Itron, Inc. — 2015 Form 10-K Summary
Business and reporting period. Itron supplies meters, smart-metering systems, software, analytics and services to electric, gas and water utilities. This annual report covers the fiscal year ended December 31, 2015; the filing also presents unaudited fourth-quarter results. The statements were audited by Ernst & Young, which issued an unqualified opinion on the financial statements.
Financial performance and liquidity
- Revenue: $1.884 billion, down 3% from revised 2014 revenue of $1.948 billion. Currency movements reduced 2015 revenue by $178.3 million; on a constant-currency basis revenue increased $114.2 million.
- Profit and margins: Gross profit was $556.7 million and gross margin 29.6%, versus $614.1 million and 31.5% in 2014. Operating income was $52.8 million, compared with $0.5 million; net income attributable to Itron was $12.7 million, compared with a $23.7 million loss. Diluted EPS was $0.33 versus a loss of $0.60. Non-GAAP operating income was $71.7 million, down from $109.1 million; non-GAAP diluted EPS was $0.73 versus $1.54.
- Cash flow: Operating cash flow was $73.4 million, down from $133.0 million. Capital expenditures were $43.9 million and company-defined free cash flow was $29.4 million, versus $88.5 million in 2014. Higher inventory and restructuring-related cash payments contributed to the decline.
- Liquidity and debt: Year-end cash was $131.0 million, working capital $281.2 million and total debt $371.2 million, up from $324.0 million a year earlier. The $725 million credit facility included a $225 million term loan and $500 million revolver; $301.6 million remained available under the revolver after borrowings and letters of credit.
- Orders: Bookings were $1.981 billion, down from $2.385 billion. Total backlog was $1.575 billion and estimated 12-month backlog was $836 million, both higher than 2014.
Changes and notable items
- Electricity revenue rose 6% to $820.3 million; Gas revenue fell 9% to $543.8 million and Water revenue fell 10% to $519.4 million. Water gross margin declined to 28.0% from 35.1%, principally reflecting a $29.4 million special warranty charge for premature failures in certain communication modules. The charge reduced 2015 diluted EPS by $0.47.
- Management revised 2013–2014 annual results and 2014 and 2015 quarterly results after reviewing revenue and cost recognition for certain software and maintenance arrangements. Management said prior annual and quarterly statements were not materially misstated; the filing presents revised figures.
- Fourth-quarter 2015 revenue was $496.4 million and net income attributable to Itron was $9.0 million. A $13.3 million reversal of previously accrued incentive compensation was recorded in Q4.
Outlook, risks and contingencies
- Management expected the 2014 restructuring projects to be substantially complete by Q4 2016, targeting $40 million in annualized savings; labor rules and facility-sale timing could delay completion. Management said liquidity should fund operations and obligations for the next 12 months and foreseeable future, but gave no assurance.
- Internal control over financial reporting was ineffective at year-end due to a material weakness in software revenue-recognition controls. The auditor issued an adverse opinion on internal control. Itron also filed its 2015 Form 10-K and Q1 2016 Form 10-Q late; reporting-covenant due dates were waived through September 12, 2016, and the company temporarily could not use Form S-3.
- Other key exposures include utility spending and project timing, foreign exchange, product failures, competition, suppliers, cybersecurity, pension assumptions and credit-facility covenants. Transdata patent litigation and a Brazilian competition investigation remained ongoing; management did not expect material adverse effects on business or financial condition. The IRS proposed adjustments to R&D tax credits in April 2016; management disputed them and did not expect a material financial-position impact.
Investor verification points
- Review the revised comparative financial statements and the scope and remediation progress of the revenue-recognition control weakness.
- Confirm subsequent compliance with credit-facility reporting requirements and the status of the covenant waivers and Form S-3 eligibility.
- Track warranty claims and costs for the affected water communication modules, restructuring completion and realized savings.
- Assess cash conversion, inventory growth, debt balances and backlog conversion into revenue.
- Follow the Transdata cases, Brazilian investigation and IRS R&D tax-credit dispute for changes in exposure or estimates.