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| ITRI > SEC Filings for ITRI > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
Quarterly Report
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, 2008 filed with the Securities and Exchange Commission (SEC) on February 26, 2009.
Documents we provide to the Securities and Exchange Commission 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) competition, 4) changes in estimated liabilities for product warranties
and/or litigation, 5) our dependence on customers' acceptance of new product and
their performance, 6) changes in domestic and international laws and
regulations, 7) future business combinations, 8) changes in estimates for
stock-based compensation or pension costs, 9) changes in foreign currency
exchange rates, 10) international business risks, 11) our own and our customers'
or suppliers' access to and cost of capital, and 12) 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, see "Risk Factors" within
Item 1A included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, which was filed with the SEC on February 26, 2009, and Item
1A included in our Quarterly Report on Form 10-Q for the three months ended
March 31, 2009, which was filed with the SEC on May 5, 2009.
Results of Operations
We derive the majority of our revenues from sales of products and services to utilities. Our products and services include hardware, software, managed services, and consulting. Cost of revenues includes materials, labor, overhead, warranty expense, and distribution and documentation costs for software.
Overview
Our 2009 financial results have been negatively impacted by a number of factors including economic uncertainty, a shift in technology choice for some utilities from automated meter reading (AMR) to advanced metering infrastructure (AMI) systems, foreign exchange rate volatility, and delayed purchases for customers awaiting approval of projects that may qualify for stimulus funding through the American Recovery and Reinvestment Act of 2009.
With the current economic environment and foreign exchange rate volatility, we considered it prudent to strengthen our financial position. As a result, during the nine months ended September 30, 2009, we reduced our borrowings by $357 million, issued $289 million in common stock, and amended our credit facility to reduce our current and future covenant requirements.
Twelve-month backlog was $749 million at September 30, 2009, compared with $436 million at September 30, 2008.
Total Company Revenues, Gross Profit and Margin, and Unit Shipments
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 % Change 2009 2008 % Change
(in millions, except gross margin) (in millions, except gross margin)
Revenues $ 408.4 $ 484.8 (16%) $ 1,210.6 $ 1,477.2 (18%)
Gross Profit $ 129.5 $ 162.9 (21%) $ 392.2 $ 501.7 (22%)
Gross Margin 32 % 34 % 32 % 34 %
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Table of Content
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
(in millions)
Revenues by region
Europe $ 203.9 $ 233.0 $ 610.9 $ 722.4
United States and Canada 132.1 161.3 402.8 488.3
Other 72.4 90.5 196.9 266.5
Total revenues $ 408.4 $ 484.8 $ 1,210.6 $ 1,477.2
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Revenues
Revenues decreased 16% and 18% for the three and nine months ended September 30,
2009, compared with the same periods in 2008, or $76.4 million and $266.6
million, respectively. A strengthening U.S. dollar against most foreign
currencies accounted for 32% and 50% of the decrease in revenues for each of the
respective periods. A more detailed analysis of these fluctuations is provided
in Operating Segment Results.
No single customer represented more than 10% of total revenues for the three and nine months ended September 30, 2009 and 2008. Our 10 largest customers accounted for approximately 16% and 12% of total revenues for the three and nine months ended September 30, 2009, and 16% of total revenues for each of the same periods in 2008.
Gross Margins
Gross margin was 32% for the three and nine months ended September 30, 2009,
compared with 34% during the same periods in 2008. The decrease in gross margin
for the three and nine months ended September 30, 2009 was primarily due to a
decline in Itron North America's gross margins. A more detailed analysis of
these fluctuations is provided in Operating Segment Results.
