UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2008
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
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Commission
file number 000-22418
ITRON,
INC.
(Exact
name of registrant as specified in its charter)
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Washington
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91-1011792
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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2111
N Molter Road, Liberty Lake, Washington 99019
(509)
924-9900
(Address
and telephone number of registrant’s principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
stock, no par value
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NASDAQ
Global Select Market
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Preferred
share purchase rights
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NASDAQ
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated
filer ¨
Non-accelerated filer ¨ (Do not check if a
smaller reporting
company) Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
As of
June 30, 2008 (the last business day of the registrant’s most recently
completed second fiscal quarter), the aggregate market value of the shares of
common stock held by non-affiliates of the registrant (based on the closing
price for the common stock on the NASDAQ Global Select Market) was
$3,370,625,236.
As of
January 31, 2009, there were outstanding 36,754,853 shares of the
registrant’s common stock, no par value, which is the only class of common stock
of the registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
to be held on May 5, 2009.
Table
of Contents
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Page
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PART
I
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1
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9
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15
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15
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15
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15
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PART
II
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16
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19
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20
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37
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39
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42
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43
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44
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45
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46
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85
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85
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86
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PART
III
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87
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87
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87
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87
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87
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PART
IV
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88
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91
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In this
Annual Report on Form 10-K, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
Certain
Forward-Looking Statements
This
document contains forward-looking statements concerning our operations,
financial performance, revenues, earnings growth, estimated stock-based
compensation expense, pension liabilities and other items. These statements
reflect our current plans and expectations and are based on information
currently available as of the date of this Annual Report on Form 10-K. When we
use the words “expect,” “intend,” “anticipate,” “believe,” “plan,” “project,”
“estimate,” “future,” “objective,” “may,” “will,” “will continue” and similar
expressions, they are intended to identify forward-looking statements.
Forward-looking statements rely on a number of assumptions and estimates. These
assumptions and estimates could be inaccurate and cause our actual results to
vary materially from expected results. Risks and uncertainties include
1) the rate and timing of customer demand for our products, 2) rescheduling
or cancellations of current customer orders and commitments, 3) changes in
estimated liabilities for product warranties and/or litigation, 4) our
dependence on new product development and performance, 5) changes in domestic
and international laws and regulations, 6) current and future business
combinations, 7) changes in estimates for stock-based compensation or pension
costs, 8) changes in foreign currency exchange rates, 9) international business
risks, 10) our own and our customers’ or suppliers’ access to and cost of
capital and 11) other factors. You should not solely rely on these
forward-looking statements as they are only valid as of the date of this Annual
Report on Form 10-K. We do not have any obligation to publicly update or revise
any forward-looking statement in this document. For a more complete description
of these and other risks, see “Risk Factors” in Item 1A.
PART
I
ITEM 1: BUSINESS
Available
Information
Documents
we provide to the Securities and Exchange Commission (SEC) are available free of
charge under the Investors section of our website at www.itron.com as soon as
practicable after they are filed with or furnished to the SEC. In addition,
these documents are available at the SEC’s website (http://www.sec.gov) and at the SEC’s
Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling
1-800-SEC-0330.
General
We
provide a comprehensive portfolio of products and services to utilities for the
energy and water markets throughout the world. Our strong position in meter data
collection and software solutions started with our introduction of handheld
computer-based systems in 1977. Through product innovations and several
acquisitions, we have become one of the world’s leading providers of metering,
data collection and software solutions, serving our customers for over 100
years.
Market
Overview, Products, Systems and Solutions
The
market for managing the delivery and use of energy and water is dynamic and
competitive. The acquisition of Actaris Metering Systems SA (Actaris) in the
second quarter of 2007 created an opportunity for us to deploy technology and
expertise around the world as electric, gas and water utilities worldwide look
for advanced metering and communication products to better serve their markets.
During 2009 we will begin operating under the Itron brand worldwide and will
report our Actaris operating segment as Itron International.
Our
operating segments as of December 31, 2008 are Itron North America and Actaris.
See “Item 7: Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for specific segment results. Itron North America
generates the majority of its revenue in the United States and Canada and offers
meters and data collection systems for electric, gas and water utilities,
including handheld data collection, automated meter reading (AMR) and advanced
metering infrastructure (AMI) systems, as well as software and services. Actaris
generates the majority of its revenue in Europe, Africa, South America and
Asia/Pacific and offers electricity, gas and water meters, AMR and AMI systems
and services.
The
following are our major products and services.
Meters
We
estimate there are approximately 2.7 billion meters currently installed
worldwide and 150 million electricity meters, 75 million gas meters
and 90 million water meters deployed in the United States and Canada. We
estimate there are approximately 1.1 billion electricity meters, 335 million gas
meters and 900 million water meters in the rest of the world.
Meters
measure the consumption of energy and water and are critical components of a
utility’s distribution infrastructure. The primary purpose of a meter is to
accurately measure consumption, provide long-term durability and meet certain
safety needs of the utility. Changes in technology are providing increased
capabilities, reliability and accuracy through the use of electronic technology
rather than traditional gear-based technology. Electronic technology also allows
for simple and cost-effective integration of embedded AMR
functionality.
Meter
growth has traditionally been driven by new construction and the replacement of
old meters. Meters are typically replaced at specified intervals, depending on
the type of meter and the specific regulatory oversight in the respective
country. Normal meter replacements are typically not affected by factors that
influence overall utility capital spending. Therefore, due to the replacement
schedule of the installed base and the increase in meter population, the
metering market has grown between 3% and 5% annually, although the adoption of
AMR and AMI systems is likely to cause volatility and affect these growth rates.
We cannot predict how, and to what extent, the current slowdown in the world
economy will impact this historical growth rate.
We
produce electricity, gas, water and heat meters and a variety of other
associated metering products for residential, commercial and industrial
(C&I) and transmission and distribution (T&D) customers. Our meters
comply with the standards established by each standard setting regulatory body
in each of the over 130 countries where we sell our products. The primary
differences between meters used in different countries relate to the physical
configuration and the differing certification requirements of the
meters.
Electricity
Meters, Products and Systems
The
world’s demand for energy continues to grow. Utilities are faced with the
challenges of volatile fuel costs and the burden of increasingly stringent
environmental regulations affecting their operations and costs. In this
environment, utilities strive to reduce energy during peak consuming hours,
defer the building of additional generation facilities and improve customer
service. In addition to our residential, C&I and T&D electricity meters,
we also offer several meter reading alternatives to help meet these challenges.
In North America, electricity meters may have AMR functionality using either
Itron North America’s AMR or AMI technology, or our competitors’ AMR technology
provided by our competitors embedded in the meter. In Europe and in other parts
of the world, Actaris offers prepayment meters as well as AMR and AMI
solutions.
Gas
Meters, Products and Systems
Investments
in the natural gas industry are rising and gas T&D networks are expanding as
a result of growing demand. Throughout most of the world, accelerating market
deregulation trends are allowing more and more customers to choose gas suppliers
based on price. With these industry changes, there is a growing need to conserve
energy and improve customer service. Actaris’ residential and industrial gas
meters include diaphragm, turbine and rotary technologies. Actaris provides a
wide selection of regulators and safety devices for most applications in natural
gas distribution, from high pressure regulators used in city gate stations, to
low pressure regulators designed for residential customers or small collective
distributors. Our products and systems combine modern metering, regulators and
safety devices, AMR, prepayment, load monitoring and operating
controls.
Water
& Heat Meters, Products and Systems
Water
conservation continues to be a worldwide concern. There are many efforts
underway to stimulate more efficient use of water and heat. Water utilities are
focused on increasing the efficiency of water production and minimizing waste in
consumption. Demand for water metering and heating and cooling metering (the
measurement of energy consumed in district heating and cooling distribution
systems and in heat cost allocations) is constantly growing. We supply a
complete range of water and heat meters and associated AMR systems for
residential and C&I markets including mechanical detection (turbine and
piston) and ultrasonic technology. All water and heat meters are pre-equipped
for remote data reading needs. Benefiting from almost 25 years of AMR
experience, we provide a range of modules (wireless and wired technology),
advanced leak detection systems and a variety of software for managing the
collection and transmission of data from our AMR systems, including meter data
for billing systems and our knowledge applications.
MR
and AMI Systems
Out of
the total 2.7 billion electric, gas and water meters worldwide, we estimate
about 7% have AMR or AMI capabilities. We estimate that of the 315 million
energy and water meters in North America, about 45% are read with AMR or AMI
systems, of which about half are read with Itron North America technology. AMR
growth in the United States and Canada has primarily been driven by the need to
reduce operational cost, including the reduction of labor costs, a strong focus
on operating cash flow from shorter read-to-pay cycles and enhanced customer
service in the form of increased billing accuracy and faster invoicing cycles.
We estimate that about 3% of the meters outside the U.S. and Canada are
currently read with AMR or AMI systems. In many parts of the world, meters are
only read annually and bills are estimated monthly or quarterly. However, with
the increased demand for energy and water, compounded by the scarcity of
resources and environmental concerns, regulatory bodies worldwide are starting
to require utilities to increase their reading frequency. Therefore, the
demand for AMR or AMI systems has increased each year.
We
believe AMI growth will be primarily driven by limited energy supplies
particularly at utilities with a geographically concentrated customer base.
Limited supplies of energy may force these utilities to utilize their current
energy supplies more efficiently. Many utilities are working to smooth
consumption during peak hours in order to reduce the need to buy or build new
sources of power generation to meet peak load demand. Construction costs,
combined with environmental and regulatory challenges, make the addition of new
power generation assets a difficult endeavor. AMI will allow utilities to
communicate real-time pricing and usage information to their customers, deploy
time of use pricing strategies and enable demand side management. As a result,
AMI systems are expected to help decrease peak loads by allowing customers to
make informed and real-time choices about their energy consumption and
associated costs.
AMI
systems have substantially more features and functions than AMR systems and
include such capabilities as the ability to remotely connect and disconnect
service to the meter, perform bi-directional metering and communicate with
in-home displays, smart thermostats and appliances. AMI systems are generally
implemented after extensive review by the utility’s standard setting regulatory
body and usually involve a limited trial of the system before full deployment.
While we believe most utilities will implement AMR or AMI systems, the timing of
these investments can be affected by many factors including the rate of
regulatory changes and utility capital spending levels.
|
o
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Itron
North America AMR systems
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For over
15 years, Itron North America has offered AMR technology that has enabled
utilities to migrate from one product offering, such as our handheld computer
product, to a mobile or fixed network, with a view to achieving higher forms of
automation and more frequent meter reads. These AMR systems are composed of AMR
meters or modules and data collection hardware and software.
Our North
America AMR meters and modules encode consumption, tamper and other information
from the meter and communicate the data via RF (radio frequency) to our
handheld, mobile and network radio-based data collection technology. We embed
our AMR technology into our electronic electricity meters. Gas and water AMR
modules can be retrofitted to existing gas or water meters or installed in or on
new meters.
Data
collection hardware consists of handheld computers, mobile AMR and fixed network
AMR. We provide several models of handheld computers that are used by meter
readers to walk a route. Most handheld units we sell today are radio-equipped
(handheld AMR); however, where there is not an AMR-enabled meter, the meter
reader visually reads the meters and inputs the data. Mobile AMR uses a radio
transceiver located in a vehicle that communicates with all AMR-enabled meters
within range and receives meter data, tamper and other information from the
meters. Mobile AMR is designed for reading concentrated deployments of
AMR-enabled meters. Fixed network AMR communicates with AMR-enabled meters
through an RF network on a more frequent basis. Concentrators are installed
within a utility’s territory and use a variety of public communication platforms
including general packet radio service (GPRS), Ethernet, telephone (PSTN-public
switched telephone networks), BPL (broadband over power line) and other
communication technologies to transfer data between the concentrators and a host
processor at a utility.
The data
collection systems manage the collection and transmission of data and provide
meter data for billing systems, data warehouses, Internet data presentment and
our knowledge applications.
Our water
fixed network and water products are designed to cost-effectively address issues
that are unique to the water industry. In addition to fixed network AMR
capabilities, we provide an advanced water leak detection system and software
for pipeline management using patented acoustic technology that analyzes
vibration patterns from the distribution system. This technology has helped
utilities optimize water infrastructure and reduce waste.
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o
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Itron
North America AMI Systems
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Itron
North America offers AMI, or smart metering, systems with our OpenWay®
architecture. OpenWay is a standards-based, open-architecture smart metering
solution that helps utilities better manage limited energy supplies and provides
pertinent information about energy usage to energy consumers. The OpenWay system
provides two-way communication for residential and commercial electricity
meters, which allows for advanced data collection and certain command and
control functions, including remote connect and disconnect, net metering,
integrated clock for critical peak pricing (CPP), time of use and CPP displays
on the register, interval data storage, alarms and upgradeable firmware
(software contained in the meters). Our AMI software can be configured to
include load management, demand response and prepayment capabilities. Each
OpenWay electricity meter is equipped with a ZigBee® based
gateway (a low-power, short distance wireless standard) that enables the utility
to communicate with its customer’s designated in-home monitoring devices,
allowing the consumer to make more informed choices about energy consumption.
ZigBee technology also has the ability to gather gas and water meter reads from
AMR-enabled gas and water meters. The OpenWay system can utilize a variety of
public communication platforms to transfer data, including GPRS, Ethernet,
telephone, BPL, Wi-Fi, WiMax and others.
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o
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Actaris
AMR and AMI Systems
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Actaris
offers a range of AMR and AMI communication technologies for its electricity,
gas, water and heat metering products that provide consumption, tamper, outage
and leak detection and profile analysis. Information is transmitted from modules
embedded in the Actaris meter to either handheld computers and/or fixed
networks, allowing utilities to use valuable information to improve their
operations, including customer billing and asset management. These communication
technologies include telephone, RF, GSM (Global System for Mobile
communications), GPRS, PLC (power line carrier) and Ethernet devices. Actaris’
AMR and AMI electricity solutions also offer single and multi-tariff
capabilities and certain load shedding functions.
|
o
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Actaris
Prepayment Metering
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Prepayment electricity
meters are widely used in the United Kingdom and South Africa. Actaris is one of
the largest prepayment meter suppliers in the world, offering one-way and
two-way electricity prepayment systems, using smart key, keypad and smart card
communication technologies.
Other
Products
|
o
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Meter Data
Management: Itron North America provides solutions for
residential and C&I meter data management. Our meter data management
software solutions provide functions that support the process of meter
data collection by using open and flexible interfaces, data validation,
estimation and editing, complex calculations and aggregation, time-of-use
information and interactive graphics. These databases are also used for
other complex data applications.
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|
o
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Knowledge
Applications: Itron North America provides utilities and large
C&I end-users with software knowledge applications, data warehouses
and analytic and visualization tools that use the meter and other data
collected. Our knowledge applications include modules for C&I complex
billing; web-based usage analysis for customers with advanced metering
data and C&I customers (customer care); distribution asset analysis;
load research and management; revenue protection, including theft
detection and identification of unbilled revenue; and central market data
collection and load settlement. We also offer forecasting services and
software products that are used by utilities, market operators, government
agencies and others for predicting load growth and requirements, revenue,
new facility requirements, customer reaction to proposed programs and
rates, day-ahead energy needs and longer-term energy
needs.
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|
o
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Consulting and
Analysis: Itron North America provides consulting and analysis
(C&A) services in the areas of market research, load research,
renewable and distribution generation program design and evaluation,
energy efficiency program evaluation and design, energy policies, rate
design and regulatory support. The C&A client base includes major
energy utilities, research organizations, government agencies and other
institutional clients throughout the United
States.
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|
o
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Professional Services:
Itron North America offers professional services that help our customers
implement, install, project manage and maintain their meter reading
systems. Our service professionals assist our customers in identifying and
correcting operational issues, optimizing the use of our innovative
solutions and providing training and education. A support team is
available and on-call to assist customers who have purchased Itron North
America products. In addition, we have service and repair depots in
several locations for our handheld and AMR
systems.
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|
o
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Managed Services:
Actaris’ managed service business provides a solution that allows
utilities to outsource operations related to prepayment activity. These
managed services include the issuing of prepayment devices (smart keys,
smart cards, mobile phone credit cards and tokens), automated processing
of transaction details, customer account management, maintenance of
historical financial transactions, business-to-business call centers and
personalized mailing services. In the United Kingdom, our managed services
are fully integrated into the nationwide industry standard utility data
transfer network, which allows data to be exchanged automatically with
other utilities in a standard
format.
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Operational
Capabilities
Sales
and Distribution
The sales
organizations for Itron North America and Actaris use a combination of direct
and indirect sales channels. A direct sales force with technical support teams
is utilized for the largest electric, gas and water utilities, with which we
have long-established relationships. For smaller utilities, we typically use an
indirect sales force that consists of distributors, representative agencies,
partners and meter manufacturer representatives. We also sell water AMR modules
through original equipment manufacturer arrangements with several major meter
manufacturers. We license our North America AMR/AMI technology to certain meter
manufacturers who embed our technology into their meters.
No single
customer represented more than 10% of total revenues for 2008 or 2007. One
customer, Progress Energy, represented 16% of total revenues for 2006. During
2008, 2007 and 2006, our 10 largest customers in each of those years accounted
for approximately 15%, 14% and 40%, of total revenues,
respectively.
Manufacturing
We have
manufacturing facilities throughout the world. Our Itron North America operating
segment has two primary manufacturing facilities: one in Minnesota that
manufactures gas and water AMR modules and one in South Carolina that
manufactures electricity meters. Contract manufacturers are used for certain
handheld systems, peripheral equipment and low volume AMR products.
Our
Actaris operating segment has three business lines. The electricity division is
headquartered in Felixstowe, United Kingdom, with principal manufacturing
facilities located in France, the United Kingdom, Hungary, Brazil, Portugal and
South Africa. The gas division is headquartered in Karlsruhe, Germany, with
principal manufacturing facilities in Germany, the United Kingdom, France,
Italy, China, South America and the United States. The water division is
headquartered in Mâcon, France, with principal manufacturing facilities in
France, Germany, Italy, the United States and Brazil. All three business lines
have a number of smaller local assembly, test, service and calibration
facilities to address local markets.
Our
products require a wide variety of components and materials. Although we have
multiple sources of supply for most of our material requirements, certain
components and raw materials are supplied by sole-source vendors, and our
ability to perform certain contracts depends on the availability of these
materials. In most instances, multiple vendors of raw materials are screened
during a qualification process to ensure that there will be no interruption of
supply should one of them discontinue operations. Nonetheless, in some
situations, there is a risk of shortages due to reliance on a limited number of
suppliers or due to price fluctuations related to the nature of the raw
materials, such as electrical components, plastics, copper and brass, which are
used in varying amounts in our meter products. See “Risk Factors” within
Item 1A, included in this Annual Report on Form 10-K, for a further
discussion related to risks.
Product
Development
Our
current product development focus is on improvements to existing technology as
well as the development of next-generation technology for electricity, gas and
water meters, data collection, communications technologies, data warehousing and
software knowledge applications. We spent approximately $121 million, $95
million and $59 million on product development in 2008, 2007 and 2006,
respectively.
Marketing
Our
marketing efforts focus on brand recognition and product solutions through an
integrated approach that includes participation in industry trade shows and
web-based seminars and the preparation and distribution of various brochures,
published papers, case studies, print advertising, direct mail, newsletters and
conferences. In addition, we direct customers to our global website that
provides information on all of our products and services.
We
maintain communications with our customers through integrated and targeted
marketing campaigns, market surveys, market trend analysis and at our annual
North America Users’ Conference.
Workforce
At
December 31, 2008, we had approximately 8,700 people in our workforce,
including permanent and temporary employees and contractors. We have not
experienced any work stoppages and consider our employee relations to be
good.
Competition
We
provide a broad portfolio of products, systems and services to customers in the
utility industry and compete with a large number of competitors who offer
similar products, systems and services. We believe that our competitive
advantage is based on established customer relationships, our track record of
reliable products, integrated solutions, product cost, product innovation,
upgradeable AMR systems and our knowledge application tools. During recent
years, vendor consolidation has occurred in the industry. In many of our
markets, there are participants who may be both competitors and
partners.
Our
primary competitors for our products and services (including AMR and AMI
technology, software and services) are Badger Meter, Inc., Cooper Industries,
Ltd., the Elster Group, Dandong Visionseal Co., Ltd., Datamatic, Ltd., Diehl
Metering, Dresser, Inc., Echelon Corporation, Emerson Electric Co., eMeter
Corporation, EnergyICT NV, ESCO Technologies Inc., General Electric Company,
Holley Group Co., Ltd., Iskraemeco, D.D., Landis+Gyr Holdings, Oracle
Corporation, Roper Industries, Inc., Schneider Electric SA, Sensus Metering
Systems Inc., Silver Spring Networks and Trilliant Incorporated. These
competitors may offer a broad range of meters and related products, or may
specialize in a specific technology or service.
Bookings
and Backlog of Orders
Bookings
for a reported period represent customer contracts and purchase orders received
during the period that have met certain conditions, such as regulatory approval.
Total backlog represents committed but undelivered contracts and purchase orders
at period end. Twelve-month backlog represents the portion of total backlog that
we estimate will be recognized as revenue over the next 12 months. Backlog is
not a complete measure of our future business as we have significant
book-and-ship orders. Bookings and backlog can fluctuate significantly due to
the timing of large project awards. In addition, annual or multi-year contracts
are subject to rescheduling and cancellation by customers due to the long-term
nature of the contracts. Beginning total backlog, plus bookings, minus revenues,
will not equal ending total backlog due to miscellaneous contract adjustments,
foreign currency fluctuations and other factors.
Information
on bookings and backlog is summarized as follows:
|
Year
Ended
|
Annual
Bookings
|
Ending
Total
Backlog
|
Ending
12-Month
Backlog
|
|||||||
|
(in
millions)
|
||||||||||
|
December
31, 2008
|
$ | 2,543 | $ | 1,309 | $ | 507 | ||||
|
December
31, 2007
|
1,419 | 659 | 501 | |||||||
|
December
31, 2006
|
652 | 392 | 225 | |||||||
As we
enter into AMI agreements to deploy our OpenWay meter and communications system,
we include these contracts in bookings and backlog when regulatory approvals are
received or certain other conditions are met. At December 31, 2008, we had four
signed AMI contracts. Bookings and backlog for 2008 include $480 million related
to the Southern California Edison AMI contract and $334 million related to the
CenterPoint Energy AMI contract. A significant portion of these AMI contracts is
not included in 12-month backlog.
Other
Business Considerations
Intellectual
Property
We own
187 U.S. patents and 786 international patents. We have on file 102 U.S.
patent applications and 341 international patent applications. These patents
cover a range of technologies related to metering, portable handheld computers,
water leak detection and AMR and AMI related technologies.
We also
rely on a combination of copyrights and trade secrets to protect our products
and technologies. We have registered trademarks for most of our major product
lines in the United States and many foreign countries. Itron North America’s
registered trademarks include, but are not limited to, ITRON®,
“KNOWLEDGE TO SHAPE YOUR FUTURE®”,
CENTRON®,
MV-90®,
MV-90®xi,
ENDPOINT-LINK®,
ERT®, EEM
SUITE®,
OPENWAY®,
QUANTUM® Q1000,
SENTINEL® and
SERVICE-LINK®. Itron
North America’s unregistered trademarks include, but are not limited, to
CHOICECONNECT™, ITRON
ENTERPRISE EDITION™,
LD-PRO™,
METRIXND™,
MLOG™, SREAD™ and
UNILOG™.
Actaris’ registered trademarks include, but are not limited to, ACTARIS®,
AQUADIS®,
CYBLE®,
FLOSTAR®,
WOLTEX®,
FLODIS®,
ECHO®,
GALLUS®,
RF1®,
DELTA®,
FLUXI®,
CORUS®,
ACE®,
SL7000® and
PULSADIS®.
Disputes
over the ownership, registration and enforcement of intellectual property rights
arise in the ordinary course of our business. We license some of our technology
to other companies, some of which are our competitors. Currently, we are not a
party to any material intellectual property litigation.
Regulation
and Allocation of Radio Frequencies
Certain
of our products made for the U.S. market use radio frequencies that are
regulated by the Federal Communications Commission (FCC) pursuant to the
Communications Act of 1934, as amended. In general, a radio station license
issued by the FCC is required to operate a radio transmitter. The FCC issues
these licenses for a fixed term, and the licenses must be renewed periodically.
Because of interference constraints, the FCC can generally issue only a limited
number of radio station licenses for a particular frequency band in any one
area.
Although
radio licenses generally are required for radio stations, Part 15 of the FCC’s
rules permits certain low-power radio devices (Part 15 devices) to operate on an
unlicensed basis. Part 15 devices are designed for use on frequencies used by
others. These other users may include licensed users, which have priority over
Part 15 users. Part 15 devices cannot cause harmful interference to licensed
users and must be designed to accept interference from licensed radio devices.
Our AMR modules and AMR-equipped electronic residential electricity meters are
typically Part 15 devices that transmit information back to handheld, mobile or
fixed network AMR reading devices pursuant to these rules. Many of our AMR
systems utilize the 902-928 MHz band pursuant to the Part 15 rules for these
transmissions.
The FCC
has initiated a rulemaking proceeding in which it is considering adopting
“spectrum etiquette” requirements for unlicensed Part 15 devices operating in
the 902-928 MHz band. Although the outcome of the proceeding is uncertain, we do
not expect to have to make material changes to our equipment, and adoption of
some of the proposals that have been made in the proceeding could reduce the
potential for interference with our systems from other Part 15
devices.
The FCC
has also adopted service rules governing the use of the 1427-1432 MHz band. We
use this band in connection with various devices in our network solutions. Among
other things, the rules reserve parts of the band for general telemetry,
including utility telemetry, and provide that nonexclusive licenses will be
issued in accordance with Part 90 rules and the recommendations of frequency
coordinators. Telemetry licensees must comply with power limits and out-of-band
emission requirements that are designed to avoid interference with other users
of the band. Although the FCC issues licenses on a nonexclusive basis and it is
possible that the demand for spectrum will exceed supply, we believe we will
continue to have access to sufficient spectrum in the 1429.5-1432 MHz band under
favorable conditions.
Outside
of the United States, certain of our products require the use of radio
frequencies and are also subject to regulations in those jurisdictions where we
have deployed such equipment. In some jurisdictions, radio station licensees are
generally required to operate a radio transmitter and such licenses may be for a
fixed term and must be periodically renewed. In other jurisdictions, the rules
permit certain low power devices to operate on an unlicensed basis. Our AMR
modules and AMR-equipped electronic residential electricity meters typically are
devices that transmit information back to handheld, mobile or fixed network AMR
reading devices in unlicensed bands pursuant to rules regulating such use.
Generally, we use the unlicensed Industrial, Scientific and Medical (ISM) bands
with the various devices in our network solutions. In Europe, we generally use
the 433 MHz and 868 MHz bands. In the rest of the world, we use the
2.4000-2.4835 GHz band. In either case, although the availability of unlicensed
bands or radio station licenses for a particular frequency band in jurisdictions
outside of the United States may be limited, we believe we will continue to have
access to sufficient spectrum under favorable conditions.
Environmental
Regulations
In the
ordinary course of our business we use metals, solvents and similar materials
that are stored on-site. The waste created by use of these materials is
transported off-site on a regular basis by unaffiliated waste haulers and is
processed by unaffiliated contractors or vendors. We have made a concerted
effort to reduce or eliminate the use of mercury and other hazardous materials
in our products. We believe we are in compliance with laws, rules and
regulations applicable to the storage, discharge, handling, emission,
generation, manufacture and disposal of, or exposure to, toxic or other
hazardous substances in each of those jurisdictions in which we
operate.
Incorporation
We were
incorporated in the state of Washington in 1977.
MANAGEMENT
Set forth
below are the names, ages and titles of our executive officers as of February
25, 2009.
|
Name
|
Age
|
Position
|
||
|
LeRoy
D. Nosbaum
|
62
|
Chairman
of the Board and Chief Executive Officer
|
||
|
Malcolm
Unsworth
|
59
|
President,
Chief Operating Officer and Director
|
||
|
Steven
M. Helmbrecht
|
46
|
Sr.
Vice President and Chief Financial Officer
|
||
|
John
W. Holleran
|
54
|
Sr.
Vice President, General Counsel and Corporate Secretary
|
||
|
Philip
C. Mezey
|
49
|
Sr.
Vice President and Chief Operating Officer - Itron North
America
|
||
|
Marcel
Regnier
|
52
|
Sr.
Vice President and Chief Operating Officer - Actaris
|
||
|
Jared
P. Serff
|
41
|
Vice
President, Competitive Resources
|
LeRoy Nosbaum* is Chairman of
the Board and Chief Executive Officer. Mr. Nosbaum has been a director and our
CEO since 2000 and Chairman of the Board since 2002. Since joining Itron in
1996, Mr. Nosbaum has held positions as Chief Operating Officer and Vice
President with responsibilities for manufacturing, product development,
operations and marketing. Before joining Itron, Mr. Nosbaum was with
Metricom Inc., a supplier of wireless data communications networking technology.
Prior to joining Metricom, Mr. Nosbaum was with Schlumberger from 1969 to
1989 in various roles, including General Manager of Schlumberger’s Integrated
Metering Systems Division.
Malcolm Unsworth* is
President, Chief Operating Officer and a member of the Board of Directors.
Mr. Unsworth joined Itron in July 2004 as Sr. Vice President, Hardware
Solutions upon our acquisition of Schlumberger’s electricity metering business.
Mr. Unsworth spent 25 years with Schlumberger. His last position with
Schlumberger was as President of its electricity metering business from 2000 to
2004. Following Itron’s acquisition of Actaris in 2007, Mr. Unsworth was
promoted to Sr. Vice President and Chief Operations Officer, Actaris. Mr.
Unsworth was promoted to his current position in 2008 and elected to the Board
of Directors on December 16, 2008.
Steve Helmbrecht is Sr. Vice
President and Chief Financial Officer. Mr. Helmbrecht joined Itron in 2002
as Vice President and General Manager, International and was named Sr. Vice
President and Chief Financial Officer in 2005. From 2000 to 2002,
Mr. Helmbrecht was Chief Financial Officer of LineSoft Corporation
(LineSoft), which was acquired by Itron in 2002. Prior to joining LineSoft,
Mr. Helmbrecht spent seven years with SS&C Technologies, Inc., a
software company focused on portfolio management and accounting systems for
institutional investors.
John Holleran is Sr. Vice
President, General Counsel and Corporate Secretary. Mr. Holleran joined
Itron in January 2007. Prior to joining Itron, Mr. Holleran spent over 25 years
with Boise Cascade Corporation where he served as Vice President and General
Counsel for eight years prior to his promotion in 1999 to Senior Vice President,
Human Resources and General Counsel, a position he held until 2004. In 2005, he
served as Executive Vice President, Administration, and Chief Legal Officer for
Boise Cascade, LLC, the paper and forest products company resulting from the
reorganization of Boise Cascade Corporation. In 2006 he was associated with
Holleran Law Offices PLLC.
Philip Mezey is Sr. Vice
President and Chief Operating Officer - Itron North America. Mr. Mezey
joined Itron in March 2003 as Managing Director of Software Development for
Itron’s Energy Management Solutions Group as a result of Itron’s acquisition of
Silicon Energy Corp. (Silicon). He later was promoted to Group Vice President
and Manager of Software Solutions in 2004. In 2005 he became Sr. Vice President
Software Solutions and was promoted to his current position in 2007 following
our acquisition of Actaris. Mr. Mezey joined Silicon in 2000 as Vice
President, Software Development. Prior to joining Silicon, Mr. Mezey was a
founding member of Indus, a leading provider of integrated asset and customer
management software.
Marcel Regnier is Sr. Vice
President and Chief Operating Officer - Actaris. Mr. Regnier joined Itron
in April 2007 as part of the Actaris acquisition as Managing Director of
Actaris’ water and heat business unit, a position he held since Actaris’
formation in 2001. In April 2008, Mr. Regnier was promoted to his current
position. Prior to Actaris, Mr. Regnier was with Schlumberger for 20 years
holding a variety of positions in areas including research and development,
marketing and operations.
Jared Serff is Vice President,
Competitive Resources. Mr. Serff joined Itron in July 2004 as part of the
Schlumberger electricity metering acquisition. Mr. Serff spent six years
with Schlumberger, the last four of which were as Director of Human Resources
with Schlumberger’s electricity metering business where he was in charge of
personnel for all locations in Canada, Mexico, France, Taiwan and the United
States.
* On
February 12, 2009,
Itron, Inc.’s Board of Directors elected Malcolm Unsworth to succeed
LeRoy Nosbaum as President and Chief Executive Officer, effective March 31,
2009. Mr. Nosbaum will remain on the Board and serve as its Executive Chairman
until December 31, 2009.
ITEM 1A: RISK
FACTORS
We
are dependent on the utility industry, which has experienced volatility in
capital spending.
Many
industries have been affected by current economic factors, including the
significant deterioration of global economic conditions. We derive the majority
of our revenues from sales of products and services to utilities. Purchases of
our products may be deferred as a result of many factors including economic
downturns, slowdowns in new residential and commercial construction, a
customer’s access to capital at acceptable terms, utility specific financial
circumstances, mergers and acquisitions, regulatory decisions, weather
conditions and rising interest rates. We have experienced, and may in the future
experience, variability in operating results on an annual and a quarterly basis
as a result of these factors.
Utility
industry sales cycles can be lengthy and unpredictable.
Sales
cycles for standalone meter products (i.e., meters without AMR and AMI features)
are typically based on annual or bi-annual bid-based agreements, with no defined
delivery dates. Customers can place purchase orders against these contracts as
their meter stocks deplete, which can create fluctuations in our sales
volumes.
Sales
cycles for AMR and AMI projects are generally long and unpredictable due to
budgeting, purchasing and regulatory approval processes that can take up to
several years to complete. Our utility customers typically issue requests for
quotes and proposals, establish evaluation committees, review different
technical options with vendors, analyze performance and cost/benefit
justifications and perform a regulatory review, in addition to applying the
normal budget approval process within a utility. Section 1252 of the U.S. Energy
Policy Act of 2005 requires electric utilities to consider offering their
customers time-based rates. The Act also directs these utilities and state
utility commissions to study and evaluate methods for implementing demand
response, to shift consumption away from peak hours and to improve power
generation. These requirements could change the process of evaluating and
approving technology purchases, which could extend or delay sales.
The
European Union has also issued a directive stating that customers should have a
choice in their electric and gas suppliers. The directive obligates member
states to take necessary measures to achieve a competitive, secure and
environmentally sustainable market in electricity and gas. Member states must
ensure that all household customers and small enterprises enjoy the right to be
supplied with electricity and gas of a specified quality at reasonable,
comparable and transparent prices. While we believe the opening of these markets
will provide opportunities for sales of our products, the pace at which these
markets will be opened could be slowed substantially by legislative and
regulatory delays, regulatory approvals related to the deployment of new
technology, capital budgets of the utilities and purchasing decisions by our
customers.
Our
quarterly results may fluctuate substantially.
We have
experienced variability in quarterly results, including losses, and believe our
quarterly results will continue to fluctuate as a result of many factors,
including costs related to acquisitions, in-process research and development
(IPR&D), intangible asset amortization expenses, stock-based compensation,
legal expenses, litigation, unexpected warranty liabilities, restructuring
charges, size and timing of significant customer orders, FCC or other
governmental actions, changes in accounting standards or practices, changes in
existing taxation rules or practices, the gain or loss of significant customers,
timing and levels of new product developments, shifts in product or sales
channel mix, the shortage or change in price of certain components or materials,
foreign currency fluctuations, changes in interest rates, limited access to
capital at acceptable terms, increased competition and pricing pressure and
general economic conditions affecting enterprise spending for the utility
industry.
Our
acquisitions of and investments in third parties carry risks and may affect
earnings due to charges associated with the acquisition or could cause
disruption to the management of our business.
We have
acquired nine companies since December 31, 2002, the two largest of which
are our most recent acquisition of Actaris for $1.7 billion and the acquisition
of Schlumberger’s electricity metering business for $256 million in 2004. We
expect to complete additional acquisitions and investments in the future, both
within and outside of the United States. There are no assurances, however, that
we will be able to successfully identify suitable candidates or negotiate
acceptable acquisition terms. In order to finance future acquisitions, we may
need to raise additional funds through public or private financings, and there
are no assurances that such financing would be available at acceptable terms.
Acquisitions and investments involve numerous risks such as the diversion of
senior management’s attention, unsuccessful integration of the acquired entity’s
personnel, operations, technologies and products, lack of market acceptance of
new services and technologies, difficulties in operating businesses in foreign
legal jurisdictions, changes in the legal and regulatory environment or a shift
in industry dynamics that negatively impacts the forecasted demand for the new
products. We may experience difficulties that could affect our internal control
over financial reporting, which could create a significant deficiency or
material weakness in our overall internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002. Failure to properly or adequately address these
issues could result in the diversion of management’s attention and resources and
materially and adversely impact our ability to manage our business. Impairment
of an investment or goodwill and intangible assets may also result if these
risks materialize. There can be no assurances that an acquired business will
perform as expected, accomplish our strategic objective or generate significant
revenues, profits or cash flows. During prior years, we have incurred
impairments and write-offs of minority interest investments. In addition,
acquisitions and investments in third parties may involve the assumption of
obligations, significant write-offs or other charges associated with the
acquisition.
