ITRON, INC. 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for Itron, Inc., a provider of products and services to utilities for energy and water markets. The report covers the quarterly and six-month periods ended June 30, 2008. The company operates through two primary segments: Itron North America and Actaris (acquired in April 2007). As of July 31, 2008, there were 34,306,600 shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Revenues | $513.9 million | $401.6 million | $992.4 million | $549.5 million |
| Gross Profit | $176.2 million | $124.7 million | $338.8 million | $186.0 million |
| Gross Margin | 34% | 31% | 34% | 34% |
| Operating Income | $36.2 million | ($23.4 million) | $63.5 million | ($14.1 million) |
| Net Income | $13.1 million | ($23.9 million) | $16.1 million | ($16.7 million) |
| Diluted EPS | $0.37 | ($0.79) | $0.47 | ($0.58) |
| Cash from Operations (6mo) | $120.5 million (vs. $62.9 million in 2007) | |||
| Total Debt (Current + Long-term) | $1.27 billion (Current: $356.3M; Long-term: $915.2M) | |||
| Cash and Equivalents | $152.2 million (as of June 30, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 28% for the quarter and 81% for the six months compared to the prior year. This growth is primarily driven by the inclusion of full-period results from the Actaris acquisition in 2008, whereas 2007 included only partial results post-acquisition.
- Profitability Turnaround: The company returned to profitability, reporting net income of $13.1 million for the quarter compared to a net loss of $23.9 million in the same period in 2007. Operating income improved from a loss of $23.4 million to a profit of $36.2 million.
- Debt Reduction: The company repaid $350.7 million in borrowings during the first six months of 2008, utilizing cash flows from operations and proceeds from a $311 million common stock offering in May 2008.
- Convertible Notes Reclassification: Due to the stock price exceeding the conversion threshold, $345 million of convertible senior subordinated notes were reclassified from long-term to current liabilities as of June 30, 2008.
- Segment Performance: The Actaris segment reported an operating income of $25.4 million for the quarter, a significant improvement from a loss of $30.5 million in the prior year, which had been impacted by $35.6 million in in-process research and development (IPR&D) expenses.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue expanding operations through internal development and acquisitions, funded by existing cash, operating cash flows, and potential future issuances of stock or debt. They believe current liquidity is sufficient for the remainder of the year.
- Convertible Notes: The $345 million convertible notes are currently convertible at the option of the holder through the third quarter of 2008. If converted, the principal will be settled in cash, with the remaining obligation potentially settled in cash or shares.
- Legal Contingencies:
- PT Mecoindo: A joint venture dispute in Indonesia where courts awarded approximately $14.1 million in damages. The company is appealing and does not believe an adverse outcome will be material.
- IP Co. LLC: A patent infringement lawsuit filed in March 2008 regarding wireless mesh networking. The company believes the claims are without merit.
- Market Risks: The company faces exposure to foreign currency exchange rates (68% of revenues are international) and interest rate fluctuations. Sensitivity analysis indicates a 10% increase in the U.S. dollar value would decrease operating results by approximately $4.1 million.
- Accounting Changes: The company is evaluating the impact of new FASB pronouncements (SFAS 141(R), SFAS 160, FSP APB 14-1) effective in 2009, which may materially affect financial statements.
Key Facts for Investor Verification
- Debt Maturity Profile: Verify the ability to service the $356.3 million in current debt, which includes the $345 million convertible notes that are currently convertible.
- Actaris Integration: Confirm that the margin improvements in the Actaris segment are sustainable and not solely due to the absence of one-time IPR&D charges present in 2007.
- Convertible Note Conversion: Monitor the stock price relative to the $65.16 conversion price to assess the likelihood of cash outflow or dilution from the convertible notes.
- Legal Exposure: Track the status of the PT Mecoindo appeal in the Indonesian Supreme Court to ensure the potential $14.1 million liability remains non-material.
- Working Capital: Note the shift to negative working capital of ($55.8) million, primarily driven by the reclassification of the convertible notes to current liabilities.