ITRON, INC. annual report, FY2019

Itron, Inc. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone Q4 filing; Q4 figures are identified separately below. Itron provides devices, connected networks, software and services for utilities and municipalities in more than 100 countries.

Financial performance and liquidity

Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise stated.

Metric	FY2019	FY2018
Revenue	$2,502.5	$2,376.1
Gross profit / margin	$752.3 / 30.1%	$730.3 / 30.7%
Operating income (loss) / margin	$132.7 / 5.3%	$(49.7) / (2.1)%
Net income (loss) attributable to Itron	$49.0	$(99.3)
Diluted GAAP EPS	$1.23	$(2.53)
Adjusted EBITDA (non-GAAP)	$270.0	$235.8
Free cash flow (non-GAAP)	$112.1	$49.8

Revenue increased 5%: product revenue rose 6% to $2,220.4 million, while service revenue increased 1% to $282.1 million. Foreign exchange reduced reported revenue by $54.5 million; constant-currency revenue growth was $180.9 million.
Gross margin declined 0.6 percentage points. Product gross margin fell to 28.5% from 29.5%, partly offset by service gross margin improving to 42.4% from 39.7%.
Operating expenses fell $160.4 million, chiefly because restructuring expense declined $70.9 million and acquisition/integration costs declined $65.3 million. GAAP results therefore include sizable year-over-year effects from these unusual costs.
Operating cash flow was $172.8 million, up from $109.8 million; capital expenditures were $60.7 million. Cash, cash equivalents and restricted cash ended the year at $149.9 million, versus $122.3 million.
Working capital was $325.9 million. Debt principal totaled $950.2 million ($932.5 million net carrying value), compared with $1,037.8 million principal a year earlier. The revolver had no borrowings; $458.9 million remained available after outstanding letters of credit.
Bookings were $2,551 million, total backlog $3,207 million and estimated 12-month backlog $1,499 million, compared with $2,515 million, $3,173 million and $1,349 million, respectively, in 2018.

Q4 2019 snapshot

Q4 revenue was $628.4 million, versus $587.0 million in Q4 2018. Gross profit was $177.4 million versus $176.8 million. Net income attributable to Itron was $14.6 million, down from $23.9 million; diluted EPS was $0.36 versus $0.60.

Material changes and business developments

Networked Solutions revenue grew 16% to $1,417.3 million, primarily from North American deployments; its gross margin fell to 36.6% from 39.4% on unfavorable mix.
Device Solutions revenue declined 8% to $858.9 million, with lower EMEA sales and a gross-margin decline to 17.8% from 20.1%.
Outcomes revenue increased 4% to $226.3 million; gross margin rose to 35.8% from 27.7%, helped by higher-margin software licenses and improved services margins.
Itron amended its credit facility in October 2019, extending maturity to October 18, 2024. It repaid $87.7 million of net debt during 2019 and repurchased $25 million of shares under a $50 million authorization.
The 2018 acquisition of Silver Spring Networks continued to drive integration costs. Itron reported $26.6 million of related expense in 2019, down from $91.9 million in 2018.

Outlook, risks and unusual items

No specific 2020 revenue or earnings guidance is provided. Management expects existing liquidity to fund operations and obligations for the next 12 months and into the foreseeable future, while noting there can be no assurance.
Management targets approximately $50 million in annualized savings from the Silver Spring integration, expected to be substantially complete by the end of 2020. It also anticipates $45–$50 million of annualized savings from the 2018 restructuring projects; $13.5 million of additional restructuring expense was expected, substantially during 2020.
Key risks include utility customers’ variable capital spending and lengthy sales cycles; competition and product-mix pressure; dependence on limited or sole-source suppliers; project delivery, warranty and contractual penalty exposure; cybersecurity and service-continuity risks; international, currency and regulatory exposure; and acquisition integration and impairment risks.
Debt exposes Itron to variable-rate and refinancing risk. The company reported compliance with credit-facility covenants at year-end; $550.2 million of term debt was LIBOR-based. It uses interest-rate and currency derivatives, but these may not fully offset exposures. The filing also discusses LIBOR transition uncertainty.
Restructuring liabilities were $56.1 million at year-end, of which $18.9 million was current. Warranty expense was $18.0 million, down from $26.5 million in 2018, which included an $11.4 million reserve for replacement of certain gas meters. The 2019 restructuring expense also included a $5.4 million gain on sale of a UK property.
Unrecognized tax benefits were $121.7 million; management said the range of possible changes over the next 12 months could not be estimated. Deloitte issued unqualified opinions on the financial statements and internal control. Revenue recognition was identified as a critical audit matter because contracts may include multiple obligations, customer-specific terms and modifications.

Important facts for investors to verify

Whether Networked Solutions’ growth and Outcomes’ margin improvement persist, and whether lower Device Solutions revenue and product margins stabilize.
Progress, remaining costs and realized savings from the Silver Spring integration and restructuring plans.
Cash conversion and working-capital trends, including the impact of contract timing and customer collections.
Debt repayment capacity, covenant headroom, variable-rate exposure and refinancing needs ahead of the 2024 credit-facility maturity.
Potential effects of tax audits and loss carryforwards, warranty claims, contractual penalties, supplier constraints and cybersecurity or service interruptions.
Backlog conversion: the filing cautions that backlog is not a complete measure of future revenue and that contracts may be rescheduled or canceled.