Itron's Rev Lags, Tops EPS

Zacks

Itron, Inc.’s (ITRI) third-quarter 2012 adjusted earnings were 97 cents per share compared with 92 cents in the year-earlier quarter. Adjusted earnings surpassed the Zacks Consensus Estimate of 94 cents per share.
    
Including amortization expenses, restructuring costs and acquisition related expenses, earnings in the quarter were 89 cents per share compared with the year-ago quarter's loss of $12.70.

Total revenues during the quarter fell 18.1% to $504.1 million, lagging behind the Zacks Consensus Estimate of $525 million. The decline in revenues stemmed mainly from an unfavorable $35 million impact from foreign currency translation and a further $76 million from the completion of many OpenWay projects in North America. Moreover, the Water segment’s higher revenues were offset by lower gas module shipments in North America and lesser shipments of Energy products in Asia Pacific.

Cost and Margins

Cost of goods sold declined 24.2% to $332.3 million. Gross profit also dropped 2.9% to $171.8 million. However, gross margin expanded 530 basis points to 34.1%. The improvement was driven by lower warranty costs at the Energy and Water segments, along with benefits from restructuring actions as well as manufacturing efficiencies, offsetting the negative impacts of lower volumes.

Adjusted operating expenses increased 0.7% to $117.6 million in the quarter. Expenses increased due to sales and marketing efficiencies, along with product development initiatives.

Adjusted operating profit declined 10% to $54.2 million. Including one-time items, operating income was $46 million in the reported quarter compared to an operating loss of $497.3 million in the year-ago quarter.

Financial Position

Cash and cash equivalents decreased to $91.5 million as of September 30, 2012, from $133.1 million as of December 31, 2011. Cash from operations decreased to $137 million for the first nine months of 2012 from $153.8 million in the year-ago comparable period. The debt-to-capitalization ratio improved to 30.2% as of September 30, 2012, compared to 33% as of June 30, 2012, and 33.3% as of December 31, 2011.

During the quarter, Itron repurchased 342,415 shares of its common stock at an average price of $43.00 per share. The company has repurchased approximately 1.9 million shares of Itron common stock at an average price of $37.55 per share since the inception of the program, representing 4.6% of total shares outstanding as of October 2011.

Outlook

The company has narrowed its revenue guidance to the range of $2.1 billion to $2.15 billion from $2.1-$2.2 billion for 2012. Similarly, it now expects the adjusted earnings to lie within the band of $3.60-$3.80, down from the previous range of $3.80-$4.00 per share for 2012.

Our View

Itron aims at upgrading its smart meter platform in the global arena. Recently, the company  won the nation’s largest gas metering contract from Southern California Gas Company, a subsidiary of Sempra Energy (SRE).

The company is undertaking restructuring initiatives to increase its efficiency and lower manufacturing costs. It anticipates annualized cost savings of $15 million in 2012, which is expected to further increase to $30 million in 2013.

But at the same time, Itron expects to book associated pre-tax charges in the range of $75-$80 million, a major portion of which will be incurred in 2012.  Therefore, higher operating expenses are likely to create margin headwinds in 2012 and first half of 2013. Moreover, the competition of the OpenWay projects is expected to impact revenues negatively in the next three quarters.

Itron has a short-term Zacks #3 (Hold) Rank. We have a long-term Neutral recommendation on the stock.
 

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