The AES Corporation (AES) reported second-quarter 2012 adjusted earnings per share (EPS) of 18 cents, missing the Zacks Consensus Estimate of 26 cents and the year-ago figure of 29 cents.
The significant year-over-year decline reflects lower plant availability in Chile and the final impact of the July 2011 tariff reset at Eletropaulo in Brazil, which resulted in lower operating income. Moreover, unfavorable movements in foreign exchange rates and a higher effective tax rate also impacted the quarter negatively. However, these negatives were partially offset by the contributions of new businesses in the United States, Bulgaria, and Latin America.
On a GAAP basis, the company clocked net earnings per share of 9 cents versus 24 cents per share in the prior-year quarter.
The variance of 9 cents between GAAP and adjusted earnings in the reported quarter stems from currency transaction loss and derivative mark-to-market losses of 4 cents each as well as impairment loss of 1 cent.
Quarterly Operational Results
In the reported quarter, consolidated revenue decreased $243 million year over year to approximately $4,192 million. The figure also fell short of the Zacks Consensus Estimate by $500 million.
During the quarter, gross profit decreased by 30.2% year over year to $692 million. General and administrative expenses in the quarter were $74 million, down 23.7% year over year.
AES Corp. ended the quarter with cash and cash equivalents of $1,727 million, down from $3,624 million at the end of the second quarter of 2011.
Consolidated cash flow from operating activities was down 14.1% year over year to $580 million. The decline resulted from a decrease at its utility businesses in Latin America. However, this decline was partially offset by an increase in contribution from the company’s generation businesses in Latin America driven by improved working capital, as well as improved gross margin at Tiete in Brazil. Moreover, new businesses and benefits from the acquisition of DP&L in the United States, which was closed in November 2011, also helped to offset the decline.
Total capital expenditures were $498 million, down 5.9% year over year. During the second quarter of 2012, the company has repurchased 20.5 million shares for $252 million.
As previously planned, the company has declared the first quarterly cash dividend since 1993. On November 15, 2012, the company will pay a quarterly dividend of 4 cents per share to shareholders of record as of October 30, 2012.
The AES Corporation expects derivative losses of 7 cents, currency losses of 2 cents, debt retirement losses of 1 cent, and impairment losses of 8 cents to be offset by disposition gains of 18 cents. Therefore, the company expects both adjusted and GAAP earnings to be at the low end of $1.22 to $1.30 per share in FY12.
The company plans to exceed its $50 million target of cost cut and expects a savings of $65 million in 2012.
For full-year 2012, the company expects consolidated cash flow from operating activities to be in the range of $2,900 million to $3,100 million versus its prior expectation of $3,100 to $3,300 million due to decreases at its Latin American utility and Latin American generation businesses. It expects consolidated free cash flow in the range of $1,700 to $1,900 compared with its prior expectation of $1,900 to $2,100 million.
At the Peer
Recently, one of the company’s peers Exelon Corporation (EXC) announced second-quarter 2012 operating earnings of 61 cents per share, lower than the year-ago figure of $1.05 per share and the Zacks Consensus Estimate of 63 cents per share.
Though AES Corporation’s results were below our expectation, it is in line with the company’s expectation. Going forward, with new businesses in the United States, Bulgaria and Latin America and the cost cutting initiatives, the company will be able to reach its earnings growth while meeting its goal for full-year 2012. Also, the company’s geographic disparity insulates it from specific risks which will add visibility to the story.
However, we are concerned regarding the commodity price risk, foreign exchange risk, as well as political risk. The company presently retains a short-term Zacks #4 Rank (Sell). Over the longer run, we maintain our long-term Neutral recommendation on the stock.
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