ITURAN LOCATION AND CONTROL LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Six Months Ended June 30, 2018
Comparison of Period to Period Results of Operations
| | | US dollars | |
| | | Six month period
ended June 30, | |
| (in thousands except per share data) | | 2018 | | | 2017 | |
| | | (unaudited) | |
| Revenues: | | | | | | |
| Location-based services | | | 87,189 | | | | 81,437 | |
| Wireless communications products | | | 33,605 | | | | 32,010 | |
| | | | 120,794 | | | | 113,447 | |
| | | | | | | | | |
| Cost of revenues: | | | | | | | | |
| Location-based services | | | 27,839 | | | | 27,305 | |
| Wireless communications products | | | 32,571 | | | | 27,879 | |
| | | | 60,410 | | | | 55,184 | |
| | | | | | | | | |
| Gross profit | | | 60,384 | | | | 58,263 | |
| Research and development expenses | | | 2,099 | | | | 1,768 | |
| Selling and marketing expenses | | | 5,482 | | | | 6,278 | |
| General and administrative expenses | | | 22,590 | | | | 22,391 | |
| Other expenses (income), net | | | (118 | ) | | | (143 | ) |
| Total operating expenses | | | 30,053 | | | | 30,294 | |
| Operating income | | | 30,331 | | | | 27,969 | |
| Financing income, net | | | 568 | | | | 841 | |
| Income before income tax | | | 30,899 | | | | 28,810 | |
| Income tax expenses | | | (8,510 | ) | | | (8,444 | ) |
| Share in gains of affiliated companies ,net | | | 2,224 | | | | 4,489 | |
| Net income for the period | | | 24,613 | | | | 24,855 | |
| Less: Net income attributable to non-controlling interests | | | (1,319 | ) | | | (1,415 | ) |
| Net income attributable to the Company | | | 23,294 | | | | 23,440 | |
| | | US dollars | |
| | | Six month period
ended June 30, | |
| (in thousands except per share data) | | 2018 | | | 2017 | |
| | | (unaudited) (as a% of revenues) | |
| Revenues: | | | | | | |
| Location-based services | | | 72.2 | % | | | 71.8 | % |
| Wireless communications products | | | 27.8 | % | | | 28.2 | % |
| | | | 100 | % | | | 100 | % |
| | | | | | | | | |
| Cost of revenues: | | | | | | | | |
| Location-based services | | | 23.0 | | | | 24.1 | |
| Wireless communications products | | | 27.0 | | | | 24.6 | |
| | | | 50.0 | | | | 48.7 | |
| | | | | | | | | |
| Gross profit | | | 50.0 | | | | 51.3 | |
| Research and development expenses | | | 1.7 | | | | 1.6 | |
| Selling and marketing expenses | | | 4.5 | | | | 5.5 | |
| General and administrative expenses | | | 18.7 | | | | 19.7 | |
| Other expenses (income), net | | | (0.1 | ) | | | (0.1 | ) |
| Total Operating Expenses , net | | | 24.8 | | | | 26.7 | |
| Operating income | | | 25.2 | | | | 24.6 | |
| Financing income, net | | | 0.5 | | | | 0.7 | |
| Income before income tax | | | 25.7 | | | | 25.3 | |
| Income tax expenses | | | (7.1 | ) | | | (7.4 | ) |
| Share in gains of affiliated companies ,net | | | 1.8 | | | | 4.0 | |
| Net income for the period | | | 20.4 | | | | 21.9 | |
| Less: Net income attributable to non-controlling interests | | | (1.1 | ) | | | (1.2 | ) |
| Net income attributable to the Company | | | 19.3 | % | | | 20.7 | % |
Comparison of the Six Months Ended June 30, 2018 and 2107
Revenues
Total revenues increased from $113.4 million in the six month period ended June 30, 2017, to $120.8 million in the six month period ended June 30, 2018, or 6.5%. This increase consisted of an increase of $5.8 million from subscription fees from our location-based services and an increase of $1.6 million from sales of our wireless communications products.
Location-based services segment
Revenues in our location-based services segment increased by $5.8 million from $81.4 million in the six month period ended June 30, 2017, to $87.2 million in the six month period ended June 30, 2018, or 7.1% mainly due to an increase in our average semiannual number of subscribers from 1,084,000 in the six month period ended June 30, 2017, to 1,180,000 in the six month period ended June 30, 2018, which was offset by the negative impact of the exchange rate fluctuations in an amount of $4.0 million. The significant strengthening of the US Dollar versus the Brazilian Real and the Argentinean Peso during the six months ended June 30, 2018 versus the comparable period of 2017 reduced the revenue level in US Dollars.
Excluding the negative impact of the exchange rate fluctuations the revenues in our location-based services would have increased by $9.8 million or 12.0%.
Wireless communications products segment
Revenues in our wireless communications products segment increased from $32.0 million in the six month period ended June 30, 2017, to $33.6 million in the six month period ended June 30, 2018, or 5%. The increase of $1.6 million is primarily due to an increase of $0.6 million in our products' sales, and a positive effect of exchange rates fluctuation in an amount of $1.0 million.
Cost of revenues
Total cost of revenues increased from $55.2 million in the six month period ended June 30, 2017, to $60.4 million in the six month period ended June 30, 2018, or 9.4%.This increase consisted of an increase of $0.5 million in the location based services segment and an increase of $4.7 million in the wireless communication product segment. As a percentage of total revenues, cost of revenues increased from 48.7% in the six month period ended June 30, 2017, to 50.0% in the six month period ended June 30, 2018.
