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, 2009
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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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
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.
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Large
accelerated filer x
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Accelerated
filer ¨
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Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
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Smaller
reporting company ¨
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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, 2009 (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
$2,201,140,741.
As of
January 31, 2010, there were outstanding 40,166,339 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 4, 2010.
Itron,
Inc.
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Page
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PART
I
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PART
II
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PART
III
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PART
IV
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| SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS | 89 | ||
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, liquidity, and other items.
This document reflects our current plans and expectations and is 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) competition, 4) changes in estimated liabilities for product warranties
and/or litigation, 5) our dependence on customers’ acceptance of new product and
their performance, 6) changes in domestic and international laws and
regulations, 7) future business combinations, 8) changes in estimates for
stock-based compensation and pension costs, 9) changes in foreign currency
exchange rates and interest rates, 10) international business risks, 11) our own
and our customers’ or suppliers’ access to and cost of capital, and 12) 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, refer
to Item 1A: “Risk Factors” included in this Annual Report on Form
10-K.
PART
I
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. We were incorporated in 1977 and
introduced a handheld computer-based system used to collect meter reads and
print on-site bills. Through innovation and acquisitions, we became the market
leader in automated meter reading (AMR) systems and software knowledge
applications that enabled our customers to analyze and manage meter-based data.
In 2004, we entered the electricity meter manufacturing business with the
acquisition of Schlumberger Electricity Metering. Then, in 2007, we established
a significant presence in global meter manufacturing and systems with the
acquisition of Actaris Metering Systems SA (Actaris). Today, together with our
subsidiary companies, we are one of the world’s leading providers of intelligent
metering, data collection, and utility software solutions, having served utility
customers for over 125 years.
Market
Overview, Products, Systems, and Solutions
The
market for managing the delivery and use of energy and water is dynamic and
competitive. Increased demand for energy and water, coupled with increased
scarcity of resources and environmental concerns, are causing regulatory bodies
worldwide to establish strict climate policies and promote smart grid and
intelligent metering initiatives. As a result, many electric, natural gas, and
water utilities are transforming their operations.
We
estimate there are approximately 2.7 billion meters currently installed
worldwide, of which we estimate approximately 9% have been
automated.
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·
1.3
billion electricity meters
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·
430
million gas meters
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·
945
million water meters
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Electric
utilities are striving to reduce demand during peak hours in lieu of building
additional generation capacity, while improving customer service. In addition,
utilities are faced with a convergence of factors including environmental
concerns, more stringent regulations and directives, and government funding and
incentives. The smart grid provides utilities with the tools necessary to tackle
these challenges as it consists of a multi-layered network that is an
interactive platform on which technology allows utilities to better
understand and control their energy usage and needs. Advanced metering
infrastructures (AMI), consisting of hardware, software, communications, and
meter data management, is the foundation of the smart grid. AMI uses two-way
communication between utilities and their customers, which allows utilities to
better manage energy usage and enables customers to become smarter about their
energy consumption. Given AMI’s advanced technological capabilities, as compared
with traditional metering, many major utilities are investing in
AMI.
Natural
gas utilities are also looking towards sustainability and conservation. In
addition, natural gas has increasingly become a preferred choice for electricity
generation and consumer consumption. Smart infrastructures, such as smart
metering, are helping natural gas utilities meet sustainability and conservation
requirements through two-way meter communications, accurate measurement, leak
detection and flow control, customer relationship management, distribution asset
optimization, and demand-side management.
Water
conservation continues to be a worldwide concern. Population growth and water
consumption are outpacing water resources across many parts of the world. This
trend reflects the need for more sustainable management and use of water
supplies. Water utilities and municipalities are committed to providing safe and
adequate water supplies while facing diminishing resources and infrastructure
challenges. Water utilities are focused on increasing the efficiency of water
production and minimizing waste both in delivery and consumption. Upgrading
infrastructures and deploying smart metering systems will help water utilities
meet conservation requirements through accurate measurement, leak detection
capabilities, and by allowing them to monitor water usage and time of use using
two-way meter communications.
We
operate under the Itron brand worldwide and sell solutions and provide expertise
to electric, gas, and water utilities around the world. Our operating segments
as of December 31, 2009 are Itron North America and Itron
International.
Itron
North America generates the majority of its revenue in the United States and
Canada and offers intelligent meters and data collection and communication
systems for electric, gas, and water utilities. Collection and communication
systems include AMI/AMR systems and a host of utility software and
services.
Itron
International generates the majority of its revenue in Europe, and the balance
primarily in South Africa, South America, and Asia/Pacific. Itron International
offers a variety of electricity, gas, water, and heat meters, AMR and AMI
systems, software, and services. Our Itron International operations are
primarily the result of the acquisition of Actaris in the second quarter of
2007.
The
following is a discussion of our operating segment markets and their major
products and solutions. Refer to Item 7: “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included in this Annual Report
on Form 10-K for specific segment results.
The
Market
Itron North America
We
estimate there are approximately 355 million meters currently installed in North
America.
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·
175
million electricity meters
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·
80
million gas meters
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·
100
million water meters
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We
estimate 47% of the total installed meters are read with automated technologies
and about half of these automated meters are read with our
technology.
Historically,
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 improvement from shorter read-to-pay cycles, and
enhanced customer service in the form of increased billing accuracy and faster
invoicing cycles.
The
United States’ American Recovery and Reinvestment Act of 2009 (ARRA) provided
grants and awards of $4.5 billion to utilities for investment in
electricity delivery and energy reliability (smart grid), $16.8 billion for
energy efficiency programs and tax incentives, and $6 billion for water
infrastructure upgrades. The ARRA, combined with limited energy supplies and
shrinking reserve margins, is increasing the interest in AMI and the devices
that enable the smart grid and is expected to accelerate growth.
Itron
International
We
estimate there are approximately 2.3 billion meters currently installed outside
of North America, of which 3% are read with automated technologies.
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·
1.1
billion electricity meters
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· 350
million gas meters
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·
845
million water meters
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Historically,
the meter industry has been driven by new construction and the replacement of
old meters. This combination of factors has resulted in annual growth rates
ranging between 3% and 7%.
The
European Commission has established a directive to cut greenhouse gas emissions
by 20% compared with 1990 levels, produce 20% of its energy from renewable
sources, and increase energy efficiency by 20% by 2020. The European Union (EU)
Energy Package, which became effective September 2009, directs EU Member States
to have 80% of their consumers using smart electric meters by 2020. This equates
to the replacement of approximately 145 million electricity meters. With
significant technological progress and encouragement from lawmakers and
regulators, smart metering is expected to revolutionize energy management and
grid reliability across the globe.
Our
Products, Systems, and Solutions
Our
solutions include:
· Meters
and AMI and AMR systems
· Software
for data collection, management, and analysis
· Professional
services
Meters and AMI and AMR
systems:
Worldwide,
we produce residential, commercial and industrial (C&I), and transmission
and distribution (T&D) electricity, gas, and water meters; gas and water AMR
modules; and a variety of data collection systems. The physical configuration
and the different certification requirements of the meters represent the primary
differentiator in each of the over 130 countries where we sell our
products.
Smart
metering solutions are available worldwide and have substantially more features
and functions than AMR systems. Smart meters provide energy and water utilities
demand side management, the ability to remotely connect and disconnect service
to the meter, bi-directional metering, reverse flow metering, support for time
of use and critical peak pricing, data logging, storage for interval data, and
upgradeable firmware (software contained in the meters).
Our AMI,
or smart metering, systems include OpenWay®, a
standards-based, open-architecture system that provides two-way communication to
residential and commercial electricity and gas meters. Our AMI software can be
configured for load management, demand response, prepayment, and other
capabilities. Each OpenWay electricity meter is equipped with a ZigBee®
component (a low-power, short distance wireless standard), which enables the
utility to communicate with and control in-home devices and can provide
information to help consumers make more informed choices about energy
consumption. The OpenWay system can utilize a variety of public communication
platforms to transfer data, including GPRS (general packet radio services), Ethernet, telephone, BPL
(broadband over power line), Wi-Fi, WiMax and others. For water utilities, we
offer an advanced water leak detection system that uses patented acoustic
technology analyzing vibration patterns in the distribution system. This
technology helps utilities optimize water infrastructure and reduce
waste.
For
almost 20 years, we have offered AMR technology worldwide, which allows
utilities to achieve greater operational efficiencies through reduced labor
costs and more accurate reads. Our AMR systems include AMR meters or modules and
a variety of data collection hardware and software, which enables utilities to
cost effectively deploy AMR. AMR meters and modules transmit a variety of
important information to the utility, such as consumption, tamper data, and
other information. Several communication options are available, which are
typically dependent on the country or region. In North America, information is
transmitted via radio frequency (RF) to our handheld, mobile, or network data
collection technology. In other parts of the world, telephone, RF, GSM (global
System for Mobile communications), GPRS, PLC (power line carrier), and Ethernet
devices may be utilized. Data collection systems manage the collection of meter
data and provide the data to billing systems, data warehouses, Internet
presentment, and knowledge applications.
Prepayment
electricity and gas metering systems are widely used in the United Kingdom and
South Africa. We are 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.
Meter
Data Management and Knowledge Applications
Our meter
data management software and knowledge application solutions provide utilities
and large C&I end-users with support for data collection, complex data
applications, data warehouses, and analytic and visualization
tools.
Professional
services
We offer
professional services that help our customers implement, install,
project-manage, operate, and maintain their AMR and AMI systems. We provide
managed services to utilities in North America, the United Kingdom, and South
Africa that allow them to outsource certain operations, such as meter reading
services and prepayment program activities. In North America, our consulting and
analysis services provide market research, load research, energy efficiency
program evaluation and design, energy policy design, rate design, and regulatory
support.
Operational
Capabilities
Sales
and Distribution
We use a
combination of direct and indirect sales channels in both Itron North America
and Itron International. A direct sales force 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 offer our North America AMR/AMI technology to
certain meter manufacturers who embed our technology into their meters. We also
offer our European AMR/AMI technology and prepayment to certain meter and system
providers, who embed our technology into their network data concentrators and
routers.
No single
customer represented more than 10% of total revenues for the three years ended
December 31, 2009, 2008, and 2007. Our 10 largest customers in each of the years
ended December 31, 2009, 2008, and 2007 accounted for approximately 17%, 15%,
and 14%, of total revenues, respectively.
Manufacturing
We have
manufacturing facilities throughout the world. Our Itron North America operating
segment has manufacturing facilities located in Minnesota, South Carolina, and
Kentucky. Our Itron International operating segment has 30 manufacturing
facilities, the largest of which are located in France, Germany, and the United
Kingdom. Refer to Item 2: “Properties”, included in this Annual
Report on Form 10-K for a listing of the number of factories and offices we own
and lease by region. Contract manufacturers are used for certain low volume
products including handheld and mobile collection devices and peripheral
equipment.
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 and components
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. Refer to
Item 1A: “Risk Factors”, included in this Annual Report on Form 10-K, for
further discussion related to risks.
Product
Development
Our
product development is focused on both improving existing technology and
developing next-generation technology for electricity, gas, water, and heat
meters, data collection, communications technologies, data warehousing, and
software knowledge applications. We spent approximately $122 million,
$121 million, and $95 million on product development in 2009, 2008, and
2007, respectively.
Marketing
Our
marketing efforts focus on brand recognition and go-to-market strategies to
promote product solutions. We use an integrated approach that includes
participation in industry trade shows and web-based seminars and the preparation
and distribution of various publications, including brochures, published papers,
case studies, print advertising, direct mail, and newsletters. In addition, we
direct customers to our global website (www.itron.com), which
provides information on all of our products and solutions.
We
maintain communications with our customers through our direct and indirect sales
channels, integrated and targeted marketing campaigns, market surveys, market
trend research, and at our annual users’ conferences.
Workforce
At
December 31, 2009, we had approximately 9,000 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 have a large number of competitors who offer similar
products, systems, and services. In recent years, the market has experienced an
increase in acquisitions and alliances. We believe that our competitive
advantage is based on our ability to provide complete end-to-end integrated
solutions, our established customer relationships, and our track record of
delivering reliable, accurate, and long-lived products and systems. Refer to
Item 1A: “Risk Factors” included in this Annual Report on Form 10-K for a
discussion of the competitive pressures we face.
Our
primary competitors include the following:
|
· Badger
Meter, Inc.
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· Emerson
Electric Co.
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· Roper
Industries, Inc.
|
|
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· Cooper
Industries, Ltd.
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· eMeter
Corporation
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· Schneider
Electric SA
|
|
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· Dandong
Visionseal Co., Ltd.
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· ESCO
Technologies Inc.
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· Sensus
|
|
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· Datamatic,
Ltd.
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· General
Electric Company
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· Silver
Spring Networks
|
|
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· Diehl
Metering
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· Holley
Group Co., Ltd.
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· Shanghai
Fiorentini Gas
|
|
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· Dresser,
Inc.