Meter and Module Summary
Meters are sold with and without advanced functionality (AMR/AMI/smart
metering). In addition, smart meter modules can be sold separately from the
meter. Depending on customers' preferences, we also incorporate other vendors'
technology in our meters. A summary of our meter and AMR/AMI modules are as
follows:
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
Total meters (with and without
AMR/AMI) (units in thousands)
Itron North America
Electricity 740 1,250 2,340 3,870
Gas 90 100 260 290
Itron International
Electricity 1,890 2,060 5,670 5,760
Gas 1,160 1,490 3,880 4,040
Water 1,960 2,090 6,540 7,080
Total meters with and without
AMR/AMI 5,840 6,990 18,690 21,040
Additional meter information
(Total Company)
Meters with AMR 670 1,150 2,200 3,860
Meters with AMI 120 10 220 20
Standalone AMR/AMI modules 850 1,250 2,860 3,550
Meters with AMR/AMI and modules 1,640 2,410 5,280 7,430
Meters with other vendors'
AMR/AMI 160 220 470 620
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Operating Segment Results
For a description of our operating segments, see Note 14 of the condensed
consolidated financial statements. The following tables and discussion highlight
significant changes in trends or components of each operating segment.
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 % Change 2009 2008 % Change
(millions) (millions)
Segment Revenues
Itron North America $ 137.4 $ 176.2 (22%) $ 419.7 $ 528.0 (21%)
Itron International 271.0 308.6 (12%) 790.9 949.2 (17%)
Total revenues $ 408.4 $ 484.8 (16%) $ 1,210.6 $ 1,477.2 (18%)
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
Gross Profit Gross Margin Gross Profit Gross Margin Gross Profit Gross Margin Gross Profit Gross Margin
Segment Gross Profit and
Margin (millions) (millions) (millions) (millions)
Itron North America $ 42.5 31% $ 66.5 38% $ 144.8 35% $ 200.8 38%
Itron International 87.0 32% 96.4 31% 247.4 31% 300.9 32%
Total gross profit and
margin $ 129.5 32% $ 162.9 34% $ 392.2 32% $ 501.7 34%
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
Operating Operating Income Operating Operating Income
Segment Operating Income (Loss) Income (Loss) Operating Margin (Loss) Operating Margin Income (Loss) Operating Margin (Loss) Operating Margin
and Operating Margin (millions) (millions) (millions) (millions)
Itron North America $ (1.2 ) (1%) $ 17.9 10% $ 12.5 3% $ 56.3 11%
Itron International 17.3 6% 18.4 6% 40.0 5% 63.1 7%
Corporate unallocated (7.1 ) (11.0 ) (22.8 ) (30.6 )
Total Company $ 9.0 2% $ 25.3 5% $ 29.7 2% $ 88.8 6%
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Itron North America: Revenues decreased $38.8 million, or 22%, during the three months ended September 30, 2009, and $108.3 million, or 21%, during the nine months ended September 30, 2009, compared with the same periods in 2008. Revenues in 2008 included electricity meter and AMR module shipments in support of a number of AMR deployments. The lower 2009 revenues were primarily driven by the substantial completion of a number of AMR contracts in 2008 and fewer shipments of electricity meters and AMR modules. Utilities have delayed orders due to the current spending environment and the uncertainty surrounding the announcement and disbursement of stimulus funds.
Gross margin decreased seven percentage points and three percentage points for the three and nine months ended September 30, 2009, compared with the same periods in 2008, primarily due to shipments of our first generation AMI meters, which currently have higher costs, fewer AMR meter and AMR gas module shipments, and reduced overhead absorption resulting from lower overall production levels. Itron North America gross margins are expected to remain at lower levels until we have higher volume shipments of a cost reduced AMI meter.
No customer represented more than 10% of Itron North America operating segment revenues in the three and nine months ended September 30, 2009 and the three months ended September 30, 2008. One customer accounted for 11% of Itron North America operating segment revenues for the nine months ended September 30, 2008, respectively.
Itron North America operating expenses decreased $4.9 million, or 10%, for the three months ended September 30, 2009 and $12.2 million, or 8%, for the nine months ended September 30, 2009, compared with the same periods in 2009. Lower sales expenses and general and administrative expenses were the primary factors for the reduced expenses. Operating expenses as a percentage of revenues were 32% for the three and nine months ended September 30, 2009, compared with 28% for the same periods in 2008, as a result of lower revenues in 2009.
