Itron Beats Q3 Earnings, Shares Fall on Y/Y Decline - Analyst Blog

Shares of Itron, Inc. (ITRI) lost over 2% and closed at $39.67 on Nov 4, after the company reported its third-quarter 2014 results. Adjusted earnings plunged 40% year over year to 39 cents per share in the reported quarter, impacted by higher tax rate, increased professional fees and higher variable compensation. However, earnings came ahead of the Zacks Consensus Estimate of 35 cents.

Including one-time items, such as amortization, restructuring and acquisition-related expenses, the company reported earnings of 19 cent per share, which reversed from the year-ago quarter's loss of 19 cents a share.

Operational Update

Total revenue increased marginally to $496 million from $495 million in the year-ago quarter. Revenues also surpassed the Zacks Consensus Estimate of $480 million. Growth in Gas and Water revenues were partly offset by lower revenues in the Electricity segment.

Cost of goods sold inched up to $346 million from $345 million in the prior-year quarter. Gross profit also increased slightly to $150.7 million from $150 million in the year-ago quarter. Gross margin increased 10 basis points (bps) to 30.4%.

Adjusted operating expenses increased 4.7% year over year to $123 million. Adjusted operating profit decreased 15% year over year to $27 million. Itron reported an operating profit of $16.5 million in the reported quarter compared with an operating loss of $6.5 million in the year-ago quarter.

Segment Performance

Electricity Segment: Net sales at the Electricity Segment decreased 6% year over year to $203 million. The segment reported an adjusted operating loss of $4.9 million for the quarter compared with a loss of $6.6 million in the year-ago quarter.

Gas Segment: The segment's sales rose 4.2% year over year to $149 million. Adjusted operating income for the quarter was $26 million, down 11.9% from $29.5 million in the year-ago quarter.

Water Segment: The Water Segment reported sales of $143.7 million in the quarter, up 6% from $135.6 million in the prior-year quarter. Adjusted operating income for the quarter was $21.5 million, a 3.4% fall from $22.2 million in the year-ago quarter.

Financial Position

Itron ended the quarter with cash and cash equivalents of $122.5 million versus $124.8 million as of 2013-end. Cash flow from operating activities for the period of nine months ended Sep 30, 2014 was $116.5 million compared with $65.9 million in the year-ago period.

The debt-to-capitalization ratio was 27% as of Sep 30, 2014 as against 30.3% as of Dec 31, 2013. Free cash flow in the reported quarter was $36.7 million, compared with $31 million in the third quarter of 2013.

During the quarter, the company repurchased 203,700 shares for about $82 million. The repurchases were made under the $50 million share repurchase program authorized by its board of directors for a 12-month period beginning Mar 2013.

Bookings and Backlog

Itron had bookings of $514 million in the quarter. Total backlog increased 27% year over year and came in at $1.35 billion at the quarter-end.

Guidance

Itron did not provide any specific guidance. The company is progressing with its restructuring projects announced in 2013, including plans to reduce workforce by 9% and delivering annualized savings of $30 million. So far, the company has completed approximately 75% of the workforce reductions and is on track with the facility activities. Itron hopes to achieve approximately 80% of the expected annualized savings on a run rate basis by the end of 2014.

Itron expects to incur restructuring charges in the fourth quarter of approximately $65 million to $75 million.

Electricity business will benefit from the product mix shift to higher margins smart metering. Ramp up of projects, like FirstEnergy, Duke, Consumers Energy, ERDF and others, to their deployment schedules will assist the business.

Our View

Itron will benefit from its consistent focus on lowering costs and capital expenditure. Moreover, a strong backlog, new contracts, flexible business operations and expansion in emerging markets are likely to drive long-term growth. However, business challenges, economic uncertainty and different geographic regions still remain headwinds, especially in the EMEA region.

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

Itron currently carries a Zacks Rank #5 (Strong Sell). However, some better-ranked stocks in the electrical test equipment sector include National Instruments Corporation (NATI), Arrow Electronics, Inc. (ARW) and Advanced Semiconductor Engineering Inc. (ASX). All these stocks carry a Zacks Rank #2 (Buy).