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ITRI > SEC Filings for ITRI > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for ITRON INC /WA/


5-Nov-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), 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 solutions, while the Water operating segment includes our global water and heat solutions.

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 manufacturing operations were centralized and are now 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. Therefore, changes to Itron's management reporting and external financial reporting are in process, and we expect to complete the implementation of the new reporting processes in the fourth quarter of 2013.

We have three measures of segment performance: revenue, gross profit (margin), and operating income (margin). Intersegment revenues were minimal.
Corporate-specific operating expenses, interest income, interest expense, other income (expense), and income tax provision (benefit) are not allocated to the segments and are not 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 nine months ended September 30, 2013 were $495 million and $1.4 billion, compared with $504 million and $1.7 billion in the same periods last year. The decrease in 2013 was the result of lower revenues in the Energy segment. Gross margins for the three and nine months ended September 30, 2013 were 30.3% and 31.6%, compared with gross margins of 34.1% and 33.3% for the same periods in 2012. The lower margins were the result of lower volumes and a charge for increased costs associated with specific contract components within an OpenWay project in North America.

Our tax benefit for the first nine 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, as it was calculated as of September 30, 2012. During the three and nine months ended September 30, 2012, we had tax provisions of 15.4% and 22.2%, measured as a percentage of income before tax, which included minimal discrete benefits.

Total backlog was $1.1 billion and twelve-month backlog was $582 million at September 30, 2013.

On March 8, 2013, our Board of Directors authorized a twelve-month repurchase program of up to $50 million in shares of our common stock. During the three months ended September 30, 2013, we repurchased 174,200 shares of our common stock for $7.4 million. No shares were purchased subsequent to September 30, 2013.

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

                 Three Months Ended September 30,           Nine Months Ended September 30,
                  2013            2012       % Change       2013            2012        % Change
                    (in thousands)                             (in thousands)
Revenues     $   495,491       $ 504,063       (2)%     $ 1,425,202     $ 1,654,843      (14)%
Gross Profit $   150,084       $ 171,797      (13)%     $   449,795     $   551,647      (18)%
Gross Margin        30.3 %          34.1 %                     31.6 %          33.3 %



                             Three Months Ended September 30,         Nine Months Ended September 30,
                                  2013                2012                2013                2012
                                                          (in thousands)
Revenues by Region
United States and Canada
(North America)            $         227,784     $     224,956     $         616,555     $     802,542
Europe, Middle East, and
Africa (EMEA)                        208,546           211,195               635,691           648,050
Other                                 59,161            67,912               172,956           204,251
Total revenues             $         495,491     $     504,063     $       1,425,202     $   1,654,843

Revenues
Revenues decreased $8.6 million and $229.6 million, or 2% and 14%, for the three and nine months ended September 30, 2013, compared with the same periods in 2012. These decreases were driven by the Energy segment and reflected the impact of the substantial completion of four of our five largest OpenWay projects in 2012. Gas revenues were lower, driven primarily by decreased product shipments in EMEA. Water revenues increased in 2013, primarily due to increases in services in North America and product shipments in Latin America. 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 nine months ended September 30, 2013, and during the three months ended September 30, 2012, while one customer, namely BC Hydro and Power Authority, accounted for 10% of total Company revenues during the nine months ended September 30, 2012. Our 10 largest customers accounted for 24% and 22% of total revenues during the three and nine months ended September 30, 2013, and 25% and 29% for the three and nine months ended September 30, 2012, respectively.


Table of Contents

Gross Margins
Gross margin for the third quarter of 2013 was 30.3%, compared with 34.1% for the same period in 2012. For the nine months ended September 30, 2013, gross margin was 31.6%, compared with 33.3% in the same period in 2012. Margins declined in both the Energy and Water segments. The lower margins in the Energy segment were primarily the result of a charge for increased costs associated with specific contract components within an OpenWay project in North America. In the third quarter of 2013, we determined a charge was necessary as the estimated costs to complete the project are expected to exceed the expected revenues for the remaining components. In addition, the Energy segment gross margin declined because of less favorable product mix, which is due to lower volumes of higher margin products as a proportion of total sales. The Water operating segment gross margins declined due to increased professional services in North America, which have a lower gross margin, as well as less favorable product mix in other regions. 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 September 30,     Nine Months Ended September 30,
                                        2013              2012              2013              2012
                                                          (units in thousands)
Meters
Standard                                    3,480           4,110              12,650          13,610
Advanced and smart                          1,100           1,700               4,070           6,110
Total meters                                4,580           5,810              16,720          19,720

