Itron, Inc. — Q2 2013 Form 10-Q
Business context and period. Itron supplies metering products, software and services to energy and water utilities worldwide. This unaudited report covers the three and six months ended June 30, 2013, compared with the same 2012 periods; balance-sheet comparisons are to December 31, 2012.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $482.2m | $579.1m | $929.7m | $1,150.8m |
| Gross profit / margin | $159.6m / 33.1% | $196.7m / 34.0% | $299.7m / 32.2% | $379.9m / 33.0% |
| Operating income | $18.0m | $46.1m | $20.3m | $85.7m |
| Net income attributable to Itron | $12.4m | $31.6m | $15.0m | $57.0m |
| Diluted EPS | $0.31 | $0.79 | $0.38 | $1.42 |
For the six months, operating cash flow was $19.0m versus $92.4m; capital expenditures were $28.9m, and cash used in investing activities was $29.5m versus $99.2m, largely reflecting lower acquisition spending. Cash declined $32.7m to $103.7m.
At June 30, total debt was $410.0m ($22.5m current and $387.5m long-term), versus $417.5m at year-end. Cash less total debt was approximately $306.3m net debt. Working capital was $355.1m. The company had $473.0m available under its secured revolver after outstanding letters of credit, and reported compliance with credit-facility covenants.
Material changes and operating drivers
- Revenue fell 17% in Q2 and 19% for the first half, primarily because of lower Energy revenue as major North American OpenWay projects moved toward completion, alongside weaker gas sales. Water revenue was nearly flat.
- Energy revenue declined 21% in Q2 and 25% year to date; Water revenue declined 1% in Q2 and was essentially flat year to date. Meter shipments also fell: total meters were 6.07m in Q2 versus 6.78m, and 12.14m for the half versus 13.91m.
- Lower volumes and higher warranty costs weighed on gross margin. The prior-year comparison included a $4.3m warranty-accrual reduction; manufacturing efficiencies partly offset the pressure. Water margin was affected by increased lower-margin professional services and unfavorable product mix.
- Operating expenses decreased, but operating income dropped substantially as revenue and gross profit contracted. Energy operating expenses included higher legal reserves, up $4.6m in Q2 and $6.6m for the half year over comparable 2012 periods.
- Q2 bookings were $515m; total backlog was $1.058bn and estimated 12-month backlog was $558m, compared with $1.122bn and $637m, respectively, at June 30, 2012. Backlog is subject to rescheduling and cancellation and excludes significant book-and-ship business.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management said existing liquidity sources should be sufficient for operations and obligations over the next 12 months and into the foreseeable future, while noting this is not assured.
- The company expects approximately $300,000 of state taxes and $11.6m of local and foreign taxes in 2013, net of refunds, and no U.S. federal tax payments. A $4.0m benefit from the retroactive extension of the 2012 research and experimentation credit contributed to the first-half 2013 tax benefit.
- The 2011 manufacturing restructuring was substantially complete; no significant further costs were expected. First-half 2013 restructuring expense was $4.4m, with $17.6m of related liabilities remaining at June 30.
- In finalizing the SmartSynch acquisition allocation, Itron identified an acquired long-term contract expected to incur a $2.4m loss and reduced a related $1.5m customer-relationship intangible to zero, with corresponding goodwill adjustments. Management concluded the adjustments were not material and did not revise comparative periods.
- Legal exposures include patent litigation involving Transdata and EON and approximately 270 former employees’ claims against Itron Brazil. Management said recorded legal liabilities were not material; outcomes and potential losses in these matters remain uncertain. The Transdata court adopted the plaintiff’s proposed construction of one claim term; further proceedings were pending.
- Key risks include customer demand and project timing, order cancellations, warranty claims, litigation, competition, foreign exchange and interest-rate movements, international operations, and goodwill impairment. Over half of revenue and operating expenses are denominated in foreign currencies; derivatives are used for hedging, not speculation.
- Management reported effective disclosure controls at June 30, 2013, with no material change in internal control over financial reporting during the quarter. The global ERP and IT infrastructure upgrade was ongoing.
Important facts for investors to verify
- Whether Energy revenue stabilizes as large OpenWay projects wind down, and whether bookings convert into revenue without customer deferrals or cancellations.
- Whether operating cash flow recovers from the first-half decline, particularly as inventory increased to $190.4m from $170.7m at year-end.
- Warranty accrual adequacy and future claim costs, given the prior-year $4.3m reserve release and higher 2013 warranty expense.
- Developments and potential financial exposure in the Transdata, EON and Brazil employment matters.
- Debt repayment, revolver availability, foreign-cash access and repurchase activity. Itron repurchased $16.1m of shares through June 30 under a $50m program and reported additional purchases after quarter-end.