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Itron, Inc.’s (ITRI - Analyst Report) second-quarter 2013 adjusted earnings slumped 50% year over year to 58 cents per share due to revenue deterioration and the consequent lower gross profit. Adjusted earnings fell short of the Zacks Consensus Estimate of 60 cents.

Including restructuring charges, acquisition-related expenses and amortization of intangible assets and debt fees, earnings came at 31 cents per share compared with the year-ago earnings of 79 cents.

Operational Update

Total revenue fell 17% year over year to $482 million, missing the Zacks Consensus Estimate of $493 million. The decline was mainly due to lower revenues from the Energy Segment.

Cost of goods sold declined 15.6% year over year to $322.5 million. Gross profit also dropped 18.9% to $159.6 million. Consequently, gross margin contracted 90 basis points (bps) to 33.1%. The year-over-year decline was due to lower volumes and higher warranty costs.

Adjusted operating expenses decreased 1.6% year over year to $127.3 million. The decline was led by lower global sales and marketing and product development expenses and restructuring costs, partly offset by an increase in general and administrative costs.

Adjusted operating profit declined 52% year over year to $32 million. Including one-time items, operating income was $18 million in the reported quarter compared with $46 million in the year-ago quarter.

Segment Performance

Energy Segment: Net sales at the Energy Segment dropped 21% year over year to $349.6 million, affected by the ramp down of five OpenWay contracts in North America. Gross profit for the segment reduced 24% to $112.6 million. Gross margin also decreased year over year to 32%.

Water Segment: The Water Segment reported sales of $132.5 million in the quarter, down 1.5% from $134.5 million in the year-ago quarter. Gross profit for the segment dropped 1.8% to $46.9 million. Gross margin decreased 20 bps to 35% due to an increase in professional services which have lower margins.

Financial Position

As of Jun 30, 2013, cash and cash equivalents amounted to $103.6 million versus $136 million as of Dec 31, 2012. Cash flow from operating activities was $18.9 million in the reported quarter compared with $92 million in the prior-year quarter. The debt-to-capitalization ratio declined to 29.1% as of Jun 30, 2013 from 29.2% as of Dec 31, 2012.

Free cash flow for the quarter was $4.2 million compared with $26.9 million in the second quarter of 2012. The decline was due to lower net income coupled with an increase in working capital.

Share Repurchase

During the reported quarter, Itron repurchased 380,310 shares for $15.9 million. As of Jun 30, 2013, the company had $27 million worth of shares remaining under the $50 million share repurchase authorization.

Bookings and Backlog

Bookings in the reported quarter increased 15% year over year to $515 million, while total backlog at the end of the quarter was $1.06 billion.

Guidance

For full-year 2013, Itron expects revenues in the range of $1.95–$2 billion. The company forecast earnings in the band of $2.25–$2.55 per share. Annual gross margin is expected at around 32%.

For the second half, revenues are predicted in the band of $1.02–$1.07 billion, representing growth of about 10–15% over the first half. However, revenues from gas will be lower than expected due to a slower pace of business in EMEA and product mix in North America. Free cash flow will be about 4% to 5% of second-half revenues.

Our View

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

However, the company continues to face a more challenged 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.

Other sector players, Agilent Technologies Inc. (A - Analyst Report) and Ametek Inc. (AME - Analyst Report) are yet to announce their quarterly results. One of Itron’s peers Teradyne Inc. (TER - Analyst Report) reported second quarter earnings of 43 cents per share, down 44% from 77 cents earned in the year-ago quarter, but ahead of the Zacks Consensus Estimate of 33 cents.

Itron currently retains a Zacks Rank #4 (Sell).
 

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