Shares of Itron, Inc. (ITRI) dipped 8% since it reported a 38% year-over-year decline in its fourth-quarter 2013 adjusted earnings to 36 cents per share on Feb 12. A lower-than-expected guidance which reflects the uneven global economic recovery and the potential impact on the timing of projects, also led to the downward move. Adjusted earnings fell short of the Zacks Consensus Estimate of 76 cents a share by a wide margin of 53%.
Including one-time items viz amortization, restructuring and acquisition-related expenses, the company reported $3.93 loss per share compared with earnings of 40 cents per share in the year-ago quarter. In addition, the reported quarter included a goodwill impairment charge in the Electricity segment and a discrete tax charge.
Operational Update
Total revenue remained flat year over year at $523 million, ahead of the Zacks Consensus Estimate of $520 million. Unfavorable foreign currency exchange and lower revenues from the Gas Segment dragged overall revenues in the quarter.
Cost of goods sold remained flat at $359 million. Gross profit edged up 1% to $165 million. Consequently, gross margin expanded 30 basis points (bps) to 31.5% helped by a favorable impact from product mix.
Adjusted operating expenses dipped 6% to $138 million due to lower sales and marketing expenses. Adjusted operating profit increased 27% year over year to $38 million attributed to higher gross profit and lower operating expenses. Including one-time items, Itron reported an operating loss of $149 million in the reported quarter which compared unfavorably to an operating income of $19 million in the year-ago quarter.
Segment Performance
Electricity Segment: Net sales at the Energy Segment remained flat at $230 million compared with the year-ago quarter. However, adjusted operating income for the quarter was $1.28 million compared favorably with a loss of $2.55 million in the year-ago quarter.
Gas Segment: The segment’s sales dipped 5% year over year to $154 million. Adjusted operating income for the quarter was $26.5 million, down 8% from $28.8 million in the year-ago quarter.
Water Segment: The Water Segment reported sales of $139 million in the quarter, up 5% from $132 million in the year-ago quarter. Adjusted operating income for the quarter was $20.4 million, a 61% jump from $12.7 million in the year-ago quarter.
Fiscal 2013 Performance
Itron reported adjusted earnings per share of $1.90 in fiscal 2013, a 48% drop from $3.62 in the prior year, falling way short of the Zacks Consensus Estimate of $2.29. Including one-time items, Itron reported a loss per share of $3.74 compared with earnings per share of $2.71 in fiscal 2012.
Revenues dipped 10.5% to $1.948 billion, missing the Zacks Consensus Estimate of $1.956 billion. Changes in foreign currency exchange rates had a negative impact of $15 million for the year. Lower revenues in the Electricity segment due to the completion of several OpenWay smart meter projects in North America as well as in the Gas segment, offset the rise in Water segment revenues and led to the overall decline.
Financial Position
As of Dec 31, 2013, cash and cash equivalents amounted to $125 million versus $136 million as of Dec 31, 2012. Cash flow from operating activities was $105 million in fiscal 2013, compared with $205 million in the prior year. The debt-to-capitalization ratio was at 30.3% as of Dec 31, 2013 from 29.3% as of Dec 31, 2012. Free cash flow for the year was $45 million compared with $155 million in 2012, mainly due to lower earnings.
During the quarter, the company repurchased 86,392 shares of Itron common stock for $3.4 million. This was pursuant to board authorization of repurchasing up to $50 million of Itron common stock during a 12-month period beginning Mar 2013. As of Dec 31, 2013, the company had repurchased 645,392 shares of its common stock at an average price of $41.80 per share. This represented approximately 1.6% of its total shares outstanding as of Mar 2013.
Itron also announced that its board of directors authorized a new share repurchase program of up to $50 million of the company’s common stock over a 12-month period to start after the current repurchase program in Mar 2014.
Bookings and Backlog
Itron had bookings of $527 million in the quarter, reflecting a year-over-year increase of 13%. Total backlog at the end of the quarter was $1.1 billion.
2014 Guidance
Itron expects revenues to be within the range of $1.825 to $1.925 billion. The company forecasts earnings to lie between $1.30 and $1.80 per share. This factors in assumptions of gross margin between 31% and 32%, a Euro to U.S. dollar average exchange rate of $1.33, average shares outstanding of approximately 39.8 million and an effective tax rate between 30% and 32%.
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.
The gas utility market continues to move through the early stages of the transition to smart metering. Despite the existing pipeline of large gas opportunities in the long term, it presents a lumpy business over the short. Some pockets of Itron’s electric segment — which include lower-end legacy products — are under pricing pressure. Some countries in Asia and Europe with lowest bid auction-based price points and bids for low volumes of highly specified hardware offer limited differentiation. These are weighing down the overall margin in the electric segment.
Additional costs related to the BC Hydro project remains a concern for the Energy segment. Moreover, delay in contracts and rise in expenses could challenge future growth.
Liberty Lake, Wash.-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 along with various other associated metering products for residential, commercial and industrial, and transmission and distribution customers.
Itron currently retains a Zacks Rank #5 (Strong Sell). A better-ranked stock in the electrical test equipment sector is Ametek Inc. (AME), which carries a Zacks Rank #2 (Buy).
Peer Performance
National Instruments Corporation (NATI) reported fourth-quarter adjusted earnings per share of 31 cents, up 7% from 29 cents in the year-ago quarter and beat the Zacks Consensus Estimate by a penny.
Cognex Corporation (CGNX) reported fourth-quarter earnings of 23 cents, flat year over year and in line with the Zacks Consensus Estimate.
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