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· Iskraemeco,
D.D.
|
Equipment Co., Ltd.
|
|
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· Echelon
Corporation
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· Landis+Gyr
Holdings AG
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· Trilliant
Incorporated
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· Elster
Group S.E.
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· Oracle
Corporation
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· Telvent
GIT, S.A.
|
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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 may 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:
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Year Ended
|
Annual
Bookings
|
Total
Backlog
|
12-Month
Backlog
|
|||||||
|
(in
millions)
|
||||||||||
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December
31, 2009
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$ | 1,849 | $ | 1,488 | $ | 807 | ||||
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December
31, 2008
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2,543 | 1,309 | 418 | |||||||
|
December
31, 2007
|
1,419 | 659 | 501 | |||||||
When we
sign 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, 2009, three large
AMI contracts were included in bookings and backlog. Annual bookings for 2009
included $257 million related to the San Diego Gas & Electric AMI contract.
Annual bookings for 2008 reflected $334 million related to the CenterPoint
Energy AMI contract and $470 million related to the Southern California Edison
AMI contract.
Other
Business Considerations
Intellectual
Property
We own
180 U.S. patents and 636 international patents. We have on file 110 U.S.
patent applications and 343 international patent applications. These patents
cover a range of technologies, the more important of which relate 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™.
Itron International’s registered trademarks include, but are not limited to,
ACTARIS®,
AQUADIS®,
CYBLE®,
FLOSTAR®,
WOLTEX®,
FLODIS®,
ECHO®,
EVERBLU®,
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. While we believe patents
and trademarks are important to our operations and in the aggregate constitute
valuable assets, no single patent or trademark, or group of patents or
trademarks, is critical to the success of our business. We license some of our
technology to other companies, some of which are our competitors. 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 RF 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 are generally 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 and AMI modules and AMR and AMI-equipped electronic residential
electricity, gas, and water meters are typically Part 15 devices that transmit
information back to handheld, mobile, or fixed network AMR reading devices
pursuant to these rules.
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, which many of our AMR and AMI systems utilize. Although
the outcome of the proceeding is uncertain, we do not expect to have to make
material changes to our equipment. Furthermore, the 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 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 RF 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 granted 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 and AMI
modules and AMR and AMI-equipped electronic residential electricity, gas, water,
and heat meters typically are devices that transmit information back to
handheld, mobile, or fixed network AMR and AMI 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 reading devices
in our solutions. In Europe, we generally use the 433 MHz and 868 MHz bands. In
the rest of the world, we use the 433 MHz and 2.4000-2.4835 GHz band. In either
case, we believe we will continue to have access to sufficient spectrum under
favorable conditions 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.
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 the 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
24, 2010.
|
Name
|
Age
|
Position
|
|||
|
Malcolm
Unsworth
|
60 |
President
and Chief Executive Officer
|
|||
|
Steven
M. Helmbrecht
|
47 |
Sr.
Vice President and Chief Financial Officer
|
|||
|
John
W. Holleran
|
55 |
Sr.
Vice President, General Counsel and Corporate Secretary
|
|||
|
Philip
C. Mezey
|
50 |
Sr.
Vice President and Chief Operating Officer - Itron North
America
|
|||
|
Marcel
Regnier
|
52 |
Sr.
Vice President and Chief Operating Officer - Itron
International
|
|||
|
Jared
P. Serff
|
42 |
Vice
President, Competitive Resources
|
|||
Malcolm Unsworth is President
and Chief Executive Officer, and a member of our 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.
In 2007, following our acquisition of Actaris (now known as Itron
International), he was promoted to Sr. Vice President and Chief Operating
Officer – Itron International. Mr. Unsworth was appointed President and Chief
Operating Officer of Itron in April 2008, and promoted to President and Chief
Executive Officer effective March 2009. Mr. Unsworth was elected to the Board of
Directors in December 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. Previously, Mr. Helmbrecht
was Chief Financial Officer of LineSoft Corporation, acquired by Itron in
2002.
John Holleran is Sr. Vice
President, General Counsel, and Corporate Secretary. Mr. Holleran joined
Itron in January 2007. In 2006, Mr. Holleran was associated with Holleran Law
Offices PLLC, and in 2005 was 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 2004.
While with Boise Cascade Corporation, Mr. Holleran most recently served as Sr.
Vice President, Human Resources, and General Counsel.
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 with Itron’s acquisition of Silicon
Energy Corp. Mr. Mezey was promoted to Group Vice President and Manager of
Software Solutions in 2004. In 2005, Mr. Mezey became Sr. Vice President
Software Solutions and was promoted to his current position in
2007.
Marcel Regnier is Sr. Vice
President and Chief Operating Officer - Itron International. Mr. Regnier
joined Itron in April 2007 as part of our acquisition of Actaris. Mr. Regnier
served as Actaris’ Managing Director of its water and heat business unit from
2001, when Actaris was created as a result of the reorganization of
Schlumberger’s operations, until April 2008, when he was promoted to his current
position.
Jared Serff is Vice President,
Competitive Resources. Mr. Serff joined Itron in July 2004 as part of the
Schlumberger 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.
We
are dependent on the utility industry, which has experienced volatility in
capital spending.
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,
customers 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)
have typically been based on annual or bi-annual bid-based agreements. Customers
place purchase orders against these agreements as their inventories decline,
which can create fluctuations in our sales volumes.
Sales
cycles for AMR and AMI projects are generally long and unpredictable due to
several factors, including budgeting, purchasing, and regulatory approval
processes that can take 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. In addition, during 2009, the American Recovery and Reinvestment Act
allocated approximately $4.5 billion to the investment in electricity delivery
and energy reliability (smart grid). These requirements could change the process
and timing of evaluating and approving technology purchases, which could impact
sales.
The
European Union has issued the EU Energy Package, which includes directives and
regulations intended to strengthen consumer rights and protection in the EU
energy market. The EU’s 20-20-20 goals include a 20% increase in energy
efficiency, a 20% reduction of CO2 emissions compared
with 1990 levels, and produce 20% of its energy from renewable energy by 2020.
The package requires EU Member States to ensure the implementation of
intelligent metering systems and outlines deployment by 2022, with 80% of
consumers equipped with smart metering systems by 2020. While we believe these
initiatives will provide opportunities for sales of our products, the pace at
which these markets will grow is unknown due to the timing of legislation,
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 due to several
factors.
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:
|
· size
and timing of significant customer orders
|
· changes
in accounting standards or practices
|
|
· the
gain or loss of significant customers
|
· changes
in existing taxation rules or practices
|
|
· required
product developments to maintain our
|
· shifts
in product or sales channel mix
|
|
competitive
advantage
|
· foreign
currency fluctuations
|
|
· the
shortage or change in price of certain
|
· access
to capital at acceptable terms
|
|
components
or materials
|
· costs
related to acquisitions
|
|
· increased
competition and pricing pressure
|
· intangible
asset amortization expenses
|
|
· changes
in interest rates
|
· stock-based
compensation
|
|
· litigation
expense
|
· FCC
or other governmental actions
|
|
· unexpected
warranty liabilities
|
· changes
in fair value of assets and liabilities
|
|
· restructuring
charges
|
· general
economic conditions affecting enterprise
|
|
spending
for the utility industry
|
Our
acquisitions of and investments in third parties have risks.
We have
acquired nine companies since December 31, 2002, the two largest of which
were our acquisition of Actaris for $1.7 billion in 2007 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 were to materialize. For investments in
entities that are not wholly owned by Itron, such as joint ventures, a loss of
U.S. generally accepted accounting principles (GAAP) defined control could
result in significant change in accounting treatment and a change in the
carrying value of the entity. 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 noncontrolling 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:
|
·
|
underperformance
relative to projected future operating
results;
|
|
·
|
changes
in the manner of or use of the acquired assets or the strategy for our
overall business;
|
|
·
|
negative
industry or economic trends;
|
|
·
|
decline
in our stock price for a sustained period or decline in our market
capitalization below net book value;
and
|
|
·
|
changes
in our organization or management reporting structure, which could result
in additional reporting units, requiring greater aggregation or
disaggregation in our analysis by reporting unit and potentially
alternative methods/assumptions of estimating fair
values.
|
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. Refer to Item 1: “Management’s Discussion and Analysis
of Financial Condition and Results of Operations, Critical Accounting
Estimates” included in
this Annual Report on Form 10-K for additional information regarding the results
of our October 1, 2009 goodwill impairment assessment.
The
realization of our deferred tax assets 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
from that 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 is derived from operations conducted outside
the United States. International sales and operations may be subjected 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 those commonly used 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 international currencies 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 in the same manner as 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 competitive 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, in order to keep pace with technological advances, changing customer
requirements, international market acceptance, and other factors in the markets
in which we sell our products. 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 revenue is generated with 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 17%, 15%, and 14% of
revenues for 2009, 2008, and 2007, respectively. No single customer represented
more than 10% of total Company revenues in those years. 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 our financial and operating results. 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 value of these contracts is substantially larger than contracts we have had
with our customers in the past. These deployments last several years and may
exceed the length of prior deployment agreements. The terms and conditions of
these AMI agreements related to testing, contractual liabilities, warranties,
performance, and indemnities can be substantially different than the terms and
conditions associated with our previous contracts.
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 grow 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. We depend upon sufficient radio spectrum to be 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 crowded
to unacceptable levels, 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 may have to be
periodically renewed. In some jurisdictions, the rules permit certain low power
devices to operate on an unlicensed basis. Our AMR/AMI meters and modules
transmit information to and from handheld, mobile, or fixed reading devices
primarily in unlicensed bands pursuant to rules regulating such use. To the
extent we introduce new 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 or negotiation 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 potentially 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 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
that do not protect such rights in the same manner as they do in 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.
Business
interruptions could adversely affect our business.
Our
worldwide operations could be subject to hurricanes, tornados, earthquakes,
floods, fires, extreme weather conditions, medical epidemics or pandemics, or
other natural or manmade disasters or business interruptions. The occurrence of
any of these business disruptions could seriously harm our business, financial
condition, and results of operations.
Our key
manufacturing facilities are concentrated and 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
operations.
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 vendors’ 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. Should any of these vendors become unable to perform up to their
responsibilities, our operations could be materially disrupted.
We
rely on information technology systems
We are
dependent on information technology systems, including, but not limited to,
networks, applications, and outsourced services. We continually enhance and
implement new systems and processes throughout our global operations. The
failure of these systems to operate effectively, problems with transitioning to
upgraded or replacement systems, or a breach in security of these systems could
materially and adversely affect our business, financial condition, and results
of operations.
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, and 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 and the indenture related to our convertible senior subordinated
notes limit our ability and the ability of most of our subsidiaries to take
certain actions.
Our
credit facility and convertible notes 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 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 required payments against such indebtedness. We cannot be
certain we will be able to remedy any such defaults. If our required payments
are accelerated, we cannot be certain that we will have sufficient funds
available to pay the indebtedness or that we will have the ability to raise
sufficient capital to replace the 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
credit facility is sensitive to interest rate and foreign currency exchange rate
risks that could impact our financial position and results of
operations.
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, 2009, approximately 79% of our outstanding term loans were at fixed
London Interbank Offered Rate (LIBOR) rates as a result of interest rate swaps.
These interest rate swaps protect us against the risk of adverse fluctuations in
the borrowing’s denominated 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, 2009, we had outstanding standby letters of credit of $39.9 million
issued under our credit facility’s $115 million multicurrency revolver,
resulting in $75.1 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 alternative financing and be unable to
obtain acceptable terms. This could adversely impact our ability to fund some of
our internal initiatives or future acquisitions.
We
are exposed to counterparty risks with our third party depository institutions
and insurance providers.
As the
worldwide fallout from the credit crisis persists, the financial strength of
some depository institutions has diminished, and this trend may continue. If one
or more of the depository institutions in which we maintain significant cash
balances were to fail, our ability to access these funds might be temporarily or
permanently limited, and we could face material liquidity problems and financial
losses.
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.
Changes
in tax laws and unanticipated tax liabilities could adversely affect our
effective income tax rate and profitability.
We are
subject to income taxes in the United States and numerous foreign jurisdictions.
Our effective income tax rate in the future could be adversely affected by a
number of factors, including: changes in the mix of earnings in countries with
differing statutory tax rates, changes in the realization of deferred tax
assets, changes in tax laws, the outcome of income tax audits in various
jurisdictions around the world, and any repatriation of non-U.S. earnings for
which we have not previously provided for U.S. taxes. We regularly assess all of
these matters to determine the adequacy of our tax provision, which is subject
to significant discretion.
None.
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 | - | 20 | ||||||||
|
Other
(rest of world)
|
4 | 9 | - | 10 | ||||||||
|
Total
|
24 | 33 | 1 | 84 | ||||||||
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 Itron International’s
facilities are in Europe, Asia/Pacific, and throughout the rest of the world. We
own our headquarters facility, which is located in Liberty Lake, Washington. Our
other 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.
Our U.S.
