Itron, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Itron supplies products and services to energy and water utilities. Comparative 2010 results are restated, primarily for a prior-period extended-warranty revenue recognition correction.
Financial results
Amounts below are in millions, except per-share data. Q3 and nine-month comparisons are to the restated 2010 periods.
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $615.6 | $573.7 | $1,791.6 | $1,638.6 |
| Gross profit | $176.2 | $181.8 | $551.4 | $512.9 |
| Gross margin | 28.6% | 31.7% | 30.8% | 31.3% |
| Operating income (loss) | $(497.3) | $58.9 | $(399.1) | $140.6 |
| Net income (loss) | $(517.1) | $27.6 | $(455.5) | $78.2 |
| Diluted EPS | $(12.70) | $0.68 | $(11.21) | $1.91 |
- Impairment: Q3 operating expenses include a $540.4 million estimated goodwill impairment tied to Itron International’s Electricity and Water reporting units. It was triggered by the sharp decline in Itron’s share price and was not tax-deductible. The final amount was subject to fourth-quarter completion of the impairment test.
- Revenue and segments: Revenue grew 7% in Q3 and 9% for nine months. Itron International revenue rose 23% and 19%, respectively; Itron North America declined 6% in Q3 and was roughly flat for nine months. Foreign-currency translation contributed $28 million to Q3 and $68 million to nine-month revenue growth. Q3 total meter shipments were broadly stable.
- Margins: Q3 gross margin fell 3.1 percentage points, primarily because of North American warranty charges. These included a $12.6 million charge related to a vendor component and $4.7 million for customer-specific corrective actions. International margins improved, partly offsetting the decline.
- Cash flow: Nine-month operating cash flow was $153.8 million, versus $167.1 million. Investing cash outflow was $59.8 million, including $45.8 million of capital expenditures and $14.6 million for an acquisition. Financing cash outflow was $136.1 million. Cash declined to $129.5 million from $169.5 million at year-end 2010.
- Debt and liquidity: Debt was $496.3 million at September 30, compared with $610.9 million at December 31, 2010. Itron replaced its prior facility with an $800 million secured facility, including a $300 million term loan and a $500 million revolver. The revolver had $200 million drawn and $264.1 million available after letters of credit. Working capital was $372.4 million, versus $178.5 million at year-end. The company reported compliance with credit covenants.
- Other costs: Nine-month interest expense was $34.3 million, including debt-fee and swap-related items. The Q3 tax benefit was $6.0 million; the nine-month tax benefit was $15.5 million. The filing attributes the relatively limited tax benefit partly to the nondeductible goodwill impairment.
Material changes and management commentary
- Growth was led by International, including higher advanced metering project activity and electricity prepayment sales. North American Q3 revenue declined amid the timing of OpenWay project completions.
- Backlog was $1.439 billion at September 30, including $901 million expected to be recognized over the next 12 months. Management cautions that backlog is not a complete indicator of future business and that customer contracts may be rescheduled or canceled.
- In August, Itron entered a new credit facility and repaid its prior facility. Holders tendered $184.8 million of convertible notes in August; Itron redeemed the remaining $38.8 million on September 30.
- The 2010 comparative results were restated for deferred revenue on one contract because of an extended-warranty provision. For the first nine months of 2010, the restatement reduced revenue by $6.1 million and diluted EPS by $0.11. Securities and shareholder derivative lawsuits related to the restatement are disclosed; the company says it intends to defend them.
Outlook, risks and unusual items
- No specific revenue or EPS guidance is provided. Management said existing liquidity was expected to fund operations and obligations for the next 12 months and beyond, while noting that this was not assured.
- On October 26, 2011, Itron announced plans to close or sell six manufacturing facilities, reduce operations at other sites, and reduce its workforce by about 7.5%. It estimated pretax restructuring charges of $65–$75 million over 15–18 months, including about $45 million expected in Q4 2011 and about $15 million in 2012. Management forecast approximately $15 million of savings in 2012 and about $30 million in annualized savings by the end of 2013. Labor and employment requirements could delay implementation.
- On October 24, the board authorized up to $100 million of share repurchases over 12 months.
- Key risks include variable-rate debt—all borrowings were variable-rate at quarter-end—foreign-exchange exposure, customer demand and order timing, key suppliers, warranty claims, litigation, and the possibility of further goodwill impairment. The company reported that a one-percentage-point increase in market interest rates was not expected to materially affect 2011 results.
- Warranty accruals rose to $79.0 million from $51.3 million at year-end. The filing notes that future claims and estimation changes could adversely affect gross margin.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Final goodwill impairment amount and assumptions for the affected International reporting units, particularly the remaining 7% fair-value cushion disclosed for International Gas.
- Whether North American warranty costs persist, and the adequacy of the warranty reserve and vendor recovery prospects.
- Execution, timing, total cash cost, and realized savings from the manufacturing restructuring.
- Backlog conversion, customer project timing or cancellations, and the contribution of foreign-exchange movements to reported growth.
- Liquidity and covenant headroom as debt remains variable-rate, alongside the planned share repurchases and restructuring cash outlays.
- Developments in the restatement-related lawsuits and the patent litigation disclosed in the filing.