Itron Shares Fall on Q3 Earnings Miss

Shares of Itron, Inc. (ITRI) dropped 9% since it reported a 33% year-over-year decline in its third-quarter 2013 adjusted earnings to 65 cents per share on Oct 30. Lower revenues and the consequent drop in gross profit led to the decline. Adjusted earnings fell short of the Zacks Consensus Estimate of 68 cents a share.

Including restructuring charges, acquisition-related expenses and amortization of intangible assets and debt fees, the company reported a loss per share of 19 cents per share compared to the year-ago earnings per share of 89 cents.

Operational Update

Total revenue fell 1.7% year over year to $495 million, missing the Zacks Consensus Estimate of $513 million. Unfavorable foreign currency exchange and lower revenues from the Energy Segment dragged down overall revenues in the quarter.

Cost of goods sold increased 4% year over year to $345 million. Gross profit dropped 13% to $150 million. Consequently, gross margin contracted 380 basis points (bps) to 30.3%. The year-over-year decline was due to increased costs on an OpenWay project in North America, lower volumes and the impact of product mix.

Adjusted operating expenses remained flat at $117 million as lower global sales, and marketing and product development expenses were partially offset by higher general and administrative expenses primarily due to legal reserves.

Adjusted operating profit declined 39% year over year to $32.9 million due to lower gross profit. Including one-time items, Itron reported an operating loss of $6.5 million in the reported quarter compared to an operating income of $46 million in the year-ago quarter.

Segment Performance

Energy Segment: Net sales at the Energy Segment dropped 4.7% year over year to $360 million. Adjusted operating income for the quarter was $22.8 million compared with $40.8 million in the year-ago quarter.

Water Segment: The Water Segment reported sales of $135 million in the quarter, up 7.2% from $126 million in the year-ago quarter. Adjusted operating income for the quarter was $22.2 million compared with $20.5 million in the year-ago quarter.

Financial Position

As of Sep 30, 2013, cash and cash equivalents amounted to $122 million versus $136 million as of Dec 31, 2012. Cash flow from operating activities was $66 million in the nine-month period ended Sep 30, 2013, compared with $137 million in the prior-year comparable period. The debt-to-capitalization ratio declined to 28.7% as of Sep 30, 2013 from 29.6% as of Dec 31, 2012. Free cash flow for the quarter was $31 million compared with $34 million in the third quarter of 2012.

During the reported quarter, Itron repurchased 174,200 shares for $7.4 million. In March, Itron’s board authorized a new 1 year share repurchase plan for up to $50 million. Itron has repurchased 559,000 shares under this plan for an average price of $42 per share. The company currently has $26 million available under this plan.

Bookings and Backlog

Itron had bookings of $457 million in the quarter, reflecting a book-to-bill ratio of 0.9:1. The largest booking during the quarter was $61 million related to CenterPoint Energy's smart gas module deployment. Total backlog at the end of the quarter was $1.1 billion.

2013 Guidance

Given the weak third quarter results and continuing softness in Europe, Itron expects revenues to be at the lower end of the guidance range of $1.95–$2 billion. The company also forecasts earnings to be at the lower end of its previously stated guidance range of $2.25–$2.55 per share.

Our View

Itron will benefit from the continuous focus on lowering costs, reducing capital expenditure and working capital balance. A strong backlog, new contracts, flexible business operation and expansion in emerging markets will drive long-term growth.

However, the company continues to face competitive environment in the U.S. for water and gas metering markets as increasing number of vendors are focusing on these segments to offset softer electric AMI markets. The shift in product mix and lower volume will act as headwinds in the upcoming quarters.

Liberty Lake, Wash.-based Itron Inc., along with its subsidiaries, is one of the principal technology providers to the energy and water industries worldwide. It produces electricity, gas, water, and heat meters, data collection and utility software solutions along with various other associated metering products for residential, commercial and industrial, and transmission and distribution customers.

One of Itron’s peers, Cognex Corporation (CGNX) reported third quarter earnings of 23 cents per share, up 14% from 19 cents earned in the year-ago quarter, a penny ahead of the Zacks Consensus Estimate of 22 cents.

Itron currently retains a Zacks Rank #3 (Hold). For investors keen on this industry, we recommend Agilent Technologies Inc. (A) and Ametek Inc. (AME), both carrying a Zacks Rank #2 (Buy).

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