ITRON, INC. annual report, FY2010

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Itron, Inc. — FY 2010 Form 10-K

Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report. Itron supplies metering systems, software and services to electric, gas and water utilities through its North America and International segments. Unless otherwise stated, financial figures below are in millions of U.S. dollars.

Financial performance and position

  • Revenue: $2,259.3, up 34% from $1,687.4 in 2009. North America revenue rose 91% to $1,177.4, principally from smart-meter deployments; International revenue increased 1% to $1,081.9.
  • Profitability: Gross profit was $698.2, up 30%; gross margin declined to 30.9% from 31.9%. Operating income rose to $184.2 from $45.0, and net income was $104.8 versus a $2.2 loss. Diluted EPS was $2.56 versus a $0.06 loss.
  • Fourth quarter: Revenue was $620.7, gross profit $185.4, net income $26.6 and diluted EPS $0.65.
  • Cash flow: Operating cash flow was $254.6 versus $140.8 in 2009; investing cash outflow was $56.3 and financing cash outflow was $148.6. Capital expenditures were $62.8. Cash increased $47.6 to $169.5.
  • Debt and liquidity: Total debt was $610.9 at year-end, down from $781.8; $155.2 of borrowings were repaid during 2010. Working capital was $178.5, down from $282.5. The $223.6 face amount of convertible notes was classified as current because holders had 2011 put, conversion and other options. The $240 revolving facility had no borrowings and $43.5 of letters of credit outstanding, leaving $196.5 available at year-end.
  • Margins and costs: Smart-meter contracts made up 49% of North America segment revenue, compared with 17% in 2009, but smart-meter work carried lower margins than advanced metering. International margin was also pressured by higher material costs and a $14.4 Swedish arbitration-related warranty charge. Total 2010 warranty expense was $38.6, compared with $15.0.

Material changes versus 2009

  • Company revenue rebounded following a 12% decline in 2009. North America was the principal source of the 2010 growth; International revenue was nearly flat.
  • Smart-meter shipments increased to 4.46 million from 0.71 million; total meter shipments rose to 28.45 million from 25.03 million.
  • Total backlog increased 9% to $1.62 billion and estimated 12-month backlog rose 13% to $913 million. Annual bookings increased to $2.40 billion from $1.85 billion. Management cautions that backlog is not a complete predictor of future revenue and contracts can be rescheduled or canceled.
  • Operating expenses increased 4% to $514.0, while their share of revenue fell to 23% from 29%, aided by revenue growth and lower intangible amortization. Interest expense declined with lower debt.
  • Revenue concentration increased: the ten largest customers represented 34% of revenue versus 17% in 2009; one customer accounted for 11% in 2010.

Outlook, risks and unusual items

  • Outlook and liquidity: No specific revenue or earnings guidance is provided. Management expected existing liquidity to fund operations and obligations for the next 12 months and beyond, while noting there are no assurances. On January 20, 2011, the revolving facility was increased to $315 million. Management anticipated a possible $223.6 million note repurchase in August 2011 if holders exercised their put; it stated the expanded facility should provide sufficient liquidity. The filing estimated 2011 income-tax payments, net of refunds, at minimal U.S. federal tax, approximately $2.5 million state tax and $17.6 million foreign/local tax; a note repurchase could add about $22 million of cash taxes.
  • Restatement: The first three quarters of 2010 were restated to defer revenue recognized incorrectly on a contract because of a misinterpreted extended-warranty obligation. For the first nine months, revenue decreased $6.1 million and diluted EPS decreased $0.11. Management said the correction was not material to any individual quarter but was material in aggregate to the fourth quarter. Operating cash flow for the period was unchanged.
  • Litigation: A securities class action was filed February 23, 2011 concerning the 2010 restatement. The filing also describes patent claims involving Acoustic Technologies and Transdata, and a patent notice from Dialight. The company disputed or intended to defend the claims; it said an adverse outcome could affect results in the period recognized. No material pending legal proceedings were reported under the filing’s Item 3 disclosure.
  • Principal risks: Utility spending and long, uncertain procurement cycles; customer order delays or cancellations; dependence on smart-grid adoption and regulation; customer concentration; product performance, warranty and indemnity exposure; competition and pricing pressure; foreign exchange and international operating risks; supply constraints; and debt covenant, refinancing and interest-rate risks. The filing also notes potential regulatory changes affecting radio spectrum used by products.
  • Other items: The company spent $140.2 million on product development in 2010. Goodwill testing resulted in no impairment charge, although International reporting-unit fair-value headroom was relatively limited in one unit. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective at year-end. The company paid no cash dividends and said it did not expect to do so in the foreseeable future.

Important facts for investors to verify

  1. Whether smart-meter deployment growth and backlog convert into revenue on schedule, and whether North America margins improve as newer product generations scale.
  2. The amount and timing of any 2011 convertible-note repurchase, and the resulting impact on cash, taxes, revolver availability and debt covenants.
  3. The effects and resolution of the 2010 revenue restatement and related securities class action, including any subsequent developments in the patent matters.
  4. Whether elevated customer concentration and warranty accruals—especially the Swedish arbitration charge—lead to further volatility in revenue or margins.
  5. Whether the International segment sustains revenue and margin performance amid foreign-exchange, demand and material-cost pressures.