Itron, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with the three months ended March 31, 2016 unless noted. Itron provides metering, smart-network, software, and related services to utilities and municipalities through Electricity, Gas, and Water segments.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $477.6 million | $497.6 million | Down 4% |
| Gross profit / margin | $157.2 million / 32.9% | $163.2 million / 32.8% | Profit down 4%; margin up 0.1 percentage point |
| Operating expenses | $127.2 million | $139.6 million | Down 9% |
| Operating income / margin | $30.0 million / 6.3% | $23.6 million / 4.7% | Income up 27% |
| Net income attributable to Itron | $15.8 million | $10.1 million | Up 57% |
| Diluted EPS | $0.40 | $0.26 | Up $0.14 |
| Adjusted EBITDA (non-GAAP) | $45.1 million | $40.3 million | Up 12% |
| Non-GAAP diluted EPS | $0.57 | $0.44 | Up $0.13 |
Revenue fell by $20.0 million, including a $5.3 million unfavorable foreign-exchange effect. Management attributed the improved company gross margin mainly to product mix and lower operating expenses primarily to restructuring efficiencies and reduced prior-year legal and professional fees.
Segments and operating indicators
- Electricity: Revenue rose 10% to $238.8 million; operating income increased to $16.9 million from $10.6 million. Gross margin declined to 28.1% from 29.7% on unfavorable mix. One customer accounted for 18% of segment revenue.
- Gas: Revenue declined 11% to $124.2 million, mainly after significant prior-year projects ended. Gross margin improved to 40.7% from 34.9% on favorable mix; operating income rose to $21.3 million from $16.3 million.
- Water: Revenue declined 19% to $114.6 million, reflecting lower product revenue after significant projects ended. Gross margin slipped to 34.5% from 35.5%; operating income fell to $8.7 million from $18.1 million.
- Meter shipments were 6.45 million versus 6.56 million: standard meters declined to 4.01 million from 4.37 million, while smart meters rose to 2.44 million from 2.19 million. Stand-alone smart communication module shipments were 1.40 million versus 1.46 million.
- Bookings were $424 million; total backlog was $1.605 billion and estimated 12-month backlog was $819 million. Management cautions that backlog excludes significant book-and-ship orders and may be rescheduled or cancelled.
Cash flow, liquidity, and debt
- Operating cash flow was $63.3 million versus $33.8 million; capital expenditures were $9.1 million, producing non-GAAP free cash flow of $54.1 million versus $25.0 million. Management said the operating cash flow increase was primarily driven by working-capital timing, including a $46.4 million increased cash source from timing of receipts; inventory buildup and higher variable-compensation payments partly offset the benefit.
- Cash and equivalents were $187.9 million at March 31, up from $133.6 million at year-end. Working capital was $341.0 million, compared with $319.4 million at year-end.
- Total borrowings were $304.4 million: a $205.3 million term loan and $99.1 million revolver balance. Cash exceeded borrowings by approximately $116.5 million. The revolving facility had $371.7 million available for additional borrowing or letters of credit; $220.8 million remained available under its letter-of-credit subfacility.
- The credit facility matures in June 2020. The reported rate on the term loan and U.S.-dollar revolver was 2.24% at quarter-end. Itron uses interest-rate swaps and caps; management estimated a one-percentage-point increase in market rates would not materially affect 2017 results.
- Net cash used in investing activities was $9.2 million. Financing activities used $2.3 million, mainly reflecting $2.7 million of debt repayments.
Outlook, management commentary, and material items
- Itron expects approximately $68 million of total pretax charges for its 2016 restructuring projects, with approximately $17 million of costs remaining at March 31, 2017. Expected annualized savings upon completion are approximately $40 million; completion is expected by the end of 2018. These savings are expectations, not guaranteed results.
- Management stated existing liquidity should be sufficient for operations and obligations for the next 12 months and into the foreseeable future, while noting there are no assurances. No specific revenue or earnings guidance was provided in the supplied filing text.
- The company expected 2017 net cash tax payments of approximately $42 million: $7 million state, $22 million U.S. federal, and $13 million local and foreign. It reported $43.8 million of cash and short-term investments in certain foreign subsidiaries considered permanently reinvested for tax purposes; repatriation could create additional tax costs.
- Adoption of share-based payment guidance in January 2017 resulted in a one-time $14.6 million reduction in accumulated deficit and increase in deferred tax assets for cumulative excess tax benefits, plus a $0.2 million one-time adjustment related to forfeiture accounting.
- Unrecognized tax benefits were $59.4 million. Tax examinations cover 2000–2015 in several jurisdictions; the company reported no material change to prior assessments and did not expect resolution to materially harm its financial condition, results, or liquidity. It could not estimate the reasonably possible range of changes to these tax balances.
- Warranty expense was $4.0 million, and the warranty accrual was $41.5 million at quarter-end. Itron disclosed various legal proceedings and contractual indemnities; the filing text does not provide a clear quantified range of potential legal losses.
- Foreign-currency-denominated functional revenues were 47% of total revenue. Currency movements contributed to reported results, and non-functional-currency remeasurement losses helped raise other expense to $5.0 million from $4.2 million.
- The company authorized up to $50 million of share repurchases over 12 months beginning February 23, 2017; no shares had been repurchased by quarter-end. Management reported disclosure controls were effective and no material change in risk factors from the 2016 Form 10-K.
Most important facts for investors to verify
- Whether Electricity growth and improved Gas margins can offset continued weakness in Water and the completion of major customer projects.
- How much of the quarter’s stronger operating cash flow reflects sustainable performance versus working-capital timing, and whether inventory levels normalize.
- Progress, remaining cash costs, timing, and realized savings from the restructuring program.
- Debt repayment, revolver availability, interest-rate exposure, and the effect of foreign-currency movements on earnings and cash.
- Developments in tax examinations and uncertain tax positions, warranty claims, legal contingencies, and any customer order rescheduling or cancellations.
- Non-GAAP results alongside GAAP results: adjusted EBITDA, non-GAAP EPS, and free cash flow are supplemental measures and are not substitutes for GAAP measures.