Itron, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter report; quarterly figures are included below where relevant. Itron supplies meters, communications networks, software, and services to electricity, gas, and water utilities.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1.949 billion | $2.178 billion |
| Gross profit / margin | $614.5 million / 31.5% | $715.1 million / 32.8% |
| Operating income (loss) | $(135.2) million | $151.1 million |
| Net income (loss) attributable to Itron | $(146.8) million | $108.3 million |
| Diluted EPS | $(3.74) | $2.71 |
| Cash from operations | $105.4 million | $205.1 million |
| Capital expenditures | $60.0 million | $50.5 million |
| Cash and cash equivalents at year-end | $124.8 million | $136.4 million |
| Total debt at year-end | $378.8 million | $417.5 million |
| Working capital at year-end | $344.4 million | $353.6 million |
FY2013 operating cash flow less capital expenditures was approximately $45.4 million. The company had $490.5 million of additional availability under its $660 million revolver after borrowings and standby letters of credit. It reported compliance with credit-facility covenants. The credit facility matures in August 2016. The 2013 income-tax benefit was $3.7 million; the effective tax benefit rate was 2.5% of pretax loss.
In Q4 2013, revenue was $523.5 million, gross profit was $164.7 million, net loss attributable to Itron was $154.4 million, and diluted loss per share was $3.93. The quarter included the $173.2 million goodwill impairment charge.
Material changes versus FY2012
- Revenue declined 11%, primarily as several large OpenWay electricity projects completed in 2012; unfavorable foreign-currency translation also reduced revenue.
- Gross margin fell 130 basis points, reflecting lower Electricity and Gas volumes, less favorable product mix, higher Gas warranty expense, and additional costs on a North American OpenWay contract.
- Electricity revenue declined 18% to $836.6 million; Gas revenue declined 9% to $570.3 million. Water revenue increased 3% to $541.9 million.
- Operating results swung to a loss, including a $173.2 million non-cash Electricity goodwill impairment. Electricity segment operating loss was $235.9 million; Gas and Water reported operating income of $83.9 million and $63.3 million, respectively.
- Operating cash flow fell by $99.7 million, mainly due to lower earnings excluding the impairment and higher deferred taxes. Total debt declined by $38.8 million.
- Meter shipments decreased: total meters fell to 23.8 million from 26.0 million; advanced and smart meters fell to 5.9 million from 8.0 million. Total bookings rose to $1.946 billion from $1.861 billion.
Outlook, management commentary, risks, and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management said existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, while noting there are no assurances. It expected full savings from the 2013 restructuring by the end of 2014 and into 2015.
- Restructuring: The 2013 program targets an approximately 9% workforce reduction and facility closures or consolidations. Expected costs were about $31.3 million at year-end; substantially complete by December 31, 2014 was the target, subject to labor-law and property-sale timing risks.
- Goodwill and forecasts: The Electricity impairment followed delays in global smart-grid projects and lower volumes and pricing pressure in parts of Europe and Asia/Pacific. Remaining Electricity goodwill was $60.2 million. Further adverse changes in demand or forecasts could cause additional impairment.
- Warranty and contracts: Warranty expense rose to $15.9 million from $13.2 million, including added provision for identified battery and firmware issues. The filing also describes contract-performance and liquidated-damages exposure.
- Contingencies: Matters include patent litigation involving Transdata and customer indemnification, Brazilian former-employee claims, and a customer claim over alleged meter defects; the company could not estimate a potential loss for the latter. No material pending legal proceedings were reported under the specified SEC definition, though certain matters could materially affect results in the period of an unfavorable resolution.
- Other risks: Utility spending and lengthy procurement cycles, customer order rescheduling, competition and pricing pressure, product failures, foreign exchange and international operations, component-supply constraints, cybersecurity and IT-system risks, pension obligations, and tax uncertainty.
- Tax and capital allocation: Management expected the 2014 effective tax rate to be higher than 2013, citing expiration of certain tax provisions and foreign valuation allowances and legislation. The company repurchased $27.0 million of shares in 2013 and authorized a new program of up to $50 million after the existing program expired; it does not anticipate cash dividends in the foreseeable future.
Most important facts for investors to verify
- Whether Electricity demand, project timing, pricing, and margins stabilize after the large OpenWay project completions and goodwill write-down.
- Whether the 2013 restructuring achieves targeted savings on schedule and within the estimated cost.
- Whether warranty claims, the North American OpenWay contract costs, and disclosed legal/customer claims require additional charges or cash payments.
- Whether cash generation and revolver availability remain adequate as debt approaches its 2016 maturity and contractual obligations come due.
- How foreign exchange, tax-rate changes, and realization of deferred tax assets affect future earnings and cash taxes.
- Bookings and backlog conversion: year-end total backlog was $1.068 billion, including $549 million estimated for recognition over the following 12 months; the filing cautions that backlog is not a complete measure of future revenue and may be rescheduled or canceled.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2013.