Elster Reports 2011 Third Quarter and Nine Month Results

ESSEN, Germany, Nov. 3, 2011 /PRNewswire/ -- Elster Group SE (NYSE: ELT) today announced results for the third quarter and first nine months ended September 30, 2011. Third quarter 2011 highlights include:

• Third quarter revenues of $464.4 million, up 2.9 percent year-over-year (down 2.6 percent on a constant currency basis(1))
• Third quarter adjusted EBITDA(2) of $67.6 million, adjusted EBITDA margin(2) of 14.6 percent
• Third quarter GAAP earnings per ADS from continuing operations of $0.21(3)
• Contracted future revenues(4) of nearly $1.1 billion at September 30, 2011
• North American market environment impacts water and electricity revenue, margins

"The strength of Elster's gas business and our geographic diversity have driven our steady performance in the face of the challenging macro environment, especially in North America," said Simon Beresford-Wylie, chief executive officer of Elster.

"I am very encouraged by our strong forward order book and the momentum coming from Europe and Latin America for their near and mid-term Smart Grid deployments. I am also especially pleased by the very strong results turned in by our gas business," Beresford-Wylie added.

Third quarter 2011

Elster's third quarter 2011 (3Q 2011) revenues were $464.4 million, up $13.1 million, or 2.9 percent, over the third quarter 2010 (3Q 2010), and down 2.6 percent on a constant currency basis. Strong gas segment growth outweighed weaker performances in the electricity and water segments, especially in North America.

Elster recorded adjusted EBITDA of $67.6 million in 3Q 2011, down 10.7 percent compared to 3Q 2010. 3Q 2011 GAAP net income from continuing operations attributable to Elster Group SE was $23.3 million, or $0.21 per ADS. Non-GAAP net income from continuing operations(5), which excludes the amortization of purchase price allocation after income taxes, was $30.5 million in 3Q 2011. This compares with $43.3 million in 3Q 2010.

3Q 2011 gross margin was 31.5 percent compared to 31.2 percent in 3Q 2010. Solid gross margin performance in the gas segment offset weaker results in the water segment and in North America.

Total operating expenses increased by $19.0 million, or 23.2 percent to $100.9 million in 3Q 2011, up from $81.9 million in 3Q 2010. 3Q 2010 operating expenses included $15.0 million of non-cash gains related to the valuation of the Management Equity Program terminated after Elster's initial public offering (IPO) and expenses related to the IPO. On an operational basis, continued investments in sales and marketing for our Smart Offerings(6) and increased research and development investments accounted for the majority of the increase in operating expenses.

First nine months 2011

In the first nine months of 2011, Elster's revenues were $1,395.0 million, up $112.4 million, or 8.8 percent over the first nine months of 2010, and up 3.7 percent on a constant currency basis.

Elster recorded adjusted EBITDA of $199.7 million in the first nine months of 2011, a 3.3 percent decrease from $206.6 million in the first nine months of 2010. In the first nine months of 2011 GAAP net income from continuing operations attributable to Elster Group SE was $61.6 million, or $0.55 per ADS. Non-GAAP net income from continuing operations, which excludes the amortization of purchase price allocation after income taxes and the loss of extinguishment of debt after income taxes, was $91.1 million in the first nine months of 2011, up 28.1 percent from $71.1 million in the first nine months of 2010.

Gross margin for the first nine months of 2011 was 32.3 percent compared to 31.0 percent in the first nine months of 2010. Product and geographic sales mix drove the year-over-year increase in gross margin. Gross margin in the first nine months of 2010 was impacted negatively by an inventory write-down related to the termination of business with a distributor in the electricity segment.

Total operating expenses increased by $44.3 million, or 16.1 percent to $318.7 million in the first nine months of 2011, up from $274.4 million in the first nine months of 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 Elster became in the fourth quarter of 2010.

In April 2011, Elster entered into a euro 590 million multicurrency revolving credit and bank guarantee facilities agreement, and successfully placed euro 250 million Senior Notes. 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.

Elster Segment Results

Gas

Gas revenues in 3Q 2011 of $276.4 million reflect a 16.7 percent increase versus 3Q 2010, and segment profit(7) of $64.1 million grew 8.3 percent compared to 3Q 2010. 3Q 2011 segment profit margin(8) decreased to 23.2 percent from 25.0 percent in 3Q 2010.

