4. Company Overview
• The global leader in utility smart meters
• Electric
• Natural gas
• Water
• Projections/manage
• Install
• Implement
• Operate
• Maintain systems
5. History of Transformation
FIRST TO BRING
HANDHELDS
Removing paper
INVENTED AMR
Remote reading
LEADER IN SMART METERING
Continued commitment to utilities
and cities
NOW
IoT Infrastructure
and Cloud Services
9. Philip Mezey
History:
Senior VP of Product Development at Silicon Energy Corp.
• 2003 joined as Director of Software Development for Energy Management Solutions Group
• 2004 VP of software solutions
• 2005 Senior VP Software Solutions
• 2007 Senior VP and CEO of North America
• 2011 President and CEO of Itron’s Energy segment
• 2013 President, Chief Executive Officer, Board member
Appointed CEO
10. Why are Utilities Looking for Change?
Consumers are being more aware of spending less on utilities
Pressures from the state and federal governments to do more with less energy
Pressure to improve operating margins
• industry is notorious for being slow to adapt
11. Trend of Grants for City Modernization
• Germany to end nuclear power energy sources in 2022
• Looking for ways to use less energy
• In 2011, 20% of electricity came from nuclear power
• Jay Inslee approves bill to give $12 million in grants for smart grid
technology
• Trump infrastructure plan: “investments in transportation, clean
water, a modern and reliable electricity grid, telecommunications,
security infrastructure”
12. Restructuring
Non-recurring expense
• Laying off manufacturing jobs as they transition towards software focus
• Severance packages
• Loss on sale or disposal of assets
• Expected completion in 2018
• Pre-tax restructuring charges for 2016 projects $66 M
• +90% cash expenditure
• Annualized savings of $40M upon completion
• $49M accrued for restructuring
• $20.3M to be paid in next 12 months (as of Sept 30)
20. Long term liabilities
Total long term liabilities: $566.9M
Total liabilities: 1.046B
0
50000
100000
150000
200000
250000
300000
350000
Long term
debt
long term
warranty
Pension
benefit
obligation
Deferred tax
liabilities,
noncurrent
Other
21. Debt
2015 Credit facility
• Revolving credit line
• $725M total
• $250M standby letter of credit sub facility
• $50M swing line sub facility (available for immediate cash needs at a higher interest rate)
• Both the term loan and the revolver mature on June 23, 2020
• 1.75% cost of debt
30. Itron IdeaLabs
• Itron Mobile
• Can securely collect data on the device of their choice, including smartphones, tablet and laptop
• Group of 30 entrepreneurs who present new ways of utilizing Itron’s smart grid infrastructure
• Led by a current advisor to Google
• Made apps that securely transfer data to smartphones/tablets/laptops
• Dedicated to finding and designing/high margin business ideas
• Centered around data analytics
32. Investment Thesis
Higher margin data management services from restructuring
• Improvements in gross margin
• Operating margin
• Revenue
• Trends are solidified by global governments commitment to infrastructure and grid modernization
34. Income Statement
3 Months Ended 9 Months Ended
Sep. 30, 2016 Sep. 30, 2015 Sep. 30, 2016 Sep. 30, 2015
Revenues $ 506,859 $ 469,528 $ 1,517,473 $ 1,387,085
Cost of revenues 336,110 322,238 1,013,816 982,819
Gross profit 170,749 147,290 503,657 404,266
Operating expenses
Sales and marketing 38,894 39,217 119,037 123,302
Product development 39,386 41,559 128,086 126,399
General and administrative 40,384 31,118 130,781 103,195
Amortization of intangible assets 4,996 7,869 19,002 23,730
Restructuring 40,679 587 41,294 (8,828)
Total operating expenses 164,339 120,350 438,200 367,798
Operating income 6,410 26,940 65,457 36,468
Other income (expense)
Interest income 102 180 594 440
Interest expense (2,691) (2,799) (8,344) (9,336)
Other income (expense), net 707 (1,119) (1,074) (3,003)
Total other income (expense) (1,882) (3,738) (8,824) (11,899)
Income before income taxes 4,528 23,202 56,633 24,569
Income tax provision (13,430) (9,932) (34,249) (19,060)
Net income (loss) (8,902) 13,270 22,384 5,509
Net income attributable to noncontrolling
interests
983 630 2,263 1,817
Net income (loss) attributable to Itron, Inc. $ (9,885) $ 12,640 $ 20,121 $ 3,692
35. BS
Consolidated Balance Sheets - USD ($) $ in Thousands Sep. 30, 2016 Dec. 31, 2015
ASSETS
Cash and cash equivalents $ 151,380 $ 131,018
Accounts receivable, net 368,710 330,895
Inventories 189,553 190,465
Other current assets 122,037 106,562
Total current assets 831,680 758,940
Property, plant, and equipment, net 180,867 190,256
Deferred tax assets noncurrent, net 91,808 109,387
Other long-term assets 45,332 51,679
Intangible assets, net 82,733 101,932
