Itron, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; statements are unaudited. The report was signed August 12, 2016. Itron provides smart metering, software, and related services to electric, gas, and water utilities through its Electricity, Gas, and Water segments.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $497.6 million | $446.7 million |
| Gross profit / margin | $163.2 million / 32.8% | $138.4 million / 31.0% |
| Operating income / margin | $23.6 million / 4.7% | $13.5 million / 3.0% |
| Net income attributable to Itron | $10.1 million | $5.4 million |
| Diluted EPS | $0.26 | $0.14 |
| Operating cash flow | $33.8 million | $(4.0) million |
| Free cash flow (non-GAAP) | $25.0 million | $(13.4) million |
Revenue increased 11%, while foreign exchange reduced reported revenue growth by $16.0 million. Gross margin improved 180 basis points, primarily on stronger results across segments and lower Water warranty charges. GAAP operating expenses rose $14.7 million, including higher restructuring, G&A, and product development costs. Adjusted EBITDA, a non-GAAP measure, increased 36% to $40.3 million; non-GAAP diluted EPS was $0.44 versus $0.22.
All segments grew revenue: Electricity $217.3 million (+13%), Gas $139.3 million (+11%), and Water $141.0 million (+9%). Water gross margin rose to 35.5% from 31.0%, largely reflecting lower warranty charges; Gas margin edged down to 34.9% from 35.2%.
Liquidity and debt
Cash was $132.6 million at March 31, 2016, compared with $131.0 million at year-end 2015. Total debt was $349.1 million, including $132.6 million outstanding on the revolver; working capital was $283.3 million. Net cash from investing activities was $(8.2) million and net cash used in financing was $(25.0) million. Operating cash flow improved substantially year over year, reflecting higher earnings and favorable inventory and payroll-related movements, partly offset by increased receivables.
The $725 million credit facility matures in 2020. Itron reported that it was not in compliance with the facility’s financial-reporting covenants at March 31, 2016. Amendments dated April 1 and June 13, 2016 granted waivers extending specified audited and quarterly reporting deadlines to September 12, 2016, and reduced the letter-of-credit subfacility from $300 million to $250 million. The filing reported $321.5 million available for additional borrowing or letters of credit at quarter-end; letter-of-credit availability was subsequently reduced under the amendments.
Changes, outlook, and notable matters
- Backlog: Total backlog was $1.504 billion and estimated 12-month backlog was $785 million at quarter-end. Quarterly bookings were $394 million, down from $424 million in Q1 2015. Backlog is subject to project timing, customer rescheduling, and cancellations, and does not capture all book-and-ship orders.
- Management outlook: Itron said existing liquidity sources should fund operations and obligations for the next 12 months and beyond, but gave no assurance. The filing provides no specific revenue or earnings guidance. Management expected restructuring projects to be substantially complete by Q4 2016; the 2013 projects were expected to deliver full savings in 2017.
- Accounting and controls: The company revised previously reported 2015 quarterly financial statements for the timing of revenue and cost recognition on certain software-related contracts. A material weakness in revenue recognition controls remained unremediated at March 31, 2016, involving evidence of fair value for certain maintenance elements and whether software was essential to hardware functionality. Management concluded disclosure controls were not effective.
- Restructuring and unusual items: Q1 restructuring expense was $2.2 million, versus a $5.2 million restructuring credit in Q1 2015. The 2014 restructuring program had $2.0 million of expected costs remaining at March 31, 2016; accrued restructuring liabilities totaled $25.5 million.
- Risks and contingencies: Foreign-currency losses, net of hedging, were $1.1 million versus gains of $0.2 million a year earlier. About half of revenue and operating expenses were denominated in foreign currencies. Itron disclosed tax examinations for 2000–2013 and $55.0 million of unrecognized tax benefits; management could not estimate the range of possible changes over the next 12 months. A Brazilian competition investigation remained open, with provisions recorded; Itron did not expect a material adverse outcome. A July 14, 2016 settlement with Transdata provided a patent license and dismissal of pending litigation. No material risk-factor changes were reported for the quarter.
Investor facts to verify
- Progress in remediating the revenue-recognition material weakness and the implications of the 2015 financial-statement revisions.
- Compliance with amended credit-facility reporting deadlines and the availability of borrowing and letter-of-credit capacity.
- Whether backlog converts to revenue as estimated, given project timing and customer cancellation or rescheduling rights.
- Future warranty experience, restructuring execution and savings, and resolution of tax and Brazil investigation matters.
- Performance excluding foreign-exchange effects and the nature and recurrence of adjustments used in non-GAAP results.