Gas segment revenue and profitability in 3Q 2011 were driven by broad geographic and product strength. Revenue grew in all major geographies, with particular strength across Europe. A strong contribution from the utilization product portfolio drove continued gas segment profitability. Investment in research and development increased broadly in line with revenue growth year-over-year in the third quarter.

Gas revenues in the first nine months of 2011 of $807.2 million reflect an 18.9 percent year-over-year increase versus the first nine months of 2010, and segment profit of $193.3 million grew 17.3 percent compared to the first nine months of 2010. In the first nine months of 2011 segment profit margin decreased to 23.9 percent from 24.3 percent in the first nine months of 2010.

Metering strength and high demand in key markets drove gas segment revenue and profitability in the first nine months of 2011. Revenues were significantly higher in most major markets, highlighted by particular strength in Western Europe. The gas utilization product portfolio continued its strong performance, which contributed to the results. Improved segment profit was driven by favorable product mix, despite increased research and development investments.

Electricity

3Q 2011 electricity revenues were $105.1 million, a decrease of 10.7 percent versus 3Q 2010. Segment profit of $8.3 million declined 50.9 percent compared to 3Q 2010. 3Q 2011 segment profit margin declined to 7.9 percent from 14.4 percent last year.

3Q 2011 electricity segment revenues reflect continued weakness in North America and the Middle East. The decrease was partly offset by solid results in Latin America and Europe. Mainly, lower sales and, to a lesser extent, continuing new product investments, impacted segment profitability in 3Q 2011.

Electricity revenues in the first nine months of 2011 of $321.8 million reflect a 0.7 percent year-over-year decrease versus the first nine months of 2010. Segment profit of $24.5 million declined 32.9 percent compared to the first nine months of 2010, and segment profit margin in the first nine months of 2011 declined to 7.6 percent from 11.3 percent in the first nine months of 2010.

Electricity segment revenues in the first nine months of 2011 were particularly impacted by weakness in North America and, to a lesser extent, the Middle East. Strong growth in markets across Europe and Latin America positively impacted revenues. 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 3Q 2011 of $91.2 million reflect a 10.2 percent decrease versus 3Q 2010, and water segment profit of $3.5 million declined 62.0 percent compared to 3Q 2010. Water segment profit margin declined to 3.8 percent from 9.1 percent last year.

Ongoing weakness in North America, along with lower sales in the Middle East and North Africa were the main drivers behind the sales decline. This development was partly offset by strong results in Western Europe and Oceania in 3Q 2011. Water segment profitability in 3Q 2011 was impacted primarily by lower sales in North America and the Middle East and North Africa, which lowered operating leverage. Margins also were impacted by less favorable geographic and product mix, raw material price increases and strong competitive pricing in several markets.

Water revenues in the first nine months of 2011 of $290.0 million reflect a 1.9 percent decrease versus the first nine months of 2010, and water segment profit of $15.6 million declined 45.1 percent compared to the first nine months of 2010. Water segment profit margin declined to 5.4 percent from 9.6 percent in the first nine months of 2010.

The first nine months of 2011 water segment revenues were affected by lower revenues in selected Middle East and North African markets and continued weakness in North America, while revenues grew in Western Europe and Oceania. Product and geographic mix as well as increased raw material prices impacted the first nine months of 2011 water segment profitability, as Elster also continued to invest in the development of new products. Segment profitability in the first nine months of 2011 also was impacted by a number of charges discrete to 2Q 2011.

Outlook(9):

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 from continuing operations to be in the range of $0.90 to $1.00.

Company management will webcast a conference call at 8:00 a.m. ET on Thursday, November 3, 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 +1-612-332-0720 and using confirmation number 220943.

Webcast and telephone replays of the conference call will be available approximately two hours after the completion of the call through Thursday, November 17, 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 220943.

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 reports filed with or furnished 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 expressed 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 and the flooding in Thailand in fall 2011; Elster's ability to raise capital to refinance its indebtedness; Elster's ability to manage its outsourcing arrangements; or other factors.

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In addition to figures prepared in accordance with U.S. GAAP, Elster presents non-GAAP financial measures, such as adjusted EBITDA, non-GAAP net income from continuing operations, 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 on 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 non-GAAP net income from continuing operations.

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