activities both geographically and
in terms of product teams. We spent $21.3 million and $26.7 million on product
development in 2000 and 1999, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Operating Expenses
and Note 8 to our accompanying financial statements."
Our future success will depend in part on our ability to continue to develop
or acquire new competitive products and technology. In particular, our ability
to further enhance our network and other products or to develop or acquire new
products that provide energy suppliers with the ability to optimize the
distribution aspects of their business and to provide Internet connections to
energy consumers. There can be no assurance that we will not experience
unforeseen problems or delays with respect to our product development efforts.
Delays in the availability of new and enhanced products could have a material
adverse effect on our business, financial condition and results of operations.
See "Certain Risk Factors-Dependence on New Product Development."
Manufacturing
We manufacture meter modules and other communications technology products,
as well as certain peripheral equipment. Our primary manufacturing objective
is to design and produce cost-effective, high-quality meter modules and other
network components utilizing high-volume automation equipment.
In 1999, our restructuring measures included the consolidation of our high
volume products into one location. See "Note 8 to our accompanying financial
statements." Our primary manufacturing facility is located in Waseca,
Minnesota. We currently have the capacity to produce approximately 3.3 million
(combination of electric, gas and water) meter modules annually on a two-shift
basis. With the addition of a third shift and certain ancillary equipment, we
could expand our capacity to approximately 4.8 million meter modules annually.
We have installed extensive automated testing equipment in our manufacturing
facilities to provide quality control and process repeatability. Our testing
includes both visual inspection and automated testing of technical parameters
established for each of our products. Our quality control equipment also
includes a sophisticated information system that collects data from testing
equipment and provides extensive reports and analyses of such data. This
information system permits us to promptly identify potential problems or
weaknesses in our manufacturing processes. Our Spokane facility has been ISO
9002 certified since 1993 and our Waseca facility received ISO 9002
certification in 1998.
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In 2000, we outsourced the manufacturing of certain handheld systems and
peripheral equipment, as well as other lower-volume AMR products from our
Spokane manufacturing location to a contract manufacturer in which we have a
minority ownership interest. The contract manufacturer purchased certain of
our manufacturing equipment and inventory from us and is leasing approximately
two thirds of the space in our Spokane manufacturing facility, approximately
24,000 square feet.
In addition, certain of our handheld systems products, telephone modules and
international meter module products are manufactured for us by non-related
third parties.
Employees
As of February 28, 2001, we employed 877 full-time persons, 32% in
manufacturing, 13% in product development, 3% in marketing, 11% in global
service and support, 14% in finance and corporate administration, and 27% in
our SBUs. Of these employees, 92% were located in the U.S. and Canada, and the
remainder in Europe and Australia. None of our employees are represented by a
labor union. We have not experienced any work stoppages and consider our
employee relations to be good.
Competition
Although we are the industry leader in supplying energy and water data
collection products, systems and services to the utility industry, we face
competition from a variety of companies in each of the markets we serve. The
emerging market for network communications systems for the utility industry,
together with the potential market for other two-way communications
applications, have led communications, electronics and utility companies to
begin developing various systems, some of which currently compete, and others
of which may in the future compete, with the our products, systems, and
services. These competitors can be expected to offer a variety of technologies
and communications approaches, as well as meter reading, installation and
other services to utilities and other industry participants.
We believe that we enjoy a number of competitive advantages. We believe the
diversity of our energy and water data collection products is broader than
that of any other provider. This diversity gives us the ability to provide
comprehensive solutions to our customers. Our radio-based communications
solutions utilize the same AMR radio meter modules and facilitate the
migration from one level of systems automation to another. We believe that we
are able to price our AMR meter modules competitively as a result of our
highly automated manufacturing lines as well as high production volumes. We
have a substantially larger installed base of handheld and automated meter
reading systems than any of our competitors which gives us the advantage of a
proven record of providing cost-efficient, quality products and services and
the proven ability to interface meter data with a wide variety of utility host
billing systems.
As of December 31, 2000, we had more than 55% market share in terms of AMR
meter modules shipped. Our largest competitor in the AMR meter module market
is Schlumberger's Resource Management Services division, which acquired a
former competitor, CellNet Data Systems in March 2000. In addition to being a
competitor, Schlumberger also acts as a reseller and integrator of our
solutions. There are also a few new communications providers, radio-based,
Internet-based, and public network-based, most of whom are narrowly focused,
that have recently been awarded pilot systems at utilities, including
companies such as Nexus and Innovatec. These companies currently offer
alternative solutions and compete aggressively with us.
In our EIS market, there are many market participants that may be both
competitors and potential partners. We face competition from a number of
companies such as ABB, Siemens, Lodestar, ICF Kaiser, and Anderson Consulting.
In competitive wholesale markets in California and Ontario, Canada, we have
partnered with ABB and Ernst & Young to offer a total integrated system
solution. We will continue to partner with some of these companies to address
future competitive energy markets.
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We believe that as we expand our offerings towards optimizing energy
delivery products, systems and solutions, there are several very large
suppliers of equipment, services or technology to the utility industry that
have developed or could develop competitive products for this market, such as
ABB, Siemens, Invensys, and Honeywell. Similarly, we believe that as we move
towards offering systems and solutions for end-user customers, we will face
competition from telecommunications, billing, and controls companies. We
expect to develop cooperative relationships with several of these companies to
jointly develop and offer solutions to the market.
Many of our present and potential competitors have substantially greater
financial, marketing, technical and manufacturing resources, and in some
cases, greater name recognition and experience. Our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products and services than we can. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that increase their
ability to address the needs of our prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. There can be no
assurance that we will be able to compete successfully against current and
future competitors, and any failure to do so would have a material adverse
effect on our business, financial condition, results of operations and cash
flow. See "Certain Risk Factors--Competition."
Intellectual Property
We own or license numerous United States, Canadian and foreign patents and
have filed various patent applications. These patents cover a range of
technologies for meter reading, portable handheld computer and AMR-related
technologies. We also rely on copyrights to protect our proprietary software
and documentation. We have registered trademarks for most of our major product
lines in the United States and many foreign countries. While we believe that
our patents, trademarks and other intellectual property have significant
value, there can be no assurance that these patents or trademarks, or any
patents or trademarks issued in the future, will provide meaningful
competitive advantages. The Company is currently involved a legal action
related to the Company's alleged infringement of another patent; see "Legal
Proceedings." We believe that our continued success will be based on continued
innovation, market knowledge, technical and marketing capabilities, existing
product relationships with utilities and a fundamental commitment to customer
service excellence. See "Certain Risk Factors--Intellectual Property."
FCC Regulation and Allocation of Radio Frequencies
Certain of our products made for use in the United States use radio
frequencies, the access to and use of which, are regulated by the FCC pursuant
to the Communications Act of 1934, as amended. In general, a radio station
license issued by the FCC is required to operate a radio transmitter. The FCC
issues these licenses for a fixed term, and the licenses must be periodically
renewed. Because of interference constraints, the FCC can generally issue only
a limited number of radio station licenses for a particular frequency band in
any one area.
Although radio licenses generally are required for radio stations, Part 15
of the FCC's rules permit certain low-power radio devices ("Part 15 devices")
to operate on an unlicensed basis. Part 15 devices are designed to be used on
frequencies used by others. These other users may include licensed users,
which have priority over Part 15 users. Part 15 devices are not permitted to
cause harmful interference to licensed users and must be designed to accept
interference from licensed radio devices. Our radio meter modules are Part 15
devices which transmit information back to either the handheld, mobile or
network AMR reading devices in the 910-920 MHz band pursuant to these rules.
Our RF products are designed to eliminate virtually all interference to
other frequency users, while still enabling a complete and accurate read from
our radio meter modules. However, if we were unable to eliminate harmful
interference caused by our Part 15 devices through technical or other means,
we or our customers could
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be required to cease operations in the band in the locations affected by the
harmful interference. Further, in the event that the unlicensed frequencies
used by our customers and us become unacceptably crowded or restrictive, and
no additional frequencies that are suitable are available or allocated, our
business could be materially and adversely affected.
In 1994 the Company was issued a non-exclusive nationwide Federal
Communications Commission (FCC) license to operate in the 1427-1432 MHz band.
With the exception of meter modules and handheld or mobile reading devices
that operate in MAS bands and the 910-920 MHz band, our network products
operate in parts of this band. At the time our license was issued, the 1427-
1432 MHz band was allocated primarily for use by the federal government, which
consented to our use of the band on a secondary, non-interference basis.
Current government use of the band is limited to a discrete number of well-
defined locations, and we did not expect the fact that we were secondary to
federal government operations to have either a present or future material
impact on our business.
The 1427-1432 MHz band is among 235 MHz of spectrum that has been earmarked
for reallocation from federal government users to private sector users (to be
licensed by the FCC). The band is subject to continuing federal government use
in specified areas through 2004. On June 8, 2000, the FCC issued a Report and
Order allocating three MHz of the band (1429-1432MHz) on a primary basis for
use by wireless medical telemetry. Use of the remaining two MHz (1427-1429MHz)
was to be the subject of further rulemaking proceedings by the FCC, which may
or may not grant Itron the right to use that band. Until that time, we may
continue operating in the 1427-1429MHz band. On January 23, 2001, the FCC
published in the Federal Register a Notice of Proposed Rulemaking that invites
public comment on three options for allocating the 1427-32 MHz band. Option 2,
which the Company supports, allocates the band to utility telemetry and
medical telemetry. Options 1 and 3 require utility and medical telemetry to
share a portion of the band and allocates the rest of the band to fixed and
mobile terrestrial communication and low earth orbit users respectively. There
can be no assurance that the Company will have adequate spectrum in the 1427-
32 MHz band for its network systems if Option 1 or Option 3 is adopted.
If we are not successful in our efforts to continue operations in the 1427-
1432 MHz band under favorable conditions, we believe that current
installations will be permitted to continue under a grandfathering provision.
However, there can be no assurance that such grandfathering will be permitted
or that we will have any rights whatsoever in the band after final rulemaking
by the FCC. In such event, our network products (other than modules) would
have to be redesigned to operate at a different frequency spectrum, and the
cost associated with that could have a material adverse effect on our
business.
The regulatory environment we operate in is subject to change. There can be
no assurance that the FCC or Congress will not take regulatory actions in the
future that would have a material adverse effect on us. See "Certain Risk
Factors--Availability and Regulation of Radio Spectrum." We are also subject
to regulatory requirements in international markets. These regulations, which
vary by country, require modifications to our products, including operating on
different frequencies with different power specifications.
Backlog of Orders
Our twelve-month revenue backlog of unshipped factory orders at December 31,
2000 and 1999 was approximately $56 million and $58 million, respectively. We
expect that substantially all of the orders in twelve-month backlog at the end
of 2000 will be shipped during 2001. In addition, we have multi-year contracts
to supply radio meter modules and multi-year outsourcing arrangements with
several customers. Total backlog, including revenues beyond the next twelve
months, was $151 million and $155 million at December 31, 2000 and 1999,
respectively. While backlog is one indicator of future revenues for us, our
backlog fluctuates from quarter-end to quarter-end primarily as a result of
the timing of large contracts. In recent years we have increased the amount of
revenue derived from distribution channels for smaller utilities and
municipalities. To the extent that future revenues are derived from this
segment of the market, which typically has a smaller order size that
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may book and ship within the same quarter, or from service offerings verses
product sales, backlog may not be as reliable an indicator of near-term
revenues.
Environmental Regulations
In the ordinary course of our business, we use metals, solvents, and similar
materials which are stored on site. The waste created by use of these
materials is transported off site on a regular basis by a state-registered
waste hauler. Although we are not aware of any material claim or investigation
with respect to these activities, there can be no assurance that such a claim
may not arise in the future or that the cost of complying with governmental
regulations in the future will not have a material adverse effect on us.
Working Capital
Information on the Company's practice relating to working capital items is
contained in "Notes 1 and 3 to our accompanying financial statements."
Financial Information by Geographic Area
Financial information by geographic area is contained in "Note 14 to our
accompanying financial statements."
Other
We do not have any contracts with the federal government. Our business is
not significantly seasonal.
Certain Risk Factors
Dependence on Utility Industry; Uncertainty Resulting From Mergers and
Acquisitions and Regulatory Reform: We derive substantially all of our
revenues from sales of products and services to the utility industry. We have
experienced variability of operating results, on both an annual and a
quarterly basis, due primarily to utility purchasing patterns and delays of
purchasing decisions as a result of changes or potential changes in the state
and federal regulatory frameworks within which the utility industry operates,
and mergers and acquisitions in the utility industry.
The utility industry, both domestic and foreign, is generally characterized
by long budgeting, purchasing and regulatory process cycles that can take up
to several years to complete. Our utility customers typically issue requests
for quotes and proposals, establish evaluation committees, review different
technical options with vendors, analyze performance and cost/benefit
justifications and perform a regulatory review, in addition to applying the
normal budget approval process within a utility. Purchases of our products
are, to a substantial extent, deferrable in the event that utilities reduce
capital expenditures as a result of mergers and acquisitions, pending or
unfavorable regulatory decisions, poor revenues due to weather conditions,
rising interest rates or general economic downturns, among other factors.
The domestic electric utility industry is currently the focus of regulatory
reform initiatives in virtually every state. These initiatives have resulted
in significant uncertainty for industry participants and raised concerns
regarding assets that would not be considered for recovery through ratepayer
charges. Consequently, in recent years, many utilities have delayed purchasing
decisions that involve significant capital commitments. While we expect some
states will act on these regulatory reform initiatives in the near term, and
some states have, there can be no assurance that the current regulatory
uncertainty will be resolved in the near future or that the advent of new
regulatory frameworks will not have a material adverse effect on our business,
financial condition and results of operations. For example, in California,
where the new regulatory framework put utilities in the position of selling
electricity at prices substantially below their cost, several of the large
investor owned utilities, including Southern California Edison (SCE) have come
close to bankruptcy. In the event SCE were to enter into
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bankruptcy proceedings, our business could be adversely affected. See "Note 10
to our accompanying financial statements--Commitments and Contingencies."
Moreover, in part as a result of the competitive pressures in the utility
industry arising from the regulatory reform process, many utility companies
are pursuing merger and acquisition strategies. We have experienced
considerable delays in purchase decisions by utilities that have become
parties to merger or acquisition transactions. Typically, such purchase
decisions are put on hold indefinitely when merger negotiations begin. The
pattern of merger and acquisition activity among utilities may continue for
the foreseeable future. If such merger and acquisition activity continues at
its current rate or intensifies, our revenues may continue to be materially
adversely affected.
Certain state regulatory agencies are considering the "unbundling" of
metering and certain other services from the basic transport aspects of
electricity distribution. Unbundling includes the identification of the
separate costs of metering and other services and may extend to subjecting
metering and other services to competition. For example, in California, the
CPUC issued a decision that subjects metering, billing and related services to
competitive supply. Other states, including Arizona, Nevada and Pennsylvania,
have adopted or are adopting similar measures. The discontinuance of a
utility's metering monopoly could have a significant impact upon the manner in
which we market and sell our products and services. As the customer for our
products and services could change from utilities alone to utilities and their
competitive suppliers of metering services, we could also be required to
modify our products and services (or develop new products and services) to
meet the needs of the participants in a competitive meter services market.
