Itron, Inc. — Q1 2019 Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; unaudited results compared with the three months ended March 31, 2018. Itron provides technology, meters, networks, software and services primarily to utilities and municipalities. Its segments are Device Solutions, Networked Solutions and Outcomes.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $614.6 million | $607.2 million |
| Gross profit / margin | $187.3 million / 30.5% | $179.9 million / 29.6% |
| Operating income (loss) | $20.8 million | $(140.4) million |
| Net loss attributable to Itron | $(1.9) million; $(0.05) per diluted share | $(145.7) million; $(3.74) per diluted share |
| Non-GAAP net income / diluted EPS | $27.9 million / $0.70 | $5.1 million / $0.13 |
| Adjusted EBITDA | $65.8 million | $39.6 million |
| Operating cash flow / free cash flow | $24.9 million / $13.5 million | $(24.4) million / $(41.9) million |
- Revenue rose 1%; foreign exchange reduced reported revenue by $22.0 million. Product revenue increased 1%, while service revenue declined 1%.
- Gross margin increased 0.9 percentage points. Product margin benefited from mix, including Networked Solutions software, and lower warranty costs; service margin also improved.
- GAAP operating expenses fell $153.9 million, mainly reflecting $80.6 million less restructuring expense and $61.7 million lower sales, general and administrative expense. Q1 2018 included substantially higher acquisition/integration and restructuring costs, making the year-over-year GAAP profit comparison unusually favorable.
- Cash and cash equivalents were $110.8 million at March 31, 2019; cash, cash equivalents and restricted cash totaled $113.0 million, down $9.4 million from year-end. Capital expenditures were $11.4 million.
- Gross debt was $1.024 billion: $623.8 million on the term loan and $400 million of senior notes. The company had no revolver borrowings and reported $459.3 million available under the revolver after outstanding letters of credit. The term-loan rate was 4.50%; debt covenants were met.
- Total current assets were $935.0 million and current liabilities $665.9 million. Required term-loan principal payments include $438.8 million in 2023.
Material changes and segment results
- Networked Solutions revenue grew 11% to $336.4 million, with operating income rising to $95.3 million. Device Solutions revenue fell 11% to $221.8 million; its gross margin declined to 18.0% from 21.5%, amid lower EMEA project shipments, unfavorable mix and higher component costs. Outcomes revenue increased 2% to $56.4 million, while gross margin rose to 36.0% from 21.6%.
- Endpoint shipments decreased to 9.45 million from 9.68 million. One customer accounted for 11% of Q1 2019 revenue; no customer exceeded 10% in Q1 2018.
- Investing cash use was $11.1 million versus $819.8 million in Q1 2018, principally because the prior-year quarter included the Silver Spring Networks acquisition. Financing used $23.2 million, including $14.1 million of net debt repayments and $8.5 million of share repurchases.
- Itron adopted ASC 842 leases on January 1, 2019, recording $77.9 million of operating lease right-of-use assets and $81.3 million of lease liabilities at quarter-end.
Outlook, commentary and risks
- No specific quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. Management said existing liquidity sources are expected to fund operations and obligations for the next 12 months and into the foreseeable future, but gave no assurance.
- The 2018 restructuring plan is expected to be substantially complete by the end of 2020; management anticipates $45–$50 million of annualized savings at completion. Q1 restructuring expense was $5.6 million, with $15.3 million of additional costs expected for that plan. Total accrued restructuring liabilities were $71.9 million, including $30.6 million expected to be paid within 12 months.
- The Silver Spring integration plan targets approximately $50 million of annualized savings by the end of 2020. Itron recorded $11.6 million of acquisition/integration expense in Q1 and expects another $10–$20 million, approximately 95% cash, mostly over the next 12 months.
- The Board authorized up to $50 million of repurchases. Itron bought $7.8 million of shares through March 31 and another $17.2 million after quarter-end. The senior-note indenture limits 2019 repurchases to $25 million, which the company said it had reached; it therefore planned no further repurchases in 2019.
- Risks include foreign-currency exposure (37% of revenue was denominated in non-U.S.-dollar functional currencies), dependence on three suppliers for most integrated circuit board assemblies, customer concentration, and variable-rate debt. Management’s sensitivity analysis said the specified interest-rate and currency changes would not materially affect 2019 results.
- Unrecognized tax benefits were $113.5 million; examinations cover tax years 2010–2017 in several jurisdictions. Management did not expect their resolution to materially adversely affect financial condition, results or liquidity, but could not estimate the possible range of changes to unrecognized benefits. Various legal claims and indemnities are disclosed; the filing text does not provide a clear quantified exposure.
- Management reported effective disclosure controls and no material change in risk factors from the 2018 Form 10-K. The filing also notes that the comparative 2018 cash-flow presentation was revised to separately show $150 million of borrowing proceeds and debt payments; the correction did not change net cash flows and was assessed as not material to prior periods.
Important facts for investors to verify
- Whether Networked Solutions growth and Outcomes margin gains persist, and whether Device Solutions weakness stabilizes.
- Progress toward the stated restructuring and Silver Spring integration savings, including remaining cash costs and execution timing.
- Debt repayment capacity and the 2023 term-loan maturity concentration, alongside available revolver capacity and covenant compliance.
- Customer and supplier concentration, foreign-exchange exposure, and developments in tax examinations or legal contingencies.
- Non-GAAP results and adjusted EBITDA reconciliations against GAAP results; these measures exclude specified costs and may not be comparable with other companies’ measures.