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Elster Reports 2011 Second Quarter and Half-Year Results

July 29, 2011

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.

_____________________________


    [1]  Constant currency rates: Calculated by translating the results
     from entities that have functional currencies other than U.S.
     dollars into dollars using the exchange rates of the prior year.
     [2] A reconciliation of Adjusted EBITDA, a non-GAAP measure, to net
      income is available at the end of this press release. Adjusted
      EBITDA margin is consolidated adjusted EBITDA as a percentage of
      consolidated revenue. Commencing in the second quarter of 2011,
      Elster has changed the calculation for its Non-GAAP measure
      Adjusted EBITDA, for details please see at the end of this press
      release.
     [3] Elster defines contracted future revenues as total order backlog
      plus additional contract revenues under awarded contracts with an
      initial value of $500,000 or more. Additional contract revenues
      represent contracted deliverables for which orders have not yet
      been placed. Elster cannot predict how many purchase orders
      ultimately will be placed under these awarded contracts.
     [4] A reconciliation of Non-GAAP net income to GAAP net income is
      available at the end of this press release. In the second quarter
      of 2011 Elster has changed the calculation for its Non-GAAP
      measure Non-GAAP net income, for details please see at the end of
      this press release.
     [5] Elster defines Smart Offerings as automated meter reading, or
      AMR, advanced metering infrastructure, or AMI, and Smart Grid
      solutions and individual products, components and services for use
      therein.
     [6] Commencing in the second quarter of 2011, Elster has changed the
      calculation for its segment profits, for details please see Note 15
      to our unaudited interim condensed consolidated financial
      statements included in our quarterly report for the second quarter
      2011 on Form 6-K.
     [7] Segment profit margin is segment profit as a percentage of
      segment revenues.
     [8] The FY 2011 GAAP earnings per ADS expectations are based on
      112,880,164 ADSs outstanding. Reported FY 2010 GAAP earnings per
      ADS were based on 77,182,292 weighted average ADSs outstanding.
      Elster's FY 2011 GAAP earnings per ADS expectations are based on
      certain assumptions with respect to foreign currency exchange
      rates, particularly of the euro of 1.39 and pound sterling of 1.64
      against the U.S. dollar. These targets do not include the effects
      from the second quarter 2011 debt refinancing.


                             Conference Call and Webcast

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.


                                    About Elster

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.

                                      Elster Group SE
                       Condensed Consolidated Statement of Operations

                                                    Three Months Ended
                                                         June 30,
                                                         --------
    (unaudited, in millions, except per
     share data)                                       2011            2010
                                                       ----            ----

    Revenues                                         $486.7          $433.1
    Cost of revenues                                 -328.1          -293.6
                                                     ------          ------
    Gross profit                                     $158.5          $139.5

    Operating expenses
    Selling expenses                                  -47.3           -40.7
    General and administrative expenses               -36.9           -33.4
    Research and development expenses                 -27.3           -20.7
    Other operating income (expenses),
     net                                               -0.5            -2.4
                                                       ----            ----
    Operating income                                  $46.6           $42.4

    Non-operating expenses
    Interest expense, net                             -12.1           -16.9
    Loss on extinguishment of debt                    -13.4             0.0
    Other income, net                                   1.0             1.2
    Total non-operating expenses                     $-24.6          $-15.7

    Income before income tax                          $22.0           $26.7
    Income tax expense                                 -6.9            -9.7
                                                       ----            ----
    Net income from continuing operations             $15.0           $17.0
    Net income from discontinued
     operations                                          $-            $2.6
                                                        ---            ----
    Net income                                        $15.0           $19.6
    Net income attributable to
     noncontrolling interests                           0.7             0.8
                                                        ---             ---
    Net income attributable to Elster
     Group SE                                         $14.4           $18.8
                                                      =====           =====

    Weighted average number of shares
     outstanding
      Basic                                      28,220,041      16,320,750
      Diluted                                    28,238,175      16,320,750
    Weighted average number of ADS
     outstanding
      Basic                                     112,880,164      65,283,000
      Diluted                                   112,952,700      65,283,000

    Basic income per share
      Income from continuing operations
       attributable to Elster Group SE                $0.51           $0.64
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.16
                                                       ----            ----
    Net income per share attributable to
     Elster Group SE shareholders                     $0.51           $0.80
                                                      =====           =====

    Diluted income per share
      Income from continuing operations
       attributable to Elster Group SE                $0.51           $0.64
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.16
                                                       ----            ----
    Net income per share attributable to
     Elster Group SE shareholders                     $0.51           $0.80
                                                      =====           =====