AMR standalone module operations are located in Waseca, Minnesota and our
electricity meter operations are located in Oconee, South Carolina. Our
international operations are more diversified. If any of our facilities are
disrupted, our production capacity could be reduced, though most significantly
in the United States.
On
December 18, 2009, we received a statement of claim in the matter of an
arbitration between Cinclus Technology (Cinclus) and Itron Metering Solutions UK
Ltd (Itron UK). The claim relates to an alleged defect in meters sold to Cinclus
during 2007 for installation on a project Cinclus was managing for E.ON, a
utility with customers in Sweden. On December 23, 2009, we received a statement
of claim in the matter of an arbitration between Cinclus and Itron UK relating
to an alleged defect in meters sold to Cinclus during 2007 - 2009 for
installation on a project Cinclus was managing for Fortum, a utility with
customers in Sweden. Both arbitrations have been filed with the Arbitration
Institute of the Stockholm Chamber of Commerce. In both arbitrations, Cinclus
claims the meters provided by Itron UK fail to meet specifications because in
certain environments the meters are affected by external events, which impairs
the meter’s capability to measure energy accurately. Cinclus asserts that all
meters must be replaced at Itron UK’s cost and expense, including the cost of
field work to replace the meters, plus other losses and damages to be specified
at a later date. Itron UK has denied all of the allegations and will defend
these claims. We do not believe this matter will have a material adverse effect
on our business or financial condition, although an unfavorable outcome could
have a material adverse effect on Itron’s results of operations for the period
in which such a loss is recognized.
No
matters were submitted to a vote of shareholders of Itron, Inc. during the
fourth quarter of 2009.
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 2009 and 2008 as reported by the NASDAQ Global Select
Market.
|
2009
|
2008
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 66.66 | $ | 40.10 | $ | 100.00 | $ | 70.48 | ||||||||
|
Second
Quarter
|
$ | 62.19 | $ | 42.77 | $ | 106.25 | $ | 88.77 | ||||||||
|
Third
Quarter
|
$ | 67.89 | $ | 50.15 | $ | 105.99 | $ | 84.71 | ||||||||
|
Fourth
Quarter
|
$ | 69.49 | $ | 54.92 | $ | 90.10 | $ | 34.25 | ||||||||
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 the NASDAQ
Composite Index and our peer group of companies used for the year ended December
31, 2009.
The above
presentation assumes $100 invested on December 31, 2004 in the common stock
of Itron, Inc., the NASDAQ Composite 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 annual 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, 2010, there were 309 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 prohibits the
declaration or payment of a cash dividend as long as this facility is 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.
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,
|
||||||||||||||||
|
2009
|
2008
(3)
|
2007 (1)
(3)
|
2006
(3)
|
2005
|
||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
Consolidated
Statements of Operations Data
|
||||||||||||||||
|
Revenues
|
$ | 1,687,447 | $ | 1,909,613 | $ | 1,464,048 | $ | 644,042 | $ | 552,690 | ||||||
|
Cost
of revenues
|
1,149,991 | 1,262,756 | 976,761 | 376,600 | 319,069 | |||||||||||
|
Gross
profit
|
537,456 | 646,857 | 487,287 | 267,442 | 233,621 | |||||||||||
|
Operating
income
|
45,027 | 109,822 | 46,473 | 61,743 | 46,238 | |||||||||||
|
Net
income (loss)
|
(2,249 | ) | 19,811 | (22,851 | ) | 33,759 | 33,061 | |||||||||
|
Earnings
(loss) per common share-Basic
|
$ | (0.06 | ) | $ | 0.60 | $ | (0.77 | ) | $ | 1.33 | $ | 1.41 | ||||
|
Earnings
(loss) per common share-Diluted
|
$ | (0.06 | ) | $ | 0.57 | $ | (0.77 | ) | $ | 1.28 | $ | 1.33 | ||||
|
Weighted
average common shares outstanding-Basic
|
38,539 | 33,096 | 29,584 | 25,414 | 23,394 | |||||||||||
|
Weighted
average common shares outstanding-Diluted
|
38,539 | 34,951 | 29,584 | 26,283 | 24,777 | |||||||||||
|
Consolidated
Balance Sheet Data
|
||||||||||||||||
|
Working
capital (2)
|
$ | 282,532 | $ | 293,296 | $ | 249,579 | $ | 492,861 | $ | 116,079 | ||||||
|
Total
assets
|
2,854,621 | 2,856,348 | 3,030,457 | 988,522 | 598,884 | |||||||||||
|
Total
debt
|
781,764 | 1,151,767 | 1,538,799 | 469,324 | 166,929 | |||||||||||
|
Shareholders'
equity
|
1,400,514 | 1,058,776 | 790,435 | 390,982 | 317,534 | |||||||||||
|
Other
Financial Data
|
||||||||||||||||
|
Cash
provided by operating activities
|
$ | 140,787 | $ | 193,146 | $ | 133,327 | $ | 94,773 | $ | 79,617 | ||||||
|
Cash
used in investing activities
|
(53,994 | ) | (67,075 | ) | (1,714,416 | ) | (85,499 | ) | (30,571 | ) | ||||||
|
Cash
(used in) provided by financing activities
|
(114,121 | ) | (63,376 | ) | 1,310,360 | 318,493 | (27,032 | ) | ||||||||
|
Capital
expenditures
|
(52,906 | ) | (63,430 | ) | (40,602 | ) | (31,739 | ) | (31,973 | ) | ||||||
|
(1)
|
On
April 18, 2007, we completed the acquisition of Actaris Metering Systems
SA (Actaris). 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)
|
Working
capital represents current assets less current liabilities.
|
|
(3)
|
On
January 1, 2009, we adopted Financial Accounting Standards Board (FASB)
Staff Position (FSP) APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (FSP 14-1) relating to our
convertible senior subordinate notes issued in August 2006. (The guidance
in FSP 14-1 is now embedded within Accounting Standards CodificationTM
(ASC) 470-20). We used the SEC staff’s Alternative A transition
election for presenting prior financial information, and therefore the
financial information as of and for the year ended December 31, 2006 has
not been adjusted and is not comparable to the financial information as of
and for the years ended December 31, 2009, 2008, and 2007. Refer to Item
8: "Financial Statements and Supplementary Data Note 1: Summary of
Significant Accounting Policies" included in this Annual Report on Form
10-K for a discussion of the effects of the implementation of FSP
14-1.
|
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.
Our products and services include hardware, software, managed services, and
consulting. Cost of revenues includes materials, labor, overhead, warranty
expense, and distribution and documentation costs for software.
Overview
Our 2009
financial results have been negatively impacted by a number of factors including
the economic downturn, foreign exchange rate volatility, and delayed purchases
by some utilities due to uncertainty related to a shift in technology choices
from automated meter reading (AMR) to advanced metering infrastructure (AMI)
systems and customers awaiting approval of projects that may qualify for
stimulus funding through the United States’ American Recovery and Reinvestment
Act of 2009.
With the
current economic environment and foreign exchange rate volatility, we took steps
to strengthen our financial position. During 2009, we reduced our borrowings by
$383.6 million, issued $290.0 million in common stock, and amended our
credit facility to reduce our current and future covenant
requirements.
Twelve-month
backlog was $807 million at December 31, 2009, compared with $418 million at
December 31, 2008.
Total
Company Revenues, Gross Profit and Margin, and Unit Shipments
|
Year
Ended December 31,
|
|||||||||||||||||
|
2009
|
%
Change
|
2008
|
%
Change
|
2007
|
|||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||||
|
Revenues
|
$ | 1,687.4 | (12%) | $ | 1,909.6 | 30% | $ | 1,464.0 | |||||||||
|
Gross
Profit
|
537.5 | (17%) | 646.9 | 33% | 487.3 | ||||||||||||
|
Gross
Margin
|
32 | % | 34 | % | 33 | % | |||||||||||
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Revenues
by region
|
||||||||||
|
Europe
|
$ | 806.5 | $ | 916.3 | $ | 623.6 | ||||
|
United
States and Canada
|
606.5 | 648.0 | 596.6 | |||||||
|
Other
|
274.4 | 345.3 | 243.8 | |||||||
|
Total
revenues
|
$ | 1,687.4 | $ | 1,909.6 | $ | 1,464.0 | ||||
Revenues
Revenues
decreased 12%, or $222.2 million, in 2009, compared with 2008. A strengthening
U.S. dollar against most foreign currencies accounted for 46% of the decrease in
revenues. Revenue growth in 2008, compared with 2007, was primarily due to the
Actaris acquisition in the second quarter of 2007. A more detailed analysis of
these fluctuations is provided in Operating Segment
Results.
No single
customer represented more than 10% of total revenues for the years ended
December 31, 2009, 2008, and 2007. Our 10 largest customers accounted for
approximately 17%, 15%, and 14% of total revenues in 2009, 2008, and
2007.
Gross
Margins
Gross
margin was 32% in 2009, compared with 34% and 33% in 2008 and 2007,
respectively. Approximately two-thirds of the decline in gross margins was
attributable to the Itron North America operations and one-third was
attributable to the Itron International operations. 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. A more detailed analysis of these fluctuations is provided in Operating Segment
Results.
Meter
and Module Summary
Meters
are sold with and without advanced functionality. In addition, smart meter
modules (AMR/AMI) can be sold separately from the meter. Depending on customers’
preferences, we also incorporate other vendors’ technology in our meters. A
summary of our meter and AMR/AMI module shipments are as follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
Total
meters (with and without AMR/AMI)
|
(units
in thousands)
|
|||||||||
|
Itron
North America
|
||||||||||
|
Electricity
|
3,480 | 4,800 | 5,075 | |||||||
|
Gas
|
350 | 390 | 210 | |||||||
|
Itron
International
|
||||||||||
|
Electricity
|
7,790 | 7,840 | 5,400 | |||||||
|
Gas
|
4,980 | 5,400 | 3,100 | |||||||
|
Water
|
8,430 | 9,170 | 6,340 | |||||||
|
Total
meters with and without AMR/AMI
|
25,030 | 27,600 | 20,125 | |||||||
|
Additional
meter information (Total Company)
|
||||||||||
|
Meters
with AMR
|
3,110 | 4,690 | 3,600 | |||||||
|
Meters
with AMI
|
710 | 20 | - | |||||||
|
Standalone
AMR/AMI modules
|
3,830 | 4,890 | 4,675 | |||||||
|
Meters
with AMR/AMI and modules
|
7,650 | 9,600 | 8,275 | |||||||
|
Meters
with other vendors' AMR/AMI
|
630 | 840 | 925 | |||||||
Operating
Segment Results
For a
description of our operating segments, refer to Item 8: “Financial Statements
and Supplementary Data, Note 15: Segment Information” in this Annual Report on
Form 10-K. The following tables and discussion highlight significant changes in
trends or components of each operating segment.
|
Year
Ended December 31,
|
|||||||||||||||
|
2009
|
%
Change
|
2008
|
%
Change
|
2007
|
|||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||
|
Segment
Revenues
|
|||||||||||||||
|
Itron
North America
|
$ | 615.8 | (12%) | $ | 696.7 | 9% | $ | 637.4 | |||||||
|
Itron
International
|
1,071.6 | (12%) | 1,212.9 | 47% | 826.6 | ||||||||||
|
Total
revenues
|
$ | 1,687.4 | (12%) | $ | 1,909.6 | 30% | $ | 1,464.0 | |||||||
|
Year
Ended December 31,
|
|||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||
|
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
|
$ | 211.8 | 34% | $ | 263.9 | 38% | $ | 257.5 | 40% | ||||||
|
Itron
International
|
325.7 | 30% | 383.0 | 32% | 229.8 | 28% | |||||||||
|
Total
gross profit and margin
|
$ | 537.5 | 32% | $ | 646.9 | 34% | $ | 487.3 | 33% | ||||||
|
Year
Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||
|
Segment
Operating Income (Loss)
|
Operating
Income (Loss)
|
Operating
Margin
|
Operating
Income (Loss)
|
Operating
Margin
|
Operating
Income (Loss)
|
Operating
Margin
|
||||||||||
|
and
Operating Margin
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
|||||||||||||
| Itron North America | $ | 36.9 | 6% | $ | 73.4 | 11% | $ | 72.6 | 11% | |||||||
| Itron International | 37.6 | 4% | 74.1 | 6% | 5.9 | 1% | ||||||||||
| Corporate unallocated | (29.5 | ) | (37.7 | ) | (32.0 | ) | ||||||||||
|
Total
Company
|
$ | 45.0 | 3% | $ | 109.8 | 6% | $ | 46.5 | 3% | |||||||
Itron North America: Revenues decreased $80.9 million, or 12%, in 2009, compared with 2008. Revenues in 2008 included electricity meter and AMR module shipments in support of a number of AMR contracts that were substantially completed in 2008. During 2009, these revenues were lower as utilities delayed orders due to the current spending environment and the uncertainty surrounding the announcement and disbursement of stimulus funds. AMI revenues began increasing in the fourth quarter of 2009 and totaled $101.8 million for the year.
