Itron, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results; comparisons are with the corresponding 2011 periods unless stated otherwise. Itron supplies products and services to global energy and water utilities.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $579.1 million | $612.4 million | $1,150.8 million | $1,176.1 million |
| Gross profit | $196.7 million | $192.0 million | $379.9 million | $376.9 million |
| Gross margin | 34.0% | 31.3% | 33.0% | 32.0% |
| Operating income | $46.1 million | $48.1 million | $85.7 million | $98.2 million |
| Net income attributable to Itron | $31.6 million | $34.4 million | $57.0 million | $61.6 million |
| Diluted EPS | $0.79 | $0.84 | $1.42 | $1.50 |
- Revenue and margins: Revenue fell 5% in Q2 and 2% in the first half. Foreign currency translation reduced revenue by approximately $35 million and $48 million, respectively. Excluding translation effects, revenue increased, driven by OpenWay projects and Water, partly offset by weaker Gas revenue. Lower warranty costs, product mix, and manufacturing efficiencies lifted gross margins.
- Expenses and earnings: Operating expenses rose 5% in Q2 and 6% in the first half, reflecting greater sales and product-development spending and restructuring charges. Operating income declined 4% in Q2 and 13% year to date. Lower interest expense benefited pretax income, but higher tax expense and the absence of prior-year discrete tax benefits contributed to lower net income attributable to Itron.
- Cash flow: First-half operating cash flow was $92.4 million, versus $87.7 million. Capital expenditures were $23.5 million; cash used for acquisitions was $79.6 million. Cash declined $30.3 million to $102.8 million. The filing does not present free cash flow as a measure.
- Liquidity and debt: Working capital was $346.2 million. Debt totaled $455.0 million, against cash of $102.8 million. The $660 million revolving facility had $170 million drawn and $439.1 million available after letters of credit. The company reported compliance with debt covenants and stated that liquidity should be sufficient for operations and obligations over the next 12 months and into the foreseeable future, while giving no assurance.
Material changes and business developments
- Energy revenue fell 6% in Q2 and 3% in the first half; Water revenue fell 2% and 1%, respectively. Management said both businesses grew excluding foreign-exchange effects. Gas was a notable source of weakness.
- Total backlog was $1.12 billion at June 30, down from $1.62 billion a year earlier; twelve-month backlog was $637 million, versus $1.05 billion. Q2 bookings were $447 million, compared with $483 million a year earlier. Backlog can fluctuate and is subject to customer rescheduling or cancellation.
- One customer, BC Hydro, represented 11% of company revenue in both the quarter and first half. The largest customer represented 15% of Energy segment revenue.
- Itron acquired SmartSynch on May 1 for a preliminary net cash purchase price of $78.7 million. SmartSynch contributed $4.0 million of revenue and a $2.8 million net loss through June 30; $60 million was added to backlog. Purchase accounting remained preliminary, including allocation of $42.6 million of goodwill.
- The company repurchased $26.0 million of shares in the first half under its $100 million program; $44.6 million remained authorized at June 30, before subsequent purchases.
Outlook, risks and unusual items
- Restructuring: Expected total costs were approximately $89 million, with $77 million incurred since the program began. Management anticipated approximately $15 million in annualized savings during 2012, primarily in the second half, and approximately $30 million by the end of 2013. Environmental remediation costs increased the expected program cost; labor rules and property-market conditions could delay completion beyond 2013.
- Foreign exchange and comprehensive income: Currency translation reduced Q2 revenue by about $35 million and produced a $52.3 million after-tax translation loss for the quarter. Itron reported a $21.6 million comprehensive loss attributable to the company despite positive net income.
- Tax: Effective tax rates were 24.7% for Q2 and 25.9% for the first half, versus a tax benefit of 0.2% and a provision of 13.1% in the prior-year periods. Unrecognized tax benefits were $25.0 million; management said approximately $4.9 million could reverse within 12 months.
- Legal and warranty exposures: The filing describes patent litigation involving TransData and EON, as well as securities and derivative shareholder litigation relating to the 2010 restatement. Recorded legal liabilities were not material, but an unfavorable outcome could materially affect results in the period recognized. Warranty estimates are subject to claims and cost experience; a $4.3 million reserve reduction in Q2 reflected lower-than-estimated replacements.
- Other risks: Management cited customer demand and project timing, order cancellations, competition, product acceptance, foreign exchange and interest rates, international operations, access to capital, acquisition execution, and estimates for warranties, litigation, restructuring, taxes, and goodwill. No material risk-factor changes were reported for the quarter.
- No specific revenue or earnings guidance was provided in the supplied filing text.
Investor verification points
- Track backlog and bookings, particularly the decline in twelve-month backlog, and assess conversion into recognized revenue.
- Check whether constant-currency growth persists and whether Gas demand and EMEA performance recover.
- Evaluate margin improvement in light of the temporary $4.3 million warranty reserve benefit and ongoing restructuring savings.
- Monitor SmartSynch integration, final purchase-price allocation, acquired project completion costs, and returns relative to the purchase price.
- Review cash generation, acquisition and repurchase spending, revolver availability, debt covenants, and the timing of restructuring cash payments.
- Follow the cited patent and shareholder litigation, uncertain tax positions, and potential goodwill impairment indicators.