Itron, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results; comparisons are with the corresponding 2017 periods unless noted.
Business context
Itron provides metering, network, software and related services primarily to utilities and municipalities. It reports four segments: Electricity, Gas, Water and Networks. Networks was added following the January 5, 2018 acquisition of Silver Spring Networks (SSNI), for a net purchase price of approximately $809 million. SSNI’s results are included from the acquisition date.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $585.9m | $503.1m | $1,193.1m | $980.7m |
| Gross profit / margin | $176.6m / 30.1% | $178.3m / 35.4% | $356.4m / 29.9% | $335.9m / 34.3% |
| Operating income (loss) | $20.6m | $37.6m | $(119.9)m | $68.5m |
| Net income (loss) attributable to Itron | $2.7m | $14.1m | $(143.0)m | $29.9m |
| Diluted EPS | $0.07 | $0.36 | $(3.66) | $0.76 |
| Operating cash flow | Not stated here | Not stated here | $16.9m | $93.4m |
| Free cash flow (non-GAAP) | Not stated here | Not stated here | $(12.4)m | $71.5m |
Q2 non-GAAP diluted EPS was $0.51 versus $0.71; six-month non-GAAP diluted EPS was $0.64 versus $1.28. Adjusted EBITDA was $56.9m in Q2 versus $60.2m and $96.5m for the six months versus $105.8m. These are company-defined non-GAAP measures and should be considered alongside GAAP results.
At June 30, cash and cash equivalents were $162.9m, with another $2.2m of restricted cash. Working capital was $301.3m. Total debt was $1,141.9m, versus $619.5m at December 31, 2017; this included a $645.9m term loan, $96.0m revolver borrowings and $400m of senior notes. The credit facility interest rate was 4.10% at quarter-end, and Itron reported compliance with its debt covenants.
For the first half, investing cash outflow was $832.3m, primarily reflecting $802.5m paid for business acquisitions, while financing provided $498.0m. Cash, cash equivalents and restricted cash fell $322.3m to $165.0m.
Material changes versus prior periods
- Revenue rose 16% in Q2 and 22% for the first half. SSNI contributed $73.6m of Q2 revenue and $159.5m for the first half; currency movements also increased reported revenue. The filing attributes much of the increase to acquisitions and foreign exchange.
- Total gross margin declined 5.3 percentage points in Q2 and 4.4 points for the first half. Management cited product mix, component and commodity costs, manufacturing and supply-chain transition inefficiencies, and the absence of a prior-year Water-segment insurance recovery.
- First-half operating expenses increased $208.9m, reflecting the new restructuring program, SSNI acquisition and integration costs, acquired-intangible amortization, and higher product development spending. Q2 restructuring expense was a credit of $5.6m, versus a $5.0m charge a year earlier; the first-half restructuring charge was $82.2m.
- Interest expense and debt-fee amortization increased following acquisition financing. First-half operating cash flow and free cash flow were materially below 2017.
- Revenue recognition standard ASC 606 was adopted January 1, 2018 using the modified retrospective method. The filing says the income-statement impact for the reported 2018 periods was immaterial; adoption reduced opening accumulated deficit by $10.9m.
Outlook, commentary and risks
- Management expects approximately $50m of annualized savings from the SSNI integration by the end of 2020. It reported $74.6m of acquisition and integration expenses for the first half and expects another $20m–$30m, mostly cash costs, with most expected over the next 12 months.
- The 2018 restructuring plan is expected to be substantially complete by the end of 2020. Expected costs were approximately $100.1m, of which $82.1m had been recognized by June 30; $18.0m remained for that plan. Management cited anticipated annualized savings of $45m–$50m. Across restructuring projects, it expected approximately $23m of future costs.
- Backlog at June 30 was $3.1bn, including $1.4bn expected to be recognized over the next 12 months. Management cautions that backlog is not a complete measure of future revenue and can be affected by cancellations, rescheduling, contract terms and large-project timing.
- Itron stated that existing liquidity sources should be sufficient for operations and obligations over the next 12 months and foreseeable future, while noting there are no assurances. Risks include working-capital and capital-spending variability, customer and supplier dependence, warranty and litigation estimates, acquisition execution, foreign exchange and interest rates. Three suppliers provide a majority of integrated circuit board assemblies.
- Customer concentration is notable in some segments: in Q2, two customers represented 23% and 16% of Electricity revenue; two represented 18% and 15% of Networks revenue. The company also reported $75.4m of unrecognized tax benefits and ongoing tax examinations, but did not expect their resolution to materially harm financial condition, results or liquidity.
- No material risk-factor changes were reported for the quarter. The filing provides no specific revenue or EPS guidance for the remainder of 2018.
Important facts for investors to verify
- Whether SSNI integration delivers the targeted savings and whether further integration costs remain within the stated range.
- Whether product margins recover as supply-chain transitions, component costs and product mix evolve.
- Whether operating cash flow improves and debt declines after acquisition-related spending; monitor covenant headroom and interest costs.
- How backlog converts to revenue, particularly given customer concentration, cancellation rights and project timing.
- Final SSNI purchase-price allocations, restructuring cash payments, tax exposures and the outcomes of legal or warranty matters.