Itron, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Itron provides technology, devices, software, and services for utilities and municipalities, across Device Solutions, Networked Solutions, and Outcomes. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $540.2 | $624.5 | $1,648.2 | $1,874.1 |
| Gross margin | 26.5% | 31.5% | 27.5% | 30.7% |
| Operating income (loss) | $(24.0) | $39.4 | $(43.0) | $103.8 |
| Net income (loss) attributable to Itron | $(25.4) | $16.8 | $(79.5) | $34.4 |
| Diluted EPS | $(0.63) | $0.42 | $(1.98) | $0.86 |
| Adjusted EBITDA (non-GAAP) | $39.7 | $74.5 | $122.9 | $213.2 |
- Q3 product revenue fell 15% and service revenue fell 3%; nine-month product revenue declined 14%, while service revenue was approximately flat.
- Q3 product gross margin was 23.9% (29.5% prior year); service gross margin was 44.4% (46.5%). Lower margins reflected unfavorable mix, inventory reserves, and COVID-related manufacturing inefficiencies.
- Cash provided by operations was $70.6 million for the first nine months, versus $128.1 million. Capital spending was $36.3 million, resulting in reported non-GAAP free cash flow of $34.3 million, versus $83.5 million. Q3 free cash flow was $37.5 million, versus $32.0 million.
- At September 30, cash and cash equivalents were $586.2 million, compared with $149.9 million at December 31, 2019. The increase principally reflected a $400 million revolver draw. Total debt was $1.35 billion, including $400 million drawn on the revolver and $400 million of 5% senior notes due in 2026.
- Working capital was positive: current assets of $1.35 billion exceeded current liabilities of $586.7 million. Quarter-end revolver availability was $33.2 million after outstanding borrowings and letters of credit. Itron repaid $100 million on the revolver after quarter-end.
Material changes and unusual items
- Revenue decreased 13% in Q3 and 12% for the first nine months. Management attributed much of the decline to COVID-related customer project and deployment delays. Device Solutions and Networked Solutions revenue declined; Q3 Outcomes revenue increased 5%.
- Q3 operating expenses included $43.9 million of restructuring charges. For the nine months, operating expenses also included a $57.3 million loss on the sale of the Latin American operations, completed June 25, 2020. The divestiture loss largely reflected accumulated foreign-currency translation losses and allocated goodwill.
- The September 2020 restructuring plan is expected to cost $55–$65 million pretax, including $35–$45 million in cash expenditures, and is scheduled to be substantially complete by the end of 2022. Management estimates annualized savings of $20–$25 million after completion.
- Non-GAAP results also weakened: Q3 non-GAAP diluted EPS was $0.61 versus $1.04; nine-month non-GAAP diluted EPS was $1.21 versus $2.60. These measures exclude specified items and should be considered alongside GAAP results.
Outlook, risks, and contingencies
- Itron did not provide a clear full-year revenue or earnings forecast in the filing. Management said some customer projects and deployments may shift into 2021, while it had not identified a significant decline in long-term demand. It stated that existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, but gave no assurance.
- COVID-19 risks include further project delays, facility closures, supply-chain disruption, weaker demand, delayed customer collections, and disruption to sales and operations. Management noted that European factories were open throughout Q3.
- At September 30, total backlog was $2.8 billion, including $1.1 billion expected to convert to revenue in the next 12 months. Remaining performance obligations were approximately $1.0 billion for the next 12 months and $1.2 billion thereafter; these measures have different definitions and are not complete measures of future revenue.
- On October 19, 2020, the credit facility was amended to provide higher maximum leverage thresholds through 2021 and add a pricing tier. Itron reported covenant compliance at September 30.
- Other exposures include variable-rate debt, foreign exchange movements, dependence on three suppliers for a majority of integrated circuit board assemblies, warranty obligations, tax examinations, and legal proceedings whose outcomes are uncertain. The filing says it cannot estimate a range of reasonably possible changes to unrecognized tax benefits.
Important facts for investors to verify
- Whether COVID-related deployment deferrals convert to orders and revenue, and whether backlog remains durable and on schedule.
- Whether the restructuring achieves the projected $20–$25 million annualized savings, and the timing and cash cost of implementation.
- Debt, covenant headroom, revolver availability after the post-quarter repayment, and cash generation excluding borrowed funds.
- Whether weaker gross margins—especially in Device Solutions—recover as product mix and manufacturing conditions change.
- The final working-capital settlement and remaining sale proceeds from the Latin American divestiture, as well as the effect of the transaction on ongoing regional revenue.
- How much of reported non-GAAP performance depends on exclusions, and how GAAP results compare with those adjusted measures.