Elster Reports 2011 Second Quarter and Half-Year Results

ESSEN, Germany, July 29, 2011 /PRNewswire/ -- Elster Group SE (NYSE: ELT) today announced results for the second quarter and six months ended June 30, 2011. Second quarter 2011 highlights include:

• Second quarter revenues of $486.7 million, up 12.4 percent year-over-year (up 3.5 percent on a constant currency basis[1])
• Second quarter adjusted EBITDA[2] of $70.0 million, adjusted EBITDA margin[2] of 14.4 percent
• Second quarter GAAP earnings per ADS of $0.13, including a one-time, non-cash debt extinguishment charge related to refinancing of $10.3 million (net of tax $0.09 per ADS)
• Contracted future revenues[3] of nearly $1.1 billion at June 30, 2011

"We have seen steady growth across many of our business segments and geographies in the first half of the year. The positive trends in our contracted future revenues, our growing traction in emerging markets like Russia and Brazil, and the continued strength throughout our large and profitable gas business position the company strongly to manage through the slower U.S. market and capitalize on potential global drivers in the remainder of the year," said Simon Beresford-Wylie, chief executive officer of Elster.

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Second quarter 2011

Elster's second quarter 2011 (2Q 2011) revenues were $486.7 million, up $53.6 million, or 12.4 percent, over the second quarter 2010 (2Q 2010), and up 3.5 percent on a constant currency basis. Strong growth in the gas segment was supported by solid performance in the electricity and water segments.

Elster recorded adjusted EBITDA of $70.0 million in 2Q 2011, down 4.6 percent compared to 2Q 2010. 2Q 2011 GAAP net income attributable to Elster Group SE was $14.4 million, or $0.13 per ADS. Non-GAAP net income[4], which excludes the amortization of purchase price allocation after income taxes and the loss of extinguishment of debt after income taxes, was $30.5 million in 2Q 2011. This compares with $25.1 million in 2Q 2010.

2Q 2011 gross margin was 32.6 percent compared to 32.2 percent in 2Q 2010. Solid gross margin performance in the gas and electricity segments outweighed weaker results in water.

Total operating expenses increased by $14.8 million, or 15.2 percent to $112.0 million in 2Q 2011, up from $97.2 million in 2Q 2010. Continued investments in sales and marketing for our Smart Offerings[5] and increased research and development investments accounted for the majority of the increase in operating expenses.

In April, Elster entered into a euro 590 million multicurrency revolving credit and bank guarantee facilities agreement, and successfully placed euro 250 million Senior Notes. The new revolving credit facilities agreement provides Elster with additional financial flexibility to support its strategy. Under the new financing structure, the company improved its debt maturity profile and is also able to use cash to repay outstanding debt, while obtaining the flexibility to re-draw funds if additional financing is required.

The refinancing resulted in a one-time, non-cash, after-tax charge of $10.3 million or $0.09 per ADS in 2Q 2011 to write off the unamortized debt issuance cost associated with the old credit facility.

Half-year 2011

In the first half of 2011 (1H 2011), Elster's revenues were $930.6 million, up $99.3 million, or 11.9 percent over the first half of 2010 (1H 2010), and up 7.1 percent on a constant currency basis.

Elster recorded adjusted EBITDA of $132.2 million in 1H 2011, which increased by 1.0 percent from $130.9 million in 1H 2010. 1H 2011 GAAP net income attributable to Elster Group SE was $38.3 million, or $0.34 per ADS. Non-GAAP net income, which excludes the amortization of purchase price allocation after income taxes and the loss of extinguishment of debt after income taxes, was $60.5 million in 1H 2011. This compares with $30.3 million in 1H 2010.

Gross margin for 1H 2011 was 32.8 percent compared to 30.9 percent in 1H 2010. Product and geographic sales mix drove the year-over-year increase in gross margin. 1H 2010 gross margin was negatively affected by an inventory write-down related to the termination of business with a distributor in the electricity segment.

Total operating expenses increased by $25.3 million, or 13.1 percent to $217.8 million in 1H 2011, up from $192.5 million in 1H 2010. Investments in sales and marketing and research and development, particularly for Elster's Smart Offerings, accounted for the majority of the increase in expenses. The increase in general and administrative expenses were a result, primarily, of the now fully established corporate structure as a public company, which was only at a nascent stage last year.

