Itron Announces Third Quarter 2014 Financial Results

LIBERTY LAKE, Wash. — Nov. 4, 2014 — Itron, Inc. (NASDAQ:ITRI) announced today financial results for its third quarter and nine months ended Sept. 30, 2014. Highlights include:

• Quarterly and nine month revenues of $496 million and $1.5 billion;

• Quarterly and nine month GAAP diluted earnings per share of 19 cents and 67 cents;

• Quarterly and nine month non-GAAP diluted earnings per share of 39 cents and $1.24;

• Quarterly and nine month adjusted EBITDA of $40 million and $121 million;

• Twelve-month backlog of $700 million and total backlog of $1.3 billion; and

• Quarterly bookings of $514 million.

"Our third quarter revenues and bookings were strong and we continue to grow our backlog with new smart grid projects around the world," said Philip Mezey, Itron's president and chief executive officer. "Additionally, we are executing well on a number of initiatives to drive growth and profit improvement, including plans to improve the profitability of the Electricity segment."

"I am encouraged by the improved visibility for revenue growth that our increased backlog provides, and I am confident in our ability to execute on our operational plans," continued Mr. Mezey. "As we move forward with these key steps to achieve our long-term profitability goals, we also plan to immediately increase the rate of our share repurchases and fully utilize the $50 million authorized by the board."

Financial Results

Revenues were $496 million for the quarter and $1.5 billion for the first nine months of 2014 compared with $495 million and $1.4 billion for the same periods in 2013. Changes in foreign currency exchange rates unfavorably impacted revenues by approximately $3 million for the quarter and $6 million for the first nine months of 2014. Excluding the impact from foreign currency, revenues increased $4 million, or 1 percent for the quarter and $42 million, or 3 percent, for the nine month period compared with the same periods in 2013. The increases for the quarter and nine month period were driven by growth in the Water and Gas segments, which more than offset a decrease in the Electricity segment.

Gross margin for the quarter was 30.4 percent compared with the prior year period margin of 30.3 percent. For the first nine months of 2014, gross margin was 32.1 percent compared with 31.6 percent in the prior year period. The higher gross margin for the quarter was driven primarily by improved performance in the Water segment. The improved gross margin for the nine month period was driven by higher relative contribution from the Water and Gas segments, which have higher gross margins than the Electricity segment.

During the quarter, a net charge of $11.4 million was recorded in the Electricity segment for increased costs on an OpenWay project in North America, which impacted the company's gross margin by 270 basis points. A similar charge was recorded on this project in the third quarter in 2013, impacting gross profit by $13.6 million, or 260 basis points of gross margin.

GAAP operating expenses were $134 million in the quarter and $415 million in the nine month period compared with $157 million and $436 million in the same periods of 2013. The decrease in operating expenses in both periods was driven by lower restructuring expenses and reduced headcount, partially offset by increased general and administrative costs related to professional fees and variable compensation.

GAAP operating income for the quarter was $16 million compared with a loss of $6 million in the same period last year. The increase was driven by lower restructuring expenses and reduced headcount, partially offset by increased general and administrative costs related to professional fees and variable compensation. GAAP net income and diluted EPS for the quarter were $7 million and 19 cents per share, compared with a net loss of $7 million and 19 cents per share in the same period in 2013. The increase in GAAP net income for the quarter was driven by higher operating income, partially offset by higher foreign exchange losses due to the devaluation of currencies in certain markets and a higher effective tax rate. Both the GAAP and non-GAAP estimated tax rates for full year 2014 have increased compared with 2013 due to the expiration of a research and development credit in the U.S. that has not yet been reinstated for the year, and a valuation allowance on certain deferred tax assets.

GAAP operating income for the first nine months of 2014 was $53 million compared with $14 million in the prior year period. The increase was driven by higher revenues and gross profit, as well as lower restructuring expenses partially offset by increased general and administrative costs related to professional fees and variable compensation. GAAP net income and diluted earnings per share for the nine month period were $26 million and 67 cents per share, compared with net income of $8 million and 19 cents per share in the same period last year. The increase in GAAP net income was driven by higher operating income, partially offset by higher net interest expense, higher foreign exchange losses due to the devaluation of currencies in certain markets and a higher effective tax rate.

Non-GAAP operating expenses for the quarter, which exclude amortization of intangibles, restructuring charges, acquisition related expenses and goodwill impairment, were $123 million compared with $117 million in the prior year period. For the first nine months of 2014, non-GAAP operating expenses were $383 million compared with $370 million in the prior year period. The increase in operating expenses in both periods was driven primarily by higher general and administrative costs associated with variable compensation and professional fees.

