Itron, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Itron supplies products and services to global energy and water utilities. The company reported under Energy and Water segments following a reorganization; prior-period segment figures were recast.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $571.6 million | $563.7 million | +1% |
| Gross profit / margin | $183.1 million / 32.0% | $185.0 million / 32.8% | Profit -1%; margin -0.8 pts |
| Operating income / margin | $39.6 million / 6.9% | $50.1 million / 8.9% | -21% |
| Net income attributable to Itron | $25.4 million | $27.1 million | -7% |
| Diluted EPS | $0.63 | $0.66 | -5% |
| Cash from operations | $54.0 million | $36.0 million | +50% |
| Capital expenditures | $12.0 million | $11.3 million | — |
Revenue growth was about 3% excluding an unfavorable $13 million foreign-exchange translation impact. Operating expenses increased 6% to $143.5 million, including higher sales and product-development spending, $2.0 million in SmartSynch acquisition costs, and $2.1 million in ERP planning and training costs. Lower interest expense—$2.4 million versus $12.1 million in the income statement—partly offset lower operating income. Q1 2011 gross margin benefited from an $8.6 million insurance recovery related to warranty claims.
Segments, demand and operating trends
- Energy: Revenue $437.7 million (+1%); gross margin 30.7% versus 31.9%; operating income $38.2 million versus $43.2 million. Electricity growth was partly offset by lower gas revenue.
- Water: Revenue $133.9 million (+2%; +5% excluding currency effects); gross margin 36.2% versus 35.9%; operating income $15.9 million versus $16.9 million.
- Total backlog was $1.221 billion, including $760 million expected to be recognized over the next 12 months. Bookings were $488 million, compared with $681 million a year earlier; the prior-year quarter included a $268 million BC Hydro OpenWay contract.
- Shipments increased to 7.13 million meters from 6.76 million; advanced and smart meters rose to 2.25 million from 1.89 million.
- BC Hydro and Power Authority represented 11% of company revenue. The 10 largest customers represented 33% of revenue, versus 32% a year earlier.
Cash, debt and liquidity
- Cash and equivalents were $154.4 million at March 31, up from $133.1 million at December 31, 2011. Operating cash flow was $54.0 million; investing cash use was $12.6 million and financing cash use was $23.2 million.
- Total debt was $438.8 million, down from $452.5 million at year-end; $15.0 million was current and $423.8 million long-term. Cash less debt was approximately $284.3 million.
- Working capital was $391.4 million, compared with $329.6 million at year-end. The credit facility had $303.2 million available for additional borrowings and letters of credit at quarter-end. On April 2, the revolving commitment increased from $500 million to $660 million.
- All borrowings were variable-rate; the reported rate at March 31 was 1.50%. Itron said a one-percentage-point increase in average 2012 rates was not expected to materially affect results.
Outlook, notable items and risks
- No specific company-wide revenue or earnings guidance is provided in the filing. Management said existing liquidity should fund operations and obligations for the next 12 months and beyond, while noting there are no assurances.
- Manufacturing restructuring is expected to cost about $85.5 million in total, with $16.6 million remaining to be recognized at March 31. Management expects about $15 million of savings in the second half of 2012 and approximately $30 million annualized by the end of 2013; completion could slip beyond 2013 due to labor requirements or real-estate conditions.
- On May 1, 2012, Itron completed its $100 million cash acquisition of SmartSynch, a cellular-network smart-grid solutions provider. Purchase accounting details were unavailable when the filing was prepared.
- Goodwill was $651.0 million. Following a $584.8 million goodwill impairment recorded in 2011, management reported that each new reporting unit’s fair value exceeded carrying value by at least 35% at the January 2012 reorganization date; further deterioration in demand, economies or market capitalization could trigger impairment.
- Warranty expense was $8.0 million versus $2.3 million a year earlier; the prior-year period included the $8.6 million insurance recovery. Warranty accruals and future repair costs remain estimates that could affect margins.
- Risks include foreign-exchange exposure (56% of revenue was denominated in non-U.S. dollar functional currencies), customer order delays or cancellations, competition, execution of restructuring and acquisition plans, and uncertain warranty, tax and litigation outcomes. The filing discusses patent litigation and securities-related cases; recorded legal liabilities were not material, but an unfavorable outcome could materially affect results in the period recognized.
- Management reported effective disclosure controls. It implemented Oracle financial consolidation and reporting applications during the quarter and was updating related internal-control documentation and processes.
Key facts for investors to verify
- Whether backlog converts to revenue as expected, particularly given lower bookings and customer rescheduling or cancellation rights.
- Whether margins recover as prior-year warranty benefits roll off and investment and restructuring costs continue.
- Progress and realized savings from the $85.5 million restructuring, including timing of remaining cash payments.
- SmartSynch’s final purchase accounting, integration costs and contribution to results after the May 1 closing.
- Liquidity and covenant capacity after the acquisition, share repurchases and any further borrowing; verify exposure to variable rates and foreign exchange.
- Developments in warranty claims, goodwill valuation, uncertain tax positions and the disclosed litigation matters.