Goodwill 475,705 468,122
Total assets 1,708,125 1,680,316
LIABILITIES AND EQUITY
Accounts payable 203,986 185,827
Other current liabilities 49,340 78,630
Wages and benefits payable 88,519 76,980
Taxes payable 18,295 14,859
Current portion of debt 12,656 11,250
Current portion of warranty 26,084 36,927
Unearned revenue 80,342 73,301
Total current liabilities 479,222 477,774
Long-term debt 330,042 358,915
Long-term warranty 18,702 17,585
Pension benefit obligation 86,310 85,971
Deferred tax liabilities noncurrent, net 1,680 1,723
Other long-term obligations 130,177 115,645
Total liabilities 1,046,133 1,057,613
Commitments and contingencies (Note 11)
Equity
Preferred stock, no par value, 10 million shares authorized, no shares issued or outstanding 0 0
Common stock, no par value, 75 million shares authorized, 38,259 and 37,906 shares issued and
outstanding
1,259,704 1,246,671
Accumulated other comprehensive loss, net (194,694) (200,607)
Accumulated deficit (421,185) (441,306)
Total Itron, Inc. shareholders' equity 643,825 604,758
Noncontrolling interests 18,167 17,945
Total equity 661,992 622,703
Total liabilities and equity $ 1,708,125 $ 1,680,316
36. CF
Consolidated Statements of Cash Flows - USD ($) $ in Thousands
9 Months Ended
Sep. 30, 2016 Sep. 30, 2015
Operating activities
Net income (loss) $ 22,384 $ 5,509
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 51,563 57,790
Stock-based compensation 13,300 10,879
Amortization of prepaid debt fees 806 1,851
Deferred taxes, net 17,772 14,744
Restructuring, non-cash 5,153 1,018
Other adjustments, net (734) 1,877
Changes in operating assets and liabilities:
Accounts receivable (32,652) (14,193)
Inventories 3,207 (73,464)
Other current assets (15,591) (998)
Other long-term assets 8,499 (2,529)
Accounts payable, other current liabilities, and taxes payable (5,830) (11,119)
Wages and benefits payable 11,516 3,787
Unearned revenue (8,684) 6,536
Warranty (9,900) 20,207
Other operating, net 21,072 (1,741)
Net cash provided by operating activities 81,881 20,154
Investing activities
Acquisitions of property, plant, and equipment (30,563) (33,324)
Business acquisitions, net of cash and cash equivalents acquired (951) (5,754)
Other investing, net (1,258) 545
Net cash used in investing activities (32,772) (38,533)
Financing activities
Proceeds from borrowings 0 89,709
Payments on debt (29,031) (30,186)
Issuance of common stock 1,993 2,229
Repurchase of common stock 0 (35,278)
Other financing, net (3,658) 1,881
Net cash provided by (used in) financing activities (30,696) 28,355
Effect of foreign exchange rate changes on cash and cash equivalents 1,949 (12,889)
Increase (decrease) in cash and cash equivalents 20,362 (2,913)
Cash and cash equivalents at beginning of period 131,018 112,371
Cash and cash equivalents at end of period 151,380
Supplemental disclosure of cash flow information:
Income taxes, net 17,207 22,578
Interest, net of amounts capitalized $ 7,592 $ 7,549
37. Debt repayments
• At Sept 30
• $132.6M outstanding debt under credit facility
• $321M available for additional borrowings for additional borrowings
• Debt is expected to be repaid in increments from now until 2020
38. Important Q3 Metrics
• Revenue growth of 9% excluding FX impacts
• Non-GAAP adjusted EBITDA margin increased to 12%
• Highest quarterly adjusted EBITDA margin since Q3 2012
• Revenue growth & higher mix of smart products
• Gross margin improvement to 33.7%
• Increasingly realizing operational and restructuring benefits
• Completion expected in Q4 2018
• $55-65M total
• Roughly $40M already paid
• Book-to-bill of 1.3 and ending backlog of $1.5B
39. Hedging
The key inputs include interest rate yield curves (swap rates and futures) and foreign exchange spot and
forward rates
Asset Derivatives (thousands) 2016 2015
Interest rate swaps contracts -- 1,632
Interest rate cap contracts 240 1,423
FX forward contracts 119 27
Interest rate cap contracts 60 --
Total asset derivatives $419 3,082
41. Industry Metrics
felt satisfied with the amount of
communication from utilities
of consumers
25%Only
of energy utility executives
66%
said electricity and gas grids will grow
together
of water utility
executives
71%
believed their ability to deliver adequate services will
be diminished if inefficiency in the industry persists
of all utility
executives79%
said there needs to be a connected energy system
that includes gas, solar and wind renewables
of consumers
71%
Were increasingly concerned about
cybersecurity and physical attacks on utility
systems
Editor's Notes
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Helping utilities to work more efficiency is at the core of our DNA as a company. It’s where we came from.
