Itron, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Unless stated otherwise, amounts are in U.S. dollars. Itron provides metering products, software and services to electric, gas and water utilities worldwide.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $474.8 million | $447.5 million; up 6% |
| Gross profit / margin | $154.5 million / 32.5% | $140.1 million / 31.3% |
| Operating income | $4.5 million | $2.3 million |
| Net income (loss) attributable to Itron | $(0.3) million; $(0.01) per diluted share | $2.6 million; $0.06 per diluted share |
| Operating cash flow | $66.8 million | $0.6 million |
| Cash and cash equivalents | $146.3 million at March 31 | $124.8 million at December 31, 2013 |
| Total debt | $348.1 million | $378.8 million at December 31, 2013 |
| Working capital | $328.2 million | $344.4 million at December 31, 2013 |
Net loss before tax was $0.8 million, compared with pretax income of $0.3 million a year earlier. A $0.7 million income tax benefit left consolidated net loss at $0.1 million; noncontrolling interests accounted for $0.1 million of income. Comprehensive loss attributable to Itron was $3.4 million, mainly reflecting $3.4 million of foreign-currency translation losses.
Operating cash flow improved substantially, in part because of invoice and payment timing, increased receivable collections and higher unearned-revenue receipts. Investing activities used $8.4 million, including $8.6 million of property and equipment purchases; financing activities used $35.5 million, including $30.6 million of debt repayments. Cash increased by $21.5 million during the quarter.
At March 31, debt comprised a $253.1 million term loan and $95.0 million drawn on a $660 million revolving facility. The reported facility availability, after $47.3 million of letters of credit, was $517.7 million. The facility carried a 1.66% interest rate at quarter-end, and Itron reported compliance with its debt covenants. Management said existing liquidity should be sufficient for operations and obligations over the next 12 months and into the foreseeable future, while noting that this is not assured.
Material changes and operating trends
- Revenue rose across all three segments. Electricity revenue was $180.2 million, Gas $146.1 million and Water $148.5 million. Water had the largest percentage increase, up 10%.
- Gas and Water gross margins improved to 40.0% and 36.0%, respectively, on product mix, volume and, for Gas, lower warranty costs. Electricity gross margin fell to 23.7% from 25.6%, reflecting mix, lower volumes and higher warranty expense; its operating loss widened to $23.0 million.
- Corporate unallocated operating expenses increased to $18.9 million from $10.7 million, including higher restructuring and professional-services costs. Total operating expenses rose $12.2 million, with restructuring expense of $5.5 million and a $1.0 million goodwill impairment charge.
- Quarterly bookings were $745 million, including a $279 million Electricity project. Backlog was $1.33 billion, of which $614 million was expected to be recognized within 12 months. The filing cautions that backlog can change through customer rescheduling or cancellation and does not include significant book-and-ship orders.
Outlook, risks and unusual items
- Itron expects to substantially complete its 2013 restructuring projects by December 31, 2014. The plan targets an approximately 9% workforce reduction and facility closures or consolidations. Expected total costs increased by $5.8 million in the quarter to $37.1 million; approximately $0.5 million remained to be recognized at March 31. Timing could be delayed by labor and employment requirements.
- The company recorded a $977,000 goodwill impairment adjustment in Q1 after finalizing its 2013 analysis. It said the adjustment was not material to Q1, expected 2014 results or 2013 results. This followed a $173.2 million Electricity reporting-unit impairment recorded in Q4 2013. Further deterioration in demand, forecasts or market value could put remaining goodwill at risk.
- Tax benefits affected comparisons: Q1 2014 benefited from discrete tax items, while Q1 2013 included a $4.0 million benefit from the retroactive extension of the research and experimentation credit. Itron estimated approximately $19.9 million of 2014 cash taxes, net of refunds. It also disclosed $29.1 million of unrecognized tax benefits and said about $2.0 million might decrease within 12 months.
- Foreign-exchange losses, net of hedging, were $2.1 million in Q1 2014, versus $0.6 million in Q1 2013. Foreign-currency translation reduced Q1 2014 comprehensive income; 60% of revenue was denominated in non-U.S.-dollar functional currencies. Itron uses derivatives for risk management, not trading.
- Disclosed legal matters include patent-infringement claims against utility customers that Itron has agreed to defend or indemnify, employment claims in Brazil, and a customer claim alleging meter defects. Itron said it could not yet estimate the potential loss on the meter claim; an unfavorable outcome in certain matters could materially affect results in the period recognized. The company did not believe the disclosed matters would materially adversely affect its business or financial condition.
- Management identified demand and order timing, cancellations or rescheduling, product acceptance and performance, competition, warranty and litigation estimates, foreign exchange and interest rates, and international business conditions among relevant risks. No specific earnings or revenue guidance was provided in the filing.
Important facts for investors to verify
- Whether the large Electricity project and elevated backlog convert to revenue on schedule, and whether customers reschedule or cancel orders.
- Whether gross-margin pressure and operating losses in Electricity persist, and whether Gas and Water margin improvements are sustainable.
- How much of the strong operating cash flow reflected temporary working-capital timing, and whether cash generation continues.
- Restructuring execution, final costs and timing, including the effects of workforce and facility changes.
- Developments in the meter-defect, patent and Brazil employment matters, as well as any changes to warranty reserves or tax exposures.
- Goodwill impairment indicators, debt-covenant compliance and liquidity, including cash availability in foreign subsidiaries and joint ventures.