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Article Excerpt
OPERATOR: Good day, everyone, and welcome to the Itron, Incorporated fourth quarter 2008 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Deloris Duquette. Please go ahead.
DELORIS DUQUETTE, VP, IR, ITRON, INC.: Good afternoon, everyone, and thank you for joining us today. On the call today we have Leroy Nosbaum our Chairman and CEO; Malcolm Unsworth our President and COO; Steve Helmbrecht our Chief Financial Officer; Marcel Regnier, Chief Operating Officer for Actaris; and Philip Mezey, Chief Operating Officer for Itron North America.
The earnings release that we issued today includes an outlook for revenue, earnings and adjusted EBITDA for 2009. We will also talk about other issues on today's call that could be forward-looking in nature. The outlook and other forward-looking nature we are providing is based on what we know today is and is subject to a number of risks and uncertainties. I encourage you to read the forward-looking disclosure in our press release, which alerts you to a number of factors that can cause a difference between our expectations and actual results.
You should also refer to our 2007 Form 10-K and other related SEC filings for more complete disclosures for specific risks and uncertainties related to our business. We do not assume any obligation to update or revise forward-looking statements, although we may do so from time to time.
Our earnings release includes non-GAAP financial information that we believe enhance your overall understanding of our current and future performance. Schedules reconciling GAAP to non-GAAP financial information are included with our press release and are also available on Itron's external website. Supplemental information is posted on our website under the Investor tabs with the pertinent points that each officer will discuss today.
We have a lot of information to cover on today's call so our scripted remarks will be longer than usual. We are willing to remain on the call a bit longer than we normally do to ensure that we are answering any questions that you may have. We will start the call with an overview of our financial results, followed by operational updates and then Malcolm will talk about his new position. We will finish with Leroy's thoughts on his new role and now I would like to turn the call over to Steven Helmbrecht Itron's CFO.
STEVEN HELMBRECHT, CFO, ITRON, INC.: Thank you, Deloris. We have provided detailed financial information in the release so I will give an overview of our results for the fourth quarter and full year 2008. I will also talk about our debt including our recent issuance of equity in exchange for convertible notes and then we will turn the call over to Malcolm. We faced some headwinds in the fourth quarter, with slower year end spending in the US coupled with significant strengthening of the dollar. We had revenue of 432 million in the quarter, which was 48 million or 10% lower than the fourth quarter of 2007. Gross margin for the quarter was 34%, which compares favorably to 33% in the fourth quarter 2007. Due to an increase in Actaris revenues in higher margin regions. Operating expenses for the quarter were comparable to the prior year over higher as a percentage of revenue due primarily to increased Actaris sales and marketing and R&D expense as as expenses related to Sarbanes-Oxley compliance.
Non-GAAP operating margin was 11.2% for the quarter, down from 12% from the fourth quarter of '07, due primarily to the increased operating expenses and the lower revenues. We had a non-GAAP effective tax rate of 27% for the quarter and the year a bit higher than our expectations due to the impact of exchange rates on foreign earnings. Non-GAAP diluted EPS was $0.71 for the quarter compared with $0.81 in the fourth quarter of 2007. For the year, we had revenue of 1.91 billion, compared with 1.46 billion for 2007 , an increase of about 30%. Keep in minding the Actaris results for 2007 were from the April 18th acquisition date.
Our non-GAAP operating margin was 12.1% for the year compared to 12.5% in 2007, due primarily to increased compensation and R&D expenses as well as the expenses for Sarbanes-Oxley compliance. We are wrapping up the Sarbanes-Oxley project for Actaris we launched in 2007. This was an extensive project and we are pleased with the results in terms of the assessment of our internal controls. As a result, we expect the ongoing compliance cost for Sarbanes-Oxley in 2009 to be much lowered than the cost incurred in 2007 and 2008. Non-GAAP diluted EPS for the year was 336 compared with 281 in 2007 , an increase of 20%. Cash flow from operations was 37 million for the quarter and 193 million for the year. Our capital expenditures for the year were back end loaded with 22 million for the quarter and 63 million for the year. Capital expenditures in the quarter were primarily for AMI related equipment in North America and for automation of our Electricity Metering Manufacturing in the UK. We had free cash flow of 15 million for the quarter and 130 million for the year.
Turning to liquidity, our cash balance was 144 million as of December 31. We have about 65 million in unused capacity on a revolver line. The rest is currently being used for letters of credit and bonds. Our accounts receivable remain healthy. We had adjusted EBITDA for the quarter of 60 million and an EBITDA margin of 14%. Our adjusted EBITDA for the year was 280 million with an EBITDA margin of 14.7%. As a reminder to our debt investors, we make several adjustments including the add back of stock compensation expense when calculating EBITDA for debt ratios. Stock compensation expense for the year was 16.5 million.
At December 31, we had about 1.2 billion in total debt at a blended interest rate of about 4.6%. During the quarter, we made 4 million in debt purchase including the repurchase of 1 million in senior subordinated notes. We made lower debt prepayments in the fourth quarter in order to maintain a higher level of liquidity and for the year we made debt payments of 388 million. Our debt to EBITDA ratio was 4.1 times at December 31, and we were in compliance with our debt covenants. As we move into 2009, starting at the end of Q1, our credit agreement calls for a tightening in these covenants with a maximum debt to EBITDA ratio of four times and a minimum interest coverage ratio of 3.5 times.
