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ITRI > SEC Filings for ITRI > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for ITRON INC /WA/


3-May-2013

Quarterly Report


ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, the terms "we," "us," "our," "Itron," and the "Company" refer to Itron, Inc.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes included in this report and with our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (SEC) on February 22, 2013.

Documents we provide to the SEC are available free of charge under the Investors section of our website at www.itron.com as soon as practicable after they are filed with or furnished to the SEC. In addition, these documents are available at the SEC's website (http://www.sec.gov) and at the SEC's Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling 1-800-SEC-0330.

Certain Forward-Looking Statements

This document contains forward-looking statements concerning our operations, financial performance, revenues, earnings growth, liquidity, and other items. This document reflects our current plans and expectations and is based on information currently available as of the date of this Quarterly Report on Form 10-Q. When we use the words "expect," "intend," "anticipate," "believe," "plan," "project," "estimate," "future," "objective," "may," "will," "will continue," and similar expressions, they are intended to identify forward-looking statements. Forward-looking statements rely on a number of assumptions and estimates. These assumptions and estimates could be inaccurate and cause our actual results to vary materially from expected results. Risks and uncertainties include 1) the rate and timing of customer demand for our products, 2) rescheduling or cancellations of current customer orders and commitments, 3) changes in estimated liabilities for product warranties and/or litigation, 4) our dependence on customers' acceptance of new products and their performance,
5) competition, 6) changes in domestic and international laws and regulations,
7) changes in foreign currency exchange rates and interest rates, 8) international business risks, 9) our own and our customers' or suppliers' access to and cost of capital, 10) future business combinations, and 11) other factors. You should not solely rely on these forward-looking statements as they are only valid as of the date of this Quarterly Report on Form 10-Q. We do not have any obligation to publicly update or revise any forward-looking statement in this document. For a more complete description of these and other risks, refer to Item 1A: "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which was filed with the SEC on February 22, 2013.

Results of Operations

We are a technology company, offering end-to-end smart metering solutions to electric, natural gas, and water utilities around the world. Our smart metering solutions, meter data management software, and knowledge application solutions bring additional value to a utility's metering and grid systems. Our professional services help our customers project-manage, install, implement, operate, and maintain their systems.

We have two operating segments. The Energy operating segment includes our global electricity and gas products, while the Water operating segment includes our global water and heat products.

On March 27, 2013, we separated the management of our Energy operating segment into Electricity and Gas to allow each business to develop its own go-to-market strategy, prioritize its marketing and product development requirements, and focus on its strategic investments. As a result, our sales, marketing, and delivery function will be managed under three operating segments - Electricity, Gas, and Water. At the same time, product development and operations will be centralized and managed on a global basis. Although certain management positions of the new operating segments have been identified, the transition to the new organizational structure is ongoing, and we are currently assessing the implications to our operational and financial reporting systems.

We have three measures of segment performance: revenue, gross profit (margin), and operating income (margin). Intersegment revenues were minimal. Corporate operating expenses, interest income, interest expense, other income (expense), and income tax provision (benefit) are not allocated to the segments, nor included in the measure of segment profit or loss. In addition, we allocate only certain production assets and intangible assets to our operating segments. We do not manage the performance of the segments on a balance sheet basis.

Overview

Revenues for the three months ended March 31, 2013 were $448 million, compared with $572 million in the same period last year. The decrease in 2013 was the result of significantly lower revenues in the Energy segment, partially offset by a 1% increase


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in the Water segment. Fluctuations in foreign currency exchange rates unfavorably impacted revenues by $5 million for the three months ended March 31, 2013. Gross margin for the first quarter of 2013 was 31.3%, compared with gross margin of 32.0% for the same period in 2012. Lower volumes and unfavorable product mix in 2013 had a negative impact on gross margin.

