Itron, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise noted. Itron supplies metering products, software, and services to energy and water utilities worldwide.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $447.5 million | $571.6 million | Down 22% |
| Gross profit / margin | $140.1 million / 31.3% | $183.1 million / 32.0% | Down 23%; margin down 0.7 points |
| Operating income / margin | $2.3 million / 0.5% | $39.6 million / 6.9% | Substantially lower |
| Net income attributable to Itron | $2.6 million | $25.4 million | Down 90% |
| Diluted EPS | $0.06 | $0.63 | Down $0.57 |
| Operating cash flow | $0.6 million | $54.0 million | Down $53.4 million |
| Capital expenditures | $14.8 million | $12.0 million | Up $2.7 million |
Q1 2013 included a $3.2 million income tax benefit, including a $4.0 million discrete benefit from the retroactive research and experimentation credit. Foreign-currency translation reduced revenue by about $5 million. Other comprehensive loss was $31.8 million, primarily from foreign-currency translation; comprehensive loss attributable to Itron was $29.2 million.
Liquidity, debt, and cash
- Cash and cash equivalents were $101.6 million at March 31, down from $136.4 million at year-end. Working capital was $335.5 million, versus $353.6 million at December 31.
- Total debt was $398.8 million: $273.8 million term loan and $125.0 million revolver. Debt declined from $417.5 million at year-end. The credit facility rate was 1.46%; $487.2 million remained available after borrowings and letters of credit. Itron reported compliance with debt covenants.
- Cash declined by $34.9 million during the quarter. Investing used $15.6 million and financing used $17.2 million, including $18.8 million of debt repayments.
- Management said existing liquidity sources should fund operations and obligations for the next 12 months and beyond, while noting this is not assured. Approximately $34.1 million of cash at foreign subsidiaries may be repatriated, subject to tax considerations; about $18.5 million of consolidated cash was held in joint ventures and may be less accessible.
Material changes and operating trends
- Energy revenue fell 29% to $312.7 million; electricity revenue declined 38% and gas revenue 11%. The principal driver was scheduled declines following substantial completion of four of the five largest OpenWay projects in 2012, alongside lower North American gas-module shipments and lower Energy shipments in EMEA.
- Water revenue increased 1% to $134.9 million, but gross margin fell to 33.0% from 36.2%, reflecting more lower-margin professional services and unfavorable product mix.
- Total backlog was $1.029 billion, including $565 million expected to be recognized within 12 months, compared with $1.221 billion and $760 million, respectively, at March 31, 2012. Bookings were $447 million versus $488 million a year earlier.
- Meter shipments declined to 6.07 million from 7.13 million; standalone advanced and smart communication module shipments declined to 1.34 million from 1.59 million.
- Cash from operations was sharply lower, reflecting reduced earnings adjusted for noncash items and working-capital outflows, particularly accounts payable. Inventory rose to $182.5 million from $170.7 million at year-end.
Outlook, risks, and unusual items
- The filing provides no specific revenue or EPS guidance. Management expected restructuring savings to be fully realized by year-end 2013 and into 2014. The manufacturing restructuring was expected to be substantially complete by year-end 2013, but facility-sale conditions or labor and employment requirements could delay completion. Expected total restructuring costs were $75.5 million, with $4.7 million remaining to be recognized.
- The Board authorized a $50 million share repurchase program through March 7, 2014. Itron repurchased $0.2 million during Q1 and, after quarter-end, bought 65,339 shares for about $2.8 million.
- Interest-rate swaps fix the LIBOR component on $200 million of debt at 1.00% from July 31, 2013 through August 8, 2016; they do not fix the credit-facility margin. Itron also uses foreign-exchange forwards and does not use derivatives for speculation.
- Risks include customer demand and order cancellations or rescheduling, product acceptance and warranty costs, competition, foreign exchange and interest rates, international operations, access to capital, and acquisitions. Itron disclosed patent litigation involving Transdata and EON; management did not expect a material adverse effect on business or financial condition, but noted an unfavorable outcome could materially affect results in the period resolved.
- Goodwill was $683.2 million, down from $701.0 million at year-end, primarily due to currency movements. SmartSynch in-process research and development was completed and reclassified to technology intangibles for seven-year amortization. Management reported no material change in risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether revenue and bookings stabilize as large OpenWay projects wind down, and whether backlog converts to revenue on schedule.
- Whether operating cash flow recovers and working-capital needs, especially inventory and payables, remain manageable.
- Whether restructuring is completed on time and within the remaining estimated costs, and whether expected savings are realized.
- Developments in the Transdata and EON patent cases, warranty exposure, and uncertain tax positions; unrecognized tax benefits were $27.0 million.
- Foreign-exchange effects on reported revenue, cash, goodwill, and comprehensive income, as well as the accessibility and tax cost of foreign and joint-venture cash.