Itron, Inc. — Second-Quarter 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Itron supplies products and services to utility customers in energy and water markets worldwide, including meters, AMR/AMI systems, software, installation and consulting.
Financial performance
- Revenue: Q2 revenue was $569.5 million, up 38% year over year; first-half revenue was $1.069 billion, up 33%. Management attributed growth principally to AMI contract rollouts.
- Profit and margins: Q2 gross profit was $176.3 million and gross margin was 31.0%, versus 32.2% a year earlier. Operating income was $52.3 million, versus $11.7 million; net income was $26.9 million, versus $15.3 million. Diluted EPS was $0.65, versus $0.40. First-half operating income was $85.7 million versus $20.7 million; net income was $53.7 million versus a $4.4 million loss; diluted EPS was $1.31 versus a $0.12 loss.
- Cash flow: First-half operating cash flow was $117.1 million, compared with $67.4 million in 2009. Investing cash outflow was $23.2 million, including $27.7 million of capital expenditures. Financing cash outflow was $69.3 million, including $73.9 million of debt repayments. Cash increased $15.5 million to $137.4 million.
- Liquidity and debt: Working capital was $317.0 million, compared with $282.5 million at year-end 2009. Total debt was $673.3 million, down from $781.8 million; cash was $137.4 million. The revolving facility was expanded from $115 million to $240 million; with $30.1 million of letters of credit, $209.9 million remained available. Itron reported compliance with debt covenants.
- Balance sheet: Total assets were $2.627 billion and total liabilities were $1.344 billion at June 30, 2010. Goodwill was $1.146 billion and net intangible assets were $309.0 million.
Changes versus the prior comparable period
- North America revenue rose 112% in Q2 and 94% in the first half, driven by OpenWay projects. International revenue fell 2% in Q2 and was approximately flat in the first half.
- North America meter volumes increased 124% in Q2 and 95% year to date; International meter volumes decreased 3% and 8%, respectively.
- OpenWay contracts represented 48% of North America segment revenue in Q2, versus 8% a year earlier. Total company gross margin declined despite higher revenue, reflecting lower-margin first-generation AMI shipments and services, reduced International margins, and increased warranty expense.
- Interest expense declined as debt balances fell. First-half 2009 included a $10.3 million net loss on extinguishment of debt, which did not recur in 2010.
- Foreign-currency translation materially affected equity: accumulated other comprehensive income shifted from $71.1 million at December 31, 2009 to a $116.0 million loss at June 30, 2010. The filing attributes much of the goodwill and intangible balance declines to exchange-rate movements.
Outlook, risks and unusual items
- Backlog: At June 30, total backlog was $1.686 billion and estimated 12-month backlog was $1.017 billion. Q2 bookings were $806 million, including $339 million for a Detroit Edison OpenWay contract. The filing cautions that backlog may be rescheduled or cancelled and excludes significant book-and-ship business.
- Liquidity outlook: Management said existing liquidity sources should fund operations and obligations for the next 12 months and into the foreseeable future, while noting there can be no assurance. The filing provides no specific full-year revenue or earnings guidance.
- Convertible notes: The $223.6 million face-value notes were classified as long-term at June 30, but Itron stated they would be classified as current effective July 1, 2010 because put, call and conversion options fall within the following 12 months. This creates a significant upcoming liquidity and refinancing consideration.
- Warranty and arbitration: Q2 warranty expense was $17.3 million; first-half expense was $21.3 million, compared with $3.1 million and $6.2 million, respectively, in 2009. A $9.6 million accrual related to Swedish meter arbitration claims. The E.ON-related claim was resolved; the Fortum arbitration had been heard and remained under advisement. Itron denied the allegations and said an unfavorable outcome could materially affect results for the period recognized.
- Customer concentration: Southern California Edison represented approximately 12% of Q2 revenue and 11% of first-half revenue. The ten largest customers accounted for 34% and 33%, respectively, versus 15% and 13% in the corresponding 2009 periods.
- Other risks: The company cited customer demand and order changes, competition, product acceptance and warranty claims, litigation, tax uncertainty, foreign exchange and interest rates, international business risks, and access to capital. Interest-rate swaps covered exposure such that 88% of borrowings were at fixed rates; management estimated a one-percentage-point increase in market rates would not materially affect 2010 pretax earnings.
Key facts for investors to verify
- Progress, margins and cash conversion on OpenWay deployments, including the timing and recognition of the Detroit Edison contract.
- Convertible-note holder put/conversion terms and the company’s plan for the notes’ current classification and potential repayment.
- Updates to the Fortum arbitration, the $9.6 million warranty accrual and subsequent warranty claims.
- Whether backlog converts to revenue as expected, given cancellation and rescheduling provisions and increased customer concentration.
- Effects of foreign-currency movements on reported revenue, goodwill, equity and cash flows.
- Tax provision variability and resolution or expiration of uncertain tax positions; unrecognized tax benefits were $34.4 million at June 30, 2010.