Elster Segment Results

Gas

Gas revenues in 2Q 2011 of $275.1 million reflect a 22.9 percent increase versus 2Q 2010, and segment profit[6] of $64.4 million grew 19.7 percent compared to 2Q 2010. 2Q 2011 segment profit margin[7] decreased to 23.4 percent from 24.0 percent last year.

Gas segment revenue and profitability in 2Q 2011 reflect metering strength across geographies and outstanding performance from the utilization product portfolio. Revenues were particularly strong across Europe, as revenue grew in all major geographies. Gas segment profit was buoyed by a strong contribution from utilization products. Research and development investment accelerated year-over-year in the second quarter.

Gas revenues in 1H 2011 of $530.8 million reflect a 20.1 percent year-over-year increase versus 1H 2010, and segment profit of $129.2 million grew 22.3 percent compared to 1H 2010. 1H 2011 segment profit margin increased to 24.3 percent from 23.9 percent last year.

Improved global economic conditions and strong markets drove gas segment revenue and profitability in 1H 2011. Revenues were significantly higher in most major markets, highlighted by particular strength in Western Europe. Continued strong performance from the gas utilization product portfolio also contributed to the results. Favorable overall product mix drove improved gas segment profit despite increased research and development investments in new products.

Electricity

2Q 2011 electricity revenues were $117.3 million, an increase of 1.2 percent versus 2Q 2010. Segment profit of $12.5 million declined 6.7 percent compared to 2Q 2010. 2Q 2011 segment profit margin declined to 10.7 percent from 11.6 percent last year.

2Q 2011 electricity segment revenues reflect solid results in Europe, Asia and Latin America, which offset continued weakness in North America and the Middle East. Elster's continued sales force and new product investments impacted segment profitability in the second quarter.

Electricity revenues in 1H 2011 of $216.7 million reflect a 4.9 percent year-over-year increase versus 1H 2010. Segment profit of $16.2 million declined 16.9 percent compared to 1H 2010. 1H 2011 segment profit margin declined to 7.5 percent from 9.4 percent last year.

1H 2011 electricity segment revenues reflect strong growth in markets across Europe, which offset weakness in North America. Electricity segment profitability was impacted primarily by the continued investment in the Smart Offerings-focused sales force and by continued investment in new products, particularly in Europe and North America.

Water

Water revenues in 2Q 2011 of $102.4 million reflect a 2.5 percent increase versus 2Q 2010, and water segment profit of $4.9 million declined 54.2 percent compared to 2Q 2010. Water segment profit margin declined to 4.8 percent from 10.7 percent last year.

Similar to last quarter, strong results in Western Europe and Oceania in 2Q 2011 drove water segment revenue growth, offset by continued weakness in North America. 2Q 2011 water segment profitability was impacted by a number of charges discrete to 2Q 2011 and a less favorable geographic mix.

Water revenues in 1H 2011 of $198.8 million reflect a 2.5 percent increase versus 1H 2010, and water segment profit of $12.1 million declined 37.3 percent compared to 1H 2010. Water segment profit margin declined to 6.1 percent from 10.0 percent last year.

1H 2011 water segment revenues were driven by considerable growth in Western Europe and Oceania, which were offset by weaker revenues in selected North America markets. Product and geographic mix impacted 1H 2011 water segment profitability, as Elster also continued to invest in the development of new products. Segment profitability in 1H 2011 was also impacted by a number of charges discrete to 2Q of 2011.

Outlook[8]:

Elster expects that full year 2011 revenues will grow five percent to nine percent in 2011 compared to 2010 and estimates its 2011 GAAP earnings per ADS to be in the range of $0.90 to $1.00.

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Company management will webcast a conference call at 8:00 a.m. ET on Friday, July 29, 2011 on the company's website. To access the live webcast, please log on to the investors section of the company's website at http://investors.elster.com. Analysts and institutional investors may participate in the conference call by dialing +1-612-234-9959 and using confirmation number 208459.