Our tax benefit for the first three months of 2013 reflects the favorable discrete tax benefit for the retroactive extension of the 2012 research and experimentation credit in the amount of $4.0 million. The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013 and extended several business tax provisions including the research and experimentation credit. Our annual estimated effective tax rate for 2013 was favorably impacted by a proportionate increase in projected earnings in foreign jurisdictions with tax rates below 35%, the benefit of certain interest expense deductions, and an election under U.S. Internal Revenue Code Section 338 with respect to a foreign acquisition in 2007. Accordingly, our 2013 annual estimated effective tax rate is lower than our 2012 annual estimated effective tax rate. During the first quarter of 2012, we had a tax provision of 27.4%, based on a percentage of income (loss) before tax, which included minimal discrete benefits.

Total backlog was $1.0 billion and twelve-month backlog was $565 million at March 31, 2013.

On March 8, 2013, our Board of Directors authorized a twelve-month repurchase program of up to $50 million of our common stock. During the three months ended March 31, 2013, we repurchased 4,490 shares of our common stock for $200,000. Subsequent to March 31, 2013, we repurchased 65,339 shares of our common stock for $2.8 million.

Total Company Revenues, Gross Profit and Margin, and Unit Shipments

                 Three Months Ended March 31,
                2013          2012       % Change
                  (in thousands)
Revenues     $ 447,536     $ 571,640      (22)%
Gross Profit $ 140,123     $ 183,105      (23)%
Gross Margin      31.3 %        32.0 %



                                               Three Months Ended March 31,
                                                    2013                  2012
                                                      (in thousands)
Revenues by Region
United States and Canada (North America) $       177,206               $ 284,587
Europe, Middle East, and Africa (EMEA)           211,895                 220,956
Other                                             58,435                  66,097
Total revenues                           $       447,536               $ 571,640

Revenues
Revenues decreased $124.1 million, or 22%, for the three months ended March 31, 2013, compared with the same period in 2012. This decrease was due to the substantial completion of four of our five largest OpenWay projects in 2012, lower gas module shipments in North America, and lower Energy product shipments in EMEA, the combination of which was partially offset by a slight increase in Water revenues. The net translation effect of our operations denominated in foreign currencies resulted in an unfavorable impact to revenues of $5.0 million in 2013. A more detailed analysis of these fluctuations is provided in Operating Segment Results.

No single customer accounted for more than 10% of total Company revenues during the first quarter of 2013, while one customer, BC Hydro and Power Authority, accounted for 11% of total Company revenues during the first quarter of 2012. Our 10 largest customers accounted for 20% and 33% of total revenues during the first quarters of 2013 and 2012, respectively.

Gross Margins
Gross margin for the first quarter of 2013 was 31.3%, compared with gross margin of 32.0% for the same period in 2012. The decline over the prior year was due primarily to lower volumes, partially offset by benefits from manufacturing efficiencies and lower warranty costs, in the Energy operating segment and an increase in professional services, which have lower margins, and unfavorable product mix in the Water operating segment. A more detailed analysis of these fluctuations is provided in Operating Segment Results.


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Meter and Module Summary
We classify meters into three categories:
• Standard metering - no built-in remote reading communication technology

• Advanced metering - one-way communication of meter data

• Smart metering - two-way communication including remote meter configuration and upgrade (consisting primarily of our OpenWay® technology)

In addition, advanced and smart meter communication modules can be sold separately from the meter. A summary of our meter and communication module shipments is as follows:

                                        Three Months Ended March 31,
                                               2013                  2012
                                            (units in thousands)
Meters
Standard                                  4,440                     4,880
Advanced and smart                        1,630                     2,250
Total meters                              6,070                     7,130

Stand-alone communication modules
Advanced and smart                        1,340                     1,590


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Operating Segment Results

For a description of our operating segments, refer to Item 1: "Financial
Statements Note 15: Segment Information".