Recent Operating Losses: While we were profitable in all four quarters of
2000, we have experienced operating losses in certain quarters and years from
1996 through 1999. There can be no assurance that we will maintain consistent
profitability on a quarterly or annual basis. We have experienced variability
of quarterly results and believe our quarterly results will continue to
fluctuate as a result of factors such as size and timing of significant
customer orders, delays in customer purchasing decisions, FCC or other
governmental actions, timing and levels of development and other operating
expenses, shifts in product or sales channel mix, and increased competition.
Our operating margins have in the past been adversely affected by excess
manufacturing capacity. We expect competition in the AMR market to increase as
current competitors and new market entrants introduce competitive products.
Operating margins also may be affected by other factors. For example, in the
past, we entered into large network AMR contracts with Duquesne and Virginia
Power with margins significantly below our historical margins due to the early
stage of our network products at the time those systems were shipped and
installed, and due to competitive pressures.
Customer Concentration: In some years, our revenues are concentrated with a
limited number of customers, the identity of which changes over time. From
time to time, we are dependent on large, multi-year contracts that are subject
to cancellation or rescheduling by our customers. Cancellation or postponement
of one or more of these contracts would have a material adverse effect on us.
Dependence on New Product Development: We have made, and expect to continue
to make, substantial investments in technology development. Our future success
will depend, in part, on our ability to continue to design and manufacture new
competitive products and to enhance our existing products. This product
development will require continued investment in order to maintain our market
position. There can be no assurance that unforeseen problems will not occur
with respect to the development, performance or market acceptance of our
technologies or products. Development schedules for technology products are
subject to uncertainty, and there can be no assurance, that we will meet our
product development schedules. We have previously experienced significant
delays and cost overruns in development of new products, and there can be no
assurance that delays or cost overruns will not be experienced in the future.
Delays in new product development, including software, can result from a
number of causes, including changes in product definition during the
development stage, changes in customer requirements, initial failures of
products or unexpected behavior of products under certain conditions, failure
of third-party-supplied components to meet specifications or lack of
availability of such components, unplanned interruptions caused by problems
with existing products
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that can result in reassignment of product development resources, and other
factors. Delays in the availability of new products, or the inability to
successfully develop or acquire products that meet customer needs, could
result in increased competition, the loss of revenue or increased service and
warranty costs, any of which would have a material adverse effect on our
business, financial condition and results of operations.
Dependence on the Installation, Operations and Maintenance of AMR Systems
Pursuant to Outsourcing Contracts: A portion of our business consists of
outsourcing, wherein we install, operate and maintain AMR systems that we may
continue to own in order to provide meter reading and other related services
to utilities and their customers. We currently have three outsourcing
contracts involving mobile AMR solutions and, in one of those cases, the
system has been sold on a turnkey basis. We use the cost-to-cost percentage of
completion method of accounting for our long-term outsourcing contracts, which
involves our having to estimate revenues and expenses into the future. To the
extent we need to revise our estimates, our financial results can be adversely
affected. In addition, these long-term outsourcing contracts are subject to
cancellation or termination in certain circumstances in the event of a
material and continuing failure on our part to meet contractual performance
standards on a consistent basis over agreed time periods. In 1999 we incurred
approximately $24.1 million in charges related to revisions of our estimates
on an outsourcing contract with Duquesne Light Company. In March 2000, we sold
the system at Duquesne to DQE, the parent company of Duquesne, and incurred a
loss of approximately $50 million in connection with this sale, which is
reflected, in our 1999 financial results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Revenues and Gross
Margins, and Note 8 to our accompanying financial statements."
Increasing Competition: We face competitive pressures from a variety of
companies in each of the markets we serve. In the radio-based network AMR
market, companies such as Schlumberger, Nexus and Innovatec currently offer
alternative solutions to the utility industry and compete aggressively with
us. The emerging market for two-way communications systems for advanced
metering and billing for the utility industry, together with the potential
market for the same kind of systems to provide energy delivery optimization
and Internet connections to customers, have led communications, electronics
and utility companies to begin developing various systems, some of which
currently compete, and others of which may in the future compete, with the our
current and future product and service offerings. These competitors can be
expected to offer a variety of technologies and communications approaches, as
well as meter reading, installation and other services, to utilities and other
industry participants.
We believe that several large suppliers of equipment, services or technology
to the utility industry may be developing competitive products for the AMR
market. In addition, large meter manufacturers could expand their current
product and services offerings so as to compete directly with us. To stimulate
demand, and due to increasing competition in the AMR market, we have from time
to time lowered prices on our AMR products and may continue to do so in the
future. We also anticipate increasing competition with respect to the features
and functions of our products. In the handheld systems market, we have
encountered competition from a number of companies, resulting in margin
pressures in the maturing domestic handheld systems business and in some
international markets.
Many of our present and potential future competitors have or may have
substantially greater financial, marketing, technical or manufacturing
resources, and in some cases, greater name recognition and experience than we
do. Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products and
services than we can. In addition, current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties that increase their ability to address the needs of our
prospective customers. It is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. For example, in 2000, one of our competitors, Schlumberger, acquired
the assets of another competitor in bankruptcy, CellNet. There can be no
assurance that we will be able to compete successfully against current and
future competitors, and any failure to do so would have a material adverse
effect on our business, financial condition, results of operations and cash
flow.
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Uncertainty of Market Acceptance of New Technology: The AMR market is
evolving, and it is difficult to predict the future growth rate and size of
this market with any assurance. The AMR market has not grown as quickly in
recent years as we expected. Further market acceptance of the our new AMR
products and systems, will depend in part on our ability to demonstrate cost
effectiveness, strategic and other benefits of our products and systems, the
utilities' ability to justify such expenditures and the direction and pace of
federal and state regulatory reform actions. In the event that the utility
industry does not adopt our technology or does not adopt it as quickly as we
expect, our future results will be materially and adversely affected.
International market demand for AMR systems varies by country based on such
factors as the regulatory and business environment, labor costs and other
economic conditions.
Rapid Technological Change: The telecommunications industry, including the
data transmission segment, currently is experiencing rapid and dramatic
technology advances. The advent of computer-linked electronic networks, fiber
optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities, and private communications networks
have greatly expanded communications capabilities and market opportunities.
Many companies from diverse industries are actively seeking solutions for the
transmission of data over traditional communications mediums, including radio-
based and cellular telephone networks. Competitors may be capable of offering
significant cost savings or other benefits to our customers. There can be no
assurance that technological advances will not cause our technology to become
obsolete or uneconomical.
Availability and Regulation of Radio Spectrum: See "FCC Regulation and
Allocation of Radio Frequencies." A significant portion of our products use
radio spectrum and in the United States are subject to regulation by the FCC.
Licenses for radio frequencies must be obtained and periodically renewed, and
there can be no assurance that any license granted to us or our customers will
be renewed on acceptable terms, if at all, or that the FCC will keep in place
rules for our frequency bands that are compatible with our business. In the
past, the FCC has adopted changes to the requirements for equipment using
radio spectrum, and there can be no assurance that the FCC or Congress will
not adopt additional changes in the future.
More recently, on January 23, 2001, the FCC published in the Federal
Register a Notice of Proposed Rulemaking that invites public comment on three
options for allocating the 1427-1432 MHz band. There can be no guarantee that
the FCC ruling on this matter will not have a materially adverse impact on the
Company's financial condition. See "FCC Regulation and Allocation of Radio
Frequencies."
We have committed, and will continue to commit, significant resources to the
development of products that use particular radio frequencies. Action by the
FCC could require modifications to our products, and there can be no assurance
that we would be able to modify our products to meet such requirements, that
we would not experience delays in completing such modifications or that the
cost of such modifications would not have a material adverse effect on our
future financial condition and results of operations.
Our radio-based products currently employ both licensed and unlicensed radio
frequencies. There must be sufficient radio spectrum allocated by the FCC for
the use we intend. As to the licensed frequencies, there is some risk that
there may be insufficient available frequencies in some markets to sustain our
planned operations. The unlicensed frequencies are available for a wide
variety of uses and are not entitled to protection from interference by other
users. In the event that the unlicensed frequencies become unacceptably
crowded or restrictive, and no additional frequencies are allocated, our
business could be materially adversely affected.
We are also subject to regulatory requirements in international markets that
vary by country. To the extent we wish to introduce products designed for use
in the United States or another country into a new market, such products may
require significant modification or redesign in order to meet frequency
requirements and power specifications. Further, in some countries, limitations
on frequency availability or the cost of making necessary modifications may
preclude us from selling our products.
Dependence on Key Personnel: Our success depends in large part upon our
ability to retain highly qualified technical and management personnel, the
loss of one or more of whom could have a material adverse
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effect on our business. Our success depends upon our ability to continue to
attract and retain highly qualified personnel in all disciplines. There can be
no assurance that we will be successful in hiring or retaining the requisite
personnel.
Intellectual Property: While we believe that our patents, trademarks and
other intellectual property have significant value, there can be no assurance
that these patents and trademarks, or any patents or trademarks issued in the
future, will provide meaningful competitive advantages. There can be no
assurance that our patents or pending applications will not be challenged,
invalidated or circumvented by competitors or that rights granted thereunder
will provide meaningful proprietary protection. Despite our efforts to
safeguard and maintain our proprietary rights, there can also be no assurance
that such rights will remain protected or that our competitors will not
independently develop patentable technologies that are substantially
equivalent or superior to our technologies.
Dependence on Key Vendors, Components, and Internal Manufacturing
Capabilities: Certain of our products, subassemblies and components are
procured from a single source, and others are procured only from limited
sources. Our reliance on such components or on these limited or sole source
vendors or subcontractors involves certain risks, including the possibility of
shortages and reduced control over delivery schedules, manufacturing
capability, quality and costs. In particular, we currently obtain the majority
of our handheld devices from one vendor with locations in the United Kingdom
and Liberty Lake, Washington. Also, we may be affected by worldwide shortages
of certain components such as capacitors, inductors and certain types of
memory and discrete semiconductor devices. A significant price increase in
certain components or subassemblies could have a material adverse effect on
our results of operations. Although we believe alternative suppliers of these
products, subassemblies and components are available, in the event of supply
problems from our sole- or limited-source vendors or subcontractors, our
inability to develop alternative sources of supply quickly or cost-effectively
could materially impair our ability to manufacture our products and,
therefore, could have a material adverse effect on our business, financial
condition and results of operations. In the event of a significant
interruption in production at our manufacturing facilities, considerable time
and effort could be required to establish an alternative production line.
Depending on which production lines were affected, such a break in production
would have a material adverse effect on our business, financial condition, and
results of operations.
Dependence on Outsourcing Financing: We intend to utilize limited recourse,
long-term, fixed-rate project financing for our future outsourcing contracts.
We have established Itron Finance, Inc. as a wholly owned Delaware subsidiary
and plan to establish bankruptcy-remote, single and special purpose
subsidiaries of Itron Finance, Inc. for this purpose. Although we completed a
project financing facility for an AMR project in 1997, there can be no
assurance that we will be able to affect other project financing facilities.
If we are unable to utilize limited recourse, long-term, fixed-rate project
financing for our outsourcing contracts, our borrowing capacity will be
reduced, and we may be subject to the negative effects of floating interest
rates if we cannot hedge this exposure.
International Operations: International sales and operations may be subject
to risks such as the imposition of government controls, political instability,
export license requirements, restrictions on the export of critical
technology, currency exchange rate fluctuations, generally longer receivables
collection periods, trade restrictions, changes in tariffs, difficulties in
staffing and managing international operations, potential insolvency of
international dealers and difficulty in collecting accounts receivable. In
addition, the laws of certain countries do not protect our products to the
same extent as do the laws of the United States. There can be no assurance
that these factors will not have a material adverse effect on our future
international sales and, consequently, on our business, financial condition,
and results of operations.
Anti-takeover Considerations: We have the authority to issue 10 million
shares of preferred stock in one or more series, and to fix the powers,
designations, preferences, and relative, participating, optional or other
rights thereof without any further vote or action by our shareholders. The
issuance of preferred stock could dilute the voting power of holders of Common
Stock and could have the effect of delaying or preventing a change in control
of the Company. Certain provisions of our Restated Articles of Incorporation,
Restated Bylaws,
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shareholder rights plan and employee benefit plans, as well as Washington law,
may operate in a manner that could discourage or render more difficult a
takeover of the Company or the removal of management or may limit the price
certain investors may be willing to pay in the future for our shares of Common
Stock.
Regulatory Compliance: We are subject to various federal and state
governmental regulations related to occupational safety and health, labor, and
wage practices as well as federal, state, and local governmental regulations
relating to the storage, discharge, handling, emission, generation,
manufacture, and disposal of toxic or other hazardous substances used to
produce our products. We believe that we are currently in material compliance
with such regulations. Failure to comply with current or future environmental
regulations could result in the imposition of substantial fines on us,
suspension of production, alteration of our production processes, cessation of
operations, or other actions which could materially and adversely affect our
business, financial condition, and results of operations. In the ordinary
course of our business, we use metals, solvents, and similar materials, which
are stored on site. The waste created by use of these materials is transported
off site on a regular basis by a state-registered waste hauler. Although we
are not aware of any material claim or investigation with respect to these
activities, there can be no assurance that such a claim will not arise in the
future, or that the cost of complying with governmental regulations in the
future, will not have a material adverse effect on us.
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ITEM lA: EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with the Company, and principal
occupations and employment for the last five years of the persons serving as
executive officers of Itron as of February 28, 2001.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
LeRoy D. Nosbaum............ 54 President and Chief Executive Officer
Robert D. Neilson........... 44 Chief Operating Officer
William L. Brown............ 55 Vice President, Competitive Resources
Michael A. Cantelme......... 47 Vice President, Global Services
Russell N. Fairbanks, Jr. .. 57 Vice President and General Counsel
Timothy J. Gelvin........... 47 Vice President and General Manager,
International Division
John W. Hengesh............. 46 Vice President and General Manager, Natural
Gas and Water & Public Power Systems
Randi L. Neilson............ 38 Vice President, Marketing
David G. Remington.......... 59 Vice President and Chief Financial Officer
Jemima G. Scarpelli......... 42 Vice President, Investor Relations and
Corporate Communications
Dennis A. Shepherd.......... 52 Vice President and General Manager, EIS
Systems
Russell E. Vanos............ 44 Vice President and General Manager,
Electric Systems
Robert W. Whitney........... 42 Vice President, Manufacturing
</TABLE>
LeRoy Nosbaum was named President and Chief Executive Officer in March 2000.
Previously, he had been Chief Operating Officer. LeRoy joined Itron in March
1996 and had Vice President responsibilities covering manufacturing, product
development, operations and marketing before being promoted to Chief Operating
Officer. Before joining us, LeRoy was Executive Vice President and General
Manager of Metricom, Inc.'s UtiliNet Division, and held a variety of positions
with Metricom from 1989 to 1996. Prior to joining Metricom, he was employed by
Schlumberger, Ltd. and Sangamo Electric for 20 years, most recently as General
Manager of the Integrated Metering Systems Division of Electricity
Management--North America, an operating group of Schlumberger.
