Itron, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. Itron provides metering products, software, and services to energy and water utilities. Its reportable segments are Energy and Water.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $495.5 million | $504.1 million | $1,425.2 million | $1,654.8 million |
| Gross profit | $150.1 million | $171.8 million | $449.8 million | $551.6 million |
| Gross margin | 30.3% | 34.1% | 31.6% | 33.3% |
| Operating income (loss) | $(6.5) million | $46.0 million | $13.8 million | $131.7 million |
| Net income (loss) attributable to Itron | $(7.3) million | $35.3 million | $7.6 million | $92.3 million |
| Diluted EPS | $(0.19) | $0.89 | $0.19 | $2.31 |
- Cash flow: For the first nine months, operating cash flow was $65.9 million, versus $137.0 million a year earlier. Investing activities used $41.7 million and financing activities used $36.1 million. Cash decreased $14.4 million to $122.0 million.
- Liquidity: Working capital was $349.7 million, compared with $353.6 million at December 31, 2012. The company reported $474.9 million available under its main revolving credit facility after borrowings and letters of credit.
- Debt: Total debt was $399.4 million at September 30, including $264.4 million under the term loan and $135.0 million drawn on the revolver; debt was $417.5 million at year-end 2012. The facility rate was 1.68%, and Itron reported compliance with its covenants.
- Backlog: Total backlog was $1.055 billion, including $582 million expected to convert to revenue over the following 12 months.
Material changes and operating drivers
- Q3 revenue declined 2% year over year; nine-month revenue declined 14%. The principal factor was lower Energy revenue as several major North American OpenWay projects approached completion in 2012. The 2012 nine-month comparison also included the SmartSynch acquisition.
- Energy revenue fell 5% in Q3 and 19% year to date. Water revenue increased 7% in Q3 and 2% year to date. Energy operating results were a $9.3 million loss in Q3, compared with $31.0 million income a year earlier; Water operating income was $17.2 million, down from $22.3 million.
- Management attributed lower margins to reduced volume and less favorable product mix, increased lower-margin professional services in Water, and increased estimated costs on specific components of a North American OpenWay project. The project charge reduced Q3 Energy gross margin by approximately 350 basis points.
- Operating expenses included $28.4 million of restructuring expense in Q3, versus a $5.1 million restructuring recovery in Q3 2012. Nine-month restructuring expense was $32.8 million, versus $3.5 million in 2012.
- Meter shipments were lower: total meter shipments were 4.58 million in Q3 versus 5.81 million, and 16.72 million for nine months versus 19.72 million.
Outlook, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided in the filing. Management said existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, while noting that this is not assured. Backlog and bookings can fluctuate, and customers may reschedule or cancel orders.
- Restructuring: A new program approved in September targets an approximately 9% workforce reduction and closure or consolidation of several facilities. Expected costs were $29.1 million; $28.4 million had been recognized by September 30, with completion expected by June 30, 2014. Labor and employment requirements may delay implementation. The prior 2011 restructuring was substantially complete.
- Contract and acquisition items: The OpenWay cost estimate was revised such that remaining project components are expected to cost more than their associated revenue. Separately, an acquired SmartSynch contract was found to be loss-making over its term, with an expected $2.4 million loss; the company recorded a liability and reduced a related $1.5 million intangible asset to zero, with adjustments to goodwill. Itron said these acquisition-accounting adjustments were not material to the periods discussed.
- Legal and warranty exposure: Itron is defending customer-indemnified TransData patent litigation and employment claims involving former employees in Brazil. On October 31, 2013, it received a customer claim alleging defects in meters sold since 2000; the potential loss could not yet be estimated. Management did not expect these matters to materially affect the business or financial condition, but said an unfavorable outcome could materially affect results in the period recognized. Warranty expense rose to $11.6 million for the first nine months, from $8.1 million; the 2012 comparison included a $5.0 million accrual reduction.
- Other exposures: More than half of revenue and operating expenses are denominated in foreign currencies, exposing results to exchange-rate movements. Itron also identified interest-rate, customer-demand, competition, product acceptance, international business, warranty, litigation, and tax risks. Unrecognized tax benefits were $27.6 million; approximately $3.0 million could decrease within 12 months due to statute expirations.
- Share repurchases: Under a $50 million authorization, Itron repurchased 559,000 shares for $23.6 million through September 30, leaving $26.4 million authorized. No shares were purchased after quarter-end through the filing’s stated date.
Most important facts for investors to verify
- Whether the revised cost estimates and delivery schedule for the North American OpenWay project change further, and how the contract affects future margins and cash flow.
- Whether the restructuring achieves planned savings, and whether implementation costs or timing differ from management’s estimates.
- Whether Energy demand and bookings stabilize as major OpenWay projects wind down, and whether Water growth can offset that decline.
- How operating cash flow, working capital, and debt evolve, including compliance with credit-facility covenants.
- Updates on the October 31 customer meter-defect claim, TransData litigation, and Brazil employment cases, including any estimable loss ranges or accruals.
- Whether warranty claims, foreign-exchange movements, or tax settlements materially affect subsequent results.