Non-GAAP operating income for the quarter was $28 million compared with $33 million in the same period last year. The decrease was driven by increased non-GAAP operating expenses. Non-GAAP net income and diluted earnings per share for the quarter were $15 million and 39 cents per share, compared with $25 million and 65 cents per share in the same period in 2013. The decrease in non-GAAP net income and earnings per share was attributable to decreased operating income, higher foreign exchange losses due to the devaluation of currencies in certain markets and a higher effective tax rate.

Non-GAAP operating income for the first nine months of 2014 was $86 million compared with $80 million in the same period in 2013. The increase in non-GAAP operating income was driven by higher revenue and gross profit. Non-GAAP net income and diluted earnings per share for the first nine months of 2014 were $49 million and $1.24 per share, compared with $61 million and $1.54 per share in the same period in 2013. Non-GAAP net income was impacted by higher net interest expense, higher foreign exchange losses due to the devaluation of currencies in certain markets and a higher effective tax rate in 2014.

Free cash flow for the quarter was $37 million compared with $31 million in the third quarter of 2013. Free cash flow in the quarter was positively impacted by improved earnings, working capital management and lower capital expenditures. During the first nine months of 2014, free cash flow was $84 million, an improvement of $63 million over 2013 due to higher profits, better relative working capital metrics and lower levels of capital expenditures.

Share Repurchase

The company plans to fully utilize the $50 million authorized by its board to repurchase shares during a 12-month period beginning March 7, 2014. The company has repurchased $15 million of Itron common stock through Nov. 3, 2014 and intends to fully utilize the remaining $35 million available through the expiration of the authorization.

During the third quarter, the company repurchased 203,700 shares of Itron common stock at an average price of $40.06 per share. As of Sept. 30, 2014, the company had repurchased 311,177 shares of Itron common stock at an average price of $39.77 per share since inception of the current authorization

Restructuring

The company filed a Form 8-K today announcing plans to restructure the Electricity business segment and related general and administrative activities to improve operational efficiencies and reduce expenses. The company expects to substantially complete the plans by the end of 2016 and achieve annualized cost savings of approximately $40 million upon completion. The company estimates total pre-tax restructuring charges of $65 to $75 million and expects to record the majority of the charges in the fourth quarter of 2014. See the Form 8-K for further details on the restructuring project.

Earnings Conference Call

Itron will host a conference call to discuss the financial results contained in this release at 4:30 p.m. Eastern Standard Time (EST) on Nov. 4, 2014. The call will be webcast in a listen-only mode. Webcast information and conference call materials will be made available 10 minutes before the start of the call and are accessible on Itron's website at http://investors.itron.com/events.cfm. A replay of the audio webcast will be available within 90 minutes of the conclusion of the live call and available for one year athttp://investors.itron.com/events.cfm. A telephone replay of the conference call will be available through Nov. 9, 2014. To access the telephone replay, dial (888) 203-1112 (Domestic) or (719) 457-0820 (International), and enter passcode 8690717.

Forward Looking Statements

This release contains forward-looking statements concerning our expectations about operations, financial performance, sales, earnings and cash flows. These statements reflect our current plans and expectations and are based on information currently available. The statements rely on a number of assumptions and estimates, which could be inaccurate, and which are subject to risks and uncertainties that could cause our actual results to vary materially from those anticipated. Risks and uncertainties include the rate and timing of customer demand for our products, rescheduling of current customer orders, changes in estimated liabilities for product warranties, changes in laws and regulations, our dependence on new product development and intellectual property, future acquisitions, changes in estimates for stock-based and bonus compensation, increasing volatility in foreign exchange rates, international business risks and other factors that are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2013 and other reports on file with the Securities and Exchange Commission. Itron undertakes no obligation to update publicly or revise any forward-looking statements, including our business outlook.

Non-GAAP Financial Information

To supplement our consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP financial measures, including non-GAAP operating expense, non-GAAP operating income, non-GAAP net income, non-GAAP diluted EPS, adjusted EBITDA and free cash flow. We provide these non-GAAP financial measures because we believe they provide greater transparency and represent supplemental information used by management in its financial and operational decision making. Specifically, these non-GAAP financial measures are provided to enhance investors' overall understanding of our current financial performance and our future anticipated performance by excluding infrequent or non-cash costs, particularly those associated with acquisitions. We exclude certain costs in our non-GAAP financial measures as we believe the net result is a measure of our core business. Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP. Our non-GAAP financial measures may be different from those reported by other companies. A more detailed discussion of why we use non-GAAP financial measures, the limitations of using such measures, and reconciliations between non-GAAP and the nearest GAAP financial measures are included in this press release.

Related Documents:

Itron Q3 2014 Earnings Statement.