Warranty Costs Hurt Itron

Itron, Inc. (ITRI - Analyst Report) has reported an EPS of 92 cents in the fiscal 2011 third quarter results, compared with $1.03 in the year-earlier quarter. Results were impacted by increased warranty costs. The EPS in the quarter fell short of the Zacks Consensus Estimate of $1.05.

The quarter excluded a non-cash goodwill impairment charge of $13.27 per share. Including this, Itron recorded a loss per share of $12.70 in the quarter versus 68 cents in the year-ago quarter.

Total revenue during the quarter amounted to $615.6 million versus $573.7 million in the prior year quarter, above the Zacks Consensus Estimate of $579 million. The improvement was primarily due to increased electric, gas and water smart metering projects in the company’s International segment.

Cost and Margins

Costs of goods sold increased 12% to $439.4 million in the quarter. Gross profit dipped 3% to $176 million from the prior-year quarter. Gross margins contracted 310 basis points year over year to 28.6% due to increased warranty expense in Itron’s North America segment.

Operating income declined 21% to $60.2 million from $75.8 million in the year-earlier quarter, thereby contracting operating margin by 340 basis points year over year to 9.8%.

Financial Position

As of September 30, 2011, cash and cash equivalent declined to $129.5 million from $169.5 million as of June 30, 2011. Cash from operations for the first nine months of 2011 amounted to $154 million compared with $167 million in the year ago comparable period.

As of September 30, 2011, debt-to-capitalization ratio of the company was 33% versus 26% as of June 30, 2011.

The company also announced that its Board of Directors has authorized the repurchase of up to $100 million of its common stock during the next 12 months.

Itron has also announced projects to restructure its manufacturing operations to increase efficiency and lower manufacturing costs. The company expects to achieve annualized cost savings of approximately $30 million.

Outlook

For FY11, Itron expects revenues in the range of $2.3 billion to $2.4 billion; while EPS is projected in the range of $4.00 to $4.20. For FY12, Itron expects revenue to be flat to down 5% and EPS to be flat to down a few percentage points.

Itron is a leading technology provider to the global energy and water industries. It is the world's leading provider of intelligent metering, data collection and utility software solutions, with nearly 8,000 utilities worldwide relying on its technology to optimize the delivery and use of energy and water.

The company competes with the likes of General Electric Co. (GE - Analyst Report) and Roper Industries Inc. (ROP - Snapshot Report). We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.