Itron, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Itron provides smart-metering solutions and related software and services to electric, gas, and water utilities. Figures below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $470.1 million | $489.4 million | $918.4 million | $964.1 million |
| Gross profit / margin | $118.6 million / 25.2% | $163.0 million / 33.3% | $256.8 million / 28.0% | $317.6 million / 32.9% |
| Operating income (loss) | $(4.0) million | $31.9 million | $9.6 million | $36.5 million |
| Net income (loss) attributable to Itron | $(14.2) million | $19.3 million | $(9.3) million | $19.0 million |
| Diluted EPS | $(0.37) | $0.49 | $(0.24) | $0.48 |
- Cash flow: First-half operating cash flow was $17.6 million, down from $67.2 million; capital expenditures were $21.0 million, producing negative free cash flow of $3.4 million versus positive $47.8 million a year earlier.
- Liquidity: Cash was $128.8 million at June 30, up from $112.4 million at year-end. Working capital was $326.2 million. Management said existing liquidity sources should fund operations and obligations for the next 12 months and into the foreseeable future, while noting this is not assured.
- Debt: Total debt was $373.0 million, including $225.0 million of term debt and $148.0 million drawn on the revolver; cash less debt was approximately $244.1 million net debt. The new $725 million secured facility matures in 2020. Itron reported covenant compliance and $244.5 million available for additional revolver borrowings under leverage constraints.
- Other balance-sheet items: Inventories rose to $195.4 million from $154.5 million at year-end. Total liabilities were $1.05 billion and shareholders’ equity was $645.3 million.
Material changes and operating trends
- Reported revenue declined 4% in Q2 and 5% in the first half, but foreign exchange reduced revenue by $50.2 million and $93.9 million, respectively. On a constant-currency basis, revenue increased $31.0 million in Q2 and $48.1 million in the first half.
- Revenue trends diverged by segment: Q2 Electricity revenue rose 11% to $203.4 million; Gas fell 10% to $139.4 million; and Water fell 16% to $127.3 million. Constant-currency Electricity growth was strong, while Gas was roughly flat and Water declined modestly.
- Gross margin fell sharply, primarily because of Water-segment warranty charges and weaker Gas margins. Q2 operating results also moved from profit to loss; first-half operating income fell 74% year over year.
- Regional revenue shifted toward the United States and Canada, which generated $253.9 million in Q2 versus $214.3 million a year earlier. EMEA revenue was $168.4 million versus $216.3 million, with foreign exchange a major factor.
- Bookings were $398 million in Q2. Total backlog was $1.37 billion, including $791 million expected to convert to revenue in the next 12 months. The filing cautions that backlog is not a complete measure of future revenue and may be rescheduled or canceled.
Outlook, unusual items, and risks
- Water product replacement: Itron identified premature failures in certain Water communication modules manufactured from July 2013 through December 2014. It recorded a $23.6 million Q2 warranty charge and $3.1 million in Q1 for the matter; the filing says the charge reduced first-half EPS by $0.43. Total warranty expense was $30.7 million for the first half, versus $2.7 million in 2014.
- Restructuring: The 2014 restructuring is expected to be substantially complete by the end of 2016. Expected costs fell by approximately $11.3 million during the first half, including a $9.7 million expense release; $9.2 million of additional costs remained to be recognized at June 30. Labor requirements could delay some actions.
- Credit facility and repurchases: The new credit agreement was entered into June 23, 2015. Itron repurchased $9.9 million of shares under a new $50 million program through June 30, with $40.1 million remaining; it also repurchased 230,000 shares after quarter-end at an average $32.00 per share.
- Contingencies: Patent litigation brought by Transdata against customers Itron agreed to indemnify remains unresolved. Itron did not expect a material adverse effect on its business or financial condition, but an unfavorable outcome could materially affect results in the period recognized. The company also disclosed ongoing tax examinations and customer-contract guarantees, including letters of credit and surety bonds.
- Key risks: Demand and order timing, contract delivery or performance, product acceptance and warranty costs, foreign-currency and interest-rate movements, competition, international conditions, and access to capital. More than half of revenue and operating expenses are denominated in foreign currencies; exchange-rate changes materially affected reported revenue.
- Guidance: The filing provides no specific revenue or earnings guidance. Management’s liquidity assessment and backlog disclosures are not formal earnings guidance.
Important facts for investors to verify
- Whether the Water module replacement program’s scope, claims, and ultimate warranty costs remain consistent with the recorded provision.
- Whether the sharp Q2 margin deterioration and Gas/Water segment trends persist after adjusting for the one-time warranty charge and currency effects.
- Whether operating cash flow recovers after the inventory build and whether backlog converts to revenue on expected timing.
- Current borrowing availability and covenant headroom under the secured credit facility, alongside continued share repurchases.
- Developments in the Transdata litigation, tax examinations, and restructuring execution and costs.