                                        Three Months Ended March 31,
                                 2013               2012             % Change
Segment Revenues                     (in thousands)
Energy
Electricity                $      175,763     $      284,460          (38)%
Gas                               136,915            153,287          (11)%
Total Energy                      312,678            437,747          (29)%
Water                             134,858            133,893            1%
Total revenues             $      447,536     $      571,640          (22)%

                                               Three Months Ended March 31,
                                          2013                                2012
                                Gross              Gross              Gross            Gross
                                Profit             Margin             Profit           Margin
Segment Gross Profit and    (in thousands)                        (in thousands)
Margin
Energy                     $       95,554          30.6%         $      134,603        30.7%
Water                              44,569          33.0%                 48,502        36.2%
Total gross profit and
margin                     $      140,123          31.3%         $      183,105        32.0%

                                               Three Months Ended March 31,
                                          2013                                2012
                              Operating          Operating          Operating        Operating
                            Income (Loss)          Margin         Income (Loss)        Margin
Segment Operating Income
(Loss) and Operating        (in thousands)                        (in thousands)
Margin
Energy                     $          480            -%          $       38,164          9%
Water                              12,575            9%                  15,937         12%
Corporate unallocated             (10,708 )                             (14,480 )
Total Company              $        2,347            1%          $       39,621          7%

Energy:

Revenues - Three months ended March 31, 2013 vs. Three months ended March 31, 2012
Electricity revenues decreased $108.7 million, or 38%, for the three months ended March 31, 2013, compared with the same period in 2012. Revenues in 2013 were lower primarily due to $120.9 million in scheduled decreases in our five largest OpenWay projects in North America, $2.8 million in decreased product shipments in Latin America, and $3.5 million for the currency translation effect of our operations denominated in foreign currencies. These decreases were partially offset by $15.0 million in increased revenues from sources other than the five largest OpenWay projects in North America.

Gas revenues decreased $16.4 million, or 11%, for the three months ended March 31, 2013, compared with the same period in 2012, primarily as the result of $10.4 million in lower product sales in EMEA and $4.8 million in lower product sales and services in North America. The translation effect into U.S. dollars of our operations denominated in foreign currencies had no significant impact on our gas revenues.

No single customer accounted for more than 10% of the Energy operating segment revenues during the first quarter of 2013, while two customers each accounted for more than 10% of the Energy operating segment revenues during the first quarter of 2012.

Gross Margin - Three months ended March 31, 2013 vs. Three months ended March 31, 2012
Energy gross margin was 30.6% for the three months ended March 31, 2013, compared with 30.7% for the same period in 2012. During the first quarter of 2013, gross margin decreased slightly over the prior year as benefits from efficiencies from our restructuring projects and lower warranty costs were offset by the impact of lower volumes.


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Operating Expenses - Three months ended March 31, 2013 vs. Three months ended March 31, 2012
Energy operating expenses decreased $1.4 million, or 1.4%, for the three months ended March 31, 2013, compared with the same period in 2012, primarily due to lower restructuring costs and the favorable foreign currency translation impact of $0.9 million. Operating expenses as a percentage of revenues were 30% for the three months ended March 31, 2013, compared with 22% for the same period in 2012.

Water:

Revenues - Three months ended March 31, 2013 vs. Three months ended March 31, 2012
Revenues increased $1.0 million, or 1%, for the three months ended March 31, 2013, compared with the same period last year. Excluding the translation effect of a stronger U.S. dollar against most foreign currencies in the first quarter of 2013, as compared with the first quarter of 2012, revenues increased 2%. The increase was driven primarily by $4 million in higher service revenues in North America, partially offset by lower product shipments in Latin America.

No single customer represented more than 10% of the Water operating segment revenues during the first quarter of 2013 and 2012.

Gross Margin - Three months ended March 31, 2013 vs. Three months ended March 31, 2012
Water gross margin decreased to 33.0% for the three months ended March 31, 2013, compared with 36.2% for the same period last year, primarily as a result of an increase in professional services in North America, which have a lower gross margin, and unfavorable product mix in other regions.

