Itron, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. Itron supplies metering, communications, software, and services, primarily to utilities and municipalities.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $635.0 million | $585.9 million | $1,249.6 million | $1,193.1 million |
| Gross profit / margin | $191.2 million / 30.1% | $176.6 million / 30.1% | $378.5 million / 30.3% | $356.4 million / 29.9% |
| Operating income (loss) | $43.6 million | $20.6 million | $64.4 million | $(119.9) million |
| Net income (loss) attributable to Itron | $19.4 million | $2.7 million | $17.5 million | $(143.0) million |
| Diluted GAAP EPS | $0.49 | $0.07 | $0.44 | $(3.66) |
| Operating cash flow | $53.1 million | $41.3 million | $78.1 million | $16.9 million |
| Free cash flow (non-GAAP) | $38.0 million | $29.5 million | $51.6 million | $(12.4) million |
Q2 product revenue rose 10% while service revenue fell 1%. For the first half, product revenue rose 5% and service revenue declined 1%. Foreign exchange reduced revenue by $15.7 million in Q2 and $37.7 million in the first half. Q2 operating expenses declined 5%; first-half expenses fell 34%, largely reflecting lower restructuring and acquisition/integration costs versus 2018. Non-GAAP diluted EPS was $0.87 in Q2 and $1.57 for the first half; these are management-defined measures and exclude specified costs.
Segments and operating developments
- Networked Solutions: Revenue grew 20% in Q2 and 16% in the first half, principally on higher North American product sales. Gross margin declined year over year in both periods, with management citing product mix and warranty costs.
- Outcomes: Revenue increased 15% in Q2 and 8% in the first half. Higher-margin software licenses and professional services lifted segment gross margin.
- Device Solutions: Revenue declined 8% in Q2 and 9% in the first half; management cited lower EMEA project shipments and unfavorable currency. Higher component costs pressured segment gross margin.
- Total endpoint shipments were 9.83 million in Q2, versus 9.43 million a year earlier. Networked endpoint shipments increased; standard endpoint shipments declined.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $135.7 million; total cash, cash equivalents, and restricted cash were $137.9 million, up $15.5 million from year-end 2018.
- Debt principal totaled $1.016 billion, including a $615.6 million term loan and $400 million of 5% senior notes. The term loan and revolving facility mature January 2023; the notes mature January 2026. The term-loan rate was 4.16% at quarter-end. Itron reported compliance with credit-facility covenants.
- The $500 million revolver had no borrowings; $457.7 million was available after outstanding letters of credit. Required term-loan principal payments include $438.8 million in 2023.
- First-half investing cash use was $16.7 million, versus $832.3 million in 2018, primarily because the prior-year period included the Silver Spring Networks acquisition. Financing used $46.5 million, including $25 million of share repurchases and $22.2 million of net debt repayments.
- Management said existing liquidity should fund operations and obligations for the next 12 months and beyond, while noting that cash flows are sensitive to working capital, capital spending, and debt payments.
Outlook, risks, and unusual items
- Itron expects annualized savings of $45–$50 million when the 2018 restructuring projects conclude; it expects to substantially complete the plan by the end of 2020. An additional $15.3 million of restructuring costs was expected, and $65.7 million was accrued at June 30.
- The Silver Spring Networks integration plan targets approximately $50 million of annualized savings by the end of 2020. Itron estimated $30–$40 million of remaining cash payments, most expected within 12 months.
- Bookings were $702 million for Q2; total backlog was $3.09 billion, including $1.40 billion estimated for recognition over the next 12 months. Management cautions that backlog can fluctuate, and contracts may be rescheduled or cancelled.
- One customer represented 11% of revenue in both the Q2 and first-half 2019 periods. Itron also depends on three suppliers for a majority of integrated circuit board assemblies; supplier disruptions could adversely affect results.
- Other exposures include foreign currency and floating-rate debt, product warranty obligations, legal matters, and tax examinations. Unrecognized tax benefits were $115.3 million; management said it could not estimate a reasonably possible range of changes. The filing says no material adverse effect from current tax examinations is anticipated. No material risk-factor changes from the 2018 Form 10-K were reported.
- Q2 restructuring expense was a $6.2 million credit, including a $5.4 million gain on sale of a UK property. First-half restructuring expense was $1.1 million. Itron adopted lease accounting in 2019, recording operating lease right-of-use assets of $79.5 million and total operating lease liabilities of $83.8 million at June 30.
- The filing states that 2018 cash-flow borrowings and debt payments had previously been improperly netted; the presentation was revised, with no change to net cash flows, and management concluded the misstatement was not material to prior periods.
Important facts for investors to verify
- Whether Networked Solutions growth and Outcomes margin improvement continue, and whether Device Solutions’ sales and component-cost pressures improve.
- How much of reported earnings and cash-flow improvement is sustainable versus attributable to lower prior-year restructuring and acquisition/integration costs.
- Progress toward restructuring and integration savings, remaining cash costs, and customer delivery timing reflected in backlog.
- Debt repayment capacity, the 2023 maturity concentration, and compliance with covenants as operating conditions change.
- Exposure to the large customer, concentrated component suppliers, warranty claims, foreign exchange, and unresolved tax matters.