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ITRI > SEC Filings for ITRI > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for ITRON INC /WA/

Form 10-Q for ITRON INC /WA/


6-Aug-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 line 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 are managed under three business lines - Electricity, Gas, and Water. At the same time, product development and operations were centralized and are managed on a global basis. Although most management positions of the new business lines have been identified, the transition to the new organizational structure is ongoing, and we are continuing to assess the implications to our operating segments and 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.


Table of Contents

Overview

Revenues for the three and six months ended June 30, 2013 were $482 million and $930 million, compared with $579 million and $1.2 billion in the same periods last year. The decrease in 2013 was the result of significantly lower revenues in the Energy segment. Gross margins for the three and six months ended June 30, 2013 were 33.1% and 32.2%, compared with gross margins of 34.0% and 33.0% for the same periods in 2012. In 2013, lower volumes and increased warranty costs, as the result of a $4.3 million warranty accrual reduction recognized in the second quarter of 2012, had a negative impact on gross margin.

Our tax benefit for the first six 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 higher percentage of 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 three and six months ended June 30, 2012, we had tax provisions of 24.7% and 25.9%, based on a percentage of income before tax, which included minimal discrete benefits.

Total backlog was $1.1 billion and twelve-month backlog was $558 million at June 30, 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 June 30, 2013, we repurchased 380,310 shares of our common stock for $15.9 million. Subsequent to June 30, 2013, we repurchased 174,200 shares of our common stock for $7.4 million.

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

                 Three Months Ended June 30,              Six Months Ended June 30,
                2013          2012       % Change      2013           2012        % Change
                  (in thousands)                          (in thousands)
Revenues     $ 482,175     $ 579,140      (17)%     $ 929,711     $ 1,150,780      (19)%
Gross Profit $ 159,588     $ 196,745      (19)%     $ 299,711     $   379,850      (21)%
Gross Margin      33.1 %        34.0 %                   32.2 %          33.0 %



                               Three Months Ended June 30,              Six Months Ended June 30,
                                 2013               2012                 2013                 2012
                                                          (in thousands)
Revenues by Region
United States and Canada
(North America)            $       211,565     $     292,999     $      388,771          $     577,586
Europe, Middle East, and
Africa (EMEA)                      215,250           215,899            427,145                436,855
Other                               55,360            70,242            113,795                136,339
Total revenues             $       482,175     $     579,140     $      929,711          $   1,150,780

Revenues
Revenues decreased $97.0 million and $221.1 million, or 17% and 19%, for the three and six months ended June 30, 2013, compared with the same periods in 2012. This decrease was driven by the Energy segment and reflected the impact of the substantial completion of four of our five largest OpenWay projects in 2012 combined with lower gas revenues in North America, EMEA, and Asia/Pacific. Water revenues were essentially flat. 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 three and six months ended June 30, 2013, while one customer, BC Hydro and Power Authority, accounted for 11% of total Company revenues during the same periods in 2012. Our 10 largest customers accounted for 22% and 20% of total revenues during the three and six months ended June 30, 2013, and 30% and 32% for the three and six months ended June 30, 2012, respectively.


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Gross Margins
Gross margin for the second quarter of 2013 was 33.1%, compared with 34.0% for the same period in 2012. For the six months ended June 30, 2013, gross margin was 32.2%, compared with 33.0% in the same period in 2012. The decline over the prior year was due primarily to lower volumes and higher warranty costs, as the result of a $4.3 million warranty accrual reduction recognized in the second quarter of 2012, partially offset by benefits from manufacturing efficiencies in the Energy operating segment. In addition, the Water operating segment had a negative impact on gross margin as the result of increased professional services in North America, which have a lower gross margin, and less favorable product mix in other regions, which is the result a lower volume of higher margin products as a proportion of total sales. A more detailed analysis of these fluctuations is provided in Operating Segment Results.

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 June 30,       Six Months Ended June 30,
                                       2013             2012             2013            2012
                                                        (units in thousands)
Meters
Standard                                  4,730           4,620            9,170           9,500
Advanced and smart                        1,340           2,160            2,970           4,410
Total meters                              6,070           6,780           12,140          13,910

Stand-alone communication modules
Advanced and smart                        1,350           1,960            2,690           3,550


Table of Contents

Operating Segment Results

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

                              Three Months Ended June 30,                                        Six Months Ended June 30,
                         2013             2012           % Change                         2013             2012            % Change
Segment Revenues           (in thousands)                                                    (in thousands)
Energy
Electricity        $      213,612     $  283,484          (25)%                     $      389,375     $   567,944          (31)%
Gas                       136,011        161,114          (16)%                            272,926         314,401          (13)%
Total Energy              349,623        444,598          (21)%                            662,301         882,345          (25)%
Water                     132,552        134,542           (1)%                            267,410         268,435            -%
Total revenues     $      482,175     $  579,140          (17)%                     $      929,711     $ 1,150,780          (19)%