Operating Expenses - Three months ended March 31, 2013 vs. Three months ended March 31, 2012
Operating expenses for the three months ended March 31, 2013 decreased by $571,000 over the first quarter of 2012, primarily as the result of lower sales and marketing and general and administrative expenses and scheduled decreases in amortization of intangible assets, partially offset by $1 million in increased product development costs.

Corporate unallocated:

Operating expenses not directly associated with an operating segment are classified as "Corporate unallocated." These expenses were lower by $3.8 million in the three months ended March 31, 2013, primarily due to certain costs incurred in 2012, including costs for the SmartSynch acquisition of $2.0 million, management training and development costs, and for preliminary planning costs for our global enterprise resource planning (ERP) software initiative.

Bookings and Backlog of Orders

Bookings for a reported period represent customer contracts and purchase orders received during the period that have met certain conditions, such as regulatory and/or contractual approval. Total backlog represents committed but undelivered contracts and purchase orders at period-end. Twelve-month backlog represents the portion of total backlog that we estimate will be recognized as revenue over the next 12 months. Backlog is not a complete measure of our future revenues as we also receive significant book-and-ship orders. Bookings and backlog may fluctuate significantly due to the timing of large project awards. In addition, annual or multi-year contracts are subject to rescheduling and cancellation by customers due to the long-term nature of the contracts. Beginning total backlog, plus bookings, minus revenues, will not equal ending total backlog due to miscellaneous contract adjustments, foreign currency fluctuations, and other factors.

                                     Ending       Ending
                      Quarterly       Total      12-Month
Quarter Ended          Bookings      Backlog     Backlog
                                 (in millions)
March 31, 2013       $       447    $  1,029    $     565
December 31, 2012            467       1,035          568
September 30, 2012           459       1,079          592
June 30, 2012                447       1,122          637
March 31, 2012               488       1,221          760


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Information on bookings by our operating segments is as follows:

Quarter Ended         Total Bookings      Energy      Water
                                  (in millions)
March 31, 2013       $            447    $    305    $  142
December 31, 2012                 467         345       122
September 30, 2012                459         341       118
June 30, 2012                     447         330       117
March 31, 2012                    488         341       147



Operating Expenses

                                               Three Months Ended March 31,
                                                    % of                                % of
                                  2013            Revenues            2012            Revenues
                             (in thousands)                      (in thousands)
Sales and marketing        $         48,216         11%        $         49,856          9%
Product development                  44,208         10%                  44,356          8%
General and administrative           33,595          8%                  36,570          6%
Amortization of intangible
assets                               10,744          2%                  11,913          2%
Restructuring                         1,013          -%                     789          -%
Total operating expenses   $        137,776         31%        $        143,484         25%

Operating expenses decreased $5.7 million for the three months ended March 31, 2013, primarily due to certain costs incurred in 2012, including costs for the SmartSynch acquisition of $2.0 million, management training and development costs, and for preliminary planning costs for our global enterprise resource planning (ERP) software initiative. In addition, 2013 includes a scheduled decrease in amortization of intangible assets of $1.2 million and the favorable impact from foreign currency translation of $1.0 million.

Other Income (Expense)

The following table shows the components of other income (expense):

                                     Three Months Ended March 31,
                                        2013               2012
                                            (in thousands)
Interest income                   $       1,061       $         193
Interest expense                         (1,925 )            (2,089 )
Amortization of prepaid debt fees          (413 )              (348 )
Other income (expense), net                (817 )            (2,176 )
Total other income (expense)      $      (2,094 )     $      (4,420 )

Interest income: Interest income is generated from our cash and cash equivalents balances and certain deposits on hand with third parties. Interest income in the three months ended March 31, 2013 includes interest recognized on certain deposits with governmental entities related to tax contingencies.

Interest expense: Interest expense declined due to a lower balance of outstanding debt on our credit facility. Average total debt outstanding was $416.7 million and $445.7 million for the quarters ended March 31, 2013 and March 31, 2012, respectively.