In January, we issued about 2.25 million shares of common stock in exchange for 121 million of face value of our convertible notes. These exchanges reduced our convertible debt from 345 million to 224 million, including the exchange we have reduced our debt by 585 million since the April 2007 acquisition, a debt reduction of over 35%.
A few comments about the exchange. First, the notes have been and continue to be an important part of our capital structure. We issued the notes in 2006 and they helped fund the Actaris acquisition, but it has been 21/2 years since issued the notes and this exchange reduced the balance by about a 1/3. We estimate the exchange will be dilutive to 2009 EPS by approximately $0.17 a share which we have already taken into account in our guidance issue today. The accounting for the convertible notes is getting increasingly complex. A new accounting announcement became effective on January 1st, which will result in additional non-cash interest expense of about 9.5 million in 2009. Also, the exchange will result in a one time non-cash charge of about 10 million pretax.
Additional non-cash interest expense and loss on exchange are excluded from our non-GAAP earnings guidance for 2009. There will be more information in our Form 10-K filing and Deloris and I can take offline additional questions related to the exchange into new accounting rules.
I will now turn the call over to Malcolm to discuss our outlook
MALCOLM UNSWORTH, PRESIDENT, COO, ITRON, INC.: Thank you, Steven and good afternoon everyone. Guidance for 2009 is very difficult. So we thought it appropriate that I talk about it as I am responsible for the results of ' 09. Obviously we find ourselves in an economy that is bad and from our perspective continues to worsen. The US housing start report this morning is 466,000 is clearly indicative. As we came out of 2008, we said year end spending was disappointing, especially in the US and it was. As we have come through January and moved through February, business in the US continues to decline. The question now becomes will it continue to worsen or level off. The answer to that is unclear.
In addition, as we move through the first two months of ' 09, foreign exchange and currency other than the Euro have weakened relative to the US dollar. For example, since last month the deterioration on non Euro currency, primarily the Brazilian Rea and the British Pound have decreased our 2009 projected revenues in US dollars by approximately 20 million. So while our modeling at $1.30 for the Euro has been close, others have deteriorated and therefore, it is quite hard to know what the year will be.
Unfortunately, as it has been well publicized, San Diego has chosen to delay their OpenWay rollout in order to upgrade to a higher level of platform security. A move that is not helpful from an ' 09 perspective but one with which we cannot argue either. Philip will talk more about this in his prepared remarks. The net of this is that we have moved our guidance range for ' 09 down to reflect uncertainty. Particularly in the front half of the year and the reality of San Diego moving out. Our new revenue range for 2009 is 1.78 billion to 1.88 billion. Earnings per share range is $3.35 to $3.75 and EBITDA is 270 million to 290 million. We take no pleasure in lowering guidance for 2009, but at this point we think it is a prudent think to do.
Now let's move to Philip and our staff for their respective operation reviews.
PHILIP MEZEY, COO OF ITRON NORTH AMERICA, ITRON, INC.: Thank you, Malcolm and good afternoon everyone. I thought I would highlight a few things from the quarter but spend most of my time today talking about some of the broader issues in the industry and market and try to address some misconceptions that may exist. First a few highlights of the quarter. North America revenue for the quarter of $153 million was 8% lower than the same period of 2007, primarily due to lower than usual year end spending from utilities in the US. When we gave guidance in the third quarter we said that this could be a risk.
In 2008 our quarterly revenue pattern was a bit different from normal years. Instead of a slower first half, we experienced more revenue in the first nine months of the year than we were expecting but by year end between the economy and financial markets many utilities did not adhere to their normal use it or lose it budget spending and instead began delaying those purchases that were discretionary, thus we end up at the lower end of our revenue guidance. INA also had lower gross margin during the quarter compared to 2007 primarily due to the lower revenue. Unabsorbed overhead was a bit higher and our product mix was not as favorable as last year. Expenses were basically in line and INA ended the year with non-GAAP operating margins for the quarter and year of about 16%, slightly lower than 2007 non-GAAP operating margin of 17% but not out of line considering all the work that we did this year bringing OpenWay to market. INA bookings during the quarter were very impressive at $422 million which gave us a total bookings for 2008 of $1.25 billion.
For Q4 a large part of this was the electric AMI portion of our contract with CenterPoint Energy for 334 million, whose project was approved by the Public Utility Commission of Texas in December. While we are pleased with the AMI bookings the fact that Q4 core business bookings excluding AMI were only $88 million indicates a concerning slow down in our core business in North America. However, with that said, we still delivered over $628 million of core business in the past year. I will speak more about our thinking about the economy but the most significant factor here, again, is the impact that AMI project consideration has on our AMR and base electric metering business.
Last week at DistributeTech one of our customers made a presentation in which they commented publicly on the roll out plans. I would like to clarify a few misconceptions that have arisen after that presentation. Inferences were drawn from this change in deployment plans both in terms of revenue impact to Itron and the reasons the change was made. Questions were raised about whether or not the security function of OpenWay was the major reason for the delay.
Last week we issued a press release providing more detail on our latest software release, which further enhances our security capabilities and has been a part of our road map for quite some time. To clarify, the customer has chosen to implement the enhanced version of security that our new release provides and their intent to test the software thoroughly until August. We applaud them for this. It will effect the initial deployment schedule for 2009 but it will provide our customer with the right solution and that is more important in the long-term. There have also been some concerns expressed about Itron's ability to successfully launch OpenWay into a fast evolving Smart Grid marketplace. Let me assure you, OpenWay works and works well.
I will remind you that we are currently working with and deploying...
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