    Basic income per ADS
      Income from continuing operations
       attributable to Elster Group SE                $0.13           $0.16
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.04
                                                       ----            ----
    Net income per ADS attributable to
     Elster Group SE shareholders                     $0.13           $0.20
                                                      =====           =====

    Diluted income per ADS
      Income from continuing operations
       attributable to Elster Group SE                $0.13           $0.16
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.04
                                                       ----            ----
    Net income per ADS attributable to
     Elster Group SE shareholders                     $0.13           $0.20
                                                      =====           =====


                                                     Six Months Ended
                                                         June 30,
                                                         --------
    (unaudited, in millions, except per
     share data)                                       2011            2010
                                                       ----            ----

    Revenues                                         $930.6          $831.3
    Cost of revenues                                 -625.6          -574.6
                                                     ------          ------
    Gross profit                                     $305.0          $256.7

    Operating expenses
    Selling expenses                                  -91.4           -80.8
    General and administrative expenses               -74.0           -69.9
    Research and development expenses                 -53.5           -41.4
    Other operating income (expenses),
     net                                                1.1            -0.4
                                                        ---            ----
    Operating income                                  $87.3           $64.3

    Non-operating expenses
    Interest expense, net                             -19.0           -38.4
    Loss on extinguishment of debt                    -13.4             0.0
    Other income, net                                   2.1             1.7
    Total non-operating expenses                     $-30.4          $-36.6

    Income before income tax                          $56.8           $27.7
    Income tax expense                                -17.0           -11.1
                                                      -----           -----
    Net income from continuing operations             $39.9           $16.5
    Net income from discontinued
     operations                                          $-            $2.6
                                                        ---            ----
    Net income                                        $39.9           $19.1
    Net income attributable to
     noncontrolling interests                           1.6             1.2
                                                        ---             ---
    Net income attributable to Elster
     Group SE                                         $38.3           $17.9
                                                      =====           =====

    Weighted average number of shares
     outstanding
      Basic                                      28,220,041      16,320,750
      Diluted                                    28,236,462      16,320,750
    Weighted average number of ADS
     outstanding
      Basic                                     112,880,164      65,283,000
      Diluted                                   112,945,848      65,283,000

    Basic income per share
      Income from continuing operations
       attributable to Elster Group SE                $1.36           $0.20
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.16
                                                       ----            ----
    Net income per share attributable to
     Elster Group SE shareholders                     $1.36           $0.36
                                                      =====           =====

    Diluted income per share
      Income from continuing operations
       attributable to Elster Group SE                $1.35           $0.20
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.16
                                                       ----            ----
    Net income per share attributable to
     Elster Group SE shareholders                     $1.35           $0.36
                                                      =====           =====

    Basic income per ADS
      Income from continuing operations
       attributable to Elster Group SE                $0.34           $0.05
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.04
                                                       ----            ----
    Net income per ADS attributable to
     Elster Group SE shareholders                     $0.34           $0.09
                                                      =====           =====

    Diluted income per ADS
      Income from continuing operations
       attributable to Elster Group SE                $0.34           $0.05
      Income from discontinued operations
       attributable to Elster Group SE                 0.00            0.04
                                                       ----            ----
    Net income per ADS attributable to
     Elster Group SE shareholders                     $0.34           $0.09
                                                      =====           =====

                              Elster Group SE
                   Condensed Consolidated Balance Sheets

                                                           December
                                               June 30,       31,
                                               --------   ---------
                                                     2011       2010
                                                     ----       ----
                                              (unaudited)
    (in millions)
    Assets
    Current assets
    Cash and cash equivalents                      $129.9     $216.3
    Accounts receivable                             322.7      292.4
    Inventories                                     174.4      154.5
    Other current assets                            100.8      104.5
    Total current assets                           $727.8     $767.8
                                                   ------     ------

    Noncurrent assets
    Property, plant and equipment, net              212.1      202.9
    Other intangible assets, net                    206.5      216.4
    Goodwill                                        983.1      937.0
    Other noncurrent assets                          63.5       40.2
    Total noncurrent assets                      $1,465.2   $1,396.5
    Total assets                                 $2,193.0   $2,164.3
                                                 ========   ========

    Liabilities and equity
    Current liabilities
    Pension and other long-term employee
     benefits, current portion                      $14.0      $13.5
    Payroll, bonuses and related accruals            60.5       57.8
    Short-term debt and current portion of
     long-term debt                                  18.7       18.0
    Accounts payable                                231.2      204.3
    Warranties                                       34.7       31.6
    Deferred tax liabilities                          7.3        6.7
    Other current liabilities                       103.3       96.4
    Total current liabilities                      $469.8     $428.3
                                                   ------     ------

