Itron, Inc. — Q1 2020 Form 10-Q
Business context and period. Itron provides smart-metering, network, software and services for utilities and municipalities. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019; balance-sheet amounts are compared with December 31, 2019.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior balance |
|---|---|---|
| Revenue | $598.4 million | $614.6 million; down 3% |
| Gross profit / margin | $171.6 million / 28.7% | $187.3 million / 30.5% |
| Operating income / margin | $26.4 million / 4.4% | $20.8 million / 3.4% |
| Net income attributable to Itron | $8.7 million; diluted EPS $0.21 | Net loss $1.9 million; diluted EPS $(0.05) |
| Non-GAAP net income / diluted EPS | $23.0 million / $0.57 | $27.9 million / $0.70 |
| Adjusted EBITDA | $52.0 million | $65.8 million |
| Operating cash flow / free cash flow | $18.9 million / $6.3 million | $24.9 million / $13.5 million |
| Cash and cash equivalents | $554.5 million | $149.9 million at December 31, 2019 |
| Total debt principal | $1,350.2 million | $950.2 million at December 31, 2019 |
| Current assets less current liabilities | $720.6 million | $325.9 million at December 31, 2019 |
Revenue was mostly product sales ($528.1 million); service revenue was $70.3 million. Total revenue by segment: Device Solutions $202.3 million, Networked Solutions $340.8 million and Outcomes $55.3 million. Gross margin fell primarily because of unfavorable product mix and manufacturing inefficiencies. The tax provision was $7.6 million, with a 45% effective rate; management cited geographic earnings mix, losses in jurisdictions with valuation allowances, stock-compensation tax benefits and uncertain tax positions.
Material changes and management commentary
- Revenue declined $16.2 million year over year. COVID-19-related project delays and unfavorable foreign exchange contributed; Device Solutions fell 9%, Networked Solutions grew 1%, and Outcomes fell 2%.
- Operating expenses declined $21.2 million, mainly due to lower acquisition and integration costs and restructuring expense. Consequently, GAAP operating income rose despite lower revenue and gross profit. Non-GAAP operating income fell 32% to $38.5 million.
- Cash increased by $404.6 million, principally reflecting a $400 million revolver draw on March 25 to strengthen liquidity. The draw left $59.1 million available under the $500 million revolver after outstanding letters of credit. The company reported compliance with credit-facility covenants.
- Bookings were $418 million; quarter-end total backlog was $3.0 billion and 12-month backlog was $1.3 billion, versus $3.2 billion and $1.5 billion, respectively, at year-end 2019. Management cautioned that backlog is not a complete measure of future revenue and may be rescheduled or canceled.
- Management expected Q2 2020 to be most affected by the pandemic and said some customer deployments could shift to later in 2020 or 2021. It could not quantify the full-year impact and had not identified a significant decrease in long-term customer demand. Some European factories had closed; some reopened after quarter-end.
Risks, contingencies and unusual items
- COVID-19 could disrupt suppliers and manufacturing, delay projects and customer collections, reduce demand, impede sales, and materially affect revenue, cash flow and financial condition. Management also cited risks from facility restrictions, remote work and potential cyber disruption.
- Three suppliers provide the majority of integrated circuit board assemblies; supply constraints or a supplier change could adversely affect results. One customer represented 11% of revenue in both periods.
- Floating-rate debt exposes Itron to interest-rate risk. The company uses swaps, caps and currency hedges; it reported that a one-percentage-point increase in average 2020 rates would not materially affect results under its sensitivity analysis.
- Unrecognized tax benefits were $121.7 million. The company was under examination in several jurisdictions but did not expect the resolution to materially harm financial condition, results or cash flows; it could not estimate a possible range of adjustments over the next 12 months.
- Restructuring liabilities totaled $50.8 million at quarter-end, with $22.2 million expected to be paid within 12 months. The SSNI integration plan had approximately $10–$15 million of estimated cash payments remaining, mostly expected within 12 months.
- Standby letters of credit and bonds support customer obligations. Management did not believe any outstanding instrument would be called as of May 4, 2020. The filing discusses legal proceedings but provides no clear quantified material loss estimate.
- The 2020 first-quarter results include a net restructuring credit of $0.2 million; non-GAAP measures exclude specified amortization, restructuring, transition and acquisition-related items and should be considered alongside GAAP results.
Key investor verification points
- Track whether COVID-related plant disruptions, project deferrals and customer-payment delays affected subsequent-quarter revenue, margins and cash conversion as management anticipated.
- Verify that cash generation and revolver availability support liquidity and debt service; distinguish the cash increase from operating cash flow, since the quarter’s increase was largely debt-funded.
- Monitor gross-margin recovery, segment trends and whether Networked Solutions growth offsets weakness in Device Solutions and Outcomes.
- Assess backlog conversion, bookings and customer cancellation or rescheduling, given the decline in 12-month backlog and management’s stated limitations on backlog as a revenue indicator.
- Follow restructuring and SSNI integration cash costs, tax examinations and covenant compliance.