Itron, Inc. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011. The filing also reports fourth-quarter results; this is an annual report, not a standalone Q4 filing. Itron provides metering systems, software, and services to electric, natural-gas, and water utilities worldwide.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $2.434 billion | $2.259 billion |
| Gross profit / margin | $743.0 million / 30.5% | $698.2 million / 30.9% |
| Operating income (loss) | $(459.2) million | $184.2 million |
| Net income (loss) | $(510.2) million | $104.8 million |
| Diluted EPS | $(12.56) | $2.56 |
| Cash from operating activities | $252.4 million | $254.6 million |
| Capital expenditures | $60.1 million | $62.8 million |
| Cash and cash equivalents, year-end | $133.1 million | $169.5 million |
| Total debt, year-end | $452.5 million | $610.9 million |
| Working capital, year-end | $329.6 million | $178.5 million |
Revenue rose 8%; Itron International revenue increased 15%, while North America increased 1%. Gross margin fell 0.4 percentage points, mainly due to higher North American warranty costs. Operating cash flow was broadly flat. The reported net loss was dominated by a $584.8 million goodwill impairment; restructuring expense was $68.1 million.
In Q4 2011, revenue was $642.5 million, gross profit was $191.6 million, net loss was $54.6 million, and diluted loss per share was $1.35. Q4 2010 revenue was $620.7 million and net income was $26.6 million.
Liquidity, debt, and capital allocation
- At year-end, Itron had $133.1 million cash and $295.5 million of additional borrowing capacity under its revolving credit facility, after outstanding borrowings and letters of credit.
- Management stated that existing liquidity sources should fund operations and obligations for the next 12 months and into the foreseeable future, while noting this is not assured.
- The company repaid net debt of $178.1 million during 2011 and replaced its prior facility with an $800 million senior secured credit facility maturing in August 2016. All borrowings were at variable rates at year-end; the reported rate was 1.55%. The company was in compliance with covenants.
- Itron repurchased $29.4 million of stock in 2011 under a new authorization of up to $100 million through October 23, 2012. It did not pay cash dividends.
Material changes, outlook, and risks
- Goodwill impairment: A share-price decline prompted an impairment test in September. Itron recorded $584.8 million against two Itron International reporting units, electricity and water. The charge was not tax-deductible. Management noted that further deterioration in demand, economies, or market capitalization could put remaining goodwill at risk.
- Restructuring: The company plans to close or sell six facilities, reduce operations at other sites, and reduce its workforce by about 7.5%. Expected total pretax charges were approximately $75 million to $85 million; $68.1 million had been recorded in 2011. Management expected annualized savings of about $15 million in 2012 and $30 million by the end of 2013. Implementation may be delayed by labor rules or facility-sale timing.
- Warranty and product issues: North American warranty charges rose by $22.7 million for three unrelated matters, including a supplier component and a batch of C&I meters. Total warranty expense was $49.9 million, up from $38.6 million in 2010. Contract penalties, product failures, and additional warranty claims remain risks.
- Demand and execution: Utility spending, regulation, customer budgets, long sales cycles, and cancellation or rescheduling of large contracts can make results volatile. Total backlog fell to $1.296 billion from $1.620 billion; twelve-month backlog fell to $766 million from $913 million. Backlog does not capture significant book-and-ship business.
- Other exposures: Risks include competition and pricing pressure, foreign exchange, variable interest rates, international operations, supply constraints, spectrum regulation, tax uncertainty, litigation, and systems implementation. The filing identifies patent suits and securities-related and derivative actions; recorded legal contingency liabilities were not material, though some adverse outcomes could materially affect results in the period recognized.
- Organization and subsequent event: The company planned to report Energy and Water segments beginning in Q1 2012, after completing the transition from geographic reporting. In February 2012 it signed an agreement to acquire SmartSynch for approximately $100 million in cash, with closing expected in Q2 2012.
Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at December 31, 2011.
Most important facts for investors to verify
- Whether the two impaired international businesses meet future operating and cash-flow assumptions, and whether further goodwill impairment is needed.
- Actual restructuring cash costs, timing of facility closures and workforce reductions, and realization of the projected savings.
- Warranty claim developments, particularly for the three North American matters, and adequacy of the year-end warranty accrual.
- Backlog conversion, cancellations or delays, and the pace of utility smart-meter spending.
- Liquidity, covenant headroom, and interest-cost sensitivity under the variable-rate debt structure.
- Completion and purchase economics of the proposed SmartSynch acquisition, including integration risks.