    Noncurrent liabilities
    Pension and other long-term employee
     benefits, less current portion                 145.4      137.5
    Payroll, bonuses and related accruals             1.5        1.3
    Long-term debt, less current portion            728.4      822.4
    Deferred tax liabilities                         66.6       60.7
    Other noncurrent liabilities                     62.9       57.8
                                                     ----       ----
    Total noncurrent liabilities                 $1,004.7   $1,079.7
    Total liabilities                            $1,474.5   $1,508.0
                                                 --------   --------

    Equity
    Total equity attributable to Elster Group
     SE                                             708.8      640.7
    Noncontrolling interests                          9.6       15.5
    Total equity                                   $718.4     $656.2
                                                   ------     ------
    Total liabilities and equity                 $2,193.0   $2,164.3
                                                 ========   ========

                              Elster Group SE
              Condensed Consolidated Statements of Cash Flows

                                                          Six Months
                                                          Ended June
                                                                30,
                                                           -----------
    (unaudited, in millions)                             2011         2010
                                                         ----         ----

    Cash flows from operating activities                $75.1        $37.0
                                                        -----        -----

    Cash flows from investing activities
    Purchases of property, plant and equipment and
     intangible assets                                  -23.2        -18.1
    Proceeds from disposals of property, plant and
     equipment and intangible assets                      1.9          1.5
    Net cash flow used in investing activities         $-21.4       $-16.6
                                                       ------       ------

    Cash flows from financing activities
    Proceeds from issuance of Senior Notes              364.6          0.0
    Proceeds from other bank borrowings                 412.0         43.7
    Payment of deferred financing cost                  -20.6          0.0
    Repayment of bank borrowings                       -900.6        -36.3
    Repayment of capital lease obligations               -0.3         -0.3
    Dividends to noncontrolling interests                -6.4          0.0
    Net cash flow from (used in) financing activities $-151.2         $7.1
                                                      -------         ----

    Net increase (decrease) in cash and cash
     equivalents                                       $-97.5        $27.5
    Effect of exchange rate fluctuations on cash held    11.1         -3.9
    Cash and cash equivalents at January 1              216.3         75.4
    Cash and cash equivalents at June 30               $129.9        $99.0
                                                       ======        =====

    Income taxes paid                                    20.2         10.8
    Interest paid                                        20.1         24.4

                             Elster Group SE
                           Segment Information

                                    Gas                   Electricity
                                    ---                   -----------
                                Three Months Ended June 30,
                                ---------------------------
    (unaudited, in
     millions)               2011        2010        2011        2010
                             ----        ----        ----        ----

    Total revenues         $275.1      $223.9      $117.3      $115.9
      thereof to
       external
       customers            274.8       222.5       111.8       111.4
      thereof to
       other segments         0.2         1.4         5.5         4.5
                              ---         ---         ---         ---
    Segment profit          $64.4       $53.8       $12.5       $13.4
                            =====       =====       =====       =====

                                  Gas               Electricity
                                  ---               -----------
                             Six Months Ended June 30,
                             -------------------------
    (unaudited, in
     millions)               2011        2010        2011        2010
                             ----        ----        ----        ----

    Total revenues         $530.8      $442.1      $216.7      $206.5
      thereof to
       external
       customers            530.1       439.8       206.9       199.0
      thereof to
       other segments         0.7         2.4         9.8         7.5
                              ---         ---         ---         ---
    Segment profit         $129.2      $105.6       $16.2       $19.5
                           ======      ======       =====       =====


                                   Water
                                   -----
                       Three Months Ended June 30,
                       ---------------------------
    (unaudited,
     in millions)            2011        2010
                             ----        ----

    Total
     revenues              $102.4       $99.9
      thereof to
       external
       customers            100.0        99.2
      thereof to
       other
       segments               2.3         0.8
                              ---         ---
    Segment
     profit                  $4.9       $10.7
                             ====       =====

                             Water
                             -----
                       Six Months Ended June 30,
                       -------------------------
    (unaudited,
     in millions)            2011        2010
                             ----        ----

    Total
     revenues              $198.8      $193.9
      thereof to
       external
       customers            193.6       192.5
      thereof to
       other
       segments               5.2         1.4
                              ---         ---
    Segment
     profit                 $12.1       $19.3
                            =====       =====


                                   Elster Group SE
                   Reconciliations of Non-GAAP Financial Measures

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.


