Itron, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar amounts are in millions unless otherwise stated. Itron provides smart infrastructure technology, devices, software and services to utilities and municipalities through Device Solutions, Networked Solutions and Outcomes.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $486.9 | $540.2 | $1,495.9 | $1,648.2 |
| Gross profit / margin | $135.0 / 27.7% | $143.3 / 26.5% | $451.9 / 30.2% | $453.3 / 27.5% |
| Operating income (loss) | $4.2 | $(24.0) | $28.2 | $(43.0) |
| Net loss attributable to Itron | $(1.9) | $(25.4) | $(22.4) | $(79.5) |
| Diluted loss per share | $(0.04) | $(0.63) | $(0.51) | $(1.98) |
| Adjusted EBITDA (non-GAAP) | $26.1 | $39.7 | $112.0 | $122.9 |
Q3 revenue fell 10% year over year, primarily from lower product sales, while service revenue increased. Nine-month revenue declined 9%. Product and service gross margins diverged in Q3: product margin rose to 25.5% from 23.9%, while service margin declined to 39.7% from 44.4%. For the nine months, product margin improved to 28.2% from 25.4%; service margin was 41.4% versus 41.7%.
For the nine months, net cash from operating activities was $141.1 million, compared with $70.6 million; capital expenditures were $27.8 million versus $36.3 million. Free cash flow, a non-GAAP measure, was $113.4 million versus $34.3 million. Cash and cash equivalents were $188.7 million at September 30, down from $206.9 million at year-end 2020.
At quarter-end, total debt was $460.0 million, consisting of convertible notes due 2026; the credit-facility term loan and senior notes had been repaid. The $500 million revolver had no borrowings, with $435.6 million available after standby letters of credit. Current assets were $802.4 million and current liabilities $495.8 million. Itron reported compliance with credit-facility covenants.
Material changes and operating trends
- Networked Solutions revenue declined 10% in Q3 and 15% year to date, chiefly because component shortages and customer-project timing constrained shipments. Nine-month gross margin increased to 36.1% from 34.2%.
- Device Solutions revenue declined 14% in Q3 and 4% year to date; year-to-date gross margin improved to 17.5% from 12.8%.
- Outcomes revenue increased 5% in Q3 and 7% year to date, with year-to-date gross margin improving to 37.8% from 33.3%.
- Q3 GAAP operating expenses fell 22%, largely reflecting lower restructuring charges than in 2020. Nine-month operating expenses fell 15%, also benefiting from lower restructuring and sale-of-business charges.
- Non-GAAP results were weaker despite improved GAAP loss: Q3 non-GAAP net income was $9.5 million versus $24.6 million, and nine-month non-GAAP net income was $44.0 million versus $48.9 million.
- Total backlog was $3.4 billion and twelve-month backlog $1.4 billion at September 30, 2021, compared with $2.8 billion and $1.1 billion, respectively, a year earlier. Remaining performance obligations were approximately $1.3 billion for the next 12 months and $1.5 billion thereafter; management cautions these are not complete measures of future revenue.
Outlook, risks and unusual items
- Supply chain and demand: COVID-19-related mechanical, electrical, logistics and semiconductor shortages impaired timely shipments. Customer deliveries originally expected in 2021 were pushed to future periods. Management said it had not identified a significant decline in long-term demand, but the timing of supply recovery was uncertain.
- Restructuring and divestiture: In October 2021, Itron approved a new plan associated with a planned gas-device business sale, estimating $65–75 million of pretax restructuring charges, mostly in Q4 2021, and $15–20 million of annualized savings after completion, expected by end-2024. The company expected a separate $30–40 million pretax loss when the sale closes, anticipated in the first half of 2022; estimated cash proceeds were $62–63 million.
- Other subsequent events: Itron acquired SELC Group Limited on October 12, 2021, funded with cash on hand. On November 1, the board authorized repurchases of up to $100 million of common stock over 18 months.
- Debt and financing: March 2021 financing included $460 million of zero-interest convertible notes and a public equity offering that raised net proceeds of $389.4 million. Debt refinancing and repayment generated unusual fees and charges, including a $10 million senior-note redemption premium and debt-fee write-offs.
- Contingencies and taxes: Unrecognized tax benefits were $134.1 million; the company said it could not estimate a reasonably possible adjustment range. It reported no expectation that current tax examinations would materially adversely affect its financial condition, results or cash flows. The filing describes legal proceedings generally but provides no clear quantified exposure in the supplied text.
- Management liquidity view: Itron said existing liquidity should be sufficient for operations and obligations over the next 12 months and foreseeable future, while noting this was not assured and depended on operating, supply-chain, market and other risks. No formal revenue or earnings guidance is provided in the filing text.
Important facts for investors to verify
- Whether semiconductor and other component supply constraints ease, and the extent and timing of deferred customer deliveries and revenue.
- Whether backlog and remaining performance obligations convert to revenue as expected, given possible customer rescheduling or cancellation rights.
- Execution, cash costs, timing and savings from the new restructuring plan, and the final sale terms and loss for the gas-device divestiture.
- Liquidity and capital allocation after the debt refinancing, including any share repurchases and the terms and potential dilution or cash-settlement effects of convertible notes and warrants.
- Underlying operating trends alongside GAAP results, particularly the decline in non-GAAP earnings and Q3 service gross margin.