Itron, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise. Itron supplies metering, network, software and services solutions, primarily to utilities and municipalities. Results are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $503.1 million | $513.0 million | $980.7 million | $1,010.6 million |
| Gross profit / margin | $177.9 million / 35.4% | $169.7 million / 33.1% | $335.1 million / 34.2% | $332.9 million / 32.9% |
| Operating income / margin | $36.8 million / 7.3% | $35.5 million / 6.9% | $66.9 million / 6.8% | $59.0 million / 5.8% |
| Net income attributable to Itron | $14.1 million | $19.9 million | $29.9 million | $30.0 million |
| Diluted GAAP EPS | $0.36 | $0.52 | $0.76 | $0.78 |
| Non-GAAP diluted EPS | $0.71 | $0.65 | $1.28 | $1.09 |
| Adjusted EBITDA | $59.7 million | $51.8 million | $104.7 million | $92.1 million |
Q2 revenue declined 2%, while gross profit rose 5% and operating income rose 4%. Itron-attributable net income fell 29%, reflecting higher tax expense and greater net other expense, including foreign-currency-related losses. For the first half, revenue declined 3%, but operating income increased 13%; attributable net income was essentially flat. Non-GAAP measures are company-defined and should be read alongside GAAP results.
Cash flow: First-half operating cash flow was $93.4 million, versus $51.1 million a year earlier. Capital expenditures were $21.9 million, resulting in company-defined free cash flow of $71.5 million, versus $31.2 million. Investing activities used $121.8 million, primarily reflecting the Comverge acquisition; financing activities provided $17.5 million. Cash declined by $5.7 million from year-end to $127.9 million.
Liquidity and debt: At June 30, cash was $127.9 million; working capital was $294.2 million, down from $319.4 million at December 31, 2016. Debt principal totaled $325.0 million, comprising a $202.5 million term loan and $122.5 million drawn on the revolving facility. The revolver had $348.8 million available for additional borrowings or letters of credit; $28.7 million of the letter-of-credit subfacility was in use. The credit facility matures in June 2020. The term-loan and U.S.-dollar revolver rate was 2.48% at quarter-end.
Material changes and business developments
- Segment mix: Q2 Electricity revenue rose 8% to $250.3 million; Gas fell 8% to $138.7 million; Water fell 12% to $114.1 million. For the first half, Electricity rose 9%, while Gas declined 9% and Water declined 16%.
- Margins and unusual item: An $8.0 million Water-segment insurance recovery related to previously recognized costs from a 2015 communication-module replacement notification increased Q2 gross margin by about 160 basis points and first-half margin by about 80 basis points overall. It contributed approximately 700 basis points to Q2 Water margin. Improved product mix also supported consolidated margins.
- Comverge acquisition: Itron acquired Comverge on June 1 for a preliminary net cash purchase price of $99.5 million, funded with cash and revolver borrowings. Comverge added $4.8 million of revenue and a $1.8 million net loss in June. The preliminary allocation included $36.5 million of identifiable intangible assets and $60.3 million of goodwill assigned to Electricity. Management expected minimal impact on 2017 diluted EPS and accretion in 2018; the purchase-price allocation remained provisional.
- Backlog: Total backlog was $1.629 billion and twelve-month backlog was $860 million at June 30; these included $112.8 million and $43.9 million, respectively, related to Comverge. Management cautions backlog is not a complete measure of future revenue and contracts may be rescheduled or cancelled.
Outlook, risks and contingencies
- No general revenue or earnings guidance is stated in the provided filing text. Management said existing liquidity should fund operations and obligations for the next 12 months and into the foreseeable future, while giving no assurance.
- The 2016 restructuring program is expected to cost approximately $68 million in total and generate about $40 million in annualized savings upon completion, expected by the end of 2018. At June 30, $49.3 million was accrued, with $35.7 million expected to be paid within 12 months; about $12 million of additional costs remained expected.
- Risks highlighted include changes in utility customer demand, contract milestone performance, order rescheduling or cancellation, warranty and litigation estimates, product acceptance, competition, currency and interest-rate movements, regulation, international operations, acquisitions and integration, and access to capital. The filing reported no material changes to previously disclosed risk factors.
- Foreign-currency movements affected results: revenue translation reduced Q2 revenue by $6.4 million and first-half revenue by $11.7 million. Itron uses derivatives to manage certain currency and interest-rate exposures and states they are not used for speculation.
- Tax authorities were examining tax years 2000–2015 in several jurisdictions. Unrecognized tax benefits were $64.4 million; management said it could not estimate the range of possible changes within 12 months and did not expect examination outcomes to materially harm financial condition, results or liquidity. The filing also reports routine legal proceedings and customer-related guarantees; it states outstanding letters of credit and bonds were not expected to be called.
- Management reported effective disclosure controls as of June 30. The filing describes ongoing enterprise-software upgrades and finance-process transitions to a European shared-services center.
Most important facts for investors to verify
- Whether revenue and demand recover in Gas and Water, and whether Electricity growth—including its customer concentration—continues.
- How much reported margin and earnings benefited from the one-time $8.0 million insurance recovery, and whether underlying margins sustain improvement.
- Comverge’s integration, realized synergies, provisional purchase accounting and expected 2018 accretion.
- Cash conversion and working-capital trends, particularly inventory growth, alongside acquisition-related borrowing and available facility capacity.
- Restructuring cash costs, timing and delivery of the stated annualized savings; also monitor tax examinations, warranty obligations and other contingencies.