Itron, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Itron provides metering products, smart-metering systems, software, and services to electricity, gas, and water utilities worldwide. Figures are unaudited; dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $489.4 | $482.2 | $964.1 | $929.7 |
| Gross profit / margin | $163.0 / 33.3% | $159.6 / 33.1% | $317.6 / 32.9% | $299.7 / 32.2% |
| Operating income | $31.9 | $18.0 | $36.5 | $20.3 |
| Net income attributable to Itron | $19.3 | $12.4 | $19.0 | $15.0 |
| Diluted EPS | $0.49 | $0.31 | $0.48 | $0.38 |
- Q2 revenue rose 1%; first-half revenue rose 4%. Gas and Water growth more than offset lower Electricity revenue. Q2 segment revenue changes: Electricity down 14%, Gas up 13%, and Water up 14% year over year.
- First-half operating cash flow was $67.2, versus $19.0 a year earlier. Management attributed much of the increase to timing of supplier payments, along with higher wages and benefits payable, less inventory buildup, and higher unearned revenue; lower receivables collections partly offset the increase.
- First-half investing cash outflow was $19.3, including $19.4 of capital expenditures. Financing cash outflow was $55.7, mainly reflecting $51.3 of debt repayments and $7.2 of share repurchases. Cash declined $10.0 to $114.8 from year-end 2013.
- At June 30, total debt was $327.5 ($30.0 current and $297.5 long-term). The credit facility rate was 1.65%; $530.2 of additional borrowing and letter-of-credit capacity was available. Itron reported compliance with debt covenants.
- Current assets were $825.9 and current liabilities $492.6; working capital was $333.4, compared with $344.4 at December 31, 2013.
Changes and notable items
- Higher Gas and Water revenue and their relatively higher margins lifted consolidated gross margin. Electricity revenue and margin declined, reflecting weaker shipments, mix, and volume; a temporary U.S. manufacturing delay affected Q2 shipments.
- Operating expenses included restructuring credits of $7.8 in Q2 and $2.3 for the first half, following reassessment of planned actions. These credits materially supported operating income comparisons. First-half expenses also included a $1.0 goodwill impairment charge.
- First-half tax expense was $7.2, compared with a $1.3 tax benefit in 2013, when a $4.0 research-credit benefit was recognized. 2014 tax expense reflected, among other factors, earnings mix and foreign tax credits.
- Foreign-currency translation reduced first-half other comprehensive income by $11.4. Foreign-currency losses, net of hedging, were $2.9 for the first half.
- The company repurchased 107,477 shares for $4.2 during the quarter under a $50 million authorization; $45.8 remained at June 30. It subsequently repurchased another 79,500 shares at an average $39.46.
Outlook, risks, and contingencies
- Management expected to substantially complete its 2013 restructuring program by mid-2015, with an intended workforce reduction of approximately 9%. Labor and employment requirements could delay completion. The filing reports $24.6 of restructuring liabilities at June 30.
- Total backlog was $1.33 billion, including $675 million expected to be recognized over the next 12 months. Management cautioned that backlog is not a complete measure of future revenue and that long-term contracts may be rescheduled or canceled.
- Management stated that existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, while noting this is not assured. It expected 2014 cash taxes of approximately $24.7 in U.S. federal and local/foreign taxes combined.
- Unrecognized tax benefits were $39.3, increased by $10.6 during the first half in connection with tax positions related to intercompany transactions. Itron said approximately $2.0 might decrease within 12 months due to statute expirations; timing of related cash flows was not estimable.
- Significant disclosed legal matters include a supplier counterclaim seeking more than $60 million, with trial scheduled for February 2015; Transdata patent litigation involving customer meters; Brazilian former-employee claims; and a customer claim concerning alleged meter defects for which a potential loss range was not estimable. The company said an unfavorable outcome in certain matters could materially affect results in the period recognized.
- Other risks include utility demand and order timing, warranty estimates, competition, foreign exchange and interest rates, international operations, and access to capital. No material risk-factor changes were reported for the quarter. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Q2 and first-half operating-income improvement persists without restructuring credits and favorable warranty estimate revisions.
- Whether Electricity shipments recover after the reported manufacturing delay and whether segment demand, mix, and margins improve.
- How much of the higher operating cash flow reflects sustainable earnings versus working-capital timing.
- Progress against the restructuring schedule and any changes in expected costs or savings.
- Developments in the supplier litigation, meter-defect claim, patent cases, and uncertain tax positions, including potential cash or earnings effects.
- Backlog conversion, customer order changes, debt repayments, covenant compliance, and available liquidity.