Revenues
increased $59.3 million, or 9%, in 2008, compared with 2007, primarily due to
increased sales for many of our products and services, with the largest increase
in standalone AMR water and gas modules. Revenues in 2008 also included a full
year of sales from our North America gas and water meters, which were part of
the Actaris acquisition in 2007.
Gross
margin decreased four percentage points in 2009, compared with 2008, primarily
due to shipments of our first generation AMI meters, which currently have higher
costs, fewer AMR meter and module shipments, and reduced overhead absorption
resulting from lower overall production levels.
Gross
margin decreased two percentage points in 2008, compared with 2007, primarily as
a result of lower overhead absorption due to lower electricity meter
volumes.
No
customer represented more than 10% of Itron North America operating segment
revenues in 2009, 2008, or 2007.
Itron
North America operating expenses decreased $15.6 million, or 8%, in 2009,
compared with 2008, primarily due to lower sales expense and reduced
compensation associated with our 2009 suspension of bonus, profit sharing, and
employee savings plan match. Operating expenses as a percentage of revenues were
28% for 2009 and 27% for 2008, as a result of lower revenues in
2009.
Operating
expenses increased $5.6 million, or 3%, in 2008, compared with 2007. Higher
product development, sales, and marketing were partially offset by reduced
general and administrative expenses and amortization of intangible assets.
Operating expenses as a percentage of revenues were 29% for 2007.
Itron International: Revenues
decreased $141.3 million, or 12% in 2009, compared 2008. Excluding the effect of
a strengthening U.S. dollar against most foreign currencies, as compared with
the prior year, revenues declined 4% as a result of the completion of a smart
metering/AMI project in 2008 and softening demand in some markets, such as Spain
and the United Kingdom, which was due to financial and economic
conditions.
Revenues
for 2008 increased by $386.3 million due to a full year of results, whereas
revenues for 2007 primarily included results of 8.5 months of operations from
April 18, 2007, the date of the Actaris acquisition.
Gross
margin decreased two percentage points in 2009, compared with 2008, primarily as
a result of expenses for discontinuing certain product lines and streamlining
our service operations in Brazil.
Gross
margin for 2008 was four percentage points higher at 32%, compared with 28% in
2007. In 2007, gross margin was negatively impacted by a two percentage 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.
Business
line revenues for Itron International were as follows:
|
Year
Ended December 31,
|
April 18, 2007
through December
31,
|
|||||||
|
2009
|
2008
|
2007
|
||||||
|
Electricity
|
40% | 40% | 45% | |||||
|
Gas
|
30% | 30% | 28% | |||||
|
Water
|
30% | 30% | 27% | |||||
No single
customer represented more than 10% of Itron International operating segment
revenues in 2009, 2008, or 2007.
Operating
expenses for Itron International were $288.1 million, or 27% of revenues, for
2009, compared with $308.9 million, or 25% of revenues, in 2008, and $223.9
million, or 27% of revenues, in 2007. In 2009, decreased operating expense
consisted of lower amortization expense of $18.0 million and a $16.5 million
decrease due to a stronger U.S. dollar, which was partially offset by an
increase in product development and administrative expense.
Operating
expenses in 2008 increased, compared with 2007, in all areas due to higher
revenues, increased emphasis on product development, higher intangible asset
amortization, administrative expenses, and foreign exchange fluctuations.
Operating expenses for 2007 included results from the date of acquisition as
well as $35.8 million of in-process research and development (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.” These expenses decreased $8.2 million in
2009, compared with 2008, due primarily to reduced compensation expense
associated with our 2009 suspension of bonus and profit sharing and reduced
consulting fees primarily for Sarbanes-Oxley Act of 2002 compliance. Corporate
unallocated expenses increased $5.7 million in 2008, compared with 2007, due to
increased variable compensation and financial integration expenses. These
expenses, as a percentage of total Company revenues, were 2% in 2009, 2008, and
2007.
Total
Company
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues:
|
Year
Ended December 31,
|
||||||||||||||||||
|
2009
|
%
of Revenue
|
2008
|
%
of Revenue
|
2007
|
%
of Revenue
|
|||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||
|
Sales
and marketing
|
$ | 152.4 | 9% | $ | 167.5 | 9% | $ | 125.8 | 9% | |||||||||
|
Product
development
|
122.3 | 7% | 120.7 | 6% | 94.9 | 6% | ||||||||||||
|
General
and administrative
|
119.1 | 7% | 128.5 | 7% | 100.1 | 7% | ||||||||||||
|
Amortization
of intangible assets
|
98.6 | 6% | 120.3 | 6% | 84.0 | 6% | ||||||||||||
|
In-process
research and development
|
- | - | - | - | 36.0 | 2% | ||||||||||||
|
Total
operating expenses
|
$ | 492.4 | 29% | $ | 537.0 | 28% | $ | 440.8 | 30% | |||||||||
Operating
expenses decreased $44.6 million, or 8%, in 2009, compared with 2008, as a
result of lower amortization of intangible assets of $21.7 million and foreign
exchange rate fluctuations of $17.0 million, with the remaining decrease
primarily due to cost containment measures. 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. Amortization
of intangible assets increased $36.3 million in 2008, compared with 2007,
due to recording a full year of amortization related to the Actaris acquisition.
General and administrative expenses in 2008 were impacted by increased
compensation and financial integration expenses. 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,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Interest
income
|
$ | 1,186 | $ | 5,970 | $ | 10,477 | ||||
|
Interest
expense
|
(62,053 | ) | (85,260 | ) | (87,409 | ) | ||||
|
Amortization
of debt placement fees
|
(8,258 | ) | (8,917 | ) | (13,526 | ) | ||||
|
Loss
on extinguishment of debt, net
|
(12,800 | ) | - | - | ||||||
|
Other
income (expense), net
|
(9,176 | ) | (3,033 | ) | 435 | |||||
|
Total
other income (expense)
|
$ | (91,101 | ) | $ | (91,240 | ) | $ | (90,023 | ) | |
Interest income: Interest
income decreased in 2009, compared with 2008, primarily due to lower interest
rates in 2009, partially offset by an average cash balance that was
approximately 15% higher than during 2008. The decrease in interest income in
2008, compared with 2007, was primarily the result of lower average cash and
cash equivalent balances and short-term investments. The decrease in interest
income in 2008 was also impacted by lower interest rates, compared with
2007.
Interest expense: Interest
expense decreased 27% in 2009, compared with 2008, primarily due to the decline
in the principal balance of our debt outstanding as well as the LIBOR interest
rate. The weighted average debt balance outstanding during 2009 was $923.0
million, compared with $1.3 billion during 2008, representing a decline of 30%.
The decrease in interest expense was partially offset by an increase in the
applicable margin on our term loans related to our term loan agreement
amendment, which went from 1.75% to 3.50% effective April 24, 2009, and
subsequently increased to 3.75% in August 2009. At December 31, 2009, inclusive
of our interest rate swaps, 79% of our term loans were at fixed LIBOR rates.
Interest expense decreased 2% in 2008, compared with 2007 due to a reduction in
our term loan’s applicable margin from 2% to 1.75% in 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.
Amortization of prepaid debt
fees: Amortization of prepaid debt fees decreased 7% during 2009,
compared with 2008, due to lower debt repayments. Debt repayments were $275.8
million during 2009, compared with $388.4 million in 2008. When debt is repaid
early, the related portion of unamortized prepaid debt fees is written-off and
included in interest expense. 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.
Loss on extinguishment of
debt: During the second quarter of 2009, we redeemed the $109.6 million
remaining principal balance of our senior subordinated notes at 101.938% of the
principal amount, which was $111.7 million. This redemption resulted in a
$2.5 million loss on extinguishment of debt.
During
the first quarter of 2009, we entered into exchange agreements with certain
holders of our convertible notes to issue, in the aggregate, approximately 2.3
million shares of common stock, valued at $132.9 million, in exchange for, in
the aggregate, $121.0 million principal amount of the convertible notes,
representing 35% of the aggregate principal outstanding at the date of the
exchanges. As a result, we recognized a net loss on extinguishment of debt of
$10.3 million, calculated as the inducement loss, plus an allocation of advisory
fees less the revaluation gain. For a description of the redemption of our
subordinated notes and the induced conversion of a portion of our convertible
notes, refer to Item 8: “Financial Statements and Supplementary Data,
Note 6: Debt” included in this Annual Report on Form 10-K.
Other income (expense), net: In 2009, other
expenses, net, resulted primarily from net foreign currency losses due to the
revaluation of monetary asset and liability balances denominated in a currency
other than the reporting entity’s functional currency and $1.5 million in legal
and advisory fees associated with the amendment to our credit facility. 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 Actaris acquisition.
Income
Tax Provision (Benefit)
Our tax
provision (benefit) as a percentage of income (loss) before tax typically
differs from the federal statutory rate of 35%. Changes in our actual 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 in domestic and foreign jurisdictions, tax credits (including
research and development and foreign tax), state income taxes, and changes in
our valuation allowance.
Our tax
benefit as a percentage of loss before tax was 95.1% for 2009. Our actual tax
rate for 2009 was higher than the federal statutory rate due to a variety of
factors, including: (1) 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; (2) benefit of foreign interest
expense deductions; (3) tax planning and tax elections regarding the
repatriation of foreign earnings and the associated foreign tax credits; (4) a
decrease in pretax income in high tax jurisdictions for the year; and (5) a
refund of taxes previously paid in foreign tax audits.
Our tax
benefit as a percentage of income before tax was (6.6%) for
2008. Our actual 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. 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 47.5% for 2007. Our actual tax
rate 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 with respect to the
Actaris acquisition.
Our net
deferred 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 tax assets resulted primarily from acquisitions.
Our
deferred tax assets at December 31, 2009 do not include the tax effect on $57.8
million of tax benefits from employee stock option exercises. Equity (common
stock) will be increased by $22.2 million if and when such excess tax benefits
reduce cash taxes payable.
Our cash
income tax payments for 2009, 2008, and 2007 are as follows:
|
Years
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
State
income taxes paid
|
$ | 0.6 | $ | 0.1 | $ | 1.1 | ||||
|
Foreign
and local income taxes paid
|
31.1 | 26.3 | 20.6 | |||||||
|
Total
income taxes paid
|
$ | 31.7 | $ | 26.4 | $ | 21.7 | ||||
For 2009,
2008, and 2007, we had operating losses for federal income taxes purposes and
did not pay significant cash taxes. Based on current projections, we expect to
pay minimal U.S. federal and state taxes and approximately $22.0 million in
foreign and local income taxes in 2010.
Refer to
Item 8: “Financial Statements and Supplementary Data, Note 11: Income Taxes”
included in this Annual Report on Form 10-K for a discussion of our tax
provision (benefit) and unrecognized tax benefits.
Financial
Condition
Cash
Flow Information:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Operating
activities
|
$ | 140.8 | $ | 193.2 | $ | 133.3 | ||||
|
Investing
activities
|
(54.0 | ) | (67.1 | ) | (1,714.4 | ) | ||||
|
Financing
activities
|
(114.1 | ) | (63.4 | ) | 1,310.4 | |||||
|
Effect
of exchange rates on cash and cash equivalents
|
4.8 | (10.3 | ) | 1.3 | ||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | (22.5 | ) | $ | 52.4 | $ | (269.4 | ) | ||
Cash and
cash equivalents was $121.9 million at December 31, 2009, compared with $144.4
million at December 31, 2008. The decrease was primarily due to lower
operating results and higher repayments of borrowings in excess of net proceeds
from public offerings of common stock. 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 operating results
that included a full year of the Actaris acquisition operations and the $310.9
million stock offering in May 2008, partially offset by $388.4 million in
debt repayments.
Operating
activities:
Cash
provided by operating activities for 2009 was $52.4 million lower, compared with
2008, primarily due to lower earnings and less non-cash expenses, such as
depreciation and amortization. Cash provided by operating activities increased
$59.9 million in 2008, compared with 2007. Operating results for 2008 included a
full year of the Actaris acquisition operations and higher non-cash expenses,
such as depreciation and amortization.
Investing
activities:
Net cash
used in investing activities decreased 20% in 2009, compared with 2008,
primarily due to delayed purchases of machinery and equipment. Contingent
consideration of $4.3 million was paid during 2009 to shareholders of three of
our previous acquisitions for the achievement of certain earn-out thresholds.
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.
Financing
activities:
During
2009, we repaid $275.8 million in borrowings, which included utilizing $160.4
million in net proceeds from a public offering of approximately 3.2 million
shares of common stock. In 2008, we repaid $388.4 million in borrowings, which
included $310.9 million in net proceeds from a public offering of approximately
3.4 million shares of common stock. In 2007, we financed the acquisition of
Itron International 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 sale of common stock
were $225.2 million in 2007.
Effect
of exchange rates on cash and cash equivalents:
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. The effect of exchange rates on cash balances held in foreign
currency denominations was $4.8 million, $10.3 million, and $1.3 million in
2009, 2008, and 2007, respectively.
