Itron, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. Itron supplies metering, software, and services to electricity, gas, and water utilities worldwide.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $496.5 million | $495.5 million | $1,460.6 million | $1,425.2 million |
| Gross profit / margin | $150.8 million / 30.4% | $150.1 million / 30.3% | $468.3 million / 32.1% | $449.8 million / 31.6% |
| Operating income (loss) | $16.5 million | $(6.5) million | $52.9 million | $13.8 million |
| Net income (loss) attributable to Itron | $7.3 million | $(7.3) million | $26.3 million | $7.6 million |
| Diluted EPS | $0.19 | $(0.19) | $0.67 | $0.19 |
For the nine months, operating cash flow was $116.5 million, compared with $65.9 million in 2013. Investing cash outflow was $32.3 million and financing cash outflow was $79.4 million. Cash declined $2.3 million to $122.5 million from year-end 2013.
At September 30, 2014, total debt was $310.0 million, down from $378.8 million at December 31, 2013. Working capital was $319.9 million. The company reported $540.9 million available under its main credit facility after borrowings and letters of credit, and compliance with debt covenants. The facility rate was 1.66% at quarter-end.
Comprehensive loss attributable to Itron was $41.6 million in Q3 and $33.7 million for the nine months, primarily reflecting foreign-currency translation losses. Nine-month revenue growth was led by Gas and Water, offset in part by Electricity declines. Segment revenue changes for the nine months were Electricity down 6%, Gas up 8%, and Water up 10%.
Material changes and notable items
- Q3 revenue was essentially flat year over year; nine-month revenue rose 2%. Nine-month net income attributable to Itron increased to $26.3 million from $7.6 million.
- A revised cost-to-complete estimate on a North American OpenWay project reduced Q3 gross profit by $11.4 million and EPS by $0.18. A similar $13.6 million charge affected Q3 2013.
- Operating expenses fell year over year, principally because of lower restructuring charges. Nine-month restructuring expense was a $2.2 million credit, compared with $32.8 million of expense in 2013.
- Foreign exchange losses contributed to other expense; the nine-month foreign-exchange loss, net of hedging, was $3.9 million. Foreign-currency translation reduced nine-month OCI by $60.8 million.
- Backlog was $1.345 billion at quarter-end, including $700 million expected to be recognized within 12 months. Management cautions that backlog can fluctuate and is subject to rescheduling or cancellation.
Outlook, risks, and contingencies
On November 4, 2014, after quarter-end, Itron announced a new restructuring of Electricity and related administrative operations. It estimated pre-tax charges of $65–$75 million, with about 90% expected to be cash expenditures, and targeted approximately $40 million of annualized savings by the end of 2016. Most charges were expected in Q4 2014. Consultation and regulatory requirements may affect timing. The filing provides no clear quantified full-year revenue or EPS guidance.
Key disclosed exposures include a SmartSynch-related contract dispute seeking more than $60 million, with trial scheduled for February 2015; a customer claim concerning alleged meter defects for which a potential loss could not yet be estimated; and tax matters. The company reported a French tax assessment of about $9.5 million, which it disputes and has not accrued, and an Italian assessment of about $5 million received after quarter-end. Unrecognized tax benefits were $35.6 million. Management stated it did not expect the tax examinations to materially adversely affect financial condition, results, or liquidity.
Other risks include warranty estimates, contract cost estimates, goodwill impairment, foreign-currency and interest-rate movements, customer demand and order changes, and international operations. The company reported no material change in its previously disclosed risk factors and stated that disclosure controls were effective.
Investor verification priorities
- Track the OpenWay project’s remaining cost exposure and any further contract estimate changes.
- Assess delivery and cash timing of the announced restructuring, including the $65–$75 million charge and expected savings.
- Monitor Electricity segment performance, backlog conversion, customer order changes, and the mix and margins of Gas and Water.
- Review developments in the SmartSynch dispute, meter-defect claim, and French and Italian tax assessments.
- Verify cash generation, debt repayment, covenant compliance, and the availability of borrowing capacity as the credit facility approaches its August 2016 maturity.