                                    Three Months Ended June 30,                                        Six Months Ended June 30,
                                2013                             2012                             2013                             2012
                        Gross            Gross            Gross           Gross          Gross             Gross            Gross           Gross
                        Profit           Margin           Profit         Margin          Profit           Margin            Profit         Margin
Segment Gross       (in thousands)                    (in thousands)                                                    (in thousands)
Profit and Margin                                                                    (in thousands)
Energy             $      112,673        32.2%       $      148,951       33.5%     $      208,227         31.4%       $      283,554       32.1%
Water                      46,915        35.4%               47,794       35.5%             91,484         34.2%               96,296       35.9%
Total gross profit
and margin         $      159,588        33.1%       $      196,745       34.0%     $      299,711         32.2%       $      379,850       33.0%

                                    Three Months Ended June 30,                                        Six Months Ended June 30,
                                2013                             2012                             2013                             2012
                      Operating        Operating        Operating       Operating      Operating         Operating        Operating       Operating
                    Income (Loss)        Margin       Income (Loss)      Margin      Income (Loss)        Margin        Income (Loss)      Margin
Segment Operating
Income (Loss) and   (in thousands)                    (in thousands)                 (in thousands)                     (in thousands)
Operating Margin
Energy             $       14,764          4%        $       47,069        11%      $       15,244          2%         $       85,233        10%
Water                      15,389         12%                11,666        9%               27,964          10%                27,603        10%
Corporate
unallocated               (12,177 )                         (12,672 )                      (22,885 )                          (27,152 )
Total Company      $       17,976          4%        $       46,063        8%       $       20,323          2%         $       85,684        7%

Energy:

Revenues - Three months ended June 30, 2013 vs. Three months ended June 30, 2012 Electricity revenues decreased $69.9 million, or 25%, for the three months ended June 30, 2013, compared with the same period in 2012. Revenues in 2013 were lower primarily due to $97.7 million in scheduled decreases in our five largest OpenWay projects in North America and $9.2 million in decreased meter shipments in Asia/Pacific. These decreases were partially offset by $22.8 million in increased revenues from sources other than the five largest OpenWay projects in North America and $16.9 million in higher product shipments and services in EMEA, of which $8.8 million was in South Africa.

Gas revenues decreased $25.1 million, or 16%, for the three months ended June 30, 2013, compared with the same period in 2012, primarily as the result of $16.3 million in lower product sales in EMEA and $6.3 million in lower product sales and services in North America.

Revenues - Six months ended June 30, 2013 vs. Six months ended June 30, 2012 Electricity revenues decreased $178.6 million, or 31%, for the six months ended June 30, 2013, compared with the same period in 2012. Revenues in 2013 were lower primarily due to $219.1 million in scheduled decreases in our five largest OpenWay projects in North America, $8.2 million in decreased meter shipments in Asia/Pacific, and $6.5 million in decreased product shipments in Latin America. These decreases were partially offset by $37.9 million in increased revenues from sources other than the five largest OpenWay projects in North America and $17.4 million in EMEA.

Gas revenues decreased $41.5 million, or 13%, for the six months ended June 30, 2013, compared with the same period in 2012, primarily as the result of $26.4 million in lower product sales in EMEA and $11.3 million in lower product sales and services in North America. Revenues in Latin America and Asia/Pacific were lower, as well.


Table of Contents

No single customer accounted for more than 10% of the Energy operating segment revenues during the three and six months ended June 30, 2013, while one customer accounted for more than 10% of the Energy operating segment revenues during the same periods of 2012.

Gross Margin - Three months ended June 30, 2013 vs. Three months ended June 30, 2012
Energy gross margin was 32.2% for the three months ended June 30, 2013, compared with 33.5% for the same period in 2012. During the second quarter of 2013, gross margin decreased 1.3% over the prior year, primarily as the result of lower volumes and higher warranty expense. In the second quarter of 2012, we recognized a $4.3 million adjustment, which reduced a warranty accrual, originally recorded in 2011, as a result of lower than estimated replacements. These decreases were partially offset by the benefits from efficiencies from our restructuring projects.

Gross Margin - Six months ended June 30, 2013 vs. Six months ended June 30, 2012 Energy gross margin was 31.4% for the six months ended June 30, 2013, compared with 32.1% for the same period in 2012. During the first half of 2013, gross margin decreased 0.7% over the prior year as benefits from efficiencies from our restructuring projects were more than offset by higher warranty costs and the impact of lower volumes. In the second quarter of 2012, we recognized a $4.3 million adjustment, which reduced a warranty accrual, originally recorded in 2011, as a result of lower than estimated replacements.

Operating Expenses - Three months ended June 30, 2013 vs. Three months ended June 30, 2012
Energy operating expenses decreased $4.0 million, or 3.9%, for the three months ended June 30, 2013, compared with the same period in 2012, primarily due to lower sales and marketing and product development, as well as a scheduled decrease in amortization of intangible assets of $1.1 million. These decreases were partially offset by $4.6 million in higher legal reserve costs, which are included within general and administrative expenses. Operating expenses as a percentage of revenues were 28% for the three months ended June 30, 2013, compared with 23% for the same period in 2012.

