Itron, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unless otherwise stated, amounts are U.S. dollars. Itron provides technology, devices, software, and services for utilities and municipalities across Device Solutions, Networked Solutions, and Outcomes.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $420.9 million | $486.9 million | $1,328.1 million | $1,495.9 million |
| Gross profit / margin | $120.1 million / 28.5% | $135.0 million / 27.7% | $381.4 million / 28.7% | $451.9 million / 30.2% |
| Operating income (loss) | $6.9 million | $4.2 million | $(19.8) million | $28.2 million |
| Net income (loss) attributable to Itron | $4.1 million | $(1.9) million | $(31.9) million | $(22.4) million |
| Diluted EPS | $0.09 | $(0.04) | $(0.71) | $(0.51) |
| Adjusted EBITDA (non-GAAP) | $24.3 million | $26.1 million | $60.7 million | $112.0 million |
Q3 revenue fell 14% year over year, with product revenue down 15% and service revenue down 4%. For the nine-month period, revenue declined 11%; the company reported a 12% product revenue decline and a 4% service revenue decline. Q3 gross margin improved 0.8 percentage points, while nine-month gross margin declined 1.5 points. Nine-month non-GAAP net income was $18.8 million versus $44.0 million; non-GAAP diluted EPS was $0.42 versus $0.99. Non-GAAP measures are supplemental and exclude specified items.
By segment, Q3 revenue decreased 38% in Device Solutions, 2% in Networked Solutions, and 5% in Outcomes. Outcomes gross margin improved to 41.0% from 37.5%; Networked Solutions margin declined to 30.3% from 32.8%. Nine-month Device Solutions revenue was down 31%, reflecting component constraints, discontinued legacy products, foreign exchange, and the Dresser divestiture.
Cash, debt, and liquidity
- Cash and cash equivalents were $215.4 million at September 30, 2022, versus $162.6 million at December 31, 2021.
- Nine-month operating cash flow was $37.5 million, down from $141.1 million; capital expenditures were $14.9 million, producing reported non-GAAP free cash flow of $22.6 million versus $113.4 million.
- Debt comprised $460 million of 0% convertible notes due March 2026; carrying value, net of fees, was $451.9 million. No revolving-credit-facility borrowings were outstanding. $444.1 million remained available under the $500 million revolver after letters of credit. The company reported compliance with debt covenants.
- Working capital was described as favorable. Management stated that cash, operating cash flows, and access to capital markets were expected to fund operations and commitments for at least 12 months and into the foreseeable future, while noting there are no assurances.
Material changes and operating context
- Management attributed lower sales primarily to component shortages, particularly semiconductors, which constrained timely shipments despite recovering customer demand. Revenue timing for some customer projects shifted into future periods.
- Higher raw-material, component, freight, and labor costs contributed to pressure on nine-month gross margin. The company said it might not fully recover these costs through customer pricing.
- Quarterly bookings were $578 million, a 1.4-to-1 book-to-bill ratio. Total backlog was $4.2 billion and 12-month backlog was $1.6 billion, compared with $3.4 billion and $1.4 billion, respectively, a year earlier. Management cautioned that backlog is not a complete measure of future revenue and may be rescheduled or canceled.
- Endpoints under management increased to 91.5 million from 78.5 million a year earlier.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific forward revenue, earnings, or margin guidance. Management described supply recovery timing as uncertain and identified supply constraints, inflation, customer delivery delays, and COVID-19-related disruption as risks.
- Russia, Belarus, and Ukraine exposure was described as limited directly, but the conflict and sanctions could worsen economic and supply-chain disruptions. Itron substantially liquidated its Russian entity in Q3 and recorded a $1.9 million currency-translation loss in SG&A.
- A $38.5 million goodwill impairment was recorded in Q2 after higher costs and a lower Device Solutions revenue forecast. The Dresser Gas-device divestiture generated $55.9 million of cash proceeds; final sale-price and working-capital adjustments remained subject to finalization, expected in Q4 2022.
- Restructuring liabilities totaled $48.5 million at quarter end; $15.3 million was expected to be paid within 12 months. Restructuring projects are expected to be substantially complete by the end of 2022 and 2024, respectively.
- Unrecognized tax benefits were $136.6 million. The company said it did not expect ongoing tax examinations to have a material adverse effect, but could not estimate the reasonably possible range of changes in uncertain tax benefits.
- The filing describes ordinary-course legal proceedings and customer performance guarantees, letters of credit, and surety bonds; it does not identify a specific material legal loss in the supplied text.
Key facts for investors to verify
- Whether semiconductor and other supply constraints ease, enabling delayed demand to convert into shipments and revenue.
- Whether pricing, product mix, and efficiency measures offset inflation and restore margins, particularly in Networked Solutions and Device Solutions.
- Cash conversion and working-capital trends, given the substantial year-over-year decline in nine-month operating cash flow and free cash flow.
- Final Dresser divestiture adjustments and the implications of the Device Solutions goodwill impairment and revised forecasts.
- Debt covenant headroom, the 2024 revolver maturity, and the company’s ability to meet restructuring and other cash commitments.