Itron was created by utility executives and engineers who, back in the 70’s, were looking for a better way to collect and manage meter data. They wanted to improve accuracy and speed in collecting data. This early work led to the development of the ruggedized handheld computer which revolutionized the way many utilities collected meter data. We became the leader in handhelds.
Our next step was to take it further. How could that process be further automated? We invested in, and developed, the next technology breakthrough with AMR. Now utilities could utilize radio communications to collect data with mobile solutions or network solutions, further improving the efficiency, accuracy and value of their customer data. We developed software to support the management of this data, allowing utilities to streamline their back office operations. We became the leader in AMR solutions.
As we continued to seek new innovations for our utility customers, we felt the next step was greater integration. We knew that to unlock the potential of the smart grid, we wanted to offer our customers the full spectrum solution, from meter to managed services. We acquired two world leaders in metering- Schlumberger and Actaris. This gave Itron the global footprint we have today and the ability to develop a global platform for smart grid solutions across the electric, gas and water platforms. This is OpenWay. We became the world leader in smart metering.
So what’s next? We are working on the next chapter. Itron will focus more on software and services. Our future will include offering utilities the full spectrum support that will fulfill the vision of the value data can provide. We will continue to innovate and invest in new technologies. That’s both our history and our future. It’s in our DNA.
By the way…..we are a company that also recognizes the diverse needs among our utility customers. You can still buy a handheld, an AMR solution, or a smart meter from Itron.
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The red dots are minor facilities
The blue ones are major locations
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More opportunities have been realized in NA but in EMEA there are significant unrealized opportunities
Germany passed a $25 B investment plan to modernize cities
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Jon Eliassen (age 69) has served as Chairman of the board since 2010. Former president and CEO and member of the board of Red lion hotels corporation.
Worked in Avista from 1970-2003
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http://www.utilitydive.com/news/report-utilities-struggle-to-find-new-business-models/400260/
http://www.elp.com/Electric-Light-Power-Newsletter/articles/2016/03/new-revenue-streams-for-electric-utilities-the-distributech-take.html
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http://www.governor.wa.gov/news-media/inslee-announces-clean-energy-fund-grid-modernization-grants
http://www.nortonrosefulbright.com/knowledge/publications/66180/european-renewable-energy-incentive-guide-Germany
https://www.greentechmedia.com/articles/read/as-germany-curtails-wind-and-solar-billion-euro-grid-projects-seek-to-bring
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We expect to substantially complete the 2016 Projects by the end of 2018. Many of the affected employees are represented by unions or works councils, which requires consultation, and potential restructuring projects may be subject to regulatory approval, both of which could impact the timing of charges, total expected charges, costs recognized, and planned savings in certain jurisdictions.
We expect pre-tax restructuring charges associated with the 2016 Projects of approximately $66 million, with expected annualized savings of approximately $40 million upon completion. Of the total estimated charge, more than 90% is expected to result in cash expenditures.
As of September 30, 2016, $49.8 million was accrued for the restructuring projects, of which $20.3 million is expected to be paid over the next 12 months.
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Stagnant revenues,
Investors have been waiting for a tick in revenue from the smart grid network and smart meter sales
This chart shows that since 2011-2015, the revenues have been flatt
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Revenues went up from an increase in the smart meter sales.
What caused the jump in revenues?
Uptick in sales from advanced technology
Higher margin products (software, services) Can I get an example of this software?