Itron International: Revenues decreased $37.6 million, or 12%, and $158.3 million, or 17%, for the three and nine months ended September 30, 2009, compared with the same periods in 2008. Excluding the effect of a strengthening U.S. dollar against most foreign currencies as compared with the prior period, revenues declined 4% and 3% for the respective periods as a result of softening demand in some markets due to financial and economic conditions.
Gross margin increased one percentage point for the three months ended September 30, 2009, compared with the same period last year, primarily as a result of lower material costs, such as copper alloys and electronic components. Gross margin decreased one percentage point for the nine months ended September 30, 2009, compared with the same period last year, primarily due to a change in product mix, which included increased service costs in South America, partially offset by lower material costs.
Business line revenues for Itron International were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
Electricity 42% 40% 39% 40%
Gas 30% 32% 30% 30%
Water 28% 28% 31% 30%
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No single customer represented more than 10% of Itron International operating segment revenues in the three and nine months ended September 30, 2009 and 2008.
Operating expenses for Itron International were $69.7 million and $78.0 million for the three months ended September 30, 2009 and 2008, or 26% and 25% of revenues for the respective periods. Operating expenses for the nine months ended September 30, 2009 and 2008 were $207.4 million and $237.8 million, or 26% and 25% of revenues for the respective periods. For the three months ended September 30, 2009, amortization of intangible assets decreased by $4.3 million, while the remaining decrease was the result of a stronger U.S. dollar as compared with the prior year. For the nine months ended September 30, 2009, a stronger U.S. dollar compared with the prior year and a $17.5 million decline in intangible asset amortization resulted in a decrease in operating expense of $40.6 million. The decrease was partially offset by slightly higher product development and other operating expenses.
Corporate unallocated: Operating expenses not directly associated with an operating segment are classified as "Corporate unallocated." These expenses decreased $3.9 million and $7.8 million in the three and nine months ended September 30, 2009, compared with the same periods last year, due to reductions in compensation expense and reduced consulting fees, primarily for Sarbanes-Oxley Act of 2002 compliance.
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 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 business as we have 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.
Information on bookings and backlog is summarized as follows:
Ending Ending
Quarter Ended Quarterly Bookings Total Backlog 12-Month Backlog
(in millions)
September 30, 2009 $ 400 $ 1,577 $ 749
June 30, 2009 427 1,573 646
March 31, 2009 625 1,526 471
December 31, 2008 733 1,309 418
September 30, 2008 894 1,012 436
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As we enter into AMI agreements to deploy our OpenWay® meter and communications
system, we include these contracts in bookings and backlog when regulatory
approvals are received or certain other conditions are met. At September 30,
2009, three of our four signed AMI contracts were included in bookings and
backlog. Bookings for the first quarter of 2009 included $257 million related to
the San Diego Gas & Electric AMI contract. During the fourth quarter of 2008,
$334 million was booked related to the CenterPoint Energy AMI contract and
during the third quarter of 2008, $470 million was booked related to the
Southern California Edison AMI contract. A majority of the value of these AMI
contracts are not included in 12-month backlog as these are multi-year
contracts.
Operating Expenses
The following table details our total operating expenses in dollars and as a
percentage of revenues:
Three Months Ended September 30, Nine Months Ended September 30,
2009 % of Revenue 2008 % of Revenue 2009 % of Revenue 2008 % of Revenue
(millions) (millions) (millions) (millions)
Sales and marketing $ 37.7 9% $ 41.3 9% $ 112.6 9% $ 127.5 9%
Product development 31.1 8% 31.8 6% 93.0 8% 92.3 6%
General and administrative 26.6 7% 34.1 7% 84.1 7% 100.0 7%
Amortization of intangible assets 25.1 6% 30.4 6% 72.8 6% 93.1 6%
Total operating expenses $ 120.5 30% $ 137.6 28% $ 362.5 30% $ 412.9 28%
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Operating expenses decreased 12% for the three and nine months ended September 30, 2009, compared with the same periods in 2008. The $17.1 million decrease in operating expenses for the three months ended September 30, 2009 was due to lower amortization of intangible assets of $5.3 million and approximately $4.3 million related to foreign exchange rate fluctuations, with the remaining decrease due to cost containment measures. For the nine months ended September 30, 2009, operating expenses decreased by $50.4 million as a result of lower amortization of intangible assets of $20.3 million and foreign exchange rate fluctuations of $23.7 million, with the remaining decrease due to cost containment measures. To partially mitigate the reduced revenues, we have implemented, and continue to perform a variety of measures to reduce operating expenses, including, but not limited to, constraining compensation increases and selective headcount reductions.
