Itron, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited results; comparisons are with the corresponding 2011 periods. Itron supplies products and services to utility customers in global energy and water markets and reports Energy and Water segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $504.1 million | $615.6 million | $1,654.8 million | $1,791.6 million |
| Gross profit / margin | $171.8 million / 34.1% | $177.0 million / 28.8% | $551.6 million / 33.3% | $553.9 million / 30.9% |
| Operating income (loss) | $46.0 million | $(497.3) million | $131.7 million | $(399.1) million |
| Net income (loss) attributable to Itron | $35.3 million | $(517.1) million | $92.3 million | $(455.5) million |
| Diluted EPS | $0.89 | $(12.70) | $2.31 | $(11.21) |
Revenue declined 18% in Q3 and 8% year to date. Foreign-exchange translation reduced revenue by approximately $35 million and $83 million, respectively. Excluding currency effects, declines reflected the scheduled wind-down of five large North American OpenWay projects, lower North American gas-module shipments, and weaker Energy shipments in Asia-Pacific; stronger Water sales partly offset these factors. Gross margin improved, principally because of lower warranty costs, with additional year-to-date benefit from product mix and lower manufacturing costs.
The 2011 comparisons include a $540.4 million goodwill impairment charge, explaining much of the swing from prior-year operating and net losses to 2012 profitability. Q3 2012 operating margin was approximately 9%; net income attributable to Itron was approximately 7% of revenue. The nine-month income tax provision was $26.7 million, or 22.2% of pretax income.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $137.0 million, versus $153.8 million a year earlier. Capital expenditures were $34.3 million; business acquisitions used $79.9 million, mainly for SmartSynch.
- Cash declined to $91.5 million at September 30 from $133.1 million at year-end 2011. Working capital was $353.1 million, compared with $329.6 million at year-end.
- Total debt was $421.3 million, down from $452.5 million at December 31, 2011; cash less debt therefore implies net debt of about $329.8 million. The reported credit-facility interest rate was 1.47%, and the company was in compliance with its covenants.
- The $660 million revolving facility had $140 million drawn and $49.4 million committed to letters of credit, leaving $470.6 million available. Management said existing liquidity should fund operations and obligations for the next 12 months and beyond, while noting this was not assured.
- Cash includes approximately $16.2 million held in joint ventures, where minority partners control their proportional share. The company also cited potential limitations and tax costs associated with repatriating foreign cash.
Material changes, outlook and notable items
- Energy revenue fell 22% in Q3 and 9% year to date; Water revenue fell 4% and 2%, respectively. Excluding currency effects, Water revenue rose 5% in both periods. One customer accounted for 10% of nine-month company revenue.
- Total backlog was $1.079 billion and estimated 12-month backlog was $592 million at quarter-end, both lower than at December 31, 2011 ($1.296 billion and $766 million). Q3 bookings were $459 million. Management cautioned backlog can fluctuate, and contracts may be rescheduled or cancelled.
- SmartSynch was acquired May 1 for a preliminary net cash purchase price of $77.7 million. It contributed $11.9 million revenue and a $6.6 million net loss through September 30. Purchase-price allocations remained preliminary; $19.4 million of acquired in-process R&D projects were expected to be completed within 12 months.
- The manufacturing restructuring was expected to cost $81.1 million in total, with $9.6 million remaining to be recognized at quarter-end. Management expected approximately $15 million of annualized savings in 2012 and $30 million by the end of 2013; completion could be delayed by labor requirements or real-estate conditions.
- The board extended the $100 million share-repurchase program through February 15, 2013. By September 30, $70.1 million had been repurchased, including $40.7 million during the first nine months.
- Q3 restructuring expense included a $5.4 million noncash reduction to correct an overstatement of goodwill allocated to a disposal group; management judged the error immaterial to the cited prior and current periods. The company also recognized $675,000 of goodwill-related restructuring expense on a European business sale.
- Legal exposures included patent-infringement claims for which Itron agreed to defend or indemnify customers, and a shareholder derivative action relating to the 2010 financial restatement. The federal securities class action was dismissed with prejudice in October 2012. Recorded legal contingency liabilities were not material, but the filing noted an unfavorable outcome in certain matters could materially affect results for the period.
- Management identified demand and order timing, customer acceptance of new products, warranty and litigation estimates, competition, foreign exchange and interest rates, international operations, and access to capital as risks. No new risk-factor changes were reported for the quarter. Disclosure controls were judged effective; ERP implementation was changing internal control processes, which management said it would continue to monitor.
Key facts for investors to verify
- Whether the decline in OpenWay project shipments and backlog is offset by future orders, and how concentrated Energy revenue remains among major customers.
- Whether gross-margin gains persist as the favorable warranty comparisons and reserve adjustments normalize.
- Actual restructuring cash costs, completion timing, and realization of the projected $30 million annualized savings.
- Final SmartSynch purchase-price allocation, integration performance, and completion and commercialization of acquired R&D.
- Cash availability after considering joint-venture restrictions, foreign repatriation taxes, debt covenants, and outstanding letters of credit.
- Developments in the patent and derivative litigation, and the company’s scheduled annual goodwill impairment review.