Itron Inc. (ITRI) delivered record earnings per share (EPS) of $1.06 in its third quarter ended September 30, 2010, zooming past the Zacks Consensus Estimate by an impressive 21 cents, and more than doubling the EPS of 45 cents in the year-ago quarter. The year-over-year improvement was driven by robust sales in North America.
Adjusted EPS for both the reported and comparable quarters exclude amortization of intangible assets, amortization of debt placement fees, the amortization of convertible debt discount, and the non-cash net loss associated with the convertible debt-for-stock exchange. Including these items, EPS in the quarter was 71 cents compared with a loss per share of 7 cents a year ago.
Revenues surged 41% year over year to a record $576 million, well above the Zacks Consensus Estimate of $525 million, mainly driven by a whopping 130% increase in revenues in North America, which was partially offset by a 4% decline in International revenues.
Cost & Margin Performance
Cost of revenues spiked 40% to $392 million in the quarter and, based on revenues; it dipped 30 basis points to 68%. Gross profit shot up 42% to $184.2 million and gross margin expanded 30 basis points to 32%.
Total operating expenses (which comprise sales and marketing, product development, general and administrative expenses excluding amortization of intangibles) went up 11% to $105.9 million mostly due to increased compensation expense resulting from the reinstatement of bonus and profit sharing plans. Based on revenues, operating expenses improved 500 basis points to 18.4%. Itron’s adjusted operating income more than doubled to $78.3 million from $34.1 million in the prior-year period. Adjusted operating margin soared 520 basis points to 13.6% in the quarter.
Segment Performance
Itron North America led the performance with a year-over-year growth of 130% to a record $315 million driven by higher shipments of Open Way meters (1.3 million) and modules. Open Way meters contributed 50% to the segment’s revenue. The segment’s gross margins soared 450 basis points to 35.5% driven by higher volumes and cost reduction efforts. The segment posted an operating profit of $64.6 million, reversing the loss of $1.2 million incurred in the year-earlier quarter.
Itron International revenues on the other hand dropped 4% to $260.6 million, affected by foreign exchange rates. Gross margins suffered a decline of 430 basis points to 27.85% due to increased warranty expense, facility consolidation and material costs. Operating income dropped to $7.6 million from $17.3 million. Operating margin was 3% compared with 6% in the year-earlier quarter.
Bookings and Backlog
As of September 30, 2010, Itron’s total backlog was $1.7 billion compared with $1.6 billion as of September 30, 2009. The twelve-month backlog was $958 million as of September 30, 2010, higher than $749 million as of September 30, 2009. Bookings in the quarter were $528 million compared with $400 million in the third quarter of 2009.
Financial Position
As of September 30, 2010, Itron had cash and cash equivalents of $148.1 million, up from $137.4 million as of June 30, 2010. During the quarter, the company generated operating cash flows of $50 million compared with $19.7 million in the year-ago quarter. Free cash flow generated during the quarter was $32.2 million, substantially higher than the year-ago free cash flow of $9.5 million.
As of September 30, 2010, the company paid back its debt, thus improving its debt-to-capitalization ratio to 32% from 34% as of June 30, 2010.
Our Take
The technology-based advanced metering infrastructures (AMI) and automated meter reading (AMR) markets have huge growth prospects in the years to come, providing Itron with ample scope for growth and expansion. Two driving forces facilitating AMI and AMR growth are the cost reduction strategies implemented by almost all the companies to deal with the economic recession and its subsequent slow recovery, necessitating efficient allocation of energy supply to meet the increasing demand.
Recently, Itron entered into a project contract with Cleveland Division of Water (Cleveland), the largest water provider in the United States. The contract enables the latter to deploy the former’s smart water metering solution in increasing the operational efficiency and providing upgraded services to its customers.
This contract is considered Itron’s largest water meter automation project in North America and is expected to bring long-term benefits. Another project of great value is with Severn Trent Water, one of the leading water and waste water providers in the U.K. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.
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.
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