Rob Neilson was named Chief Operating Officer in March 2000. Previously, he
had been Vice President, Strategy and Business Development since October 1997
and Vice President, Marketing from 1993 to 1997. He joined Itron in 1983 as
manager of market development and planning, and served as Director of
Marketing from 1987 to 1993.
Bill Brown was named Vice President, Competitive Resources in January 2000
and has responsibility for human resources, information systems, corporate
training, facilities and security. Bill joined Itron in 1997 as
Vice President, Network Systems Operations responsible for deploying Itron's
radio-based network AMR systems. He later became Vice President, Residential
Systems Operations where he assumed responsibility for customer service as
well as project management for all domestic AMR systems. From 1969 to 1996,
Bill served in numerous operational assignments with the federal government
throughout the world, including serving as the U.S. Defense Representative to
the government of Norway, and as a senior advisor on defense matters to the
U.S. Ambassador to Honduras.
Mike Cantelme joined Itron in July 2000 as Vice President, Global Services.
From 1998 to 2000, Mike worked with Teligent, L.L.C. as Region Vice President
for the Southern Region. Teligent is one of the largest competitive local
exchange carriers (CLEC) in the country, and while there, Mike had
responsibilities for real estate acquisition, network and central office
buildout, sales and customer installation for the 13 state southern region.
Part of that responsibility also included the initial launch of telephone
service in 4 of the first 10 of Teligent's service cities. From 1976 to 1998,
Mike spent 22 years with AT&T in a number of positions, most recently Vice
President, General Manager in Middle Markets. Previous to being promoted to
V.P., G.M., Mike was the Director for Sales Training for AT&T.
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Russ Fairbanks joined Itron in January 2000 as Vice President and General
Counsel. From 1997 to 1999, Russ served as Vice President and General Counsel
for ASM America, Inc., a manufacturer of chemical vapor deposition equipment
used to make integrated circuits. Prior to that, he was Vice President,
General Counsel and Secretary for Cyrix Corporation, a manufacturer of high
performance X-86 microprocessors from 1993 until 1997 at which time Cyrix
became a subsidiary of National Semiconductor. Russ was with EDS Corporation
from 1985 to 1993 and served in a variety of corporate law and strategic
roles.
Tim Gelvin joined Itron in June 2000 as Vice President and General Manager,
International Division, which encompasses all of Itron's operations, including
sales and support, outside of the U.S. and Canada. In the year prior to
joining Itron, Tim had been managing director of R.P.G. & Associates Inc., an
energy marketing and consultancy firm. From 1995 to 1999, Tim was with
UtiliCorp United, an international growth-oriented energy and services company
based in Kansas City, Missouri, where he held a number of executive positions
with broad marketing responsibilities covering operations in the U.S. and
Canada, Europe, Australia and New Zealand. Prior to UtiliCorp, he was with
Florida Power Corporation from 1977 to 1995 where he had responsibilities
covering sales, marketing, operations and customer service.
John Hengesh has been with Itron since 1984 is Vice President and General
Manager, Natural Gas Systems and Water and Public Power Systems. He has served
in a number of positions with Itron covering sales, marketing, hardware and
software development, manufacturing, quality and customer and field support.
Prior to his present responsibilities, John was Vice President Handheld,
Mobile and Telephone Solutions, and previous to that was General Manager for
Itron Telephone Solutions in Boise. Prior to joining Itron, John was the
western regional sales manager for the Computer Products Division of General
Instrument.
Randi Neilson was named Vice President, Marketing in January 2000 and has
responsibility for all marketing communications, market research, product
management, regulatory and marketing support. Randi joined Itron in 1990 and
has served in a number of positions, most recently as Director of Solutions
and Product Marketing where her responsibilities included product marketing,
program management, installation and servicing of Itron's radio-based network
AMR products as well as marketing communications. Prior to joining Itron,
Randi was the Director of Marketing for American Sign and Indicator, a leading
supplier of electronic signage and scoreboard systems.
Dave Remington joined Itron in early 1996 as Vice President and Chief
Financial Officer. Before joining Itron, Dave was an investment banker and
Managing Director at Dean Witter Reynolds Inc. or Dean Witter Realty Inc. from
1988 to 1996. Previously, he spent 15 years in the financial services industry
and two years with a high technology firm. During this time, he was Vice
President-Finance, and later President, of Steiner Financial Corporation and
the founding President of one if its subsidiaries.
Mima Scarpelli was named Vice President, Investor Relations and Corporate
Communications in January 2000. She has responsibilities for all investor
relations activities, employee communications, and corporate communications
activities. Mima has been with Itron since 1985 and has held numerous
positions in the finance and accounting area including Treasurer and
Controller. Prior to joining Itron, Mima was a CPA and audit manager with the
Seattle office of Deloitte & Touche.
Dennis Shepherd was named Vice President and General Manager, Energy
Information Systems in January 2000. Prior to assuming his present position,
he was Vice President, Commercial & Industrial Systems since July 1998. Dennis
joined Itron as Vice President of Marketing and Sales of Utility Translation
Systems, Inc. in March 1996, when Itron acquired UTS. Dennis worked for UTS
for 11 years where he led the company's sales and marketing and product
planning activities. Prior to joining UTS, Dennis was an industrial engineer
and marketing representative for Westinghouse Electric Corporation.
Russ Vanos returned to Itron as Vice President and General Manager, Electric
Systems in January 2001. Prior to returning to Itron, Russ was Vice President,
sales for LineSoft, a software and consulting firm specializing in power line
design and optimization from January through October, 2000. His experience in
the utility industry spans two decades, much of it related to advanced data
collection systems and distribution system optimization. Russ first joined
Itron in 1980 as a field service representative responsible for installation
of Itron's
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first generation meter-reading system, and from there, held numerous positions
of increasing responsibility, including Vice President, Utility and Energy
Services Solutions from 1997 until January, 2000.
Bob Whitney was named Vice President, Manufacturing in April 2000 and has
been with Itron since 1992. Bob has responsibility for the fabrication of all
of Itron's hardware products including supply chain management, development
and administration of contract manufacturing relationships, and interfacing
with internal product development and marketing. Prior to assuming his present
position, he was Director of Manufacturing for Itron's Minnesota operations
from 1994 until 1999 when he assumed director responsibilities for all of
Itron's manufacturing operations. Previous to Itron, Bob held various
manufacturing positions with EF Johnson, a two-way radio manufacturing
company.
ITEM 2: PROPERTIES
Our headquarters are located in approximately 141,000 square feet of owned
space in Spokane, Washington. In May 2000, we subleased the majority of the
manufacturing space in our facility to a subcontract manufacturer, in which we
have a minority ownership interest, and who manufactures most of our low
volume hardware products. In Raleigh, North Carolina, we own approximately
18,000 square feet and are leasing an additional 25,000 square feet used for
activities related to our business. In Waseca, Minnesota, we lease 86,000
square feet of manufacturing and engineering space. In late 1998, we began
relocating activities from our facility in Lakeville, Minnesota to the Waseca
facility and had sub-leased approximately 40% of the 32,000 square feet in the
Lakeville facility as of December 31, 2000. In February 2001 we subleased the
remaining space in the Lakeville facility. We have approximately 40,000 square
feet of leased space in various cities in North America for sales and service.
Additionally, we lease sales offices in the United Kingdom, France and
Australia and in various cities throughout the United States. Our 2000
aggregate domestic and international base monthly lease obligation was
approximately $142,000. All the above facilities are in good condition and we
believe our current manufacturing and other properties will be sufficient to
support our operations for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
Benghiat Patent Litigation
On April 3, 1999, the Company 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 in the
United States District Court for the District of Minnesota (Civil Case No. 99-
cv-501). Benghiat has filed a counterclaim alleging patent infringement by the
same devices. Both lawsuits were filed in the United States District Court for
the District of Minnesota. The lawsuit is currently in the motion stage with a
trial date expected some time in 2001. While the Company believes that its
products do not infringe the Benghiat patent, there can be no assurance that
it will prevail in this matter, in which case a decision or settlement of this
case may have a material adverse effect on our financial condition and if the
Company does prevail, there can be no assurance that legal costs incurred in
connection therewith will not have a material adverse effect on its financial
condition.
CellNet Patent Litigation
On October 3, 1996, the Company filed a patent infringement suit against
CellNet Data Systems (CellNet) in the United States District Court for the
District of Minnesota (Civil Case No. 4-96-972). The suit alleged that CellNet
infringed on its United States Patent No. 5,553,094 entitled "Radio
Communication Network for Remote Data Generating Stations," issued on
September 3, 1996. The Company sought injunctive relief as well as monetary
damages, costs and attorneys' fees. On January 28, 1999, the Court issued its
decision on motions and cross motions for summary judgment that had previously
been filed by the Company and CellNet. In its decision, the Court held the
Company's patent valid, but not infringed. Both parties appealed the decision
to the federal Circuit Court of Appeals. Oral arguments were heard on the
appeal in October 2000 and the appellate court upheld the lower court decision
in all respects. This case is now over.
The Company is not involved in any other material legal proceedings.
26
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Itron during the
fourth quarter of 2000.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information for Common Stock
Itron's common stock is traded on the NASDAQ National Market (ITRI). The
following table reflects the range of high and low closing sales prices for
all four quarters of 2000 and 1999 as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
2000 1999
----------- -----------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter...................................... $8.50 $4.50 $9.56 $6.88
Second Quarter..................................... 8.75 4.50 9.50 6.75
Third Quarter...................................... 8.38 5.13 8.88 5.88
Fourth Quarter..................................... 6.75 3.14 6.94 4.25
</TABLE>
Holders
At February 28, 2001 there were approximately 600 holders of record of our
Common Stock.
Dividends
We have never declared or paid cash dividends. We intend to retain future
earnings, if any, for the development of our business and do not anticipate
paying cash dividends in the foreseeable future.
Unregistered Equity Security Sales
None.
27
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- --------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues
Sales.................... $141,899 $ 147,128 $187,051 $164,325 $150,770
Service.................. 42,073 46,283 54,351 51,792 26,814
-------- --------- -------- -------- --------
Total revenues........... 183,972 193,412 241,402 216,117 177,584
Cost of revenues........... 111,454 202,640 167,276 139,578 108,541
-------- --------- -------- -------- --------
Gross profit............... 72,518 (9,229) 74,126 76,539 69,043
Operating expenses
Sales and marketing...... 20,726 25,243 23,991 25,394 25,014
Product development...... 21,331 26,764 33,493 32,220 33,285
General and
administrative.......... 17,565 13,498 12,834 12,064 10,970
Amortization of
intangibles............. 1,762 1,986 2,261 2,190 1,542
Restructuring charges.... (185) 16,686 3,930 -- --
-------- --------- -------- -------- --------
Total operating
expenses................ 61,199 84,177 76,509 71,868 70,811
Operating income (loss).... 11,319 (93,405) (2,383) 4,671 (1,768)
Other income (expense)
Equity in affiliates..... 1,069 (600) (1,154) (1,120) (50)
Gain on sale of business
interests............... -- -- -- 2,000 --
Interest, net............ (3,795) (6,261) (6,508) (3,916) (316)
-------- --------- -------- -------- --------
Total other income
(expense)................. (2,726) (6,861) (7,662) (3,036) (366)
-------- --------- -------- -------- --------
Income (loss) before income
taxes and
extraordinary item........ 8,593 (100,266) (10,045) 1,635 (2,134)
Income tax (provision)
benefit................... (3,334) 28,010 3,820 (625) 670
-------- --------- -------- -------- --------
Net income (loss) before
extraordinary item and
cumulative effect of a
change in accounting
principle................. 5,259 (72,256) (6,225) 1,010 (1,464)
Extraordinary gain on early
extinguishment of debt,
net of income taxes of
$570 and $1,970 1,044 3,660 -- -- --
Cumulative effect of change
in accounting principle,
net of income taxes of
$1,020.................... (1,646) -- -- -- --
-------- --------- -------- -------- --------
Net income (loss).......... $ 4,657 $ (68,596) $ (6,225) $ 1,010 $ (1,464)
======== ========= ======== ======== ========
Earnings per share
Basic
Income (loss) before
extraordinary item........ $ .35 $ (4.87) $ (.42) $ .07 $ (.11)
Extraordinary item......... .07 .25 -- -- --
Cumulative effect.......... (.11) -- -- -- --
-------- --------- -------- -------- --------
Basic net income (loss) per
share..................... $ .31 $ (4.62) $ (.42) $ .07 $ (.11)
======== ========= ======== ======== ========
Diluted
Income (loss) before
extraordinary item...... $ .34 $ (4.87) $ (.42) $ .07 $ (.11)
Extraordinary item....... .07 .25 -- -- --
Cumulative effect........ (.11) -- -- -- --
-------- --------- -------- -------- --------
Diluted net income (loss)
per share............... $ .30 $ (4.62) $ (.42) $ .07 $ (.11)
======== ========= ======== ======== ========
Average number of shares
outstanding
Basic.................... 15,180 14,851 14,668 14,118 13,297
Diluted.................. 15,385 14,851 14,668 14,562 13,297
Balance Sheet Data
Working capital.......... $ 48,394 $ 44,260 $ 54,230 $ 68,307 $ 26,239
Total assets............. 177,890 192,079 247,755 240,211 186,671
Total debt............... 65,546 74,998 92,197 73,814 39,502
Shareholders' equity..... 54,043 47,525 115,022 120,427 114,222
</TABLE>
28
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Information" and the Consolidated Financial
Statements and Notes thereto.
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 625 customers are using our radio and telephone-based technology to
automatically collect and process information from nearly 17.6 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
$200 billion in energy and water transactions every year in North America
alone.
Only 11% of the electric, gas and water meters in North America are read
using automated meter data collection and communication systems. While we are
aggressively pursuing the numerous opportunities remaining for advanced
metering and billing systems, we also intend to use our core technology and
industry knowledge to move beyond meter reading and open up new opportunities
for growth. These new opportunities are centered on supplying systems,
technology and services to help electric, gas and water utilities:
. Run their distribution systems more efficiently,
. Automate the data and information requirements of deregulation and
performance-based ratemaking, and
. Outsource services utilities no longer want to or no longer have the
people or expertise to perform.
We design, develop, manufacture, market, install and service hardware,
software and integrated systems. Sales include hardware, custom and licensed
software, consulting, project management and installation and sales support
activities. Services include post-sale maintenance support and outsourcing
services where we own and operate, or simply operate systems for a periodic
fee.
We currently derive the majority of our revenues from sales of products and
services to utilities. However, our business may increasingly consist of sales
to other energy and water industry participants such as energy service
providers, end user customers, wholesale power markets, and others.