Amortization of prepaid debt fees: Amortization of prepaid debt fees for the three months ended March 31, 2013 increased from the same period in 2012 due to fees paid in the second quarter of 2012 associated with the increase in the principal amount of the multicurrency revolving line of credit. Refer to Item 1:
"Financial Statements Note 6: Debt" for additional details related to our long-term borrowings.


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Other income (expense), net: Other expenses, net, consist primarily of unrealized and realized foreign currency gains and losses from balances denominated in currencies other than the reporting entity's functional currency and other non-operating income (expenses). Foreign currency losses, net of hedging, were $594,000 for the three months ended March 31, 2013, compared with net foreign currency losses of $1.0 million in the same period in 2012.

Financial Condition

Cash Flow Information:

                                                       Three Months Ended March 31,
                                                        2013                   2012
                                                              (in thousands)
Operating activities                            $             595       $          54,003
Investing activities                                      (15,569 )               (12,620 )
Financing activities                                      (17,243 )               (23,226 )
Effect of exchange rates on cash and cash
equivalents                                                (2,633 )                 3,195
Increase (decrease) in cash and cash
equivalents                                     $         (34,850 )     $          21,352

Cash and cash equivalents was $101.6 million at March 31, 2013, compared with $136.4 million at December 31, 2012.

Operating activities
Cash provided by operating activities during the three months ended March 31, 2013 was $53.4 million lower, compared with the same period in 2012. This decline was primarily due to (1) a decrease in net income, adjusted for non-cash items, such as depreciation and amortization, stock-based compensation, and other adjustments, of $33.4 million and (2) a larger increase in working capital, primarily as a result of cash outflows for accounts payable, in 2013 as compared to 2012.

Investing activities
Cash used in investing activities during the three months ended March 31, 2013 was $2.9 million higher, compared with the same period in 2012, primarily due to an increase in acquisitions of property, plant, and equipment.

Financing activities
Net cash used in financing activities during the three months ended March 31, 2013 was $6.0 million lower, compared with the same period in 2012, as a result of a decrease of $10.4 million in repurchases of our common stock in 2013. This decrease was partially offset by increased repayments of debt in 2013. During the first three months of 2013, we made payments on debt of $18.8 million, compared to $13.8 million during the same period in 2012. Refer to Part II, Item 2: "Unregistered Sale of Equity Securities and Use of Proceeds" for additional details related to our share repurchase program.

Effect of exchange rates on cash and cash equivalents The effect of exchange rates on the cash balances of currencies held in foreign denominations for the three months ended March 31, 2013 was a decrease of $2.6 million, compared with an increase of $3.2 million for the same period in 2012.

Off-balance sheet arrangements:

We have no off-balance sheet financing agreements or guarantees as defined by Item 303 of Regulation S-K at March 31, 2013 and December 31, 2012 that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.

Liquidity and Capital Resources:

Our principal sources of liquidity are cash flows from operations, borrowings, and sales of common stock. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments on debt. Working capital, which represents current assets less current liabilities, was $335.5 million at March 31, 2013, compared with $353.6 million at December 31, 2012.

Borrowings
In August 2011, we entered into a senior secured credit facility (the credit facility). The credit facility consists of a $300 million U.S. dollar term loan and a multicurrency revolving line of credit (the revolver) with a principal amount of up to $660 million.


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At March 31, 2013, $125.0 million was outstanding under the revolver, and $47.8 million was utilized by outstanding standby letters of credit, resulting in $487.2 million available for additional borrowings.

For further description of the term loan and the revolver under our credit facility, refer to Item 1: "Financial Statements, Note 6: Debt."

For a description of our letters of credit and performance bonds, and the amounts available for additional borrowings or letters of credit under our lines of credit, including the revolver that is part of our 2011 credit facility, refer to Item 1: "Financial Statements, Note 11: Commitments and Contingencies."

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