Impairment
of our intangible assets, long-lived assets, goodwill or deferred tax assets
could result in significant charges that would adversely impact our future
operating results.
We have
significant intangible assets, long-lived assets, goodwill and deferred tax
assets that are susceptible to valuation adjustments as a result of changes in
various factors or conditions.
We assess
impairment of amortizable intangible and long lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors that could trigger an impairment of such assets include the
following:
|
·
|
a
significant underperformance relative to historical or projected future
operating results;
|
|
·
|
a
significant changes in the manner of or use of the acquired assets or the
strategy for our overall
business;
|
|
·
|
a
significant negative industry or economic
trends;
|
|
·
|
a
significant decline in our stock price for a sustained
period;
|
|
·
|
changes
in our organization or management reporting structure could result in
additional reporting units, which may require alternative methods of
estimating fair values or greater aggregation or disaggregation in our
analysis by reporting
unit; and
|
|
·
|
a
decline in our market capitalization below net book
value.
|
We do not
believe an impairment assessment was required at December 31, 2008; however,
such an assessment may be required in the future.
We assess
the potential impairment of goodwill each year as of October 1. We also assess
the potential impairment of goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Adverse changes in our
operations or other unforeseeable factors could result in an impairment charge
in future periods that would impact our results of operations and financial
position in that period.
The
realization of our deferred tax assets related to net operating loss
carryforward is supported by projections of future profitability. We provide a
valuation allowance based on estimates of future taxable income in the
respective taxing jurisdiction and the amount of deferred taxes that are
expected to be realizable. If future taxable income is different than expected,
we may not be able to realize some or all of the tax benefit, which could have a
material and adverse effect on our financial results and cash
flows.
We
are subject to international business uncertainties.
A
substantial portion of our revenues are derived from operations conducted
outside the United States. International sales and operations may be subject to
risks such as the imposition of government controls, government expropriation of
facilities, lack of a well-established system of laws and enforcement of those
laws, access to a legal system free of undue influence or corruption, political
instability, terrorist activities, restrictions on the import or export of
critical technology, currency exchange rate fluctuations, adverse tax burdens,
availability of qualified third-party financing, generally longer receivable
collection periods than in the United States, trade restrictions, changes in
tariffs, labor disruptions, difficulties in staffing and managing foreign
operations, potential insolvency of international distributors, burdens of
complying with different permitting standards and a wide variety of foreign laws
and obstacles to the repatriation of earnings and cash. Fluctuations in the
value of the U.S. dollar may impact our ability to compete in international
markets. International expansion and market acceptance depend on our ability to
modify our technology to take into account such factors as the applicable
regulatory and business environment, labor costs and other economic conditions.
In addition, the laws of certain countries do not protect our products or
technologies to the same extent as do the laws of the United States. There can
be no assurance that these factors will not have a material adverse effect on
our future international sales and, consequently, on our business, financial
condition and results of operations.
We
depend on our ability to develop new products.
Our
future success will depend, in part, on our ability to continue to design and
manufacture new competitive products and to enhance and sustain our existing
products, including technological advances, changing customer requirements,
international market acceptance and other factors in the markets in which we
sell our products. This product development will require continued investment in
order to maintain our market position. We may not have the necessary capital, or
access to capital at acceptable terms, to make these investments. We have made,
and expect to continue to make, substantial investments in technology
development. However, we may experience unforeseen problems in the development
or performance of our technologies or products. In addition, we may not meet our
product development schedules. Oftentimes, new products require certifications
or regulatory approvals before the products can be used and we cannot be certain
that our new products will be approved in a timely manner. Finally, we may not
achieve market acceptance of our new products and services.
A
significant portion of our revenues are generated from a limited number of
customers.
Historically,
our revenues have been concentrated with a limited number of customers, which
change over time. The 10 largest customers accounted for 15%, 14% and 40% of
revenues for 2008, 2007 and 2006, respectively. One customer, Progress Energy,
accounted for 16% of total Company revenues in 2006. No single customer
represented more than 10% of total Company revenues in 2008 and 2007. We are
often a party to large, multi-year contracts that are subject to cancellation or
rescheduling by our customers due to many factors, such as extreme, unexpected
weather conditions that cause our customers to redeploy resources, convenience,
regulatory issues or possible acts of terrorism. Cancellation or postponement of
one or more of these significant contracts could have a material adverse effect
on us. In addition, if a large customer contract is not replaced upon its
expiration with new business of similar magnitude, our financial and operating
results would be adversely affected.
As we
enter into agreements related to the deployment of AMI products and technology,
the potential value of these contracts could be substantially larger than
contracts we have had with our customers in the past. These deployments could
also last several years and thus exceed the length of prior deployment
agreements. The terms and conditions of these AMI agreements related to testing,
contractual liabilities, warranties, performance and indemnities could be
substantially different than the terms and conditions associated with our
standard products and services.
We
are facing increasing competition.
We face
competitive pressures from a variety of companies in each of the markets we
serve. Some of our present and potential future competitors have, or may have
substantially greater financial, marketing, technical or manufacturing resources
and, in some cases, have greater name recognition and experience. Some
competitors may enter markets we serve and sell products at lower prices in
order to obtain market share. Our competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements.
They may also be able to devote greater resources to the development, promotion
and sale of their products and services than we can. Some competitors have made,
and others may make, strategic acquisitions or establish cooperative
relationships among themselves or with third parties that enhance their ability
to address the needs of our prospective customers. It is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Other companies may also drive
technological innovation and develop products that are equal in quality and
performance or superior to our products, which could put pressure on our market
position, reduce our overall sales and require us to invest additional funds in
new technology development. We may also have to adjust the prices of some of our
products to stay competitive. Should we fail to compete successfully with
current or future competitors, we could experience material adverse effects on
our business, financial condition, results of operations and cash
flows.
We
are affected by availability and regulation of radio spectrum.
A
significant number of our products use radio spectrum, which are subject to
regulation by the FCC in the United States. Licenses for radio frequencies must
be obtained and periodically renewed. Licenses granted to us or our customers
may not be renewed at acceptable terms, if at all. The FCC may adopt changes to
the rules for our licensed and unlicensed frequency bands that are incompatible
with our business. In the past, the FCC has adopted changes to the requirements
for equipment using radio spectrum, and it is possible that the FCC or the U.S.
Congress will adopt additional changes.
We have
committed, and will continue to commit, significant resources to the development
of products that use particular radio frequencies. Action by the FCC could
require modifications to our products. The inability to modify our products to
meet such requirements, the possible delays in completing such modifications and
the cost of such modifications all could have a material adverse effect on our
future business, financial condition and results of operations.
Our
radio-based products currently employ both licensed and unlicensed radio
frequencies. There must be sufficient radio spectrum allocated by the FCC for
our intended uses. As to the licensed frequencies, there is some risk that there
may be insufficient available frequencies in some markets to sustain our planned
operations. The unlicensed frequencies are available for a wide variety of uses
and may not be entitled to protection from interference by other users who
operate in accordance with FCC rules. The unlicensed frequencies are also often
the subject of proposals to the FCC requesting a change in the rules under which
such frequencies may be used. If the unlicensed frequencies become unacceptably
crowded, restrictive or subject to changed rules governing their use, our
business could be materially adversely affected.
We are
also subject to regulatory requirements in jurisdictions outside of the United
States. In those jurisdictions, licensees are generally required to operate a
radio transmitter. Such licenses may be for a fixed term and must be
periodically renewed. In some jurisdictions, the rules permit certain low power
devices to operate on an unlicensed basis. Most of our AMR modules and
AMR-equipped electronic residential electricity meters are devices that transmit
information back to handheld, mobile or fixed network AMR reading devices in
unlicensed bands pursuant to rules regulating such use. To the extent we wish to
introduce products designed for use in the United States or another country into
a new market, such products may require significant modification or redesign in
order to meet frequency requirements and other regulatory specifications.
Further, in some countries, limitations on frequency availability or the cost of
making necessary modifications may preclude us from selling our products in
those countries.
We
may face liability associated with the use of products for which patent
ownership or other intellectual property rights are claimed.
We may be
subject to claims or inquiries regarding alleged unauthorized use of a third
party’s intellectual property. An adverse outcome in any intellectual property
litigation could subject us to significant liabilities to third parties, require
us to license technology or other intellectual property rights from others,
require us to comply with injunctions to cease marketing or using certain
products or brands, or require us to redesign, re-engineer, or rebrand certain
products or packaging, any of which could affect our business, financial
condition and results of operations. If we are required to seek licenses under
patents or other intellectual property rights of others, we may not be able to
acquire these licenses at acceptable terms, if at all. In addition, the cost of
responding to an intellectual property infringement claim, in terms of legal
fees, expenses and the diversion of management resources, whether or not the
claim is valid, could have a material adverse effect on our business, financial
condition and results of operations.
If our
products infringe the intellectual property rights of others, we may be required
to indemnify our customers for any damages they suffer. We generally indemnify
our customers with respect to infringement by our products of the proprietary
rights of third parties. Third parties may assert infringement claims against
our customers. These claims may require us to initiate or defend protracted and
costly litigation on behalf of our customers, regardless of the merits of these
claims. If any of these claims succeed, we may be forced to pay damages on
behalf of our customers or may be required to obtain licenses for the products
they use. If we cannot obtain all necessary licenses on commercially reasonable
terms, our customers may be forced to stop using our products.
We
may be unable to adequately protect our intellectual property.
While we
believe that our patents, trademarks and other intellectual property have
significant value, it is uncertain that this intellectual property or any
intellectual property acquired or developed by us in the future, will provide
meaningful competitive advantages. There can be no assurance that our patents or
pending applications will not be challenged, invalidated or circumvented by
competitors or that rights granted thereunder will provide meaningful
proprietary protection. Moreover, competitors may infringe our patents or
successfully avoid them through design innovation. To combat infringement or
unauthorized use, we may need to commence litigation, which can be expensive and
time-consuming. In addition, in an infringement proceeding a court may decide
that a patent or other intellectual property right of ours is not valid or is
unenforceable, or may refuse to stop the other party from using the technology
or other intellectual property right at issue on the grounds that it is
non-infringing or the legal requirements for an injunction have not been met.
Policing unauthorized use of our intellectual property is difficult and
expensive, and we cannot provide assurance that we will be able to, or have the
resources to, prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully as do the laws
of the United States.
We
may face product-failure exposure that exceeds our recorded
liability.
We
provide product warranties for varying lengths of time and establish allowances
in anticipation of warranty expenses. In addition, we record contingent
liabilities for additional product-failure related costs. These warranty and
related product-failure allowances may be inadequate due to undetected product
defects, unanticipated component failures, as well as changes in various
estimates for material, labor and other costs we may incur to replace projected
product failures. As a result, we may incur additional warranty and related
expenses in the future with respect to new or established products.
Our
key manufacturing facilities are concentrated.
In the
event of a significant interruption in production at any of our manufacturing
facilities, considerable expense, time and effort could be required to establish
alternative production lines to meet contractual obligations, which would have a
material adverse effect on our business, financial condition and results of
operation.
A
number of key personnel are critical to the success of our
business.
Our
success depends in large part on the efforts of our highly qualified technical
and management personnel in all disciplines. The loss of one or more of these
employees and the inability to attract and retain qualified replacements could
have a material adverse effect on our business.
We
depend on certain key vendors.
Certain
of our products, subassemblies and system components are procured from limited
sources. Our reliance on such limited sources involves certain risks, including
the possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality, costs and our vendor’s access to capital at
acceptable terms. Any adverse change in the supply of, or price for, these
components could adversely affect our business, financial condition and results
of operations. In addition, we depend on a small number of contract
manufacturing vendors for a large portion of our low-volume manufacturing
business and all of our repair services for our domestic handheld meter reading
units. If any of these vendors should become unable to perform their
responsibilities, our operations could be materially disrupted.
We
are subject to regulatory compliance.
We are
subject to various governmental regulations in all of the jurisdictions in which
we conduct business. Failure to comply with current or future regulations could
result in the imposition of substantial fines, suspension of production,
alteration of our production processes, cessation of operations or other
actions, which could materially and adversely affect our business, financial
condition and results of operations.
Changes
in environmental regulations, violations of the regulations or future
environmental liabilities could cause us to incur significant costs and
adversely affect our operations.
Our
business and our facilities are subject to a number of laws, regulations and
ordinances governing, among other things, the storage, discharge, handling,
emission, generation, manufacture, disposal, remediation of, or exposure to
toxic or other hazardous substances and certain waste products. Many of these
environmental laws and regulations subject current or previous owners or
operators of land to liability for the costs of investigation, removal or
remediation of hazardous materials. In addition, these laws and regulations
typically impose liability regardless of whether the owner or operator knew of,
or was responsible for, the presence of any hazardous materials and regardless
of whether the actions that led to the presence were conducted in compliance
with the law. In the ordinary course of our business, we use metals, solvents
and similar materials, which are stored on-site. The waste created by the use of
these materials is transported off-site on a regular basis by unaffiliated waste
haulers. Many environmental laws and regulations require generators of waste to
take remedial actions at, or in relation to, the off-site disposal location even
if the disposal was conducted in compliance with the law. The requirements of
these laws and regulations are complex, change frequently and could become more
stringent in the future. Failure to comply with current or future environmental
regulations could result in the imposition of substantial fines, suspension of
production, alteration of our production processes, cessation of operations or
other actions, which could materially and adversely affect our business,
financial condition and results of operations. There can be no assurance that a
claim, investigation or liability will not arise with respect to these
activities, or that the cost of complying with governmental regulations in the
future, will not have a material adverse effect on us.
Our
credit facility (credit facility) and the indentures related to our senior
subordinated notes and our convertible senior subordinated notes, limit our
ability and the ability of most of our subsidiaries to take certain
actions.
Our
credit facility, senior subordinated notes (7.75% senior subordinated notes due
2012) and convertible notes (2.5% convertible senior subordinated notes due
2026) place restrictions on our ability and the ability of most of our
subsidiaries to, among other things:
|
·
|
incur
more debt;
|
|
·
|
pay
dividends and make distributions;
|
|
·
|
make
certain investments;
|
|
·
|
incur
capital expenditures above a set
limit;
|
|
·
|
redeem
or repurchase capital stock;
|
|
·
|
create
liens;
|
|
·
|
enter
into transactions with affiliates;
|
|
·
|
enter
into sale lease-back transactions;
|
|
·
|
merge
or consolidate; and
|
|
·
|
transfer
or sell assets.
|
Our
credit facility contains other customary covenants, including the requirement to
meet specified financial ratios. Our ability to borrow under our credit facility
will depend on the satisfaction of these covenants. Events beyond our control
can affect our ability to meet those covenants. Our credit facility is sensitive
to interest rate and foreign currency exchange rate risks that could impact our
financial position and results of operations.
Our
failure to comply with obligations under our borrowing arrangements may result
in declaration of an event of default. An event of default, if not cured or
waived, may permit acceleration of such indebtedness. In addition, indebtedness
under other instruments (such as our senior subordinated notes) that contain
cross-default or cross-acceleration provisions also may be accelerated and
become due and payable. We cannot be certain we will be able to remedy any such
defaults. If our indebtedness is accelerated, we cannot be certain that we will
have sufficient funds available to pay the accelerated indebtedness or that we
will have the ability to borrow sufficient funds to replace the accelerated
indebtedness on terms favorable to us or at all. In addition, in the case of an
event of default under our secured indebtedness such as our credit facility, the
lenders may be permitted to foreclose on our assets securing that
indebtedness.
Our
ability to service our indebtedness is dependent on our ability to generate
cash, which is influenced by many factors beyond our control.
Our
ability to make payments on or refinance our indebtedness, fund planned capital
expenditures and continue research and development will depend on our ability to
generate cash in the future. This is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control, including counterparty risks with banks and other financial
institutions. We may need to refinance all or a portion of our indebtedness on
or before maturity. We cannot provide assurance that we will be able to
refinance any of our indebtedness on commercially reasonable terms or at
all.
We
are potentially exposed to default risk on our interest rate swaps and our line
of credit.
As of
December 31, 2008, we had $17.5 million of interest rate swaps, which
convert an aggregate notional principal amount of $539.3 million (or
approximately 73% of our term loans) from floating rate interest payments to
fixed interest rate obligations. These swaps protect us against the risk of
adverse fluctuations in the borrowing’s denominated London Interbank Offered
Rate (LIBOR).
Given the
current economic disruptions and the restructuring of various commercial
financing organizations, there is a risk of counter-party default on these
items. Currently, our exposure to default risk on our interest rate swap
agreements is minimal as we are in a liability position on all interest rate
swaps. However, if the LIBOR rates were to significantly increase, there is a
risk that one or more counterparties may be unable to meet its obligations under
the swap agreement.
At
December 31, 2008, we had outstanding standby letters of credit of $50.2 million
issued under our credit facility’s $115 million multicurrency revolver,
resulting in $64.8 million being available for additional borrowings. The
lenders of our credit facility consist of several participating financial
institutions. Our lenders may not be able to honor their line of credit
commitment due to the loss of a participating financial institution or other
circumstance, which could lead us to seek financing in a credit market that is
becoming less accessible. This could adversely impact our ability to fund some
of our internal initiatives or future acquisitions.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and effectively prevent fraud. We have devoted significant
resources and time to comply with the internal control over financial reporting
requirements of the Sarbanes-Oxley Act of 2002. In addition, Section 404
under the Sarbanes-Oxley Act of 2002 requires that our auditors attest to the
design and operating effectiveness of our controls over financial reporting. Our
compliance with the annual internal control report requirement for each fiscal
year will depend on the effectiveness of our financial reporting and data
systems and controls across our operating subsidiaries. Furthermore, an
important part of our growth strategy has been, and will likely continue to be,
the acquisition of complementary businesses, and we expect these systems and
controls to become increasingly complex to the extent that we
integrate acquisitions and our business grows. Likewise, the complexity of our
transactions, systems and controls may become more difficult to manage. We
cannot be certain that these measures will ensure that we design, implement and
maintain adequate controls over our financial processes and reporting in the
future, especially for acquisition targets that may not have been required to be
in compliance with Section 404 of the Sarbanes-Oxley Act of 2002 at the
date of acquisition. Any failure to implement required new or improved controls,
difficulties encountered in their implementation or operation, or difficulties
in the assimilation of acquired businesses into our control system could harm
our operating results or cause it to fail to meet our financial reporting
obligations. Inadequate internal controls could also cause investors to lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our stock and our access to
capital.
ITEM 1B: UNRESOLVED STAFF
COMMENTS
None.
ITEM
2: PROPERTIES
The
following table lists the number of factories and sales and administration
offices by region.
|
Manufacturing,
Assembly, Service and Distribution
|
Sales,
Administration and Other
|
|||||||
|
Owned
|
Leased
|
Owned
|
Leased
|
|||||
|
North
America
|
4
|
11
|
1
|
28
|
||||
|
Europe
|
14
|
6
|
-
|
26
|
||||
|
Asia/Pacific
|
2
|
7
|
-
|
21
|
||||
|
Other
(rest of world)
|
4
|
2
|
-
|
15
|
||||
|
Total
|
24
|
26
|
1
|
90
|
||||
Our
factory locations consist of manufacturing, assembly, service and distribution
facilities. Our sales and administration offices may also include various
product development operations. Itron North America facilities are located
primarily in the United States, Canada and Mexico, while Actaris’ facilities are
in Europe, Asia/Pacific and throughout the rest of the world. Our headquarters
facility is located in Liberty Lake, Washington. Our principal properties are
owned and in good condition and we believe our current facilities will be
sufficient to support our operations for the foreseeable future.
ITEM 3: LEGAL
PROCEEDINGS
During
the fourth quarter of 2008, Itron settled a lawsuit that had been filed against
Itron by IP Co. LLC in the U.S. District Court for the Eastern District of Texas
for an alleged infringement of a patent owned by IP Co. LLC. This settlement did
not result in a material impact to Itron’s financial condition or results of
operations.
ITEM 4: SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of shareholders of Itron, Inc. during the
fourth quarter of 2008.
PART
II
ITEM 5: MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information for Common Stock
Our
common stock is traded on the NASDAQ Global Select Market. The following table
reflects the range of high and low common stock sales prices for the four
quarters of 2008 and 2007 as reported by the NASDAQ Global Select
Market.
|
2008
|
2007
|
|||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||
|
First
Quarter
|
$ | 100.00 | $ | 70.48 | $ | 68.91 | $ | 51.15 | ||||
|
Second
Quarter
|
$ | 106.25 | $ | 88.77 | $ | 78.72 | $ | 64.57 | ||||
|
Third
Quarter
|
$ | 105.99 | $ | 84.71 | $ | 96.08 | $ | 73.55 | ||||
|
Fourth
Quarter
|
$ | 90.10 | $ | 34.25 | $ | 112.92 | $ | 72.78 | ||||
Performance
Graph
The
following graph compares the five-year cumulative total return to shareholders
on our common stock with the five-year cumulative total return of NASDAQ (U.S.
Companies) Index and our peer group of companies used for the year ended
December 31, 2008.
The above
presentation assumes $100 invested on December 31, 2003 in the common stock
of Itron, Inc., the NASDAQ (U.S. Companies) Index and the peer group, with all
dividends reinvested. With respect to companies in the peer group, the returns
of each such corporation have been weighted to reflect relative stock market
capitalization at the beginning of each period plotted. The stock prices shown
above for our common stock are historical and not necessarily indicative of
future price performance.
Our peer
group consists of global companies that are either direct competitors or have
similar industry and business operating characteristics. Our peer group includes
the following publicly traded companies: Badger Meter, Inc., Cooper Industries,
Ltd., ESCO Technologies Inc., Mueller Water Products, LLC, National Instruments
Corporation and Roper Industries, Inc.
Holders
At
January 31, 2009 there were 315 holders of record of our common
stock.
Dividends
Since the
inception of the Company, we have not declared or paid cash dividends. In
addition, our credit facility dated April 18, 2007 and our senior
subordinated notes due 2012 prohibit the declaration or payment of a cash
dividend as long as these facilities are in place. Upon repayment of our
borrowings, we intend to retain future earnings for the development of our
business and do not anticipate paying cash dividends in the foreseeable
future.
Unregistered
Equity Security Sales
In
January 2009, we entered into an exchange agreement with holders of our
convertible notes to issue, in the aggregate, 93,109 shares of Itron’s common
stock, no par value (the Common Stock), in exchange for, in the aggregate,
$5,000,000 principal amount of the convertible notes, representing 2% of the
aggregate outstanding principal amount of the convertible notes. All of the
convertible notes acquired by us pursuant to the exchange agreement were retired
upon closing of the exchange. The issuance of the shares of common stock in
these transactions was exempt from registration under Section 3(a)(9) of the
Securities Act of 1933. No commission or remuneration was paid or given,
directly or indirectly, for soliciting these transactions. The number of shares
of common stock issued was less than 1% of the number of shares outstanding
of our common stock subsequent to the January 26, 2009 Form 8-K.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL
DATA
The
selected consolidated financial data below is derived from our consolidated
financial statements, which have been audited by independent registered public
accounting firms. This selected consolidated financial and other data represents
portions of our financial statements. You should read this information together
with “Item 7: Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Item 8: Financial Statements and Supplementary Data”
included in this Annual Report on Form 10-K. Historical results are not
necessarily indicative of future performance.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007 (1)
|
2006
|
2005
|
2004
(2)
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statements
of Operations Data
|
||||||||||||||||||||
|
Revenues
|
$ | 1,909,613 | $ | 1,464,048 | $ | 644,042 | $ | 552,690 | $ | 399,194 | ||||||||||
|
Cost
of revenues
|
1,262,756 | 976,761 | 376,600 | 319,069 | 228,525 | |||||||||||||||
|
Gross
profit
|
646,857 | 487,287 | 267,442 | 233,621 | 170,669 | |||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Sales
and marketing
|
167,457 | 125,842 | 63,587 | 56,642 | 45,279 | |||||||||||||||
|
Product
development
|
120,699 | 94,926 | 58,774 | 47,077 | 44,379 | |||||||||||||||
|
General
and administrative
|
128,515 | 100,071 | 52,213 | 44,428 | 35,490 | |||||||||||||||
|
Amortization
of intangible assets
|
120,364 | 84,000 | 31,125 | 38,846 | 27,901 | |||||||||||||||
|
In-process
research and development
|
- | 35,975 | - | - | 6,400 | |||||||||||||||
|
Restructurings
|
- | - | - | 390 | 7,258 | |||||||||||||||
|
Total
operating expenses
|
537,035 | 440,814 | 205,699 | 187,383 | 166,707 | |||||||||||||||
|
Operating
income
|
109,822 | 46,473 | 61,743 | 46,238 | 3,962 | |||||||||||||||
|
Other
income (expense)
|
||||||||||||||||||||
|
Interest
income
|
5,970 | 10,477 | 9,497 | 302 | 166 | |||||||||||||||
|
Interest
expense
|
(80,735 | ) | (89,965 | ) | (17,785 | ) | (18,944 | ) | (13,145 | ) | ||||||||||
|
Other
income (expense), net
|
(2,984 | ) | 435 | (1,220 | ) | (68 | ) | (389 | ) | |||||||||||
|
Total
other income (expense)
|
(77,749 | ) | (79,053 | ) | (9,508 | ) | (18,710 | ) | (13,368 | ) | ||||||||||
|
Income
(loss) before income taxes
|
32,073 | (32,580 | ) | 52,235 | 27,528 | (9,406 | ) | |||||||||||||
|
Income
tax (provision) benefit
|
(4,014 | ) | 16,436 | (18,476 | ) | 5,533 | 4,149 | |||||||||||||
|
Net
income (loss)
|
$ | 28,059 | $ | (16,144 | ) | $ | 33,759 | $ | 33,061 | $ | (5,257 | ) | ||||||||
|
Earnings
(loss) per common share
|
||||||||||||||||||||
|
Basic
|
$ | 0.85 | $ | (0.55 | ) | $ | 1.33 | $ | 1.41 | $ | (0.25 | ) | ||||||||
|
Diluted
|
$ | 0.80 | $ | (0.55 | ) | $ | 1.28 | $ | 1.33 | $ | (0.25 | ) | ||||||||
|
Weighted
average common shares outstanding
|
||||||||||||||||||||
|
Basic
|
33,096 | 29,584 | 25,414 | 23,394 | 20,922 | |||||||||||||||
|
Diluted
|
34,951 | 29,584 | 26,283 | 24,777 | 20,922 | |||||||||||||||
|
Balance
Sheets Data
|
||||||||||||||||||||
|
Working
capital (3)
|
$ | 293,296 | $ | 249,579 | $ | 492,861 | $ | 116,079 | $ | 58,123 | ||||||||||
|
Total
assets
|
2,871,214 | 3,050,566 | 988,522 | 598,884 | 557,151 | |||||||||||||||
|
Total
debt
|
1,190,018 | 1,590,541 | 469,324 | 166,929 | 278,235 | |||||||||||||||
|
Shareholders'
equity
|
1,035,391 | 758,802 | 390,982 | 317,534 | 184,430 | |||||||||||||||
|
(1)
|
On
April 18, 2007, we completed the acquisition of Actaris. Refer to “Item 8:
Financial Statements and Supplementary Data, Note 4: Business
Combinations" for a discussion of the effects of the acquisition. The
Consolidated Statement of Operations for the year ended December 31, 2007
includes the operating activities of the Actaris acquisition from April
18, 2007 through December 31, 2007.
|
|
(2)
|
On
July 1, 2004, we completed the acquisition of Schlumberger's electricity
metering business. The Consolidated Statement of Operations for the year
ended December 31, 2004 includes the operating activities of this
acquisition from July 1, 2004 through December 31,
2004.
|
|
(3)
|
Working
capital represents current assets less current
liabilities.
|
ITEM 7: MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with
“Item 8: Financial Statements and Supplementary Data.”
Results
of Operations
We derive
the majority of our revenues from sales of products and services to utilities.
Revenues include hardware, software, managed services and consulting. Cost of
revenues includes materials, labor, overhead, warranty expense and distribution
and documentation costs for software.
Highlights
Our
financial results for the year ended December 31, 2008 include the operations of
our two operating segments: Itron North America and Actaris. Actaris was
acquired on April 18, 2007; therefore our 2007 operating results reflect
Actaris’ operations from the date of acquisition through December 31, 2007. A
small portion of Itron North America’s operations outside North America was
transferred to our Actaris operating segment on January 1, 2008, resulting
in a restatement of 2007 segment information for comparative
purposes.
Highlights
for the year ended December 31, 2008 include:
|
·
|
revenues
of $1.9 billion
|
|
·
|
diluted
earnings per common share (EPS) of 80
cents
|
|
·
|
annual
bookings of $2.5 billion
|
|
·
|
cash
flow from operations of $193
million
|
We made
debt repayments of $388 million during the year ended December 31, 2008. These
repayments were made with cash flows from operations and a portion of the $311
million in net proceeds from the sale of 3.4 million shares of our common stock,
which was completed in the second quarter of 2008. Cash and cash equivalents
were $144 million at December 31, 2008.
Total
Company Revenues, Gross Profit and Margin and Unit Shipments
|
Year
Ended December 31,
|
|||||||||||||||
|
2008
|
%
Change
|
2007
|
%
Change
|
2006
|
|||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||
|
Revenues
|
$ | 1,909.6 |
30%
|
$ | 1,464.0 |
127%
|
$ | 644.0 | |||||||
|
Gross
Profit
|
646.9 |
33%
|
487.3 |
82%
|
267.4 | ||||||||||
|
Gross
Margin
|
34% | 33% | 42% | ||||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||
|
(in
millions)
|
||||||||||
|
Revenues
by region
|
||||||||||
|
Europe
|
$ | 916.3 | $ | 623.6 | $ | 4.0 | ||||
|
United
States and Canada
|
648.0 | 596.6 | 602.9 | |||||||
|
Other
|
345.3 | 243.8 | 37.1 | |||||||
|
Total
revenues
|
$ | 1,909.6 | $ | 1,464.0 | $ | 644.0 | ||||
Revenues
Year-over-year
revenue growth was primarily due to the Actaris acquisition in the second
quarter of 2007. In addition, both Actaris and Itron North America realized
higher revenues in 2008 due to increased shipments of AMR-enabled meters. The
decline in revenue in the United States and Canada from 2006 to 2007 was due
primarily to the completion of a large contract with Progress
Energy.
No single
customer represented more than 10% of total revenues for 2008 or 2007. One
customer, Progress Energy, represented 16% of total revenues for the year ended
December 31, 2006. The 10 largest customers accounted for approximately 15%, 14%
and 40% of total revenues in 2008, 2007 and 2006, respectively.
Gross
Margins
Gross
margin was 34% in 2008, compared with 33% in 2007 and 42% in 2006. The mix of
system sales to meter sales is higher in Itron North America than Actaris
resulting in different margins between the segments. During 2007, business
combination accounting rules required the valuation of Actaris inventory on hand
at the acquisition date to equal the sales price, less costs to complete and a
reasonable profit allowance for selling effort. Accordingly, the historical cost
of inventory acquired as part of the Actaris acquisition was increased by $16.0
million, which lowered the 2007 total Company gross margin by one percentage
point.
Unit
Shipments
Meters
can be sold with and without AMR functionality. In addition, AMR modules can be
sold separately from the meter. Depending on customers’ preferences, we also
incorporate other vendors’ AMR technology in our meters. Meter and AMR shipments
are as follows:
|
Year
Ended December 31,
|
||||||||
|
2008
|
2007
|
2006
|
||||||
|
(in
thousands)
|
||||||||
|
Total
meters (with and without AMR)
|
||||||||
|
Electricity
- Itron North America
|
4,800
|
5,075
|
6,625
|
|||||
|
Electricity
- Actaris
|
7,840
|
5,400
|
-
|
|||||
|
Gas
|
4,080
|
2,600
|
-
|
|||||
|
Water
|
8,440
|
5,575
|
-
|
|||||
|
Total
meters
|
25,160
|
18,650
|
6,625
|
|||||
|
AMR
units (Itron North America & Actaris)
|
||||||||
|
Meters
with AMR
|
4,700
|
3,600
|
4,000
|
|||||
|
AMR
modules
|
4,890
|
4,675
|
4,625
|
|||||
|
Total
AMR units
|
9,590
|
8,275
|
8,625
|
|||||
|
Meters
with other vendors' AMR
|
840
|
925
|
925
|
|||||
Operating
Segment Results
The
Actaris operating segment consists primarily of the operations from the Actaris
acquisition, as well as other Itron operations not located in North America that
are now included in the Actaris operating segment. The operations of the Actaris
operating segment are primarily located in Europe, with approximately 5% of
revenues located in the United States and approximately 20% located throughout
the rest of the world. Our remaining operations, primarily located in the United
States and Canada, have been combined into a single operating segment called
Itron North America. As we continue to integrate the Actaris acquisition,
certain refinements of our operating segments may occur. The operating segment
information as set forth below is based on our current segment reporting
structure. In accordance with Statement of Financial Accounting Standards (SFAS)
131, Disclosures about
Segments of an Enterprise and Related Information, historical segment
information has been restated from the segment information previously provided
to conform to our current segment reporting structure after the April 18, 2007
Actaris acquisition and our January 1, 2008 refinement. For the January 1, 2008
refinement, we have not restated the historical segment reporting for 2006 as
the amounts were not material.
We have
three measures of segment performance: revenue, gross profit (margin) and
operating income (margin). Intersegment revenues were minimal. Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Depreciation and amortization expenses
are allocated to our segments. For each of the years ended December 31, 2008,
2007 and 2006, Itron North America depreciation and amortization expense was
$41.4 million, $43.8 million and $46.2 million. Depreciation and amortization
expense for Actaris for the years ended December 31, 2008 and 2007 was $132.2
million and $82.6 million.
Segment
Products
|
Itron
North America
|
Electronic
electricity meters with and without AMR functionality; gas and water AMR
modules; handheld, mobile and network AMR data collection technologies;
advanced metering infrastructure (AMI) technologies; software,
installation, implementation, consulting, maintenance support and other
services.
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and two-way
electricity prepayment systems, including smart key, keypad and smart
card; two-way gas prepayment systems using smart card; AMR and AMI data
collection technologies; installation, implementation, maintenance support
and other managed services.
|
The
following tables and discussion highlight significant changes in trends or
components of each segment.
|
Year
Ended December 31,
|
|||||||||||||
|
2008
|
%
Change
|
2007
|
%
Change
|
2006
|
|||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||
|
Segment
Revenues
|
|||||||||||||
|
Itron
North America
|
$ | 628.2 |
6%
|
$ | 593.5 |
(8%)
|
$ | 644.0 | |||||
|
Actaris
|
1,281.4 |
47%
|
870.5 |
-
|
- | ||||||||
|
Total
revenues
|
$ | 1,909.6 |
30%
|
$ | 1,464.0 |
127%
|
$ | 644.0 | |||||
|
Year
Ended December 31,
|
|||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||
|
Gross
Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
Gross
Profit
|
Gross
Margin
|
||||||||||
|
Segment
Gross Profit and Margin
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||
|
Itron
North America
|
$ | 247.8 |
39%
|
$ | 247.3 |
42%
|
$ | 267.4 |
42%
|
||||||
|
Actaris
|
399.1 |
31%
|
240.0 |
28%
|
- |
-
|
|||||||||
|
Total
gross profit and margin
|
$ | 646.9 |
34%
|
$ | 487.3 |
33%
|
$ | 267.4 |
42%
|
||||||
|
Year
Ended December 31,
|
|||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||
|
Operating
Income (Loss)
|
Operating
Margin
|
Operating
Income (Loss)
|
Operating
Margin
|
Operating
Income (Loss)
|
Operating
Margin
|
||||||||||
|
Segment
Operating Income (Loss)
|
|||||||||||||||
|
and
Operating Margin
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||
|
Itron
North America
|
$ | 77.1 |
12%
|
$ | 74.4 |
13%
|
$ | 89.0 |
14%
|
||||||
|
Actaris
|
70.4 |
5%
|
4.1 |
0%
|
- |
-
|
|||||||||
|
Corporate
unallocated
|
(37.7 | ) | (32.0 |
)
|
(27.3 | ) | |||||||||
|
Total
Company
|
$ | 109.8 |
6%
|
$ | 46.5 |
3%
|
$ | 61.7 |
10%
|
||||||
Itron North America: Revenues
increased $34.7 million, or 6%, in 2008, compared with 2007, due to increased
sales for many of our products and services, with the largest increase in
standalone AMR water and gas modules. The decline in revenue from 2006 to 2007
was due to the completion of a large contract with Progress Energy.
Gross
margin decreased three percentage points in 2008, compared with 2007, primarily
as a result of lower overhead absorption due to lower electricity meter volumes.
