Itron, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Itron provides smart-network, device, software and services solutions for utilities and municipalities. Comparisons below are with the corresponding 2019 periods unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $509.6m | $635.0m | $1,108.0m | $1,249.6m |
| Gross profit / margin | $138.5m / 27.2% | $191.2m / 30.1% | $310.1m / 28.0% | $378.5m / 30.3% |
| Operating income (loss) | $(45.4)m | $43.6m | $(19.0)m | $64.4m |
| Net income (loss) attributable to Itron | $(62.8)m | $19.4m | $(54.1)m | $17.5m |
| Diluted EPS | $(1.56) | $0.49 | $(1.35) | $0.44 |
| Adjusted EBITDA (non-GAAP) | $31.2m | $73.0m | $83.2m | $138.7m |
Q2 revenue fell 20%, driven by a 22% decline in product revenue; service revenue rose 2%. Q2 gross margin fell 2.9 percentage points, with management citing unfavorable product mix and manufacturing inefficiencies. For the first half, revenue declined 11% and gross margin fell 2.3 points. Non-GAAP diluted EPS was $0.03 in Q2 and $0.60 for the first half, versus $0.87 and $1.57, respectively, in 2019.
- Segment revenue, Q2: Device Solutions $129.2m, down 41%; Networked Solutions $324.5m, down 9%; Outcomes $55.9m, down 9%. Device Solutions gross margin fell to 9.3% from 19.1%; Networked Solutions margin was 33.4% versus 35.5%; Outcomes margin was 32.6% versus 38.1%.
- Cash flow: First-half operating cash flow was $25.8m, down from $78.1m. Capital expenditures were $29.0m, producing negative free cash flow of $3.3m (non-GAAP), versus positive $51.6m in 2019. Q2 operating cash flow was $6.9m and free cash flow was negative $9.6m.
- Liquidity: Cash and cash equivalents were $544.8m at June 30, up from $149.9m at year-end 2019, largely reflecting a $400m revolver draw. Working capital was described as favorable. The company said existing liquidity should fund operations and obligations for at least 12 months and into the foreseeable future, while noting there are no assurances.
- Debt: Total debt principal was $1.350bn, including $550.2m term debt, $400m drawn on the revolving facility and $400m senior notes. The revolver had $54.5m available after outstanding letters of credit. The reported facility interest rate was 1.68% at June 30; the senior notes bear 5.00% interest and mature in 2026. Itron reported compliance with debt covenants. Cash less total debt principal was approximately $805m of net debt.
Material changes and unusual items
- COVID-19 materially affected Q2 performance through delayed customer projects and deployments, lower shipments and factory disruption. European factories that had closed during parts of the first half had reopened by quarter-end. Management expected some projects to move into later 2020 or 2021, but had not identified a significant decline in long-term demand.
- On June 25, Itron sold five subsidiaries comprising its Latin American manufacturing and sales operations. It retained product intellectual property, will receive royalties on certain licensed products, and appointed the buyer as exclusive regional distributor. The divestiture generated a $56.9m GAAP loss, primarily reflecting $52.1m of accumulated currency translation losses and $3.0m of allocated goodwill. Most of the remaining sale proceeds were due by December 31, 2020; the transaction terms allowed working-capital adjustments for 60 days after closing.
- The company drew $400m on its revolver on March 25 to increase cash and preserve financial flexibility. This explains much of the cash increase and financing cash flow; it did not represent operating cash generation.
- Bookings were $390m in Q2. Backlog was $2.895bn, including $1.291bn expected to convert to revenue within 12 months, compared with $3.090bn and $1.403bn, respectively, a year earlier.
Outlook, risks and contingencies
The filing provides no quantified full-year 2020 revenue, earnings or cash-flow guidance. Management said it expected Q2 to be the period most affected by the pandemic, but warned that further disruption could affect supply chains, customer collections, demand, sales activity and operations. The company also cited the possibility of further facility closures and project delays.
- Key operating risks include dependence on three suppliers for a majority of integrated circuit board assemblies, customer project timing and cancellations, foreign-currency movements, warranty estimates, and the uncertain duration and effects of COVID-19. One customer represented 13% of Q2 revenue.
- Standby letters of credit and bonds support customer obligations. As of August 3, management did not believe any outstanding instrument would be called. The filing discusses legal proceedings generally but does not provide a clear quantified exposure for them.
- Unrecognized tax benefits were $122.6m at June 30. The company said it had appropriately accrued for tax examinations and did not anticipate a material adverse outcome, though reasonably possible changes in unrecognized benefits could not be estimated.
- Restructuring accruals were $44.7m, of which $15.6m was expected to be paid within 12 months. The company also expected $5m–$10m of remaining cash payments for the Silver Spring Networks integration plan, mostly within 12 months.
Important facts for investors to verify
- Whether COVID-related deployment delays and shipment weakness persist, and how backlog converts into revenue and cash.
- Whether product mix, manufacturing efficiency and segment margins recover from Q2 levels.
- Use of the $544.8m cash balance, revolver availability and compliance with debt covenants as operations and cash flow evolve.
- Final proceeds and any working-capital adjustments for the Latin America divestiture, and the continuing economics of royalties and distribution.
- Potential changes in tax exposures, warranty and restructuring liabilities, and the effect of supply-chain constraints.