Iteris Inc (ITI) reported fiscal third quarter earnings last week.
Although product sales were up 16%, the company was forced to report a large goodwill impairment charge in its Transportation Systems segment.
The stock dropped sharply on the news, but has since rebounded.
Earnings Highlights
Overall, revenue for the quarter was up 3.4% to $14m, compared to $13.6m in the same quarter last year.
The increase was primarily due to a 16% hike in product sales (with both Roadway Sensors and Vehicle Sensors showing double-digit growth rates) offset by a decline in Transportation Systems revenue of 12.2%.
Despite the top-line increase in the Vehicle Sensors division, ITI still reported a small loss in the segment.
The Roadway Sensors segment commands the highest margins so continued sales increases will help overall profitability and cash flow.
In my analysis of 2nd quarter earnings, I mentioned that a major risk was goodwill impairment in the Transportation Systems division. Those fears came true in the third quarter, with the company taking an $8m impairment charge.
According to management, the charge
“does not impact in any way our bullish long-term view for the business segment”
The impairment charge makes earnings comparisons difficult, with the company officially reporting a loss of $7m, or $0.20 per share.
Excluding the impairment charge and other non-cash items, Iteris would have reported earnings of $0.01 per share, compared to $0.02 per share in 2009.
The company still reported positive free cash flow for the quarter, and added to its cash balance – net cash sits at $9m.
Acquisition
In December, Iteris announced the acquisition of Meridian Environmental Technology, Inc (MET), a leader in 511 advanced traveler information systems. MET has been around for 17 years and is a growing business in an important niche.
The purchase price was approx. $4m in cash, plus another $2m based on an 24-month earn-out provision.
The companies have worked together on projects in the past. The new combination is now one of the top 1 or 2 providers in the U.S.
The good news is that management expects the acquisition to be immediately accretive, to the tune of $1m in revenue plus positive operating income in the upcoming quarter.
Conference Call Notes
Transportation Systems
– Just sent out a $10m design and build proposal to a state agency
– Making additional investments in sales & marketing ; new office in Abu Dhabi
– Federal Highway Bill – a key piece of transportation legislation – is expected to be brought before Congress sometime in the next 6-9 months. ITI expects funding for transportation technology to be significantly higher in the new bill
Vehicle Sensors
– EU is mandating safety features (like LDW) for new commercial trucks by 2013
– Joint announcement & go-to-market strategy with Audiovox for Advanced Driver Assistance System. Over 200 media people in attendance. ITI handled design but VOXX is doing all manufacturing and marketing. Lots of growth potential
Roadway Sensors
– 25% of sales in past two years has been from new products
– Continued push into both domestic and international markets
Conclusions
While the impairment charge put a damper on the earnings release, management seemed extremely bullish on the conference call.
In the past 3 years, free cash flow has averaged $6.1m, a number that the company should approach for fiscal 2011 as well. That would translate into an EV/FCF of only 7.8x, leaving plenty of room for improvement.
Lloyd Miller, a noted microcap investor and large holder of ITI, made a huge purchase on the initial drop after earnings, a positive sign.
This quarter is traditionally the slowest of the year, and management expects improvements in both the top and bottom line for the upcoming quarter.
I think the long-term trends in this business remain extremely strong, especially with the recent acquisition, new product lines / partnerships, and the upcoming Transportation Bill.
Disclosure
Long ITI