Itron, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results; comparisons are with the corresponding 2017 periods unless otherwise stated. Itron provides utility and municipal metering, network, software, and related services.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $596.0m | $486.7m | $1,789.1m | $1,467.4m |
| Gross profit / margin | $197.1m / 33.1% | $165.8m / 34.1% | $553.5m / 30.9% | $501.7m / 34.2% |
| Operating income (loss) | $41.7m | $38.2m | $(78.2)m | $106.7m |
| Net income (loss) attributable to Itron | $19.9m | $25.6m | $(123.1)m | $55.5m |
| Diluted EPS | $0.50 | $0.65 | $(3.14) | $1.41 |
| Adjusted EBITDA (non-GAAP) | $80.5m | $58.1m | $177.0m | $163.8m |
| Operating cash flow | Quarterly value not clearly provided | Quarterly value not clearly provided | $67.4m | $114.5m |
| Free cash flow (non-GAAP) | Quarterly value not clearly provided | Quarterly value not clearly provided | $24.9m | $81.0m |
Q3 revenue rose 22%, primarily reflecting $89.8m of Networks revenue following the Silver Spring Networks (SSNI) acquisition. Nine-month revenue also rose 22%; Networks contributed $249.3m. Q3 non-GAAP diluted EPS was $1.13 versus $0.77; nine-month non-GAAP diluted EPS was $1.77 versus $2.05. These non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Liquidity and debt
- At September 30, cash and cash equivalents were $109.0m; cash, cash equivalents, and restricted cash totaled $111.2m, down from $487.3m at December 31, 2017.
- Current assets were $868.2m and current liabilities $615.8m. Total debt was $1,051.9m, including $24.4m current debt; long-term debt on the balance sheet was $1,005.4m.
- Nine-month investing cash use was $845.7m, including $803.1m for acquisitions. Financing provided $408.4m. Management said existing liquidity sources should fund operations and obligations for the next 12 months and into the foreseeable future, but gave no assurance.
- The $1.2bn credit facility includes a $650m term loan and a $500m revolver, both maturing January 2023. The company reported compliance with debt covenants; the September 30 interest rate was 4.25% on the term loan and revolver.
Material changes and notable items
- SSNI acquisition: Completed January 5, 2018, for a net purchase price of $809.2m. The acquired Networks segment reported $89.8m Q3 revenue and a $15.6m GAAP operating loss; nine-month revenue was $249.3m and operating loss $119.4m. Preliminary purchase accounting included $570.8m goodwill, assigned to Networks.
- Restructuring: The 2018 plan incurred $83.1m of expense through September, with $18.1m expected to be recognized later; management expects annualized savings of $45m–$50m upon completion, targeted by end-2020. A separate SSNI integration plan is expected to yield about $50m annualized savings by end-2020. The company had recognized $83.9m of acquisition and integration expenses in the first nine months and anticipated another $15m–$25m.
- Margins and costs: Q3 gross margin decreased 1.0 percentage point; nine-month gross margin decreased 3.3 points. Management cited component and commodity cost increases, supply-chain transition and manufacturing inefficiencies, product mix, and the absence of a prior-year Water warranty insurance recovery. Nine-month operating expenses rose $236.8m, driven substantially by restructuring, acquisition/integration costs, acquired-intangible amortization, and R&D.
- Segment trends: Q3 Gas revenue rose 19%, while Electricity and Water revenue declined 1% and 2%. Nine-month Networks operating loss included acquisition/integration expense and acquired-intangible amortization; on the company’s non-GAAP basis, Networks operating income was $4.0m year to date.
- Backlog: Total backlog was $3.1bn and twelve-month backlog $1.35bn at September 30; Networks accounted for $1.5bn and $406.4m, respectively. Backlog may be rescheduled or cancelled and is not a complete measure of future revenue.
- Accounting and organization: ASC 606 adoption had an immaterial effect on reported revenue, but the filing estimates that without the new standard deferred revenue would have been about $23m higher and accumulated deficit about $18m lower. Effective October 1, the company reorganized reporting into Device Solutions, Networked Solutions, and Outcomes.
Outlook, risks, and contingencies
- Management expects to complete the 2018 restructuring and SSNI integration substantially by the end of 2020 and anticipates the savings noted above; these are targets, not guaranteed outcomes.
- Key disclosed risks include integration execution and costs, restructuring timing and savings, supply-chain and component availability (including dependence on three suppliers for most integrated circuit board assemblies), commodity costs, foreign currency exposure, variable-rate debt, customer project timing/cancellation, and warranty or litigation liabilities.
- The company used interest-rate swaps and caps, a cross-currency swap, and foreign-exchange forwards to manage exposures. Management’s stated sensitivity analyses indicated no material 2018 impact under the specified rate scenarios; actual results may differ.
- Tax authorities were examining tax years 2010–2016. Itron said it had accrued for expected outcomes and did not anticipate a material adverse effect, but reported $78.3m of unrecognized tax benefits and could not estimate the range of possible changes over the next 12 months.
- Standby letters of credit, performance bonds, and customer indemnifications are disclosed; management did not believe outstanding letters of credit or bonds would be called. The filing describes legal proceedings generally but does not provide a clear quantified aggregate exposure.
Investor verification priorities
- Verify whether SSNI integration and the 2018 restructuring meet their cost, timing, and annualized savings targets, and how much additional cash spending is required.
- Track operating cash flow, free cash flow, working capital, and cash balances against the substantial acquisition-related debt and scheduled repayments.
- Assess whether gross-margin pressure from supply-chain changes, manufacturing inefficiencies, component costs, product mix, and warranty comparisons persists or reverses.
- Reconcile GAAP losses and margins with non-GAAP measures, including the treatment of restructuring, integration costs, acquired-intangible amortization, and debt-fee amortization.
- Monitor Networks’ stand-alone and integrated performance, backlog conversion and cancellation risk, covenant compliance, and the impact of the new segment structure.