Itron, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Financial comparisons are with Q1 2017 unless noted. Itron provides metering, network, software, and related services to utilities and municipalities. Its four segments were Electricity, Gas, Water, and Networks; Networks was added following the January 5, 2018 acquisition of Silver Spring Networks (SSNI).
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $607.2 million | $477.6 million |
| Gross profit / margin | $179.9 million / 29.6% | $157.6 million / 33.0% |
| Operating income (loss) | $(140.4) million | $30.8 million |
| Net income (loss) attributable to Itron | $(145.7) million | $15.8 million |
| Diluted EPS | $(3.74) | $0.40 |
| Non-GAAP net income / diluted EPS | $5.1 million / $0.13 | $22.2 million / $0.57 |
| Adjusted EBITDA | $39.6 million | $45.6 million |
| Operating cash flow | $(24.4) million | $63.3 million |
| Free cash flow | $(41.9) million | $54.1 million |
Revenue increased 27%, including $85.9 million from Networks and favorable foreign exchange effects of $25.8 million. Product revenue rose 24%; service revenue rose 55%. Gross margin fell, chiefly reflecting product-margin pressure from supply-chain transitions, manufacturing inefficiencies, and higher component and commodity costs. Service margin improved, partly because Networks has higher service margins.
GAAP operating expenses rose to $320.3 million, up $193.5 million. Major items included $87.9 million of restructuring charges, $62.4 million of SSNI acquisition and integration expenses, and $17.7 million of intangible amortization. Non-GAAP operating income was $27.8 million, down from $38.8 million.
Balance sheet, cash flow, and liquidity
- At March 31, cash and cash equivalents were $144.0 million; cash, cash equivalents, and restricted cash totaled $145.5 million. Cash, equivalents, and restricted cash were $487.3 million at December 31, 2017.
- Total debt was $1.146 billion, compared with $619.5 million at year-end; debt net of cash and cash equivalents was approximately $1.002 billion. Debt increased primarily to finance SSNI. The new credit facility and term loan mature January 5, 2023; $400 million of senior notes bear 5.00% interest and mature in 2026. The company reported compliance with credit-facility covenants.
- Working capital was $294.6 million, down from $342.0 million at December 31. Net availability under the revolving facility was $357.9 million, after borrowings and letters of credit.
- Investing cash outflow was $819.8 million, including $802.5 million for SSNI net of acquired cash. Financing provided $501.8 million, principally from borrowings. Operating cash use reflected lower earnings and working-capital timing, partly offset by accrued restructuring severance.
- Management said existing liquidity should be sufficient for operations and obligations for the next 12 months and into the foreseeable future, while cautioning that it could not provide assurance.
Material changes and management outlook
- SSNI acquisition: Purchased for $809.2 million net of acquired cash. SSNI contributed $85.8 million revenue and a $29.8 million net loss from January 5 through March 31. Purchase accounting and integration costs materially affected results. Itron expects another $30–$40 million of acquisition and integration expenses, mostly cash and largely over the next 12 months, and targets $50 million in annualized savings by the end of 2020.
- Restructuring: A new plan approved in February covers supply chain and manufacturing, product development, and sales and marketing. Itron recorded $88.0 million of charges and expects another $16.5 million under the 2018 plan; it targets $45–$50 million in annualized savings upon completion, expected by the end of 2020. Including other restructuring projects, management cited approximately $22 million of future restructuring costs. Restructuring accruals totaled $121.6 million at quarter-end, of which $60.3 million was expected to be paid within 12 months.
- Bookings and obligations: Total backlog was $3.139 billion, including $1.4 billion attributable to SSNI; 12-month backlog was $1.363 billion. Remaining performance obligations were approximately $1.1 billion expected within 12 months and $740 million thereafter. Backlog and performance obligations are not complete measures of future revenue and may be affected by cancellations, rescheduling, and order timing.
- Guidance: The filing provides savings and cost expectations but no specific consolidated revenue or earnings forecast.
Risks, contingencies, and other notable items
- Manufacturing inefficiencies and restructuring weighed on margins; management also cited component and commodity price increases and unfavorable product mix in some segments.
- Two Electricity customers represented 22% and 16% of that segment’s revenue; one customer represented 11% of Gas and one 11% of Networks revenue. Two suppliers provide a majority of integrated circuit boards, a key component.
- SSNI had previously disclosed a material weakness in revenue-recognition controls. Itron had not completed its assessment of SSNI controls at March 31 and excluded SSNI from its internal-control assessment, except for goodwill and intangible assets. Itron stated its disclosure controls were effective and described additional financial-statement procedures.
- Approximately 44% of Q1 revenue was denominated in currencies other than the U.S. dollar. Itron uses derivatives to manage currency and interest-rate exposure and said modeled rate sensitivities were not expected to materially affect 2018 results.
- Legal proceedings and customer indemnifications are described, but the filing does not provide a clear quantified exposure for legal matters. Management said it did not expect tax examinations to have a material adverse effect; unrecognized tax benefits were $76.1 million.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The adoption’s Q1 income-statement and cash-flow effects were not material; it reduced opening accumulated deficit by $10.9 million.
- Networks gross margin included an approximately 500-basis-point adverse purchase-accounting inventory effect, which management said would not recur because the affected inventory had been sold.
Investor facts to verify
- Whether SSNI integration delivers the targeted $50 million annualized savings by the end of 2020, and the timing and cash cost of the remaining integration work.
- Whether restructuring achieves its $45–$50 million savings target without prolonged manufacturing disruption or further margin deterioration.
- Debt reduction, interest expense, covenant headroom, and liquidity following the acquisition and negative operating cash flow.
- Underlying margin trends by segment, particularly Gas and Water, after excluding restructuring and purchase-accounting effects.
- Progress in assessing and remediating SSNI’s revenue-recognition control deficiencies, and exposure to customer concentration and key component suppliers.