Itron, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Itron supplies products and services to electricity, gas and water utilities. Comparisons are with Q1 2014 unless stated otherwise. Amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $448.2 million | $474.8 million; down 6% |
| Gross profit / margin | $138.2 million / 30.8% | $154.5 million / 32.5% |
| Operating income / margin | $13.5 million / 3.0% | $4.5 million / 1.0% |
| Net income (loss) attributable to Itron | $4.9 million; diluted EPS $0.13 | ($0.3 million); diluted EPS ($0.01) |
| Non-GAAP net income / diluted EPS | $7.8 million / $0.20 | $12.2 million / $0.31 |
| Operating cash flow / free cash flow | ($4.0 million) / ($13.4 million) | $66.8 million / $58.2 million |
| Cash and cash equivalents | $118.1 million | $112.4 million at Dec. 31, 2014 |
| Total debt | $361.3 million | $324.0 million at Dec. 31, 2014 |
| Working capital | $279.7 million | $261.9 million at Dec. 31, 2014 |
Cash from operations fell sharply, reflecting increased payments for current liabilities, employee compensation and taxes, lower receivable collections, and inventory buildup. Investing cash outflow was $9.6 million; financing provided $25.9 million, including $63.0 million of revolving-credit borrowings. Debt less cash was approximately $243.2 million at quarter-end. The $660 million revolver had $136.3 million drawn and $53.0 million committed to letters of credit, leaving $470.7 million available; Itron reported compliance with its debt covenants.
Foreign exchange reduced reported revenue by $43.6 million and contributed to a $61.1 million foreign-currency translation loss in other comprehensive income. Total comprehensive loss attributable to Itron was $55.8 million. Itron reported cash of $47.5 million in certain foreign subsidiaries considered permanently reinvested and approximately $30.2 million held in joint ventures, where repatriation may be limited.
Material changes and segment performance
- Revenue declined despite $25.6 million of currency-adjusted growth in Electricity; Gas declined $8.5 million excluding currency effects, while Water was flat on that basis. Revenue by segment was Electricity $193.9 million, Gas $125.1 million and Water $129.3 million.
- Electricity gross margin rose to 28.4% from 23.7%, and operating income improved to $2.4 million from a $23.0 million loss. Drivers included product mix, lower warranty costs, and the absence of a prior-year $2.5 million OpenWay project charge.
- Gas gross margin fell to 34.8% from 40.0%, and operating income decreased to $13.6 million from $25.7 million. Water gross margin fell to 30.6% from 36.0%, and operating income decreased to $8.1 million from $20.6 million. Lower volumes or less favorable mix and higher warranty costs weighed on both segments.
- GAAP operating expenses declined 17% to $124.7 million, including a $5.4 million restructuring expense reversal versus $5.5 million of expense in Q1 2014. Operating income improved, but non-GAAP operating income declined 19% to $18.4 million and non-GAAP diluted EPS fell to $0.20 from $0.31.
- Bookings were $424 million; total backlog was $1.438 billion and estimated 12-month backlog was $779 million. Management cautions that backlog is not a complete measure of future revenue and contracts can be rescheduled or canceled.
Outlook, commentary and risks
No specific quarterly or full-year revenue or earnings guidance is provided. 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. Management expected approximately $34.3 million of 2015 cash taxes, net of refunds, and about $388,000 of pension contributions.
The 2014 restructuring program is intended to improve efficiency through facility consolidation and workforce reductions and is expected to be substantially complete by the end of 2016. Expected total costs were $59.8 million at March 31, with $9.4 million of costs remaining to be recognized. The company released $5.4 million of restructuring expense in Q1, mainly because some identified employees resigned or filled other roles. Timing and costs remain subject to labor laws and execution.
Warranty expense increased to $5.8 million from $3.3 million, primarily due to special provisions for several customers. Itron cited demand timing, order changes or cancellations, product acceptance and performance, warranty and litigation estimates, foreign exchange and interest rates, competition, international operations, and access to capital among the risks to results. A Transdata patent-infringement case involving utility customers remains unresolved; Itron provides contractual indemnification and said an unfavorable outcome could materially affect results in the period recognized, though it did not expect a material adverse effect on the business or financial condition. Tax authorities were examining years 2000–2013; management said it had accrued appropriately but could not estimate potential changes in unrecognized tax benefits.
Other notable items: the company repurchased 419,251 shares for $16.3 million during the quarter and authorized a new $50 million repurchase program in February. The filing reported effective disclosure controls and no material changes in internal control over financial reporting.
Key investor verification points
- Assess how much of the revenue decline and reported balance-sheet movement reflects currency translation versus underlying demand, particularly in EMEA.
- Monitor Gas and Water margins, elevated warranty costs, and whether Electricity’s margin improvement is sustainable.
- Track operating cash flow and working-capital needs; Q1 free cash flow was negative despite positive GAAP net income.
- Review debt maturities: the credit facility matures August 8, 2016, with scheduled term-loan payments and a substantial revolving balance.
- Follow restructuring execution, remaining costs, and whether expected savings materialize; compare GAAP results with non-GAAP measures that exclude certain recurring costs.
- Update exposure to the Transdata litigation, tax examinations and unrecognized tax benefits, and any changes in warranty estimates or customer claims.
- Evaluate backlog conversion and cancellations, and the availability of cash held in foreign subsidiaries and joint ventures.