Gross margin remained constant in 2007, compared with 2006, as a result of
increased margins in 2007 from product mix, offset by lower overhead absorption
from lower volumes. Approximately 60% of our meters sold in 2008 were equipped
with our AMR technology, compared with 45% in 2007 and 60% in 2006.
One
customer accounted for 10% of the Itron North America operating segment revenues
in 2008 while no single customer represented more than 10% in 2007. Progress
Energy accounted for 16% of the Itron North America operating segment revenues
in 2006.
Itron
North America operating expenses as a percentage of revenues were 27% in 2008,
compared with 29% in 2007 and 28% in 2006. During 2008, amortization of
intangible assets and corporate overhead costs declined by approximately
$10.6 million. This decrease was partially offset by increased research and
development (R&D) costs, which were 12% of revenues in 2008. During 2007,
operating expenses increased compared with 2006. The increase was primarily due
to R&D costs, which were 11% of revenues, compared with 9% in 2006. This
increase was partially offset by a decline in intangible asset amortization and
lower bonus and profit sharing expense.
Actaris: Actaris was acquired
on April 18, 2007. Certain operations not located in North America that were
previously reported within the Itron North America operating segment were moved
to the Actaris operating segment on January 1, 2008, due to a realignment.
Therefore, 2007 segment information has been restated to conform to the January
1, 2008 presentation.
Actaris
revenues for 2008 increased by $410.9 million as a result of a full year of
results, whereas revenues for 2007 primarily included results of operations from
the date of acquisition on April 18, 2007. The electricity business line
revenues as a percentage of total operating segment revenues decreased due to
the completion of a significant prepayment project. Business line revenues for
Actaris were as follows:
|
Year
Ended
December
31, 2008
|
April
18, 2007
through
December
31, 2007
|
||
|
Electricity
|
38%
|
43%
|
|
|
Gas
|
33%
|
30%
|
|
|
Water
|
29%
|
27%
|
Gross
margin for 2008 was three percentage points higher at 31%, compared with 28% in
2007. In 2007, gross margin was negatively impacted by a two percent point
reduction due to the revaluation of inventory on hand at the acquisition date in
accordance with business combination accounting rules, which increased cost of
sales. Gross margin was also favorably impacted in 2008 by product mix and lower
indirect cost of sales.
No single
customer represented more than 10% of the Actaris operating segment revenues for
the years ended December 31, 2008 and 2007.
Operating
expenses for Actaris were $328.7 million, or 26% of revenues, for 2008, compared
with $235.9 million, or 27% of revenues, in 2007. Operating expenses have
increased in all areas due to higher revenues, increased emphasis on product
development, higher intangible asset amortization, general and administrative
expense for financial integration and foreign exchange fluctuations. Operating
expenses for 2007 primarily included results from the date of acquisition as
well as $35.8 million of IPR&D costs recorded in accordance with
business combination accounting rules.
Corporate
unallocated: Operating
expenses not directly associated with an operating segment are classified as
“Corporate unallocated.” Corporate unallocated expenses increased $5.7 million
for the year ended December 31, 2008, compared with 2007, due to increased
compensation and financial integration expenses. These expenses, as a percentage
of total Company revenues, were 2% in 2008 and 2007 and 4% in
2006.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues:
|
Year
Ended December 31,
|
||||||||||||||||||
|
2008
|
%
of Revenue
|
2007
|
%
of Revenue
|
2006
|
%
of Revenue
|
|||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||
|
Sales
and marketing
|
$ | 167.5 |
9%
|
$ | 125.8 |
9%
|
$ | 63.6 |
10%
|
|||||||||
|
Product
development
|
120.7 |
6%
|
94.9 |
6%
|
58.8 |
9%
|
||||||||||||
|
General
and administrative
|
128.5 |
7%
|
100.1 |
7%
|
52.2 |
8%
|
||||||||||||
|
Amortization
of intangible assets
|
120.3 |
6%
|
84.0 |
6%
|
31.1 |
5%
|
||||||||||||
|
In-process
research and development
|
- |
-
|
36.0 |
2%
|
- |
-
|
||||||||||||
|
Total
operating expenses
|
$ | 537.0 |
28%
|
$ | 440.8 |
30%
|
$ | 205.7 |
32%
|
|||||||||
As a
percentage of revenues, operating expenses have remained constant between 2008
and 2007, except for IPR&D, which was directly related to the Actaris
acquisition. Operating expenses in 2006 reflect higher costs as a percentage of
revenue due to lower revenues and more of an emphasis on research and
development. Amortization of intangible assets increased $36.3 million in
2008 and $52.9 million in 2007 due to the Actaris acquisition and as a result of
amortization based on estimated discounted cash flows. General and
administrative expenses in 2008 were impacted by increased compensation and
financial integration expenses. We have devoted significant resources and time
to comply with internal control over financial reporting requirements of the
Sarbanes-Oxley Act of 2002. In 2007, the acquisition of Actaris also resulted in
$36 million of IPR&D expense, consisting primarily of next generation
technology. These research and development projects were completed in 2008 and
expensed as product development.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
Year
Ended December 31,
|
|||||||||
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
|||||||||
|
Interest
income
|
$ | 5,970 | $ | 10,477 | $ | 9,497 | |||
|
Interest
expense
|
(71,817 | ) | (76,443 | ) | (13,205 | ) | |||
|
Amortization
of debt placement fees
|
(8,918 | ) | (13,522 | ) | (4,580 | ) | |||
|
Other
income (expense), net
|
(2,984 | ) | 435 | (1,220 | ) | ||||
|
Total
other income (expense)
|
$ | (77,749 | ) | $ | (79,053 | ) | $ | (9,508 | ) |
Interest income: Our cash
balances have fluctuated period over period due to the timing of proceeds from
the sale of common stock and repayments on borrowings. The decrease in interest
income in 2008 from 2007 and 2006 was primarily the result of lower average cash
and cash equivalent balances and short-term investments. The decrease in
interest income was also impacted by reduced market interest rates during 2008.
Such average balances were $119.5 million, $174.0 million and $193.8 million
during 2008, 2007 and 2006, respectively. The higher cash and short-term
investment balances during the previous two years were attributable to the
issuance of $345 million 2.50% convertible senior subordinated notes
(convertible notes) in August 2006 and the sale of 4.1 million shares of common
stock in March 2007, the proceeds of which were used to fund a portion of the
Actaris acquisition on April 18, 2007. In May 2008, we sold 3.4 million
shares of common stock, with net proceeds of $311 million, partially offset by
our repayment of borrowings.
Interest expense: Interest
expense decreased 6% in 2008, compared with 2007. This decrease was due to a
reduction in the Company’s applicable margin for the term loans from 2% to 1.75%
effective August 2008 and lower market rates on the floating portion of our
debt, partially offset by a full year of interest expense from the $1.2 billion
credit facility used to finance the Actaris acquisition on April 18, 2007. The
average loan balance outstanding during 2008 was $1.4 billion, compared with
$1.3 billion during 2007 as the credit facility was outstanding for a full year
in 2008. The increase in interest expense in 2007, compared with 2006, was
primarily the result of the new $1.2 billion credit facility and the $345
million convertible notes issued in August 2006. Average loan balances
outstanding during 2006 were $273.7 million.
Amortization of debt placement
fees: Amortization of debt placement fees decreased in 2008, compared
with 2007, due to the write-off of $6.6 million associated with our convertible
notes in September 2007. The debt placement fees associated with our convertible
notes were amortized through the date of the earliest put or conversion option;
therefore, when our convertible notes exceeded the conversion threshold, the
remaining debt placement fees were written-off. In addition, when debt is repaid
early, the portion of unamortized prepaid debt fees related to the early
principal repayment is written-off and included in interest expense.
Amortization of prepaid debt fees was higher in 2007, compared with 2006, due to
the August 2006 issuance of our convertible notes.
Other income (expense): Other
income (expense) consists primarily of foreign currency gains and losses, which
can vary from period to period, as well as other non-operating events or
transactions. In 2008, other expenses, net resulted primarily from net foreign
currency losses due to balances denominated in a currency other than the
reporting entity’s functional currency. In 2007, in addition to foreign currency
fluctuations, other income, net included $3.0 million in unrealized gains
on our euro denominated borrowings, which are now designated as a hedge of a net
investment in foreign operations, with future foreign currency fluctuations
recorded in other comprehensive income. Other income, net in 2007 also included
$2.8 million in net realized gains from foreign currency hedge range forward
contracts that were settled as part of the Actaris acquisition and a $1.0
million realized gain from an overnight euro rate change prior to the
acquisition of Actaris. During 2006, other expense consisted primarily of
foreign currency fluctuations.
Income
Taxes
Our tax
provision (benefit) as a percentage of income (loss) before tax typically
differs from the federal statutory rate of 35%. Changes in our effective tax
rate are subject to several factors, including fluctuations in operating
results, new or revised tax legislation and accounting pronouncements, changes
in the level of business conducted in domestic and international jurisdictions,
research credits, state income taxes and changes in valuation
allowance.
Our tax
provision as a percentage of income before tax was 12.5% for
2008. Our actual effective tax rate for 2008 was lower than the federal
statutory rate due to a variety of factors, including lower effective tax rates
on certain international earnings due to an election made under Internal Revenue
Code Section 338 with respect to the Actaris acquisition in 2007 that resulted
in a reduced global effective tax rate. Additionally, our reduced foreign tax
liability reflects the benefit of foreign interest expense
deductions.
Our tax
benefit as a percentage of loss before tax was 50.5% for 2007. Our actual
effective tax benefit for 2007 was higher than the federal statutory rate as a
result of benefits from legislative tax rate reductions in Germany and the
United Kingdom. The German Business Tax Reform 2008 was finalized on August 17,
2007, which reduced the German tax rate from approximately 39% to 30%. On July
19, 2007, the United Kingdom enacted the Finance Act of 2007, which lowered the
main corporate tax rate from 30% to 28%. These benefits were offset by
IPR&D, which was not tax deductible and increased our effective tax rate.
The 2007 effective tax rate was also favorably impacted by lower effective tax
rates on international earnings due to the Internal Revenue Code Section 338
election.
Our 2006
effective tax rate equaled the statutory tax rate of 35%. Although our actual
income tax rate was the same as the statutory rate, this was due to several
factors. Such factors include state income taxes that increased the actual
income tax rate, the adoption of SFAS 123(R), Share-Based Payment, and
current year federal, state and Canadian R&D credits that decreased the
actual income tax rate. The tax provision was further reduced by approximately
$1.5 million due to prior year state and Canadian R&D credits and the
signing of the Relief and Health Care Act, extending the research tax credit for
qualified research expenses incurred throughout 2006 and 2007. We recorded
approximately $2.2 million in federal and state R&D credits after the
effective date of this legislation.
We
adopted the provisions Financial Accounting Standards Board (FASB)
Interpretation 48 (FIN 48), Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No.109, on January 1, 2007. FIN
48 clarifies the accounting for uncertain tax positions and requires companies
to recognize the impact of a tax position in their financial statements, if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. As a result of the implementation of FIN 48,
we recognized a $5.4 million increase in the liability for unrecognized tax
benefits, with a corresponding increase in deferred tax assets. Our
implementation did not require an adjustment to retained earnings.
We
classify interest expense and penalties related to unrecognized tax benefits and
interest income on tax overpayments as components of income tax expense. For
each of the years ended December 31, 2008 and 2007, we recognized interest and
penalties of approximately $1.2 million. At December 31, 2008 and 2007, the
amount of accrued interest totaled $3.2 million and $2.7 million, respectively,
and the amount of accrued penalties totaled $2.9 million and $2.2 million,
respectively. The amount of unrecognized tax benefits that would affect our
actual tax rate at December 31, 2008, December 31, 2007 and January 1, 2007
were $37.0 million, $8.4 million and $5.4 million, respectively. Over the next
12 months, we do not expect our unrecognized tax benefits to change
significantly except for the payment of approximately $4.5 million income tax
obligations related to FIN 48. We are not able to reasonably estimate the timing
of future cash flows relating to the remaining balance.
We are
subject to income tax in the U.S. federal jurisdiction and numerous foreign and
state jurisdictions. The Internal Revenues Service has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Due to the existence of net operating loss and tax credit carryforwards,
tax years subsequent to 1995 remain open to examination by the major tax
jurisdictions to which we are subject. Actaris’ subsidiaries in France are
currently finalizing an examination for the years 2004 through
2006.
Financial
Condition
Cash
Flow Information:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Operating
activities
|
$ | 193.2 | $ | 133.3 | $ | 94.8 | ||||||
|
Investing
activities
|
(67.1 | ) | (1,714.4 | ) | (85.5 | ) | ||||||
|
Financing
activities
|
(63.4 | ) | 1,310.4 | 318.5 | ||||||||
|
Effect
of exchange rates on cash and cash equivalents
|
(10.3 | ) | 1.3 | - | ||||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | 52.4 | $ | (269.4 | ) | $ | 327.8 | |||||
Cash and
cash equivalents increased from $92.0 million at December 31, 2007 to $144.4
million at December 31, 2008. The increase in cash was the result of cash
flows from operations and the $311.1 million stock offering in May 2008,
partially offset by $388.4 million in debt repayments. The cash and cash
equivalents balance of $361.4 million at December 31, 2006 consisted
primarily of the proceeds of the $345 million of convertible notes issued in
August 2006, which were subsequently used in 2007 to fund the Actaris
acquisition.
Operating activities: Cash
provided by operating activities increased $59.9 million in 2008, compared with
2007. Non-cash charges for 2008 consisted primarily of depreciation on property,
plant and equipment, amortization of intangible assets, stock-based compensation
and amortization of prepaid debt fees, partially offset by increased deferred
income taxes. Non-cash charges in 2007 also include IPR&D related to the
Actaris acquisition. We did not have non-cash charges in 2008 and 2007 related
to tax benefits on stock-based compensation expense as we do not expect to pay
cash taxes. Changes in our operating assets and liabilities during 2008
consisted primarily of lower receivables and inventory, as well as slightly
higher payables. Changes in our operating assets and liabilities during 2007
consisted primarily of lower inventory balances and increased payables,
completely offset by increased accounts receivable. Changes in operating assets
and liabilities during 2006 resulted in a net decrease to operating cash flows.
The balances of our operating assets and liabilities can fluctuate as a result
of the timing of customer orders and revenues.
Investing activities: The
acquisition of property, plant and equipment increased $22.8 million in 2008,
compared with 2007, consisting primarily of manufacturing equipment for
production capacity expansion and our new AMI product line. Cash paid for the
acquisition of Actaris in 2007 was approximately $1.7 billion. In 2007,
$35.0 million in short-term investments matured with the proceeds used to
partially fund the Actaris acquisition. During 2006, we invested $205.0 million
in short-term held to maturity investments from the net proceeds of our $345
million convertible notes issuance. The remaining proceeds were placed in cash
and cash equivalents. As the investments matured, $170.4 million was placed
in cash and cash equivalents. For 2006, property, plant and equipment purchases
were $31.7 million and were primarily related to capital improvements to
our new corporate headquarters and our enterprise resource planning system
upgrade. Investing activities in 2006 also included a total of $21.1 million
used for three small acquisitions.
During
2007, contingent consideration of $7.9 million became payable for our 2006
acquisition of ELO Sistemas e Tecnologia Ltda (ELO), of which $6.9 million was
paid during 2008. We paid the remaining $1.0 million in January 2009. In
addition, during 2008, contingent consideration totaling $1.3 million became
payable for our 2006 acquisitions of Flow Metrix, Inc. and Quantum Consulting,
Inc. These amounts are expected to be paid in 2009.
Financing activities: We
financed the 2007 acquisition of Actaris with proceeds from a new credit
facility and sale of common stock. Proceeds from the credit facility were $1.2
billion, partially offset by debt placement fees of $22.1 million. Net proceeds
from the sales of common stock were $310.9 million in 2008 and $225.2 million in
2007. Cash generated from the exercise of stock-based awards was
$13.4 million during 2008, compared with $22.4 million for the 2007
and $15.3 million in 2006. During 2008, we repaid $388.4 million of our
borrowings from proceeds of the sale of common stock and operating cash flows,
compared with $76.1 million in 2007 and $42.7 million in 2006. In 2006, we
received $345.0 million in gross proceeds from the issuance of convertible
notes, with debt placement fees of $8.8 million.
Effect of exchange rates on cash and
cash equivalents: The effect of exchange rates on the cash balances of
currencies held in foreign denominations for 2008 was a decrease of $10.3
million, compared with an increase of $1.3 million for 2007. There was no effect
of foreign exchange rate changes on cash and cash equivalents for
2006.
Off-balance
sheet arrangements:
We had no
off-balance sheet financing agreements or guarantees at December 31, 2008, 2007
and 2006 that we believe were reasonably likely to have a current or future
effect on our financial condition, results of operations or cash
flows.
Disclosures
about contractual obligations and commitments:
The
following table summarizes our known obligations to make future payments
pursuant to certain contracts as of December 31, 2008, as well as an
estimate of the timing in which these obligations are expected to be
satisfied.
|
Less
than
|
1-3
|
3-5
|
Beyond
|
||||||||||||
|
Total
|
1
year
|
years
|
years
|
5
years
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
Credit
facility (1)
|
|||||||||||||||
|
USD
denominated term loan
|
$ | 443,047 | $ | 17,910 | $ | 37,763 | $ | 37,877 | $ | 349,497 | |||||
|
EUR
denominated term loan
|
448,891 | 21,883 | 42,374 | 42,817 | 341,817 | ||||||||||
|
Senior
subordinated notes (1)
|
139,241 | 8,422 | 16,986 | 113,833 | - | ||||||||||
|
Convertible
senior subordinated notes (1)
(2)
|
366,129 | 8,618 | 357,511 | - | - | ||||||||||
|
Operating
lease obligations (3)
|
22,578 | 9,207 | 8,802 | 3,422 | 1,147 | ||||||||||
|
Purchase
and service commitments (4)
|
166,154 | 162,961 | 3,052 | 141 | - | ||||||||||
|
Other
long-term liabilities reflected on the balance
|
|||||||||||||||
|
sheet
under generally accepted accounting principles (5)
|
79,315 | - | 42,608 | 12,971 | 23,736 | ||||||||||
|
Total
|
$ | 1,665,355 | $ | 229,001 | $ | 509,096 | $ | 211,061 | $ | 716,197 | |||||
|
(1)
|
Borrowings
are disclosed within “Item 8: Financial Statements and Supplementary
Data, Note 7: Debt”, with the addition of estimated interest
expense, not including the amortization of prepaid debt
fees.
|
|
(2)
|
Our
convertible notes have a stated due date of August 2026. We expect the
outstanding principal and the unpaid accrued interest to be paid by August
2011 due to the combination of put, call and conversion options as
outlined in the indenture.
|
|
(3)
|
Operating
lease obligations are disclosed in “Item 8: Financial Statements and
Supplementary Data, Note 13: Commitments and Contingencies” and do not
include common area maintenance charges, real estate taxes and insurance
charges for which we are obligated.
|
|
(4)
|
We
enter into standard purchase orders in the ordinary course of business
that typically obligate us to purchase direct materials and other items.
Purchase orders can vary in terms, which include open-ended agreements
that provide for estimated quantities over an extended shipment period,
typically up to one year at an established unit cost. Our long-term
executory purchase agreements that contain termination clauses have been
classified as less than one year, as the commitments are the estimated
amounts we would be required to pay at December 31, 2008 if the
commitments were canceled.
|
|
(5)
|
Other
long-term liabilities consist of warranty obligations, estimated pension
benefit payments and other obligations. Estimated pension benefit payments
include amounts through 2018. Non-current FIN 48 liabilities totaling
$32.0 million, which include interest and penalties, as well as
non-current deferred income taxes, are not included in the above
contractual obligations and commitments table as we cannot reliably
estimate the period of cash settlement with the respective taxing
authorities.
|
Liquidity,
Sources and Uses of Capital:
Our
principal sources of liquidity are cash flows from operations, borrowings and
sales of common stock. Cash flows can fluctuate and are sensitive to many
factors including changes in working capital and the timing and magnitude of
capital expenditures and payments on debt.
Credit
Facility
The
Actaris acquisition in 2007 was financed in part by a $1.2 billion credit
facility. The credit facility, dated April 18, 2007, was composed of a
$605.1 million first lien U.S. dollar denominated term loan; a
€335 million first lien euro denominated term loan; a £50 million
first lien pound sterling denominated term loan (collectively the term loans);
and a $115 million multicurrency revolving line-of-credit (revolver). Our
loan balances denominated in currencies other than the U.S. dollar fluctuate due
to currency exchange rates. The principal balance of our euro denominated term
loan at December 31, 2008 and 2007 was €254.1 million and €302.5 million,
respectively. Interest rates on the credit facility are based on the
respective borrowing’s denominated LIBOR or the Wells Fargo Bank, National
Association’s prime rate, plus an additional margin of 1.75% subject to factors
including our consolidated leverage ratio. Our interest rates were 3.19% for the
U.S. dollar denominated and 6.89% for the euro denominated term loans at
December 31, 2008. Scheduled amortization of principal payments is 1% per year
(0.25% quarterly) with an excess cash flow provision for additional annual
principal repayment requirements. Maturities of the term loans and multicurrency
revolver are seven years and six years from the date of issuance, respectively.
The credit facility is secured by substantially all of the assets of Itron,
Inc., our operating subsidiaries, except our international subsidiaries, and
includes covenants, which contain certain financial ratios and place
restrictions on the incurrence of debt, the payment of dividends, certain
investments, incurrence of capital expenditures above a set limit and mergers.
We were in compliance with these debt covenants at December 31, 2008. At
December 31, 2008, there were no borrowings outstanding under the revolver and
$50.2 million was utilized by outstanding standby letters of credit resulting in
$64.8 million being available for additional borrowings.
We repaid
$372.7 million of the term loans during 2008. These repayments were made with
cash flows from operations and $311 million in net proceeds from the sale
of 3.4 million shares of our common stock. During 2007, we repaid $76.1 million
of the term loans.
Senior
Subordinated Notes
In May
2004, we issued $125 million of 7.75% senior subordinated notes (subordinated
notes) due in 2012, which were discounted to a price of 99.265 to yield 7.875%.
The subordinated notes are registered with the SEC and are generally
transferable. Fixed interest payments are required every six months, in May and
November. The notes are subordinated to our credit facility (senior secured
borrowings) and are guaranteed by all of our operating subsidiaries, except for
our international subsidiaries. The subordinated notes contain covenants, which
place restrictions on the incurrence of debt, the payment of dividends, certain
investments and mergers. We were in compliance with these debt covenants at
December 31, 2008. From time to time, we may reacquire a portion of the
subordinated notes on the open market, resulting in the early extinguishment of
debt.
During
2008, we reacquired $15.3 million in principal amount of the subordinated
notes. The balance of the subordinated notes, including unaccreted discount, was
$109.2 million at December 31, 2008. Currently, some or
all of the subordinated notes may be redeemed at our option at a redemption
price of 103.875% of the principal amount, decreasing to 101.938% on May 15,
2009 and 100.000% on May 15, 2010.
Convertible
Senior Subordinated Notes
On August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC and
are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in EITF 05-2, The Meaning of “Conventional
Convertible Debt Instruments” in Issue 00-19, as the number of shares, or
cash, to be received by the holders was not fixed at the inception of the
obligation. We have concluded that the conversion feature of our convertible
notes does not require bifurcation from the host contract in accordance with
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as the conversion feature
is indexed to the Company’s own stock and would be classified within
stockholders’ equity if it were a freestanding instrument as provided by EITF
00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.
The
convertible notes may be converted at the option of the holder at a conversion
rate of 15.3478 shares of our common stock for each $1,000 principal amount of
the convertible notes, under the following circumstances, as defined in the
indenture (filed with the SEC on November 6, 2006 as Exhibit 4.16 to our
Quarterly Report on Form 10-Q):
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o
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during
any fiscal quarter commencing after December 31, 2006, if the closing sale
price per share of our common stock exceeds $78.19, which is 120% of the
conversion price of $65.16, for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter;
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o
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between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
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|
o
|
during
the five business days after any five consecutive trading day period in
which the trading price of the convertible notes for each day was less
than 98% of the conversion value of the convertible
notes;
|
|
o
|
if
the convertible notes are called for
redemption;
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|
o
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if
a fundamental change occurs; or
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|
o
|
upon
the occurrence of defined corporate
events.
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The
amount payable upon conversion is the result of a formula based on the closing
prices of our common stock for 20 consecutive trading days following the
date of the conversion notice. Based on the conversion ratio of 15.3478 shares
per $1,000 principal amount of the convertible notes, if our stock price is
lower than the conversion price of $65.16, the principal amount payable will be
less than the $1,000 principal amount and will be settled in cash.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination. The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved.
The
convertible notes also contain purchase options, at the option of the holders,
which may require us to repurchase all or a portion of the convertible notes on
August 1, 2011, August 1, 2016 and August 1, 2021 at 100% of the principal
amount, plus accrued and unpaid interest.
On or
after August 1, 2011, we have the option to redeem all or a portion of the
convertible notes at a redemption price equal to 100% of the principal amount
plus accrued and unpaid interest.
The
convertible notes are unsecured, subordinated to our credit facility (senior
secured borrowings) and are guaranteed by all of our operating subsidiaries,
except for our international subsidiaries. The convertible notes contain
covenants, which place restrictions on the incurrence of debt and certain
mergers. We were in compliance with these debt covenants at December 31,
2008.
As our
stock price is subject to fluctuation, the contingent conversion threshold may
be triggered during any quarter, prior to July 2011, and the notes become
convertible. At December 31, 2008 and 2007, the contingent conversion threshold
was not exceeded and, therefore, the aggregate principal amount of the
convertible notes is included in long-term debt. However, during the third
quarter of 2008 and the third quarter of 2007, the contingent conversion
threshold of our convertible notes was exceeded, and the notes became
convertible for the following quarters. During the fourth quarter of 2008, one
holder elected to convert $412,000 of the notes.
In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion, addressing
convertible instruments that may be settled in cash upon conversion (see New Accounting
Pronouncements).
Other
Sources and Uses of Capital
We are
often required to obtain letters of credit or bonds in support of our
obligations for customer contracts. These letters of credit or bonds typically
provide a guarantee to the customer for future performance, which usually covers
the installation phase of a contract and may on occasion cover the operations
and maintenance phase of outsourcing contracts. At December 31, 2008, in
addition to the outstanding standby letters of credit of $50.2 million issued
under our credit facility’s $115 million multicurrency revolver, our
Actaris operating segment has a total of $28.8 million of unsecured
multicurrency revolving lines of credit with various financial institutions with
total outstanding standby letters of credit of $6.7 million. At December 31,
2007, Actaris had $28.0 million of unsecured multicurrency revolving line of
credit with total outstanding standby letters of credit of $5.9 million.
Unsecured surety bonds in force were $33.1 million and $13.8 million at
December 31, 2008 and 2007, respectively. The increase in bonds relates to
a major sales contract signed in 2007. In the event any such bonds or letters of
credit are called, we would be obligated to reimburse the issuer of the letter
of credit or bond; however, we do not believe that any currently outstanding
bonds or letters of credit will be called.
Our net
deferred income tax assets consist primarily of accumulated net operating loss
carryforwards, hedging activities and tax credits that can be carried forward,
some of which are limited by Internal Revenue Code Sections 382 and 383. The
limited deferred income tax assets resulted primarily from acquisitions. For
2008 and 2007, we had operating losses for federal income tax purposes and did
not pay cash taxes. For state income tax purposes we paid a minimal amount of
cash taxes. However, we paid approximately $26.3 million and $21.7 million in
local and foreign tax obligations for the years ended December 31, 2008 and
2007, respectively. Based on current projections, we expect to pay minimal U.S.
federal and state taxes and approximately $25.5 million in local and
foreign taxes in 2009.
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary and
Indonesia. These plans were assumed with the acquisition of Actaris on April 18,
2007. Our general funding policy for these qualified pension plans is to
contribute amounts sufficient to satisfy regulatory funding standards of the
respective countries for each plan. Our expected contribution assumes that
actual plan asset returns are consistent with our expected rate of return and
that interest rates remain constant. For the year ended December 31, 2008, we
contributed approximately $445,000 to the defined benefit pension plans and
expect to contribute a total of $400,000 in 2009.
Working
capital, which represents current assets less current liabilities, was $293.3
million at December 31, 2008, compared with $249.6 million at December 31, 2007.
The $43.7 million increase in working capital resulted primarily from cash
generated from operations.
We expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from or to others,
distribution agreements, partnership arrangements and acquisitions of technology
or other companies. We expect these activities to be funded with existing cash,
cash flow from operations, borrowings and the sale of common stock or other
securities. We believe existing sources of liquidity will be sufficient to fund
our existing operations and obligations for the next 12 months and into the
foreseeable future, but offer no assurances. Our liquidity could be affected by
the stability of the energy and water industries, competitive pressures,
international risks, intellectual property claims, capital market fluctuations
and other factors described under “Risk Factors” within Item 1A of Part
1.
Contingencies
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at December 31, 2008 were not material to our
financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger Limited. PT Berca claims that it had preemptive
rights in the joint venture and has sought to nullify the transaction in 2001
whereby Schlumberger transferred its ownership interest in PT Mecoindo to an
Actaris subsidiary. The plaintiff also seeks to collect damages for the earnings
it otherwise would have earned had its alleged preemptive rights been observed.
The Indonesian courts have awarded 129.6 billion rupiahs ($11.7 million) in
damages, plus accrued interest at 18% annually, against the defendants and have
invalidated the 2001 transfer of the Mecoindo interest to a subsidiary of
Actaris. All of the parties have appealed the matter and it is currently pending
before the Indonesian Supreme Court. We intend to continue vigorously defending
our interest. In addition, Actaris has notified Schlumberger that it will seek
to have Schlumberger indemnify Actaris from any damages it may incur as a result
of this claim. In any event, we do not believe that an adverse outcome is likely
to have a material adverse impact to our financial condition or results of
operations.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue Recognition: The
majority of our revenues are recognized when products are shipped to or received
by a customer or when services are provided. For arrangements involving multiple
elements, we determine the estimated fair value of each element and then
allocate the total arrangement consideration among the separate elements based
on the relative fair value percentages. Revenues for each element are then
recognized based on the type of element, such as 1) when the products are
shipped, 2) services are delivered, 3) percentage-of-completion when
implementation services are essential to other elements in the arrangements, 4)
upon receipt of customer acceptance or 5) transfer of title. Fair values
represent the estimated price charged when an item is sold separately. We review
our fair values on an annual basis or more frequently if a significant trend is
noted.
We
recognize revenue for delivered elements when the delivered elements have
standalone value and we have objective and reliable evidence of fair value for
each undelivered element. If the fair value of any undelivered element included
in a multiple element arrangement cannot be objectively determined, revenue is
deferred until all elements are delivered and services have been performed, or
until fair value can objectively be determined for any remaining undelivered
elements.
If
implementation services are essential to a software arrangement, revenue is
recognized using either the percentage-of-completion methodology if project
costs can be estimated or the completed contract methodology if project costs
cannot be reliably estimated. The estimation of costs through completion of a
project is subject to many variables such as the length of time to complete,
changes in wages, subcontractor performance, supplier information and business
volume assumptions. Changes in underlying assumptions/estimates may adversely or
positively affect financial performance. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance
period.
Unearned
revenue is recorded when a customer pays for products or services where the
criteria for revenue recognition have not been met as of the balance sheet date.
Deferred cost is recorded for products or services for which ownership
(typically defined as title and risk of loss) has transferred to the customer,
but for which the criteria for revenue recognition have not been met as of the
balance sheet date. Previously recorded unearned revenue and deferred costs are
recognized when the applicable revenue recognition criteria are met. Shipping
and handling costs and incidental expenses billed to customers are recorded as
revenue, with the associated cost charged to cost of revenues.
Warranty: We offer standard
warranties on our hardware products and large application software products. We
accrue the estimated cost of projected warranty claims based on historical and
projected product performance trends and costs. Testing of new products in the
development stage helps identify and correct potential warranty issues prior to
manufacturing. Continuing quality control efforts during manufacturing reduce
our exposure to warranty claims. If our quality control efforts fail to detect a
fault in one of our products, we could experience an increase in warranty
claims. We track warranty claims to identify potential warranty trends. If an
unusual trend is noted, an additional warranty accrual may be assessed and
recorded when a failure event is probable and the cost can be reasonably
estimated. Management continually evaluates the sufficiency of the warranty
provisions and makes adjustments when necessary. The warranty allowances may
fluctuate due to changes in estimates for material, labor and other costs we may
incur to repair or replace projected product failures, and we may incur
additional warranty and related expenses in the future with respect to new or
established products. The long-term warranty balance includes estimated warranty
claims beyond one year.
Inventories: Items are
removed from inventory using the first-in, first-out method. Inventories include
raw materials, sub-assemblies and finished goods. Inventory amounts include the
cost to manufacture the item, such as the cost of raw materials, labor and other
applied direct and indirect costs. We also review idle facility expense,
freight, handling costs and wasted materials to determine if abnormal amounts
should be recognized as current-period charges. We review our inventory for
obsolescence and marketability. If the estimated market value, which is based
upon assumptions about future demand and market conditions, falls below the
original cost, the inventory value is reduced to the market value. If technology
rapidly changes or actual market conditions are less favorable than those
projected by management, inventory write-downs may be required. Our inventory
levels may vary period to period as a result of our factory scheduling and
timing of contract fulfillments.
Goodwill and Intangible
Assets: Goodwill and intangible assets result from our acquisitions. We
use estimates, including estimates of useful lives of intangible assets, the
amount and timing of related future cash flows and fair values of the related
operations, in determining the value assigned to goodwill and intangible assets.
We test goodwill for impairment each year as of October 1, under the guidance of
SFAS 142, Goodwill and Other
Intangible Assets. Our Itron North America operating segment represents
one reporting unit, while our Actaris operating segment has three reporting
units. We forecast discounted future cash flows at the reporting unit level
based on estimated future revenues and operating costs, which take into
consideration factors such as existing backlog, expected future orders, supplier
contracts and general market conditions. Changes in our forecasts or cost of
capital may result in asset value adjustments, which could have a significant
effect on our current and future results of operations and financial condition.
Our intangible assets have a finite life and are amortized over their estimated
useful lives based on estimated discounted cash flows and are tested for
impairment when events or changes in circumstances indicate the carrying value
may not be recoverable.
Stock-Based Compensation:
SFAS 123(R), Share-Based Payment, requires
the measurement and recognition of compensation expense for all stock-based
awards made to employees and directors, based on estimated fair values. We
record stock-based compensation expense under SFAS 123(R) for awards of stock
options, our Employee Stock Purchase Plan (ESPP) and issuance of restricted and
unrestricted stock awards and units. The fair values of stock options and ESPP
awards are estimated at the date of grant using the Black-Scholes option-pricing
model, which includes assumptions for the dividend yield, expected volatility,
risk-free interest rate and expected life. For restricted and unrestricted stock
awards and units, the fair value is the market close price of our common stock
on the date of grant. We consider many factors when estimating expected
forfeitures, including types of awards, employee class and historical
experience. Actual results and future estimates may differ substantially from
our current estimates. We expense stock-based compensation using the
straight-line method over the vesting requirement. A substantial portion of our
stock-based compensation cannot be expensed for tax purposes. When we have tax
deductions in excess of the compensation cost, they are classified as financing
cash inflows in the Consolidated Statements of Cash Flows.
Defined Benefit Pension
Plans: We
sponsor both funded and unfunded non-U.S. defined benefit pension plans. SFAS
87, Employers' Accounting for
Pensions, as amended by SFAS 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, requires the assets
acquired and liabilities assumed in a business combination to include a
liability for the projected benefit obligation in excess of plan assets or an
asset for plan assets in excess of the projected benefit obligation. SFAS 158
also requires employers to recognize the funded status of their defined benefit
pension plans on their consolidated balance sheet and recognize as a component
of other comprehensive income, net of tax, the actuarial gains or losses and
prior service costs or credits, if any, that arise during the period but are not
recognized as components of net periodic benefit cost.
Several
economic assumptions and actuarial data are used in calculating the expense and
obligations related to these plans. The assumptions are updated annually at
December 31 and include the discount rate, the expected remaining service
lifetime, the expected rate of return on plan assets and rate of future
compensation increase. The discount rate is a significant assumption used to
value our pension benefit obligation. We use the average 15 year corporate bond
yield curve from the central banks of each respective country in which we have
an established benefit pension plan. The weighted average discount rate used to
measure the projected benefit obligation as of December 31, 2008 was 6.52%. A
change of 25 basis points in the discount rate would change our pension benefit
obligation by approximately $2 million. The financial and actuarial assumptions
used at December 31, 2008 may differ materially from actual results due to
changing market and economic conditions and other factors. These differences
could result in a significant change in the amount of pension expense recorded
in future periods. Gains and losses resulting from changes in actuarial
assumptions, including the discount rate, are recognized in other comprehensive
income in the period in which they occur.
