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Press Release

Itron Announces Second Quarter 2015 Financial Results

LIBERTY LAKE, Wash.—Aug. 5, 2015—Itron, Inc. (NASDAQ:ITRI) announced today financial results for its second quarter and six months ended June 30, 2015. The financial results include:

  • Quarterly and six month revenues of $470 million and $918 million;
  • Quarterly and six month Electricity segment revenues increased 11 percent and 9 percent;
  • Quarterly and six month GAAP net loss per share of 37 cents and 24 cents;
  • Quarterly and six month non-GAAP net loss per share of 38 cents and 18 cents;
  • A previously announced warranty charge of $23.6 million in the quarter and $26.7 million in the six month period impacted per share results by 38 cents and 43 cents, respectively;
  • An unfavorable tax adjustment due to losses in countries with full valuation allowances impacted per share results by approximately 18 cents in the quarter, and 21 cents in the six month period;
  • Quarterly and six month adjusted EBITDA of $4 million and $33 million;
  • Twelve-month backlog of $791 million and total backlog of $1.4 billion;
  • Quarterly bookings of $398 million.

"Revenues for the quarter increased by six percent excluding the impact of foreign currency, however, our earnings were unacceptable," said Philip Mezey, Itron's president and chief executive officer. "Strong improvement in the Electricity business was offset by the previously announced warranty cost in the Water segment, as well as weaker than expected Gas gross margin in the EMEA region. In addition, tax expense contributed to the unfavorable earnings. The higher tax rate in the quarter was due to operating losses in countries where deferred tax assets have been impaired. Improved profitability in these countries should result in a lower tax rate for the balance of the year."

"We are taking aggressive steps to strengthen our quality processes and improve operational performance, including immediate cost control measures to strengthen earnings in the second half of the year," continued Mr. Mezey. "Itron has a strong competitive position in a growing industry. We are also on track with our restructuring initiatives, which will deliver long-term sustainable cost savings. We are confident that we are taking the right steps to create increased value for shareholders in 2016 and beyond."

Financial Results — Quarter
Revenues were $470 million for the quarter compared with $489 million in 2014. Changes in foreign currency exchange rates unfavorably impacted revenues by approximately $50 million for the quarter. Excluding the impact from foreign currency, revenues increased $31 million, or 6 percent, compared with the 2014 quarter. The increase in revenues was driven by the Electricity segment, which grew 19 percent year-over-year, on a constant currency basis.

Gross margin for the quarter was 25.2 percent compared with the prior year period margin of 33.3 percent. Increased warranty expense, primarily due to $23.6 million recorded in the Water segment, negatively impacted gross margin by approximately 570 basis points. In addition, lower volumes and an unfavorable product mix in the Gas segment negatively impacted gross margin.

GAAP operating expenses in the quarter were $123 million compared with $131 million in same period of 2014. Changes in foreign currency exchange rates favorably impacted GAAP expenses by approximately $13 million in the quarter. Excluding the impact from foreign currency, expenses in the quarter increased $4 million compared with the prior year quarter. The increase was driven by restructuring, higher sales and marketing expenses in Electricity and increased product development investments in Gas and Water. These increases were partially offset by lower general and administrative costs driven by a recovery of $4.6 million from a litigation matter associated with the 2012 SmartSynch acquisition and lower intangible asset amortization expense.

GAAP operating loss for the quarter was $4 million compared with operating income of $32 million in the same period of 2014. GAAP net loss for the quarter was $14 million, or 37 cents per share, compared with net income of $19 million, or 49 cents per diluted share. The operating and net losses for the quarter were primarily attributable to the Water segment warranty charge and decreased contribution from the Gas segment. Interest expense in the quarter increased $1 million compared with the prior year due to the write-off of unamortized debt fees associated with the refinancing of a previous debt agreement. In addition, despite having a pre-tax net loss, tax expense was recorded due to valuation allowances applied to deferred tax assets in certain jurisdictions. These valuation allowances currently restrict the ability to recognize a tax benefit on losses in these jurisdictions.

Non-GAAP operating expenses, which exclude amortization of intangibles, restructuring charges, acquisition related expenses and goodwill impairment, were $123 million for the quarter compared with $128 million in the prior year quarter. Changes in foreign currency exchange rates favorably impacted Non-GAAP expenses by approximately $13 million in the quarter. Excluding the foreign currency impact, expenses increased by $8 million driven by higher sales and marketing costs in Electricity, increased product development investments in Gas and Water and higher general and administrative expenses due to employee related benefits and information technology support.

Non-GAAP operating loss was $5 million for the quarter compared with operating income of $35 million in the same period in 2014. Non-GAAP net loss for the quarter was $15 million, or 38 cents per share, compared with net income of $21 million, or 54 cents per diluted share in the prior year quarter. The Non-GAAP operating and net loss for the quarter were primarily attributable to the Water segment warranty charge and decreased contribution from the Gas segment. In addition, despite having a pre-tax net loss, tax expense was recorded due to valuation allowances applied to deferred tax assets in certain jurisdictions. These valuation allowances currently restrict the ability to recognize a tax benefit on losses in these jurisdictions.

Free cash flow was $10 million for the quarter compared with negative $10 million in the prior year quarter. Free cash flow for the quarter was positively impacted by timing of accounts payable disbursements, offset by increased inventory to support future production requirements.

During the quarter, the company repurchased 188,775 shares of Itron common stock at an average price of $36.25 per share pursuant to Board authorization to repurchase up to $50 million of Itron common stock during a 12-month period beginning February 2015. As of June 30, 2015, the company had repurchased 272,775 shares of Itron common stock at an average price of $36.30 per share, since the inception of the plan.