Stand-alone communication modules
Advanced and smart                          1,420           1,500               4,110           5,050


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 September 30,                                     Nine Months Ended September 30,
                           2013               2012           % Change                          2013              2012            % Change
Segment Revenues              (in thousands)                                                      (in thousands)
Energy
Electricity         $       216,615       $  226,552           (4)%                      $       605,990     $   794,496          (24)%
Gas                         143,240          150,937           (5)%                              416,166         465,338          (11)%
Total Energy                359,855          377,489           (5)%                            1,022,156       1,259,834          (19)%
Water                       135,636          126,574            7%                               403,046         395,009            2%
Total revenues      $       495,491       $  504,063           (2)%                      $     1,425,202     $ 1,654,843          (14)%

                                     Three Months Ended September 30,                                     Nine Months Ended September 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              $       102,940          28.6%       $      125,503       33.2%      $       311,167         30.4%       $      409,057       32.5%
Water                        47,144          34.8%               46,294       36.6%              138,628         34.4%              142,590       36.1%
Total gross profit
and margin          $       150,084          30.3%       $      171,797       34.1%      $       449,795         31.6%       $      551,647       33.3%

                                     Three Months Ended September 30,                                     Nine Months Ended September 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              $        (9,284 )         (3)%       $       30,978         8%       $         5,960          1%         $      116,211         9%
Water                        17,225           13%                22,293        18%                45,189          11%                49,896        13%
Corporate
unallocated                 (14,429 )                            (7,304 )                        (37,314 )                          (34,456 )
Total Company       $        (6,488 )         (1)%       $       45,967         9%       $        13,835          1%         $      131,651         8%

Energy:

Revenues - Three months ended September 30, 2013 vs. Three months ended September 30, 2012
Electricity revenues decreased $9.9 million, or 4%, for the three months ended September 30, 2013, compared with the same period in 2012. Revenues in 2013 were lower primarily due to $46.4 million in scheduled decreases in our five largest OpenWay projects in North America and $7.2 million in decreased meter shipments in Asia/Pacific. 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 $7.6 million in higher product shipments and services in EMEA.

Gas revenues decreased $7.7 million, or 5%, for the three months ended September 30, 2013, compared with the third quarter of 2012, primarily as the result of $10.1 million in lower product sales in EMEA. The overall decrease was partially offset by higher product and service revenue in North America of $4.1 million.

Revenues - Nine months ended September 30, 2013 vs. Nine months ended September 30, 2012
Electricity revenues decreased $188.5 million, or 24%, for the nine months ended September 30, 2013, compared with the same period in 2012. Revenues in 2013 were lower primarily due to $265.5 million in scheduled decreases in our five largest OpenWay projects in North America, $12.9 million in decreased meter shipments in Asia/Pacific, and $5.3 million in decreased product shipments in Latin America. These decreases were partially offset by $79.0 million in increased revenues from sources other than the five largest OpenWay projects in North America and $29.6 million in EMEA. The translation effect of our operations denominated in foreign currencies negatively impacted revenues by $13.4 million.


Table of Contents

Gas revenues decreased $49.2 million, or 11%, for the nine months ended September 30, 2013, compared with the third quarter of 2012, primarily as the result of $36.5 million in lower product sales in EMEA and $7.2 million in lower product sales and services in North America.

No single customer accounted for more than 10% of the Energy operating segment revenues during the three and nine months ended September 30, 2013, while one customer accounted for 11% and 13% of the Energy operating segment revenues during the same periods of 2012.

Gross Margin - Three months ended September 30, 2013 vs. Three months ended September 30, 2012
Energy gross margin was 28.6% for the three months ended September 30, 2013, compared with 33.2% for third quarter in 2012. During the third quarter of 2013, gross margin decreased 460 basis points over the prior year, primarily as the result of a charge for increased costs associated with specific contract components within an OpenWay project in North America, impacting gross margin by 350 basis points. In addition, gross margin was negatively impacted by lower volumes and less favorable product mix.

Gross Margin - Nine months ended September 30, 2013 vs. Nine months ended September 30, 2012
Energy gross margin was 30.4% for the nine months ended September 30, 2013, compared with 32.5% in 2012. During the first nine months of 2013, gross margin decreased 210 basis points over the prior year primarily as the result of a charge for increased costs associated with specific contract components within an OpenWay project in North America, impacting gross margin by 130 basis points. In addition, gross margin was negatively impacted by lower volumes and less favorable product mix.