Volume of advanced and smart meters increased more than 29% from last year.
Reflecting an acceleration in smart grid infrastructure
How much of it came from the smart and advanced meter revenue?
Much of it was from extraordinary conditions in Q3.
Electricity has seen the best margin improvements from the restructuring.
How can we be sure that this trend will continue?
What is our expected gross margin going to be?
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Other: The long-term restructuring liabilities are classified within other long-term obligations on the Consolidated Balance Sheets, and include facility exit costs and severance accruals.
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June 23 2015. Entered an amended and restated agreement providing for commited credit facilities in the amount of $725 M USD.
At September 30, 2016, the interest rate for both the term loan and the USD revolver was 1.78% (the LIBOR rate plus a margin of 1.25%), and the interest rate for the EUR revolver was 1.25% (the EURIBOR floor rate plus a margin of 1.25%).
A business may use a credit facility rather than reapplying for a loan each time it needs money. The company may take out a credit facility based on collateral that may be sold or substituted without altering the terms of the original contract. The facility may apply to different projects or departments in a business and be distributed at the company’s discretion. The time period for repaying the loan is flexible. Read more: Credit Facility Definition | Investopedia http://www.investopedia.com/terms/c/creditfacility.asp#ixzz4VPWhMb24
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Company comparisons are useful but the DCF is better because it can account for the increase in recurring revenues.
Which Itron is better positioned to receive
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Backlog increased significantly in 2014, have we seen those revenues yet?
Avista ordered more than 400,000 meters (openway Rival platform) Lays the foundation of smart city applications this is a recurring revenue probability. I don’t know how much it could be, but it will be very high margin.
500,000 expansion of OpenWay meters in South Carolina with Duke energy. (one of the largest power utilities in the US)
Recent award for more than 2 million G3 Linky Smart Meters to be installed over the next 18 months. A French utility company largely owned by the state.
35 million electric meter upgrade.
“supplying substantial volume for the second phase of the project with a disciplined approach to the bit process”
Signed a 10 year total outcomes cloud services agreement with Texan New Mexico power.
Itron will manage their OpenWay Network Software and Services for 250,000 customers through the cloud network.
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SAP HANA
Run meter data management on SAP HANA platform. Will help utilities more easily integrate their enterprise data as they rollout smart systems.
Microsoft Azure
Services and software built onto this. Will be the backbone of managed services. Major source of lower costs and improved performance.
Cisco: security platform. Router hardware.
Verizon: Cell phone towers for nodes and routers. Communications
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Scheduled principal repayments for the term loan are due quarterly in the amount of $2.8 million through June 2017, $4.2 million from September 2017 through June 2018, $5.6 million from September 2018 through March 2020, and the remainder due at maturity on June 23, 2020. The term loan may be repaid early in whole or in part, subject to certain minimum thresholds, without penalty.
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» Revenue growth driven by global smart meter projects in Electricity and Gas
» Gross margin increased 230 bps due to favorable product mix, benefits from increased volumes and efficiencies in the Electricity and Gas segments
» GAAP operating and net income impacted by $41M restructuring charge, increased professional services and legal costs in G&A and a higher tax rate
» Increased cash from operations from improved profitability (adjusted for non-cash items) and working capital management
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The key inputs include interest rate yield curves (swap rates and futures) and foreign exchange spot and forward rates
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The Resourcefulness Index Report actually combines insights from a global survey and a country-by-country ranking of resourcefulness
This year, our survey reached 988 utility execs and 1000 informed consumers in 17 countries
This slide highlights the key findings from the report.
Only 25% of consumers felt satisfied with the amount of communication from utilities about changes in the industry
The survey paints a picture of misinformed consumers who aren’t hearing the messages from their utilities.
66% of energy utility executives said electricity and gas grids will grow together.
This is important as gas can play a role in storing surplus renewable electricity in the form of hydrogen and methane.
71% of water utility executives believed their ability to deliver adequate services will be diminished if inefficiency in the industry persists
For executives, it’s all about water efficiency. Water leak detection technology was the top of the water utility executive’s wish list.
79% of energy executives want an integrated energy system for gas and electricity
Utilities are deploying technology that can lead the age of the Internet of Things and smart cities
71% of consumers were increasingly concerned about cybersecurity and physical attacks on utility systems
Today’s smart metering systems have cybersecurity features built in at both the device and the network level, including encryption of data, authentication of messages, key management and administrative security features
