Itron, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; unaudited. Itron supplies products and services to energy and water utilities worldwide, including meters, automated meter reading and advanced metering infrastructure systems, software, and related services.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $576.0 million | $408.4 million | $1,644.7 million | $1,210.6 million |
| Gross profit / margin | $184.2 million / 32.0% | $129.5 million / 31.7% | $519.4 million / 31.6% | $392.2 million / 32.4% |
| Operating income | $61.4 million | $9.0 million | $147.1 million | $29.7 million |
| Net income (loss) | $29.1 million | $(3.0) million | $82.8 million | $(7.4) million |
| Diluted EPS | $0.71 | $(0.07) | $2.02 | $(0.19) |
| Operating cash flow | — | — | $167.1 million | $87.1 million |
- Revenue grew 41% in Q3 and 36% year to date. Management attributed the increase primarily to OpenWay project deployments in Itron North America.
- Operating margin was approximately 10.7% in Q3 and 8.9% for the first nine months, versus approximately 2.2% and 2.5% in the comparable 2009 periods.
- Capital expenditures were $45.5 million for the nine months. Operating cash flow less capital expenditures was approximately $121.6 million, compared with $49.1 million in 2009; this is a derived measure.
Business and segment changes
- Itron North America revenue increased 130% in Q3 and 105% year to date, to $315.3 million and $861.6 million, respectively. OpenWay represented 50% of segment revenue in Q3 and 48% year to date, compared with 15% and 8% in 2009.
- Itron International revenue decreased 4% in Q3 and 1% year to date. Its gross margin declined to 27.8% in Q3 from 32.1%, and to 28.7% year to date from 31.3%.
- Total backlog was $1.657 billion at quarter-end, including $958 million expected to be recognized as revenue over the next 12 months. Backlog can be rescheduled or cancelled and is not a complete measure of future business.
- Customer concentration increased: Southern California Edison represented approximately 12% of Q3 and 11% of year-to-date company revenue. The ten largest customers accounted for 37% and 33% of revenue, respectively, versus 16% and 12% in 2009.
Cash, debt, and liquidity
- Cash and equivalents were $148.1 million at September 30, up from $121.9 million at December 31, 2009. Working capital was $148.6 million, down from $282.5 million, largely because convertible notes were reclassified as current.
- Total borrowings were $663.0 million, down from $781.8 million at year-end 2009. The balance included $226.2 million classified as current and $436.7 million long-term. The current classification reflects note put, call, and conversion provisions, not solely scheduled maturity.
- The company repaid $106.5 million of term loans in the first nine months. Its revolving credit facility was increased to $240 million; no amounts were drawn at September 30, and $193.2 million remained available after standby letters of credit. Itron reported compliance with credit-facility covenants.
- Management said existing liquidity sources should be sufficient for operations and obligations for the next 12 months and foreseeable future, while cautioning that this is not assured. No formal earnings or revenue guidance is provided in the supplied filing text.
Material items, risks, and outlook
- Warranty expense was $32.7 million for the first nine months, versus $10.1 million in 2009. The increase included $13.8 million related to Swedish arbitration claims, which were resolved during Q2 and Q3 2010. The total warranty liability was $53.2 million, including $28.2 million current.
- The company cited foreign exchange exposure, customer demand and order timing, competition, product acceptance and warranty performance, international business risks, access to capital, and uncertain tax positions as risks. It uses interest-rate and foreign-exchange derivatives to manage exposures, not for trading.
- At quarter-end, 89% of borrowings were fixed-rate including swaps. A one-percentage-point increase in market rates was not expected to materially affect 2010 earnings based on the company’s sensitivity analysis.
- One-year expected cash payments for uncertain tax positions were approximately $0.6 million; unrecognized tax benefits were $33.3 million. Management said these benefits could decrease by about $5.9 million within 12 months, subject to audit resolution and statute expirations.
- Foreign currency translation reduced goodwill by $69.0 million during the nine months. No material legal-contingency liabilities were recorded; the Swedish claims were resolved.
Investor verification points
- Confirm the timing, settlement alternatives, and liquidity implications of the convertible notes’ holder put and conversion provisions, and the current debt classification.
- Track OpenWay execution, backlog conversion, customer order changes, and the increased revenue concentration among major customers.
- Assess whether elevated warranty accruals and the Swedish claim resolution fully capture potential product and service costs.
- Monitor Itron International margins, which were pressured by warranty costs, facility consolidation and movement, material costs, and currency translation.
- Review cash conversion and working-capital needs, particularly rising receivables and inventories, alongside debt repayments and capital spending.