Our
general funding policy for these qualified pension plans is to contribute
amounts at least sufficient to satisfy funding standards of the respective
countries for each plan. For 2008, we contributed approximately $445,000 to the
defined benefit pension plans and for 2009, we expect to contribute a total of
$400,000. Our expected contribution assumes that actual plan asset returns are
consistent with our expected rate of return and that interest rates remain
constant.
Income Taxes: Income taxes
are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes.
We estimate income taxes in each of the taxing jurisdictions in which we
operate. Changes in our effective tax rate are subject to several factors,
including fluctuations in operating results, new or revised tax legislation and
accounting pronouncements, changes in the level of business performed in
domestic and foreign jurisdictions, research credits and state income taxes.
Significant judgment is required in determining our annual tax rate and in
evaluating our tax positions. We assess the likelihood that deferred tax assets,
which include net operating loss carryforwards and temporary differences
expected to be deductible in future years, will be recoverable.
We record
valuation allowances to reduce deferred income tax assets to the extent we
believe it is more likely than not that a portion of such assets will not be
realized. In making such determinations, we consider all available positive and
negative evidence, including scheduled reversals of deferred income tax
liabilities, projected future taxable income, tax planning strategies and our
ability to carry back losses to prior years. We are required to make assumptions
and judgments about potential outcomes that lie outside management’s control.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward periods are
reduced.
We are
subject to audit in multiple taxing jurisdictions in which we operate. These
audits can involve complex issues, which may require an extended period of time
to resolve. We believe we have recorded adequate income tax provisions and FIN
48 reserves.
We
provide reserves for unrecognized tax benefits as required under FIN 48. In
applying the standards of FIN 48, we consider the relative risks and merits of
positions taken in tax returns filed and to be filed, considering statutory,
judicial and regulatory guidance applicable to those positions. FIN 48 requires
us to make assumptions and judgments about potential outcomes that lie outside
management’s control. To the extent the tax authorities disagree with our
conclusions, and depending on the final resolution of those disagreements, our
effective tax rate may be materially affected in the period of final settlement
with the tax authorities.
Derivative Instruments: We
account for derivative instruments and hedging activities in accordance with
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Consolidated Balance Sheets at fair value as either assets or liabilities.
The components and fair values of our derivative instruments, which are
primarily interest rate swaps, are determined using the fair value measurements
of significant other observable inputs (Level 2), as defined by SFAS 157, Fair Value Measurements. We
use observable market inputs based on the type of derivative and the nature of
the underlying instrument. The net fair value may switch between a net asset and
a net liability depending on the mark-to-market at the end of the period. We
include the effect of our counterparty credit risk based on current published
credit default swap rates when the net fair value of our derivative instruments
are in a net asset position and the effect of our own nonperformance risk when
the net fair value of our derivative instruments are in a net liability
position. If the derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded as a component of other comprehensive income and are
recognized in earnings when the hedged item affects earnings. If the derivative
is a net investment hedge, the effective portion of any unrealized gain or loss
is reported in accumulated other comprehensive income as a net unrealized gain
or loss on derivative instruments. Ineffective portions of fair value changes or
the changes in fair value of derivative instruments that do not qualify for
hedging activities are recognized in other income (expense) in the Consolidated
Statement of Operations. We classify cash flows from our derivative programs as
cash flows from operating activities in the Consolidated Statements of Cash
Flows. Derivatives are not used for trading or speculative purposes. We have one
counterparty to our derivatives, which is a major international financial
institution, with whom we have a master netting agreement.
Foreign Exchange: Our
consolidated financial statements are reported in U.S. dollars. Assets and
liabilities of international subsidiaries with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using an average rate for the relevant reporting period. Translation adjustments
resulting from this process are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity. Gains and losses that arise from
exchange rate fluctuations for balances that are not denominated in an entity’s
functional currency are included in the Consolidated Statements of Operations.
Currency gains and losses of intercompany balances deemed to be long-term in
nature or designated as hedges of the net investment in international
subsidiaries are included, net of tax, in accumulated other comprehensive income
in shareholders’ equity.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes. SFAS 141(R)
requires assets acquired and liabilities assumed arising from contingencies to
be recorded at fair value on the acquisition date; that IPR&D be capitalized
as an intangible asset and amortized over its estimated useful life; and that
acquisition-related costs are expensed as incurred. SFAS 141(R) also requires
that restructuring costs generally be expensed in periods subsequent to the
acquisition date and that changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period be
recognized as a component of provision for taxes. SFAS 141(R) is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We will apply SFAS 141(R) to any acquisition on or after
January 1, 2009.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of 2009. SFAS
160 is not expected to have a material effect on our consolidated financial
statements.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133,
which requires enhanced disclosures including how and why derivative instruments
are used and how derivative instruments and related hedged items are accounted
for under SFAS 133 and its related interpretations. SFAS 161 also requires the
fair values of derivative instruments and their gains and losses to be disclosed
in a tabular format. SFAS 161 does not change how we record and account for
derivative instruments. SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008 and will be adopted by us in the first
quarter of 2009.
In
February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement
157, which delays the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years (see Item 8: Financial Statements and Supplementary Data,
Note 1: Summary of Significant Accounting Policies). We do not expect this FSP
to have a material effect on our nonfinancial assets and nonfinancial
liabilities in our consolidated financial statements.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion, (FSP 14-1)
addressing convertible instruments that may be settled in cash upon conversion,
such as our convertible senior subordinated notes. FSP 14-1 requires the
convertible debt to be separated between its liability and equity components in
a manner that reflects our non-convertible debt borrowing rate. FSP 14-1 is
effective for fiscal years and interim periods beginning after December 15,
2008 and must be applied retrospectively to all periods presented at the time of
adoption. We will adopt FSP 14-1 on January 1, 2009. The impact of the
adoption of FSP 14-1 will be as follows:
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Year
Ended December 31,
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|||||||||||||||||||||||
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2008
|
2007
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As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
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(in
thousands, except per share data)
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Consolidated
Statements of Operations
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Interest
expense
|
$ | (80,735 | ) | $ | (13,442 | ) | $ | (94,177 | ) | $ | (89,965 | ) | $ | (10,970 | ) | $ | (100,935 | ) | |||||
|
Other
income (expense)
|
$ | (2,984 | ) | $ | (49 | ) | $ | (3,033 | ) | $ | 435 | $ | - | $ | 435 | ||||||||
|
Total
other income (expense)
|
$ | (77,749 | ) | $ | (13,491 | ) | $ | (91,240 | ) | $ | (79,053 | ) | $ | (10,970 | ) | $ | (90,023 | ) | |||||
|
Income
(loss) before income taxes
|
$ | 32,073 | $ | (13,491 | ) | $ | 18,582 | $ | (32,580 | ) | $ | (10,970 | ) | $ | (43,550 | ) | |||||||
|
Income
tax (provision) benefit
|
$ | (4,014 | ) | $ | 5,243 | $ | 1,229 | $ | 16,436 | $ | 4,263 | $ | 20,699 | ||||||||||
|
Net
income (loss)
|
$ | 28,059 | $ | (8,248 | ) | $ | 19,811 | $ | (16,144 | ) | $ | (6,707 | ) | $ | (22,851 | ) | |||||||
|
Earnings
(loss) per common share
|
|||||||||||||||||||||||
|
Basic
|
$ | 0.85 | $ | (0.25 | ) | $ | 0.60 | $ | (0.55 | ) | $ | (0.22 | ) | $ | (0.77 | ) | |||||||
|
Diluted
|
$ | 0.80 | $ | (0.23 | ) | $ | 0.57 | $ | (0.55 | ) | $ | (0.22 | ) | $ | (0.77 | ) | |||||||
|
At
December 31,
|
|||||||||||||||||||||||
|
2008
|
2007
|
||||||||||||||||||||||
|
As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||
|
Consolidated
Balance Sheets
|
|||||||||||||||||||||||
|
Deferred
income taxes, net
|
$ | 45,783 | $ | (14,866 | ) | $ | 30,917 | $ | 75,243 | $ | (20,109 | ) | $ | 55,134 | |||||||||
|
Total
assets
|
$ | 2,871,214 | $ | (14,866 | ) | $ | 2,856,348 | $ | 3,050,566 | $ | (20,109 | ) | $ | 3,030,457 | |||||||||
|
Long-term
debt
|
$ | 1,179,249 | $ | (38,251 | ) | $ | 1,140,998 | $ | 1,578,561 | $ | (51,742 | ) | $ | 1,526,819 | |||||||||
|
Total
liabilities
|
$ | 1,835,823 | $ | (38,251 | ) | $ | 1,797,572 | $ | 2,291,764 | $ | (51,742 | ) | $ | 2,240,022 | |||||||||
|
Common
stock
|
$ | 951,007 | $ | 41,177 | $ | 992,184 | $ | 609,902 | $ | 41177 | $ | 651,079 | |||||||||||
|
Retained
earnings
|
$ | 50,291 | $ | (17,792 | ) | $ | 32,499 | $ | 22,232 | $ | (6,707 | ) | $ | 15,525 | |||||||||
|
Cumulative
effect of change in
|
|||||||||||||||||||||||
|
accounting
principle
|
$ | - | $ | - | $ | - | $ | - | $ | (2,837 | ) | $ | (2,837 | ) | |||||||||
|
Total
shareholders' equity
|
$ | 1,035,391 | $ | 23,385 | $ | 1,058,776 | $ | 758,802 | $ | 31,633 | $ | 790,435 | |||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,871,214 | $ | (14,866 | ) | $ | 2,856,348 | $ | 3,050,566 | $ | (20,109 | ) | $ | 3,030,457 | |||||||||
In
December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, which amends SFAS 132(R), Employer’s Disclosures about
Pensions and Other Postretirement Benefits, to require additional fair
value disclosures about assets held in an employer’s defined benefit pension or
other postretirement plan. This FSP is effective for our December 31, 2009
Annual Report on Form 10-K.
Subsequent
Event
On
January 26, 2009, we filed a Form 8-K, as required by Item 701 of Regulation
S-K, to disclose that we entered into exchange agreements with holders of our
convertible notes to issue, in the aggregate, 2,158,842 shares of Itron’s common
stock, no par value (the common stock), in exchange for, in the aggregate
$115,984,000 principal amount of the convertible notes, representing 34% of the
aggregate principal amount of the convertible notes.
Subsequent
to the filing of the Form 8-K, we entered into a similar exchange agreement with
another holder of the convertible notes to issue 93,109 shares of the common
stock in exchange for $5,000,000 principal amount of the convertible notes,
representing 2% of the aggregate principal amount of the convertible notes. The
number of shares of common stock issued was less than 1% of the number of
shares outstanding of our common stock subsequent to the January 26, 2009 Form
8-K.
All of
the convertible notes acquired by us pursuant to these exchange agreements were
retired upon closing of the exchanges. The issuance of the shares of the Common
Stock in these transactions was exempt from registration under Section 3(a)(9)
of the Securities Act of 1933. No commission or remuneration was paid or given,
directly or indirectly, for soliciting these transactions.
ITEM 7A: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
In the
normal course of business, we are exposed to interest rate and foreign currency
exchange rate risks that could impact our financial position and results of
operations. As part of our risk management strategy, we use derivative financial
instruments to hedge certain foreign currency and interest rate exposures. Our
objective is to offset gains and losses resulting from these exposures with
losses and gains on the derivative contracts used to hedge them, therefore
reducing the impact of volatility on earnings or protecting fair values of
assets and liabilities. We use derivative contracts only to manage existing
underlying exposures. Accordingly, we do not use derivative contracts for
speculative purposes.
Interest
Rate Risk
The table
below provides information about our financial instruments that are sensitive to
changes in interest rates and the scheduled minimum repayment of principal over
the remaining lives of our debt at December 31, 2008. As a result or our
interest rate swaps, 83% of our borrowings are at fixed rates. Weighted average
variable rates in the table are based on implied forward rates in the Wells
Fargo swap yield curve as of December 31, 2008, our estimated ratio of funded
debt to EBITDA, which determines our rate margin, and a static foreign exchange
rate at December 31, 2008.
|
2009
|
2010
|
2011
|
2012
|
2013
|
Beyond
2013
|
Total
|
||||||||||||||
|
(in
millions)
|
||||||||||||||||||||
|
Fixed
Rate Debt
|
||||||||||||||||||||
|
Principal:
Convertible notes (1)
|
$ | - | $ | - | $ | 344.6 | $ | - | $ | - | $ | - | $ | 344.6 | ||||||
|
Interest
rate
|
2.50% | 2.50% | 2.50% | |||||||||||||||||
|
Principal:
Subordinated notes (2)
|
$ | - | $ | - | $ | - | $ | 109.6 | $ | - | $ | - | $ | 109.6 | ||||||
|
Interest
rate
|
7.75% | 7.75% | 7.75% | 7.75% | ||||||||||||||||
|
Variable
Rate Debt
(3)
|
||||||||||||||||||||
|
Principal:
U.S. dollar term loan
|
$ | 6.1 | $ | 6.1 | $ | 6.1 | $ | 6.1 | $ | 6.1 | $ | 345.2 | $ | 375.7 | ||||||
|
Average
interest rate
|
3.13% | 3.75% | 3.20% | 3.49% | 3.71% | 3.87% | ||||||||||||||
|
Principal:
Euro term loan
|
$ | 4.8 | $ | 4.8 | $ | 4.8 | $ | 4.8 | $ | 4.8 | $ | 336.5 | $ | 360.5 | ||||||
|
Average
interest rate
|
4.71% | 4.80% | 4.43% | 4.71% | 4.87% | 5.00% | ||||||||||||||
|
Interest
rate swap on euro term loan
(4)
|
||||||||||||||||||||
|
Average
interest rate (Pay)
|
6.59% | 6.59% | 6.59% | 6.59% | ||||||||||||||||
|
Average
interest rate (Receive)
|
4.96% | 5.05% | 4.68% | 4.96% | ||||||||||||||||
|
Net/Spread
|
(1.63%) | (1.54%) | (1.91%) | (1.63%) | ||||||||||||||||
|
Interest
rate swaps on USD term loan
(5)
|
||||||||||||||||||||
|
Average
interest rate (Pay)
|
2.84% | 2.68% | ||||||||||||||||||
|
Average
interest rate (Receive)
|
1.38% | 2.00% | ||||||||||||||||||
|
Net/Spread
|
(1.46%) | (0.68%) | ||||||||||||||||||
| - | ||||||||||||||||||||
|
(1)
|
$344.6
million of 2.50% convertible notes due August 2026, with fixed interest
payments due every six months, in February and August. Due to the
combination of put, call and conversion options that are part of the terms
of the convertible note agreement, we expect the outstanding principal and
the unpaid accrued interest to be paid by August 2011 (see Note
7).
|
|
(2)
|
The $109.6 million aggregate
principal amount of 7.75% subordinated notes, due in 2012, was originally
discounted to $99.265 per $100 of principal to yield 7.875%. The balance
of the subordinated notes, including unaccreted discount, was $109.2
million at December 31, 2008 (see Note
7).
|
|
(3)
|
The
Actaris acquisition was financed in part by a $1.2 billion senior secured
credit facility, of which $736.2 million remains outstanding at December
31, 2008 (see Note 7).
|
|
(4)
|
Interest
rate swap to convert a significant portion of our €254.1 million euro
denominated variable rate term loan to a fixed-rate debt obligation at a
rate of 6.59% for the term of the loan, including expected prepayments. As
a result of expected prepayments, the interest rate swap will terminate
before the stated maturity of the term loan. This variable-to-fixed
interest rate swap is considered a highly effective cash flow hedge (see
Note 8).
|
|
(5)
|
Interest
rate swaps to convert $200 million of our $375.7 million U.S. dollar
denominated term loan from a floating 1-month LIBOR interest rate, plus an
additional margin, to a fixed 3.01% interest rate through June 30, 2009,
and a fixed 2.68% interest rate for one year beginning on June 30, 2009,
plus the additional margin. These variable-to-fixed interest rate swaps
are considered/expected to be highly effective cash flow hedges (see Note
8).
|
In 2008,
we entered into a one-year interest rate swap, which is effective on June 30,
2009 when our one-year interest rate swap entered into on June 30, 2008 expires.
This swap will convert $200 million of our USD term loan from a floating 1-month
LIBOR interest rate to a fixed 2.68% interest rate. Our interest rate will
continue to contain an additional margin per the credit facility agreement. The
cash flow hedge is expected to be highly effective in achieving offsetting cash
flows attributable to the hedged risk through the term of the hedge.
Consequently, changes in the fair value of the interest rate swap are recorded
as a component of other comprehensive income and are recognized in earnings when
the hedged item affects earnings. The amounts paid or received on the hedge will
be recognized as adjustments to interest expense. The notional amount of the
swap was $200 million and the fair value, recorded as a liability was $3.1
million ($1.7 million as a short-term liability and $1.4 million as a long-term
liability) at December 31, 2008. The amount of net losses expected to be
reclassified into earnings from June 30, 2009 through December 31, 2009 is
approximately $881,000, which was based on the Wells Fargo swap yield curve as
of December 31, 2008.
In 2007,
we entered into an interest rate swap to convert a significant portion of our
€335 million euro denominated variable rate term loan to a fixed-rate debt
obligation at a rate of 6.59% for the term of the debt, including expected
prepayments. The cash flow hedge is currently, and is expected to be, highly
effective in achieving offsetting cash flows attributable to the hedged risk
through the term of the hedge. Consequently, changes in the fair value of the
interest rate swap are recorded as a component of other comprehensive income and
are recognized in earnings when the hedged item affects earnings. The amounts
paid or received on the hedge are recognized as adjustments to interest expense.
The notional amount of the swap is reduced each quarter. The notional amount of
the swap was $339.3 million (€239.1 million) and the fair value, recorded as a
liability was $12.0 million ($4.7 million as a short-term liability and $7.3
million as a long-term liability), at December 31, 2008. The fair value,
recorded as a long-term liability, was $1.7 million at December 31, 2007. The
amount of net losses expected to be reclassified into earnings in the next 12
months is approximately $4.8 million, which was based on the Wells Fargo swap
yield curve as of December 31, 2008.
We will
monitor and assess our interest rate risk and may institute additional interest
rate swaps or other derivative instruments to manage such risk.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of countries and, therefore, face exposure to
movements in foreign currency exchange rates. As a result of the Actaris
acquisition, commencing in the second quarter of 2007, a majority of our
revenues and operating expenses are denominated in foreign currencies, resulting
in changes in our foreign currency exchange rate exposures that could have a
material effect on our financial results. Our primary foreign currency exposure
relates to non-U.S. dollar denominated transactions in our international
subsidiary operations, the most significant of which is the euro. International
revenues were 66%, 59% and 6% of total revenues for the years ended December 31,
2008, 2007 and 2006, respectively.
During
2008, we began entering into monthly foreign exchange forward contracts with the
intent to reduce volatility of certain intercompany financing transactions. At
December 31, 2008, the notional amount of these forward contracts was
$4.5 million and the fair value, recorded as other current liabilities was
$67,000. The amount of net gains realized from the settlement of these monthly
contracts was $1.8 million for the year ended December 31, 2008. These contracts
are not designated as accounting hedges.
In 2007,
we designated certain portions of our foreign currency denominated term loans as
hedges of our net investment in international operations. Net unrealized gains
of $10.4 million ($6.5 million after-tax) and net unrealized losses of $41.1
million ($25.5 million after-tax) were reported as a component of accumulated
other comprehensive income for the years ended December 31, 2008 and 2007,
respectively. We had no hedge ineffectiveness.
In future
periods, we may use additional derivative contracts to protect against foreign
currency exchange rate risks. Alternatively, we may choose not to hedge certain
foreign currency risks associated with our foreign currency exposures if such
exposures act as a natural foreign currency hedge for other offsetting amounts
denominated in the same currency.
ITEM 8: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
REPORT
OF MANAGEMENT
To the
Board of Directors and Shareholders of Itron, Inc.
Management
is responsible for the preparation of our consolidated financial statements and
related information appearing in this Annual Report on Form 10-K. Management
believes that the consolidated financial statements fairly reflect the form and
substance of transactions and that the financial statements reasonably present
our financial position, results of operations and cash flows in conformity with
U.S. generally accepted accounting principles. Management has included
in our financial statements amounts based on estimates and judgments that it
believes are reasonable under the circumstances.
Management’s
explanation and interpretation of our overall operating results and financial
position, with the basic financial statements presented, should be read in
conjunction with the entire report. The notes to consolidated financial
statements, an integral part of the basic financial statements, provide
additional detailed financial information. Our Board of Directors has an Audit
and Finance Committee composed of independent directors. The Committee meets
regularly with financial management and Ernst & Young LLP to review internal
control, auditing and financial reporting matters.
|
LeRoy
D. Nosbaum
|
Steven
M. Helmbrecht
|
|
Chairman
and Chief Executive Officer
|
Sr.
Vice President and Chief Financial
Officer
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Itron, Inc.
We have
audited the accompanying consolidated balance sheets of Itron, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the two years in
the period ended December 31, 2008. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Itron, Inc. at
December 31, 2008 and 2007, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31, 2008,
in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, effective January 1,
2007, FASB No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans,
effective December 31, 2007, and FASB No. 157, Fair Value Measurements,
effective January 1, 2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Itron, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria) and our report dated February 25,
2009 expressed an unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
25, 2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Itron,
Inc.
Liberty
Lake, Washington
We have
audited the accompanying consolidated statements of operations, shareholders’
equity, and cash flows of Itron, Inc. and subsidiaries (the “Company”) for
the year ended December 31, 2006. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the results of operations and cash flows of Itron, Inc. and
subsidiaries for the year ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
DELOITTE & TOUCHE LLP
Seattle,
Washington
February
22, 2007 (September 12, 2007, as to Notes 16 and 17)
ITRON, INC.
(in
thousands, except per share data)
|
Year
Ended December 31,
|
|||||||||
|
2008
|
2007
|
2006
|
|||||||
|
Revenues
|
$ | 1,909,613 | $ | 1,464,048 | $ | 644,042 | |||
|
Cost
of revenues
|
1,262,756 | 976,761 | 376,600 | ||||||
|
Gross
profit
|
646,857 | 487,287 | 267,442 | ||||||
|
Operating
expenses
|
|||||||||
|
Sales
and marketing
|
167,457 | 125,842 | 63,587 | ||||||
|
Product
development
|
120,699 | 94,926 | 58,774 | ||||||
|
General
and administrative
|
128,515 | 100,071 | 52,213 | ||||||
|
Amortization
of intangible assets
|
120,364 | 84,000 | 31,125 | ||||||
|
In-process
research and development
|
- | 35,975 | - | ||||||
|
Total
operating expenses
|
537,035 | 440,814 | 205,699 | ||||||
|
Operating
income
|
109,822 | 46,473 | 61,743 | ||||||
|
Other
income (expense)
|
|||||||||
|
Interest
income
|
5,970 | 10,477 | 9,497 | ||||||
|
Interest
expense
|
(80,735) | (89,965 | ) | (17,785 | ) | ||||
|
Other
income (expense), net
|
(2,984) | 435 | (1,220 | ) | |||||
|
Total
other income (expense)
|
(77,749) | (79,053 | ) | (9,508 | ) | ||||
|
Income
(loss) before income taxes
|
32,073 | (32,580 | ) | 52,235 | |||||
|
Income
tax (provision) benefit
|
(4,014) | 16,436 | (18,476 | ) | |||||
|
Net
income (loss)
|
$ | 28,059 | $ | (16,144 | ) | $ | 33,759 | ||
|
Earnings
(loss) per common share
|
|||||||||
|
Basic
|
$ | 0.85 | $ | (0.55 | ) | $ | 1.33 | ||
|
Diluted
|
$ | 0.80 | $ | (0.55 | ) | $ | 1.28 | ||
|
Weighted
average common shares outstanding
|
|||||||||
|
Basic
|
33,096 | 29,584 | 25,414 | ||||||
|
Diluted
|
34,951 | 29,584 | 26,283 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
ITRON, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
At
December 31,
|
||||||
|
2008
|
2007
|
|||||
|
ASSETS
|
||||||
|
Current
assets
|
||||||
|
Cash
and cash equivalents
|
$ | 144,390 | $ | 91,988 | ||
|
Accounts
receivable, net
|
321,278 | 339,018 | ||||
|
Inventories
|
164,210 | 169,238 | ||||
|
Deferred
income taxes, net
|
31,807 | 10,733 | ||||
|
Other
|
56,032 | 42,459 | ||||
|
Total
current assets
|
717,717 | 653,436 | ||||
|
Property,
plant and equipment, net
|
307,717 | 323,003 | ||||
|
Prepaid
debt fees
|
12,943 | 21,616 | ||||
|
Deferred
income taxes, net
|
45,783 | 75,243 | ||||
|
Other
|
19,315 | 15,235 | ||||
|
Intangible
assets, net
|
481,886 | 695,900 | ||||
|
Goodwill
|
1,285,853 | 1,266,133 | ||||
|
Total
assets
|
$ | 2,871,214 | $ | 3,050,566 | ||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||
|
Current
liabilities
|
||||||
|
Accounts
payable
|
$ | 200,725 | $ | 198,997 | ||
|
Other
current liabilities
|
66,365 | 57,275 | ||||
|
Wages
and benefits payable
|
78,336 | 70,486 | ||||
|
Taxes
payable
|
18,595 | 17,493 | ||||
|
Current
portion of long-term debt
|
10,769 | 11,980 | ||||
|
Current
portion of warranty
|
23,375 | 21,277 | ||||
|
Unearned
revenue
|
24,329 | 20,912 | ||||
|
Deferred
income taxes, net
|
1,927 | 5,437 | ||||
|
Total
current liabilities
|
424,421 | 403,857 | ||||
|
Long-term
debt
|
1,179,249 | 1,578,561 | ||||
|
Warranty
|
14,880 | 11,564 | ||||
|
Pension
plan benefits
|
55,810 | 60,623 | ||||
|
Deferred
income taxes, net
|
102,720 | 173,500 | ||||
|
Other
obligations
|
58,743 | 63,659 | ||||
|
Total
liabilities
|
1,835,823 | 2,291,764 | ||||
|
Commitments
and contingencies
|
||||||
|
Shareholders'
equity
|
||||||
|
Preferred
stock, no par value, 10 million shares authorized,
|
||||||
|
no
shares issued or outstanding
|
- | - | ||||
|
Common
stock, no par value, 75 million shares authorized,
|
||||||
|
34,486,318
and 30,635,808 shares issued and outstanding
|
951,007 | 609,902 | ||||
|
Accumulated
other comprehensive income, net
|
34,093 | 126,668 | ||||
|
Retained
earnings
|
50,291 | 22,232 | ||||
|
Total
shareholders' equity
|
1,035,391 | 758,802 | ||||
|
Total
liabilities and shareholders' equity
|
$ | 2,871,214 | $ | 3,050,566 | ||
The
accompanying notes are an integral part of these consolidated financial
statements.
ITRON, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
thousands)
|
Shares
|
Amount
|
Accumulated
Other Comprehensive Income
|
Retained
Earnings
|
Total
|
||||||||||||||
|
Balances
at January 1, 2006
|
24,869 | $ | 312,046 | $ | 871 | $ | 4,617 | $ | 317,534 | |||||||||
|
Net
income
|
33,759 | 33,759 | ||||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||||
|
income
tax provision of $494
|
717 | 717 | ||||||||||||||||
|
Total
comprehensive income
|
34,476 | |||||||||||||||||
|
Stock
issues:
|
||||||||||||||||||
|
Options
exercised
|
751 | 13,081 | 13,081 | |||||||||||||||
|
Employee
stock plans income tax benefits
|
13,547 | 13,547 | ||||||||||||||||
|
Issuance
of stock-based compensation awards
|
7 | 292 | 292 | |||||||||||||||
|
Employee
stock purchase plan
|
48 | 2,169 | 2,169 | |||||||||||||||
|
Stock-based
compensation expense
|
9,397 | 9,397 | ||||||||||||||||
|
Reclassification
of liability associated with
|
||||||||||||||||||
|
restricted
stock awards upon adoption of
|
||||||||||||||||||
|
SFAS
123(R)
|
486 | 486 | ||||||||||||||||
|
Balances
at December 31, 2006
|
25,675 | $ | 351,018 | $ | 1,588 | $ | 38,376 | $ | 390,982 | |||||||||
|
Net
loss
|
(16,144 | ) | (16,144 | ) | ||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||||
|
income
tax benefit of $778
|
147,616 | 147,616 | ||||||||||||||||
|
Net
unrealized loss on derivative instruments,
|
||||||||||||||||||
|
net
of income tax benefit of $16,297
|
(26,522 | ) | (26,522 | ) | ||||||||||||||
|
Net
hedging gains reclassified into net losses,
|
||||||||||||||||||
|
net
of income tax provision of $11
|
19 | 19 | ||||||||||||||||
|
Pension
plan benefits liability adjustment,
|
||||||||||||||||||
|
net
of income tax provision of $1,653
|
3,967 | 3,967 | ||||||||||||||||
|
Total
comprehensive income
|
108,936 | |||||||||||||||||
|
Stock
issues:
|
||||||||||||||||||
|
Options
exercised
|
828 | 20,136 | 20,136 | |||||||||||||||
|
Employee
stock plans income tax provision
|
(389 | ) | (389 | ) | ||||||||||||||
|
Issuance
of stock-based compensation awards
|
6 | 304 | 304 | |||||||||||||||
|
Employee
stock purchase plan
|
40 | 2,315 | 2,315 | |||||||||||||||
|
Stock-based
compensation expense
|
11,352 | 11,352 | ||||||||||||||||
|
Issuance
of common stock
|
4,087 | 225,166 | 225,166 | |||||||||||||||
|
Balances
at December 31, 2007
|
30,636 | $ | 609,902 | $ | 126,668 | $ | 22,232 | $ | 758,802 | |||||||||
| . | ||||||||||||||||||
|
Net
income
|
28,059 | 28,059 | ||||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||||
|
income
tax provision of $8,366
|
(98,639 | ) | (98,639 | ) | ||||||||||||||
|
Net
unrealized gains on derivative instruments,
|
||||||||||||||||||
|
net
of income tax provision of $1,862
|
2,754 | 2,754 | ||||||||||||||||
|
Net
hedging gains reclassified into net income,
|
||||||||||||||||||
|
net
of income tax provision of $296
|
478 | 478 | ||||||||||||||||
|
Pension
plan benefits liability adjustment,
|
||||||||||||||||||
|
net
of income tax provision of $1,209
|
2,832 | 2,832 | ||||||||||||||||
|
Total
comprehensive loss
|
(64,516 | ) | ||||||||||||||||
|
Stock
issues:
|
||||||||||||||||||
|
Options
exercised
|
415 | 10,822 | 10,822 | |||||||||||||||
|
Issuance
of stock-based compensation awards
|
4 | 269 | 269 | |||||||||||||||
|
Employee
stock purchase plan
|
32 | 2,629 | 2,629 | |||||||||||||||
|
Stock-based
compensation expense
|
16,313 | 16,313 | ||||||||||||||||
|
Issuance
of common stock
|
3,399 | 311,072 | 311,072 | |||||||||||||||
|
Balances
at December 31, 2008
|
34,486 | $ | 951,007 | $ | 34,093 | $ | 50,291 | $ | 1,035,391 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
ITRON, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year
Ended December 31,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income (loss)
|
$ | 28,059 | $ | (16,144 |
)
|
$ | 33,759 | |||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
173,673 | 126,440 | 46,234 | |||||||
|
In-process
research and development
|
- | 35,975 | - | |||||||
|
Excess
tax benefits from stock-based compensation
|
- | - | (9,717 | ) | ||||||
|
Stock-based
compensation
|
16,582 | 11,656 | 9,689 | |||||||
|
Amortization
of prepaid debt fees
|
8,917 | 13,526 | 4,526 | |||||||
|
Deferred
income taxes, net
|
(38,074 |
)
|
(36,762 |
)
|
15,171 | |||||
|
Other,
net
|
(2,226 |
)
|
1,326 | 828 | ||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||
|
Accounts
receivable
|
19,864 | (40,718 |
)
|
(3,275 | ) | |||||
|
Inventories
|
4,914 | 19,419 | (1,599 | ) | ||||||
|
Accounts
payables, other current liabilities and taxes payable
|
(6,549 |
)
|
10,033 | (8,278 | ) | |||||
|
Wages
and benefits payable
|
7,708 | 198 | (1,774 | ) | ||||||
|
Unearned
revenue
|
3,936 | 2,660 | 5,698 | |||||||
|
Warranty
|
(2,242 |
)
|
1,761 | 2,872 | ||||||
|
Effect
of foreign exchange rate changes
|
(9,688 | 4,168 | - | |||||||
|
Other,
net
|
(11,728 |
)
|
(211 |
)
|
639 | |||||
|
Net
cash provided by operating activities
|
193,146 | 133,327 | 94,773 | |||||||
|
Investing
activities
|
||||||||||
|
Proceeds
from the maturities of investments, held to maturity
|
- | 35,000 | 170,434 | |||||||
|
Purchases
of investments, held to maturity
|
- | - | (204,995 | ) | ||||||
|
Acquisitions
of property, plant and equipment
|
(63,430 |
)
|
(40,602 |
)
|
(31,739 | ) | ||||
|
Business
acquisitions & contingent consideration, net of cash and cash
equivalents acquired
|
(6,897 |
)
|
(1,716,253 |
)
|
(21,121 | ) | ||||
|
Other,
net
|
3,252 | 7,439 | 1,922 | |||||||
|
Net
cash used in investing activities
|
(67,075 | (1,714,416 | (85,499 | ) | ||||||
|
Financing
activities
|
||||||||||
|
Proceeds
from borrowings
|
- | 1,159,023 | 345,000 | |||||||
|
Payments
on debt
|
(388,371 |
)
|
(76,099 |
)
|
(42,703 | ) | ||||
|
Issuance
of common stock
|
324,494 | 247,617 | 15,250 | |||||||
|
Excess
tax benefits from stock-based compensation
|
- | - | 9,717 | |||||||
|
Prepaid
debt fees
|
(214 |
)
|
(22,083 |
)
|
(8,771 | ) | ||||
|
Other,
net
|
715 | 1,902 | - | |||||||
|
Net
cash (used in) provided by financing activities
|
(63,376 |
)
|
1,310,360 | 318,493 | ||||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
(10,293 |
)
|
1,312 | - | ||||||
|
Increase
(decrease) in cash and cash equivalents
|
52,402 | (269,417 |
)
|
327,767 | ||||||
|
Cash
and cash equivalents at beginning of year
|
91,988 | 361,405 | 33,638 | |||||||
|
Cash
and cash equivalents at end of year
|
$ | 144,390 | $ | 91,988 | $ | 361,405 | ||||
|
Non-cash
transactions:
|
||||||||||
|
Capital
expenditures incurred but not yet paid
|
$ | 8,197 | $ | 5,401 | $ | 6,631 | ||||
|
Non-cash
effects of acquisitions
|
- | - | 637 | |||||||
|
Contingent
consideration payable for previous acquisitions
|
1,295 | 7,862 | - | |||||||
|
Conversion
of debt to common stock
|
29 | - | - | |||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Income
taxes
|
$ | 26,377 | $ | 21,714 | $ | 3,434 | ||||
|
Interest
(net of amount capitalized)
|
72,304 | 76,317 | 5,234 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
ITRON, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
In this
Annual Report on Form 10-K, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
Note
1: Summary of Significant Accounting
Policies
We were
incorporated in the state of Washington in 1977. We provide a portfolio of
products and services to utilities for the energy and water markets throughout
the world.
Financial
Statement Preparation
The
consolidated financial statements presented in this Annual Report on Form 10-K
include the Consolidated Statements of Operations, Shareholders’ Equity and Cash
Flows for the years ended December 31, 2008, 2007 and 2006 and the
Consolidated Balance Sheets as of December 31, 2008 and 2007 of Itron, Inc.
and its subsidiaries.
Basis
of Consolidation
We
consolidate all entities in which we have a greater than 50% ownership interest.
We also consolidate entities in which we have a 50% or less investment and over
which we have control. We use the equity method of accounting for entities in
which we have a 50% or less investment and exercise significant influence.
Entities in which we have less than a 20% investment and where we do not
exercise significant influence are accounted for under the cost method. We
consider for consolidation any variable interest entity of which we are the
primary beneficiary. At December 31, 2008, we had no material investments in
variable interest entities. Intercompany transactions and balances have been
eliminated.
On April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris),
which is reported as our Actaris operating segment. The operating results of
this acquisition are included in our consolidated financial statements
commencing on the date of the acquisition.
Cash
and Cash Equivalents
We
consider all highly liquid instruments with remaining maturities of three months
or less at the date of acquisition to be cash equivalents.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Consolidated Balance Sheets at fair value as either assets or liabilities.
The components and fair values of our derivative instruments, which are
primarily interest rate swaps, are determined using the fair value measurements
of significant other observable inputs (Level 2), as defined by SFAS 157, Fair Value Measurements. We
use observable market inputs based on the type of derivative and the nature of
the underlying instrument.