Operating Expenses - Three months ended September 30, 2013 vs. Three months ended September 30, 2012
Energy operating expenses increased $17.7 million, or 19%, for the three months ended September 30, 2013, compared with the same period in 2012. In 2013, restructuring expense, associated with the 2013 restructuring projects, was $24.0 million higher than 2012. Operating expenses including sales and marketing, product development, and general and administrative expense were $80.7 million in 2013 compared with $86.0 million in 2012.

Operating Expenses - Nine months ended September 30, 2013 vs. Nine months ended September 30, 2012
Energy operating expenses increased $12.4 million, or 4%, for the nine months ended September 30, 2013, compared with 2012. In 2013, restructuring expense, associated with the 2013 restructuring projects, was $20.9 million higher than 2012. Operating expenses including sales and marketing, product development, and general and administrative expense were $257.5 million in 2013 compared with $263.2 million in 2012. Litigation expense in 2013, classified within general and administrative expenses, was $7.0 million higher than in 2012.

Water:

Revenues - Three months ended September 30, 2013 vs. Three months ended September 30, 2012
Revenues increased $9.1 million, or 7%, for the three months ended September 30, 2013, compared with the third quarter of 2012. This increase was the result of $7.1 million in higher product and service revenues in North America and by $3.7 million in higher product volumes in Latin America.

Revenues - Nine months ended September 30, 2013 vs. Nine months ended September 30, 2012
Revenues increased $8.0 million, or 2%, for the nine months ended September 30, 2013, compared with 2012. The increase was driven primarily by $10.8 million in higher products and services in North America and $3.0 million in product shipments in Latin America, partially offset by $4.9 million in lower volumes in Asia/Pacific.

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

Gross Margin - Three months ended September 30, 2013 vs. Three months ended September 30, 2012
Water gross margin decreased to 34.8% for the three months ended September 30, 2013, compared with 36.6% 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, partially offset by the benefit of higher volumes in Latin America.

Gross Margin - Nine months ended September 30, 2013 vs. Nine months ended September 30, 2012
Water gross margin decreased to 34.4% for the nine months ended September 30, 2013, compared with 36.1% 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 less favorable product mix in other regions.


Table of Contents

Operating Expenses - Three months ended September 30, 2013 vs. Three months ended September 30, 2012
Operating expenses for the three months ended September 30, 2013 increased by $5.9 million, or 25%, over the third quarter of 2012, primarily as the result of $7.3 million in higher restructuring expenses in 2013. During 2012, we recognized a $5.4 million recovery of restructuring expense as the result of the correction of an error related to the write off of goodwill in 2011 associated with an asset disposal group. Operating expenses, including sales and marketing, product development, and general and administrative expenses, were $24.9 million and $25.8 million in the three months ended September 30, 2013 and 2012.

Operating Expenses - Nine months ended September 30, 2013 vs. Nine months ended September 30, 2012
Operating expenses for the nine months ended September 30, 2013 increased by $0.7 million, or 1%, over the same period in 2012, primarily as the result of $4.3 million in higher restructuring expenses in 2013. During 2012, we recognized a $5.4 million recovery of restructuring expense as the result of the correction of an error related to the write off of goodwill in 2011 associated with an asset disposal group. Operating expenses, including sales and marketing, product development, and general and administrative expenses, were $81.8 million and $83.8 million in the nine months ended September 30, 2013 and 2012.

Corporate unallocated:

Operating expenses not directly associated with an operating segment are classified as "Corporate unallocated." These expenses were higher by $7.1 million and $2.9 million in the three and nine months ended September 30, 2013, due to increased restructuring costs of $2.1 million and $4.1 million for the quarter and year-to-date periods.

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 products and services for 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)
September 30, 2013   $       457    $  1,055    $     582
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

Information on bookings by our operating segments is as follows:

Quarter Ended         Bookings     Energy      Water
                              (in millions)
September 30, 2013   $     457    $    334    $  123
June 30, 2013              515         365       150
March 31, 2013             447         305       142
December 31, 2012          467         345       122
September 30, 2012         459         341       118


Table of Contents

Operating Expenses

                               Three Months Ended September 30,                                Nine Months Ended September 30,
                                         % of                          % of                            % of                            % of
                         2013          Revenues         2012         Revenues          2013          Revenues          2012          Revenues
                    (in thousands)                 (in thousands)                 (in thousands)                  (in thousands)
Sales and
marketing         $         44,050        9%      $       44,913        9%      $        138,448       10%      $        145,616        9%
Product
development                 41,495        8%              43,299        9%               129,184        9%               134,295        8%
General and
administrative              32,260        7%              30,743        6%               104,172        7%               100,763        6%
Amortization of
. . .
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