Itron (ITRI)

Q2 2012 Earnings Call

August 01, 2012 5:00 pm ET


Barbara J. Doyle - Former Vice President of Investor Relations

Steven M. Helmbrecht - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

LeRoy D. Nosbaum - Chief Executive Officer, President and Director


Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Zach Larkin - Stephens Inc., Research Division

John Quealy - Canaccord Genuity, Research Division

Benjamin J. Kallo - Robert W. Baird & Co. Incorporated, Research Division

Amir Rozwadowski - Barclays Capital, Research Division

Noah Kaye - ThinkEquity LLC, Research Division

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Shawn E. Lockman - Piper Jaffray Companies, Research Division

Scott Reynolds



Good day, everyone, and welcome to the Itron, Inc. Quarter 2 2012 Earnings Conference Call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Barbara Boyle, Vice President of Investor Relations. Please go ahead.

Barbara J. Doyle

Thank you, Marisi. And good afternoon to everyone on the call. This is Itron's Second Quarter Fiscal 2012 Earnings Call. And on the call today, we have LeRoy Nosbaum, Itron's President and Chief Executive Officer; and Steve Helmbrecht, Senior Vice President and Chief Financial Officer.

We issued a press release earlier today announcing our results. The press release includes replay information for today's call. We also have prepared slides to accompany our remarks in this call, and these slides are available through the webcast and through our corporate website under the Investor Relations tab.

Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation.

I'd also like to cover our Safe Harbor Statement. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this call and in the Risk Factors section on our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Now please let me introduce Steve Helmbrecht, Itron's CFO, who will start our call.

Steven M. Helmbrecht

Thank you, Barbara, and good afternoon. I will begin with a summary of our Q2 results on Slide 4, starting with revenue.

Second quarter revenue of $575 million was down 5% from Q2 2011 to almost entirely the foreign exchange rates. The average euro-U.S. dollar rate in Q2 was $1.28, compared with $1.44 in Q2 of last year.

On Slide 5, you see the stronger dollar reduced revenue by $35 million. Adjusting for the impact of currency, total revenue was about flat compared with last year. The impact of FX on earnings was more muted. The stronger dollar negatively impacted GAAP operating income by $1 million and non-GAAP operating income by about $3 million, compared with last year.

Gross margin of 34% was 270 basis points higher due to special -- reduced special warranty expense and operational improvements in both Energy and Water. Lower special warranty expense, primarily in the Energy segment, drove more than half of the margin improvement over last year. Warranty expense in the quarter benefited from a $4.3 million reduction in our warranty reserve related to the satisfaction of a customer warranty issue at a lower cost than originally estimated. Excluding that item, gross margin would have been 33.2%, up 190 basis points over last year and up 115 basis points from Q1 2012.

Non-GAAP operating margin of 11.6% was up 80 basis points from last year, reflecting the improved gross margin, partially offset by higher R&D, sales and marketing expenses and the inclusion of SmartSynch in our results beginning this quarter.

Consistent with improved non-GAAP operating margin, adjusted EBITDA margin of 13.9% was up 80 basis points over last year with adjusted EBITDA of $81 million. We had GAAP diluted earnings per share of $0.79 for the quarter, compared with $0.84 a year ago. Our non-GAAP earnings per share, which exclude the impact of restructuring charges, acquisition-related expenses, amortization of intangible assets and prepaid debt fees were $1.16 per share, compared with $1.20 a year ago.

Slide 6 summarizes the year-over-year bridge for non-GAAP EPS. You see interest expense in taxes both impacted GAAP and non-GAAP EPS in the quarter. We refinanced our debt in August 2011 with more favorable rates and we have continued to pay down debt. These actions drove a $6 million year-over-year reduction in interest expense in Q2 compared with last year.

Our tax rate in Q2 was approximately 27%, as expected. Our income tax expense in the quarter was approximately $10 million higher than last year due to onetime discrete tax benefits recognized in Q2 last year.

Reduced share count resulting from share repurchases drove about $0.03 of EPS benefit in the quarter. In Q2, we repurchased 419,600 shares for $15 million. From last October through today, we have repurchased 1.6 million shares at an average price of $36.67 for a total of $60 million. That represents about 4% of our outstanding shares as of last October and still leaves us with $40 million in buyback authorization.

Now moving to Slide 7, I will review revenue by business line. Electric revenue was up 2% in constant currency. Revenue was driven by strong North America OpenWay shipments to BC Hydro, as well as the inclusion of 2 months of SmartSynch activity.

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