Itron, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Itron provides smart-network, device, software and data services for utilities and municipalities through Device Solutions, Networked Solutions and Outcomes.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $431.9 | $489.4 | $907.2 | $1,009.0 |
| Gross profit / margin | $126.1 / 29.2% | $149.9 / 30.6% | $261.3 / 28.8% | $316.9 / 31.4% |
| Operating income (loss) | $(33.5) | $(6.9) | $(26.7) | $24.0 |
| Net loss attributable to Itron | $(37.0) | $(33.1) | $(36.1) | $(20.5) |
| GAAP diluted loss per share | $(0.82) | $(0.73) | $(0.80) | $(0.47) |
| Adjusted EBITDA (non-GAAP) | $17.5 | $36.1 | $36.4 | $85.9 |
| Operating cash flow | Not separately reported in the cash-flow statement | — | $22.7 | $122.7 |
| Free cash flow (non-GAAP) | $9.8 | $63.7 | $12.0 | $102.2 |
At June 30, cash and equivalents were $208.5 million, versus $162.6 million at December 31, 2021. Total current assets were $756.1 million and current liabilities $461.2 million. Debt was $460.0 million principal, reported net of fees at $451.4 million; it consisted of 0% convertible notes due in 2026. No credit-facility borrowings were outstanding; $435.3 million remained available under the revolver after letters of credit. The company reported compliance with debt covenants.
Changes versus comparable periods
- Q2 revenue declined 12%; first-half revenue declined 10%. Management cited component shortages that constrained shipments, unfavorable currency movements and, particularly in Device Solutions, the Dresser gas-business divestiture and discontinued legacy products.
- Gross margin fell 1.4 percentage points in Q2 and 2.6 points in the first half. Higher input costs and manufacturing inefficiencies related to component shortages were key factors. First-half product gross margin fell to 26.3% from 29.5%.
- Device Solutions revenue fell 36% in Q2 and 27% in the first half. Networked Solutions revenue rose 2% in Q2 but declined 1% year to date; Outcomes revenue declined 6% and 4%, respectively.
- Operating results included a $38.5 million goodwill impairment after higher costs and reduced forecast revenue at Device Solutions. Despite lower operating expenses overall in the first half, Itron’s GAAP operating result shifted from income to loss.
- First-half operating cash flow decreased to $22.7 million from $122.7 million, which management attributed primarily to lower earnings and higher variable-compensation payments. Cash increased by $45.9 million, primarily reflecting $55.9 million of net proceeds from the Dresser sale, partly offset by share repurchases and capital spending.
Outlook, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management said cash, operating cash flows and access to capital markets were expected to fund operations and commitments for at least the next 12 months, while noting there could be no assurance.
- Backlog was $4.1 billion, including $1.7 billion expected to be recognized over the next 12 months, compared with $3.5 billion and $1.4 billion, respectively, a year earlier. Remaining performance obligations were approximately $1.5 billion for the next 12 months and $1.2 billion thereafter. Backlog and obligations are not complete measures of future revenue and may be rescheduled or canceled in some cases.
- Management described semiconductor and other supply constraints, delayed customer deliveries, and higher materials, freight and labor costs. It said cost recovery through pricing was uncertain and the timing of supply-chain improvement was also uncertain. COVID-19 developments and the Russia-Ukraine conflict and related sanctions could add disruption; direct company exposure to the conflict was described as limited.
- The Dresser transaction closed February 28, 2022. Cash proceeds were $55.9 million against a $75.0 million base sale price, subject to adjustments. The final sale price and loss remained subject to working-capital adjustments expected to be finalized in Q3 2022. First-half results also included a $55.4 million reclassification of accumulated currency translation losses into the sale loss.
- Restructuring programs were expected to be substantially complete by end-2022 and end-2024. At June 30, accrued restructuring liabilities were $60.3 million, with $20.6 million expected to be paid within 12 months; management estimated $39 million in remaining cash payments for the 2021 projects and $13 million for the 2020 projects.
- Unrecognized tax benefits were $139.2 million. The company said examinations were ongoing, but did not anticipate a material adverse outcome; it could not estimate the range of possible adjustments. Legal proceedings and customer indemnifications were disclosed, but the filing text does not provide a clear quantified exposure.
- Non-GAAP results exclude specified items, including impairment, restructuring and divestiture-related costs. They are supplemental measures and should be considered alongside GAAP results.
Key facts for investors to verify
- Whether component availability, shipment timing and cost inflation improve, and whether pricing recovers higher costs.
- Whether Device Solutions’ forecast and goodwill valuation stabilize after the $38.5 million impairment.
- The final Dresser working-capital adjustment and sale accounting expected in Q3 2022.
- Cash conversion and working-capital trends, given the sharp year-over-year fall in first-half operating cash flow.
- Execution, cash costs and expected savings from restructuring, plus compliance with credit-facility covenants.
- How much reported backlog and remaining performance obligations convert to revenue on schedule, considering cancellation and rescheduling provisions.