Other Income (Expense)
The following table shows the components of other income (expense):
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
(in thousands)
Interest income $ (45 ) $ 1,962 $ 971 $ 4,846
Interest expense (15,963 ) (19,257 ) (46,935 ) (67,695 )
Amortization of prepaid debt fees (4,112 ) (1,780 ) (6,384 ) (7,667 )
Loss on extinguishment of debt, net (2,460 ) - (12,800 ) -
Other income (expense), net (4,534 ) (281 ) (9,445 ) (1,938 )
Total other income (expense) $ (27,114 ) $ (19,356 ) $ (74,593 ) $ (72,454 )
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Interest income: Interest income decreased in the three and nine months ended September 30, 2009, compared with the same periods in 2008, primarily due to lower interest rates in 2009. Average cash and cash equivalent balances have not significantly fluctuated.
Interest expense: Interest expense decreased 17% and 31% in the three and nine months ended September 30, 2009, compared with the same periods in 2008, primarily due to the decline in the principal balance of our debt outstanding and a decline in the LIBOR interest rate during the first nine months of 2009. The decrease in interest expense was partially offset by an increase in the applicable margin on our term loans in the second quarter of 2009, from 1.75% to 3.50%, related to our term loan agreement amendment, compared with applicable margins of 2.0% to 1.75% during the nine months ended September 30, 2008. At September, 2009, inclusive of our interest rate swaps, 83% of our borrowings were at fixed rates. The average outstanding principal balance on our borrowings was $963.0 million and $986.4 million in the three and nine months ended September 30, 2009, compared with $1.2 billion and $1.4 billion for the same periods in 2008.
Amortization of prepaid debt fees: The increase in amortization of prepaid debt
fees for the three months ended September 30, 2009, compared with the same
period in 2008, was primarily due to the redemption of our 7.75% senior
subordinated notes (subordinated notes) on July 17, 2009, which resulted in the
write-off of $2.0 million in unamortized prepaid debt fees. Amortization of
prepaid debt fees decreased 17% in the nine months ended September 30, 2009,
compared with the same period in 2008, due to lower debt repayments. Debt
repayments were $236.5 million for the nine months ended September 30, 2009,
compared with $383.4 million for the nine months ended September 30, 2008. When
debt is repaid early, the related portion of unamortized prepaid debt fees is
written-off and included in interest expense.
Loss on extinguishment of debt: On July 17, 2009, we redeemed the $109.6 million remaining principal balance of our subordinated notes at 101.938% of the principal amount, which was $111.7 million. This redemption resulted in a $2.5 million loss on extinguishment of debt. During the first quarter of 2009, we entered into exchange agreements with certain holders of our convertible notes to issue, in the aggregate, approximately 2.3 million shares of common stock, valued at $132.9 million, in exchange for, in the aggregate, $121.0 million principal amount of the convertible notes, representing 35% of the aggregate principal outstanding at the date of the exchanges. As a result, we recognized a net loss on extinguishment of debt of $10.3 million, calculated as the inducement loss, plus an allocation of advisory fees less the revaluation gain. For a description of the redemption of our subordinated notes and the induced conversion of a portion of our convertible notes, see Note 6 of the condensed consolidated financial statements.
Other income (expense), net: In the three and nine months ended September 30, 2009, other expenses, net, resulted primarily from net foreign currency losses due to the revaluation of monetary asset and liability balances denominated in a currency other than the reporting entity's functional currency and $1.5 million in legal and advisory fees associated with the amendment to our credit facility. . . .
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