Results of Operations
Revenues
The following tables show our revenue and percent change from the prior year
by sales or service and by segment.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
------ ------ --------- ------ ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
Revenues
Sales.............................. $141.9 $147.1 (4)% $187.1 (21)%
Service............................ 42.1 46.3 (9) 54.3 (15)
------ ------ ------
Total Revenues................... $184.0 $193.4 (5)% $241.4 (20)%
====== ====== ======
<CAPTION>
Year Ended December 31,
----------------------------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
------ ------ --------- ------ ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
Segment Revenues
Electric........................... $ 59.2 $ 57.4 3 % $119.6 (52)%
Natural Gas........................ 39.5 46.6 (15) 40.1 16
Water & Public Power............... 47.5 53.3 (11) 51.9 3
Energy Information Systems......... 20.4 16.0 28 10.0 60
International...................... 17.2 20.1 (14) 19.8 2
------ ------ ------
Total Revenues................... $184.0 $193.4 (5)% $241.4 (20)%
====== ====== ======
</TABLE>
29
<PAGE>
2000 compared to 1999
For the full year 2000, revenues were $184.0 million compared to $193.4
million in 1999. Service revenues were down in 2000 compared to 1999,
primarily as a result of less outsourcing revenues in 2000. In March 2000, we
sold our outsourcing system at Duquesne Light Company to an affiliate of
Duquesne. That system produced service revenues of $9.9 million in 1999
compared to $2.7 million in 2000.
Electric segment revenues in 2000 were negatively impacted by the sale of
the outsourcing system above. Excluding those revenues in both periods,
electric segment revenues were up 19% in 2000 over 1999. Our electric segment
signed a number of new contract bookings in the second half of 2000, and as a
result, revenues in the last half of 2000 were up 15% over the first half,
excluding the $2.7 million in Duquesne outsourcing revenues in the first half.
In 1999, a single customer accounted for approximately $14.4 million, or 31%
of Natural Gas segment revenues. Shipments under this large multi-year
contract began to wind down early in 2000 as the contract completed, and
accounted for only $7.3 million, or 18% of year-to-date Natural Gas segment
revenues in 2000. Excluding activity for that single customer, Natural Gas
segment revenues were relatively flat year-to-year.
The lower revenues in 2000, compared with 1999, in our Water & Public Power
segment result primarily from lower handheld electronic meter reading system
revenues in 2000. Handheld sales in 1999 were higher than normal due to
customer upgrades to handheld systems that were Y2K compliant.
Energy Information Systems ("EIS") includes products for large commercial
and industrial (C&I) customers of utilities, such as power billing systems, as
well as products and systems for deregulated environments to manage wholesale
market settlement transactions. Revenues in our EIS segment increased 28% in
2000 compared with 1999, primarily as a result of substantial consulting,
energy settlement systems, and software customization activities in the
wholesale energy market in Ontario, Canada. The start-up of operations for the
Ontario wholesale market was delayed in the third quarter of 2000 by
approximately 6 months. This resulted in slower revenue growth in the second
half for EIS compared to EIS's revenue growth rates for the first half of
2000.
International revenues in both 2000 and 1999 are primarily derived from
sales of handheld systems. Handheld system sales in 1999 were higher as a
result of customer upgrades to Y2K compliant systems. Our International
systems revenues in the last six months of 2000 were approximately twice those
in the first six months of 2000, as a result of a large handheld system order
in Japan and a large AMR sale to Mexico.
1999 compared to 1998
The large decrease in revenues in 1999 from 1998 was primarily from our
Electric segment. In 1998, we had a very large order with one electric utility
customer for a network AMR system covering over 400,000 meters that we did not
replace with a similar size order in 1999. Additionally, 1999 revenues from
that customer were reduced by a $4.2 million price concession related to a
number of changes in the customer's requirement for the system. Also
contributing to the decrease in Electric revenues in 1999 was a $6.6 million
reduction in revenues related to changed estimates on our outsourcing contract
with Duquesne Light. In March 2000, we sold that system to an affiliate of
Duquesne. See additional comments below under "Gross Margin" and Note 9 to our
accompanying financial statements.
Natural Gas segment revenues increased 16% in 1999 over 1998 primarily
related to a contract with a single large gas utility under which we completed
installations in the first half of 2000.
Revenues from the sale of products in our EIS segment increased 60% to $16.0
million in 1999. Contributing to the increase in 1999 were development
activities for wholesale energy markets in Arizona and Ontario, Canada.
30
<PAGE>
Gross Margin
The following tables show our gross margin and percent change from the prior
year by sale or service and by segment.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C>
Gross Margin
Sales................................... 41% 36 % 5% 32% 4 %
Service................................. 35 (133) 168 27 (161)
Total gross margin.................... 39% (5)% 44% 31% (36)%
=== ==== ===
<CAPTION>
Year Ended December 31,
--------------------------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
---- ---- --------- ---- ---------
<S> <C> <C> <C> <C> <C>
Segment Gross Margin
Electric................................ 36% (111)% 146 % 23% (134)%
Natural Gas............................. 46 48 (2) 37 11
Water & Public Power.................... 34 36 (2) 33 3
Energy Information Systems.............. 47 56 (9) 68 (12)
International........................... 43 18 25 39 (21)%
Total gross margin.................... 39% (5)% 44 % 31% (36)%
=== ==== ===
</TABLE>
2000 compared to 1999
In late 1999, we implemented a number of restructuring actions, including
the consolidation of our high volume manufacturing operations from three
locations to one and the spin-off of our low volume manufacturing. As a
result, our overall gross margin in 2000 reflects improved efficiencies.
Electric gross margin was negative in 1999 as a result of a loss on the sale
of our outsourced network AMR system at Duquesne Light to an affiliate of
Duquesne and because of additional accruals in 1999 for estimated costs to
complete our remaining obligations to this customer. These two items had the
impact of reducing 1999 Electric gross profit by $67.3 million. In addition,
in the second quarter of 1999, gross margin in our Electric segment was
impacted by a $4.2 million price concession to another customer for a large
network installation. Without those items, Electric gross margin in 1999 would
have been approximately 14%.
The lower gross margin for our Natural Gas segment in 2000 compared with
1999 results from lower average selling prices in 2000 as a result of changes
in customer mix.
The lower gross margin in our Water & Public Power segment in 2000 result
from lower average selling prices due to a higher proportion of business in
2000 sold through indirect selling channels as well as higher service costs in
2000.
A substantial portion of revenues in our EIS segment come from custom
software and development activities related to wholesale energy systems.
Margins can vary from period to period depending on the mix of license
revenues versus custom development activities, but are typically much higher
than in our other business segments. Margins in the third and fourth quarters
of 2000 were negatively impacted by the delay in the start-up of operations
for the Ontario wholesale market.
Higher gross margin for International in 2000 reflects a shift in product
mix towards more profitable handheld and AMR systems and away from lower
margin development systems in Europe.
31
<PAGE>
1999 compared to 1998
See discussion above for electric gross margin in 1999. Electric gross
margins in 1998 and 1999 were unusually low, reflecting a number of unusually
large contracts at very low margins. International gross margin in 1999 was
down from 1998 primarily from the accrual of $2.9 million in 1999 for forward
losses for three AMR development contracts in Europe, in which costs were
expected to exceed committed customer funding.
Operating Expenses
The following table shows our operating expenses and percent change from the
prior year.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
----- ----- --------- ----- ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
Sales and marketing................... $20.7 $25.2 (18)% $24.0 5 %
Product development................... 21.3 26.8 (21) 33.5 (20)
General and administrative............ 17.6 13.5 30 12.8 6
Amortization of intangibles........... 1.8 2.0 (10) 2.3 (13)
Restructuring charges................. (.2) 16.7 (101) 3.9 328
----- ----- -----
Total operating expenses............ $61.2 $84.2 (27)% $76.5 10 %
===== ===== =====
</TABLE>
Effective January 1, 2000 we reorganized into strategic business units. With
the reorganization, certain personnel that had been classified as sales and
marketing in previous years are now classified as general and administrative
or cost of sales related to changes in their overall responsibilities.
Approximately $1.9 million of the decrease in sales and marketing is due to
transfers to general and administrative and $2.5 million of the decrease is
due to cost of sales transfers. The remaining decrease results from a
reduction in international staff, fewer domestic salespeople for the
comparative periods, and lower commission expense from lower revenues.
The decrease in product development expenses in 2000 compared with 1999, and
1999 compared with 1998, results primarily from restructuring measures which
included the closure of several product development locations and associated
staff reductions.
The increased general and administrative expenses in 2000 compared with 1999
result from: the reclassification of personnel previously included in sales
and marketing; expenses for executive recruiting and relocation; increased
legal and consulting costs; and earned bonus and performance incentives.
Higher legal costs in the current year are mostly the result of increased
patent litigation and FCC licensing expenses.
Restructuring charges in the first half of 2000 reversed slightly due to the
sale of equipment. Restructuring measures started in late 1999 are
substantially complete.
Other Income (Expense)
The following table shows other income (expense) and percent change from the
prior year.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
----- ----- --------- ----- ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
Equity in affiliates................ $ 1.1 $(0.6) 283% $(1.2) 50%
Interest, net....................... (3.8) (6.3) 40 (6.5) 3
----- ----- -----
Equity in affiliates................ $(2.7) $(6.9) 61 $(7.7) 10
===== ===== =====
</TABLE>
32
<PAGE>
In 2000, we had a 50% ownership interest in an affiliate, that acts as a
distributor for our water products in specific regions of the U.S., and a 30%
ownership interest in an affiliate, that serves as a contract manufacturer of
our low volume products and as our handheld service repair depot provider. The
$1.1 million in equity in affiliates in 2000 compared with a $600,000 loss in
1999 largely results from increased water sales by our distributor affiliate.
In addition, year-to-date equity in affiliates in 2000 includes a $150,000 net
gain on the sale of our interest in another partially owned domestic
affiliate.
Net interest expense decreased 40% in 2000 compared with 1999 due to lower
short-term bank borrowings, a reduction of subordinated debt outstanding, and
net invested cash during 2000. We received $33 million from the sale of our
outsourcing installation at Duquesne in the first half of this year and used
the proceeds to pay down short-term bank borrowings. Excess cash is invested
in short-term investment grade securities. The reduction in subordinated debt
resulted from a debt repurchase transaction in the first quarter of 2000.
Income Taxes
Our effective income tax rate was approximately 39% in 2000 compared with
28% in 1999 and 38% in 1998. The lower rate in 1999 resulted from valuation
allowances provided for certain domestic tax credits and international net
operating losses, which may be subject to expiration before they can be
utilized. Our effective income tax rate can vary from period to period because
of fluctuations in foreign operating results, changes in the valuation
allowances for deferred tax assets, new or revised tax legislation, and
changes in the level of business performed in different tax jurisdictions.
Extraordinary Item--Gain on Early Extinguishment 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
extinguishment of debt, net of expenses and income taxes, was $1.0 million. In
March 1999 we completed an offer to exchange $15.8 million principal amount of
new subordinated debt for $22.0 million principal amount of original
subordinated debt. The after-tax effect of the transaction, net of expenses,
was a gain of $3.7 million.
Cumulative Effect of Change in Accounting Principle
During the fourth quarter, the Company implemented the Securities and
Exchange Commission's 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 net impact of the
implementation of SAB 101 to the Company for the full year 2000 was not
material.
The implementation has been accounted for as a cumulative change in
accounting principle. As a result of this implementation, approximately $5.0
million in revenues that had been recognized in 1999 were deferred, $4.6
million of which were recognized in 2000. The impact of the implementation of
SAB101 for the full year 2000 was not material as the positive effect of those
previously recognized revenues moving into 2000 was offset by a nonrecurring,
non-cash charge for the cumulative effect of the change in accounting
principle, totaling $1.6 million net of taxes, or 11 cents per share. We have
restated our financial results for the first three quarters of 2000 to conform
revenue recognition to the requirements of SAB 101.
33
<PAGE>
Financial Condition
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
Change Change
2000 1999 2000-1999 1998 1999-1998
----- ------ --------- ------ ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
Cash Flow Information
Operating activities............ $ 1.2 $ 24.5 (95)% $ (1.9) 1,389 %
Investing activities............ 23.4 (16.1) 245 (17.1) 6
Financing activities............ (4.9) (9.6) 49 18.7 (151)
----- ------ ------
Net increase (decrease) in
cash......................... $19.7 $ (1.2) 1,742 % $ (0.3) (330)%
===== ====== ======
</TABLE>
Operating activities: We generated $1.2 million of cash from operations in
2000 compared to $24.5 million in 1999 and ($1.9) million in 1998. In 2000 we
used $9.3 million of cash for severance and other restructuring expenditures
that were accrued for in 1999. Excluding those payments, adjusted cash flow
from operations in 2000 was $10.5 million. Cash generated from operations in
1999 was $24.5 million and was unusually large as a result of collections in
1999 from two large turnkey installations in which invoicing had been
deferred. Wages and benefits payable decreased $7.1 million in 2000 from 1999,
primarily due to employee termination benefits paid in 2000. Accounts
receivable increased $3.2 million from 1999 primarily due to the fact that the
last two days of 2000 were weekend days. Collections of accounts receivable in
the first week of January 2001 totaled $5.2 million.
Investing activities: In 2000 we received $32.8 million, net of expenses,
from the sale of our network system at Duquesne Light Company, which is
reflected in investing activities. Capital acquisitions, including outsourcing
equipment requirements, were $9.0 million for 2000, down approximately $8.0
million from 1999 and $16.5 million from 1998. Most of the decrease was due to
decreases in outsourcing investments which reflected that we had substantially
completed capital build-outs for new systems. Capital acquisitions for
internal use are expected to increase slightly in 2001 as a result of upgrades
in our Waseca factory and information technology systems.
Financing activities: Financing activities required the use of $4.9 million
in cash in 2000 mostly due to $3.6 million in cash used to pay down short-term
bank borrowings and $2.1 million to repurchase and retire subordinated debt in
the first quarter of 2000. In January 2000, we signed an agreement with a bank
for a new four-year revolving line of credit for up to $35 million. As with
the previous line of credit, borrowings available under the new facility are
based on qualified accounts receivable and inventory. Financing activities
required $9.6 million in 1999 mostly due to repayment of short-term bank
borrowings. Financing cash in 1998 was provided from short-term bank
borrowings and project financing of one outsourcing project. At December 31,
2000, we had $21.2 million in cash and cash equivalents and no borrowings
under our line of credit. We believe that existing cash resources and
available borrowings under our credit facility are more than adequate to meet
our cash needs through 2001.
Business Outlook
The following statements are based on current expectations. These statements
are forward-looking, and actual results may differ materially. Itron
undertakes no obligation to update publicly or revise any forward-looking
statements.
We expect that revenues in our current business in 2001 will be 5% to 15%
higher than in 2000, and net income after tax is expected to grow by at least
30%. We expect our operating margin will improve throughout 2001 based on
additional improvements in gross margins offset by slightly higher investments
in product development.
34
<PAGE>
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 this report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained herein to reflect any change on the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. For a more complete
description of these and other risks, see "Certain Risk Factors."
