Itron Announces Third Quarter 2015 Financial Results

LIBERTY LAKE, Wash.—Nov. 3, 2015—Itron, Inc. (NASDAQ:ITRI) announced today financial results for its third quarter and nine months ended Sept. 30, 2015. The results include:

• Quarterly and nine month revenues of $469 million and $1.4 billion;
• Strong year over year Electricity revenue growth in North America of 17 percent in the quarter and 30 percent in the nine month period on a constant currency basis;
• Quarterly and nine month GAAP net earnings per share of 33 cents and 9 cents;
• Quarterly and nine month non GAAP net earnings per share of 43 cents and 25 cents;
• An unfavorable tax adjustment due to a valuation allowance on deferred tax assets in Brazil impacted per share results by approximately 11 cents in the quarter and nine month period;
• Quarterly and nine month adjusted EBITDA of $42 million or 8.9 percent, and $75 million or 5.4 percent.

"Despite foreign currency headwinds, Itron's third quarter financial performance improved year-over-year driven by strong growth in the Electricity segment in North America," said Philip Mezey, Itron president and chief executive officer. "We also progressed on our operational improvements in the Gas and Water segments. Importantly, we expect continued improvements in consolidated company profitability and a lower tax rate in the fourth quarter."

"We continue to see strong customer opportunities involving smarter endpoints, software analytics and services, and we are driving innovation in these areas," added Mr. Mezey. "At Itron Utility Week in October, we unveiled plans for the next generation communications system for energy and water customers. With OpenWay Riva, we will have a single open standards-based network and application platform for electricity, gas and water utilities &mdash differentiating Itron and positioning the company to deliver an industry-leading multi purpose network."

"We remain focused on rigorously executing our restructuring initiatives, which we expect to deliver $40 million of annualized savings beginning in 2017. We are moving quickly and are on schedule with our planned activities. Additionally, Tom Deitrich recently joined Itron as the new chief operating officer and is leading a comprehensive evaluation of Itron's manufacturing and supply chain strategies and R&D efficiency with the goal of identifying additional operational and financial improvements. A.T. Kearney, a global consulting firm, is supporting Tom with the evaluation. I am confident we have the right team in place and we are moving swiftly to deliver the value inherent in Itron for the benefit of the company's customers and shareholders."

Financial Results — Quarter
Revenues were $469 million for the quarter compared with $496 million in 2014. Changes in foreign currency exchange rates unfavorably impacted revenues by approximately $46 million for the quarter. Excluding the impact of foreign currency, revenues increased $19 million, or 4 percent, compared with the 2014 quarter. The increase in revenue was driven by strong sales performance in the Electricity segment. Third quarter Electricity segment revenues grew 17 percent in North America and 9 percent worldwide, excluding the impact of foreign currency.

Gross margin for the quarter increased to 31.3 percent compared with the prior year period margin of 30.4 percent. The improvement in gross margin was driven by the Electricity segment, which benefited from increased volumes and lower costs on an OpenWay project in North America.

GAAP operating expenses in the quarter were $120 million compared with $134 million in same period of 2014. Changes in foreign currency exchange rates favorably impacted GAAP expenses by approximately $12 million in the quarter. Excluding the impact of foreign currency, expenses in the quarter decreased $3 million compared with the prior year quarter. The decrease was the result of lower general and administrative costs driven by a recovery of $3.4 million from a litigation matter associated with the 2012 SmartSynch acquisition as well as lower intangible asset amortization expense, partially offset by increased product development investments.

GAAP operating income for the quarter improved to $27 million compared with operating income of $16 million in the same period of 2014. GAAP net income for the quarter was $13 million, or 33 cents per diluted share, compared with net income of $7 million, or 19 cents per diluted share. The increase in operating and net income for the quarter was primarily attributable to improved performance in the Electricity segment, which was partially offset by an increased tax rate due to a valuation allowance applied to deferred tax assets in Brazil.

Non-GAAP operating expenses, which exclude amortization of intangibles, restructuring charges, acquisition related expenses and goodwill impairment, were $115 million for the quarter compared with $123 million in the prior year quarter. Changes in foreign currency exchange rates favorably impacted non-GAAP expenses by approximately $11 million in the quarter. Excluding the foreign currency impact, expenses increased by $3 million driven by increased product development investments and higher general and administrative expenses related to severance costs.