The company recently concluded discussions with several work councils in Europe regarding its restructuring plans and expects the pace of activities to accelerate. Adjustments to restructuring expense were made during the quarter to reflect changes in estimates and assumptions following labor negotiations. The company continues to expect annualized savings of approximately $40 million upon completion of the restructuring activities by the end of 2016.

Financial Results — Six Months
Revenues were $918 million for the first six months of 2015, compared with $964 million in the 2014 period. Changes in foreign currency exchange rates unfavorably impacted revenues by $94 million for the first six months. Excluding the impact from foreign currency, revenues increased $48 million, or 5 percent, compared with the 2014 period. The increase in revenues was driven by the Electricity segment, which grew nearly 17 percent year-over-year, on a constant currency basis.

Gross margin for the first six months of 2015 was 28.0 percent compared with 32.9 percent in 2014. Increased warranty expenses, primarily due to $26.7 million recorded in the Water segment, negatively impacted gross margin by approximately 320 basis points. In addition, lower volumes and an unfavorable product mix in the Gas segment negatively impacted gross margin.

GAAP operating expenses for the six month period were $247 million compared with $281 million in the prior year period. Changes in foreign currency exchange rates favorably impacted GAAP expenses by approximately $28 million for the six month period. Excluding the impact from foreign currency, expenses in the six month period decreased $6 million compared with the 2014 period. The decrease was driven by lower intangible asset amortization expense and adjustments to restructuring reserves.

GAAP operating income for the six month period was $10 million compared with $36 million in the 2014 period. GAAP net loss in the first six months was $9 million, or 24 cents per share, compared with net income of $19 million, or 48 cents per share, in the 2014 period. The decrease in GAAP net earnings compared with the prior year period was driven by lower gross profit in the Water and Gas segments and an increased effective tax rate and expense as a result of valuation allowances applied to deferred tax assets in certain jurisdictions. These valuation allowances currently restrict the ability to recognize a tax benefit on losses in these jurisdictions.

Non-GAAP operating expenses, which exclude amortization of intangibles, restructuring charges, acquisition related expenses and goodwill impairment, for the six month period were $243 million compared with $260 million in the prior year period. Changes in foreign currency exchange rates favorably impacted Non-GAAP expenses by approximately $25 million in the six month period. Excluding the foreign currency impact, expenses increased due to higher sales and marketing expenses in both the Electricity and Water segments, increased product development investments in Gas and Water and higher general and administrative expenses due to employee related benefits and professional services.

Non-GAAP operating income for the first six months of 2015 was $13 million compared with $58 million in 2014. Non-GAAP net loss for the first six months of 2015 was $7 million, or 18 cents per share, compared with non-GAAP net income of $34 million, or 85 cents per diluted share, in 2014. The decrease in non-GAAP operating income for the six month period was attributable to lower gross profit. Non-GAAP net income for the year was negatively impacted by a higher effective tax rate driven primarily by the valuation allowances applied to deferred tax assets in certain jurisdictions. These valuation allowances currently restrict the ability to recognize a tax benefit on losses in these jurisdictions.

During the first six months of 2015, free cash flow was negative $3 million compared with positive $48 million in 2014. The decrease over the prior year was primarily due to lower earnings and increased inventory levels.

Financial Guidance
Itron's guidance for the full year 2015 is as follows:

  • Revenue between $1.85 and $1.95 billion
  • Non-GAAP diluted earnings per share between $1.00 and $1.30

The company's guidance includes the effect of the $26.7 million Water warranty charge recorded in the first half of the year, accounting for 43 cents of decreased earnings per share. The guidance assumes a Euro to U.S. dollar average exchange rate of $1.12 in 2015 compared with an average rate of $1.33 in 2014, a gross margin of approximately 30 percent and average shares outstanding of approximately 38.5 million for the year. The company also anticipates modest upward pressure on its previously provided guidance of 37 percent non-GAAP effective tax rate for the full year.

The guidance reflects the company's expectation for improvement in results in the second half of 2015 when compared with the first half. Earnings are expected to improve due to increased revenue supported by contracted backlog; higher gross margin reflecting additional volumes across all segments, product cost reductions and factory efficiencies in Gas in the fourth quarter; immediate cost reductions in all categories of discretionary spending; and a lower effective tax rate than realized in the first half of the year.

Earnings Conference Call
Itron will host a conference call to discuss the financial results and guidance contained in this release at 5:00 p.m. Eastern Daylight Time (EDT) on Aug 5, 2015. 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 will be 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 at http://investors.itron.com/events.cfm. A telephone replay of the conference call will be available through Aug. 10, 2015. To access the telephone replay, dial (888) 203-1112 (Domestic) or (719) 457-0820 (International) and enter passcode 5299205.

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, 2014 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 Q2 2015 Earnings Statement.


About Itron

Itron enables utilities and cities to safely, securely and reliably deliver critical infrastructure services to communities in more than 100 countries. Our portfolio of smart networks, software, services, meters and sensors helps our customers better manage electricity, gas and water resources for the people they serve. By working with our customers to ensure their success, we help improve the quality of life, ensure the safety and promote the well-being of millions of people around the globe. Itron is dedicated to creating a more resourceful world. Join us: www.itron.com.

Itron® and OpenWay® are registered trademarks of Itron, Inc. All third-party trademarks are property of their respective owners and any usage herein does not suggest or imply any relationship between Itron and the third party unless expressly stated.

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