Itron, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited quarterly results, including Q4 2016. Itron supplies meters, smart-metering networks, software, and services to electricity, gas, and water utilities worldwide.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $2.013 billion | $1.884 billion |
| Gross profit / margin | $660.3 million / 32.8% | $556.7 million / 29.6% |
| Operating income / margin | $96.2 million / 4.8% | $52.8 million / 2.8% |
| Net income attributable to Itron | $31.8 million | $12.7 million |
| Diluted EPS | $0.82 | $0.33 |
| Operating cash flow | $115.8 million | $73.4 million |
| Capital expenditures | $43.5 million | $43.9 million |
| Free cash flow (non-GAAP) | $72.3 million | $29.4 million |
Adjusted EBITDA, a non-GAAP measure, was $208.6 million, up 91%; non-GAAP diluted EPS was $2.54, compared with $0.73. These measures exclude specified costs and should be considered alongside GAAP results.
Q4 2016, unaudited: Revenue was $495.7 million versus $496.4 million in Q4 2015; gross profit was $156.7 million versus $152.4 million; net income attributable to Itron was $11.6 million versus $9.0 million; diluted EPS was $0.30 versus $0.23.
Liquidity, debt, and segments
- At year-end, cash and cash equivalents were $133.6 million, working capital was $319.4 million, total debt was $304.5 million, and total assets were $1.578 billion. Total Itron shareholders’ equity was $631.6 million.
- The $500 million revolving facility had $97.2 million drawn and $356.7 million available for additional borrowings or letters of credit; $46.1 million of standby letters of credit were outstanding. The credit facility matures in 2020.
- FY revenue by segment: Electricity $938.4 million, up 14%; Gas $569.5 million, up 5%; Water $505.3 million, down 3%. Gross margins improved in all segments.
- Bookings were $2.066 billion; total backlog was $1.652 billion and estimated 12-month backlog was $761 million. Backlog is subject to rescheduling and cancellation and excludes significant book-and-ship business.
Changes, outlook, and material items
- Revenue rose 7%, while gross margin increased 3.2 percentage points. Management attributed margin improvement to better product mix and stronger segment results, as well as the absence of the prior-year Water warranty charge.
- Water had recorded a $29.4 million warranty charge in 2015 for premature failures in certain communication modules. FY 2016 warranty expense was $13.9 million versus $46.0 million in 2015.
- Operating expenses increased $60.3 million, primarily reflecting restructuring. Itron recorded $47.8 million for its 2016 restructuring projects and estimated total charges of about $68 million, with approximately $40 million of annualized savings upon completion. Substantial completion was expected by the end of 2018; timing and costs depend partly on consultations and regulatory approvals.
- Management said existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, but gave no specific revenue or earnings guidance. It expected 2017 income-tax payments, net of refunds, of approximately $22 million federal, $9 million state, and $15 million foreign/local.
- Foreign exchange unfavorably affected FY 2016 revenue by $34.8 million. About 47% of revenue was denominated in currencies other than the U.S. dollar.
- The 2016 goodwill impairment test found each reporting unit’s fair value above carrying value; no impairment was recorded. Management noted that weaker demand, economic conditions, or market capitalization could change future impairment assessments.
- Itron settled Transdata patent litigation in July 2016 and received a license for future meter production and sales. A Brazil competition investigation was settled in October 2016; the settlement was not material. The company also filed an IRS protest seeking an Appeals hearing over a 2011–2013 R&D tax-credit assessment.
- The company disclosed late filing of its 2015 10-K and two 2016 quarterly reports, which made it temporarily ineligible to use Form S-3; it anticipated regaining eligibility in November 2017 if subsequent reports were timely. Management and the auditor reported that the prior-year material weakness in revenue controls was remediated by December 31, 2016; the auditor gave unqualified opinions on the 2016 financial statements and internal controls.
Key investor verification points
- Assess the sustainability of 2016 margin, earnings, and cash-flow improvements, including the contribution from prior-year warranty costs, restructuring adjustments, and non-GAAP exclusions.
- Track execution, remaining cash costs, timing, and realized savings from the 2016 restructuring program.
- Review segment trends and customer concentration: the 10 largest customers represented 31% of revenue in 2016, up from 22% in 2015; two Electricity customers represented 12% and 10% of that segment’s revenue.
- Monitor warranty claims, contract delivery obligations and potential liquidated damages, tax-audit outcomes, pension assumptions, and foreign-currency exposure.
- Confirm covenant compliance, debt repayments, and liquidity availability; consider that $42.1 million of cash and short-term investments was held in certain foreign subsidiaries treated as permanently reinvested, and $28.0 million was held in consolidated joint ventures.
- Consider the February 2017 authorization of a new share-repurchase program of up to $50 million over 12 months; no shares were repurchased in Q4 2016.