Non-cash
transactions:
During
2009, we completed exchanges with certain holders of our convertible notes in
which we issued, in the aggregate, approximately 2.3 million shares of common
stock recorded at $123.4 million, in exchange for $107.8 million net carrying
amount of the convertible notes and the reversal of deferred taxes of $5.8
million. Refer to Item 8: “Financial Statements and Supplemental
Data, Note 6: Debt” included in this Annual Report on Form 10-K for a further
discussion associated with the exchange agreements and the derecognition
requirement for induced conversions.
Off-balance
sheet arrangements:
We have
no off-balance sheet financing agreements or guarantees as defined by Item 303
of Regulation S-K at December 31, 2009 and 2008 that we believe are 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, 2009, 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
|
$ | 344,469 | $ | 17,956 | $ | 39,535 | $ | 286,978 | $ | - | ||||||
|
EUR
denominated term loan
|
354,281 | 18,298 | 39,857 | 296,126 | - | |||||||||||
|
Convertible
senior subordinated notes (1)
(2)
|
234,784 | 5,590 | 229,194 | - | - | |||||||||||
|
Operating
lease obligations (3)
|
28,901 | 10,260 | 11,435 | 5,540 | 1,666 | |||||||||||
|
Purchase
and service commitments (4)
|
252,163 | 251,716 | 447 | - | - | |||||||||||
|
Other
long-term liabilities reflected on the balance
|
||||||||||||||||
|
sheet
under generally accepted accounting principles (5)
|
92,769 | - | 55,818 | 11,982 | 24,969 | |||||||||||
|
Total
|
$ | 1,307,367 | $ | 303,820 | $ | 376,286 | $ | 600,626 | $ | 26,635 | ||||||
|
(1)
|
Borrowings
are disclosed within Item 8: “Financial Statements and Supplementary
Data, Note 6: Debt” included in this Annual Report on Form 10-K, with the
addition of estimated interest expense, not including the amortization of
prepaid debt fees and debt discount.
|
|
(2)
|
Our
convertible notes have a stated due date of August 2026. We reflected the
principal repayment in 2011 due to the combination of put, call, and
conversion options that are part of the terms of the convertible note
agreement.
|
|
(3)
|
Operating
lease obligations are disclosed in Item 8: “Financial Statements and
Supplementary Data, Note 12: Commitments and Contingencies” included in
this Annual Report on Form 10-K 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, 2009 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 2019. Noncurrent unrecognized tax
benefits totaling $42.6 million recorded in other long-term liabilities,
which include interest and penalties, 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 may fluctuate and are sensitive to many
factors including changes in working capital and the timing and magnitude of
capital expenditures and payments on debt.
For a
description of our credit facility, senior subordinated notes, and convertible
senior subordinated notes, refer to Item 8: “Financial Statements and
Supplementary Data, Note 6: Debt” included in this Annual Report on Form
10-K.
With the
current economic environment and volatile foreign exchange rates, we took steps
to strengthen our financial position. In addition to our financing activities and
non-cash transactions
discussed above, in April 2009, we amended our credit facility to adjust our
maximum leverage ratio and the minimum interest coverage ratio. The amendment
also allows us to seek a $75 million increase to the $115 million multicurrency
revolving line-of-credit without further amendment. The current lending
participants may then choose to increase their level of participation or approve
the participation of additional lenders. The revolver may also be increased
beyond the $75 million with the approval of the majority of revolver banks, the
issuing agents, the swingline lender, and the administrative agent. This
option will provide further potential sources of liquidity to allow us to
support the growth of our business. At December 31, 2009, there were no
borrowings outstanding under the revolver, and $39.9 million was utilized by
outstanding standby letters of credit, resulting in $75.1 million being
available for additional borrowings.
Other
Sources and Uses of Capital:
For a
description of our letters of credit and performance bonds, refer to Item 8:
“Financial Statements and Supplementary Data, Note 12: Commitments and
Contingencies” included in this Annual Report on Form 10-K. For a description of
our funded and unfunded non-U.S. defined benefit pension plans and our expected
2010 contributions, refer to Item 8: “Financial Statements and Supplementary
Data, Note 8: Defined Benefit Pension Plans” included in this Annual Report on
Form 10-K.
Working
capital, which represents current assets less current liabilities, was $282.5
million at December 31, 2009, compared with $293.3 million at December 31,
2008.
We expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from and 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 Item 1A: “Risk
Factors” included in this Annual Report on Form 10-K.
Contingencies
Refer to
Item 8: “Financial Statements and Supplementary Data, Note 12: Commitments and
Contingencies” included in this Annual Report on Form 10-K.
Critical
Accounting Estimates
Revenue
Recognition
The
majority of our revenue arrangements involve multiple elements, which require us
to 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. A majority of our revenue is recognized
when products are shipped to or received by a customer or when services are
provided.
Fair
values represent the estimated price charged when an item is sold separately. 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. We review our
fair values on an annual basis or more frequently if a significant trend is
noted.
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.
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.
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.
Unearned revenues relate primarily to professional services and software
associated with our OpenWay®
contracts, extended warranty, and prepaid post contract support. Unearned
revenue is recognized when the applicable revenue recognition criteria are met.
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. Deferred costs are recognized when the applicable revenue
recognition criteria are met. Refer to Item 8: “Financial Statements and
Supplementary Data, Note 1: Summary of Significant Accounting Policies” included
in this Annual Report on Form 10-K for unearned revenue and deferred costs
outstanding at December 31, 2009 and 2008.
Warranty
We offer
standard warranties on our hardware products and large application software
products. We accrue the estimated cost of 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. When new products are introduced, our process relies on historical
averages until sufficient data are available. As actual experience becomes
available, it is used to modify the historical averages to ensure the expected
warranty costs are within a range of likely outcomes. 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, which could adversely
affect our gross margin. The long-term warranty balance includes estimated
warranty claims beyond one year.
Income
Taxes
We
estimate income taxes in each of the taxing jurisdictions in which we operate.
Changes in our actual 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 in domestic and foreign
jurisdictions, tax credits (including research and development and foreign tax),
state income taxes, and changes in our valuation allowance. Significant judgment
is required in determining our actual tax rate and in evaluating our tax
positions. Changes in tax laws and unanticipated tax liabilities could
significantly impact our actual tax rate and profitability. We assess the
likelihood of recovering our deferred tax assets, which include net operating
loss and credit carryforwards and temporary differences expected to be
deductible in future years.
We record
valuation allowances to reduce deferred 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 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. Our most sensitive and
critical factor is projected future taxable income. Although realization is not
assured, management believes it is more likely than not that deferred tax assets
will be realized. The amount of deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward periods are reduced or current tax planning strategies
are not implemented.
We are
subject to audit in multiple taxing jurisdictions in which we operate. These
audits may involve complex issues, which may require an extended period of time
to resolve. We believe we have recorded adequate income tax provisions and
reserves for uncertain tax positions.
In
evaluating uncertain tax positions, 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. We 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 actual tax rate
may be materially affected in the period of final settlement with the tax
authorities.
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. Our intangible assets have a
finite life and are amortized over their estimated useful lives based on
estimated discounted cash flows. Intangible assets are tested for impairment
when events or changes in circumstances indicate the carrying value may not be
recoverable.
We test
goodwill for impairment each year as of October 1, or more frequently
should a significant impairment indicator occur. Our Itron North America
operating segment represents one reporting unit, while our Itron International
operating segment has three reporting units.
Determining
the fair value of a reporting unit is judgmental in nature and involves the use
of significant estimates and assumptions. We forecast discounted future cash
flows at the reporting unit level using risk-adjusted discount rates and
estimated future revenues and operating costs, which take into consideration
factors such as existing backlog, expected future orders, supplier contracts,
and expectations of competitive and economic environments. We also identify
similar publicly traded companies and develop a correlation, referred to as a
multiple, to apply to the operating results of the reporting units. Our 2009
annual goodwill impairment analysis did not result in an impairment charge as
the fair value of each reporting unit exceeded its carrying value. The
percentage by which the fair value of each reporting unit exceeded its carrying
value and the amount of goodwill allocated to each reporting unit at October 1,
2009 was as follows:
|
October
1, 2009
|
||||||
|
Goodwill
|
Fair
Value Exceeded Carrying Value
|
|||||
|
(in
millions)
|
||||||
|
Itron
North America
|
$ | 187.9 | 85% | |||
|
Itron
International - Electricity
|
379.7 | 3% | ||||
|
Itron
International - Gas
|
337.3 | 24% | ||||
|
Itron
International - Water
|
419.0 | 4% | ||||
| $ | 1,323.9 | |||||
Changes
in market demand, the volatility and decline in the worldwide equity markets,
and the decline in our market capitalization could negatively impact our annual
goodwill impairment test, which could have a significant effect on our current
and future results of operations and financial condition.
Derivative
Instruments
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 (also known as “Level 2”),
as defined by Financial Accounting Standards Board (FASB) ASC 820-10-20, Fair Value Measurements. 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
Statements 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. Our
derivatives are with major international financial institutions, with whom we
have master netting agreements; however, our derivative positions are not
disclosed on a net basis. There are no credit-risk-related contingent features
within our derivative instruments.
Convertible
Debt
Originally
issued as FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (FSP 14-1), ASC 470-20 requires our convertible notes to
be separated into its liability and equity components in a manner that reflects
our non-convertible debt borrowing rate, which we determined to be 7.38% at the
time of the convertible notes issuance in August 2006. Upon derecognition
of the convertible notes, we are required to remeasure the fair value of the
liability and equity components using a borrowing rate for similar
non-convertible debt that would be applicable to Itron at the date of the
derecognition. Any increase or decrease in borrowing rates from the inception of
the debt to the date of derecognition could result in a gain or loss,
respectively, on extinguishment. Based on market conditions and our credit
rating at the date of derecognition, the borrowing rate could be materially
different from the rate determined at the inception of the convertible
debt.
Defined
Benefit Pension Plans
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans. We
recognize 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. We also recognize the funded status of our defined benefit pension
plans on our Consolidated Balance Sheets 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
life, 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 determine a discount rate for our plans
based on the estimated duration of each plan’s liabilities. For our euro
denominated defined benefit pension plans, which consist of 95% of our benefit
obligation, we match the plans’ expected future benefit payments against select
bonds (bonds with market values that exceed €500 million, have a maturity
greater than one year with no special features, and have a spread between the
bid and ask prices of less than 5% of the average bid and ask prices).The yield
curve derived for the euro denominated plans was 5.5%. The weighted average
discount rate used to measure the projected benefit obligation for all of the
plans as of December 31, 2009 was 5.6%. A change of 25 basis points in the
discount rate would change our pension benefit obligation by approximately $75
million. The financial and actuarial assumptions used at December 31, 2009
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. Refer to Item 8: “Financial Statements and
Supplementary Data, Note 8: Defined Benefit Pension Plans” included in this
Annual Report on Form 10-K for our expected contributions for 2010.
Stock-Based
Compensation
We
measure and recognize compensation expense for all stock-based awards made to
employees and directors, including awards of stock options, stock issued
pursuant to our Employee Stock Purchase Plan (ESPP), and the issuance of
restricted and unrestricted stock awards and units, based on estimated fair
values. 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. In valuing our stock-based awards, significant judgment
is required in determining the expected volatility of our common stock and the
expected life that individuals will hold their stock-based awards prior to
exercising. Expected volatility is based on the historical and implied
volatility of our own common stock. The expected life of stock option grants is
derived from the historical actual term of option grants and an estimate of
future exercises during the remaining contractual period of the option. While
volatility and estimated life are assumptions that do not bear the risk of
change subsequent to the grant date of stock-based awards, these assumptions may
be difficult to measure as they represent future expectations based on
historical experience. Further, our expected volatility and expected life may
change in the future, which could substantially change the grant-date fair value
of future awards of stock options and ultimately the expense we record. 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,
adjusted for estimated forfeitures, using the straight-line method over the
vesting requirement. Our excess tax benefit cannot be credited to common stock
until the deduction reduces cash taxes payable. 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.
New
Accounting Pronouncements
Refer to
Item 8: “Financial Statements and Supplementary Data, Note 1: Summary of
Significant Accounting Policies” included in this Annual Report on Form
10-K.