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk: We are subject to market risk exposure related to
changes in interest rates on our long-term debt. At December 31, 2000, we had
$65.3 million of long-term debt. (See Note 4 of our accompanying financial
statements). Our long-term debt is at fixed rates. However, a hypothetical 100
basis point increase in the interest rate at December 31, 2000 would result in
a $2.8 million increase in fair value. We do not use derivative financial
instruments to manage interest rate risk.
Foreign Currency Exchange Rate Risk: Our earnings are affected by
fluctuations in the value of the U.S. dollar, as compared to foreign
currencies, as a result of transactions in foreign markets. 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 December 31, 2000, 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 out risk-sensitive financial instruments.
The model assumes a parallel shift in the foreign exchange rates. Exchange
rates rarely move in the same direction. The assumption that exchange rates
change in a parallel fashion may overstate the impact of changing exchange
rates on assets and liabilities denominated in a foreign currency,
consequently, actual effects on operations in the future may differ materially
from that analysis.
35
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Board of Directors and Shareholders of Itron, Inc.
Management is responsible for the preparation of our consolidated financial
statements and related information appearing in this annual report. Management
believes that the consolidated financial statements fairly reflect the form
and substance of transactions and that the financial statements reasonably
present our financial position and results of operations in conformity with
generally accepted accounting principles. Management has included in our
financial statements amounts based on estimates and judgments that it believes
are reasonable under the circumstances.
Management's explanation and interpretation of our overall operating results
and financial position, with the basic financial statements presented, should
be read in conjunction with the entire report. The Notes to Consolidated
Financial Statements, an integral part of the basic financial statements,
provide additional detailed financial information. Our Board of Directors has
an Audit and Finance Committee composed of non-management Directors. The
Committee meets regularly with financial management and Deloitte & Touche LLP
to review accounting control, auditing and financial reporting matters.
<TABLE>
<S> <C>
LeRoy D. Nosbaum David G. Remington
President and Chief Executive Officer Vice President and Chief Financial Officer
</TABLE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Itron, Inc.
We have audited the accompanying consolidated balance sheets of Itron, Inc.
and subsidiaries (the Company) as of December 31, 2000 and 199, and the
related consolidated statements of income, stockholders equity, and cash flows
for each of the three years in the period ended December 31, 2000. Our audits
also included the financial statement schedules listed in the index at Item
14. These financial statements and financial statements schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Itron, Inc. and subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000,
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for revenues in 2000.
Deloitte & Touche LLP
Seattle, Washington
February 2, 2001
36
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- --------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Revenues
Sales......................................... $141,899 $ 147,128 $187,051
Service....................................... 42,073 46,283 54,351
-------- --------- --------
Total revenues.............................. 183,972 193,412 241,402
Cost of revenues
Sales......................................... 83,954 94,607 127,761
Service....................................... 27,500 108,033 39,515
-------- --------- --------
Total cost of revenues...................... 111,454 202,640 167,276
-------- --------- --------
Gross profit (loss)............................. 72,518 (9,229) 74,126
Operating expenses
Sales and marketing........................... 20,726 25,243 23,991
Product development........................... 21,331 26,764 33,493
General and administrative.................... 17,565 13,498 12,834
Amortization of intangibles................... 1,762 1,986 2,261
Restructuring charges......................... (185) 16,686 3,930
-------- --------- --------
Total operating expenses.................... 61,199 84,177 76,509
-------- --------- --------
Operating income (loss)......................... 11,319 (93,405) (2,383)
Other income (expense)
Equity in affiliates.......................... 1,069 (600) (1,154)
Interest, net................................. (3,795) (6,261) (6,508)
-------- --------- --------
Total other expense......................... (2,726) (6,861) (7,662)
-------- --------- --------
Income (loss) before income taxes and
extraordinary item............................. 8,593 (100,266) (10,045)
Income tax (provision) benefit.................. (3,334) 28,010 3,820
-------- --------- --------
Net income (loss) before extraordinary item and
cumulative effect of a change in accounting
principle...................................... 5,259 (72,256) (6,225)
Extraordinary gain on early extinguishment of
debt, net of income taxes of $570 and $1,970... 1,044 3,660 --
Cumulative effect of change in accounting
principle, net of income taxes of $1,020....... (1,646) -- --
-------- --------- --------
Net income (loss)............................... $ 4,657 $ (68,596) $ (6,225)
======== ========= ========
Earnings per Share
Basic
Income (loss) before extraordinary item....... $ .35 $ (4.87) $ (.42)
Extraordinary item............................ .07 .25 --
Cumulative effect............................. (.11) -- --
-------- --------- --------
Basic net income (loss) per share............. $ .31 $ (4.62) $ (.42)
======== ========= ========
Diluted
Income (loss) before extraordinary item....... $ .34 $ (4.87) $ (.42)
Extraordinary item............................ .07 .25 --
Cumulative effect............................. (.11) -- --
-------- --------- --------
Diluted net income (loss) per share........... $ .30 $ (4.62) $ (.42)
======== ========= ========
Average number of shares outstanding
Basic......................................... 15,180 14,851 14,668
Diluted....................................... 15,385 14,851 14,668
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
------------------
2000 1999
-------- --------
(in thousands,
except share
data)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents................................ $ 21,216 $ 1,538
Accounts receivable, net................................. 49,734 46,561
Current portion of long-term contracts receivable........ 3,178 2,579
Inventories, net......................................... 17,196 15,300
Equipment held for sale, net............................. -- 32,750
Deferred income taxes.................................... 4,852 8,016
Other.................................................... 900 1,340
-------- --------
Total current assets................................... 97,076 108,084
Property, plant and equipment, net....................... 25,197 31,627
Equipment used in outsourcing, net....................... 9,757 5,951
Intangible assets, net................................... 12,836 15,196
Long-term contracts receivable........................... 3,194 1,813
Deferred income taxes.................................... 26,091 26,922
Other.................................................... 3,739 2,486
-------- --------
Total assets........................................... $177,890 $192,079
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Short-term borrowings...................................... $ -- $ 3,646
Accounts payable and accrued expenses...................... 30,171 34,746
Wages and benefits payable................................. 9,244 16,396
Mortgage notes and leases payable.......................... 242 622
Deferred revenue........................................... 9,025 8,413
-------- --------
Total current liabilities.............................. 48,682 63,823
Convertible subordinated debt.............................. 53,459 57,234
Mortgage notes and leases payable.......................... 5,074 6,280
Project financing.......................................... 6,671 7,216
Warranty and other obligations............................. 9,961 10,000
-------- --------
Total liabilities...................................... 123,847 144,553
Commitments and contingencies (Notes 4 and 10)............. -- --
Shareholders' equity
Common stock, no par value, 75 million shares authorized,
15,329,361 and 14,958,788 shares issued and
outstanding............................................. 109,730 107,603
Accumulated other comprehensive loss..................... (1,840) (1,573)
Retained deficit......................................... (53,847) (58,504)
-------- --------
Total shareholders' equity............................. 54,043 47,526
-------- --------
Total liabilities and shareholders' equity............. $177,890 $192,079
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Retailed
Comprehensive Earnings
Shares Amount Warrants Income (Deficit) Total
-------- -------- -------- ------------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1997................... 14,602 $105,136 $ 57 $(1,082) $ 16,317 $120,428
Net loss................ (6,225) (6,225)
Currency translation
adjustment............. (26) (26)
--------
Total comprehensive
income................. (6,251)
Stock issues:
Options exercised and
related tax
benefits............. 37 452 452
Stock repurchased by
Company.............. (109) (1,554) (1,554)
Employee savings
plan................. 87 1,161 1,161
Employee stock
purchase plan........ 81 787 787
Warrants expired...... 57 (57) --
-------- -------- ----- ------- -------- --------
Balances at December 31,
1998................... 14,698 $106,039 $ -- $(1,108) $ 10,092 $115,023
Net loss................ (68,596) (68,596)
Currency translation
adjustment............. (465) (465)
--------
Total comprehensive
income................. (69,061)
Stock issues:
Options exercised and
related tax
benefits............. 38 95 95
Employee savings
plan................. 139 1,045 1,045
Employee stock
purchase plan........ 84 424 424
-------- -------- ----- ------- -------- --------
Balances at December 31,
1999................... 14,959 $107,603 $ -- $(1,573) $(58,504) $ 47,526
Net income.............. 4,657 4,657
Currency translation
adjustment............. (267) (267)
--------
Total comprehensive
income................. 4,390
Stock issues:
Options exercised and
related tax
benefits............. 132 681 681
Employee savings
plan................. 148 988 988
Employee stock
purchase plan........ 90 458 458
-------- -------- ----- ------- -------- --------
Balances at December 31,
2000................... 15,329 $109,730 $ -- $(1,840) $(53,847) $ 54,043
======== ======== ===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
2000 1999 1998
------- -------- --------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................... $ 4,657 $(68,596) $ (6,225)
Noncash charges (credits) to income:
Depreciation and amortization................. 13,010 18,474 19,865
Deferred income tax provision (benefit)....... 4,445 (28,064) (4,550)
Equity in affiliates, net..................... (945) 600 1,154
Extraordinary gain on early extinguishment of
debt......................................... (1,044) (3,660) --
Cumulative effect of change in accounting
principle.................................... 1,646 -- --
Write-off of long-term contracts receivable... -- 34,492 --
Loss on sale of equipment used in
outsourcing.................................. -- 23,369 --
Changes in operating accounts
Accounts receivable............................. (3,242) 15,668 (1,811)
Inventories..................................... 277 5,354 11,331
Accounts payable and accrued expenses........... (3,228) 18,572 (2,663)
Wages and benefits payable...................... (7,072) 10,151 (2,935)
Deferred revenue................................ (4,407) (240) 1,894
Long-term contracts receivable.................. (1,980) (1,674) (17,646)
Other, net...................................... (955) 52 (312)
------- -------- --------
Cash provided (used) by operating activities...... 1,194 24,498 (1,898)
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment.... (4,510) (7,416) (6,364)
Equipment used in outsourcing................... (4,477) (9,859) (10,746)
Proceeds from sale of equipment used in
outsourcing, net............................... 32,750 -- --
Proceeds from sale of business interest......... 870 -- 1,000
Investment in affiliates........................ (500) -- --
Acquisitions of intangibles and patent defense
costs.......................................... (117) (171) (1,002)
Other, net...................................... (634) 1,362 8
------- -------- --------
Cash provided (used) by investing activities...... 23,382 (16,084) (17,104)
FINANCING ACTIVITIES:
Change in short-term borrowings, net............ (3,646) (10,354) 12,440
Proceeds from (payments on) project financing,
net............................................ (545) (506) 5,308
Convertible subordinated debt repurchase........ (2,101) -- --
Issuance of common stock........................ 2,127 1,564 2,400
Purchase and retirement of common stock......... -- -- (1,554)
Payments on mortgage notes payable.............. (183) -- --
Other, net...................................... (550) (323) 128
------- -------- --------
Cash provided (used) by financing activities...... (4,898) (9,619) 18,722
------- -------- --------
Increase (decrease) in cash and cash equivalents.. 19,677 (1,205) (280)
Cash and cash equivalents at beginning of period.. 1,538 2,743 3,023
======= ======== ========
Cash and cash equivalents at end of period........ $21,216 $ 1,538 $ 2,743
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid............................... $ 503 $ 614 $ 156
Interest paid................................... 4,289 5,279 6,037
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Business
We are a leading technology provider to the energy and water industries for
collecting, communicating, analyzing and managing information about electric,
gas and water usage. We design, develop, manufacture, market, sell, install
and service hardware, software and integrated systems for automatic and
electronic meter reading systems and for wholesale energy market billing and
settlement systems. We both sell our products and provide outsourcing
services.
Basis of Consolidation
The consolidated financial statements include the accounts of Itron, Inc.
and our wholly owned subsidiaries. All significant intercompany transactions
and balances are eliminated. Investments in affiliates, in which we have a
non-controlling interest, are accounted for using the equity method. At
December 31, 2000 we had a 50% interest in a sales and marketing joint venture
and a 30% interest in a contract manufacturing joint venture. In 1999, we had
a 50% interest in two joint ventures, and sold our interest in one to our
partner in 2000. In 1998, we had a 50% interest in another venture, and in
1998, sold that interest to our partner.
Cash and Cash Equivalents
We consider all highly liquid instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents are recorded at cost,
which approximates fair value.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Cost includes raw materials and labor, plus applied direct
and indirect costs. Service inventories consist primarily of sub-assemblies
and components necessary to support post-sale maintenance. During 2000, we
spun-off our low volume manufacturing and handheld service to an outside
vendor in which we have a 30% equity interest. As a result of this transition,
we have consigned inventory at the vendor totaling $3.2 million at December
31, 2000.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation, which
includes the amortization of assets recorded under capital leases, is computed
using the straight-line method over the assets estimated useful lives of three
to seven years, or over the term of the applicable capital lease, if shorter.
Equipment used in outsourcing contracts is depreciated using the straight-line
method over the shorter of the useful life or the term of the contract. Plant
is depreciated over 30 years using the straight-line method. We review the
carrying value of property, plant and equipment on a regular basis for
impairment. In 1998, we capitalized interest as a component of the cost of
property, plant and equipment constructed for our own use of $260,000. No
interest was capitalized in 2000 or 1999.
Intangible Assets
Goodwill represents the excess cost of businesses that we have acquired over
the fair value of their net assets and is amortized using the straight-line
method over periods ranging from three to 20 years. Patents, patent defense
costs, distribution and product rights are amortized using the straight-line
method over their remaining lives of three to 17 years. Capitalized software
includes costs incurred subsequent to the establishment of technological
feasibility of the related product and is amortized using the straight-line
method for a period not to exceed five years. We regularly review the carrying
value of intangible assets for impairment.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warranty
We offer standard warranty terms on our product sales. Provision for
estimated warranty costs is recorded at the time of sale and periodically
adjusted to reflect actual experience. The long-term warranty reserve covers
future expected costs of testing and replacement of radio meter module
batteries and fixed network equipment. Warranty expense was $3.8 million in
2000, $5.7 million in 1999 and $4.2 million in 1998.
Income Taxes
We account for income taxes using the asset and liability method. Under this
method, deferred income taxes are recorded for the temporary differences
between the financial reporting basis and tax basis of our assets and
liabilities. These deferred taxes are measured using the provisions of
currently enacted tax laws. Based on our forecasts, we believe that it is more
likely than not that we will generate sufficient taxable income to allow the
realization of our deferred net tax asset.
Foreign Exchange
Our consolidated financial statements are prepared in United States dollars.
Assets and liabilities of foreign subsidiaries are denominated in foreign
currencies and are translated to United States dollars at the exchange rates
in effect on the balance sheet date. Revenues, costs of revenues and expenses
for these subsidiaries are translated using an average rate for the relevant
reporting period. Translation adjustments resulting from this process are a
component of comprehensive income in shareholders' equity.
Revenue Recognition
Sales consist of hardware, software license fees, custom software
development, project management services, consulting and installation
services. Service revenues include post-sale maintenance support and
outsourcing services. Outsourcing services encompass operation and
maintenance, and in some cases installation, of meter reading systems to
provide meter information to a customer for billing and management purposes.