Operating Expenses - Six months ended June 30, 2013 vs. Six months ended June 30, 2012
Energy operating expenses decreased $5.3 million, or 2.7%, for the six months ended June 30, 2013, compared with the same period in 2012, primarily due to lower sales and marketing and product development costs, as well as a scheduled decrease in amortization of intangible assets of $1.7 million. These decreases were partially offset by $6.6 million in higher legal reserve costs, which are included within general and administrative expenses. Operating expenses as a percentage of revenues were 29% for the six months ended June 30, 2013, compared with 22% for the same period in 2012.

Water:

Revenues - Three months ended June 30, 2013 vs. Three months ended June 30, 2012 Revenues decreased $2.0 million, or 1%, for the three months ended June 30, 2013, compared with the same period last year. This decrease was the result of lower product shipments in Asia/Pacific of $2.6 million and EMEA by $1.2 million, partially offset by $2.1 million in higher volumes in Latin America.

Revenues - Six months ended June 30, 2013 vs. Six months ended June 30, 2012 Revenues decreased $1.0 million for the six months ended June 30, 2013, compared with the same period last year. The decrease was driven primarily by $3.2 million in lower product shipments in Asia/Pacific, partially offset by higher service revenues in North America.

No single customer represented more than 10% of the Water operating segment revenues during the three and six months ended June 30, 2013 and 2012.

Gross Margin - Three months ended June 30, 2013 vs. Three months ended June 30, 2012
Water gross margin decreased to 35.4% for the three months ended June 30, 2013, compared with 35.5% 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, offset by the benefit of higher volumes in Latin America.

Gross Margin - Six months ended June 30, 2013 vs. Six months ended June 30, 2012 Water gross margin decreased to 34.2% for the six months ended June 30, 2013, compared with 35.9% 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.


Table of Contents

Operating Expenses - Three months ended June 30, 2013 vs. Three months ended June 30, 2012
Operating expenses for the three months ended June 30, 2013 decreased by $4.6 million over the second quarter of 2012, primarily as the result of $3.6 million in lower restructuring expenses and lower sales and marketing costs and scheduled decreases in amortization of intangible assets. Operating expenses as a percentage of revenues were 24% for the three months ended June 30, 2013, compared with 27% for the same period in 2012.

Operating Expenses - Six months ended June 30, 2013 vs. Six months ended June 30, 2012
Operating expenses for the six months ended June 30, 2013 decreased by $5.2 million over the first half of 2012, primarily as the result of $3.0 million in lower restructuring expenses, as well as lower sales and marketing costs and scheduled decreases in amortization of intangible assets, partially offset by $1.1 million in increased product development costs. Operating expenses as a percentage of revenues were 24% for the six months ended June 30, 2013, compared with 26% for the same period in 2012.

Corporate unallocated:

Operating expenses not directly associated with an operating segment are classified as "Corporate unallocated." These expenses were lower by $495,000 and $4.3 million in the three and six months ended June 30, 2013, primarily due to certain costs incurred in 2012. The prior year included costs for the SmartSynch acquisition of $2.9 million, management training and development costs, and 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)
June 30, 2013        $       515    $  1,058    $     558
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

Information on bookings by our operating segments is as follows:

Quarter Ended         Bookings     Energy      Water
                              (in millions)
June 30, 2013        $     515    $    365    $  150
March 31, 2013             447         305       142
December 31, 2012          467         345       122
September 30, 2012         459         341       118
June 30, 2012              447         330       117


Table of Contents

Operating Expenses

                                   Three Months Ended June 30,                                      Six Months Ended June 30,
                                         % of                            % of                            % of                            % of
                         2013          Revenues          2012          Revenues          2013          Revenues          2012          Revenues
                    (in thousands)                  (in thousands)                  (in thousands)                  (in thousands)
Sales and
marketing         $         46,182       10%      $         50,847        9%      $         94,398       10%      $        100,703        9%
Product
development                 43,481        9%                46,640        8%                87,689        9%                90,996        8%
General and
administrative              38,317        8%                33,450        6%                71,912        8%                70,020        6%
Amortization of
intangible assets           10,247        2%                12,025        2%                20,991        2%                23,938        2%
Restructuring                3,385        1%                 7,720        1%                 4,398        -%                 8,509        1%
Total operating
expenses          $        141,612       29%      $        150,682       26%      $        279,388       30%      $        294,166       26%

Operating expenses decreased $9.1 million and $14.8 million for the three and six months ended June 30, 2013, primarily due to reduced sales and marketing, product development, and restructuring costs, partially offset by increased litigation reserves, which are included within general and administrative operating expense. In addition, the three and six months ended June 30, 2013 include scheduled decreases in amortization of intangible assets of $1.8 million and $2.9 million.

Other Income (Expense)

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