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
trading or 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 and
estimated cash interest payments over the remaining lives of our debt at
December 31, 2009. Including the effect of our interest rate swaps at December
31, 2009, 85% of our borrowings are at fixed rates. Weighted average variable
rates in the table are based on implied forward rates in the Bloomberg U.S.
dollar yield curve as of December 31, 2009, our estimated leverage ratio, which
determines our additional interest rate margin, and a static foreign exchange
rate at December 31, 2009.
|
2010
|
2011
|
2012
|
2013
|
2014
|
Beyond
2014
|
Total
|
|||||||||||||||
|
(in
millions)
|
|||||||||||||||||||||
|
Fixed
Rate Debt
|
|||||||||||||||||||||
|
Principal:
Convertible notes (1)
|
$ | - | $ | 223.6 | $ | - | $ | - | $ | - | $ | - | $ | 223.6 | |||||||
|
Interest
rate
|
2.50 | % | 2.50 | % | |||||||||||||||||
|
Variable
Rate Debt
|
|||||||||||||||||||||
|
Principal:
U.S. dollar term loan
|
$ | 6.1 | $ | 6.1 | $ | 6.1 | $ | 6.1 | $ | 260.3 | $ | - | $ | 284.7 | |||||||
|
Average
interest rate
|
4.16 | % | 4.73 | % | 5.16 | % | 5.79 | % | 6.31 | % | |||||||||||
|
Principal:
Euro term loan
|
$ | 4.8 | $ | 4.8 | $ | 4.8 | $ | 4.8 | $ | 269.7 | $ | - | $ | 288.9 | |||||||
|
Average
interest rate
|
4.63 | % | 5.00 | % | 5.64 | % | 6.00 | % | 6.31 | % | |||||||||||
|
Interest
rate swaps on U.S. dollar term loan
(2)
|
|||||||||||||||||||||
|
Average
interest rate (Pay)
|
2.40 | % | 2.13 | % | |||||||||||||||||
|
Average
interest rate (Receive)
|
0.41 | % | 0.98 | % | |||||||||||||||||
|
Net/Spread
|
(1.99 | %) | (1.15 | %) | |||||||||||||||||
|
Interest
rate swap on euro term loan
(3)
|
|||||||||||||||||||||
|
Average
interest rate (Pay)
|
6.59 | % | 6.59 | % | 6.59 | % | |||||||||||||||
|
Average
interest rate (Receive)
|
2.88 | % | 3.25 | % | 3.89 | % | |||||||||||||||
|
Net/Spread
|
(3.71 | %) | (3.34 | %) | (2.70 | %) | |||||||||||||||
|
(1)
|
The
face value of our convertible notes is $223.6 million, while the carrying
value is $208.2 million. (Refer to Item 8: “Financial Statements and
Supplementary Data, Note 6: Debt” included in this Annual Report on Form
10-K for a summary of our convertible note terms and a reconciliation
between the face and carrying values). Our convertible notes mature
in August 2026. We are amortizing the remaining $15.4 million discount on
the liability component of the convertible notes over the next 18 months
and have reflected the principal repayment in 2011 due to the combination
of put, call, and conversion options that are part of the terms of the
convertible note agreement.
|
|
(2)
|
The
one-year interest rate swaps are used to convert $200 million of our
$284.7 million U.S. dollar denominated variable rate term loan from a
floating LIBOR interest rate, plus the applicable margin, to a fixed
interest rate, plus the applicable margin (refer to Item 8: “Financial
Statements and Supplementary Data, Note 7: Derivative Financial
Instruments and Hedging Activities” included in this Annual Report on Form
10-K).
|
|
(3)
|
The
amortizing euro denominated interest rate swap is used to convert $252.9
million (€175.8 million) of our $288.9 million (€200.8 million) euro
denominated variable rate term loan from a floating Euro Interbank Offered
Rate (EURIBOR), plus the applicable margin, to a fixed interest rate of
6.59%, through December 31, 2012, plus or minus the variance in the
applicable margin from 2%. As a result of the amortization schedule, the
interest rate swap will terminate before the stated maturity of the term
loan (refer to Item 8: “Financial Statements and Supplementary Data, Note
7: Derivative Financial Instruments and Hedging Activities” included in
this Annual Report on
Form 10-K).
|
Based on
a sensitivity analysis as of December 31, 2009, we estimate that if market
interest rates averaged one percentage point higher in 2010 than in the table
above, our earnings before income taxes in 2010 would not be materially impacted
due to our interest rate swaps in place at December 31, 2009.
We
continually monitor and assess our interest rate risk and may institute
additional interest rate swaps or other derivative instruments to manage such
risk in the future.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of countries. As a result, the majority of our
revenues and operating expenses are denominated in foreign currencies;
therefore, we face exposure to movements in foreign currency exchange rates 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 64%, 66%, and 59% of total revenues for the years
ended December 31, 2009, 2008, and 2007, respectively.
As a
result of our acquisition of an international company, we entered into a euro
denominated term loan in 2007, which exposes us to fluctuations in the euro
foreign exchange rate. Therefore, we have designated this foreign currency
denominated term loan as a hedge of our net investment in international
operations. The non-functional currency term loan is revalued into U.S. dollar
at each balance sheet date and the changes in value associated with currency
fluctuations are recorded as adjustments to long-term debt with offsetting gains
and losses recorded in other comprehensive income. We had no hedge
ineffectiveness. (Refer to Item 8: “Financial Statements and Supplementary Data,
Note 7: Derivative Financial Instruments and Hedging Activities” included in
this Annual Report on Form 10-K).
We are
also exposed to foreign exchange risk when we enter into non-functional currency
transactions, both intercompany and third-party. At each period end, foreign
currency monetary assets and liabilities are revalued with the change recorded
to other income and expense. In 2008, we began entering into monthly foreign
exchange forward contracts, not designated for hedge accounting, with the intent
to reduce earnings volatility associated with certain of these balances. During
2009, the notional amount of our outstanding forward contracts ranged from less
than $1 million to $60 million offsetting our exposures primarily from the euro,
British pound, Canadian dollar, Czech koruna, and Hungarian forint.
In future
periods, we may use additional derivative contracts to protect against foreign
currency exchange rate risks.
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 the 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.
|
Malcolm
Unsworth
|
Steven
M. Helmbrecht
|
|
President
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, 2009 and 2008, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2009, 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, in
2009 the Company retrospectively changed its method of accounting for
its convertible debt upon the adoption of Financial Accounting Standards
Board ASC Topic 470-20.
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, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 24, 2010 expressed an
unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
24, 2010
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Revenues
|
$ | 1,687,447 | $ | 1,909,613 | $ | 1,464,048 | ||||
|
Cost
of revenues
|
1,149,991 | 1,262,756 | 976,761 | |||||||
|
Gross
profit
|
537,456 | 646,857 | 487,287 | |||||||
|
Operating
expenses
|
||||||||||
|
Sales
and marketing
|
152,405 | 167,457 | 125,842 | |||||||
|
Product
development
|
122,314 | 120,699 | 94,926 | |||||||
|
General
and administrative
|
119,137 | 128,515 | 100,071 | |||||||
|
Amortization
of intangible assets
|
98,573 | 120,364 | 84,000 | |||||||
|
In-process
research and development
|
- | - | 35,975 | |||||||
|
Total
operating expenses
|
492,429 | 537,035 | 440,814 | |||||||
|
Operating
income
|
45,027 | 109,822 | 46,473 | |||||||
|
Other
income (expense)
|
||||||||||
|
Interest
income
|
1,186 | 5,970 | 10,477 | |||||||
|
Interest
expense
|
(70,311 | ) | (94,177 | ) | (100,935 | ) | ||||
|
Loss
on extinguishment of debt, net
|
(12,800 | ) | - | - | ||||||
|
Other
income (expense), net
|
(9,176 | ) | (3,033 | ) | 435 | |||||
|
Total
other income (expense)
|
(91,101 | ) | (91,240 | ) | (90,023 | ) | ||||
|
Income
(loss) before income taxes
|
(46,074 | ) | 18,582 | (43,550 | ) | |||||
|
Income
tax benefit
|
43,825 | 1,229 | 20,699 | |||||||
|
Net
income (loss)
|
$ | (2,249 | ) | $ | 19,811 | $ | (22,851 | ) | ||
|
Earnings
(loss) per common share-Basic
|
$ | (0.06 | ) | $ | 0.60 | $ | (0.77 | ) | ||
|
Earnings
(loss) per common share-Diluted
|
$ | (0.06 | ) | $ | 0.57 | $ | (0.77 | ) | ||
|
Weighted
average common shares outstanding-Basic
|
38,539 | 33,096 | 29,584 | |||||||
|
Weighted
average common shares outstanding-Diluted
|
38,539 | 34,951 | 29,584 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
BALANCE SHEETS
|
December
31
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$ | 121,893 | $ | 144,390 | |||
|
Accounts
receivable, net
|
337,948 | 321,278 | |||||
|
Inventories
|
170,084 | 164,210 | |||||
|
Deferred
tax assets current, net
|
20,762 | 31,807 | |||||
|
Other
current assets
|
75,229 | 56,032 | |||||
|
Total
current assets
|
725,916 | 717,717 | |||||
|
Property,
plant, and equipment, net
|
318,217 | 307,717 | |||||
|
Prepaid
debt fees
|
8,628 | 12,943 | |||||
|
Deferred
tax assets noncurrent, net
|
89,932 | 30,917 | |||||
|
Other
noncurrent assets
|
18,117 | 19,315 | |||||
|
Intangible
assets, net
|
388,212 | 481,886 | |||||
|
Goodwill
|
1,305,599 | 1,285,853 | |||||
|
Total
assets
|
$ | 2,854,621 | $ | 2,856,348 | |||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$ | 219,255 | $ | 200,725 | |||
|
Other
current liabilities
|
64,583 | 66,365 | |||||
|
Wages
and benefits payable
|
71,592 | 78,336 | |||||
|
Taxes
payable
|
14,377 | 18,595 | |||||
|
Current
portion of long-term debt
|
10,871 | 10,769 | |||||
|
Current
portion of warranty
|
20,941 | 23,375 | |||||
|
Unearned
revenue
|
40,140 | 24,329 | |||||
|
Deferred
tax liabilities current, net
|
1,625 | 1,927 | |||||
|
Total
current liabilities
|
443,384 | 424,421 | |||||
|
Long-term
debt
|
770,893 | 1,140,998 | |||||
|
Warranty
|
12,932 | 14,880 | |||||
|
Pension
plan benefits
|
63,040 | 55,810 | |||||
|
Deferred
tax liabilities noncurrent, net
|
80,695 | 102,720 | |||||
|
Other
noncurrent obligations
|
83,163 | 58,743 | |||||
|
Total
liabilities
|
1,454,107 | 1,797,572 | |||||
|
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,
|
|||||||
|
40,142,924
and 34,486,318 shares issued and outstanding
|
1,299,134 | 992,184 | |||||
|
Accumulated
other comprehensive income, net
|
71,130 | 34,093 | |||||
|
Retained
earnings
|
30,250 | 50,291 | |||||
|
Cumulative
effect of change in accounting principle (Note 1)
|
- | (17,792 | ) | ||||
|
Total
shareholders' equity
|
1,400,514 | 1,058,776 | |||||
|
Total
liabilities and shareholders' equity
|
$ | 2,854,621 | $ | 2,856,348 | |||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
thousands)
|
Shares
|
Amount
|
Accumulated
Other Comprehensive Income
|
Retained
Earnings
|
Total
|
||||||||||||
|
Balances
at January 1, 2007
|
25,675 | $ | 392,195 | $ | 1,588 | $ | 38,376 | $ | 432,159 | |||||||
|
Net
loss
|
(22,851 | ) | (22,851 | ) | ||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||
|
income
tax benefit of $755
|
147,654 | 147,654 | ||||||||||||||
|
Net
unrealized loss on derivative instruments, designated as
|
||||||||||||||||
|
cash
flow hedges, net of income tax benefit of $653
|
(1,062 | ) | (1,062 | ) | ||||||||||||
|
Net
unrealized loss on nonderivative hedging instrument,
|
||||||||||||||||
|
net
of income tax benefit of $15,644
|
(25,460 | ) | (25,460 | ) | ||||||||||||
|
Net
hedging gain reclassified into net income,
|
||||||||||||||||
|
net
of income tax benefit of $12
|
(19 | ) | (19 | ) | ||||||||||||
|
Pension
plan benefits liability adjustment,
|
||||||||||||||||
|
net
of income tax provision of $1,653
|
3,967 | 3,967 | ||||||||||||||
|
Total
comprehensive income
|
102,229 | |||||||||||||||
|
Cumulative
effect of a change in accounting principle
|
||||||||||||||||
|
adoption
of FSP 14-1, net of income tax provision of $1,804
|
(2,837 | ) | (2,837 | ) | ||||||||||||
|
Stock
issues:
|
||||||||||||||||
|
Options
exercised
|
828 | 20,136 | 20,136 | |||||||||||||
|
Employee
stock plans income tax benefits
|
(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 | $ | 651,079 | $ | 126,668 | $ | 12,688 | $ | 790,435 | |||||||
|
Net
income
|
19,811 | 19,811 | ||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||
|
income
tax benefit of $10,740
|
(92,069 | ) | (92,069 | ) | ||||||||||||
|
Net
unrealized loss on derivative instruments, designated as
|
||||||||||||||||
|
cash
flow hedges, net of income tax benefit of $5,736
|
(9,239 | ) | (9,239 | ) | ||||||||||||
|
Net
unrealized gain on nonderivative hedging instrument,
|
||||||||||||||||
|
net
of income tax provision of $3,875
|
6,485 | 6,485 | ||||||||||||||
