Itron, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results. Itron provides technology, hardware, networks, software, and services primarily to utilities and municipalities through Device Solutions, Networked Solutions, and Outcomes.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $624.5m | $596.0m | $1,874.1m | $1,789.1m |
| Gross profit / margin | $196.4m / 31.5% | $197.1m / 33.1% | $574.9m / 30.7% | $553.5m / 30.9% |
| Operating income (loss) | $39.4m | $41.7m | $103.8m | $(78.2)m |
| Net income (loss) attributable to Itron | $16.8m | $19.9m | $34.4m | $(123.1)m |
| Diluted GAAP EPS | $0.42 | $0.50 | $0.86 | $(3.14) |
| Operating cash flow | Not separately presented here | Not separately presented here | $128.1m | $67.4m |
Q3 revenue rose 5%, led by Networked Solutions, but gross margin fell 1.6 percentage points and GAAP net income attributable to Itron declined 15%. For the nine-month period, revenue increased 5%; the return to GAAP profitability principally reflects substantially lower operating expenses, including restructuring and acquisition/integration costs compared with 2018. Non-GAAP nine-month net income was $103.9m versus $70.6m, and adjusted EBITDA was $213.2m versus $177.0m; these are company-defined non-GAAP measures.
Cash flow and liquidity: Nine-month capital expenditures were $44.6m and company-defined free cash flow was $83.5m, compared with $24.9m in 2018. Cash, cash equivalents, and restricted cash totaled $141.7m at September 30, 2019. Current assets of $967.0m exceeded current liabilities of $684.6m. Management said existing liquidity sources should fund operations and obligations for the next 12 months and into the foreseeable future, while noting this is not assured.
Debt: Gross principal debt was $987.5m ($587.5m term loan and $400.0m senior notes); the balance-sheet current portion was $38.8m. The term loan rate was 3.80% at quarter-end, and the company was compliant with credit-facility covenants. The $500m revolver had no borrowings; approximately $455.8m remained available after letters of credit. On October 18, 2019, after quarter-end, Itron amended the facility, extending maturity from January 2023 to October 2024 and changing amortization and pricing terms. The September 30 balance-sheet debt classification does not reflect the amendment.
Material changes and operating trends
- Segment mix: Q3 Networked Solutions revenue increased 11% to $356.2m; Device Solutions declined 3% to $213.3m and Outcomes declined 1% to $54.9m. For nine months, Networked Solutions grew 14% to $1,048.6m, Outcomes grew 5% to $172.7m, and Device Solutions fell 8% to $652.8m.
- Networked Solutions growth came primarily from higher North American product sales, while margin weakened amid unfavorable mix and higher warranty costs. Device Solutions faced lower electricity shipments, unfavorable product mix, component costs, and warranty expense. Outcomes’ nine-month margin improved with higher-margin software licenses and professional services and lower costs.
- Foreign exchange reduced reported revenue by $10.5m in Q3 and $48.2m for nine months. Product gross margin fell to 29.5% in Q3 from 32.1%; service gross margin improved to 46.5% from 40.7%.
- Q3 endpoint shipments were 9.36m versus 9.48m; networked endpoints rose to 3.94m from 3.72m, while standard endpoints declined to 5.42m from 5.76m.
- Nine-month operating expenses fell $160.7m, including lower restructuring expense and $59.3m less acquisition and integration expense. Prior-year nine-month restructuring expense was $82.9m versus $7.7m in 2019.
Outlook, risks, and unusual items
- No specific consolidated revenue or earnings guidance is provided. Management expects annualized savings of $45m–$50m when the 2018 restructuring projects conclude, with expense recognition expected to be substantially complete by the end of 2020; $13.0m of additional project costs remained expected at September 30.
- The SSNI integration plan targets approximately $50m of annualized savings by the end of 2020. Itron reported $24.6m of related expense for the first nine months of 2019 and estimated $25m–$35m of integration cash payments remained, most expected within 12 months.
- Quarter-end backlog was $3.063bn, including $1.361bn estimated for the next 12 months. Separately, remaining performance obligations were approximately $1.2bn for the next 12 months and $983m thereafter. These measures have different definitions; backlog and some customer commitments may be rescheduled or canceled.
- Warranty expense rose to $6.0m in Q3 from $1.5m a year earlier; the warranty accrual was $53.9m. One customer represented 10% of Q3 revenue and 11% of nine-month revenue. Itron obtains a majority of integrated circuit board assemblies from three suppliers.
- Unrecognized tax benefits were $113.6m, and tax authorities were examining years 2010–2017 in several jurisdictions. Management said it had appropriately accrued for tax matters and did not anticipate a material adverse effect from resolution, but could not estimate the possible range of changes in unrecognized benefits.
- Itron reported various legal proceedings and contractual indemnities; the filing does not provide a clear quantified maximum exposure. It said no outstanding standby letter of credit or bond was expected to be called. No material risk-factor changes from the 2018 Form 10-K were reported.
- ASC 842 lease adoption on January 1, 2019 recognized operating lease right-of-use assets and liabilities; lease liabilities totaled $83.2m at quarter-end. Itron also disclosed a correction to the presentation of 2018 debt proceeds and repayments in cash flows: the reclassification did not change net cash flows and was assessed as not material to prior periods.
Important facts for investors to verify
- Whether Networked Solutions growth can continue and whether product mix, component costs, and warranty claims stabilize enough to recover margins.
- Progress, cash costs, timing, and realized savings from the SSNI integration and restructuring plans.
- Cash conversion and working-capital trends, debt repayment pace, covenant headroom, and the effects of the October 2019 credit amendment.
- Customer and supplier concentration, backlog conversion and cancellation risk, and the status of tax examinations and legal contingencies.
- How reported GAAP results compare with management’s non-GAAP measures, including the adjustments excluded from those measures.