The net
fair value may switch between a net asset and a net liability depending on the
mark-to-market at the end of the period. We include the effect of our
counterparty credit risk based on current published credit default swap rates
when the net fair value of our derivative instruments are in a net asset
position and the effect of our own nonperformance risk when the net fair value
of our derivative instruments are in a net liability position. If the derivative
is designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded as a
component of other comprehensive income and are recognized in earnings when the
hedged item affects earnings. If the derivative is a net investment hedge, the
effective portion of any unrealized gain or loss is reported in accumulated
other comprehensive income as a net unrealized gain or loss on derivative
instruments.
Ineffective
portions of fair value changes or the changes in fair value of derivative
instruments that do not qualify for hedging activities are recognized in other
income (expense) in the Consolidated Statement of Operations. We classify cash
flows from our derivative programs as cash flows from operating activities in
the Consolidated Statements of Cash Flows. Derivatives are not used for trading
or speculative purposes. We have one counterparty to our derivatives, which is a
major international financial institution, with whom we have a master netting
agreement.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded for invoices issued to customers in accordance with our
contractual arrangements. Interest and late payment fees are minimal. Unbilled
receivables are recorded when revenues are recognized upon product shipment or
service delivery and invoicing occurs at a later date. The allowance for
doubtful accounts is based on our historical experience of bad debts and our
specific review of outstanding receivables at period end. Accounts receivable
are written-off against the allowance when we believe an account, or a portion
thereof, is no longer collectible.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method.
Cost includes raw materials and labor, plus applied direct and indirect
costs.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally thirty years for buildings and three to
five years for equipment, computers and furniture. Leasehold improvements are
capitalized and amortized over the term of the applicable lease, including
renewable periods if reasonably assured, or over the useful lives, whichever is
shorter. Costs related to internally developed software and software purchased
for internal uses are capitalized in accordance with Statement of Position 98-1,
Accounting for Costs of
Computer Software Developed or Obtained for Internal Use, and are
amortized over the estimated useful lives of the assets. Repair and maintenance
costs are expensed as incurred. We have no major planned maintenance
activities.
Prepaid
Debt Fees
Prepaid
debt fees represent the capitalized direct costs incurred related to the
issuance of debt and are recorded as noncurrent assets. These costs are
amortized to interest expense over the lives of the respective borrowings using
the effective interest method. When debt is repaid early, or first becomes
convertible as in the case of our convertible senior subordinated notes
(convertible notes), the related portion of unamortized prepaid debt fees is
written-off and included in interest expense in the Consolidated Statements of
Operations.
Business
Combinations
In
accordance with SFAS 141, Business Combinations, we
include in our results of operations the results of an acquired business from
the date of acquisition. Net assets of the company acquired and intangible
assets that arise from contractual/legal rights, or are capable of being
separated, are recorded at their fair values as of the date of acquisition. The
residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. Amounts allocated to
in-process research and development (IPR&D) are expensed in the period of
acquisition. Costs to complete the IPR&D are expensed as product development
in the subsequent periods as incurred.
Goodwill
and Intangible Assets
Goodwill
and intangible assets result from our acquisitions. We use estimates in
determining and assigning the fair value of goodwill and intangible assets,
including estimates of useful lives of intangible assets, the amount and timing
of related future cash flows and fair values of the related operations. Our
intangible assets have a finite life and are amortized over their estimated
useful lives based on estimated discounted cash flows and are tested for
impairment when events or changes in circumstances indicate the carrying value
may not be recoverable.
Goodwill
is tested for impairment as of October 1 of each year, or more frequently if a
significant impairment indicator occurs under the guidance of SFAS 142, Goodwill and Other Intangible
Assets. In testing goodwill for impairment, we forecast discounted future
cash flows at the reporting unit level based on estimated future revenues and
operating costs, which take into consideration factors such as existing backlog,
expected future orders, supplier contracts and general market conditions.
Goodwill is assigned to our reporting units based on the expected benefit from
the synergies arising from each business combination, determined by using
certain financial metrics, including the incremental discounted cash flows
associated with each reporting unit.
Warranty
We offer
standard warranties on our hardware products and large application software
products. We accrue the estimated cost of projected warranty claims based on
historical and projected product performance trends and costs. Testing of new
products in the development stage helps identify and correct potential warranty
issues prior to manufacturing. Continuing quality control efforts during
manufacturing reduce our exposure to warranty claims. If our quality control
efforts fail to detect a fault in one of our products, we could experience an
increase in warranty claims. We track warranty claims to identify potential
warranty trends. If an unusual trend is noted, an additional warranty accrual
may be assessed and recorded when a failure event is probable and the cost can
be reasonably estimated. Management continually evaluates the sufficiency of the
warranty provisions and makes adjustments when necessary. The warranty
allowances may fluctuate due to changes in estimates for material, labor and
other costs we may incur to repair or replace projected product failures, and we
may incur additional warranty and related expenses in the future with respect to
new or established products. The long-term warranty balance includes estimated
warranty claims beyond one year.
A summary
of the warranty accrual account activity is as follows:
|
Year
Ended December 31,
|
|||||||
|
2008
|
2007
|
||||||
|
(in
thousands)
|
|||||||
|
Beginning
balance, January 1
|
$ | 32,841 | $ | 18,148 | |||
|
Actaris
acquisition opening balance/adjustments
|
7,655 | 12,935 | |||||
|
New
product warranties
|
8,046 | 7,423 | |||||
|
Other
changes/adjustments to warranties
|
6,104 | 6,596 | |||||
|
Claims
activity
|
(15,500 | ) | (12,890 | ) | |||
|
Effect
of change in exchange rates
|
(891 | ) | 629 | ||||
|
Ending
balance, December 31
|
38,255 | 32,841 | |||||
|
Less:
current portion of warranty
|
23,375 | 21,277 | |||||
|
Long-term
warranty
|
$ | 14,880 | $ | 11,564 | |||
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $14.2 million,
$14.0 million and $10.1 million for the three years ended December 31,
2008, 2007 and 2006, respectively. Warranty expense is classified within cost of
revenues.
Health
Benefits
We are
self insured for a substantial portion of the cost of U.S. employee group health
insurance. We purchase insurance from a third party, which provides individual
and aggregate stop loss protection for these costs. Each reporting period, we
expense the costs of our health insurance plan including paid claims, the change
in the estimate of incurred but not reported (IBNR) claims, taxes and
administrative fees (collectively the plan costs). Plan costs were approximately
$20.0 million, $14.9 million and $14.5 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The IBNR accrual, which is
included in wages and benefits payable, was $3.0 million and $2.1 million
at December 31, 2008 and 2007, respectively. Our IBNR accrual and expenses can
fluctuate due to the number of plan participants, claims activity and deductible
limits. Our U.S. employees from the Actaris acquisition were transferred from a
fully insured plan and added to our self-insured group health insurance at the
beginning of 2008, resulting in higher 2008 self-insurance expenses compared
with 2007. For our employees located outside of the United States, health
benefits are provided primarily through governmental social plans, which are
funded through employee and employer tax withholdings.
Contingencies
A loss
contingency is recorded if it is probable that an asset has been impaired or a
liability has been incurred and the amount of the loss can be reasonably
estimated. We evaluate, among other factors, the degree of probability of an
unfavorable outcome and our ability to make a reasonable estimate of the amount
of the ultimate loss. Changes in these factors and related estimates could
materially affect our financial position and results of operations.
Defined
Benefit Pension Plans
Income
Taxes
Income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes.
Under this method, deferred income taxes are recorded for the temporary
differences between the financial reporting basis and tax basis of our assets
and liabilities in each of the tax jurisdictions in which we operate. These
deferred income taxes are measured using the tax rates expected to be in effect
when the temporary differences reverse. We establish a valuation allowance for
the deferred income tax asset when we believe it is more likely than not that a
portion of such asset will not be realized. Deferred income tax liabilities have
not been recorded on undistributed earnings of international subsidiaries that
are permanently reinvested.
We
evaluate whether our tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements in accordance with
Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (FIN 48). Under FIN
48, we recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained upon examination by
the taxing authorities based solely on the technical merits of the position. The
tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. We classify interest
expense and penalties related to unrecognized tax benefits and interest income
on tax overpayments as components of income tax expense.
Foreign
Exchange
Our
consolidated financial statements are reported in U.S. dollars. Assets and
liabilities of international subsidiaries with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using an average rate for the relevant reporting period. Translation adjustments
resulting from this process are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity. Gains and losses that arise from
exchange rate fluctuations for balances that are not denominated in an entity’s
functional currency are included in the Consolidated Statements of Operations.
Currency gains and losses of intercompany balances deemed to be long-term in
nature or designated as hedges of the net investment in international
subsidiaries are included, net of tax, in accumulated other comprehensive income
in shareholders’ equity.
Revenue
Recognition
Revenues
consist primarily of hardware sales, software license fees, software
implementation, project management services, installation, consulting and
post-sale maintenance support. In determining appropriate revenue recognition,
we primarily consider the provisions of the following accounting
pronouncements: Staff Accounting Bulletin 104, Revenue Recognition in Financial
Statements, FASB’s Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple
Deliverables, Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts and EITF 03-5, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software.
Revenue
arrangements with multiple deliverables are divided into separate units of
accounting if the delivered item(s) have value to the customer on a standalone
basis, there is objective and reliable evidence of fair value of both the
delivered and undelivered item(s) and delivery/performance of the undelivered
item(s) is probable. The total arrangement consideration is allocated among the
separate units of accounting based on their relative fair values and the
applicable revenue recognition criteria considered for each unit of accounting.
For our standard contract arrangements that combine deliverables such as
hardware, meter reading system software, installation and project management
services, each deliverable is generally considered a single unit of accounting.
The amount allocable to a delivered item is limited to the amount that we are
entitled to collect and that is not contingent upon the delivery/performance of
additional items.
Revenues
are recognized when (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services have been rendered, (3) the sales price is
fixed or determinable and (4) collectibility is reasonably assured. Hardware
revenues are generally recognized at the time of shipment, receipt by customer,
or, if applicable, upon completion of customer acceptance provisions. For
software arrangements with multiple elements, revenue recognition is also
dependent upon the availability of vendor-specific objective evidence (VSOE) of
fair value for each of the elements. The lack of VSOE, or the existence of
extended payment terms or other inherent risks, may affect the timing of revenue
recognition for software arrangements. If implementation services are essential
to a software arrangement, revenue is recognized using either the
percentage-of-completion methodology if project costs can be estimated or the
completed contract methodology if project costs cannot be reliably estimated.
Hardware and software post-sale maintenance support fees are recognized ratably
over the life of the related service contract.
Unearned
revenue is recorded when a customer pays for products or services where the
criteria for revenue recognition have not been met as of the balance sheet date.
Deferred cost is recorded for products or services for which ownership
(typically defined as title and risk of loss) has transferred to the customer,
but for which the criteria for revenue recognition have not been met as of the
balance sheet date. Previously recorded unearned revenue and deferred costs are
recognized when the applicable revenue recognition criteria are met. Shipping
and handling costs and incidental expenses billed to customers are recorded as
revenue, with the associated cost charged to cost of revenues. We record sales,
use and value added taxes billed to our customers on a net basis in
our Consolidated Statements of Operations.
Product
and Software Development Costs
Product
and software development costs primarily include employee compensation and third
party contracting fees. For software we develop to be marketed or sold, SFAS 86,
Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed (as amended),
requires the capitalization of development costs after technological feasibility
is established. Due to the relatively short period of time between technological
feasibility and the completion of product and software development, and the
immaterial nature of these costs, we generally do not capitalize product and
software development expenses.
Advertising
Advertising
costs are expensed as incurred. Advertising expenses were $3.7 million, $2.7
million and $1.2 million for the years ended December 31, 2008, 2007 and
2006, respectively. Advertising expense increased as a result of the Actaris
acquisition on April 18, 2007.
Stock-Based
Compensation
SFAS
123(R), Share-Based
Payment, requires the measurement and recognition of compensation expense
for all stock-based awards made to employees and directors based on estimated
fair values. We record stock-based compensation expense under SFAS 123(R) for
awards of stock options, our Employee Stock Purchase Plan (ESPP) and issuance of
restricted and unrestricted stock awards and units. The fair values of stock
options and ESPP awards are estimated at the date of grant using the
Black-Scholes option-pricing model, which includes assumptions for the dividend
yield, expected volatility, risk-free interest rate and expected life. For
restricted and unrestricted stock awards and units, the fair value is the market
close price of our common stock on the date of grant. We expense stock-based
compensation using the straight-line method over the vesting requirement. A
substantial portion of our stock-based compensation cannot be expensed for tax
purposes. When we have tax deductions in excess of the compensation cost, they
are classified as financing cash inflows in the Consolidated Statements of Cash
Flows.
Fair
Value Measurements
SFAS 157,
Fair Value
Measurements, became effective on January 1, 2008 and established a
framework for measuring fair value, expanded disclosures about fair value
measurements of our financial assets and liabilities and specified a hierarchy
of valuation techniques based on whether the inputs used are observable or
unobservable. The fair value hierarchy prioritizes the inputs used in different
valuation methodologies, assigning the highest priority to unadjusted quoted
prices for identical assets and liabilities in actively traded markets (Level 1)
and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist
of quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in non-active markets;
and model-derived valuations in which significant inputs are corroborated by
observable market data either directly or indirectly through correlation or
other means (inputs may include yield curves, volatility, credit risks and
default rates). For fair value measurements using Level 3 inputs, a
reconciliation of the beginning and ending balances is
required.
Use
of Estimates
The
preparation of financial statements in conformity with Generally Accepted
Accounting Principles (GAAP) requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Due to various
factors affecting future costs and operations, actual results could differ
materially from these estimates.
Reclassifications
Certain
prior year balances within the cash flow statement have been condensed to
conform to the current year presentation. There was no change to cash provided
by (used in) operating, investing or financing activities.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes. SFAS 141(R)
requires assets acquired and liabilities assumed arising from contingencies to
be recorded at fair value on the acquisition date; that IPR&D be capitalized
as an intangible asset and amortized over its estimated useful life; and that
acquisition-related costs are expensed as incurred. SFAS 141(R) also requires
that restructuring costs generally be expensed in periods subsequent to the
acquisition date and that changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period be
recognized as a component of provision for taxes. SFAS 141(R) is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We will apply SFAS 141(R) to any acquisition on or after
January 1, 2009.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of 2009. SFAS
160 is not expected to have a material effect on our consolidated financial
statements.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133,
which requires enhanced disclosures including how and why derivative instruments
are used and how derivative instruments and related hedged items are accounted
for under SFAS 133 and its related interpretations. SFAS 161 also requires the
fair values of derivative instruments and their gains and losses to be disclosed
in a tabular format. SFAS 161 does not change how we record and account for
derivative instruments. SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008 and will be adopted by us in the first
quarter of 2009.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement
157, which delays the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years. We do not expect this FSP to have a material effect on our
nonfinancial assets and nonfinancial liabilities in our consolidated financial
statements.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion, (FSP 14-1)
addressing convertible instruments that may be settled in cash upon conversion,
such as our convertible senior subordinated notes. FSP 14-1 requires the
convertible debt to be separated between its liability and equity components in
a manner that reflects our non-convertible debt borrowing rate. FSP 14-1 is
effective for fiscal years and interim periods beginning after December 15,
2008 and must be applied retrospectively to all periods presented at the time of
adoption. We will adopt FSP 14-1 on January 1, 2009. The impact of the
adoption of FSP 14-1 will be as follows:
|
Year
Ended December 31,
|
|||||||||||||||||||||||
|
2008
|
2007
|
||||||||||||||||||||||
|
As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
||||||||||||||||||
|
(in
thousands, except per share data)
|
|||||||||||||||||||||||
|
Consolidated
Statements of Operations
|
|||||||||||||||||||||||
|
Interest
expense
|
$ | (80,735 | ) | $ | (13,442 | ) | $ | (94,177 | ) | $ | (89,965 | ) | $ | (10,970 | ) | $ | (100,935 | ) | |||||
|
Other
income (expense)
|
$ | (2,984 | ) | $ | (49 | ) | $ | (3,033 | ) | $ | 435 | $ | - | $ | 435 | ||||||||
|
Total
other income (expense)
|
$ | (77,749 | ) | $ | (13,491 | ) | $ | (91,240 | ) | $ | (79,053 | ) | $ | (10,970 | ) | $ | (90,023 | ) | |||||
|
Income
(loss) before income taxes
|
$ | 32,073 | $ | (13,491 | ) | $ | 18,582 | $ | (32,580 | ) | $ | (10,970 | ) | $ | (43,550 | ) | |||||||
|
Income
tax (provision) benefit
|
$ | (4,014 | ) | $ | 5,243 | $ | 1,229 | $ | 16,436 | $ | 4,263 | $ | 20,699 | ||||||||||
|
Net
income (loss)
|
$ | 28,059 | $ | (8,248 | ) | $ | 19,811 | $ | (16,144 | ) | $ | (6,707 | ) | $ | (22,851 | ) | |||||||
|
Earnings
(loss) per common share
|
|||||||||||||||||||||||
|
Basic
|
$ | 0.85 | $ | (0.25 | ) | $ | 0.60 | $ | (0.55 | ) | $ | (0.22 | ) | $ | (0.77 | ) | |||||||
|
Diluted
|
$ | 0.80 | $ | (0.23 | ) | $ | 0.57 | $ | (0.55 | ) | $ | (0.22 | ) | $ | (0.77 | ) | |||||||
|
At
December 31,
|
|||||||||||||||||||||||
|
2008
|
2007
|
||||||||||||||||||||||
|
As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
As
Previously Reported
|
Impact
of FSP 14-1
|
Upon
Adoption of FSP 14-1
|
||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||
|
Consolidated
Balance Sheets
|
|||||||||||||||||||||||
|
Deferred
income taxes, net
|
$ | 45,783 | $ | (14,866 | ) | $ | 30,917 | $ | 75,243 | $ | (20,109 | ) | $ | 55,134 | |||||||||
|
Total
assets
|
$ | 2,871,214 | $ | (14,866 | ) | $ | 2,856,348 | $ | 3,050,566 | $ | (20,109 | ) | $ | 3,030,457 | |||||||||
|
Long-term
debt
|
$ | 1,179,249 | $ | (38,251 | ) | $ | 1,140,998 | $ | 1,578,561 | $ | (51,742 | ) | $ | 1,526,819 | |||||||||
|
Total
liabilities
|
$ | 1,835,823 | $ | (38,251 | ) | $ | 1,797,572 | $ | 2,291,764 | $ | (51,742 | ) | $ | 2,240,022 | |||||||||
|
Common
stock
|
$ | 951,007 | $ | 41,177 | $ | 992,184 | $ | 609,902 | $ | 41177 | $ | 651,079 | |||||||||||
|
Retained
earnings
|
$ | 50,291 | $ | (17,792 | ) | $ | 32,499 | $ | 22,232 | $ | (6,707 | ) | $ | 15,525 | |||||||||
|
Cumulative
effect of change in
|
|||||||||||||||||||||||
|
accounting
principle
|
$ | - | $ | - | $ | - | $ | - | $ | (2,837 | ) | $ | (2,837 | ) | |||||||||
|
Total
shareholders' equity
|
$ | 1,035,391 | $ | 23,385 | $ | 1,058,776 | $ | 758,802 | $ | 31,633 | $ | 790,435 | |||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,871,214 | $ | (14,866 | ) | $ | 2,856,348 | $ | 3,050,566 | $ | (20,109 | ) | $ | 3,030,457 | |||||||||
Note
2: Earnings Per Share and Capital Structure
The
following table sets forth the computation of basic and diluted Earnings per
Share (EPS).
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
|
Net
income (loss) available to common shareholders
|
$ | 28,059 | $ | (16,144 | ) | $ | 33,759 | |||||
|
Weighted
average common shares outstanding - Basic
|
33,096 | 29,584 | 25,414 | |||||||||
|
Dilutive
effect of stock-based awards and convertible notes
|
1,855 | - | 869 | |||||||||
|
Weighted
average common shares outstanding - Diluted
|
34,951 | 29,584 | 26,283 | |||||||||
|
Basic
earnings (loss) per common share
|
$ | 0.85 | $ | (0.55 | ) | $ | 1.33 | |||||
|
Diluted
earnings (loss) per common share
|
$ | 0.80 | $ | (0.55 | ) | $ | 1.28 | |||||
For
stock-based awards, the dilutive effect is calculated using the treasury stock
method. Under this method, the dilutive effect is computed as if the awards were
exercised at the beginning of the period (or at time of issuance, if later) and
assumes the related proceeds were used to repurchase common stock at the average
market price during the period. Related proceeds include the amount the employee
must pay upon exercise, future compensation cost associated with the stock award
and the amount of excess tax benefits, if any. Weighted average common shares
outstanding include 657,000 and 869,000 incremental shares that would be issued
upon the assumed exercise of stock-based awards for 2008 and 2006, respectively.
Approximately 283,000, 998,500 and 270,000 stock-based awards were excluded from
the calculation of diluted EPS for the years ended December 31, 2008, 2007 and
2006, respectively, because they were anti-dilutive. These stock-based awards
could be dilutive in future periods.
For our
$345 million convertible notes issued in August 2006, the dilutive effect is
calculated under the net share settlement method in accordance with EITF
04-8, The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share. We
are required, pursuant to the indenture for the convertible notes, to settle the
principal amount of the convertible notes in cash and may elect to settle the
remaining conversion obligation (stock price in excess of conversion price) in
cash, shares or a combination. Under the net share settlement method, we include
the amount of shares it would take to satisfy the conversion obligation,
assuming that all of the convertible notes are converted. The average closing
prices of our common stock for the years ended December 31, 2008, 2007 and 2006
are used as the basis for determining the dilutive effect on EPS. The average
price of our common stock for the year ended December 31, 2008 exceeded the
conversion price of $65.16 and therefore, approximately 1.2 million shares have
been included in the diluted EPS calculation. For the year ended
December 31, 2007, if we had net income and included the dilutive shares in
the calculation of diluted EPS, approximately 745,000 shares would have been
included. The average price of our common stock for the year ended December 31,
2006 did not exceed the conversion price of $65.16 and therefore, did not have
an effect on diluted earnings per share.
On May 6,
2008, we sold 3.4 million shares of common stock, no par value, at a public
offering price of $91.52 per share, resulting in net proceeds of $310.9 million.
The proceeds were primarily used to repay a portion of our non-convertible
debt.
We have
authorized 10 million shares of preferred stock with no par value. In the event
of a liquidation, dissolution or winding up of the affairs of the corporation,
whether voluntary or involuntary, the holders of any outstanding stock will be
entitled to be paid a preferential amount per share to be determined by the
Board of Directors prior to any payment to holders of common stock. Shares of
preferred stock may be converted into common stock based on terms, conditions,
rates and subject to such adjustments set by the Board of Directors. There was
no preferred stock issued or outstanding at December 31, 2008 and
2007.
Note
3: Certain Balance Sheet Components
|
Accounts receivable, net
|
At
December 31,
|
|||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
Trade
receivables (net of allowance of $5,954 and $6,391)
|
$ | 306,593 | $ | 324,425 | ||
|
Unbilled
revenue
|
14,685 | 14,593 | ||||
|
Total
accounts receivable, net
|
$ | 321,278 | $ | 339,018 | ||
A summary
of the allowance for doubtful accounts activity is as follows:
|
Year
Ended December 31,
|
||||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
Beginning
balance, January 1
|
$ | 6,391 | $ | 589 | ||
|
Actaris
acquisition opening balance/adjustments
|
(376 | ) | 5,176 | |||
|
Provision
for doubtful accounts
|
1,688 | 1,046 | ||||
|
Accounts
charged off
|
(1,194 | ) | (808 | ) | ||
|
Effects
of change in exchange rates
|
(555 | ) | 388 | |||
|
Ending
balance, December 31
|
$ | 5,954 | $ | 6,391 | ||
Inventories
A summary
of the inventory balances is as follows:
|
At
December 31,
|
||||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
Materials
|
$ | 85,153 | $ | 81,636 | ||
|
Work
in process
|
14,556 | 16,859 | ||||
|
Finished
goods
|
64,501 | 70,743 | ||||
|
Total
inventories
|
$ | 164,210 | $ | 169,238 | ||
Our
inventory levels may vary period to period as a result of our factory scheduling
and timing of contract fulfillments.
Consigned
inventory, consisting of raw materials and finished goods, was $19.1 million and
$22.8 million at December 31, 2008 and 2007, respectively.
|
Property, plant and equipment, net
|
At
December 31,
|
|||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
Machinery
and equipment
|
$ | 217,740 | $ | 192,562 | ||
|
Computers
and purchased software
|
62,525 | 66,412 | ||||
|
Buildings,
furniture and improvements
|
134,316 | 140,386 | ||||
|
Land
|
36,130 | 41,750 | ||||
|
Total
cost
|
450,711 | 441,110 | ||||
|
Accumulated
depreciation
|
(142,994 | ) | (118,107 | ) | ||
|
Property,
plant and equipment, net
|
$ | 307,717 | $ | 323,003 | ||
Depreciation
expense was $53.3 million, $42.4 million and $15.1 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The increase in
depreciation expense for the years ended December 31, 2008 and 2007, compared
with 2006, is the result of the Actaris acquisition on April 18,
2007.
On April
18, 2007, we completed the acquisition of Actaris, which was financed with a
$1.2 billion credit facility (credit facility), $225.2 million in net proceeds
from the sale of 4.1 million shares of common stock and cash on hand. The
acquisition included all of Actaris’ electricity, gas and water meter
manufacturing and sales operations, located primarily outside of North America,
with the majority of locations in Europe, and provided geographic expansion of
our business as well as expansion of our product offerings. The purchase price
was a significant premium to the assets acquired and liabilities assumed, due to
expected synergies from products and markets of the combined entity. The
acquisition of Actaris creates an opportunity to share technology and expertise
on a global basis as worldwide electric, gas and water utilities look for
advanced metering and communication products to better serve their markets;
therefore, the purchase price resulted in a substantial amount of
goodwill.
The
purchase price, net of cash acquired of $29.5 million, is summarized as follows
(in thousands):
|
Cash
consideration, net of cash acquired
|
$ | 1,697,505 | |
|
Direct
transaction costs
|
18,966 | ||
|
Total
purchase price
|
$ | 1,716,471 |
The
following financial information reflects the allocation of the purchase price at
April 18, 2007, after final adjustments in 2008, based on estimated fair values
of the assets acquired and liabilities assumed.
|
April
18, 2007
|
||||
|
Fair
Value
|
Useful
Life
|
|||
|
(in
thousands)
|
(in
years)
|
|||
|
Fair
value of tangible assets acquired and liabilities assumed,
net
|
$ | 27,302 | ||
|
In-process
research and development (IPR&D)
|
35,975 | |||
|
Identified
intangible assets - amortizable
|
||||
|
Core-developed
technology
|
222,705 |
9-15
|
||
|
Customer
relationships
|
270,927 |
20
|
||
|
Trademarks
and trade names
|
48,370 |
3-10
|
||
|
Other
|
5,094 |
1
|
||
|
Goodwill
|
1,106,098 | |||
|
Total
net assets acquired
|
$ | 1,716,471 | ||
IPR&D
expense consisted primarily of next generation technology. These research and
development projects were completed in 2008.
The
values assigned to the identified intangible assets were estimated using the
income approach. Under the income approach, the fair value reflects the present
value of the projected cash flows that are expected to be generated. We
validated the reasonableness of our fair value assumptions by comparing the
weighted average return on assets with our estimated weighted average cost of
capital and our internal rate of return. The intangible assets will be amortized
using the estimated discounted cash flows assumed in the valuation models. The
residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. For tax purposes,
goodwill is not deductible due to the fact we acquired the stock of
Actaris.
Note
5: Intangible Assets
The gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
At
December 31, 2008
|
At
December 31, 2007
|
||||||||||||||||||
|
Gross
Assets
|
Accumulated
Amortization
|
Net
|
Gross
Assets
|
Accumulated
Amortization
|
Net
|
||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Core-developed
technology
|
$ | 394,912 | $ | (188,953 | ) | $ | 205,959 | $ | 403,665 | $ | (126,488 | ) | $ | 277,177 | |||||
|
Customer
contracts and relationships
|
299,928 | (56,966 | ) | 242,962 | 312,709 | (25,151 | ) | 287,558 | |||||||||||
|
Trademarks
and trade names
|
76,766 | (45,851 | ) | 30,915 | 154,760 | (26,877 | ) | 127,883 | |||||||||||
|
Other
|
24,630 | (22,580 | ) | 2,050 | 24,845 | (21,563 | ) | 3,282 | |||||||||||
|
Total
intangible assets
|
$ | 796,236 | $ | (314,350 | ) | $ | 481,886 | $ | 895,979 | $ | (200,079 | ) | $ | 695,900 | |||||
A summary
of the intangible asset account activity is as follows:
|
At
December 31,
|
||||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
Beginning
balance, intangible assets, gross
|
$ | 895,979 | $ | 231,868 | ||
|
Business
acquisitions
|
- | 617,145 | ||||
|
Adjustment
of previous acquisitions
|
(70,048 | ) | (1,220 | ) | ||
|
Disposals
|
- | (6,992 | ) | |||
|
Effect
of change in exchange rates
|
(29,695 | ) | 55,178 | |||
|
Ending
balance, intangible assets, gross
|
$ | 796,236 | $ | 895,979 | ||
During
2008, intangible assets were adjusted by $70.0 million for trademarks and trade
names based on our completion of our fair value assessment associated with the
Actaris acquisition in 2007. In 2007, intangible assets decreased by $1.2
million due to an adjustment to intangible assets for the Flow Metrix
acquisition based on the final determination of fair values of intangible assets
acquired and by $7.0 million related to disposals of fully amortized
assets.
Intangible
assets are recorded in the functional currency of our international
subsidiaries; therefore, the carrying amount of intangible assets increase or
decrease, with a corresponding change in accumulated other comprehensive income,
due to changes in foreign currency exchange rates. Intangible asset amortization
expense was $120.4 million, $84.0 million and $31.1 million in 2008, 2007
and 2006, respectively.
Estimated
future annual amortization expense is as follows:
|
Years
ending December 31,
|
Estimated
Annual Amortization
|
||
|
(in
thousands)
|
|||
|
2009
|
$ | 99,731 | |
|
2010
|
72,150 | ||
|
2011
|
61,794 | ||
|
2012
|
47,761 | ||
|
2013
|
38,714 | ||
|
Beyond
2013
|
161,736 | ||
|
Total
intangible assets, net
|
$ | 481,886 | |
Note
6: Goodwill
The
following table reflects goodwill allocated to each reporting segment during the
years ended December 31, 2008 and 2007:
|
Itron
North America
|
Actaris
|
Total
Company
|
|||||||
|
(in
thousands)
|
|||||||||
|
Goodwill
balance at January 1, 2007
|
$ | 125,855 | $ | 411 | $ | 126,266 | |||
|
Goodwill
acquired
|
- | 1,047,031 | 1,047,031 | ||||||
|
Adjustment
of previous acquisitions
|
364 | 482 | 846 | ||||||
|
Effect
of change in exchange rates
|
2,109 | 89,881 | 91,990 | ||||||
|
Goodwill
balance at December 31, 2007
|
128,328 | 1,137,805 | 1,266,133 | ||||||
|
Adjustment
of previous acquisitions
|
1,295 | 59,067 | 60,362 | ||||||
|
Effect
of change in exchange rates
|
(2,628 | ) | (38,014 | ) | (40,642 | ) | |||
|
Goodwill
balance at December 31, 2008
|
$ | 126,995 | $ | 1,158,858 | $ | 1,285,853 | |||
On January 1, 2008, we consolidated certain operations between our two operating segments as a result of our continued integration of the Actaris acquisition. The allocation of goodwill to our reporting units is based on the new segment reporting structure. In accordance with SFAS 142, goodwill of $411,000 at January 1, 2007 has been reallocated between the segments to conform to the new segment reporting structure.
During
2007, the primary increase in goodwill was due to the Actaris acquisition.
Goodwill associated with the Actaris acquisition was adjusted in 2008 based on
our final determination of fair values of certain assets acquired and
liabilities assumed. For each of our 2006 acquisitions, during 2007 and 2008
certain conditions as outlined in the purchase agreements were met, resulting in
contingent consideration payable to the shareholders of the respective
acquisitions.
Goodwill
is recorded in the functional currency of our international subsidiaries;
therefore, goodwill balances may increase or decrease, with a corresponding
change in accumulated other comprehensive income due to changes in foreign
currency exchange rates.
Note
7: Debt
The
components of our borrowings are as follows:
|
At
December 31,
|
||||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
Term
loans
|
||||||
|
USD
denominated term loan
|
$ | 375,744 | $ | 596,793 | ||
|
EUR
denominated term loan
|
360,494 | 445,228 | ||||
|
GBP
denominated term loan
|
- | 79,091 | ||||
|
Convertible
senior subordinated notes
|
344,588 | 345,000 | ||||
|
Senior
subordinated notes
|
109,192 | 124,429 | ||||
| 1,190,018 | 1,590,541 | |||||
|
Current
portion of debt
|
(10,769 | ) | (11,980 | ) | ||
|
Total
long-term debt
|
$ | 1,179,249 | $ | 1,578,561 | ||
Credit
Facility
The
Actaris acquisition in 2007 was financed in part by a $1.2 billion credit
facility. The credit facility, dated April 18, 2007, was composed of a
$605.1 million first lien U.S. dollar denominated term loan; a
€335 million first lien euro denominated term loan; a £50 million
first lien pound sterling denominated term loan (collectively the term loans);
and a $115 million multicurrency revolving line-of-credit (revolver). Our
loan balances denominated in currencies other than the U.S. dollar fluctuate due
to currency exchange rates. The principal balance of our euro denominated term
loan at December 31, 2008 and 2007 was €254.1 million and €302.5 million,
respectively. Interest rates on the credit facility are based on the
respective borrowing’s denominated London Interbank Offering Rate (LIBOR)
or the Wells Fargo Bank, National Association’s prime rate, plus an additional
margin of 1.75% subject to factors including our consolidated leverage ratio.
Our interest rates were 3.19% for the U.S. dollar denominated and 6.89% for the
euro denominated term loans at December 31, 2008. Scheduled amortization of
principal payments is 1% per year (0.25% quarterly) with an excess cash flow
provision for additional annual principal repayment requirements. Maturities of
the term loans and multicurrency revolver are seven years and six years from the
date of issuance, respectively. The credit facility is secured by substantially
all of the assets of Itron, Inc., our operating subsidiaries, except our
international subsidiaries, and includes covenants, which contain certain
financial ratios and place restrictions on the incurrence of debt, the payment
of dividends, certain investments, incurrence of capital expenditures above a
set limit and mergers. We were in compliance with these debt covenants at
December 31, 2008. At December 31, 2008, there were no borrowings outstanding
under the revolver and $50.2 million was utilized by outstanding standby letters
of credit resulting in $64.8 million being available for additional
borrowings.
We repaid
$372.7 million of the term loans during 2008. These repayments were made with
cash flows from operations and $311 million in net proceeds from the sale
of 3.4 million shares of our common stock. During 2007, we repaid $76.1 million
of the term loans.
Senior
Subordinated Notes
In May
2004, we issued $125 million of 7.75% senior subordinated notes (subordinated
notes) due in 2012, which were discounted to a price of 99.265 to yield 7.875%.
The subordinated notes are registered with the Securities and Exchange
Commission (SEC) and are generally transferable. Fixed interest payments are
required every six months, in May and November. The notes are subordinated to
our credit facility (senior secured borrowings) and are guaranteed by all of our
operating subsidiaries, except for our international subsidiaries. The
subordinated notes contain covenants, which place restrictions on the incurrence
of debt, the payment of dividends, certain investments and mergers. We were in
compliance with these debt covenants at December 31, 2008. From time to time, we
may reacquire a portion of the subordinated notes on the open market, resulting
in the early extinguishment of debt.
During
2008, we reacquired $15.3 million in principal amount of the subordinated notes.
The balance of the subordinated notes, including unaccreted discount, was $109.2
million at December 31, 2008. Currently, some or
all of the subordinated notes may be redeemed at our option at a redemption
price of 103.875% of the principal amount, decreasing to 101.938% on May 15,
2009 and 100.000% on May 15, 2010.
Convertible
Senior Subordinated Notes
On August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments are required every six months, in February and August.
For each six month period beginning August 2011, contingent interest payments of
approximately 0.19% of the average trading price of the convertible notes will
be made if certain thresholds and events are met, as outlined in the indenture.
The convertible notes are registered with the SEC and are generally
transferable. Our convertible notes are not considered conventional convertible
debt as defined in EITF 05-2, The Meaning of “Conventional
Convertible Debt Instruments” in Issue 00-19, as the number of shares, or
cash, to be received by the holders was not fixed at the inception of the
obligation. We have concluded that the conversion feature of our convertible
notes does not require bifurcation from the host contract in accordance with
SFAS 133, as the conversion feature is indexed to the Company’s own stock and
would be classified within stockholders’ equity if it were a freestanding
instrument as provided by EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.