Webcast and telephone replays of the conference call will be available approximately two hours after the completion of the call through Friday, August 12, 2011. Domestic callers can access the replay by dialing +1-800-475-6701, and international callers can access the replay by dialing +1-320-365-3844 and using confirmation number 208459.

Elster (NYSE: ELT) is one of the world's largest electricity, gas and water measurement and control providers. Its offerings include distribution monitoring and control, advanced smart metering, demand response, networking and software solutions, and numerous related communications and services - key components for enabling consumer choice, operational efficiency and conservation. Its products and solutions are widely used by utilities in the traditional and emerging Smart Grid markets.

Elster has one of the most extensive installed revenue measurement bases in the world, with more than 200 million metering devices deployed over the course of the last 10 years. It sells its products and services in more than 130 countries across electricity, gas, water and multi-utility applications for residential, commercial and industrial, and transmission and distribution applications. For more information about Elster, please visit www.elster.com.

This press release contains forward-looking statements. Elster may also make written or oral forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 20-F and 6-K, in its offering prospectuses, in press releases and other written materials and in oral statements made by Administrative Board members, managing directors or employees to third parties. Statements that are not historical facts, including statements about Elster's beliefs and expectations, are forward-looking statements and include generally any information that relates to expectations for revenue or earnings per ADS or other performance measures. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "thinks," "estimates," "seeks," "predicts," "views," "potential" and similar expressions. These statements are based on current plans, estimates, assumptions and projections, and therefore readers should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and Elster undertakes no obligation to publicly update any of them in light of new information or future events.

Forward-looking statements involve inherent risks and uncertainties. Elster cautions you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Elster's control, including those described in the sections "Special Note Regarding Forward-Looking Statements" and "Risk Factors" of the Annual Report on form 20-F dated March 10, 2011 filed with the U.S. Securities and Exchange Commission. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: negative worldwide economic conditions; instability and volatility in the worldwide financial markets; growth expectations for Elster's industry; the extent of the revenues Elster derives from sales to the utility industry; the transition to more advanced technology in the industry, including increasing competition from industries Elster previously viewed as distinct from Elster's; Elster's ability to develop new products and technologies and the extent of the revenues Elster derives from Smart Grid technology; possible changes in current and proposed legislation, regulations and governmental policies, including with respect to radio frequency licensing and certification requirements; the fluctuations of Elster's operating results due to the effect of exchange rates; volatility in the prices for, and availability of, components, raw materials and energy used in Elster's businesses including as a result of disruptions to the supply chain resulting from the earthquake and tsunami in Japan earlier in 2011; Elster's ability to raise capital to refinance its indebtedness; Elster's ability to manage its outsourcing arrangements; or other factors.

In addition to figures prepared in accordance with U.S. GAAP, Elster presents non-GAAP financial measures, such as adjusted EBITDA, net income before amortization of purchase price allocation and loss on extinguishment of debt, and free cash flow, in this press release. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with U.S. GAAP. Non-GAAP financial measures are not subject to U.S. GAAP or any other generally accepted accounting principles. Other companies may define these non-GAAP financial measures in different ways. Elster has included a reconciliation of the non-GAAP measures in this document to GAAP measures below.

In the second quarter of 2011 Elster has more strictly defined the calculation for our non-GAAP measure, adjusted EBITDA. Previously, adjusted EBITDA was calculated based on a broader definition of adjusted EBITDA in our old Senior Facilities Agreement.

In connection with the refinancing that occurred in the second quarter of 2011, the old Senior Facilities Agreement was terminated. The new definition of adjusted EBITDA will now only include significant non-recurring items, including employee termination and exit costs.

The new calculation of adjusted EBITDA is based on how Elster will review business performance and determine the allocation of resources. Elster has updated all prior year periods at the group level for the new calculation of adjusted EBITDA in this press release for comparability purposes.

Additionally, the loss on extinguishment of debt recorded in the second quarter of 2011 that was a result of the refinancing and extinguishment of the Senior Facilities Agreement has been adjusted from net income before amortization of purchase price allocation.

Prospectively, Elster's three non-GAAP measures will continue to be presented in our earnings releases but will no longer be included in furnishings that include our interim financial statements or filings that include our annual financial statements due to the change in adjusted EBITDA after the refinancing.

SOURCE Elster Group SE