Shares of Itron, Inc. (ITRI) gained over 9% and closed at $39.38 on Aug 6, a day after the company reported its second-quarter 2014 results. Adjusted earnings declined 7% year over year to 54 cents per share in the reported quarter, impacted by higher effective tax rate. However it came ahead of the Zacks Consensus Estimate of 36 cents.
Including one-time items such as amortization, restructuring and acquisition-related expenses, the company reported earnings of 49 cent per share, which improved 58% from the year-ago quarter.
Operational Update
Total revenue increased 1.5% year over year to $489 million and surpassed the Zacks Consensus Estimate of $464 million. Year-over-year revenue growth was driven by improvement in the Water and Gas segments, which more than offset a decrease in the Electricity segment.
Cost of goods sold went up 1.2% year over year to $326 million. Gross profit rose 2.2% to $163 million from $160 million in the year-ago quarter. Consequently, gross margin increased 20 basis points (bps) to 33.3%.
Adjusted operating expenses remained flat year over year at $127 million. Adjusted operating profit increased 11.5% year over year to $35 million. Itron reported an operating profit of $31.9 million in the reported quarter compared with $18 million in the year-ago quarter.
Segment Performance
Electricity Segment: Net sales at the Electricity Segment decreased 14% year over year to $183.8 million compared with the year-ago quarter. The segment reported an adjusted operating loss of $2.9 million for the quarter compared with an adjusted operating profit of $3 million in the year-ago quarter.
Gas Segment: The segment’s sales rose 13.5% year over year to $154 million. Adjusted operating income for the quarter was $27.5 million, up 25.9% from $21.9 million in the year-ago quarter.
Water Segment: The Water Segment reported sales of $151 million in the quarter, up 14% from $132.5 million in the prior-year quarter. Adjusted operating income for the quarter was $23 million, a 25.7% jump from $18.5 million in the year-ago quarter.
Financial Position
Itron ended the quarter with cash and cash equivalents of $114.8 million versus $124.8 million as of 2013-end. Cash flow from operating activities for the period of six months ended Jun 30, 2014 was $67 million compared with $19 million in the year-ago period.
The debt-to-capitalization ratio was 27% as of Jun 30, 2014 against 30.3% as of Dec 31, 2013. Free cash flow in the reported quarter was negative $10 million, compared with a positive $4 million in the second quarter of 2013 impacted by increased working capital.
During the quarter, the company repurchased 107,477 shares for about $42 million. The repurchases were made under the $50 million share repurchase program authorized by board of directors for a 12-month period beginning Mar 2013. Itron also repaid debt of about $20 million during the quarter.
Bookings and Backlog
Itron had bookings of $478 million in the quarter. Total backlog increased 25% year over year and came in at $1.3 billion at the quarter-end.
Guidance
Itron expects full year 2014 revenues to be in the range of $1.9–$1.975 billion. The company projects 2014 earnings per share to be between $1.50 and $1.80. Itron anticipates gross margin of approximately 31% to 32%.
The company is progressing on restructuring projects announced in 2013, including plan to reduce workforce by 9%. During the reported quarter Itron reassessed certain restructuring actions and completed about 75% of workforce reduction. It will result in an annualized savings of about $30 million once complete.
On Aug 5, Itron announced that the city of Bismarck, North Dakota has selected Itron to help modernize its water distribution system. The city purchased Itron's AMI solution, Itron analytics and services. They will share the Itron fixed network installed at Montana Dakota Utilities Company, which provides a cost effective solution for both utilities. This along with the prior contracts will strengthen the company’s backlog bringing in stability in its revenue.
Our View
We believe that 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.
Itron's growth mainly depends on leveraging smart technologies and data expertise through innovative new software and services which will help in increasing payback opportunities for utilities to deploy smart systems, by helping them to unlock more value from the data. Itron's continuous focus on addition of new software and services will drive high margin revenue stream in addition to core metering and network product revenues.
However, software and services business forms less than 10% of Itron's total revenues as of now; yet the company remains optimistic about the expansion opportunity of this business organically with targeted M&A.
Itron is well positioned to benefit from its Gas and Water segments which are performing very well along with displaying prospects of betterment in the future. However, the Electricity business is operating in a challenging environment and remains a matter of concern.
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 #3 (Hold). Some better-ranked stock in the electrical test equipment sector include Agilent Technologies Inc. (A), Cognex Corporation (CGNX) and National Instruments Corporation (NATI). All these stocks carry a Zacks Rank #2 (Buy).
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