The
convertible notes may be converted at the option of the holder at a conversion
rate of 15.3478 shares of our common stock for each $1,000 principal amount of
the convertible notes, under the following circumstances, as defined in the
indenture (filed with the SEC on November 6, 2006 as Exhibit 4.16 to our
Quarterly Report on Form 10-Q):
|
o
|
during
any fiscal quarter commencing after December 31, 2006, if the closing sale
price per share of our common stock exceeds $78.19, which is 120% of the
conversion price of $65.16, for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter;
|
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
|
o
|
during
the five business days after any five consecutive trading day period in
which the trading price of the convertible notes for each day was less
than 98% of the conversion value of the convertible
notes;
|
|
o
|
if
the convertible notes are called for
redemption;
|
|
o
|
if
a fundamental change occurs; or
|
|
o
|
upon
the occurrence of defined corporate
events.
|
The
amount payable upon conversion is the result of a formula based on the closing
prices of our common stock for 20 consecutive trading days following the date of
the conversion notice. Based on the conversion ratio of 15.3478 shares per
$1,000 principal amount of the convertible notes, if our stock price is lower
than the conversion price of $65.16, the principal amount payable will be less
than the $1,000 principal amount and will be settled in cash.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination. The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved.
The
convertible notes also contain purchase options, at the option of the holders,
which may require us to repurchase all or a portion of the convertible notes on
August 1, 2011, August 1, 2016 and August 1, 2021 at 100% of the principal
amount, plus accrued and unpaid interest.
On or
after August 1, 2011, we have the option to redeem all or a portion of the
convertible notes at a redemption price equal to 100% of the principal amount,
plus accrued and unpaid interest.
The
convertible notes are unsecured, subordinated to our credit facility (senior
secured borrowings) and are guaranteed by all of our operating subsidiaries,
except for our international subsidiaries. The convertible notes contain
covenants, which place restrictions on the incurrence of debt and certain
mergers. We were in compliance with these debt covenants at December 31,
2008.
As our
stock price is subject to fluctuation, the contingent conversion threshold may
be triggered during any quarter, prior to July 2011, and the notes become
convertible. At December 31, 2008 and 2007, the contingent conversion threshold
was not exceeded and, therefore, the aggregate principal amount of the
convertible notes is included in long-term debt. However, during the third
quarter of 2008 and the third quarter of 2007, the contingent conversion
threshold of our convertible notes was exceeded, and the notes became
convertible for the following quarters. During the fourth quarter of 2008, one
holder elected to convert $412,000 of the notes.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion, addressing
convertible instruments that may be settled in cash upon conversion (see Note 1,
Summary of Significant
Accounting Policies).
Prepaid
Debt Fees & Interest Expense
Prepaid
debt fees for our outstanding borrowings are amortized over the respective terms
using the effective interest method. Total unamortized prepaid debt fees were
$12.9 million and $21.6 million at December 31, 2008 and 2007, respectively. The
debt placement fees associated with our convertible notes were amortized through
the date of the earliest put or conversion option; therefore, when our
convertible notes exceeded the conversion threshold in 2007, the remaining debt
placement fees of $6.6 million were written-off. Total interest costs were $80.9
million, $90.0 million and $18.7 million in 2008, 2007 and 2006. Interest costs
capitalized as property, plant and equipment were $193,000 and $900,000 in 2008
and 2006. There was no capitalized interest in 2007. Accrued interest expense
was $4.5 million and $5.0 million at December 31, 2008 and 2007,
respectively.
Minimum
Payments on Debt:
|
Minimum
Payments
|
|||
|
(in
thousands)
|
|||
|
2009
|
$ | 10,803 | |
|
2010
|
10,803 | ||
|
2011
|
10,803 | ||
|
2012
|
119,995 | ||
|
2013
|
10,804 | ||
|
Beyond
2013
|
1,026,810 | ||
|
Total
debt
|
$ | 1,190,018 | |
Note
8: Derivative Financial Instruments and Hedging
Activities
As part
of our risk management strategy, we use derivative instruments to hedge certain
foreign currency and interest rate exposures. Our objective is to offset gains
and losses resulting from these exposures with losses and gains on the
derivative contracts used to hedge them, thereby reducing the impact of
volatility on earnings or protecting fair values of assets and
liabilities.
Cash Flow Hedges
In 2008,
we entered into a one-year interest rate swap, which was effective on June 30,
2008, to convert $200 million of our USD term loan, which had a remaining
balance of $376 million at December 31, 2008, from a floating 1-month LIBOR
interest rate to a fixed 3.01% interest rate. Our interest rate will continue to
contain an additional margin per the credit facility agreement. The cash flow
hedge is currently, and is expected to be, highly effective in achieving
offsetting cash flows attributable to the hedged risk through the term of the
hedge. Consequently, changes in the fair value of the interest rate swap are
recorded as a component of other comprehensive income and are recognized in
earnings when the hedged item affects earnings. The amounts paid or received on
the hedge are recognized as adjustments to interest expense. The notional amount
of the swap was $200 million and the fair value, recorded as a short-term
liability was $2.4 million at December 31, 2008. The amount of net losses
expected to be reclassified into earnings through the remaining contract term of
six months is approximately $2.1 million, which was based on the Wells Fargo
swap yield curve as of December 31, 2008.
In 2008,
we entered into a one-year interest rate swap, which is effective on June 30,
2009 when our one-year interest rate swap entered into on June 30, 2008 expires.
This swap will convert $200 million of our USD term loan from a floating 1-month
LIBOR interest rate to a fixed 2.68% interest rate. Our interest rate will
continue to contain an additional margin per the credit facility agreement. The
cash flow hedge is expected to be highly effective in achieving offsetting cash
flows attributable to the hedged risk through the term of the hedge.
Consequently, changes in the fair value of the interest rate swap are recorded
as a component of other comprehensive income and are recognized in earnings when
the hedged item affects earnings. The amounts paid or received on the hedge will
be recognized as adjustments to interest expense. The notional amount of the
swap was $200 million and the fair value, recorded as a liability, was $3.1
million ($1.7 million as a short-term liability and $1.4 million as a long-term
liability) at December 31, 2008. The amount of net losses expected to be
reclassified into earnings from June 30, 2009 through December 31, 2009 is
approximately $881,000, which was based on the Wells Fargo swap yield curve as
of December 31, 2008.
In 2007,
we entered into an interest rate swap to convert a significant portion of our
€335 million euro denominated variable rate term loan to a fixed-rate debt
obligation at a rate of 6.59% for the term of the debt, including expected
prepayments. The cash flow hedge is currently, and is expected to be, highly
effective in achieving offsetting cash flows attributable to the hedged risk
through the term of the hedge. Consequently, changes in the fair value of the
interest rate swap are recorded as a component of other comprehensive income and
are recognized in earnings when the hedged item affects earnings. The amounts
paid or received on the hedge are recognized as adjustments to interest expense.
The notional amount of the swap is reduced each quarter. The notional amount of
the swap was $339.3 million (€239.1 million) and the fair value, recorded as a
liability was $12.0 million ($4.7 million as a short-term liability and $7.3
million as a long-term liability) at December 31, 2008. The fair value, recorded
as a long-term liability, was $1.7 million at December 31, 2007. The amount of
net losses expected to be reclassified into earnings in the next 12 months is
approximately $4.8 million, which was based on the Wells Fargo swap yield curve
as of December 31, 2008.
Net Investment Hedges
In 2007,
we designated certain portions of our foreign currency denominated term loans as
hedges of our net investment in international operations. Net unrealized gains
of $10.4 million ($6.5 million after-tax) and net unrealized losses of
$41.1 million ($25.5 million after-tax) were reported for the years ended
December 31, 2008 and 2007 as a component of accumulated other comprehensive
income, respectively. We had no hedge ineffectiveness.
Other Derivatives
During
2008, we entered into monthly foreign exchange forward contracts with the intent
to reduce volatility of certain intercompany financing transactions. The
notional amount of these forward contracts was $4.5 million and the fair value,
recorded as other current liabilities was $67,000. The amount of net gains
realized from the settlement of these monthly contracts was $1.8 million for the
year ended December 31, 2008. These contracts are not designated as accounting
hedges.
Terminated Derivatives
In 2008,
we repaid the £50 million pound sterling denominated term loan. We realized
a $208,000 loss in other income (expense) from the termination of the cross
currency interest rate swap, which we entered into in 2007.
During
the first quarter of 2007, when we signed a stock purchase agreement to acquire
Actaris, we entered into foreign currency range forward contracts (transactions
where put options were sold and call options were purchased) to reduce our
exposure to declines in the value of the U.S. dollar and pound sterling relative
to the euro denominated purchase price. Under SFAS 133, the Actaris stock
purchase agreement was considered an unrecognized firm commitment for a business
acquisition; therefore, these foreign currency range forward contracts could not
be designated as fair value hedges. In April 2007, we completed the acquisition
of Actaris and realized a $2.8 million gain in other income (expense) from
the termination of the foreign currency range forward contracts.
Fair Value Measurements
The
components and fair values of our derivative instruments are determined using
the fair value measurements of significant other observable inputs (Level 2), as
defined by SFAS 157. We have used observable market inputs based on the type of
derivative and the nature of the underlying instrument. The key inputs used at
December 31, 2008 included interest rate yield curves, foreign exchange rates,
the spot price of the underlying instrument and related volatility, all of which
are considered to be available in an active market. We have utilized the
mid-market pricing convention for these inputs, which represents the mid-point
of the observable rates in an active market at the reporting date. The net fair
value of our derivative instruments, primarily interest rate swaps, may switch
between a net asset and a net liability depending on the mark-to-market at the
end of the period. We include the effect of our counterparty credit risk based
on current published credit default swap rates when the net fair value of our
derivative instruments are in a net asset position and the effect of our own
nonperformance risk when the net fair value of our derivative instruments are in
a net liability position. We have considered our own nonperformance risk by
evaluating the effect of our credit rating on our fair value measurement and
have discounted our derivative liabilities to reflect the potential credit risk
to our counterpart by applying our current market indicative credit spread to
all cash flows.
The fair values of our derivative instruments determined using the fair value measurement of significant other observable inputs (Level 2) are as follows:
|
At
December 31, 2008
|
|||
|
(in
thousands)
|
|||
|
Other
current liabilities
|
$ | (8,839 | ) |
|
Long-term
other obligations
|
(8,723 | ) | |
|
Net
fair value of derivative instruments
|
$ | (17,562 | ) |
Note
9: Defined Benefit Pension Plans
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary and
Indonesia. These plans were assumed with the acquisition of Actaris. The defined
benefit obligation is calculated annually by using the projected unit credit
method. The measurement date for the pension plans was December 31,
2008.
Our
general funding policy for these qualified pension plans is to contribute
amounts sufficient to satisfy regulatory funding standards of the respective
countries for each plan. We contributed $445,000 and $131,000 to the defined
benefit pension plans for the year ended December 31, 2008 and from the date of
the Actaris acquisition through December 31, 2007, respectively. Assuming that
actual plan asset returns are consistent with our expected rate of return in
2008 and beyond, and that interest rates remain constant, we expect to
contribute approximately $400,000 in 2009 to our defined benefit pension
plans.
The
following table summarizes the benefit obligation, plan assets and funded status
of the defined benefit plans, amounts recognized in accumulated other
comprehensive income and amounts recognized in the Consolidated Balance Sheets
at December 31, 2008 and 2007.
|
Year
Ended
|
April
18, 2007 through
|
|||||
|
December
31, 2008
|
December
31, 2007
|
|||||
|
(in
thousands)
|
||||||
|
Change
in benefit obligation:
|
||||||
|
Benefit
obligation at beginning of period
|
$ | 72,449 | $ | 71,452 | ||
|
Service
cost
|
2,009 | 1,523 | ||||
|
Interest
cost
|
3,697 | 2,365 | ||||
|
Amendments
|
83 | - | ||||
|
Settlements
and curtailments
|
- | (362 | ) | |||
|
Actuarial
gain
|
(4,048 |
)
|
(5,620 | ) | ||
|
Benefits
paid
|
(4,450 |
)
|
(2,843 | ) | ||
|
Other
– foreign currency exchange rate changes
|
(2,917 |
)
|
5,934 | |||
|
Benefit
obligation at period end
|
$
|
66,823 | $ | 72,449 | ||
|
Change
in plan assets:
|
||||||
|
Fair
value of plan assets at beginning of period
|
$ | 7,174 | $ | 6,420 | ||
|
Actual
return on plan assets
|
354 | 230 | ||||
|
Company
contributions
|
445 | 131 | ||||
|
Benefits
paid
|
(174 |
)
|
(113 | ) | ||
|
Other
– foreign currency exchange rate changes
|
(350 |
)
|
506 | |||
|
Fair
value of plan assets at period end
|
7,449 | 7,174 | ||||
|
Ending
balance at fair value (net pension plan benefit liability)
|
$ | 59,374 | $ | 65,275 | ||
|
Amounts recognized
in accumulated other comprehensive income:
|
||||||
|
Accumulated
other comprehensive income at the beginning of the period,
pre-tax
|
$ | (5,620 |
)
|
$ | - | |
|
Net
actuarial gain
|
(4,048 |
)
|
(5,620 | ) | ||
|
Prior
service cost
|
83 | - | ||||
|
Amortization
of net actuarial gain
|
(132 |
)
|
- | |||
|
Amortization
of prior service cost
|
56 | - | ||||
|
Accumulated
other comprehensive income at period end, pre-tax
|
$ | (9,661 |
)
|
$ | (5,620 | ) |
Amounts
recognized on the Consolidated Balance Sheets consist of:
|
At
December 31,
|
||||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
Current
portion of pension plan liability in wages and benefits
payable
|
$ | 4,299 | $ | 5,210 | ||
|
Long-term
portion of pension plan liability
|
55,810 | 60,623 | ||||
|
Plan
assets in other long term assets
|
(735 | ) | (558 | ) | ||
|
Net
pension plan benefit liability
|
$ | 59,374 | $ | 65,275 | ||
The total
accumulated benefit obligation for our defined benefit pension plans was $62.7
and $68.0 million at December 31, 2008 and 2007, respectively. The estimated net
actuarial gain and prior service cost that will be amortized from accumulated
other comprehensive income into net periodic benefit cost during 2009 are
$448,000 and $30,000, respectively.
Net
periodic pension benefit costs for our plans include the following
components:
|
Year
Ended
December
31, 2008
|
April
18, 2007
through
December
31, 2007
|
|||||
|
(in
thousands)
|
||||||
|
Service
cost
|
$ | 2,009 | $ | 1,523 | ||
|
Interest
cost
|
3,697 | 2,365 | ||||
|
Expected
return on plan assets
|
(306 | ) | (184 | ) | ||
|
Settlements
and curtailments
|
- | (362 | ) | |||
|
Amortization
of actuarial net gain
|
(132 | ) | - | |||
|
Amortization
of unrecognized prior service costs
|
56 | - | ||||
|
Net
periodic benefit cost
|
$ | 5,324 | $ | 3,342 | ||
The
significant actuarial weighted average assumptions used in determining the
benefit obligations and net periodic benefit cost for our benefit plans are as
follows:
|
At
December 31,
|
|||
|
2008
|
2007
|
||
|
Actuarial
assumptions used to determine benefit obligations at end of
period:
|
|||
|
Discount
rate
|
6.52%
|
5.48%
|
|
|
Expected
annual rate of compensation increase
|
3.35%
|
3.08%
|
|
|
Actuarial
assumptions used to determine net periodic benefit cost for the
period:
|
|||
|
Discount
rate
|
6.52%
|
5.48%
|
|
|
Expected
rate of return on plan assets
|
4.06%
|
4.10%
|
|
|
Expected
annual rate of compensation increase
|
3.35%
|
3.08%
|
|
We
determine a discount rate for each individual defined benefit pension plan based
on the estimated duration of each plan’s liabilities. For our euro denominated
defined benefit pension plans, we match the plans’ expected future benefit
payments against the average 15-year corporate bond yield curve from the central
banks of each respective country.
Our
expected rate of return on plan assets is derived from a study of actual
historic returns achieved and anticipated future long-term performance of plan
assets. While the study primarily gives consideration to recent insurers’
performance and historical returns, the assumption represents a long-term
prospective return.
We have
one plan in which the fair value of plan assets exceeds the benefit obligation
and the accumulated benefit obligation. Therefore, for the pension plans in
which the accumulated benefit obligations exceeds the fair value of plan assets,
our total obligation and the fair value of plan assets are as
follows:
|
At
December 31,
|
|||||
|
2008
|
2007
|
||||
|
(in
thousands)
|
|||||
|
Projected
benefit obligation
|
$ | 65,482 | $ | 70,974 | |
|
Accumulated
benefit obligation
|
$ | 61,414 | $ | 66,685 | |
|
Fair
value of plan assets
|
$ | 5,343 | $ | 5,141 | |
The
target allocation for our pension plans assets is as follows:
|
At
December 31,
|
|||
|
2008
|
2007
|
||
|
Asset
category:
|
|||
|
Short-term
investments and cash
|
7%
|
8%
|
|
|
Insurance
funds
|
93%
|
92%
|
|
Our asset
investment strategy focuses on maintaining a portfolio using primarily insurance
funds, which are accounted for as investments and measured at fair value, in
order to achieve our long-term investment objectives on a risk adjusted basis.
Our actual invested positions in various securities change over time based on
short and longer-term investment opportunities. Strategic pension plan asset
allocations are determined by the objective to achieve an investment return,
which together with the contributions paid, is sufficient to maintain reasonable
control over the various funding risks of the plans. Based upon current market
and economic environments, the actual asset allocation may periodically be
permitted to deviate from policy targets.
Annual
benefit payments, including amounts to be paid from Company assets for unfunded
plans, and reflecting expected future service, as appropriate, are expected to
be paid as follows:
|
Year
Ending December 31,
|
Estimated
Annual Benefit Payments
|
||
|
(in
thousands)
|
|||
|
2009
|
$ | 3,850 | |
|
2010
|
4,134 | ||
|
2011
|
3,748 | ||
|
2012
|
4,242 | ||
|
2013
|
3,999 | ||
|
2014
- 2018
|
21,525 | ||
We record
stock-based compensation expense under SFAS 123(R) for awards of stock options,
our ESPP and issuance of restricted and unrestricted stock awards and units. We
expense stock-based compensation using the straight-line method over the vesting
requirement period. For the years ended December 31, 2008, 2007 and 2006,
stock-based compensation expense was $16.6 million, $11.7 million and $9.7
million and the related tax benefit was $3.5 million, $2.9 million and $1.7
million, respectively. We have not capitalized any stock-based compensation
expense. We issue new shares of common stock upon the exercise of stock options
or when vesting conditions on restricted awards are fully satisfied.
The fair
value of stock options and ESPP awards issued were estimated at the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
|
Employee
Stock Options
|
ESPP
|
|||||||||||
|
Year
Ended December 31,
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||
|
Dividend
yield
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
|
Expected
volatility
|
44.8%
|
38.9%
|
43.1%
|
48.5%
|
26.7%
|
41.3%
|
||||||
|
Risk-free
interest rate
|
3.0%
|
4.4%
|
4.8%
|
1.8%
|
4.8%
|
4.7%
|
||||||
|
Expected
life (years)
|
4.5
|
4.8
|
4.6
|
0.25
|
0.25
|
0.25
|
||||||
Expected
volatility is based on a combination of historical volatility of our common
stock and the implied volatility of our traded options for the related expected
life period. We believe this combined approach is reflective of current and
historical market conditions and an appropriate indicator of expected
volatility. The risk-free interest rate is the rate available as of the award
date on zero-coupon U.S. government issues with a remaining term equal to the
expected life of the award. The expected life is the weighted average expected
life for the entire award based on the fixed period of time between the date the
award is granted and the date the award is fully exercised. Factors considered
in estimating the expected life include historical experience of similar awards,
with consideration to the contractual terms, vesting schedules and expectations
of future employee behavior. We have not paid dividends in the past and do not
plan to pay any dividends in the foreseeable future.
Subject
to stock splits, dividends and other similar events, 5,875,000 shares of common
stock are reserved and authorized for issuance under our Amended and Restated
2000 Stock Incentive Plan. Of the authorized shares under the plan, no more than
1.0 million shares can be issued as non-stock options (awards). Awards
consist of restricted stock units, restricted stock awards and unrestricted
stock awards. At December 31, 2008, shares available for issuance as either
options or awards were 533,705.
Stock
Options
Options
to purchase the Company’s common stock are granted to employees and the Board of
Directors with an exercise price equal to the market close price of the stock on
the date the Board of Directors approve the grant. Options generally become
exercisable in three or four equal installments beginning one year from the date
of grant and generally expire 10 years from the date of grant.
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average grant date fair values
of the stock options granted during the years ended December 31, 2008, 2007 and
2006 were $39.07, $27.44 and $21.01 per share, respectively. Compensation
expense related to stock options for the years ended December 31, 2008, 2007 and
2006 was $8.8 million, $9.2 million and $8.6 million, respectively.
Compensation expense is recognized only for those options expected to vest, with
forfeitures estimated based on our historical experience and future
expectations.
A summary
of our stock option activity for the years ended December 31, 2008, 2007 and
2006 is as follows:
|
Shares
|
Weighted
Average Exercise Price per Share
|
Weighted
Average Remaining Contractual Life
|
Aggregate
Intrinsic Value
|
|||||||
|
(in
thousands)
|
(years)
|
(in
thousands)
|
||||||||
|
Outstanding,
January 1, 2006
|
2,443
|
$ | 21.24 | 6.89 | $ | 46,189 | ||||
|
Granted
|
600 | 49.39 | ||||||||
|
Exercised
|
(751 | ) | 17.32 | |||||||
|
Forfeited
|
(67 | ) | 33.55 | |||||||
|
Outstanding,
December 31, 2006
|
2,225 | $ | 29.78 | 7.46 | $ | 49,469 | ||||
|
Exercisable
and expected to vest, December 31, 2006
|
2,004 | $ | 28.55 | 7.31 | $ | 46,986 | ||||
|
Exercisable,
December 31, 2006
|
1,032 | $ | 18.13 | 5.98 | $ | 34,797 | ||||
|
Granted
|
230 | 68.45 | ||||||||
|
Exercised
|
(828 | ) | 24.24 | |||||||
|
Forfeited
|
(59 | ) | 44.28 | |||||||
|
Expired
|
(7 | ) | 42.62 | |||||||
|
Outstanding,
December 31, 2007
|
1,561 | $ | 37.81 | 6.98 | $ | 90,769 | ||||
|
Exercisable
and expected to vest, December 31, 2007
|
1,405 | $ | 36.26 | 6.82 | $ | 83,896 | ||||
|
Exercisable,
December 31, 2007
|
798 | $ | 23.84 | 5.51 | $ | 57,582 | ||||
|
Granted
|
247 | 95.79 | ||||||||
|
Exercised
|
(415 | ) | 26.42 | |||||||
|
Forfeited
|
(18 | ) | 47.70 | |||||||
|
Expired
|
(1 | ) | 21.30 | |||||||
|
Outstanding,
December 31, 2008
|
1,374 | $ | 51.53 | 6.99 | $ | 25,809 | ||||
|
Exercisable
and expected to vest, December 31, 2008
|
1,325 | $ | 50.50 | 6.92 | $ | 25,673 | ||||
|
Exercisable,
December 31, 2008
|
805 | $ | 35.71 | 5.89 | $ | 23,253 | ||||
The
aggregate intrinsic value in the table above is the amount by which the market
value of the underlying stock exceeded the exercise price of the outstanding
options before applicable income taxes, based on the closing stock price on the
last business day of the period, which represents amounts that would have been
received by the optionees had all options been exercised on that date. As of
December 31, 2008 total unrecognized stock-based compensation expense related to
nonvested stock options, net of estimated forfeitures, was approximately $10.2
million, which is expected to be recognized over a weighted average period of
approximately 19 months. During the years ended December 31, 2008, 2007 and
2006, the total intrinsic value of stock options exercised was $28.5 million,
$43.1 million and $30.3 million, respectively.
Restricted
Stock Units
Certain
employees and senior management receive restricted stock units or restricted
stock awards (collectively “restricted awards”) as a component of their total
compensation. The fair value of a restricted award is the market close price of
our common stock on the date of grant. Restricted awards, unrelated to the
Long-Term Performance Plan, generally vest over a three year period.
Compensation expense, net of forfeitures, is recognized over the service
period.
The
issuance of restricted awards under the Long-Term Performance Plan (LTPP) is
contingent on the attainment of annual goals. Vesting of these awards occurs
three years after issuance. Compensation expense, net of forfeitures, is
recognized over the annual performance and service periods. If the annual goals
are not achieved, no compensation expense is recognized and any recognized
compensation cost is reversed. The maximum restricted awards attainable for the
2008 performance period is 53,119 with an associated grant date fair value of
$77.74 per share. The restricted awards issued under the 2007 and 2006 plans
totaled 21,392 and 25,065 with associated per share fair values of $62.52 and
$62.90, respectively.
Upon
vesting, the restricted awards are converted into shares of the Company’s common
stock on a one-for-one basis and issued to employees. The Company is entitled to
an income tax deduction in an amount equal to the taxable income reported by the
employee upon vesting of the restricted awards.
Total
compensation expense recognized for restricted awards was $6.9 million, $1.8
million and $436,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. As of December 31, 2008, unrecognized compensation expense, net of
estimated forfeitures, was $12.4 million, which is expected to be
recognized over a weighted average period of approximately 20 months. The
total fair value of awards vested was $84,000, $80,000 and $66,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
The
following table summarizes restricted award activity for the years ended
December 31, 2008, 2007 and 2006:
|
Number
of Restricted Awards
(in
thousands)
|
Weighted-Average
Grant Date Fair Value
|
|||||
|
Nonvested,
January 1, 2006
|
- | |||||
|
Granted
|
30 | |||||
|
Vested
|
(1 | ) | ||||
|
Forfeited
|
(7 | ) | ||||
|
Nonvested,
December 31, 2006
|
22 | $ | 59.16 | |||
|
Granted
|
94 | |||||
|
Vested
|
(1 | ) | ||||
|
Forfeited
|
(4 | ) | ||||
|
Nonvested,
December 31, 2007
|
111 | $ | 66.92 | |||
|
Granted
|
215 | |||||
|
Vested
|
(1 | ) | ||||
|
Forfeited
|
(12 | ) | ||||
|
Nonvested,
December 31, 2008
|
313 | $ | 78.55 | |||
Unrestricted
Stock Awards
We issue
unrestricted stock awards to our Board of Directors as part of their
compensation. Awards are fully vested at issuance and are expensed when issued.
The fair value of unrestricted stock awards is the market close price of our
common stock on the date of grant. During the years ended December 31, 2008,
2007 and 2006, we issued 2,744, 4,938 and 5,762 shares of unrestricted stock
with a weighted average grant date fair value of $97.94, $61.61 and $50.71 per
share, respectively. The expense related to these awards for the years ended
December 31, 2008, 2007 and 2006 was $269,000, $304,000 and $292,000,
respectively.
Employee
Stock Purchase Plan
Under the
terms of the ESPP, eligible employees can elect to deduct up to 10% of their
regular cash compensation to purchase our common stock at a discounted price.
The purchase price of the common stock is 85% of the fair market value of the
stock at the end of each fiscal quarter. Under the ESPP, we sold 33,149, 39,840
and 48,442 shares to employees in the years ended December 31, 2008, 2007 and
2006, respectively. The fair value of ESPP awards issued is estimated using the
Black-Scholes option-pricing model. The weighted average fair value of the ESPP
awards issued in the years ended December 31, 2008, 2007 and 2006 was $15.36,
$10.90 and $8.63 per share, respectively. The expense related to ESPP for the
years ended December 31, 2008, 2007 and 2006 was $589,000, $393,000 and
$386,000, respectively. At December 31, 2008, all compensation cost associated
with the ESPP had been recognized. There were approximately 309,000 shares of
common stock available for future issuance under the ESPP at December 31,
2008.
Note
11: Employee Savings Plans and Bonus, Profit
Sharing
Employee
Savings Plan
We have
an employee incentive savings plan in which substantially all of our U.S.
employees are eligible to participate. Employees may contribute, on a
tax-deferred basis, from 1% to 50% of their salary, up to the annual Internal
Revenue Service limit. We provide a 50% match on the first 6% of the employee
salary deferral, subject to statutory limitations. The expense for our matching
contribution was $3.4 million, $3.5 million and $3.0 million for the years ended
December 31, 2008, 2007 and 2006.
Bonus
and Profit Sharing
We have
employee bonus and profit sharing plans in which many of our employees
participate, which provide award amounts for the achievement of annual
performance and financial targets. Actual award amounts are determined at the
end of the year if the performance and financial targets are met. As the bonuses
are being earned during the year, we estimate a compensation accrual each
quarter based on the progress towards achieving the goals, the estimated
financial forecast for the year and the probability of achieving results. An
accrual is recorded if management determines it probable that a target will be
achieved and the amount can be reasonably estimated. Although we monitor our
annual forecast and the progress towards achievement of goals, the actual
results at the end of the year may warrant a bonus award that is significantly
greater or less than the estimates made in earlier quarters. Bonus and profit
sharing expense was $15.2 million, $12.9 million and $9.4 million for the
years ended December 31, 2008, 2007 and 2006.
Note
12: Income Taxes
The
following table summarizes the provision (benefit) for U.S. federal, state and
foreign taxes on income from continuing operations:
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
(in
thousands)
|
|||||||||||
|
Current:
|
|||||||||||
|
Federal
|
$ | - | $ | 316 | $ | 2,428 | |||||
|
State
and local
|
(82 | ) | 76 | 1,319 | |||||||
|
Foreign
|
42,120 | 18,647 | 290 | ||||||||
|
Total
current
|
42,038 | 19,039 | 4,037 | ||||||||
|
Deferred:
|
|||||||||||
|
Federal
|
(2,838 | ) | (4,407 | ) | 15,052 | ||||||
|
State
and local
|
(1,807 | ) | (434 | ) | 1,093 | ||||||
|
Foreign
|
(33,429 | ) | (31,921 | ) | (1,504 | ) | |||||
|
Total
deferred
|
(38,074 | ) | (36,762 | ) | 14,641 | ||||||
|
Change
in valuation allowance
|
50 | 1,287 | (202 | ) | |||||||
|
Total
provision (benefit) for income taxes
|
$ | 4,014 | $ | (16,436 | ) | $ | 18,476 | ||||
A
reconciliation of income taxes at the U.S. federal statutory rate of 35% to the
consolidated actual tax rate is as follows:
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
(in
thousands)
|
|||||||||||
|
Income
(loss) before income taxes
|
|||||||||||
|
Domestic
|
$ | 82,459 | $ | 50,779 | $ | 52,068 | |||||
|
Foreign
|
(50,386 | ) | (83,359 | ) | 167 | ||||||
|
Total
income (loss) before income taxes
|
$ | 32,073 | $ | (32,580 | ) | $ | 52,235 | ||||
|
Expected
federal income tax provision (benefit)
|
$ | 11,227 | $ | (11,404 | ) | $ | 18,282 | ||||
|
Tax
credits
|
(4,341 | ) | (2,091 | ) | (2,433 | ) | |||||
|
State
income tax (benefit) provision, net of federal effect
|
(1,391 | ) | (1,260 | ) | 2,501 | ||||||
|
Change
in valuation allowance
|
50 | 1,287 | (202 | ) | |||||||
|
Acquired
in process research and development
|
- | 11,002 | - | ||||||||
|
Uncertain
tax positions, including interest and penalties
|
5,555 | 4,188 | - | ||||||||
|
Foreign
earnings
|
(10,123 | ) | (6,646 | ) | (837 | ) | |||||
|
Change
in tax rates
|
(1,222 | ) | (12,316 | ) | - | ||||||
|
Stock-based
compensation
|
1,212 | 113 | 1,876 | ||||||||
|
Disallowed
deductions
|
1,317 | - | - | ||||||||
|
Other,
net
|
1,730 | 691 | (711 | ) | |||||||
|
Total
provision (benefit) for income taxes
|
$ | 4,014 | $ | (16,436 | ) | $ | 18,476 | ||||
Our tax
provision for 2008 and the tax benefit for 2007 reflect benefits associated with
lower effective tax rates on foreign earnings. We made an election under
Internal Revenue Code Section 338 with respect to the Actaris acquisition, which
resulted in a reduced global effective tax rate. Additionally, our reduced
foreign tax liability reflects the benefit of foreign interest expense
deductions.
Deferred
tax assets and liabilities consist of the following:
|
At
December 31,
|
|||||||
|
2008
|
2007
|
||||||
|
(in
thousands)
|
|||||||
|
Deferred
tax assets
|
|||||||
|
Loss
carryforwards
|
$ | 62,538 | $ | 53,685 | |||
|
Tax
credits
|
21,995 | 24,442 | |||||
| Depreciation and amortization | 19,219 | 15,706 | |||||
|
Derivatives
|
13,754 | 16,306 | |||||
|
Warranty
reserves
|
9,652 | 7,642 | |||||
|
Accrued
expenses
|
8,090 | 8,250 | |||||
|
Equity
compensation
|
6,014 | 3,028 | |||||
|
Pension
plan benefits expense
|
5,200 | 6,388 | |||||
|
Iventory
valuation
|
2,376 | 3,109 | |||||
|
Other,
net
|
5,237 | - | |||||
|
Total
deferred tax assets
|
154,075 | 138,556 | |||||
|
Valuation
allowance
|
(16,219 | ) | (13,203 | ) | |||
|
Net
deferred tax asset
|
137,856 | 125,353 | |||||
|
Deferred
tax liabilities
|
|||||||
|
Depreciation
and amortization
|
(149,716 | ) | (208,175 | ) | |||
|
Convertible
debt
|
(12,625 | ) | (5,846 | ) | |||
|
Other,
net
|
(1,509 | ) | (2,424 | ) | |||
|
Tax
effect of accumulated translation
|
(1,064 | ) | (1,869 | ) | |||
|
Total
deferred tax liabilities
|
(164,914 | ) | (218,314 | ) | |||
|
Net
deferred tax liabilities
|
$ | (27,058 | ) | $ | (92,961 | ) | |
In
accordance with SFAS 109, Accounting for Income Taxes,
we record valuation allowances to reduce deferred income tax assets to the
extent we believe it is more likely than not that a portion of such assets will
not be realized. In making such determinations, we consider all available
positive and negative evidence, including scheduled reversals of deferred income
tax liabilities, projected future taxable income, tax planning strategies and
our ability to carry back losses to prior years. Realization is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward periods are reduced.
At
December 31, 2008, we had federal loss carryforwards of $69.7 million that
expire during the years 2018 through 2028. The remaining portion of the loss
carryforwards are composed primarily of Actaris’ losses in various foreign
jurisdictions. The majority of these losses can be carried forward indefinitely.
At December 31, 2008, there was a valuation allowance of $15.6 million
associated with Actaris’ foreign loss carryforwards. We also had federal
research and development tax credits of $16.1 million, which begin to expire in
2018. We have unused alternative minimum tax credits of $2.5 million at December
31, 2008, which are available to reduce future income tax liabilities. The
alternative minimum tax credits may be carried forward
indefinitely.
Pursuant
to SFAS 123(R), our deferred income tax assets at December 31, 2008 do not
include the tax effect on $54.6 million of windfall tax benefits from employee
stock option exercises. Equity (common stock) will be increased by $20.9 million
if and when such excess tax benefits reduce taxes payable.
We are
subject to income tax in the U.S. federal jurisdiction and numerous foreign and
state jurisdictions. The Internal Revenue Service has completed its examination
of our federal income tax returns for the tax years through 1995. Due to the
existence of net operating loss and tax credit carryforwards, tax years
subsequent to 1995 remain open to examination by the major tax jurisdictions to
which we are subject. Due to the geographic breadth of our operations, numerous
tax audits may be ongoing throughout the world at any point in time. Tax
liabilities are recorded based on estimates of additional taxes, which will be
due upon the conclusion of these audits. Estimates of these tax liabilities are
made based upon prior experience and are updated in light of changes in facts
and circumstances. Due to the uncertain and complex application of tax
regulations, it is possible that the ultimate resolution of audits may result in
liabilities, which could be different from these estimates.
In
accordance with Accounting Principles Board Opinion 23, Accounting for Income Taxes-Special
Areas, we do not provide U.S. deferred income taxes on temporary
differences related to our foreign investments that are considered permanent in
duration. These temporary differences consist primarily of undistributed foreign
earnings of $30.8 million and $11.1 million at December 31, 2008 and 2007,
respectively. Foreign taxes have been provided on these undistributed foreign
earnings. Determination of the amount of deferred taxes on these temporary
differences is not practicable due to foreign tax credits and
exclusions.