|
Net
hedging gain reclassified into net income,
|
||||||||||||||||
|
net
of income tax benefit of $296
|
(477 | ) | (477 | ) | ||||||||||||
|
Pension
plan benefits liability adjustment,
|
||||||||||||||||
|
net
of income tax provision of $1,164
|
2,725 | 2,725 | ||||||||||||||
|
Total
comprehensive loss
|
(72,764 | ) | ||||||||||||||
|
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 | $ | 992,184 | $ | 34,093 | $ | 32,499 | $ | 1,058,776 | |||||||
|
Net
loss
|
||||||||||||||||
|
Foreign
currency translation adjustment, net of
|
(2,249 | ) | (2,249 | ) | ||||||||||||
|
income
tax provision of $6,714
|
40,992 | 40,992 | ||||||||||||||
|
Net
unrealized loss on derivative instruments, designated as
|
||||||||||||||||
|
cash
flow hedges, net of income tax benefit of $4,247
|
(6,776 | ) | (6,776 | ) | ||||||||||||
|
Net
unrealized loss on nonderivative hedging instrument,
|
||||||||||||||||
|
net
of income tax benefit of $1,502
|
(2,364 | ) | (2,364 | ) | ||||||||||||
|
Net
hedging loss reclassified into net income,
|
||||||||||||||||
|
net
of income tax provision of $5,363
|
8,612 | 8,612 | ||||||||||||||
|
Pension
plan benefits liability adjustment,
|
||||||||||||||||
|
net
of income tax benefit of $1,106
|
(3,427 | ) | (3,427 | ) | ||||||||||||
|
Total
comprehensive income
|
34,788 | |||||||||||||||
|
Stock
issues:
|
||||||||||||||||
|
Options
exercised
|
176 | 3,168 | 3,168 | |||||||||||||
|
Issuance
of stock-based compensation awards
|
4 | 254 | 254 | |||||||||||||
|
Employee
stock purchase plan
|
62 | 2,934 | 2,934 | |||||||||||||
|
Stock-based
compensation expense
|
16,728 | 16,728 | ||||||||||||||
|
Exchange
of debt for common stock
|
2,252 | 123,442 | 123,442 | |||||||||||||
|
Issuance
of common stock
|
3,163 | 160,424 | 160,424 | |||||||||||||
|
Balances
at December 31, 2009
|
40,143 | $ | 1,299,134 | $ | 71,130 | $ | 30,250 | $ | 1,400,514 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Operating
activities
|
||||||||||
|
Net
income (loss)
|
$ | (2,249 | ) | $ | 19,811 | $ | (22,851 | ) | ||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
155,737 | 173,673 | 126,440 | |||||||
|
In-process
research and development
|
- | - | 35,975 | |||||||
|
Stock-based
compensation
|
16,982 | 16,582 | 11,656 | |||||||
|
Amortization
of prepaid debt fees
|
8,258 | 8,917 | 13,526 | |||||||
|
Amortization
of convertible debt discount
|
9,673 | 13,442 | 10,970 | |||||||
|
Loss
on extinguishment of debt, net
|
9,960 | - | - | |||||||
|
Deferred
taxes, net
|
(64,216 | ) | (43,317 | ) | (41,025 | ) | ||||
|
Other
adjustments, net
|
3,102 | (2,177 | ) | 1,326 | ||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||
|
Accounts
receivable
|
(2,962 | ) | 19,864 | (40,718 | ) | |||||
|
Inventories
|
3,535 | 4,914 | 19,419 | |||||||
|
Accounts
payables, other current liabilities, and taxes payable
|
9,873 | (6,549 | ) | 10,033 | ||||||
|
Wages
and benefits payable
|
(8,261 | ) | 7,708 | 198 | ||||||
|
Unearned
revenue
|
14,836 | 3,936 | 2,660 | |||||||
|
Warranty
|
(5,273 | ) | (2,242 | ) | 1,761 | |||||
|
Other
operating, net
|
(8,208 | ) | (21,416 | ) | 3,957 | |||||
|
Net
cash provided by operating activities
|
140,787 | 193,146 | 133,327 | |||||||
|
Investing
activities
|
||||||||||
|
Proceeds
from the maturities of investments, held to maturity
|
- | - | 35,000 | |||||||
|
Acquisitions
of property, plant, and equipment
|
(52,906 | ) | (63,430 | ) | (40,602 | ) | ||||
|
Business
acquisitions & contingent consideration, net of cash equivalents
acquired
|
(4,317 | ) | (6,897 | ) | (1,716,253 | ) | ||||
|
Other
investing, net
|
3,229 | 3,252 | 7,439 | |||||||
|
Net
cash used in investing activities
|
(53,994 | ) | (67,075 | ) | (1,714,416 | ) | ||||
|
Financing
activities
|
||||||||||
|
Proceeds
from borrowings
|
- | - | 1,159,023 | |||||||
|
Payments
on debt
|
(275,796 | ) | (388,371 | ) | (76,099 | ) | ||||
|
Issuance
of common stock
|
166,372 | 324,494 | 247,617 | |||||||
|
Prepaid
debt fees
|
(3,936 | ) | (214 | ) | (22,083 | ) | ||||
|
Other
financing, net
|
(761 | ) | 715 | 1,902 | ||||||
|
Net
cash (used in) provided by financing activities
|
(114,121 | ) | (63,376 | ) | 1,310,360 | |||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
4,831 | (10,293 | ) | 1,312 | ||||||
|
Increase
(decrease) in cash and cash equivalents
|
(22,497 | ) | 52,402 | (269,417 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
144,390 | 91,988 | 361,405 | |||||||
|
Cash
and cash equivalents at end of period
|
$ | 121,893 | $ | 144,390 | $ | 91,988 | ||||
|
Non-cash
transactions:
|
||||||||||
|
Fixed
assets purchased but not yet paid, net
|
$ | 3,719 | $ | 2,796 | $ | (1,230 | ) | |||
|
Exchange
of debt (face value) for common stock (see Note 6)
|
120,984 | 29 | - | |||||||
|
Contingent
consideration payable for previous acquisitions
|
- | 1,295 | 7,862 | |||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Income
taxes
|
$ | 31,720 | $ | 26,377 | $ | 21,714 | ||||
|
Interest,
net of amounts capitalized
|
54,503 | 72,304 | 76,317 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
.
ITRON,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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, 2009, 2008, and 2007 and the Consolidated
Balance Sheets as of December 31, 2009 and 2008 of Itron, Inc. and its
subsidiaries.
The
Financial Accounting Standards Board (FASB) Accounting Standards
Codification™ (ASC), which became effective on July 1, 2009, is now the
single source of authoritative generally accepted accounting principles (GAAP),
along with additional guidance issued by the Securities and Exchange Commission
(SEC). All other accounting literature is now considered non-authoritative. For
new accounting pronouncements issued by the FASB prior to the effective date of
the ASC, we continue to use the pre-ASC reference, e.g., FSP APB 14-1 or SFAS
167, for clarity, as the guidance in these recently released pronouncements is
typically located in multiple subtopics and sections within the ASC. All other
GAAP references in this Annual Report on Form 10-K are from the
ASC.
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, 2009, our investments in variable interest
entities and noncontrolling interests were not material. Intercompany
transactions and balances have been eliminated upon consolidation.
On April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris),
which is primarily reported within our Itron International operating segment.
The operating results of this acquisition are included in our consolidated
financial statements commencing on the date of the acquisition.
Change
in Accounting Principle
On
January 1, 2009, we adopted FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (FSP 14-1). FSP 14-1 requires our convertible notes to
be separated into its liability and equity components in a manner that reflects
our non-convertible debt borrowing rate and must be applied retrospectively to
all periods during which our convertible notes was outstanding. Our senior
subordinated convertible notes (convertible notes) were issued in
August 2006. Refer to Note 6 for further disclosure of the terms of the
convertible notes and the adoption of FSP 14-1. (The guidance in FSP 14-1 is now
embedded within ASC 470-20).
The
impact of the adoption of FSP 14-1 on our results of operations, financial
position, and cash flows is as follows:
|
Year
ended December 31, 2009
|
||||||||||
|
As
Reported
|
Impact
of
FSP
14-1
|
Excluding
Impact of
FSP
14-1
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Consolidated
Statements of Operations
|
||||||||||
|
Interest
expense
|
$ | (70,311 | ) | $ | 9,673 | $ | (60,638 | ) | ||
|
Income
tax benefit
|
43,825 | (3,708 | ) | 40,117 | ||||||
|
Net
Income (loss)
|
(2,249 | ) | 5,965 | 3,716 | ||||||
| Earnings (loss) per common share - Basic | $ | (0.06 | ) | $ | 0.16 | $ | 0.10 | |||
| Earnings (loss) per common share - Diluted | $ | (0.06 | ) | $ | 0.16 | $ | 0.10 | |||
|
Year
ended December 31, 2008
|
Year
ended December 31, 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), net
|
(2,984 | ) | (49 | ) | (3,033 | ) | 435 | - | 435 | |||||||||
|
Income
tax benefit (provision)
|
(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 | ) | ||
|
Earnings
(loss) per common share-Diluted
|
$ | 0.80 | $ | (0.23 | ) | $ | 0.57 | $ | (0.55 | ) | $ | (0.22 | ) | $ | (0.77 | ) | ||
|
At
December 31, 2008
|
|||||||||
|
As
Previously Reported
|
Impact
of
FSP
14-1
|
Upon
Adoption of FSP 14-1
|
|||||||
|
(in
thousands)
|
|||||||||
|
Consolidated
Balance Sheet
|
|||||||||
|
Deferred
tax assets noncurrent, net
|
$ | 45,783 | $ | (14,866 | ) | $ | 30,917 | ||
|
Long-term
debt
|
1,179,249 | (38,251 | ) | 1,140,998 | |||||
|
Common
stock
|
951,007 | 41,177 | 992,184 | ||||||
|
Cumulative
effect of change in
|
|||||||||
|
accounting
principle
|
- | (17,792 | ) | (17,792 | ) | ||||
|
Year
ended December 31, 2008
|
Year
ended December 31, 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
Statements of Cash Flows
|
||||||||||||||||||
|
Net
income (loss)
|
$ | 28,059 | $ | (8,248 | ) | $ | 19,811 | $ | (16,144 | ) | $ | (6,707 | ) | $ | (22,851 | ) | ||
|
Adjustments
to reconcile net income (loss) to
|
||||||||||||||||||
|
cash
provided by operating activities:
|
||||||||||||||||||
|
Amortization
of convertible debt discount
|
- | 13,442 | 13,442 | - | 10,970 | 10,970 | ||||||||||||
|
Deferred
income taxes, net
|
(38,074 | ) | (5,243 | ) | (43,317 | ) | (36,762 | ) | (4,263 | ) | (41,025 | ) | ||||||
|
Other
adjustments, net
|
(2,226 | ) | 49 | (2,177 | ) | 1,326 | - | 1,326 | ||||||||||
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
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
GAAP.
The net
fair value of our derivative instruments may switch between a net asset and a
net liability depending on market circumstances 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 (OCI) 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 OCI 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
Statements 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. Our derivatives are with major
international financial institutions, with whom we have master netting
agreements; however, our derivative positions are not disclosed on a net basis.
There are no credit-risk-related contingent features within our derivative
instruments. Refer to Note 7 and Note 13 for further disclosures of our
derivative instruments and their impact on other comprehensive income
(loss).
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
improvements and three to five years for machinery and equipment, computers and
purchased software, 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. Construction
in process represents capital expenditures incurred for assets not yet placed in
service. Costs related to internally developed software and software purchased
for internal uses are capitalized 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.
We review
long-lived assets for impairment whenever events or circumstances indicate the
carrying amount of an asset or asset group may not be recoverable. We have had
no significant impairments of long-lived assets. Assets held for sale are
classified within other current assets in the Consolidated Balance Sheets, are
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. We had no assets held for sale at December 31,
2009 and 2008.
Business
Combinations
On the
date of acquisition, the assets acquired, liabilities assumed, and any
noncontrolling interests in the acquiree are recorded at their fair values. The
acquiree results of operations are also included as of the date of acquisition
in the consolidated results. Intangible assets that arise from contractual/legal
rights, or are capable of being separated, as well as in-process research and
development (IPR&D), are measured and recorded at fair value. If
practicable, assets acquired and liabilities assumed arising from contingencies
are measured and recorded at fair value. If not practicable, such assets and
liabilities are measured and recorded when it is probable that a gain or loss
has occurred and the amount can be reasonably estimated. We will capitalize any
future IPR&D as an intangible asset and amortize the balance over its
estimated useful life (prior to January 1, 2009, we expensed acquired IPR&D
in accordance with U.S. GAAP in effect at that time). The residual balance of
the purchase price, after fair value allocations to all identified assets and
liabilities, represents goodwill. Acquisition-related costs will be expensed as
incurred. Restructuring costs are generally expensed in periods subsequent to
the acquisition date, and changes in deferred tax asset valuation allowances and
acquired income tax uncertainties after the measurement period are recognized as
a component of provision for income taxes.
