Itron, Inc. — Q3 2015 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Itron provides smart metering products, software and services to electric, gas and water utilities.
Financial highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $469.1 million | $496.5 million | $1,387.4 million | $1,460.6 million |
| Gross margin | 31.3% | 30.4% | 29.1% | 32.1% |
| Operating income | $27.2 million | $16.5 million | $36.8 million | $52.9 million |
| Net income attributable to Itron | $12.7 million | $7.3 million | $3.4 million | $26.3 million |
| Diluted EPS | $0.33 | $0.19 | $0.09 | $0.67 |
| Operating cash flow | Not separately presented for the quarter | $20.2 million | $116.5 million |
- Reported revenue fell 6% in Q3 and 5% year to date. Currency translation reduced revenue by $46.0 million and $139.9 million, respectively; on a constant-currency basis, revenue increased $18.6 million in Q3 and $66.7 million year to date.
- Q3 operating margin improved to 5.8% from 3.3%; nine-month operating margin declined to 2.7% from 3.6%. Nine-month earnings were pressured by the Water product-replacement charge and weaker Gas and Water gross margins.
- Q3 GAAP earnings improved partly against a prior-year $11.4 million OpenWay project charge and included a $3.4 million recovery of SmartSynch litigation-settlement costs. Year-to-date recoveries were $8.0 million. Non-GAAP diluted EPS was $0.43 for Q3 and $0.25 year to date; these measures exclude specified expenses and should be considered alongside GAAP results.
Balance sheet, cash flow and liquidity
- At September 30, cash was $109.5 million, total debt was $380.7 million, and working capital was $334.2 million. Total debt increased from $324.0 million at year-end 2014.
- Nine-month operating cash flow was $20.2 million; capital expenditures were $33.3 million, producing company-defined free cash flow of negative $13.2 million, versus positive $84.5 million in 2014. Management attributed weaker operating cash flow mainly to lower earnings, a $49.2 million higher inventory build, greater payments of current liabilities and higher taxes paid.
- The June 2015 credit agreement provides $725 million of committed facilities, including a $225 million term loan and a $500 million revolver. At quarter-end, $158.5 million was drawn on the revolver; $238.4 million was available for additional borrowing under leverage constraints. Itron reported compliance with its debt covenants.
Business changes, outlook and risks
- Segment performance was mixed: Q3 Electricity revenue rose 1% reported (up $17.7 million constant currency), while Gas and Water revenue fell 8% and 12%. For the first nine months, reported revenue increased 6% in Electricity and declined 11% in Gas and 14% in Water.
- A $28.2 million year-to-date warranty charge related to premature failures in certain Water communication modules manufactured from July 2013 through December 2014. The charge reduced nine-month EPS by $0.45 after tax; the warranty liability was $54.7 million at September 30.
- Management reported total backlog of $1.22 billion and twelve-month backlog of $727 million at quarter-end. Backlog is subject to timing, rescheduling and cancellation, and does not include all book-and-ship orders. The filing provides no specific revenue or earnings guidance.
- The 2014 restructuring program is expected to be substantially complete by the end of 2016. Expected total costs fell by about $16.3 million during the first nine months; the company recorded a $9.7 million restructuring credit, and $4.3 million of costs remained expected.
- Itron acquired water-industry software provider Temetra in August for a preliminary purchase price of $9.3 million, including estimated contingent consideration. The acquisition was described as not significant to consolidated results.
- Currency movements reduced nine-month cash by $12.9 million and contributed to a $63.9 million foreign-currency translation loss in other comprehensive income. Itron uses derivatives for currency and interest-rate risk, not for speculation.
- Transdata patent litigation remains unresolved, including claims against utility customers and a September 2015 complaint against Itron. The company said it did not expect a material adverse effect on business or financial condition, but an unfavorable outcome could materially affect results in the period recognized. Other exposures include tax examinations and customer-contract guarantees.
- Management stated that existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, while noting that this is not assured. Foreign cash and cash held in joint ventures may be subject to repatriation costs or access limitations.
Investor verification priorities
- Track claims, replacement costs and reserve adequacy for the Water communication-module warranty issue.
- Assess whether backlog converts to revenue and whether Gas and Water margins stabilize, separating operational trends from foreign-exchange effects.
- Monitor operating cash generation, inventory levels, revolver usage, leverage covenant headroom and remaining share repurchases.
- Follow developments in the Transdata litigation, tax examinations and restructuring execution or cost estimates.
- Reconcile reported results with non-GAAP measures and the disclosed one-time items, including warranty charges, restructuring credits and litigation-cost recoveries.