We
adopted the provisions of FIN 48 on January 1, 2007. FIN 48 clarifies the
accounting for uncertain tax positions and requires companies to recognize the
impact of a tax position in their financial statements, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. As a result of the implementation of FIN 48, we recorded a $5.4
million increase in the liability for unrecognized tax benefits, with a
corresponding increase in deferred tax assets. Our implementation did not
require an adjustment to retained earnings.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
|
Unrecognized
tax benefits at January 1, 2007
|
$ | 5,422 | |
|
Actaris
acquisition opening balance
|
27,498 | ||
|
Gross
increase to positions in prior years
|
2,171 | ||
|
Gross
increases to current period tax positions
|
835 | ||
|
Audit
settlements
|
(815 | ) | |
|
Effect
of change in exchange rates
|
(332 | ) | |
|
Unrecognized
tax benefits at December 31, 2007
|
$ | 34,779 | |
|
Gross
increase to positions in prior years
|
1,239 | ||
|
Gross
increases to current period tax positions
|
3,267 | ||
|
Audit
settlements
|
(391 | ) | |
|
Effect
of change in exchange rates
|
(1,250 | ) | |
|
Unrecognized
tax benefits at December 31, 2008
|
$ | 37,644 |
We
classify interest expense and penalties related to unrecognized tax benefits and
interest income on tax overpayments as components of income tax expense. For
each of the years ended December 31, 2008 and 2007, we recognized interest and
penalties of approximately $1.2 million. At December 31, 2008 and 2007, the
amount of accrued interest totaled $3.2 million and $2.7 million, respectively,
and the amount of accrued penalties totaled $2.9 million and $2.2 million,
respectively. The amount of unrecognized tax benefits that would affect our
actual tax rate at December 31, 2008, December 31, 2007 and January 1, 2007 were
$37.0 million, $8.4 million and $5.4 million, respectively. At December 31,
2008, we expect to pay $4.5 million in income tax obligations related to FIN 48
over the next 12 months. We are not able to reasonably estimate the timing of
future cash flows relating to the remaining balance.
We file
income tax returns in the U.S. federal jurisdiction and various states and
foreign jurisdictions. We are subject to income tax examination by tax
authorities in our major tax jurisdictions as follows:
|
Tax
Jurisdiction
|
Years
Subject to Audit
|
|
|
U.S.
federal
|
Subsequent
to 1995
|
|
|
France
|
Subsequent
to 2006
|
|
|
Germany
|
Subsequent
to 2003
|
|
|
Spain
|
Subsequent
to 2003
|
|
|
United
Kingdom
|
Subsequent
to 2001
|
Note
13: Commitments and Contingencies
Commitments
Operating
lease rental expense for warehouse, manufacturing and office facilities and
equipment was $15.6 million, $12.4 million and $7.0 million in 2008,
2007 and 2006, respectively. The increase in rental expense for 2008 compared
with 2007 is the result of incorporating a full year of expenses for Actaris,
which was acquired on April 18, 2007.
Future
minimum lease payments at December 31, 2008, under noncancelable operating
leases with initial or remaining terms in excess of one year are as
follows:
|
Minimum
Payments
|
|||
|
(in
thousands)
|
|||
|
2009
|
$ | 9,207 | |
|
2010
|
5,656 | ||
|
2011
|
3,146 | ||
|
2012
|
2,279 | ||
|
2013
|
1,143 | ||
|
Beyond
2013
|
1,147 | ||
|
Future
minimum lease payments
|
$ | 22,578 | |
Rent
expense is recognized straight-line over the lease term, including renewal
periods if reasonably assured. We lease most of our sales and administration
offices. Our leases typically contain renewal options similar to the original
terms with lease payments that increase based on the consumer price
index.
Guarantees
and Indemnifications
We are
often required to obtain letters of credit or bonds in support of our
obligations for customer contracts. These letters of credit or bonds typically
provide a guarantee to the customer for future performance, which usually covers
the installation phase of a contract and may on occasion cover the operations
and maintenance phase of outsourcing contracts. At December 31, 2008, in
addition to the outstanding standby letters of credit of $50.2 million issued
under our credit facility’s $115 million multicurrency revolver, our
Actaris operating segment has a total of $28.8 million of unsecured
multicurrency revolving lines of credit with various financial institutions with
total outstanding standby letters of credit of $6.7 million. At December 31,
2007, Actaris had $28.0 million of unsecured multicurrency revolving line of
credit with total outstanding standby letters of credit of $5.9 million.
Unsecured surety bonds in force were $33.1 million and $13.8 million at
December 31, 2008 and 2007, respectively. The increase in bonds relates to
a major sales contract signed in 2007. In the event any such bonds or letters of
credit are called, we would be obligated to reimburse the issuer of the letter
of credit or bond; however, we do not believe that any currently outstanding
bonds or letters of credit will be called.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Legal
Matters
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at December 31, 2008 were not material to our
financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger Limited. PT Berca claims that it had preemptive
rights in the joint venture and has sought to nullify the transaction in 2001
whereby Schlumberger transferred its ownership interest in PT Mecoindo to an
Actaris subsidiary. The plaintiff also seeks to collect damages for the earnings
it otherwise would have earned had its alleged preemptive rights been observed.
The Indonesian courts have awarded 129.6 billion rupiahs ($11.7 million) in
damages, plus accrued interest at 18% annually, against the defendants and have
invalidated the 2001 transfer of the Mecoindo interest to a subsidiary of
Actaris. All of the parties have appealed the matter and it is currently pending
before the Indonesian Supreme Court. We intend to continue vigorously defending
our interest. In addition, Actaris has notified Schlumberger that it will seek
to have Schlumberger indemnify Actaris from any damages it may incur as a result
of this claim. In any event, we do not believe that an adverse outcome is likely
to have a material adverse impact to our financial condition or results of
operations.
Note
14: Shareholders’ Equity
Shareholder
Rights Plan
On
November 4, 2002, the Board of Directors authorized the implementation of a
Shareholder Rights Plan and declared a dividend of one preferred share purchase
right (Right) for each outstanding share of common stock, without par value. The
Rights will separate from the common stock and become exercisable following the
earlier of (i) the close of business on the tenth business day after a
public announcement that a person or group (including any affiliate or associate
of such person or group) has acquired beneficial ownership of 15% or more of the
outstanding common shares and (ii) the close of business on such date, if
any, as may be designated by the Board of Directors following the commencement
of, or first public disclosure of an intent to commence, a tender or exchange
offer for outstanding common shares, which could result in the offeror becoming
the beneficial owner of 15% or more of the outstanding common shares (the
earlier of such dates being the distribution date). After the distribution date,
each Right will entitle the holder to purchase, for $160, one one-hundredth
(1/100) of a share of Series R Cumulative Participating Preferred Stock of
the Company (a Preferred Share) with economic terms similar to that of one
common share.
In the
event a person or group becomes an acquiring person, the Rights will entitle
each holder of a Right to purchase, for the purchase price, that number of
common shares equivalent to the number of common shares, which at the time of
the transaction would have a market value of twice the purchase price. Any
Rights that are at any time beneficially owned by an acquiring person will be
null and void and nontransferable and any holder of any such Right will be
unable to exercise or transfer any such Right. If, at any time after any person
or group becomes an acquiring person, we are acquired in a merger or other
business combination with another entity, or if 50% or more of its assets or
assets accounting for 50% or more of its net income or revenues are transferred,
each Right will entitle its holder to purchase, for the purchase price, that
number of shares of common stock of the person or group engaging in the
transaction having a then current market value of twice the purchase price. At
any time after any person or group becomes an acquiring person, but before a
person or group becomes the beneficial owner of more than 50% of the common
shares, the Board of Directors may elect to exchange each Right for
consideration per Right consisting of one-half of the number of common shares
that would be issuable at such time on the exercise of one Right and without
payment of the purchase price. At any time prior to any person or group becoming
an acquiring person, the Board of Directors may redeem the Rights in whole, but
not in part, at a price of $0.01 per Right, subject to adjustment as provided in
the Rights Agreement. The Rights are not exercisable until the distribution date
and will expire on December 11, 2012, unless earlier redeemed or exchanged
by us.
The terms
of the Rights and the Rights Agreement may be amended without the approval of
any holder of the Rights, at any time prior to the distribution date. Until a
Right is exercised, the holder thereof will have no rights as a shareholder of
the Company, including, without limitation, the right to vote or receive
dividends. In order to preserve the actual or potential economic value of the
Rights, the number of Preferred Shares or other securities issuable upon
exercise of the Right, the purchase price, the redemption price and the number
of Rights associated with each outstanding common share are all subject to
adjustment by the Board of Directors pursuant to certain customary antidilution
provisions. The Rights distribution should not be taxable for federal income tax
purposes. Following an event that renders the Rights exercisable or upon
redemption of the Rights, shareholders may recognize taxable
income.
Other
Comprehensive Income
Other
comprehensive income is reflected as a net increase to shareholders’ equity and
is not reflected in our results of operations. Accumulated balances within other
comprehensive income were as follows:
|
At
December 31,
|
|||||||
|
2008
|
2007
|
||||||
|
(in
thousands)
|
|||||||
|
Foreign
currency translation adjustment, net of tax
|
$ | 50,565 | $ | 149,204 | |||
|
Net
unrealized loss on derivative instruments, net of tax
|
(23,768 | ) | (26,522 | ) | |||
|
Net
hedging gains reclassified into net losses, net of tax
|
497 | 19 | |||||
|
Pension
plan benefits liability adjustment, net of tax
|
6,799 | 3,967 | |||||
|
Total
accumulated other comprehensive income
|
$ | 34,093 | $ | 126,668 | |||
Note
15: Fair Values of Financial Instruments
The fair
values provided are representative of fair values only at December 31, 2008
and 2007 and do not reflect subsequent changes in the economy, interest and tax
rates and other variables that may affect determination of fair value. The
following methods and assumptions were used in estimating fair
values.
Cash and cash equivalents:
Due to the liquid nature of these instruments, the carrying value approximates
fair value.
Term loans: The fair value is
based on risk-adjusted discounted cash flows at December 31, 2008. The foreign
currency component is revalued at spot rates at December 31, 2008.
Convertible senior subordinated
notes: The convertible notes are registered with the SEC and are
generally transferable. The fair value is based on quoted prices from recent
broker trades of the convertible notes.
Senior subordinated notes:
The senior subordinated notes are registered with the SEC and are generally
transferable. The fair value is based on quoted prices from recent broker trades
of the senior subordinated notes.
Derivatives: See Note 8 for a
description of our methods and assumptions in determining the fair value of our
derivatives, which were determined using fair value measurements of significant
other observable inputs (Level 2), as defined by SFAS 157.
|
At
December 31, 2008
|
At
December 31, 2007
|
|||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||
|
(in
thousands)
|
||||||||||||
|
Assets
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 144,390 | $ | 144,390 | $ | 91,988 | $ | 91,988 | ||||
|
Liabilities
|
||||||||||||
|
Term
loans
|
||||||||||||
|
USD
denominated term loan
|
375,744 | 317,128 | 596,793 | 581,873 | ||||||||
|
EUR
denominated term loan
|
360,494 | 308,073 | 445,228 | 427,975 | ||||||||
|
GBP
denominated term loan
|
- | - | 79,091 | 77,311 | ||||||||
|
Convertible
senior subordinated notes
|
344,588 | 380,985 | 345,000 | 554,532 | ||||||||
|
Senior
subordinated notes
|
109,192 | 95,478 | 124,429 | 122,344 | ||||||||
|
Interest
rate swap
|
17,495 | 17,495 | 1,744 | 1,744 | ||||||||
|
Cross
currency swap
|
- | - | 410 | 410 | ||||||||
|
Foreign
exchange forwards
|
67 | 67 | - | - | ||||||||
Note
16: Segment Information
The
Actaris operating segment consists primarily of the operations from the Actaris
acquisition as well as other Itron operations not located in North America that
are now included in the Actaris segment. The operations of the Actaris operating
segment are primarily located in Europe, with approximately 5% of revenues
located in the United States and approximately 20% located throughout the rest
of the world. Our remaining operations, primarily located in the United States
and Canada, have been combined into a single operating segment called Itron
North America. As we continue to integrate the Actaris acquisition, certain
refinements of our segments may occur. The operating segment information as set
forth below is based on our current segment reporting structure. In accordance
with SFAS 131, Disclosures
about Segments of an Enterprise and Related Information, historical
segment information for 2007 has been restated from the segment information
previously provided to conform to the segment reporting structure after the
April 18, 2007 Actaris acquisition and our January 1, 2008 refinement. For the
January 1, 2008 refinement, we have not restated the historical segment
reporting for 2006 as the amounts were not material.
We have
three measures of segment performance: revenue, gross profit (margin) and
operating income (margin). Intersegment revenues were minimal. Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Depreciation and amortization expenses
are allocated to our segments. For each of the years ended December 31, 2008,
2007 and 2006, Itron North America depreciation and amortization expense was
$41.4 million, $43.8 million and $46.2 million. Depreciation and amortization
expense for Actaris for the years ended December 31, 2008 and 2007 was $132.2
million and $82.6 million.
Segment
Products
|
Itron
North America
|
Electronic
electricity meters with and without automated meter reading (AMR); gas and
water AMR modules; handheld, mobile and network AMR data collection
technologies; advanced metering infrastructure (AMI) technologies;
software, installation, implementation, consulting, maintenance support
and other services.
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad and
smart card; two-way gas prepayment systems using smart card; AMR and AMI
data collection technologies; installation, implementation, maintenance
support and other managed services.
|
Segment
Information
|
Year
Ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
(in
thousands)
|
|||||||||||
| Revenues | |||||||||||
|
Itron
North America
|
$ | 628,247 | $ | 593,526 | $ | 644,042 | |||||
|
Actaris
|
1,281,366 | 870,522 | - | ||||||||
|
Total
Company
|
$ | 1,909,613 | $ | 1,464,048 | $ | 644,042 | |||||
|
Gross
profit
|
|||||||||||
|
Itron
North America
|
$ | 247,755 | $ | 247,250 | $ | 267,442 | |||||
|
Actaris
|
399,102 | 240,037 | - | ||||||||
|
Total
Company
|
$ | 646,857 | $ | 487,287 | $ | 267,442 | |||||
|
Operating
income (loss)
|
|||||||||||
|
Itron
North America
|
$ | 77,074 | $ | 74,394 | $ | 89,028 | |||||
|
Actaris
|
70,430 | 4,115 | - | ||||||||
|
Corporate
unallocated
|
(37,682 | ) | (32,036 | ) | (27,285 | ) | |||||
|
Total
Company
|
109,822 | 46,473 | 61,743 | ||||||||
|
Total
other income (expense)
|
(77,749 | ) | (79,053 | ) | (9,508 | ) | |||||
|
Income
(loss) before income taxes
|
$ | 32,073 | $ | (32,580 | ) | $ | 52,235 | ||||
No single
customer represented more than 10% of total Company revenues for the years ended
December 31, 2008 and 2007. One customer accounted for 16% of total Company
revenues for the year ended December 31, 2006.
For the
Itron North America operating segment, one customer accounted for 10% of
revenues for the year ended December 31, 2008. No single customer
represented more than 10% of segment revenues for the year ended December 31,
2007.
For the
Actaris operating segment, no single customer represented more than 10% of
revenues for the years ended December 31, 2008 and 2007.
Total
assets by operating segment were as follows:
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
(in
thousands)
|
|||||||
|
Itron
North America/Corporate(1)
|
$ | 596,206 | $ | 626,678 | |||
|
Actaris
|
2,288,408 | 2,445,125 | |||||
|
Eliminations
|
(13,400 | ) | (21,237 | ) | |||
|
Total
assets
|
$ | 2,871,214 | $ | 3,050,566 | |||
|
(1)
|
We
do not allocate assets between the Itron North America operating segment
and Corporate.
|
Revenues
by region were as follows:
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
|||||||||
|
Europe
|
$ | 916,288 | $ | 623,625 | $ | 3,999 | |||
|
United
States and Canada
|
647,966 | 596,585 | 602,942 | ||||||
|
Other
|
345,359 | 243,838 | 37,101 | ||||||
|
Total
revenues
|
$ | 1,909,613 | $ | 1,464,048 | $ | 644,042 | |||
Property,
plant and equipment, net, by geographic area was as follows:
|
December
31,
|
||||||
|
2008
|
2007
|
|||||
|
(in
thousands)
|
||||||
|
United
States
|
$ | 96,952 | $ | 85,036 | ||
|
Outside
United States
|
210,765 | 237,967 | ||||
|
Total
property, plant and equipment, net
|
$ | 307,717 | $ | 323,003 | ||
Note
17: Consolidating Financial Information
Our
subordinated notes and convertible notes, issued by Itron, Inc. (the Issuer) are
guaranteed by our U.S. domestic subsidiaries, which are 100% owned, and any
future domestic subsidiaries. The guarantees are joint and several, full,
complete and unconditional. There are currently no restrictions on the ability
of the subsidiary guarantors to transfer funds to the parent
company.
The
Actaris acquisition on April 18, 2007 consisted primarily of international
entities. These entities are considered non-guarantor subsidiaries of our
subordinated notes and convertible notes.
|
Consolidating
Statement of Operations
|
|||||||||||||||||||
|
Year
Ended December 31, 2008
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Revenues
|
$ | 606,741 | $ | 77,828 | $ | 1,264,845 | $ | (39,801 | ) | $ | 1,909,613 | ||||||||
|
Cost
of revenues
|
368,275 | 61,170 | 873,052 | (39,741 | ) | 1,262,756 | |||||||||||||
|
Gross
profit
|
238,466 | 16,658 | 391,793 | (60 | ) | 646,857 | |||||||||||||
|
Operating
expenses
|
|||||||||||||||||||
|
Sales
and marketing
|
54,180 | 8,853 | 104,424 | - | 167,457 | ||||||||||||||
|
Product
development
|
73,572 | 3,513 | 43,674 | (60 | ) | 120,699 | |||||||||||||
|
General
and administrative
|
49,797 | 2,826 | 75,892 | - | 128,515 | ||||||||||||||
|
Amortization
of intangible assets
|
22,648 | - | 97,716 | - | 120,364 | ||||||||||||||
|
Total
operating expenses
|
200,197 | 15,192 | 321,706 | (60 | ) | 537,035 | |||||||||||||
|
Operating
income
|
38,269 | 1,466 | 70,087 | - | 109,822 | ||||||||||||||
|
Other
income (expense)
|
|||||||||||||||||||
|
Interest
income
|
121,864 | (11 | ) | 4,766 | (120,649 | ) | 5,970 | ||||||||||||
|
Interest
expense
|
(80,264 | ) | (183 | ) | (120,937 | ) | 120,649 | (80,735 | ) | ||||||||||
|
Other
income (expense), net
|
2,072 | (808 | ) | (4,248 | ) | - | (2,984 | ) | |||||||||||
|
Total
other income (expense)
|
43,672 | (1,002 | ) | (120,419 | ) | - | (77,749 | ) | |||||||||||
|
Income
(loss) before income taxes
|
81,941 | 464 | (50,332 | ) | - | 32,073 | |||||||||||||
|
Income
tax benefit (provision)
|
2,536 | (131 | ) | (6,419 | ) | - | (4,014 | ) | |||||||||||
|
Equity
in losses of guarantor and
|
|||||||||||||||||||
|
non-guarantor
subsidiaries, net
|
(56,418 | ) | (876 | ) | - | 57,294 | - | ||||||||||||
|
Net
income (loss)
|
$ | 28,059 | $ | (543 | ) | $ | (56,751 | ) | $ | 57,294 | $ | 28,059 | |||||||
|
Consolidating
Statement of Operations
|
|||||||||||||||||||
|
Year
Ended December 31, 2007
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Revenues
|
$ | 586,552 | $ | 44,543 | $ | 879,147 | $ | (46,194 | ) | $ | 1,464,048 | ||||||||
|
Cost
of revenues
|
348,341 | 34,723 | 639,679 | (45,982 | ) | 976,761 | |||||||||||||
|
Gross
profit
|
238,211 | 9,820 | 239,468 | (212 | ) | 487,287 | |||||||||||||
|
Operating
expenses
|
|||||||||||||||||||
|
Sales
and marketing
|
51,169 | 4,872 | 69,801 | - | 125,842 | ||||||||||||||
|
Product
development
|
66,974 | 1,637 | 26,524 | (209 | ) | 94,926 | |||||||||||||
|
General
and administrative
|
52,737 | 2,594 | 44,740 | - | 100,071 | ||||||||||||||
|
Amortization
of intangible assets
|
26,493 | - | 57,507 | - | 84,000 | ||||||||||||||
|
In-process
research and development
|
- | - | 35,975 | - | 35,975 | ||||||||||||||
|
Total
operating expenses
|
197,373 | 9,103 | 234,547 | (209 | ) | 440,814 | |||||||||||||
|
Operating
income
|
40,838 | 717 | 4,921 | (3 | ) | 46,473 | |||||||||||||
|
Other
income (expense)
|
|||||||||||||||||||
|
Interest
income
|
92,153 | 52 | 4,535 | (86,263 | ) | 10,477 | |||||||||||||
|
Interest
expense
|
(89,025 | ) | (2,994 | ) | (84,212 | ) | 86,266 | (89,965 | ) | ||||||||||
|
Other
income (expense), net
|
9,143 | (798 | ) | (7,910 | ) | - | 435 | ||||||||||||
|
Total
other income (expense)
|
12,271 | (3,740 | ) | (87,587 | ) | 3 | (79,053 | ) | |||||||||||
|
Income
(loss) before income taxes
|
53,109 | (3,023 | ) | (82,666 | ) | - | (32,580 | ) | |||||||||||
|
Income
tax benefit
|
3,042 | 1,112 | 12,282 | - | 16,436 | ||||||||||||||
|
Equity
in losses of guarantor and
|
|||||||||||||||||||
|
non-guarantor
subsidiaries
|
(72,295 | ) | (2,556 | ) | - | 74,851 | - | ||||||||||||
|
Net
loss
|
$ | (16,144 | ) | $ | (4,467 | ) | $ | (70,384 | ) | $ | 74,851 | $ | (16,144 | ) | |||||
|
Consolidating
Statement of Operations
|
|||||||||||||||||||
|
Year
Ended December 31, 2006
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Revenues
|
$ | 618,526 | $ | - | $ | 61,968 | $ | (36,452 | ) | $ | 644,042 | ||||||||
|
Cost
of revenues
|
364,228 | - | 48,160 | (35,788 | ) | 376,600 | |||||||||||||
|
Gross
profit
|
254,298 | - | 13,808 | (664 | ) | 267,442 | |||||||||||||
|
Operating
expenses
|
|||||||||||||||||||
|
Sales
and marketing
|
56,937 | - | 6,650 | - | 63,587 | ||||||||||||||
|
Product
development
|
58,208 | - | 1,389 | (823 | ) | 58,774 | |||||||||||||
|
General
and administrative
|
48,997 | - | 3,058 | 158 | 52,213 | ||||||||||||||
|
Amortization
of intangible assets
|
29,801 | - | 1,324 | - | 31,125 | ||||||||||||||
|
Total
operating expenses
|
193,943 | - | 12,421 | (665 | ) | 205,699 | |||||||||||||
|
Operating
income
|
60,355 | - | 1,387 | 1 | 61,743 | ||||||||||||||
|
Other
income (expense)
|
|||||||||||||||||||
|
Interest
income
|
9,705 | - | 175 | (383 | ) | 9,497 | |||||||||||||
|
Interest
expense
|
(17,444 | ) | - | (723 | ) | 382 | (17,785 | ) | |||||||||||
|
Other
income (expense), net
|
(818 | ) | - | (402 | ) | - | (1,220 | ) | |||||||||||
|
Total
other income (expense)
|
(8,557 | ) | - | (950 | ) | (1 | ) | (9,508 | ) | ||||||||||
|
Income
before income taxes
|
51,798 | - | 437 | - | 52,235 | ||||||||||||||
|
Income
tax (provision) benefit
|
(19,532 | ) | - | 1,056 | - | (18,476 | ) | ||||||||||||
|
Equity
in earnings (losses) of guarantor and
|
|||||||||||||||||||
|
non-guarantor
subsidiaries
|
1,493 | (1,451 | ) | - | (42 | ) | - | ||||||||||||
|
Net
income (loss)
|
$ | 33,759 | $ | (1,451 | ) | $ | 1,493 | $ | (42 | ) | $ | 33,759 | |||||||
|
Consolidating
Balance Sheet
|
|||||||||||||||||||
|
December
31, 2008
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined
Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
ASSETS
|
|||||||||||||||||||
|
Current
assets
|
|||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 67,404 | $ | 3,180 | $ | 73,806 | $ | - | $ | 144,390 | |||||||||
|
Accounts
receivable, net
|
89,458 | 7,868 | 223,952 | - | 321,278 | ||||||||||||||
|
Intercompany
accounts receivable
|
11,221 | 594 | 3,323 | (15,138 | ) | - | |||||||||||||
|
Inventories
|
52,248 | 7,276 | 105,280 | (594 | ) | 164,210 | |||||||||||||
|
Deferred
income taxes, net
|
20,546 | 3,517 | 7,744 | - | 31,807 | ||||||||||||||
|
Other
|
18,360 | 243 | 37,429 | - | 56,032 | ||||||||||||||
|
Intercompany
other
|
6,824 | (26 | ) | 6,302 | (13,100 | ) | - | ||||||||||||
|
Total
current assets
|
266,061 | 22,652 | 457,836 | (28,832 | ) | 717,717 | |||||||||||||
|
Property,
plant and equipment, net
|
96,952 | 16,296 | 194,469 | - | 307,717 | ||||||||||||||
|
Prepaid
debt fees
|
12,943 | - | - | - | 12,943 | ||||||||||||||
|
Deferred
income taxes, net
|
68,816 | 989 | (24,022 | ) | - | 45,783 | |||||||||||||
|
Other
|
7,205 | - | 12,110 | - | 19,315 | ||||||||||||||
|
Intangible
assets, net
|
54,370 | 27,303 | 400,213 | - | 481,886 | ||||||||||||||
|
Goodwill
|
115,140 | 57,540 | 1,113,173 | - | 1,285,853 | ||||||||||||||
|
Investment
in subsidiaries
|
46,393 | 151,268 | (146,364 | ) | (51,297 | ) | - | ||||||||||||
|
Intercompany
notes receivable
|
1,706,034 | - | 2,325 | (1,708,359 | ) | - | |||||||||||||
|
Total
assets
|
$ | 2,373,914 | $ | 276,048 | $ | 2,009,740 | $ | (1,788,488 | ) | $ | 2,871,214 | ||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||||||||||||||
|
Current
liabilities
|
|||||||||||||||||||
|
Accounts
payable
|
$ | 36,962 | $ | 5,198 | $ | 158,565 | $ | - | $ | 200,725 | |||||||||
|
Other
current liabilities
|
19,307 | 126 | 46,932 | - | 66,365 | ||||||||||||||
|
Intercompany
accounts payable
|
3,070 | 1,881 | 10,187 | (15,138 | ) | - | |||||||||||||
|
Wages
and benefits payable
|
25,271 | 1,972 | 51,093 | - | 78,336 | ||||||||||||||
|
Taxes
payable
|
2,369 | 3,496 | 12,730 | - | 18,595 | ||||||||||||||
|
Current
portion of long-term debt
|
10,803 | - | (34 | ) | - | 10,769 | |||||||||||||
|
Current
portion of warranty
|
8,481 | 264 | 14,630 | - | 23,375 | ||||||||||||||
|
Unearned
revenue
|
17,365 | - | 6,964 | - | 24,329 | ||||||||||||||
|
Deferred
income taxes, net
|
- | - | 1,927 | - | 1,927 | ||||||||||||||
|
Short-term
intercompany advances
|
5,001 | 2,704 | 5,395 | (13,100 | ) | - | |||||||||||||
|
Total
current liabilities
|
128,629 | 15,641 | 308,389 | (28,238 | ) | 424,421 | |||||||||||||
|
Long-term
debt
|
1,179,249 | - | - | - | 1,179,249 | ||||||||||||||
|
Warranty
|
11,228 | 317 | 3,335 | - | 14,880 | ||||||||||||||
|
Pension
plan benefits
|
(1 | ) | - | 55,811 | - | 55,810 | |||||||||||||
|
Intercompany
notes payable
|
1,190 | 4,635 | 1,702,534 | (1,708,359 | ) | - | |||||||||||||
|
Deferred
income taxes, net
|
- | 10,615 | 92,105 | - | 102,720 | ||||||||||||||
|
Other
obligations
|
18,228 | 2,389 | 38,126 | - | 58,743 | ||||||||||||||
|
Total
liabilities
|
1,338,523 | 33,597 | 2,200,300 | (1,736,597 | ) | 1,835,823 | |||||||||||||
|
Shareholders'
equity
|
|||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | ||||||||||||||
|
Common
stock
|
951,007 | 246,982 | (47,520 | ) | (199,462 | ) | 951,007 | ||||||||||||
|
Accumulated
other comprehensive income, net
|
34,093 | 1,930 | (11,416 | ) | 9,486 | 34,093 | |||||||||||||
|
Retained
earnings (accumulated deficit)
|
50,291 | (6,461 | ) | (131,624 | ) | 138,085 | 50,291 | ||||||||||||
|
Total
shareholders' equity
|
1,035,391 | 242,451 | (190,560 | ) | (51,891 | ) | 1,035,391 | ||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,373,914 | $ | 276,048 | $ | 2,009,740 | $ | (1,788,488 | ) | $ | 2,871,214 | ||||||||
|
Consolidating
Balance Sheet
|
|||||||||||||||||||
|
December
31, 2007
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined
Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
ASSETS
|
|||||||||||||||||||
|
Current
assets
|
|||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 27,937 | $ | 1,664 | $ | 62,387 | $ | - | $ | 91,988 | |||||||||
|
Accounts
receivable, net
|
95,908 | 7,151 | 235,959 | - | 339,018 | ||||||||||||||
|
Intercompany
accounts receivable
|
15,359 | 25 | 5,855 | (21,239 | ) | - | |||||||||||||
|
Inventories
|
50,049 | 6,584 | 113,804 | (1,199 | ) | 169,238 | |||||||||||||
|
Deferred
income taxes, net
|
5,528 | 1,294 | 3,911 | - | 10,733 | ||||||||||||||
|
Other
|
13,322 | 17 | 29,120 | - | 42,459 | ||||||||||||||
|
Intercompany
other
|
7,729 | 7,800 | 19,365 | (34,894 | ) | - | |||||||||||||
|
Total
current assets
|
215,832 | 24,535 | 470,401 | (57,332 | ) | 653,436 | |||||||||||||
|
Property,
plant and equipment, net
|
85,036 | 12,543 | 225,424 | - | 323,003 | ||||||||||||||
|
Prepaid
debt fees
|
21,616 | - | - | - | 21,616 | ||||||||||||||
|
Deferred
income taxes, net
|
85,963 | 1,275 | (11,995 | ) | - | 75,243 | |||||||||||||
|
Other
|
1,762 | 15 | 13,458 | - | 15,235 | ||||||||||||||
|
Intangible
assets, net
|
77,017 | - | 618,883 | - | 695,900 | ||||||||||||||
|
Goodwill
|
113,846 | 10,001 | 1,142,286 | - | 1,266,133 | ||||||||||||||
|
Investment
in subsidiaries
|
118,733 | 71,943 | (66,192 | ) | (124,484 | ) | - | ||||||||||||
|
Intercompany
notes receivable
|
1,764,792 | 3,282 | 8,656 | (1,776,730 | ) | - | |||||||||||||
|
Total
assets
|
$ | 2,484,597 | $ | 123,594 | $ | 2,400,921 | $ | (1,958,546 | ) | $ | 3,050,566 | ||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||||||||||||||
|
Current
liabilities
|
|||||||||||||||||||
|
Accounts
payable
|
$ | 39,701 | $ | 4,336 | $ | 154,960 | $ | - | $ | 198,997 | |||||||||
|
Other
current liabilities
|
7,124 | 546 | 49,605 | - | 57,275 | ||||||||||||||
|
Intercompany
accounts payable
|
4,258 | 1,842 | 15,139 | (21,239 | ) | - | |||||||||||||
|
Wages
and benefits payable
|
17,419 | 1,750 | 51,317 | - | 70,486 | ||||||||||||||
|
Taxes
payable
|
1,335 | (158 | ) | 16,316 | - | 17,493 | |||||||||||||
|
Current
portion of long-term debt
|
11,980 | - | - | - | 11,980 | ||||||||||||||
|
Current
portion of warranty
|
8,411 | 151 | 12,715 | - | 21,277 | ||||||||||||||
|
Unearned
revenue
|
15,120 | - | 5,792 | - | 20,912 | ||||||||||||||
|
Deferred
income taxes, net
|
- | - | 5,437 | - | 5,437 | ||||||||||||||
|
Short-term
intercompany advances
|
12,807 | 14,782 | 7,305 | (34,894 | ) | - | |||||||||||||
|
Total
current liabilities
|
118,155 | 23,249 | 318,586 | (56,133 | ) | 403,857 | |||||||||||||
|
Long-term
debt
|
1,578,563 | - | (2 | ) | - | 1,578,561 | |||||||||||||
|
Warranty
|
10,104 | 100 | 1,360 | - | 11,564 | ||||||||||||||
|
Pension
plan benefits
|
1 | - | 60,622 | - | 60,623 | ||||||||||||||
|
Intercompany
notes payable
|
1,474 | 7,153 | 1,768,103 | (1,776,730 | ) | - | |||||||||||||
|
Deferred
income taxes, net
|
962 | - | 172,538 | - | 173,500 | ||||||||||||||
|
Other
obligations
|
16,536 | 25 | 47,098 | - | 63,659 | ||||||||||||||
|
Total
liabilities
|
1,725,795 | 30,527 | 2,368,305 | (1,832,863 | ) | 2,291,764 | |||||||||||||
|
Shareholders'
equity
|
|||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | ||||||||||||||
|
Common
stock
|
609,902 | 90,437 | 97,021 | (187,458 | ) | 609,902 | |||||||||||||
|
Accumulated
other comprehensive income, net
|
126,668 | 8,548 | 10,468 | (19,016 | ) | 126,668 | |||||||||||||
|
Retained
earnings (accumulated deficit)
|
22,232 | (5,918 | ) | (74,873 | ) | 80,791 | 22,232 | ||||||||||||
|
Total
shareholders' equity
|
758,802 | 93,067 | 32,616 | (125,683 | ) | 758,802 | |||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,484,597 | $ | 123,594 | $ | 2,400,921 | $ | (1,958,546 | ) | $ | 3,050,566 | ||||||||
|
Year
Ended December 31, 2008
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Operating
activities
|
|||||||||||||||||||
|
Net
income (loss)
|
$ | 28,059 | $ | (543 | ) | $ | (56,751 | ) | $ | 57,294 | $ | 28,059 | |||||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|||||||||||||||||||
|
Depreciation
and amortization
|
41,276 | 2,181 | 130,216 | - | 173,673 | ||||||||||||||
|
Stock-based
compensation
|
16,582 | - | - | - | 16,582 | ||||||||||||||
|
Amortization
of prepaid debt fees
|
8,917 | - | - | - | 8,917 | ||||||||||||||
|
Deferred
income taxes, net
|
5,103 | 7,949 | (51,126 | ) | - | (38,074 | ) | ||||||||||||
|
Equity
in (earnings) losses of guarantor and non-guarantor subsidiaries,
net
|
56,418 | 876 | - | (57,294 | ) | - | |||||||||||||
|
Other,
net
|
(180 | ) | 113 | (2,159 | ) | - | (2,226 | ) | |||||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|||||||||||||||||||
|
Accounts
receivable
|
6,450 | (717 | ) | 14,131 | - | 19,864 | |||||||||||||
|
Inventories
|
(2,804 | ) | (692 | ) | 8,410 | - | 4,914 | ||||||||||||
|
Accounts
payables, other current liabilities and taxes payable
|
7,407 | 3,810 | (17,766 | ) | - | (6,549 | ) | ||||||||||||
|
Wages
and benefits payable
|
7,852 | 222 | (366 | ) | - | 7,708 | |||||||||||||
|
Unearned
revenue
|
2,723 | 2 | 1,211 | - | 3,936 | ||||||||||||||
|
Warranty
|
1,194 | 330 | (3,766 | ) | - | (2,242 | ) | ||||||||||||
|
Effect
of foreign exchange rate changes
|
- | (46,810 | ) | 37,122 | - | (9,688 | ) | ||||||||||||
|
Intercompany
transactions, net
|
