Itron, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2011; comparative Q1 2010 figures are restated. Itron supplies metering products, software and services to energy and water utilities worldwide. In March 2011, it announced a reorganization into Energy and Water segments; 2011 reporting remains on the prior North America and International segments, with the new segment reporting expected in Q1 2012.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $563.7 million | $497.6 million |
| Gross profit / margin | $184.1 million / 32.7% | $157.1 million / 31.6% |
| Operating income | $50.1 million | $31.6 million |
| Net income | $27.1 million | $25.3 million |
| Diluted EPS | $0.66 | $0.62 |
| Cash from operations | $36.0 million | $65.8 million |
- Revenue rose 13%; gross profit increased 17%. Operating income improved as both geographic segments grew, and total gross margin expanded 110 basis points.
- Operating expenses were $134.0 million, up 7%, primarily reflecting higher product development and marketing costs. Interest expense was $12.1 million versus $14.9 million.
- Cash and equivalents were $133.4 million at March 31, down from $169.5 million at year-end. Working capital was $177.9 million. Operating cash flow fell $29.8 million year over year, which management attributed mainly to bonus/profit-sharing payments and inventory growth.
- Investing cash outflow was $25.8 million, including $14.8 million for the Asais acquisition and $11.3 million of capital expenditures. Financing cash outflow was $52.4 million, including $52.9 million of debt repayments.
- Total debt was $573.2 million, down from $610.9 million at December 31, 2010. The revolver had no borrowings; $59.7 million of its $315 million capacity supported letters of credit, leaving $255.3 million available. Itron reported compliance with debt covenants.
- Current liabilities include $231.7 million of current debt, including $223.6 million face value of convertible notes classified as current because of 2011 put, call and conversion options.
Changes, outlook, risks and unusual items
- Meter and communication-module volumes increased 7%. Advanced and smart meters and standalone modules totaled 3.32 million units versus 2.67 million; OpenWay volumes in North America rose 17%. Bookings were $681 million; backlog was $1.747 billion, including $989 million expected to convert to revenue over 12 months.
- Management said existing liquidity should fund operations and obligations for the next 12 months and beyond, while cautioning that there are no assurances. No specific earnings or revenue guidance is provided in the supplied filing text.
- The convertible-note holders may require repurchase on August 1, 2011 at face value plus accrued interest. Itron anticipated that some or all holders might exercise the put if the stock remained below the $65.16 conversion price, and said it believed liquidity was sufficient to meet a full $223.6 million repurchase. A full repurchase could increase 2011 tax payments by $5–$10 million.
- Q1 2011 tax provision was $9.6 million, or 26% of pretax income, versus a $9.0 million tax benefit in Q1 2010. The prior-year benefit included discrete clean-energy tax-credit and foreign tax-reserve items, among other factors.
- Q1 2011 International warranty results included an $8.6 million recovery tied to Swedish product claims and a $7.7 million charge for certain Brazilian products. Foreign-exchange losses, net, were $1.2 million versus a $0.2 million gain in Q1 2010.
- 2010 quarterly results were restated primarily to defer revenue incorrectly recognized under an extended-warranty provision. For the first nine months of 2010, the correction reduced revenue by $6.1 million and diluted EPS by $0.11. A securities class action and a shareholder derivative action relating to the restatement were pending; Itron disputed the claims. The filing also describes patent disputes, including an appealed dismissal of one action and an indemnity obligation to a customer in another. Recorded legal-contingency liabilities were not material.
- Key risks cited include customer demand, order rescheduling or cancellation, supplier dependence, competition, warranty and litigation estimates, product acceptance, regulation, foreign-exchange and interest-rate movements, and international business conditions.
Important facts for investors to verify
- Whether convertible-note holders exercise the August 2011 put, and the funding and tax consequences if repurchased.
- Whether bookings convert into revenue as expected; backlog may be rescheduled or canceled and is not a complete measure of future business.
- Whether lower operating cash flow and higher inventory levels reverse in subsequent quarters.
- Whether warranty experience, particularly in Brazil, changes estimated warranty liabilities or margins, and how pending litigation develops.
- How the 2011 Energy and Water reorganization affects operating performance and the transition to new segment reporting.
- How the restatement and related control or litigation matters affect investor assessments; management reported disclosure controls effective at March 31, 2011 and no material quarterly change in internal control over financial reporting.