Outsourcing services can be provided for systems we own as well as those owned
by our customers or others.
We typically recognize revenues from hardware and software license fees at
the time of shipment, subject to completion of customer acceptance provisions,
and for project management, consulting, installation and maintenance services
at the time those services are provided. In the fourth quarter of 2000, we
implemented SEC Staff Accounting Bulletin No. 101, as amended, Revenue
Recognition in Financial Statements (SAB No. 101), which provides the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues. As a result, effective January 1, 2000, we 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. As a result of
this implementation, approximately $5.0 million in revenues that had been
recognized in 1999 were deferred, $4.6 million of which were recognized in
2000.
Hardware and software support fees are recognized over the life of the
related service contracts. Revenues for both large custom systems and
outsourcing contracts are recognized using the cost-to-cost, percentage-of-
completion method of long-term contract accounting. Under this method, revenue
reported during a period is based on the percentage of estimated total
revenues to be received under the contract measured by the percentage of costs
incurred in the period to total estimated costs for each contract. This method
is used because we believe costs incurred are the best available measure of
progress on these contracts. Contract costs include all direct material and
labor costs and other indirect costs related to contract performance such as
indirect labor, supplies, tools, repairs and depreciation costs. Changes in
estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs
and income and are recognized
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on a cumulative basis in the period in which the revisions are determined.
Provisions for estimated losses on uncompleted contracts are recognized in the
period in which such losses are determined and were $0 in 2000, $6.8 million
in 1999 and $750,000 in 1998. Revenues from large custom systems and
outsourcing contracts that are recognized in excess of amounts billed are
included in long-term contracts receivable or the current portion of long-term
contracts receivable depending on the expected period of collection. Amounts
billed related to our outsourcing contracts were $5.6 million, $10.7 million
and $5.6 million in 2000, 1999, and 1998, respectively.
Deferred revenue is recorded for products or services that have been paid
for by a customer but have not yet been provided. Unbilled receivables are
recorded when revenues are recognized upon product shipment or service
delivery and invoicing occurs at a later date.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents and accounts receivable
approximate fair value. The fair market value for long-term receivables and
long-term debt notes payable (see Note 7) is based on quoted market rates or
prices where available.
Earnings per Share
Basic earnings per share ("EPS") is calculated using net income divided by
the weighted average common shares outstanding during the year. Diluted EPS is
similar to Basic EPS except that the weighted average common shares
outstanding are increased to include the number of additional common shares
that would have been outstanding if dilutive options had been exercised and
convertible subordinated notes had been converted. Diluted EPS assumes that
common shares were issued upon the exercise of stock options for which the
market price exceeded the exercise price, less shares that could have been
repurchased with the related proceeds ("Treasury Stock" method). It also
assumes that any dilutive convertible subordinated notes outstanding at the
beginning of each year were converted, with related interest adjusted
accordingly ("if converted" method).
Derivatives
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. Management does not expect the adoption of
SFAS 133 to have a significant impact on the financial position, results of
operations, or cash flows of the Company.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Our accounting for long-
term contracts requires that we estimate our total revenues and our costs of
providing outsourcing and other services over long periods of time, typically
15 years. Because of various factors affecting future costs and operations,
actual results could differ from estimates.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
We follow SFAS N. 123, "Accounting for Stock-Based Compensation." The
provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value
method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees"
("APB 25"), but disclose the pro forma effects on net income (loss) had the
fair value of the options been expensed. We have elected to continue to apply
APB 25 in accounting for our stock option incentive plans (see Note 5).
Reclassifications
Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
Note 2: Earnings Per Share and Capital Structure
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Weighted average shares outstanding................ 15,180 14,851 14,668
Effect of dilutive stock options................... 205 -- --
------- ------- -------
Weighted average shares outstanding assuming
conversion........................................ 15,385 14,851 14,668
======= ======= =======
</TABLE>
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 dilutive EPS
using the "treasury stock" method. We also have subordinated convertible notes
outstanding. These notes are not included in the above calculation as the
shares are anti-dilutive in all periods when using the "if converted" method.
There is no dilutive effect in 1999 and 1998, as the Company incurred a loss
for each year and including the securities would have been anti-dilutive.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3: Balance Sheet Components
<TABLE>
<CAPTION>
At December 31,
------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Accounts receivable
Trade (net of allowance for doubtful accounts of
$1,144 and $1,311).................................. $ 47,311 $ 40,747
Unbilled revenue..................................... 2,423 5,814
-------- --------
Total accounts receivable........................ $ 49,734 $ 46,561
======== ========
Inventories, net
Material............................................. $ 5,721 $ 6,428
Work in process...................................... 737 1,462
Finished goods....................................... 9,673 5,702
Field inventories awaiting installation.............. 50 466
-------- --------
Total manufacturing inventories.................... 16,181 14,058
Service inventories................................ 1,015 1,242
-------- --------
Total inventories................................ $ 17,196 $ 15,300
======== ========
Property, plant and equipment
Machinery and equipment.............................. $ 31,316 $ 37,740
Equipment used in outsourcing........................ 11,035 13,257
Computers and purchased software..................... 26,661 28,331
Buildings, furniture and improvements................ 20,458 22,132
Land................................................. 1,958 2,195
-------- --------
Total cost......................................... 91,428 103,655
Accumulated depreciation........................... (56,474) (66,077)
-------- --------
Property, plant and equipment, net............... $ 34,954 $ 37,578
======== ========
Intangible assets
Goodwill............................................. $ 16,991 $ 16,991
Capitalized software................................. 6,309 6,309
Distribution and product rights...................... 2,475 2,475
Patents.............................................. 7,086 6,968
-------- --------
Total cost......................................... 32,861 32,743
Accumulated amortization........................... (20,025) (17,547)
-------- --------
Intangible assets, net........................... $ 12,836 $ 15,196
======== ========
</TABLE>
Note 4: Short-term Borrowings and Long-term Debt
Short-term Borrowings:
In January 2000, we signed a new four-year agreement with a bank for a
revolving line of credit up to a maximum amount of $35 million. Borrowings
available under the new facility are based on qualified accounts receivable
and inventory, and are secured by those and certain cash accounts. At December
31, 2000, the maximum amount we could borrow under this agreement was $18
million. Interest rates depend on the form of borrowing and vary based on
published rates and financial performance. Additionally, an annual commitment
fee of .375% is required on the unused portion of the available line of
credit. The agreement contains covenants, which require us to maintain certain
liquidity and coverage ratios. Any borrowings mature in January 2004. There
were no amounts outstanding at December 31, 2000.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Our previous revolving line of credit also allowed maximum borrowings up to
$35 million, based on and secured by accounts receivable and inventory. At
December 31, 1999, there were $3.6 million in borrowings outstanding at a
weighted average interest rate of approximately 9.0%. This line of credit was
fully paid in January 2000.
Mortgage Notes Payable
<TABLE>
<CAPTION>
At December 31,
---------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Secured mortgage note payable to a shareholder with
principal and interest payments of 9% until maturity on
August 1, 2015............................................. $ 5,237 $ 5,402
Secured mortgage note payable to a shareholder with
principal and interest payments of 8 1/2% until maturity on
June 1, 2019............................................... $ -- $ 832
</TABLE>
We incurred the above notes in conjunction with the purchase of our
headquarters and related manufacturing space in Spokane, Washington. During
2000 we sold one of our facilities to a third party and satisfied the related
note. Principal payments due under the remaining note are $180,000 in 2001,
$197,000 in 2002, $216,000 in 2003, $236,000 in 2004, $258,000 in 2005 and
$4.2 million thereafter.
Project Financing
<TABLE>
<CAPTION>
At December 31,
---------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Secured note payable with principle and interest payments
of 7.6% until maturity on May 31, 2009................... $ 6,671 $ 7,216
</TABLE>
We incurred the above note in conjunction with project financing for one of
our outsourcing contracts. The note is secured by the assets of the project.
Principal payments due under the note are $589,000 in 2001, $635,000 in 2002,
$685,000 in 2003, $739,000 in 2004, $797,000 in 2005 and $3.2 million
thereafter.
Convertible Subordinated Debt
<TABLE>
<CAPTION>
At December 31,
---------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Unsecured, convertible subordinated notes................... $53,459 $57,234
</TABLE>
We completed a $63.4 million convertible subordinated note offering in March
and April 1997. Interest of 6 3/4% on the notes is payable semi-annually on
March 31 and September 30 of each year until maturity on March 31, 2004. In
February 1999 we exchanged $22 million principal amount of original notes for
$15.8 million principal amount of exchange notes. The exchange notes have the
same maturity date, interest payment dates and rate of interest as the
original notes. Both the original notes and the exchange notes have no sinking
fund requirements and are redeemable, in whole or in part, at our option at
any time on or after April 4, 2000, (for the original notes) or March 12, 2002
(for the exchange notes). The notes are convertible, in whole or in part, at
the option of the holder at any time prior to maturity at a price of $23.70
per common share for the original notes and $9.65 per common share for the
exchange notes. In March 2000, we repurchased $3.8 million of notes from a
holder for $2.1 million. The gains on the exchange and repurchase transactions
have been recognized as extraordinary gains on early extinguishment of debt.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5: Employee Benefit Plans
Employee Savings Plan
We have an employee incentive savings plan in which substantially all
employees are eligible to participate. Employees may contribute, on a tax-
deferred basis, up to 22% of their salary, 50% of which we match subject to
statutory limitations. Through September 30, 2000, our match was through the
issuance of common stock. Subsequent to that date, our match was and will be
in cash. The expense for our matching contribution was $838,000 in 2000, $1.2
million in 1999, and $1.2 million in 1998. We do not offer post-employment or
post-retirement benefits.
Stock Option Plans
At December 31, 2000, we had three stock-based compensation plans, which are
described below. We apply APB Opinion 25 and related interpretations in
accounting for our plans. Because all stock options were issued at fair value,
no compensation cost has been recognized for our stock option plans. The
following table summarizes information about stock options (including the
weighted average remaining contractual life and the weighted average exercise
price) outstanding at December 31, 2000:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
----------------------------------- -----------------------
Range of
Exercise Shares Life Shares
Prices (in 000's) (years) Price (in 000's) Price
-------- ---------- ------- ------ ---------- ------
<S> <C> <C> <C> <C> <C>
$ .86-$ 5.16 1,041 6.63 $ 4.97 680 $ 4.99
6.00- 8.66 1,190 8.79 7.62 187 8.12
12.60- 17.88 634 4.36 15.90 532 16.00
19.88- 24.50 303 5.02 21.98 246 22.11
58.75 12 5.33 58.75 12 58.75
----- -----
3,180 6.83 $ 9.97 1,657 $11.80
===== =====
</TABLE>
Under our three stock option plans, we have granted options to purchase
shares of common stock to employees and nonemployee directors at prices no
less than the fair market value on the date of grant. Those options terminate
ten years from the date granted. For grants to employees, the options become
fully exercisable within three or four years from the date granted. Grants to
nonemployee directors are fully vested and immediately exercisable. The price
range of options exercised was $.86 to $8.50 in 2000, $.17 to $2.91 in 1999
and $.86 to $17.88 in 1998. At December 31, 2000, there were 4.6 million
shares of unissued common stock under the plans, of which options for the
purchase of 1.4 million shares were available for future grants. Share amounts
(in thousands) and weighted average exercise prices are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 2,910 $10.36 2,666 $10.42 2,092 $18.78
Granted...................... 945 7.37 439 8.16 2,295 8.59
Exercised.................... (131) 5.18 (38) 2.47 (36) 12.45
Canceled..................... (544) 8.71 (157) 7.17 (1,685) 18.72
----- ----- ------
Outstanding at end of year... 3,180 9.97 2,910 10.36 2,666 10.42
===== ===== ======
Options exercisable at year
end......................... 1,657 $11.80 1,297 $12.85 651 $16.82
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma Net Income and Per Share Amounts
Had the compensation cost for our stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method prescribed in SFAS No. 123, our net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
2000 1999 1998
------ -------- -------
(in thousands except
per share data)
<S> <C> <C> <C>
Net income (loss)
As reported..................................... $4,657 $(68,596) $(6,225)
Pro forma....................................... 2,637 (68,801) (9,012)
Diluted earnings per share
As reported..................................... $ .30 $ (4.62) $ (.42)
Pro forma....................................... .17 (4.63) (.61)
</TABLE>
The weighted average fair value of options granted was $7.39, $8.16, and
$7.82 during 2000, 1999, and 1998 respectively. The fair value of each option
granted is estimated on the date of grant using the Black-Scholes option-
pricing model using the following assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
----- ---- ----
<S> <C> <C> <C>
Dividend yield............................................... 0% 0% 0%
Expected volatility.......................................... 72.5% 59% 64%
Risk-free interest rate...................................... 7.1% 5.8% 4.7%
Expected life (years)........................................ 5.9 5.9 5.3
</TABLE>
Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan, we are authorized to issue shares of
common stock to our eligible employees who have completed three months of
service, work more than 20 hours each week and are employed more than five
months in any calendar year. Employees who own 5% or more of our common stock
are not eligible to participate in the Plan. Under the terms of the Plan,
eligible employees can choose payroll deductions each year of up to 10% of
their regular cash compensation. Such deductions are applied toward the
discounted purchase price of our common stock. The purchase price of the
common stock is 85% of the fair market value of the stock as defined in the
Plan. Under the Plan we sold 94,275, 81,382, and 88,683 shares to employees in
2000, 1999, and 1998, respectively.
Note 6: Other Related Party Transactions
Certain of our customers are also shareholders with more than 10% ownership
interest and/or hold positions on our Board of Directors. Revenue from such
customers was $3.6 million in 2000, $4.6 million in 1999 and $4.5 million in
1998. Accounts receivable from these customers were $160,000, $137,000 and
$303,000 at December 31, 2000, 1999 and 1998, respectively. Interest expense
related to mortgage notes payable to a shareholder was $532,000 in 2000,
$561,000 in 1999 and $475,000 in 1998.
In May 1996, we purchased an additional facility from a shareholder for some
of our manufacturing and engineering operations. We paid $210,000 of the total
purchase price at closing, with the remaining $840,000 due under a note
payable. During 2000, this facility was sold to an unrelated third party. A
portion of the proceeds was utilized to satisfy the remaining balance on the
note payable to the shareholder.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7: Fair Values of Financial Instruments
The estimated fair value of financial instruments has been determined by
using available market information and appropriate valuation methodologies.
The values provided are representative of fair values only as of December 31,
2000 and 1999 and do not reflect subsequent changes in the economy, interest
and tax rates, and other variables that may effect determination of fair
value. The following methods and assumptions were used in estimating fair
values.
Cash, cash equivalents and accounts receivable: The carrying value
approximates fair value due to the short maturity of these instruments.
Long-term contracts receivable: The fair value of the non-current portion of
long-term contracts receivable is based on the discounted value of expected
cash flows at our current borrowing rate.
Mortgage notes payable: The fair value is estimated based on current
borrowing rates available for similar debt.
Project financing: The fair value is estimated based on quoted spreads above
treasury rates for similar issues.
