Itron, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; financial statements are unaudited. Comparisons are with the corresponding 2016 periods unless otherwise noted. Itron supplies metering, network, software, and related services to utilities and municipalities through its Electricity, Gas, and Water segments.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $486.7 million | $506.9 million | $1,467.4 million | $1,517.5 million |
| Gross profit / margin | $165.3 million / 34.0% | $170.7 million / 33.7% | $500.4 million / 34.1% | $503.7 million / 33.2% |
| Operating income / margin | $37.4 million / 7.7% | $6.4 million / 1.3% | $104.2 million / 7.1% | $65.5 million / 4.3% |
| Net income (loss) attributable to Itron | $25.6 million | $(9.9) million | $55.5 million | $20.1 million |
| Diluted GAAP EPS | $0.65 | $(0.26) | $1.41 | $0.52 |
| Adjusted EBITDA (non-GAAP) | $57.5 million | $62.7 million | $162.2 million | $154.8 million |
For the nine months, operating cash flow was $114.5 million versus $81.9 million; capital expenditures were $33.5 million, producing reported non-GAAP free cash flow of $81.0 million versus $51.3 million. Cash at September 30 was $137.6 million, up from $133.6 million at December 31, 2016. Working capital was $336.0 million.
Total debt was $322.8 million, including $18.3 million current debt; long-term debt was reported net of debt fees at $303.9 million. The revolving facility had $124.5 million drawn and $346.4 million available for additional borrowings or letters of credit. The facility matures in 2020. Total assets were $1.82 billion and total liabilities were $1.03 billion.
Material changes and operating drivers
- Revenue declined 4% in Q3 and 3% for the first nine months. Q3 declines affected all three segments; management attributed the quarterly shortfall mainly to shipment delays during supply-chain transitions and manufacturing consolidation.
- Nine-month segment revenue rose 5% in Electricity to $729.2 million, but fell 9% in Gas to $394.7 million and 12% in Water to $343.5 million. Water’s nine-month gross margin benefited from lower warranty expense and an $8.0 million insurance recovery.
- GAAP operating expenses fell $36.4 million in Q3 and $42.0 million year to date, substantially reflecting lower restructuring expense than in 2016. Q3 adjusted EBITDA nevertheless fell 8%; nine-month adjusted EBITDA rose 5%.
- Comverge, acquired June 1 for a preliminary net cash purchase price of $99.5 million, contributed $19.0 million of revenue and a $1.9 million net loss through September. The preliminary allocation includes $59.1 million goodwill and $36.5 million of intangible assets.
Outlook, risks, and unusual items
- Management said it had taken steps to address shipment and transition inefficiencies and did not anticipate a material impact on Q4 results. It expected 2016 restructuring projects to cost about $63 million in total and generate approximately $40 million of annualized savings upon completion; about $8 million of costs remained expected.
- Itron agreed to acquire Silver Spring Networks for $16.25 per share in cash, with an estimated transaction value of approximately $830 million net of Silver Spring cash. Closing was expected in late 2017 or early 2018, subject to customary conditions, including regulatory and shareholder approval. Management anticipated approximately $50 million of synergies within three years and accretion to non-GAAP diluted EPS and adjusted EBITDA in year two after closing.
- An October 3, 2017 commitment letter provided for proposed $1.1 billion senior secured credit facilities and a $350 million unsecured bridge facility to refinance existing facilities and help fund the Silver Spring acquisition; financing remained subject to conditions and definitive documentation.
- Q3 income included a prior-year comparison affected by substantial restructuring expense in 2016. The $8.0 million Water insurance recovery increased nine-month gross margin by about 50 basis points and EPS by $0.13 basic and $0.12 diluted, after tax.
- Key exposures include customer demand and project timing, supply-chain dependence, product acceptance and warranties, acquisition execution, foreign exchange and interest rates, and international operations. Two customers represented 20% and 14% of Q3 Electricity revenue; the filing reports that one customer represented 10% of Q3 total company revenue.
- Unrecognized tax benefits were $63.7 million; tax examinations covered 2000–2015 in several jurisdictions. Management stated it had accrued for expected outcomes and did not anticipate a material adverse effect, but could not estimate the range of possible changes in unrecognized tax benefits. The filing also describes guarantees, bonds, and legal proceedings; it does not provide a clear quantified maximum exposure for indemnifications.
- No material changes to previously reported risk factors were disclosed. Management reported effective disclosure controls as of September 30, 2017.
Important facts for investors to verify
- Whether supply-chain and manufacturing transitions were resolved and whether the anticipated Q4 impact proved immaterial.
- Final Comverge purchase accounting, integration costs, and the expected 2018 contribution.
- Silver Spring transaction completion, final funding terms, leverage implications, and delivery of projected synergies and accretion.
- Underlying profitability excluding the $8.0 million insurance recovery and restructuring-related comparison effects; review GAAP results alongside company-defined non-GAAP measures.
- Customer concentration, working-capital and inventory trends, available borrowing capacity, and the resolution of tax and other contingencies.