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Global Credit Research - 28 Mar 2011
Approximately $700 million of rated debt affected
Toronto, March 28, 2011 -- Moody's Investors Service upgraded Itron Inc.'s ("Itron") corporate
family (CFR) and probability of default (PDR) ratings to Ba2 from Ba3,
upgraded its senior secured ratings to Ba1 from Ba2 and assigned a speculative
grade liquidity rating of SGL-2, indicating good liquidity.
The ratings outlook was changed to stable from positive. The ratings
upgrade reflects the company's strong operating results through
2010 and solid key credit metrics which provide meaningful cushion to
withstand an expected modest reduction in operating profitability through
2011 driven by slower deployment of Advanced Metering Infrastructure ("AMI")
contracts and rising material costs.
Itron's Ba2 corporate family rating primarily reflects its strong
global leadership among metering companies, its competitive positioning
with respect to AMI, good degree of recurring replacement revenues,
favorable diversification characteristics within its niche industry and
strong key credit metrics. These strengths are offset by the company's
vulnerability to the spending cycles of utilities, possible smart
metering implementation delays, competitive pressures from new market
entrants and rising commodity costs which may weigh on margins.
Itron generated strong results in 2010 driven mostly by an increase in
smart metering shipments tied to its four large AMI contracts for electric
utilities in North America. Itron increased its adjusted EBITDA
to $335 million (up 52% from 2009) and applied free cash
flow to reduce debt by $170 million (down 22% from 2009).
As a result, its Debt/EBITDA improved to 2.3x (incorporating
Moody's standard adjustments) compared to 4.3x at the end of 2009.
While current AMI contracts will continue to drive the company's
results through the next 12 to 18 months, we expect Itron's
revenues, profitability, and cash flow will reduce modestly
compared to 2010 levels. This reflects our view that future AMI
deployment and contract wins could occur more slowly as deployment to-date
has been positively influenced by regulatory and government stimulus initiatives
and these catalysts appear to be easing.
Itron's SGL-2 rating is supported by cash balances of roughly $170
million, our expectations for average annual free cash flow generation
around $100 million, and $271 million in availability
(after $44 million of L/C usage) under its committed revolving
credit facility due 2013. These resources should be ample to fund
Itron's $224 million (face value) in convertible subordinated notes,
which represent its earliest possible debt maturity and could be put to
the company in August 2011 (or earlier should its share price trade above
certain thresholds which is not met currently). We also do not
anticipate covenant compliance problems through at least the next year.
The ratings outlook is stable to reflect our expectation that Itron's
strong market position and favorable diversification characteristics should
support its ability to generate free cash flow to repay debt and sustain
its financial leverage around 2.3x through the next 12 to 18 months.
To further upgrade Itron's ratings, we will need to gain comfort
that future AMI deployments will sustain the company's growth into the
medium term. Upward rating movement would then be considered should
Itron sustain its Debt/ EBITDA close to 2x and EBITA/ Interest above 4.5x.
Given the ratings upgrade, a near term ratings downgrade is unlikely.
However, a downgrade could occur should adjusted Debt/ EBITDA be
sustained above 3.5x or EBITA/ Interest fall below 3x.
Moody's last rating action was on June 2, 2010 when we upgraded
Itron's CFR to Ba3 and maintained a positive ratings outlook.
The principal methodologies used in this rating were Global Manufacturing
Industry Rating Methodology published in December 2010, and Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Headquartered in Liberty Lake, Washington, Itron is a leading
provider of metering and related communication systems to electric,
gas and water utilities globally. Revenues for the last fiscal
year ended December 31, 2010 were about $2.3 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Darren M. Kirk
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
Moody's Canada Inc.
Moody's upgrades Itron's CFR to Ba2; outlook is stable
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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