Itron, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; fourth-quarter figures are identified separately where available. Amounts are U.S. dollars unless stated otherwise.
Business context
Itron supplies meters, smart networks, software, and services to utilities and municipalities. Effective October 1, 2018, it reorganized reporting into Device Solutions, Networked Solutions, and Outcomes, integrating its Silver Spring Networks acquisition and adopting a unified global sales force. Itron acquired Silver Spring Networks (SSNI) on January 5, 2018, for a net purchase price of approximately $809 million.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $2.376 billion | $2.018 billion |
| Gross profit / margin | $730.3 million / 30.7% | $676.8 million / 33.5% |
| Operating income (loss) / margin | $(49.7) million / (2.1)% | $154.9 million / 7.7% |
| Net income (loss) attributable to Itron | $(99.3) million | $57.3 million |
| Diluted EPS | $(2.53) | $1.45 |
| Operating cash flow | $109.8 million | $191.4 million |
| Capital expenditures | $60.0 million | $49.5 million |
| Free cash flow (non-GAAP) | $49.8 million | $141.9 million |
| Adjusted EBITDA (non-GAAP) | $235.8 million | $230.1 million |
| Cash, cash equivalents, and restricted cash at year-end | $122.3 million | $487.3 million |
| Working capital | $243.4 million | $342.0 million |
| Total debt, net of fees | $1.017 billion | $613.3 million |
Fourth quarter: Revenue was $587.0 million versus $550.8 million in Q4 2017. Net income attributable to Itron was $23.9 million versus $1.8 million; diluted EPS was $0.60 versus $0.05.
Revenue growth was 18%, with approximately $353 million attributable to SSNI. Product revenue rose 16% and service revenue 37%. Total backlog reached $3.173 billion, including $1.349 billion expected to convert to revenue within 12 months; bookings were $2.515 billion.
By segment, 2018 revenue and operating income were: Device Solutions $933.4 million and $131.0 million; Networked Solutions $1.224 billion and $360.8 million; Outcomes $218.6 million and $16.6 million. These segment profits exclude substantial corporate-unallocated costs.
Changes, unusual items, and management outlook
- Despite revenue growth, total gross margin fell 280 basis points. Product margin declined to 29.5% from 33.6%, reflecting lower-margin product mix and pressure in Device and Networked Solutions. Service margin improved to 39.7% from 32.8%.
- Operating expenses increased $258.1 million to $780.0 million, including $91.9 million in SSNI acquisition and integration costs, $77.2 million in restructuring expense, and $71.7 million in intangible amortization. Interest expense rose to $58.2 million from $13.8 million following acquisition financing.
- SSNI contributed $353.0 million of FY2018 revenue and a reported net loss of $54.4 million during the period included in Itron’s results. The acquisition drove much of the increase in goodwill and debt.
- Operating cash flow and free cash flow declined materially, reflecting the loss, acquisition and integration spending, restructuring payments, and working-capital movements. Investing cash outflow was $862.7 million, including $803.1 million for business acquisitions.
- A $11.4 million warranty reserve was recorded for replacement of certain gas meters. Total warranty expense was $26.5 million, compared with a $2.1 million warranty benefit in 2017, which included an $8.0 million insurance recovery.
- Management expects SSNI integration to be substantially complete by the end of 2020, with approximately $50 million in annualized savings. It expects $15–$25 million of additional acquisition/integration expenses. The 2018 restructuring plan is also expected to be substantially complete by end-2020, with $45–$50 million in annualized savings and approximately $22 million of additional restructuring costs.
- Management stated existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, while noting there can be no assurance. At year-end, the $500 million revolver had no borrowings; $41 million of letters of credit were outstanding, leaving $459 million available for borrowings or letters of credit. The term loan and revolver mature January 2023; $400 million of 5% senior notes mature January 2026.
- Key risks include acquisition integration and realization of savings, margin and warranty pressures, utility spending cycles and lengthy project awards, component/vendor availability, competition, foreign exchange, cyber and operational disruption, and significant debt with variable-rate exposure. The CEO announced plans to retire; he was expected to remain through August 31, 2019, or until a successor was appointed.
Investor verification priorities
- Track whether SSNI integration delivers the stated $50 million annualized savings by end-2020 and whether remaining integration costs stay within the $15–$25 million estimate.
- Monitor product margins, the gas-meter replacement reserve, warranty claims, and the effect of restructuring and supply-chain transitions.
- Assess debt service, covenant compliance, variable-rate exposure, and the recovery of operating cash flow and free cash flow.
- Review backlog conversion, cancellations or rescheduling, and the share of recurring Outcomes revenue; backlog is not a complete forecast of future revenue.
- Consider comparability limitations: Itron adopted ASC 606 using the modified retrospective method in 2018; reported FY2018 revenue was $25.9 million higher than it would have been under the prior revenue standard.
- Note the auditor issued unqualified opinions on the financial statements and internal controls. Management excluded most SSNI controls from its year-end assessment during the first year after acquisition, while including selected controls and remediation related to revenue recognition.