                   Reconciliation of Adjusted EBITDA to Net Income


                                 Three Months Ended June 30,
                                 ---------------------------
                                   as reported                     pro forma
                                   -----------                     ---------
    (unaudited,
     in                       % of                   % of              % of
     millions)       2011  revenues         2010  revenues    2010  revenues
                     ---- ---------         ---- ---------    ---- ---------

    Net income      $15.0        3.1%      $19.6        4.5% $19.6        4.5%
    Income tax
     expense          6.9                    9.7               9.7
    Interest
     expense,
     net             12.1                   16.9              16.9
    Loss on
     extinguishment
     of debt         13.4                    0.0               0.0
     Depreciation
     and
     amortization    21.5                   20.9              20.9
    Income
     (loss)
     from
     discontinued
     operations       0.0     -2.6      -2.6
    Foreign
     currency
     exchange
     effects          0.0                    1.2                 -
    Management
     equity
     program          0.0                    0.7               0.7
    Expenses
     for
     preparation
     to become
     a public
     company          0.0      3.3       3.3
    Strategy
     development
     costs            0.0                    0.3                 -
    Employee
     termination
     and exit
     costs            1.0                    1.1               1.1
    Business
     process
     reengineering
     and
     reorganization
     costs            0.0      2.1         -
    IT project
     costs            0.0                    0.2                 -
    Adjusted
     EBITDA         $70.0       14.4%      $73.4       16.9% $69.6       16.1%
                    =====       ====       =====       ====  =====       ====


                                         Six Months Ended June 30,
                                         -------------------------
                                                as reported
                                                -----------
                                           % of                    % of
    (unaudited, in millions)      2011  revenues         2010   revenues
                                  ---- ---------         ----  ---------

    Net income                   $39.9        4.3%      $19.1         2.3%
    Income tax expense            17.0                   11.1
    Interest expense, net         19.0                   38.4
    Loss on extinguishment of
     debt                         13.4                    0.0
    Depreciation and
     amortization                 42.1                   42.6
    Income (loss) from
     discontinued operations       0.0                   -2.6
    Foreign currency exchange
     effects                      -1.5                    0.6
    Management equity program        -                    1.4
    Expenses for preparation to
     become a public company         -                    6.6
    Strategy development costs       -                    0.3
    Employee termination and
     exit costs                    1.1                    1.4
    Business process
     reengineering and
     reorganization costs          0.8                    2.1
    IT project costs               0.3                    0.9
    Effects of termination of a
     distributor                   0.0                    9.0
    Adjusted EBITDA             $132.2       14.2%     $130.9        15.7%
                                ======       ====      ======        ====


                                    Six Months Ended June 30,
                                    -------------------------
                                                  pro forma
                                                  ---------
                                            % of                   % of
    (unaudited, in millions)      2011   revenues         2010  revenues
                                  ----  ---------         ---- ---------

    Net income                   $39.9         4.3%      $19.1        2.3%
    Income tax expense            17.0                    11.1
    Interest expense, net         19.0                    38.4
    Loss on extinguishment of
     debt                         13.4                     0.0
    Depreciation and
     amortization                 42.1                    42.6
    Income (loss) from
     discontinued operations       0.0                    -2.6
    Foreign currency exchange
     effects                         -                       -
    Management equity program        -                     1.4
    Expenses for preparation to
     become a public company         -                     6.6
    Strategy development costs       -                       -
    Employee termination and
     exit costs                    1.1                     1.4
    Business process
     reengineering and
     reorganization costs            -                       -
    IT project costs                 -                       -
    Effects of termination of a
     distributor                   0.0                     9.0
    Adjusted EBITDA             $132.5        14.2%     $127.0       15.3%
                                ======        ====      ======       ====


          Reconciliation of Free Cash Flow to Cash Flows from Operating
                                    Activities

                                                        Six Months Ended
                                                            June 30,
                                                       -----------------
    (unaudited, in millions)                         2011             2010
                                                     ----             ----

    Cash flows from operating activities            $75.1            $37.0
    Purchases of property, plant and
     equipment and intangible assets                -23.2            -18.1
                                                    -----            -----
    Free cash flow                                  $51.9            $18.9
                                                    =====            =====

           Reconciliation of Non-GAAP Net Income to GAAP Net Income

                                                            Six Months
                                        Three Months        Ended June
                                           Ended                       30,
                                         June 30,         -----------
                                         --------
    (unaudited, in millions)         2011       2010  2011       2010
                                     ----       ----  ----       ----

    Net income                      $15.0      $19.6 $39.9      $19.1
    Amortization of purchase price
     allocation                       7.8        8.2  15.4       16.7
    Loss on extinguishment of debt   13.4        0.0  13.4        0.0
    Less: income taxes on
     amortization of purchase price
     allocations and on loss on
     extinguishment of debt           5.7        2.7   8.2        5.5
                                      ---        ---   ---        ---
    Non-GAAP net income             $30.5      $25.1 $60.5      $30.3
                                    =====      ===== =====      =====

SOURCE Elster Group SE


Source: newswire



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