Convertible subordinated debt: The fair value is estimated based on the
current trading activity of the notes.
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Cash, cash equivalents and accounts
receivable............................. $70,950 $70,950 $48,099 $48,099
Long-term contracts receivable.......... 3,194 2,740 1,813 1,616
Mortgage notes payable.................. 5,237 5,553 6,234 6,191
Project financing....................... 6,671 6,568 7,216 6,715
Convertible subordinated debt........... 53,459 32,373 57,234 32,910
</TABLE>
Note 8: Restructuring
2000 Charges:
There were no restructuring charges in 2000. During the year we used
restructuring reserve balances from prior years for severance and related
charges, asset impairments, lease payments for abandoned facilities, and the
sale of a building and equipment.
1999 Charges:
In our ongoing efforts to improve efficiencies and reduce costs we recorded
restructuring charges of $16.7 million during 1999. 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.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 Charges:
In 1998, in connection with management's measures to reduce costs and
improve operating efficiencies, we recorded restructuring charges of $3.9
million. The restructuring measures primarily involved the elimination or
consolidation of approximately 150 positions, primarily in product
development, the write-off of certain of our intangible assets and the
consolidation of one of our product development locations.
Restructuring Activity:
Combined restructuring activity for 2000, 1999 and 1998 and remaining
reserve balances at December 31, 2000 are as follows:
<TABLE>
<CAPTION>
Restructuring Reserve Balance
Cash/Non-cash Charges Activity 12/31/00
------------- ------------- -------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Severance and related
charges................ Cash $11,472 $11,313 $ 159
Asset impairment........ Non-cash 5,368 5,368 --
Consolidation of
facilities............. Cash 3,350 734 2,616
Other................... Non-cash 241 241 --
------- ------- ------
Total restructuring
charges................ $20,431 $17,656 $2,775
======= ======= ======
</TABLE>
The reserve balances for severance and related charges are expected to be
fully utilized in 2001. Facility consolidation reserves are dependent on our
ability to sublease vacant space, which is under a non-cancelable operating
lease through 2006.
Note 9: Sale of Outsourcing Equipment
In March 2000, we sold our network-based AMR system in Pittsburgh, that we
used to provide Duquesne Light Company with meter information for billing and
other purposes, to an affiliate of Duquesne for $33 million. In 1999, in
anticipation of the sale we recorded a $49.8 million loss on the sale, which
is reported in cost of revenues-service, consisting of a $32.8 million write-
off of all of the Duquesne contracts receivable (both current and non-current)
and an $18.6 million impairment of the assets being sold.
In March 2000, we also entered into a warranty and maintenance agreement
with the purchasing Duquesne affiliate, pursuant to which we will provide
certain maintenance and support services for the network from closing over a
term ending December 31, 2013. We will receive approximately $10 million
ratably over the term of those services. In connection with our performance
responsibilities, we furnished the purchasing affiliate with a $5 million
standby letter of credit.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10: Commitments and Contingencies
Commitments
We have noncancelable capital leases for computer equipment and software,
and operating leases for computers, office, production and storage space
expiring at various dates through December 2009. Rents under the Company's
operating leases were $2.3 million in 2000, $2.4 million in 1999. Assets under
capital leases are included in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
At December 31,
----------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Computers and software................................ $ 1,136 $ 1,188
Accumulated amortization.............................. (686) (394)
------- -------
Net capital leases.................................. $ 450 $ 794
======= =======
</TABLE>
Future minimum payments, net of sublease payments, at December 31, 2000,
under the aforementioned leases and other non-cancelable operating leases with
initial or remaining terms in excess of one year are as follows, (in
thousands):
<TABLE>
<S> <C>
2001............................................................. $2,393
2002............................................................. 1,681
2003............................................................. 1,055
2004............................................................. 706
2005............................................................. 476
Thereafter....................................................... 618
------
Total minimum lease payments................................... $6,929
======
</TABLE>
In order to maintain certain distribution rights, we have agreed to purchase
minimum quantities of components from various suppliers. Minimum purchase
requirements under these agreements are not in excess of our requirements.
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.
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 $6.3 million at December 31, 2000 and 1999,
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 our opinion, is expected to have a material effect
on our financial position or results of operations. We believe that we have
made adequate provisions for such contingent liabilities.
We have a long-term contract with Southern California Edison ("SCE"), in
which we own, operate and maintain a Mobile AMR System for approximately
360,000 of their meters. At December 31, 2000, we had trade and contracts
receivable totaling $4.6 million from SCE and net capitalized equipment
related to this contract of $6.6 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 this contract and has continued to make
timely monthly payments on its obligation to us. If SCE were to suspend
payments, or 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.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11: Development Agreements
We received funding to develop certain products under joint development
agreements with several companies. We retain the intellectual property rights
to the products that are developed. Funding received under these agreements is
credited against product development expenses. The agreements require us to
pay royalties if successful products are developed and sold. Additionally, we
are required to pay royalties on future sales of products incorporating
certain AMR technologies. Funding received and royalty expense under these
arrangements is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- ---------
(in thousands)
<S> <C> <C> <C>
Funding received................................... $ -- $ 382 $ 485
Royalties paid..................................... 800 506 1,130
</TABLE>
Note 12: Shareholder Rights Plan
We adopted a Shareholder Rights Plan and in November 1993 declared a
dividend of one common share purchase right (a "Right") for each outstanding
share of our common stock. Under certain conditions, each Right may be
exercised to purchase one share of common stock at a purchase price of $135
per share, subject to adjustment. The Rights will be exercisable only if a
person or group has acquired 15% or more of the outstanding shares of our
common stock (excluding certain persons who owned more than 15% of the common
stock when the Shareholder Rights Plan was adopted). If a person or group
acquires 15% or more of the then outstanding shares of common stock, each
Right will entitle its holder to receive, upon exercise, common stock having a
market value equal to two times the exercise price of the Right. In addition,
if we are acquired in a merger or other business combination transaction, each
Right will entitle its holder to purchase that number of the acquiring
company's common shares having a market value of twice the Right's exercise
price. We are entitled to redeem the Rights at $.001 per Right at any time
prior to the earlier of the expiration of the Rights in July 2002 or the time
that a person has acquired a 15% position. The Rights do not have voting or
distribution rights, and until they become exercisable they have no effect on
our earnings.
Note 13: Income Taxes
A reconciliation of income taxes at the U.S. federal statutory rate of 35%
to the consolidated effective tax for continuing operations is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
2000 1999 1998
------- -------- -------
(in thousands)
<S> <C> <C> <C>
Expected federal income tax provision
(benefit)..................................... $ 3,008 $(35,093) $(3,515)
Change in valuation allowance.................. (1,760) 7,048 (200)
State income taxes............................. 387 (1,233) (397)
Goodwill amortization.......................... 309 309 309
Foreign sales corporation...................... 341 -- (158)
Tax credits.................................... 917 -- (285)
Foreign operations............................. 1,426 429 307
UTS acquisition................................ -- -- --
Meals and entertainment........................ 103 122 212
Other, net..................................... 29 408 (93)
------- -------- -------
Total provision (benefit) for income taxes... $ 3,334 $(28,010) $(3,820)
======= ======== =======
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The domestic and foreign components of income before taxes were:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
2000 1999 1998
------ --------- --------
(in thousands)
<S> <C> <C> <C>
Domestic........................................ $7,894 $ (92,108) $ (8,296)
Foreign......................................... 699 (8,158) (1,749)
------ --------- --------
Income (loss) before income taxes............. $8,593 $(100,266) $(10,045)
====== ========= ========
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
2000 1999 1998
------- -------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal....................................... $ 498 $ (2,931) $ 344
State and local............................... (49) 1,000 324
Foreign....................................... 6 10 60
------- -------- -------
Total current............................... $ 455 $ (1,921) $ 728
Deferred:
Federal....................................... 2,598 (28,625) (3,332)
State and local............................... 621 (2,076) (651)
Foreign....................................... 1,420 (2,436) (365)
------- -------- -------
Total deferred.............................. 4,639 (33,137) (4,348)
Change in valuation allowance................... (1,760) 7,048 (200)
------- -------- -------
Total provision (benefit) for income taxes.... $ 3,334 $(28,010) $(3,820)
======= ======== =======
</TABLE>
Deferred income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
2000 1999 1998
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Deferred tax assets
Loss carry forwards............................ $24,439 $20,796 $ 14,715
Tax credits.................................... 6,725 7,066 5,925
Accrued expenses............................... 3,101 6,507 5,367
Inventory valuation............................ 1,994 1,806 1,889
Depreciation and amortization.................. 531 356 --
Long term contracts............................ 1,857 6,814 --
Other, net..................................... 0 284 228
------- ------- --------
Total deferred tax assets.................... 38,647 43,629 28,124
Deferred tax liabilities Acquisitions............ (86) (173) (292)
Other, net..................................... (860)
Depreciation and amortization.................. -- -- (2,789)
Long term contracts............................ -- -- (14,729)
------- ------- --------
Total deferred tax liabilities............... (946) (173) (17,810)
Valuation allowance............................ (6,758) (8,518) (1,470)
------- ------- --------
Net deferred tax assets.......................... $30,943 $34,938 $ 8,844
======= ======= ========
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Valuation allowances of $0 and $4,098,000 in 2000, $0 and $5,412,000 in
1999, and $70,000 and $1,400,000 in 1998 were provided for capital loss
carryforwards and foreign net operating loss carryforwards, respectively, for
which the Company may not receive future benefits. Valuation allowances of
$2,659,000 and $3,000,000 in 2000 and 1999, respectively, were provided for
research and development tax credit carryforwards for which the Company may
not receive future benefits.
The Company has research and development tax credits and net operating loss
carryforwards available to offset future income tax liabilities. The federal
research and development tax credits of $4,892,000 expire from 2001-2012 and
the federal loss carryforwards of $35,406,000 expire from 2018-2019.
The Company also has alternative minimum tax credits, totaling $1,832,000
that are available to offset future tax liabilities indefinitely.
Note 14: Segment Information
Effective January 2000, we organized internally around strategic business
units (SBUs) focused on the customer segments that we serve. These SBUs
include Electric Systems, Natural Gas Systems, Water & Public Power Systems,
Energy Information Systems, and International Systems. Our Energy Information
Systems SBU has two main areas of focus today, advanced software solutions for
commercial and industrial users of energy, and advanced software systems for
financial settlements, load analysis and billing for wholesale energy markets.
Sales for these SBUs include hardware, custom and licensed software,
consulting, project management, and installation and support activities.
Service revenues are derived from post-sale maintenance support and
outsourcing services, where we own and operate, or simply operate systems for
a periodic fee. Intersegment revenues are immaterial.
Management reviews the operating results of each segment before allocations
of corporate expenses. We do not allocate assets or liabilities between our
segments. Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues
Electric Systems.............................. $ 59,208 $ 57,380 $119,633
Natural Gas Systems........................... 39,474 46,606 40,086
Water & Public Power Systems.................. 47,573 53,340 51,901
Energy Information Systems.................... 20,473 15,990 9,962
International Systems......................... 17,244 20,096 19,820
-------- -------- --------
Total revenues.............................. $183,972 $193,412 $241,402
======== ======== ========
Gross Profit
Electric Systems.............................. $ 21,186 $(63,376) $ 27,661
Natural Gas Systems........................... 18,116 22,285 14,918
Water & Public Power Systems.................. 16,184 19,303 17,121
Energy Information Systems.................... 9,680 8,920 6,730
International Systems......................... 7,352 3,639 7,696
-------- -------- --------
Total gross profit.......................... $ 72,518 $ (9,229) $ 74,126
======== ======== ========
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15: Quarterly Results (Unaudited)
Results for the first three quarters of 2000 have been restated to conform
revenue recognition to the requirements of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101 (SAB 101). (See "Note 1"). The
restatement was not material in any quarter. Quarterly results are as follows
(in thousands, except per share and stock price data):
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- -------- --------
2000
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenues................ $48,587 $45,385 $41,819 $ 48,182 $183,972
Gross profit.................. 18,437 17,625 16,701 19,755 72,518
Net income before
extraordinary item and
cumulative effect of a change
in accounting principle...... 1,004 1,153 853 2,249 5,259
Extraordinary gain on early
extinguishment of debt, net
of income taxes of $570...... 1,044 -- -- -- 1,044
Cumulative effect of change in
accounting principle, net of
income taxes of $1,020....... (1,646) -- -- -- (1,646)
Net income.................... $ 402 $ 1,153 $ 853 $ 2,249 $ 4,657
======= ======= ======= ======== ========
Basic net income per share:
Before extraordinary item and
cumulative effect of a change
in accounting principle...... $ .07 $ .08 $ .06 $ .15 $ .35
Extraordinary item............ .07 .07
Cumulative effect............. (.11) (.11)
------- ------- ------- -------- --------
Basic net income per share.... $ .03 $ .08 $ .06 $ .15 $ .31
======= ======= ======= ======== ========
Diluted net income per share:
Before extraordinary item and
cumulative effect of a change
in accounting principle...... $ .07 $ .08 $ .06 $ .15 $ .34
Extraordinary item............ .07 .07
Cumulative effect............. (.11) (.11)
------- ------- ------- -------- --------
Diluted net income per share.. $ .03 $ .08 $ .06 $ .15 $ .30
======= ======= ======= ======== ========
Stock Price:
High.......................... 8.50 8.75 8.38 6.75 8.75
Low........................... 4.50 4.50 5.13 3.14 3.14
<CAPTION>
1999
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Total revenues................ $51,945 $51,221 $48,533 $ 41,713 $193,412
Gross profit.................. 18,664 16,718 17,627 (62,238) (9,229)
Net loss before extraordinary
item......................... (231) (1,584) (5,868) (64,573) (72,256)
Gain on extinguishment of
debt......................... 3,660 -- -- -- 3,660
Net income (loss)............. $ 3,429 $(1,584) $(5,868) $(64,573) $(68,596)
======= ======= ======= ======== ========
Basic net income (loss) per
share:
Before extraordinary item..... $ (.02) $ (.11) $ (.39) $ (4.32) $ (4.87)
Extraordinary item............ .25 -- -- -- .25
------- ------- ------- -------- --------
Basic net income (loss) per
share........................ $ .23 $ (.11) $ (.39) $ (4.32) $ (4.62)
======= ======= ======= ======== ========
Diluted net income (loss) per
share:
Before extraordinary item..... $ (.02) $ (.11) $ (.39) $ (4.32) $ (4.87)
Extraordinary item............ .24 -- -- -- .25
------- ------- ------- -------- --------
Basic net income (loss) per
share........................ $ .22 $ (.11) $ (.39) $ (4.32) $ (4.62)
======= ======= ======= ======== ========
Stock Price:
High.......................... $ 9.56 $ 9.50 $ 8.88 $ 6.94 $ 9.56
Low........................... $ 6.88 $ 6.75 $ 5.88 $ 4.25 $ 4.25
</TABLE>
55
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" appearing in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 16, 2001
(the "2000 Proxy Statement") sets forth certain information with regard to our
directors and is incorporated herein by reference.