Location-based services segment
Cost of revenues for our location-based services segment increased from $27.3 million in the six month period ended June 30, 2017, to $27.8 million in the six month period ended June 30, 2018, or 1.8%. As a percentage of total revenues for this segment, cost of revenues decreased from 33.5% in the six month period ended June 30, 2017, to 31.9% in the six month period ended June 30, 2018.
Wireless communications products segment
Cost of revenues for our wireless communications products segment increased from $27.9 million in the six month period ended June 30, 2017, to $32.6 million in the six month period ended June 30, 2018, or 16.8%. This increase was mainly due to a mix favoring more complex products being sold supporting our service revenues and also due to a change in the product sales mixture. As a percentage of total revenues for this segment, cost of revenues increased from 87.1% in the six month period ended June 30, 2017, to 96.9% in the six month period ended June 30, 2018.
Operating expenses
Research and development
Our research and development expenses increased from $1.8 million in the six month period ended June 30, 2017, to $2.1 million in the six month period ended June 30, 2018. As a percentage of total revenues, research and development expenses increased slightly from 1.6% in the six month period ended June 30, 2017, to 1.7% in the six month period ended June 30, 2018. There was no material change in the research and development expenses.
Selling and marketing
Our selling and marketing expenses decreased from $6.3 million in the six month period ended June 30, 2017, to $5.5 million in the six month period ended June 30, 2018. As a percentage of total revenues, selling and marketing expenses decreased from 5.5% in the six month period ended June 30, 2017, to 4.5% in the six month period ended June 30, 2018. There was no material change in the selling and marketing expenses.
General and administrative
General and administrative expenses increased slightly from $22.4 million in the six month period ended June 30, 2017, to $22.6 million in the six month period ended June 30, 2018, or 0.9%. As a percentage of total revenues, general and administrative expenses decreased from 19.7 % in the six month period ended June 30, 2017, to 18.7% in the six month period ended June 30, 2018. There was no material change in the selling and marketing expenses.
Other expenses (income), net
Other income, net in the six month period ended June 30, 2017, were $143 thousand compared with $118 thousand in the six month period ended June 30, 2018. There was no material change in the other income, net
Operating income
Total operating income increased from $28.0 million in the six month period ended June 30, 2017, to $30.3 million in the six month period ended June 30, 2018, or 8.2%. This increase of approximately $2.3 million reflects an increase of $3.9 million in the operating income in the location-based segment and a decrease of $1.6 million in the operating income in the wireless communication products segment.
Location-based services segment
Operating income in our location-based services segment increased from $25.5 million in the six month period ended June 30, 2017, to $29.4 million in the six month period ended June 30, 2018, or 15.3%. This increase was mainly due to an increase in our average semiannual number of subscribers
Wireless communications products segment
Operating income in our wireless communications products segment decreased from an operating income of $2.5 million in the six month period ended June 30, 2017, to an operating income of 0.9 million in the six month period ended June 30, 2018. This decrease in mainly due to a mix favoring more complex products being sold in order to support our service revenues and also due to a change in the product sales mixture
Financing income, net
Financing income, net, were $841 thousand in the six month period ended June 30, 2017, compared with an income of $568 thousand in the six month period ended June 30, 2018. There was no material change in the financing income, net.
Income Tax
Income Tax increased slightly from $8.4 million in the six month period ended June 30, 2017, to $8.5 million in the six month period ended June 30, 2018, or 1.2%. As a percentage of income before tax on income expense tax decreased from 29.3 % in the six month period ended June 30, 2017, to 27.5% in the six month period ended June 30, 2018, primarily due to a change in the income before tax mix among the group's companies.
The following table presents the major components of net cash flows for the periods presented:
| | | US dollars | |
| | | Six month period
ended June 30, | |
| (in thousands) | | 2018 | | | 2017 | |
| | | (unaudited) | |
| | | | | | | |
| Net cash provided by operating activities | | | 19,898 | | | | 17,276 | |
| | | | | | | | | |
| Net cash used in investment activities | | | (7,032 | ) | | | (8,559 | ) |
| | | | | | | | | |
| Net cash used in financing activities | | | (11,072 | ) | | | (13,340 | ) |
Six month period ended June 30 2018 and June 30 2017
Net cash provided by operating activities
Our operating activities provided cash of $17.3 million in in the six month period ended June 30, 2017, and $19.9 million in the six month period ended June 30, 2018.
The increase of approximately $2.6 million in cash from operation activities in the six month period ended June 30, 2018, as opposed to the six month period ended June 30, 2017, was mainly due to an increase of $2.1 million in income before income tax.
Net cash used in investment activities
Net cash used in investment activities in the six months ended June 30, 2018 was $7.0 million which was primarily attributed to our capital expenditure of $10.0 million which was offset by proceed from loans to affiliated companies and investment in affiliated and other companies, net of $1.1 million and a sale of marketable securities, net (include investment in marketable securities) of $1.7 million.
Net cash used in investment activities in the six months ended June 30, 2017 was $8.6 million which was primarily attributed to our capital expenditure of $6.7 million and invest in marketable securities, net (include sale of marketable securities) of $1.1 million and invested in affiliated and other companies, net (include proceed from loans to affiliated companies) of $0.6 million.
Net cash used in financing activities
Net cash used in financing activities in the six months ended June 30, 2018 was $11.1 million which was primarily attributed to a dividend paid to our shareholders in the amount of $10.1 million and a dividend paid to non-controlling interest in the amount of $1.0 million.
Net cash used in financing activities in the six months ended June 30, 2017 was $13.3 million which was primarily attributed to a dividend paid to our shareholders in the amount of $12.6 million and a dividend paid to non-controlling interest in the amount of $0.7 million.
