Shares of Itron, Inc. (ITRI) lost over 3% and closed at $36.01 on Feb 11, after the company reported its fourth-quarter and fiscal 2014 results. Although, adjusted earnings remained flat year over year at 36 cents per share in the reported quarter, it fell short of the Zacks Consensus Estimate of 39 cents.
Including one-time items, such as amortization, restructuring and acquisition-related expenses, the company reported a loss of $1.25 per share, narrower than the year-ago quarter’s loss of $3.93 a share.
Operational Update
Total revenue declined 2.7% to $510 million from $524 million in the year-ago quarter. Revenues, however, surpassed the Zacks Consensus Estimate of $476 million. Improvement in revenues in each segment – Electricity, Gas and Water were offset by currency fluctuations.
Cost of goods sold went down to $355 million from $358.8 million in the prior-year quarter. Gross profit also decreased 6% year over year to $154.8 million. Gross margin decreased 120 basis points (bps) to 30.3% primarily due to an unfavorable product mix in the Gas and Water segments, partially offset by improved performance in Electricity.
Adjusted operating expenses increased marginally to $125.5 million from $126.7 million in the year-ago quarter. Adjusted operating profit decreased 23% year over year to $29 million. Including one-time items, Itron reported an operating loss of $49 million in the quarter, narrower from the loss of $149 million in the year-ago quarter.
Segment Performance
Electricity Segment: Net sales at the Electricity Segment decreased 1.7% year over year to $226.7 million. The segment reported an adjusted operating income of $13.3 million compared with $1.3 million in the year-ago quarter.
Gas Segment: The segment’s sales went down 3% year over year to $149 million. Adjusted operating income for the quarter was $13.7 million, down 48.5% from $26.5 million in the year-ago quarter.
Water Segment: The Water Segment reported sales of $134 million in the quarter, down 3.5% from $138.8 million in the prior-year quarter. Adjusted operating income for the quarter was $13.8 million, which plunged 32% from $20.4 million in the year-ago quarter.
Financial Position
Itron ended the quarter with cash and cash equivalents of $112.4 million versus $124.8 million as of 2013-end. The company generated cash flow from operations of $133 million in 2014 compared with $105 million in 2013.
The debt-to-capitalization ratio was 31.2% as of Dec 31, 2014 as against 30.3% as of Dec 31, 2013. Free cash flow in the reported quarter was $4 million, compared with $24 million in the fourth quarter of 2013, largely due to the timing of collection of certain accounts receivables and cash disbursements for payables, partially offset by improved inventory management and lower capital expenditures.
During the quarter, the company repurchased 599,813 shares for about $243.4 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.
On Feb 11, Itron was selected by the City of North Miami Beach water utility to help modernize its water distribution system and recover lost water. The utility will use Itron’s advanced metering infrastructure (AMI), leak detection solution and cloud-based analytics to more effectively manage the delivery of water resources, reduce non-revenue water and conserve resources. Itron’s water AMI solution will enable North Miami Beach to enhance customer service, protect revenue, forecast consumption, analyze flow and support district metering by leveraging detailed consumption and meter alerts collected by Itron Analytics.
The Itron solution being deployed at North Miami Beach consists of water communication modules and acoustic leak sensors as well as cloud-based leak monitoring, network and Itron Analytics software applications. Installation of the solution will be complete in summer 2015.
Restructuring
Itron announced its plans to restructure the Electricity business segment and related general and administrative activities to improve operational efficiencies and reduce expenses. The company expects to substantially complete the plans by the end of 2016 and achieve annualized cost savings of approximately $40 million upon completion. The company estimates total pre-tax restructuring charges of $65 to $75 million and hopes to record the majority of the charges in the fourth quarter of 2014.
Fiscal 2014 Performance
Itron posted adjusted earnings of $1.60 per share for 2014, decreasing 15.8% from $1.90 a share in 2013. Higher gross profit was offset by increased operating expenses, resulting in the decline in earnings. Earnings also missed the Zacks Consensus Estimate by a penny. Including special items, the company reported a loss of 58 cents per share for the year compared with a loss of $3.74 in 2013.
Revenues for the full year increased 1.1% year over year to $1.97 billion from $1.95 billion in 2013, driven by growth in the Water and Gas segments, partly offset by decrease in the Electricity segment. Revenues came ahead of the Zacks Consensus Estimate of $1.94 billion.
Bookings and Backlog
Itron had bookings of $648 million in the quarter. Total backlog increased 40% year over year and came in at $1.48 billion at 2014-end.
2015 Guidance
Itron guided adjusted earnings per share for 2015 in the range of $1.60 and $2.00. The company expects revenue to be around $1.8 and $1.9 billion for the full year and assumes gross margin in the band of 32% to 33%. The company is concerned that the change in exchange rates will have a large impact on 2015 results, approximately of $150 million on revenues and 20 cents on earnings per share.
Further, the planned product exits in the electricity segment will impact revenues by $50 million compared with 2014. Excluding these impacts, revenue growth in 2015 would be in the low to mid single digits. Moreover near-term weakness in EMEA will also hurt growth.
Itron expects stronger revenue and earnings in the second half of 2015 due to project deployment schedules for several large contracts in backlog and timing of planned product cost reductions and manufacturing efficiency gains in the gas business.
Additionally, the restructuring plans which will be put into operation in 2015 and 2016 will bring in sustained financial improvement in Electricity. Significant backlog expansion, operational efficiency projects and expanded services focus for smart cities and the Internet of Things (IOT), will drive revenue growth and improved profitability going forward.
Our View
Itron will benefit from its consistent focus on lowering costs through restructuring actions. 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 in different geographic regions, especially EMEA, still remain headwinds.
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 Cognex Corporation (CGNX), China Unicom (Hong Kong) Limited (CHU) and Advanced Energy Industries, Inc. (AEIS). All these stocks carry a Zacks Rank #1 (Strong Buy).
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