Non-GAAP operating income improved to $32 million for the quarter compared with $28 million in the same period in 2014. Non-GAAP net income for the quarter was $17 million, or 43 cents per diluted share, compared with $15 million, or 39 cents per diluted share, in the prior year quarter. The increase in non-GAAP operating and net income for the quarter was primarily attributable to improved performance in the Electricity segment, which was partially offset by an increased tax rate due to a valuation allowance applied to deferred tax assets in Brazil.

Free cash flow was negative $10 million for the quarter compared with a positive $37 million in the prior year quarter. The decrease over the prior year was primarily due to increased inventory to support future production requirements and timing of accounts payable disbursements.

Financial Results — Nine Months
Revenues were $1.4 billion for the first nine months of 2015, compared with $1.5 billion in the 2014 period. Changes in foreign currency exchange rates unfavorably impacted revenues by $140 million for the first nine months. Excluding the impact of foreign currency, revenues increased $67 million, or 5 percent, compared with the 2014 period. The increase in revenues was driven by the Electricity segment, which grew 15 percent year-over-year on a constant currency basis. Smart meter projects drove significant revenue in North America resulting in 30 percent growth year over over, excluding the impacts of foreign currency.

Gross margin for the first nine months of 2015 was 29.1 percent compared with 32.1 percent in 2014. Improved performance in the Electricity segment was partially offset by increased warranty expense, primarily due to $28.2 million of charges recorded in the Water segment that negatively impacted gross margin by approximately 200 basis points. In addition, lower volumes and an unfavorable product mix in the Gas segment negatively impacted gross margin.

GAAP operating expenses for the nine month period were $367 million compared with $415 million in the prior year period. Changes in foreign currency exchange rates favorably impacted GAAP expenses by approximately $39 million for the nine month period. Excluding the impact from foreign currency, expenses in the nine month period decreased $9 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 nine month period was $37 million compared with $53 million in the 2014 period. GAAP net income in the first nine months was $3 million, or 9 cents per diluted share, compared with net income of $26 million, or 67 cents per diluted 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 Brazil as well as other certain jurisdictions.

Non-GAAP operating expenses, which exclude amortization of intangibles, restructuring charges, acquisition related expenses and goodwill impairment, were $358 million for the nine month period compared with $383 million in the prior year period. Changes in foreign currency exchange rates favorably impacted non-GAAP expenses by approximately $36 million in the nine month period. Excluding the foreign currency impact, expenses increased due to product development investments and higher personnel, severance and professional service costs.

Non-GAAP operating income for the first nine months of 2015 was $45 million compared with $86 million in the 2014 period. Non-GAAP net income for the first nine months of 2015 was $10 million, or 25 cents per diluted share, compared with non-GAAP net income of $49 million, or $1.24 per diluted share, in the 2014 period. The decrease in non-GAAP operating income for the nine month period was primarily attributable to lower gross profit in the Water and Gas segments. Non-GAAP net income was negatively impacted by a higher effective tax rate driven primarily by the valuation allowances applied to deferred tax assets in Brazil as well as other certain jurisdictions.

During the first nine months of 2015, free cash flow was negative $13 million compared with positive $84 million in the 2014 period. The decrease over the prior year was primarily due to lower earnings and increased inventory levels.

Other Measures
Total backlog was $1.2 billion and twelve month backlog was $727 million at the end of the quarter. Bookings in the quarter totaled $337 million, reflecting a number of smaller, diverse bookings across many customers.

During the quarter, the company repurchased 382,403 shares of Itron common stock at an average price of $31.62 per share pursuant to Board authorization to repurchase up to $50 million of Itron common stock. As of Sept. 30, 2015, the company had repurchased 655,178 shares of Itron common stock at an average price of $33.57 per share since the inception of the plan in February 2015.

Earnings Conference Call
Itron will host a conference call to discuss the financial results and guidance contained in this release at 5 p.m. Eastern Standard Time (EST) on Nov. 3, 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 Nov. 8, 2015. To access the telephone replay, dial (888) 203 1112 (Domestic) or (719) 457 0820 (International) and enter passcode 9516999.

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 Q3 2015 Earnings Statement.