(225 | ) | 2,645 | (2,420 | ) | - | - | ||||||||||||
|
Other,
net
|
(6,220 | ) | 2,151 | (7,659 | ) | - | (11,728 | ) | |||||||||||
|
Net
cash provided by (used in) operating activities
|
172,552 | (28,483 | ) | 49,077 | - | 193,146 | |||||||||||||
|
Investing
activities
|
|||||||||||||||||||
|
Acquisitions
of property, plant and equipment
|
(31,625 | ) | (5,763 | ) | (26,042 | ) | - | (63,430 | ) | ||||||||||
|
Business
acquisitions & contingent consideration, net of cash and cash
equivalents acquired
|
(6,897 | ) | - | - | - | (6,897 | ) | ||||||||||||
|
Cash
transferred to parent
|
- | 7,806 | - | (7,806 | ) | - | |||||||||||||
|
Cash
transferred to guarantor subsidiaries
|
1,938 | - | 7,806 | (9,744 | ) | - | |||||||||||||
|
Cash
transferred to non-guarantor subsidiaries
|
908 | - | - | (908 | ) | - | |||||||||||||
|
Intercompany
notes, net
|
(5,352 | ) | 3,282 | 6,302 | (4,232 | ) | - | ||||||||||||
|
Other,
net
|
(21,159 | ) | 36,936 | (12,525 | ) | - | 3,252 | ||||||||||||
|
Net
cash (used in) provided by investing activities
|
(62,187 | ) | 42,261 | (24,459 | ) | (22,690 | ) | (67,075 | ) | ||||||||||
|
Financing
activities
|
|||||||||||||||||||
|
Payments
on debt
|
(388,371 | ) | - | - | - | (388,371 | ) | ||||||||||||
|
Issuance
of common stock
|
324,494 | - | - | - | 324,494 | ||||||||||||||
|
Prepaid
debt fees
|
(214 | ) | - | - | - | (214 | ) | ||||||||||||
|
Cash
received from parent
|
- | (1,938 | ) | (908 | ) | 2,846 | - | ||||||||||||
|
Cash
received from guarantor subsidiaries
|
(7,806 | ) | - | - | 7,806 | - | |||||||||||||
|
Cash
received from non-guarantor subsidiaries
|
- | (7,806 | ) | - | 7,806 | - | |||||||||||||
|
Intercompany
notes payable
|
284 | (2,518 | ) | (1,998 | ) | 4,232 | - | ||||||||||||
|
Other,
net
|
715 | - | - | - | 715 | ||||||||||||||
|
Net
cash used in financing activities
|
(70,898 | ) | (12,262 | ) | (2,906 | ) | 22,690 | (63,376 | ) | ||||||||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
- | - | (10,293 | ) | - | (10,293 | ) | ||||||||||||
|
Increase
in cash and cash equivalents
|
39,467 | 1,516 | 11,419 | - | 52,402 | ||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
27,937 | 1,664 | 62,387 | - | 91,988 | ||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 67,404 | $ | 3,180 | $ | 73,806 | $ | - | $ | 144,390 | |||||||||
|
Non-cash
transactions:
|
|||||||||||||||||||
|
Capital
expenditures incurred but not yet paid
|
$ | 1,521 | $ | 346 | $ | 6,330 | $ | - | $ | 8,197 | |||||||||
|
Contingent
consideration payable for previous acquisitions
|
1,295 | - | - | - | 1,295 | ||||||||||||||
|
Conversion
of debt to common stock
|
29 | - | - | - | 29 | ||||||||||||||
|
Supplemental
disclosure of cash flow information:
|
|||||||||||||||||||
|
Cash
paid during the period for:
|
|||||||||||||||||||
|
Income
taxes
|
$ | 77 | $ | - | $ | 26,300 | $ | - | $ | 26,377 | |||||||||
|
Interest,
net of amounts capitalized
|
71,842 | 3 | 459 | - | 72,304 | ||||||||||||||
|
Year
Ended December 31, 2007
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Operating
activities
|
|||||||||||||||||||
|
Net
loss
|
$ | (16,144 | ) | $ | (4,467 | ) | $ | (70,384 | ) | $ | 74,851 | $ | (16,144 | ) | |||||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||||||||||||||
|
Depreciation
and amortization
|
43,754 | 1,474 | 81,212 | - | 126,440 | ||||||||||||||
|
In-process
research and development
|
- | - | 35,975 | - | 35,975 | ||||||||||||||
|
Stock-based
compensation
|
11,656 | - | - | - | 11,656 | ||||||||||||||
|
Amortization
of prepaid debt fees
|
13,526 | - | - | - | 13,526 | ||||||||||||||
|
Deferred
income taxes, net
|
(19,445 | ) | (3,765 | ) | (13,552 | ) | - | (36,762 | ) | ||||||||||
|
Equity
in losses of non-guarantor subsidiaries
|
72,295 | 2,556 | - | (74,851 | ) | - | |||||||||||||
|
Other,
net
|
1,224 | 17 | 85 | - | 1,326 | ||||||||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|||||||||||||||||||
|
Accounts
receivable
|
(14,358 | ) | (713 | ) | (25,647 | ) | - | (40,718 | ) | ||||||||||
|
Inventories
|
329 | 525 | 18,565 | - | 19,419 | ||||||||||||||
|
Accounts
payables, other current liabilities and taxes payable
|
12,259 | 1,875 | (4,101 | ) | - | 10,033 | |||||||||||||
|
Wages
and benefits payable
|
(5,254 | ) | 252 | 5,200 | - | 198 | |||||||||||||
|
Unearned
revenue
|
3,823 | - | (1,163 | ) | - | 2,660 | |||||||||||||
|
Warranty
|
516 | 126 | 1,119 | - | 1,761 | ||||||||||||||
|
Effect
of foreign exchange rate changes
|
- | - | 4,168 | - | 4,168 | ||||||||||||||
|
Intercompany
transactions, net
|
(7,878 | ) | 1,817 | 6,061 | - | - | |||||||||||||
|
Other,
net
|
(5,698 | ) | 382 | 5,105 | - | (211 | ) | ||||||||||||
|
Net
cash provided by operating activities
|
90,605 | 79 | 42,643 | - | 133,327 | ||||||||||||||
|
Investing
activities
|
|||||||||||||||||||
|
Proceeds
from the maturities of investments, held to maturity
|
35,000 | - | - | - | 35,000 | ||||||||||||||
|
Proceeds
from the sale of property, plant and equipment
|
(350 | ) | (3 | ) | 353 | - | - | ||||||||||||
|
Acquisitions
of property, plant and equipment
|
(20,847 | ) | 5,852 | (25,607 | ) | - | (40,602 | ) | |||||||||||
|
Business
acquisitions & contingent consideration, net of cash and cash
equivalents acquired
|
(1,716,253 | ) | - | - | - | (1,716,253 | ) | ||||||||||||
|
Cash
transferred to parent
|
- | (7,806 | ) | - | 7,806 | - | |||||||||||||
|
Cash
transferred to guarantor subsidiaries
|
(250 | ) | - | (7,806 | ) | 8,056 | - | ||||||||||||
|
Cash
transferred to non-guarantor subsidiaries
|
(5,658 | ) | - | - | 5,658 | - | |||||||||||||
|
Intercompany
notes, net
|
120,673 | (3,282 | ) | (41,857 | ) | (75,534 | ) | - | |||||||||||
|
Other,
net
|
(140,889 | ) | (9,113 | ) | 157,441 | - | 7,439 | ||||||||||||
|
Net
cash (used in) provided by investing activities
|
(1,728,574 | ) | (14,352 | ) | 82,524 | (54,014 | ) | (1,714,416 | ) | ||||||||||
|
Financing
activities
|
|||||||||||||||||||
|
Proceeds
from borrowings
|
1,159,025 | - | (2 | ) | - | 1,159,023 | |||||||||||||
|
Payments
on debt
|
(76,099 | ) | - | - | - | (76,099 | ) | ||||||||||||
|
Change
in short-term borrowing, net
|
(1,902 | ) | - | 1,902 | - | - | |||||||||||||
|
Issuance
of common stock
|
247,617 | - | - | - | 247,617 | ||||||||||||||
|
Excess
tax benefits from stock-based compensation
|
- | - | - | - | - | ||||||||||||||
|
Prepaid
debt fees
|
(22,083 | ) | - | - | - | (22,083 | ) | ||||||||||||
|
Cash
transferred from parent
|
- | 250 | 5,658 | (5,908 | ) | - | |||||||||||||
|
Cash
transferred from guarantor subsidiaries
|
7,806 | - | - | (7,806 | ) | - | |||||||||||||
|
Cash
transferred from non-guarantor subsidiaries
|
- | 7,806 | - | (7,806 | ) | - | |||||||||||||
|
Intercompany
notes payable
|
(3,843 | ) | 7,881 | (79,572 | ) | 75,534 | - | ||||||||||||
|
Other,
net
|
1,902 | - | - | - | 1,902 | ||||||||||||||
|
Net
cash provided by (used in) financing activities
|
1,312,423 | 15,937 | (72,014 | ) | 54,014 | 1,310,360 | |||||||||||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
- | - | 1,312 | - | 1,312 | ||||||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
(325,546 | ) | 1,664 | 54,465 | - | (269,417 | ) | ||||||||||||
|
Cash
and cash equivalents at beginning of period
|
353,483 | - | 7,922 | - | 361,405 | ||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 27,937 | $ | 1,664 | $ | 62,387 | $ | - | $ | 91,988 | |||||||||
|
Non-cash
transactions:
|
|||||||||||||||||||
|
Capital
expenditures incurred but not yet paid
|
$ | 1,502 | $ | - | $ | 3,899 | $ | - | $ | 5,401 | |||||||||
|
Contingent
consideration payable for previous acquisitions
|
- | - | 7,862 | - | 7,862 | ||||||||||||||
|
Supplemental
disclosure of cash flow information:
|
|||||||||||||||||||
|
Cash
paid during the year for:
|
|||||||||||||||||||
|
Income
taxes
|
$ | 2,848 | $ | - | $ | 18,866 | $ | - | $ | 21,714 | |||||||||
|
Interest
(net of amount capitalized)
|
75,175 | 140 | 1,002 | - | 76,317 | ||||||||||||||
82
|
Year
Ended December 31, 2006
|
|||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Operating
activities
|
|||||||||||||||||||
|
Net
income (loss)
|
$ | 33,759 | $ | (1,451 | ) | $ | 1,493 | $ | (42 | ) | $ | 33,759 | |||||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|||||||||||||||||||
|
Depreciation
and amortization
|
44,153 | - | 2,081 | - | 46,234 | ||||||||||||||
|
Excess tax benefits
from stock-based
compensation
|
(9,717 | ) | - | - | - | (9,717 | ) | ||||||||||||
|
Stock-based
compensation
|
9,689 | - | - | - | 9,689 | ||||||||||||||
|
Amortization
of prepaid debt fees
|
4,526 | - | - | - | 4,526 | ||||||||||||||
|
Deferred
income taxes, net
|
17,311 | - | (2,140 | ) | - | 15,171 | |||||||||||||
|
Equity
in (earnings) losses of non-guarantor subsidiaries
|
(1,493 | ) | 1,451 | - | 42 | - | |||||||||||||
|
Other,
net
|
846 | - | (18 | ) | - | 828 | |||||||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|||||||||||||||||||
|
Accounts
receivable
|
3,863 | - | (7,138 | ) | - | (3,275 | ) | ||||||||||||
|
Inventories
|
(1,948 | ) | - | 349 | - | (1,599 | ) | ||||||||||||
|
Long-term
note receivable, net
|
- | - | - | - | - | ||||||||||||||
|
Accounts
payables, other current liabilities and taxes payable
|
(5,212 | ) | - | (3,066 | ) | - | (8,278 | ) | |||||||||||
|
Wages
and benefits payable
|
(1,966 | ) | - | 192 | - | (1,774 | ) | ||||||||||||
|
Unearned
revenue
|
5,033 | - | 665 | - | 5,698 | ||||||||||||||
|
Warranty
|
3,319 | - | (447 | ) | - | 2,872 | |||||||||||||
|
Intercompany
transactions, net
|
(8,404 | ) | - | 8,404 | - | - | |||||||||||||
|
Other,
net
|
63 | - | 576 | - | 639 | ||||||||||||||
|
Net
cash provided by operating activities
|
93,822 | - | 951 | - | 94,773 | ||||||||||||||
|
Investing
activities
|
|||||||||||||||||||
|
Proceeds
from the maturities of investments, held to maturity
|
170,381 | - | 53 | - | 170,434 | ||||||||||||||
|
Purchases
of investments, held to maturity
|
(204,995 | ) | - | - | - | (204,995 | ) | ||||||||||||
|
Acquisitions
of property, plant and equipment
|
(30,702 | ) | - | (1,037 | ) | - | (31,739 | ) | |||||||||||
|
Business
acquisitions & contingent consideration, net of cash and cash
equivalents acquired
|
(19,889 | ) | - | (1,232 | ) | - | (21,121 | ) | |||||||||||
|
Cash
transferred to parent
|
- | - | (3,303 | ) | 3,303 | - | |||||||||||||
|
Cash
transferred to non-guarantor subsidiaries
|
(760 | ) | - | - | 760 | - | |||||||||||||
|
Intercompany
notes, net
|
- | - | 8,133 | (8,133 | ) | - | |||||||||||||
|
Other,
net
|
672 | - | 1,250 | - | 1,922 | ||||||||||||||
|
Net
cash (used in) provided by investing activities
|
(85,293 | ) | - | 3,864 | (4,070 | ) | (85,499 | ) | |||||||||||
|
Financing
activities
|
|||||||||||||||||||
|
Proceeds
from borrowings
|
345,000 | - | - | - | 345,000 | ||||||||||||||
|
Payments
on debt
|
(39,476 | ) | - | (3,227 | ) | - | (42,703 | ) | |||||||||||
|
Issuance
of common stock
|
15,250 | - | - | - | 15,250 | ||||||||||||||
|
Excess
tax benefits from stock-based compensation
|
9,717 | - | - | - | 9,717 | ||||||||||||||
|
Prepaid
debt fees
|
(8,771 | ) | - | - | - | (8,771 | ) | ||||||||||||
|
Cash
transferred from parent
|
- | - | 760 | (760 | ) | - | |||||||||||||
|
Cash
transferred from non-guarantor subsidiaries
|
3,303 | - | - | (3,303 | ) | - | |||||||||||||
|
Intercompany
notes payable
|
(8,133 | ) | - | - | 8,133 | - | |||||||||||||
|
Net
cash provided by (used in) financing activities
|
316,890 | - | (2,467 | ) | 4,070 | 318,493 | |||||||||||||
|
Increase
in cash and cash equivalents
|
325,419 | - | 2,348 | - | 327,767 | ||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
28,064 | - | 5,574 | - | 33,638 | ||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 353,483 | $ | - | $ | 7,922 | $ | - | $ | 361,405 | |||||||||
|
Non-cash
transactions:
|
|||||||||||||||||||
|
Capital
expenditures incurred but not yet paid
|
$ | 6,129 | $ | - | $ | 502 | $ | - | $ | 6,631 | |||||||||
|
Non-cash
effects of acquisitions
|
- | - | 637 | - | 637 | ||||||||||||||
|
Supplemental
disclosure of cash flow information:
|
|||||||||||||||||||
|
Cash
paid during the year for:
|
|||||||||||||||||||
|
Income
taxes
|
$ | 3,082 | $ | - | $ | 352 | $ | - | $ | 3,434 | |||||||||
|
Interest
(net of amount capitalized)
|
4,941 | - | 293 | - | 5,234 | ||||||||||||||
83
|
First
|
Second
|
Third
|
Fourth
|
Total
|
|||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||||||||
|
(in
thousands, except per common share and stock price data)
|
|||||||||||||||||||||
|
2008
|
|||||||||||||||||||||
|
Statement
of operations data:
|
|||||||||||||||||||||
|
Revenues
|
$ | 478,476 | $ | 513,931 | $ | 484,818 | $ | 432,388 | $ | 1,909,613 | |||||||||||
|
Gross
profit
|
$ | 162,559 | $ | 176,210 | $ | 162,960 | $ | 145,128 | $ | 646,857 | |||||||||||
|
Net
income
|
$ | 2,953 | $ | 13,125 | $ | 7,675 | $ | 4,306 | $ | 28,059 | |||||||||||
|
Basic
earnings per common share
|
$ | 0.10 | $ | 0.40 | $ | 0.22 | $ | 0.12 | $ | 0.85 | |||||||||||
|
Diluted
earnings per common share
|
$ | 0.09 | $ | 0.37 | $ | 0.21 | $ | 0.12 | $ | 0.80 | |||||||||||
|
Stock
Price:
|
|||||||||||||||||||||
|
High
|
$ | 100.00 | $ | 106.25 | $ | 105.99 | $ | 90.10 | $ | 106.25 | |||||||||||
|
Low
|
$ | 70.48 | $ | 88.77 | $ | 84.71 | $ | 34.25 | $ | 34.25 | |||||||||||
|
2007
|
|||||||||||||||||||||
|
Statement
of operations data:
|
|||||||||||||||||||||
|
Revenues
|
$ | 147,911 | $ | 401,559 | $ | 434,034 | $ | 480,544 | $ | 1,464,048 | |||||||||||
|
Gross
profit
|
$ | 61,325 | $ | 124,714 | $ | 144,810 | $ | 156,438 | $ | 487,287 | |||||||||||
|
Net
income (loss)
|
$ | 7,180 | $ | (23,880 | ) | $ | (3,446 | ) | $ | 4,002 | $ | (16,144 | ) | ||||||||
|
Basic
earnings per common share
|
$ | 0.26 | $ | (0.79 | ) | $ | (0.11 | ) | $ | 0.13 | $ | (0.55 | ) | ||||||||
|
Diluted
earnings per common share
|
$ | 0.26 | $ | (0.79 | ) | $ | (0.11 | ) | $ | 0.12 | $ | (0.55 | ) | ||||||||
|
Stock
Price:
|
|||||||||||||||||||||
|
High
|
$ | 68.91 | $ | 78.72 | $ | 96.08 | $ | 112.92 | $ | 112.92 | |||||||||||
|
Low
|
$ | 51.15 | $ | 64.57 | $ | 73.55 | $ | 72.78 | $ | 51.15 | |||||||||||
Note
19: Subsequent Event
On
January 26, 2009, we filed a Form 8-K, as required by Item 701 of Regulation
S-K, to disclose that we entered into exchange agreements with holders of our
convertible notes to issue, in the aggregate, 2,158,842 shares of Itron’s common
stock, no par value (the common stock), in exchange for, in the aggregate
$115,984,000 principal amount of the convertible notes, representing 34% of the
aggregate principal amount of the convertible notes.
Subsequent
to the filing of the Form 8-K, we entered into a similar exchange agreement with
another holder of the convertible notes to issue 93,109 shares of the common
stock in exchange for $5,000,000 principal amount of the convertible notes,
representing 2% of the aggregate principal amount of the convertible notes. The
number of shares of common stock issued was less than 1% of the number of
shares outstanding of our common stock subsequent to the January 26, 2009 Form
8-K.
All of
the convertible notes acquired by us pursuant to these exchange agreements were
retired upon closing of the exchanges. The issuance of the shares of the Common
Stock in these transactions was exempt from registration under Section 3(a)(9)
of the Securities Act of 1933. No commission or remuneration was paid or given,
directly or indirectly, for soliciting these transactions.
ITEM 9: CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There
were no disagreements with our independent accountants on accounting and
financial disclosure matters within the two year period ended December 31,
2008, or in any period subsequent to such date, through the date of this
report.
ITEM 9A: CONTROLS AND
PROCEDURES
|
(i)
|
Evaluation
of disclosure controls and
procedures.
|
|
|
An
evaluation was performed under the supervision and with the participation
of our Company’s management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange
Act of 1934 as amended. Based on that evaluation, the Company’s
management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures
were effective as of December 31, 2008. There are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance
of achieving their control
objectives.
|
|
(ii)
|
Internal
Control Over Financial Reporting.
|
|
(a)
|
Management’s Annual Report on
Internal Control Over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control— Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on our evaluation under the framework in
Internal
Control—Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of
December 31, 2008.
|
|
|
The
effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report
that is included in this Annual Report on Form
10-K.
|
|
(b)
|
Changes in internal control
over financial reporting. The Company’s disclosure controls,
including the Company’s internal controls, are designed to provide a
reasonable level of assurance that the stated objectives are met. We
concluded, as stated in (a) above, that the Company’s internal
control over financial reporting was effective in providing this
reasonable level of assurance as of December 31, 2008. The Company’s
management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that the Company’s disclosure controls or
internal controls will prevent all errors and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been prevented or
detected. These inherent limitations include the fact that judgments in
decision-making can be faulty. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. Because of the inherent
limitations in a control system, misstatements due to error or fraud may
occur and not be prevented or
detected.
|
|
|
There
have been no changes in internal control over financial reporting during
the quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal controls over
financial reporting.
|
|
(c)
|
Report of Independent
Registered Public Accounting
Firm.
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders Itron, Inc.
We have
audited Itron, Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Itron, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Itron, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO
criteria.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Itron, Inc.
as of December 31, 2008 and 2007, and the related consolidated statements
of operations, shareholders’ equity, and cash flows for each of the two years in
the period ended December 31, 2008 and our report dated February 25,
2009 expressed an unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
25, 2009
ITEM 9B: OTHER INFORMATION
No
information was required to be disclosed in a report on Form 8-K during the
fourth quarter of 2008 that was not reported.
PART
III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
The
section entitled “Item 1 – Election of Directors” appearing in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5, 2009 (the
2008 Proxy Statement) sets forth certain information with regard to our
directors as required by Item 401 of Regulation S-K and is incorporated herein
by reference.
Certain
information with respect to persons who are or may be deemed to be executive
officers of Itron, Inc. as required by Item 401 of Regulation S-K is set forth
under the caption “Management” in PART I of this Annual Report on Form
10-K.
The
section entitled “Section 16(a) Beneficial Ownership Reporting Compliance”
appearing in the 2008 Proxy Statement sets forth certain information as required
by Item 405 of Regulation S-K and is incorporated herein by
reference.
The
section entitled “Corporate Governance” appearing in the 2008 Proxy Statement
sets forth certain information with respect to the Registrant’s code of conduct
and ethics as required by Item 406 of Regulation S-K and is incorporate herein
by reference.
There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant’s board of directors during 2008, as set
forth by Item 407(c)(3).
The
section entitled “Corporate Governance” appearing in the 2008 Proxy Statement
sets forth certain information regarding the Audit/Finance Committee, including
the members of the Committee and the Audit/Finance Committee financial experts,
as set forth by Item 407(d)(4) and (d)(5) of Regulation S-K and is incorporate
herein by reference.
ITEM 11: EXECUTIVE
COMPENSATION
The
sections entitled “Compensation of Directors” and “Executive Compensation”
appearing in the 2008 Proxy Statement set forth certain information with respect
to the compensation of directors and management of the Registrant as required by
Item 402 of Regulation S-K and are incorporated herein by
reference.
The
section entitled “Corporate Governance” appearing in the 2008 Proxy Statement
sets forth certain information regarding members of the Compensation Committee
required by Item 407(e)(4) of Regulation S-K and is incorporated herein by
reference.
The
section entitled “Compensation Committee Report” appearing in the 2008 Proxy
Statement sets forth certain information required by Item 407(e)(5) of
Regulation S-K and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
section entitled “Equity Compensation Plan Information” appearing in the 2008
Proxy Statement sets forth certain information required by Item 201(d) of
Regulation S-K and is incorporated herein by reference.
The
section entitled “Security Ownership of Certain Beneficial Owners and
Management” appearing in the 2008 Proxy Statement sets forth certain information
with respect to the ownership of the Registrant’s common stock as required by
Item 403 of Regulation S-K and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The
section entitled “Transactions with Related Persons” appearing in the 2008 Proxy
Statement sets forth certain information required by Item 404 of Regulation S-K
and is incorporate herein by reference.
The
section entitled “Corporate Governance” appearing in the 2008 Proxy Statement
sets forth certain information with respect to director independence as required
by Item 407(a) of Regulation S-K and is incorporated herein by
reference.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND
SERVICES
The
section entitled “Independent Registered Public Accounting Firm’s Fees and
Services” appearing in the 2008 Proxy Statement sets forth certain information
with respect to the principal accounting fees and services and the Audit/Finance
Committee’s policy on pre-approval of audit and permissible non-audit services
performed by the Registrant’s independent auditors as required by Item 9(e) of
Schedule 14A and is incorporated herein by reference.
PART
IV
ITEM 15: EXHIBITS, FINANCIAL
STATEMENT SCHEDULE
(a)
(1) Financial Statement:
The
financial statements required by this item are submitted in Item 8 of this
Annual Report on Form 10-K.
(a)
(2) Financial Statement Schedule:
Schedule
II: Valuation and Qualifying Accounts
(3)
Exhibits:
|
Exhibit
|
||
|
Number
|
Description
of Exhibits
|
|
|
2.1
|
Stock
purchase agreement between the stockholders of Actaris Metering Systems
SA, LBO France Gestion SAS and Itron, Inc. (Filed as Exhibit 2.1 to Itron,
Inc.’s Current Report on Form 8-K, filed on April 24, 2007 - File No.
0-22418)
|
|
|
2.2
|
Amendment
No. 1 to Stock Purchase Agreement between the stockholders of Actaris
Metering Systems SA, LBO France Gestion SAS and Itron, Inc. (Filed as
Exhibit 2.2 to Itron, Inc.’s Current Report on Form 8-K, filed on April
24, 2007 - File No. 0-22418)
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation of Itron, Inc. (Filed as Exhibit
3.1 to Itron, Inc.’s Annual Report on Form 10-K, filed on March 27, 2003 -
File No. 0-22418)
|
|
|
3.2
|
Amended
and Restated Bylaws of Itron, Inc. (Filed as Exhibit 3.2 to Itron, Inc.'s
Annual Report on Form 10-K, filed on February 26, 2008 - File No.
0-22418)
|
|
|
4.1
|
Rights
Agreement between Itron, Inc. and Mellon Investor Services LLC, as Rights
Agent, dated December 11, 2002. (Filed as Exhibit 4.1 to Itron, Inc.’s
Registration of Securities on Form 8-A, filed on December 12, 2002 - File
No. 0-22418)
|
|
|
4.2
|
Form
of Itron, Inc.’s 7.75% Exchange Note due 2012. (Filed as Exhibit 4.6 to
Itron, Inc.’s Report on Form S-4, filed on September 3, 2004 - File No.
333-118782)
|
|
|
4.3
|
Indenture
relating to Itron, Inc.’s 7.75% senior subordinated notes due 2012, dated
May 10, 2004. (Filed as Exhibit 4.7 to Itron, Inc.’s Report on Form S-4,
filed on September 3, 2004 - File No. 333-118782)
|
|
|
4.4
|
Registration
Rights Agreement among Itron, Inc. domestic subsidiaries listed on
Schedule I thereto and Bear, Stearns & Co. Inc. dated May 10, 2004.
(Filed as Exhibit 4.8 to Itron, Inc.’s Report on Form S-4/A, filed on
September 9, 2004 - File No. 333-118782)
|
|
|
4.5
|
Indenture
relating to Itron, Inc.’s 2.50% convertible senior subordinated notes due
2026, dated August 4, 2006. (Filed as Exhibit 4.16 to Itron, Inc.’s
Quarterly Report on Form 10-Q, filed on November 6, 2006 - File
No. 0-22418)
|
|
|
4.6
|
Credit
Agreement dated April 18, 2007, among Itron, Inc. and the subsidiary
guarantors and UBS Securities LLC, Wells Fargo Bank, National Association
and Mizuho Corporate Bank, Ltd. (Filed as Exhibit 4.1 to Itron, Inc.'s
Current Report on Form 8-K, filed on April 24, 2007 - File No.
0-22418)
|
|
|
4.7
|
Security
Agreement dated April 18, 2007, among Itron, Inc. and the subsidiary
guarantors and Wells Fargo Bank, National Association as Collateral Agent.
(Filed as Exhibit 4.2 to Itron, Inc.'s Current Report on Form 8-K, filed
on April 24, 2007 - File No.
0-22418)
|
|
Exhibit
|
||
|
Number
|
Description
of Exhibits
|
|
|
10.1
|
Form
of Change in Control Agreement between Itron, Inc. and certain of its
executive officers. * (Filed as Exhibit 10.2 to Itron, Inc.'s Report on
From 8-K, filed on February 17, 2006 - File No.
0-22418)
|
|
|
10.2
|
||
|
10.3
|
First
Amendment to Change in Control Agreement between Itron, Inc. and Marcel
Regnier.* (Filed as Exhibit 10.2 to Itron, Inc.'s Current Report on Form
8-K, filed on December 17, 2008 - File No. 0-22418)
|
|
|
10.4
|
Employee
Agreement between Actaris Management Services S.A. and Marcel Regnier.*
(Filed as Exhibit 10.1 to Itron, Inc's Current Report on Form 8-K, filed
on December 17, 2008 - File No. 0-22418)
|
|
|
10.5
|
Form
of Indemnification Agreements between Itron, Inc. and certain directors
and officers.* (Filed as Exhibit 10.9 to Itron, Inc.'s Annual Report on
Form 10-K, filed on March 30, 2000 - File No. 0-22418)
|
|
|
10.6
|
||
|
10.7
|
Amended
and Restated 2000 Stock Incentive Plan. (Filed as Appendix A to Itron,
Inc.'s Proxy Statement for the Annual Meeting of Shareholders to be held
on May 15, 2007 - File No. 0-22418)
|
|
|
10.8
|
Terms
of the Amended and Restated Equity Grant Program for Nonemployee Directors
under the Itron, Inc. Amended and Restated 2000 Stock Incentive Plan.
(Filed as Exhibit 10.4 to Itron, Inc.'s Annual Report on Form 10-K, filed
on February 26, 2008 - File No. 0-22418)
|
|
|
10.9
|
||
|
10.10
|
Form
of Incentive Stock Option Grant Notice and Agreement for use in connection
with the Company's Amended and Restated 2000 Stock Incentive Plan. (Filed
as Exhibit 10.8 to Itron, Inc.'s Current Report on Form 8-K, filed on
February 18, 2009 - File No. 0-22418)
|
|
|
10.11
|
Form
of Non-Qualified Stock Option Grant Notice and Agreement for use in
connection with the Company's Amended and Restated 2000 Stock Incentive
Plan. (Filed as Exhibit 10.7 to Itron, Inc.'s Current Report on Form 8-K,
filed on February 18, 2009 - File No. 0-22418)
|
|
|
10.12
|
Form
of Restricted Stock Unit Award Notice and Agreement for U.S. Employees for
use in connection with the Company's Amended and Restated 2000 Stock
Incentive Plan. (Filed as Exhibit 10.4 to Itron, Inc.'s Current Report on
Form 8-K, filed on February 18, 2009 - File No.
0-22418)
|
|
|
10.13
|
Form
of Restricted Stock Unit Award Notice and Agreement for
International Employees (other than French) for use in connection with the
Company's Amended and Restated 2000 Stock Incentive Plan. (Filed as
Exhibit 10.6 to Itron, Inc.'s Current Report on Form 8-K, filed on
February 18, 2009 - File No. 0-22418)
|
|
|
10.14
|
Form
of Restricted Stock Unit Award Notice and Agreement for French
Employees for use in connection with the Company's Amended and Restated
2000 Stock Incentive Plan. (Filed as Exhibit 10.5 to Itron, Inc.'s Current
Report on Form 8-K, Filed on February 18, 2009 - File No.
0-22418)
|
|
|
10.15
|
Amended
Long-Term Performance Plan (LTPP) dated February 14, 2008 between Itron,
Inc. and certain of its executive officers.* (Filed as Exhibit 10.1 to
Itron, Inc.'s Current Report on Form 8-K, filed on February 20, 2008 -
File No. 0-22418)
|
|
|
10.16
|
Form
of Restricted Stock Unit Award Notice and Agreement for U.S. Employees for
use in connection with the Company's LTPP and issued under the Company's
Amended and Restated 2000 Stock Incentive Plan.* (Filed as Exhibit 10-1 to
Itron, Inc.'s Current Report on Form 8-K, filed on February 18, 2009 -
File No. 0-22418)
|
|
|
10.17
|
Form
of Restricted Stock Unit Award Notice and Agreement for International
Employees (other than French) for use in connection with the Company's
LTPP and issued under the Company's Amended and Restated 2000 Stock
Incentive Plan.* (Filed as Exhibit 10-2 to Itron, Inc.'s Current Report on
Form 8-K, filed on February 18, 2009 - File No.
0-22418)
|
|
|
Number
|
Description
of Exhibits
|
|
|
10.18
|
Form
of Restricted Stock Unit Award Notice and Agreement for French Employees
for use in connection with the Company's LTPP and issued under the
Company's Amended and Restated 2000 Stock Incentive Plan.* (Filed as
Exhibit 10-3 to Itron, Inc.'s Current Report on Form 8-K, filed on
February 18, 2009 - File No. 0-22418)
|
|
|
10.19
|
||
|
10.20
|
||
|
10.21
|
1989
Restated Stock Option Plan. (Filed as Appendix A to Itron, Inc.'s Proxy
Statement for the Annual Meeting of Shareholders to be held on April 29,
1997 - File No. 0-22418)
|
|
|
.
|
||
|
10.22
|
Stock
Option Plan for Nonemployee Directors. (Filed as Exhibit 10.11 to Itron,
Inc.'s Registration Statement on Form S-1 dated July 22,
1992)
|
|
|
10.23
|
Notice
of Restricted Stock Award.* (Filed as Exhibit 10.23 to Itron, Inc.'s
Report on Form 8-K, filed on February 17, 2006 - File No.
0-22418)
|
|
|
12.1
|
||
|
21.1
|
||
|
23.1
|
||
|
23.2
|
||
|
31.1
|
||
|
31.2
|
||
|
32.1
|
||
|
100.INS
|
XBRL
Instance Document **
|
|
|
100.SCH
|
XBRL
Taxonomy Extension Schema **
|
|
|
100.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase **
|
|
|
100.DEF
|
XBRL
Taxonomy Extension Definition Linkbase **
|
|
|
100.LAB
|
XBRL
Taxonomy Extension Label Linkbase **
|
|
|
100.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase **
|
|
|
*
|
Management
contract or compensatory plan or arrangement.
|
|
|
**
|
Pursuant
to Rule 401 of Regulation S-T, users of this data are advised that the
financial information contained in the XBRL (eXtensible Business Reporting
Language) related documents is unaudited and do not represent the official
publicly filed financial statements of Itron, Inc. The purpose of
submitting the XBRL related documents is to test the related format and
technology, and, as a result, investors should continue to rely on the
official filed version of the financial statements and not rely on the
XBRL related documents in making investment decisions.
In
accordance with Rule 402 of Regulation S-T, the XBRL related information
in Exhibit 100 to this Annual Report on Form 10-K shall not be deemed to
be “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, (the “Exchange Act”), or otherwise be subject to the
liability of that section, and shall not be incorporated by reference into
any registration statement or other document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference
in such filing.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Liberty Lake, State
of Washington, on the 25th day of February, 2009.
|
ITRON,
INC.
|
|||
|
By:
|
/S/ STEVEN
M. HELMBRECHT
|
||
|
Steven
M. Helmbrecht
|
|||
|
Sr.
Vice President and Chief Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on the 25th day of February, 2009.
|
Signature
|
Title
|
|
|
/S/ LEROY D. NOSBAUM
|
||
|
LeRoy
D. Nosbaum
|
Chairman
of the Board and Chief Executive Officer (Principal Executive
Officer)
|
|
|
/S/ Malcolm
Unsworth
|
||
|
Malcolm
Unsworth
|
President,
Chief Operating Officer and Director
|
|
|
/S/ STEVEN M. HELMBRECHT
|
||
|
Steven
M. Helmbrecht
|
Sr.
Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer)
|
|
|
/S/ MICHAEL B. BRACY
|
||
|
Michael
B. Bracy
|
Director
|
|
|
/S/ KIRBY A. DYESS
|
||
|
Kirby
A. Dyess
|
Director
|
|
|
/S/ JON E. ELIASSEN
|
||
|
Jon
E. Eliassen
|
Director
|
|
|
/S/ CHARLES H. GAYLORD, JR.
|
||
|
Charles
H. Gaylord, Jr.
|
Director
|
|
|
/S/ THOMAS S. GLANVILLE
|
||
|
Thomas
S. Glanville
|
Director
|
|
|
/S/
SHARON L.
NELSON
|
||
|
Sharon
L. Nelson
|
Director
|
|
|
/S/
GARY E. PRUITT
|
||
|
Gary
E. Pruitt
|
Director
|
|
|
/S/ GRAHAM M. WILSON
|
||
|
Graham
M. Wilson
|
Director
|
Schedule
II: VALUATION AND QUALIFYING ACCOUNTS
|
Acquisition
|
Additions
|
||||||||||||
|
Balance at
|
opening
|
charged to
|
Balance at
|
||||||||||
|
beginning
|
balance
/
|
costs
and
|
end of period
|
||||||||||
|
Description
|
of
period
|
adjustments
(1)
|
expenses
|
Noncurrent
|
|||||||||
|
(in
thousands)
|
|||||||||||||
|
Year
ended December 31, 2008:
|
|||||||||||||
|
Deferred
tax assets valuation allowance
|
$ | 13,203 | $ | 2,966 | $ | 50 | $ | 16,219 | |||||
|
Year
ended December 31, 2007:
|
|||||||||||||
|
Deferred
tax assets valuation allowance
|
$ | 1,083 | $ | 10,833 | $ | 1,287 | $ | 13,203 | |||||
| (1) On April 18, 2007, we completed the acquisition of Actaris Metering Systems, SA and continued to make adjustments to the purchase price as the valuation of assets and liabilities were finalized in 2008. | |||||||||||||
92