Certain information with respect to persons who are or may be deemed to be
executive officers of Itron is set forth under the caption "Executive Officers
of the Registrant" in Part I of this Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the 2001 Proxy
Statement sets forth certain information (except for those sections captioned
"Compensation Committee Report on Executive Compensation" and "Performance
Graph", which are not incorporated by reference herein) with respect to the
compensation of management of the Registrant and is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the 2001 Proxy Statement sets forth certain
information with respect to the ownership of the Registrant's Common Stock and
is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
appearing in the 2001 Proxy Statement sets forth certain information with
respect to the certain business relationships and transactions between the
Registrant and its directors and officers and is incorporated herein by
reference.
56
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
2) List of Financial Statement Schedules;
Schedule II--Valuation and Qualifying Accounts
3) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
3.1 Restated Articles of Incorporation of the Registrant. (A) (Exhibit
3.1)
3.2 Restated Bylaws of the Registrant. (A) (Exhibit 3.2)
4.1 Rights Agreement between the Registrant and Chemical Trust Company of
California dated as of July 15, 1992. (A) (Exhibit 4.1)
4.2 Indenture dated as of March 12, 1997 between the Registrant and
Chemical Trust Company of California, as trustee. (G) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain of
its executive officers, together with schedule executive officers who
are parties thereto. (I) (Exhibit 10.1)
10.2 Schedule of certain executive officers who are parties to Change of
Control Agreements (see Exhibit 10.1 hereto) with the Registrant. (I)
(Exhibit 10.2)
10.4 Form of Confidentiality Agreement normally entered into with
employees. (A) (Exhibit 10.7)
10.5 Amended and Restated Registration Rights Agreement among the
Registrant and certain holders of its securities dated March 25, 1996
(D) (Exhibit 10.4)
10.6 1989 Restated Stock Option Plan. (D) (Exhibit 10.5)
10.7 1992 Restated Stock Option Plan for Nonemployee Directors. (E)
10.8 Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)
10.9 Form of Indemnification Agreements between the Registrant and certain
directors and officers. (I) (Exhibit 10.9)
10.10 Schedule of directors and executive officers who are parties to
Indemnification Agreements (see Exhibit 10.09 hereto) with the
Registrant. (I) (Exhibit 10.10)
10.11 Employment Agreement between the Registrant and David G. Remington
dated February 29, 1996. * (C) (Exhibit 10.16)
10.12 Office Lease between the Registrant and Woodville Leasing Inc. dated
October 4, 1993. (B) (Exhibit 10.24)
10.13 Contract between the Registrant and Duquesne Light Company dated
January 15, 1996. /Delta/(C) (Exhibit 10.18)
10.14 Amendment No. 1 to Amended and Restated Utility Automated Meter Data
Acquisition Lease and Services Agreement between the Registrant and
Duquesne Light Company dated September 11, 1997. /Delta/(F) (Exhibit
10)
10.15 Purchase Agreement between the Registrant and Pentzer Development
Corporation dated July 11, 1995. (C) (Exhibit 10.19)
10.16 Loan Agreement between Itron, Inc. and GE Capital Corporation dated
January 18, 2000. (I) (Exhibit 10.16)
10.17 Employment Agreement between the Registrant and Michael J. Chesser
dated May 17, 1999. * (H) (Exhibit 10.17)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
10.18 First Amendment to Credit Agreement dated February 28, 2000. (I)
(Exhibit 10.18)
10.19 Asset Purchase Agreement between Itron, Inc. and DataCom Information
Systems, LLC (e.g. an affiliate of Duquesne Light Company) dated March
30, 2000. (J) (Exhibit 10.19)
10.20 Warranty and maintenance Agreement between Itron, Inc. and DataCom
Information Systems, LLC dated March 30, 2000. (J) (Exhibit 10.20)
10.21 Form of Change of Control Agreement between Registrant and executive
officers Tim Gelvin and Bob Whitney. (A) (10.1)
10.22 Contribution Agreement between Itron, Inc. and Servatron, Inc. dated
May 15, 2000. (K) (Exhibit 10.22)
10.23 Credit Agreement between Itron, Inc. and Servatron dated June 22,
2000. (K) (Exhibit 10.23)
10.24 Third Amendment to Credit Agreement dated June 30, 2000. (L) (Exhibit
10.24)
12 Statement of Computation of Ratios
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
</TABLE>
- --------
(A) Incorporated by reference to designated exhibit included in the
Company's Registration Statement on Form S-1 (Registration #33-49832),
as amended, filed on July 22, 1992.
(B) Incorporated by reference to designated exhibit included in the
Company's 1993 Annual Report on Form 10-K filed on March 30, 1994.
(C) Incorporated by reference to designated exhibit included in the
Company's 1995 Annual Report on Form 10-K filed on March 30, 1996.
(D) Incorporated by reference to designated exhibit included in the
Company's 1996 Annual Report on Form 10-K filed on March 5, 1997.
(E) Incorporated by reference to Appendix A to the Company's designated
Proxy Statement dated April 4, 1997 for its annual meeting of
shareholders held on April 29, 1997.
(F) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(G) Incorporated by reference to designated exhibit included in the
Company's Current Report on Form 8-K dated March 18, 1997.
(H) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated August 13, 1999.
(I) Incorporated by reference to designated exhibit included in the
Company's 1999 Annual Report on Form 10-K dated March 26, 2000.
(J) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated May 15, 2000.
(K) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated August 14, 2000.
(L) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated November 14, 2000.
* Management contract or compensatory plan or arrangement.
/Delta/ Confidential treatment requested for a portion of this agreement.
4) Reports on Form 8-K:
There were no Current Reports on Form 8-K filed during the fourth quarter of
2000.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Spokane, State of Washington, on the 22nd day of March, 2001.
ITRON, INC.
/s/ David G. Remington
By: _________________________________
David G. Remington
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated
below on the 22nd day of March, 2001.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ S. Edward White Chairman of the Board
______________________________________
S. Edward White
/s/ LeRoy D. Nosbaum President, and Chief Executive Officer and
______________________________________ Director (Principal Executive Officer)
LeRoy D. Nosbaum
/s/ David G. Remington Chief Financial Officer
______________________________________ (Principal Financial and Accounting Officer)
David G. Remington
/s/ Michael B. Bracy Director
______________________________________
Michael B. Bracy
/s/ Michael J. Chesser Director
______________________________________
Michael J. Chesser
/s/ Ted C. DeMerritt Director
______________________________________
Ted C. DeMerritt
/s/ Jon E. Eliassen Director
______________________________________
Jon E. Eliassen
/s/ Mary Ann Peters Director
______________________________________
Mary Ann Peters
/s/ Paul A. Redmond Director
______________________________________
Paul A. Redmond
/s/ Graham M. Wilson Director
______________________________________
Graham M. Wilson
</TABLE>
59
<PAGE>
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Balance at end of period
------------------------------------- ------------------------------
Balance at beginning Charged to costs
Description of period and expenses Deductions Current Non current
- ----------- -------------------- ---------------- ---------- ------- -----------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998:
Inventory
obsolescence......... $3,824 $8,316 $7,374 $4,766 $--
Warranty.............. 3,518 7,381 4,953 5,100 846
Allowance for doubtful
accts................ 752 952 219 1,485 --
Year ended December 31,
1999:
Inventory
obsolescence......... $4,766 $2,697 $4,093 $3,370 $--
Warranty.............. 5,946 5,717 4,801 6,062 800
Allowance for doubtful
accts................ 1,485 4,808 4,982 1,311 --
Year ended December 31,
2000:
Inventory
obsolescence......... $3,370 $2,397 $1,991 $3,776 $--
Warranty.............. 6,862 3,572 4,618 5,090 726
Allowance for doubtful
accts................ 1,311 570 737 1,144 --
</TABLE>
60
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
3.1 Restated Articles of Incorporation of the Registrant. (A) (Exhibit
3.1)
3.2 Restated Bylaws of the Registrant. (A) (Exhibit 3.2)
4.1 Rights Agreement between the Registrant and Chemical Trust Company of
California dated as of July 15, 1992. (A) (Exhibit 4.1)
4.2 Indenture dated as of March 12, 1997 between the Registrant and
Chemical Trust Company of California, as trustee. (G) (Exhibit 4.1)
10.1 Form of Change of Control Agreement between Registrant and certain of
its executive officers, together with schedule executive officers who
are parties thereto. (I) (Exhibit 10.1)
10.2 Schedule of certain executive officers who are parties to Change of
Control Agreements (see Exhibit 10.1 hereto) with the Registrant. (I)
(Exhibit 10.2)
10.4 Form of Confidentiality Agreement normally entered into with
employees. (A) (Exhibit 10.7)
10.5 Amended and Restated Registration Rights Agreement among the
Registrant and certain holders of its securities dated March 25, 1996
(D) (Exhibit 10.4)
10.6 1989 Restated Stock Option Plan. (D) (Exhibit 10.5)
10.7 1992 Restated Stock Option Plan for Nonemployee Directors. (E)
10.8 Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)
10.9 Form of Indemnification Agreements between the Registrant and certain
directors and officers. (I) (Exhibit 10.9)
10.10 Schedule of directors and executive officers who are parties to
Indemnification Agreements (see Exhibit 10.09 hereto) with the
Registrant. (I) (Exhibit 10.10)
10.11 Employment Agreement between the Registrant and David G. Remington
dated February 29, 1996. * (C) (Exhibit 10.16)
10.12 Office Lease between the Registrant and Woodville Leasing Inc. dated
October 4, 1993. (B) (Exhibit 10.24)
10.13 Contract between the Registrant and Duquesne Light Company dated
January 15, 1996. /Delta/(C) (Exhibit 10.18)
10.14 Amendment No. 1 to Amended and Restated Utility Automated Meter Data
Acquisition Lease and Services Agreement between the Registrant and
Duquesne Light Company dated September 11, 1997. /Delta/(F) (Exhibit
10)
10.15 Purchase Agreement between the Registrant and Pentzer Development
Corporation dated July 11, 1995. (C) (Exhibit 10.19)
10.16 Loan Agreement between Itron, Inc. and GE Capital Corporation dated
January 18, 2000. (I) (Exhibit 10.16)
10.17 Employment Agreement between the Registrant and Michael J. Chesser
dated May 17, 1999. * (H) (Exhibit 10.17)
10.18 First Amendment to Credit Agreement dated February 28, 2000. (I)
(Exhibit 10.18)
10.19 Asset Purchase Agreement between Itron, Inc. and DataCom Information
Systems, LLC (e.g. an affiliate of Duquesne Light Company) dated March
30, 2000. (J) (Exhibit 10.19)
10.20 Warranty and maintenance Agreement between Itron, Inc. and DataCom
Information Systems, LLC dated March 30, 2000. (J) (Exhibit 10.20)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
10.21 Form of Change of Control Agreement between Registrant and executive
officers Tim Gelvin and Bob Whitney. (A) (10.1)
10.22 Contribution Agreement between Itron, Inc. and Servatron, Inc. dated
May 15, 2000. (K) (Exhibit 10.22)
10.23 Credit Agreement between Itron, Inc. and Servatron dated June 22,
2000. (K) (Exhibit 10.23)
10.24 Third Amendment to Credit Agreement dated June 30, 2000. (L) (Exhibit
10.24)
12 Statement of Computation of Ratios
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
</TABLE>
- --------
(A) Incorporated by reference to designated exhibit included in the
Company's Registration Statement on Form S-1 (Registration #33-49832),
as amended, filed on July 22, 1992.
(B) Incorporated by reference to designated exhibit included in the
Company's 1993 Annual Report on Form 10-K filed on March 30, 1994.
(C) Incorporated by reference to designated exhibit included in the
Company's 1995 Annual Report on Form 10-K filed on March 30, 1996.
(D) Incorporated by reference to designated exhibit included in the
Company's 1996 Annual Report on Form 10-K filed on March 5, 1997.
(E) Incorporated by reference to Appendix A to the Company's designated
Proxy Statement dated April 4, 1997 for its annual meeting of
shareholders held on April 29, 1997.
(F) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(G) Incorporated by reference to designated exhibit included in the
Company's Current Report on Form 8-K dated March 18, 1997.
(H) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated August 13, 1999.
(I) Incorporated by reference to designated exhibit included in the
Company's 1999 Annual Report on Form 10-K dated March 26, 2000.
(J) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated May 15, 2000.
(K) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated August 14, 2000.
(L) Incorporated by reference to designated exhibit included in the
Company's Quarterly Report on Form 10-Q dated November 14, 2000.
* Management contract or compensatory plan or arrangement.
/Delta/ Confidential treatment requested for a portion of this agreement.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>2
<FILENAME>dex12.txt
<DESCRIPTION>STATEMENT OF COMPUTATION OF RATIOS
<TEXT>
<PAGE>
Exhibit 12
STATEMENT OF COMPUTATION OF RATIOS
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income (loss) 8,593 (100,266) (10,045) 1,635 (2,134)
Fixed charges:
Convertible debt amortization 259 311 426 357 0
Interest capitalized 0 0 260 994 533
Interest expense, gross 5,608 6,405 6,557 3,834 923
a) Fixed charges 5,867 6,716 7,243 5,185 1,456
b) Earnings for ratio 14,460 (93,550) (2,802) 6,820 (678)
Ratio:
Earnings to fixed charges (b/a) 2.5 n/a n/a 1.3 n/a
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>3
<FILENAME>dex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<PAGE>
Exhibit 21
ITRON SUBSIDIARIES AND AFFILIATED COMPANIES
Domestic Subsidiaries:
-----------------------------------------
Itron, Inc.
Corporate Headquarters
2818 N. Sullivan Rd.
Spokane, WA. 99216-1897
P.O. Box 15288 Spokane, WA. 99215-5288
Genesis Services Pittsburgh, Inc.
N 2818 Sullivan Rd
Spokane, WA 99216
Itron International, Inc
N 2818 Sullivan Rd
Spokane, WA 99216
Itron Finance, Inc.
N 2818 Sullivan Rd
Spokane, WA 99216
Itron Connecticut Finance, Inc
N 2818 Sullivan Rd
Spokane, WA 99216
International Subsidiaries:
-----------------------------------------------
Itron Canada, Ltd. (Canada)
160 Wilkinson Rd., #22
Brampton, ON. L6T 4Z4
Itron S.A. (France)
Espace St Germain
30 Avenue du General Leclerc
38208 VIENNE, Cedex,-FRANCE
Itron Ltd. (England)
Kilnbrook House, Rose Kiln Lane
Reading, Berkshire RG2 0BY
United Kingdom
Itron Australisia Pty Ltd. (Australia)
Level 5, 33 Erskine Street
Sydney, NSW 2000, AUSTRALIA
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>4
<FILENAME>dex23.txt
<DESCRIPTION>INDEPENDENT AUDITORS' CONSENT
<TEXT>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-28933, 333-63147, 333-04685, 333-86581 and 333-81925 of Itron, Inc. and
subsidiaries on form S-8 of our report dated February 2, 2001, appearing in
this Annual Report on Form 10-K of Itron, Inc. and subsidiaries for the year
ended December 31, 2000.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 13, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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