Goodwill
and Intangible Assets
Goodwill
and intangible assets have resulted 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 finite lives, 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 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 forecasted discounted cash flows associated
with each reporting unit. Goodwill is tested for impairment as of October 1
of each year, or more frequently if a significant impairment indicator occurs.
Determining the fair value of a reporting unit is judgmental in nature and
involves the use of significant estimates and assumptions. We forecast
discounted future cash flows at the reporting unit level using risk-adjusted
discount rates and estimated future revenues and operating costs, which take
into consideration factors such as existing backlog, expected future orders,
supplier contracts, and expectations of competitive and economic environments.
We also identify similar publicly traded companies and develop a correlation,
referred to as a multiple, to apply to the operating results of our reporting
units.
Warranty
We offer
standard warranties on our hardware products and large application software
products. We accrue the estimated cost of 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, which could adversely affect our financial position and
results of operations. The long-term warranty balance includes estimated
warranty claims beyond one year. Warranty expense is classified within cost of
revenues.
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.
Bonus
and Profit Sharing
We have
various employee bonus and profit sharing plans, which provide award amounts for
the achievement of annual financial and nonfinancial targets. If management
determines it probable that the targets will be achieved and the amounts can be
reasonably estimated, a compensation accrual is recorded based on the
proportional achievement of the financial and nonfinancial targets. Although we
monitor and accrue expenses quarterly based on our progress toward the
achievement of the annual targets, the actual results at the end of the year may
require awards that are significantly greater or less than the estimates made in
earlier quarters.
Defined
Benefit Pension Plans
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans. We
recognize 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. We also recognize the funded status of our defined benefit pension
plans on our Consolidated Balance Sheets 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 that are not
recognized as components of net periodic benefit cost.
Revenue
Recognition
Revenues
consist primarily of hardware sales, software license fees, software
implementation, project management services, installation, consulting, and
post-sale maintenance support.
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 vendor-specific objective evidence (VSOE) 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 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. 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.
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.
Unearned revenues of $45.4 million and $29.4 million at December 31, 2009 and
2008 related primarily to professional services and software associated with our
OpenWay®
contracts, extended warranty, and prepaid post contract support. Unearned
revenue is recognized when the applicable revenue recognition criteria are met.
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. Deferred costs are recognized when the applicable revenue
recognition criteria are met. Deferred costs were $19.7 million and $11.0
million at December 31, 2009 and 2008.
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, we
capitalize 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.
Stock-Based
Compensation
We
measure and recognize compensation expense for all stock-based awards made to
employees and directors, including stock options, stock issued pursuant to our
Employee Stock Purchase Plan (ESPP), and the issuance of restricted and
unrestricted stock awards and units based on estimated fair values. 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, adjusted for estimated forfeitures, using the
straight-line method over the vesting requirement. Our excess tax benefits
cannot be credited to common stock until the deduction reduces cash taxes
payable. 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.
Loss
on Extinguishment of Debt, Net
Upon
partial or full redemption of our borrowings, we recognize a gain or loss for
the difference between the cash paid and the net carrying amount of the debt.
Included in the net carrying amount is any unamortized premium or discount from
the original issuance of the debt. Due to the particular characteristics of our
convertible notes, upon conversion or derecognition of our convertible notes, we
recognize a gain or loss for the difference between the fair value of the
consideration transferred to the holder that is allocated to the liability
component, which is equal to the fair value of the liability component
immediately prior to extinguishment, and the net carrying amount of the
liability component (including any unamortized discount and debt issuance
costs). In the case of an induced conversion, a loss is recognized for the
amount of the fair value of the securities or other consideration transferred to
the holder in excess of fair value of the consideration issuable in accordance
with the original conversion terms of the debt.
Income
Taxes
We
account for income taxes using the asset and liability method of accounting.
Deferred tax assets and liabilities are recognized based upon anticipated future
tax consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, and operating loss and tax credit carryforwards in each of the
jurisdictions in which we operate. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The calculation of our tax liabilities involves applying
complex tax regulations in different tax jurisdictions to our tax positions. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets if
it is more likely than not that such assets will not be realized. We do not
record tax liabilities on undistributed earnings of international subsidiaries
that are permanently reinvested.
A tax
position is first evaluated for recognition based on its technical merits. Tax
positions that have a greater than fifty percent likelihood of being realized
upon ultimate settlement are then measured to determine amounts to be recognized
in the financial statements. This measurement incorporates information about
potential settlements with taxing authorities. A previously recognized tax
position is derecognized in the first period in which the position no longer
meets the more-likely-than-not recognition threshold. We classify interest
expense and penalties related to uncertain tax positions and interest income on
tax overpayments as part 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. Gains
and losses that arise from exchange rate fluctuations for monetary asset and
liability 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 a hedge of the net investment in international subsidiaries are included, net
of tax, in accumulated other comprehensive income in shareholders’ equity.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using a weighted 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.
Fair
Value Measurements
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 typically
required.
Use
of Estimates
The
preparation of financial statements in conformity with 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
See Change in Accounting Principle
for the impact of the adoption of FSP 14-1.
New
Accounting Pronouncements
In June
2009, the FASB issued Statement of Financial Accounting Standards (SFAS) 167,
Amendments to FASB
Interpretation No. 46(R). This Statement requires an enterprise to
perform additional analyses to assess variable interest entities (VIE’s) and the
enterprise’s involvement with these entities, as well provide additional
disclosures. We adopted SFAS 167 on January 1, 2010, and it did not have a
material impact on our consolidated financial statements. (The guidance in SFAS
167 is now embedded within ASC 810.)
In
October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Revenue Recognition (Topic
605) – Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Tax Force) (ASU 2009-13). The objective of ASU 2009-13 is
to address the accounting for multiple-deliverable arrangements (previously
known as EITF 00-21) to enable vendors to account for more products or services
separately rather than as a combined unit. The hierarchy for establishing a
selling price has been increased and consists of the following: (1) vendor
specific objective evidence (VSOE), if available, (2) third party evidence
(TPE), if VSOE is not available, and (3) estimated selling price, if VSOE and
TPE are not available. The amendments in ASU 2009-13 will also (1) replace the
term fair value with
selling price to
clarify that the allocation of revenue is based on entity-specific assumptions
rather than assumptions of a market-place participant; and (2) eliminate the
residual value method of allocation and require that arrangement consideration
be allocated at the inception of the arrangement to all deliverables using the
relative selling price method. ASU 2009-13 also requires additional disclosures
about an entity’s multiple-deliverable contracts. ASU 2009-13 is effective on
January 1, 2011, with early adoption permitted. We adopted this guidance on
January 1, 2010, on a prospective basis. We do not expect ASU 2009-13 to have a
material impact on our consolidated financial statements.
Concurrent
with the issuance of ASU 2009-13, the FASB issued ASU No. 2009-14, Software
(Topic 985), Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging
Issues Task Force) (ASU 2009-14). ASU 2009-14 affects revenue
arrangements that include both tangible products and software elements, and it
provides a scope exception from software revenue recognition guidance in ASC
985-605 (previously known as SOP 97-2) for tangible products containing software
and non-software components that function together to deliver the tangible
product’s essential functionality. Revenue arrangements that are affected by
this guidance will still be subject to the disclosure requirements of ASU
2009-13, as applicable. ASU 2009-14 is effective on January 1, 2011, with early
adoption permitted. We adopted this guidance on January 1, 2010, on a
prospective basis. ASU 2009-14 may impact the timing of revenue for our
tangible hardware products sold under new arrangements.
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,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Net
income (loss) available to common shareholders
|
$ | (2,249 | ) | $ | 19,811 | $ | (22,851 | ) | ||
|
Weighted
average common shares outstanding - Basic
|
38,539 | 33,096 | 29,584 | |||||||
|
Dilutive
effect of convertible notes
|
- | 1,198 | - | |||||||
|
Dilutive
effect of stock-based awards
|
- | 657 | - | |||||||
|
Weighted
average common shares outstanding - Diluted
|
38,539 | 34,951 | 29,584 | |||||||
|
Basic
earnings (loss) per common share
|
$ | (0.06 | ) | $ | 0.60 | $ | (0.77 | ) | ||
|
Diluted
earnings (loss) per common share
|
$ | (0.06 | ) | $ | 0.57 | $ | (0.77 | ) | ||
Common
Stock
During
the first quarter of 2009, we completed exchanges with certain holders of our
convertible notes in which we issued, in the aggregate, approximately 2.3
million shares of common stock valued at $132.9 million, in exchange for, in the
aggregate, $121.0 million principal amount of the convertible notes. See
Note 6 for a further discussion.
On June
3, 2009, we completed a public offering of approximately 3.2 million shares of
common stock for net proceeds of $160.4 million.
Stock-based
Awards
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. As a result of our net
loss for 2009 and 2007, there was no dilutive effect to the weighted average
common shares outstanding. Approximately 1.0 million, 283,000, and 998,500
stock-based awards were excluded from the calculation of diluted EPS for the
years ended December 31, 2009, 2008, and 2007, respectively, because they were
anti-dilutive. These stock-based awards could be dilutive in future
periods.
Convertible
Notes
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. 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, 2009, 2008, and 2007 were used as the basis for determining
the dilutive effect on EPS. The average price of our common stock for the years
ended December 31, 2009 and 2007 did not exceed the conversion price of $65.16
and, therefore, did not have an effect on diluted 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.
Preferred
Stock
We have
authorized the issuance of 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 preferred 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 as set
by the Board of Directors. There was no preferred stock sold or outstanding at
December 31, 2009, 2008 and 2007.
Note
3: Certain Balance Sheet Components
|
Accounts
receivable, net
|
At
December 31,
|
||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Trade
receivables (net of allowance of $6,339 and $5,954)
|
$ | 319,237 | $ | 306,593 | |||
|
Unbilled
revenue
|
18,711 | 14,685 | |||||
|
Total
accounts receivable, net
|
$ | 337,948 | $ | 321,278 | |||
A summary
of the allowance for doubtful accounts activity is as follows:
|
Year
Ended December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Beginning
balance
|
$ | 5,954 | $ | 6,391 | |||
|
Actaris
acquisition opening balance/adjustments
|
- | (376 | ) | ||||
|
Provision
for (release of) doubtful accounts, net
|
1,188 | 1,688 | |||||
|
Accounts
written off
|
(1,025 | ) | (1,194 | ) | |||
|
Effects
of change in exchange rates
|
222 | (555 | ) | ||||
|
Ending
balance
|
$ | 6,339 | $ | 5,954 | |||
|
Inventories
|
At
December 31,
|
||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Materials
|
$ | 85,358 | $ | 85,153 | |||
|
Work
in process
|
17,668 | 14,556 | |||||
|
Finished
goods
|
67,058 | 64,501 | |||||
|
Total inventories
|
$ | 170,084 | $ | 164,210 | |||
Our
inventory levels may vary period to period as a result of our factory scheduling
and timing of contract fulfillments.
Consigned
inventory is held at third-party locations; however, we retain title to the
inventory until purchased by the third-party. Consigned inventory, consisting of
raw materials and finished goods, was $10.6 million and $19.1 million at
December 31, 2009 and 2008, respectively.
|
Property,
plant, and equipment, net
|
At
December 31,
|
||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Machinery
and equipment
|
$ | 243,652 | $ | 195,677 | |||
|
Computers
and purchased software
|
66,787 | 58,505 | |||||
|
Buildings,
furniture, and improvements
|
144,639 | 132,195 | |||||
|
Land
|
37,738 | 33,702 | |||||
|
Construction
in progress, including purchased equipment
|
22,009 | 30,632 | |||||
|
Total
cost
|
514,825 | 450,711 | |||||
|
Accumulated
depreciation
|
(196,608 | ) | (142,994 | ) | |||
|
Property,
plant, and equipment, net
|
$ | 318,217 | $ | 307,717 | |||
Depreciation
expense was $57.2 million, $53.3 million, and $42.2 million for the years ended
December 31, 2009, 2008, and 2007, respectively. Capitalized interest was
$293,000, $187,000, and $6,000 for the years ended December 31, 2009, 2008, and
2007, respectively.
Note
4: Intangible Assets
The gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
At
December 31, 2009
|
At
December 31, 2008
|
||||||||||||||||||
|
Gross
Assets
|
Accumulated
Amortization
|
Net
|
Gross
Assets
|
Accumulated
Amortization
|
Net
|
||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Core-developed
technology
|
$ | 398,043 | $ | (244,545 | ) | $ | 153,498 | $ | 394,912 | $ | (188,953 | ) | $ | 205,959 | |||||
|
Customer
contracts and relationships
|
306,061 | (92,187 | ) | 213,874 | 299,928 | (56,966 | ) | 242,962 | |||||||||||
|
Trademarks
and trade names
|
77,439 | (57,957 | ) | 19,482 | 76,766 | (45,851 | ) | 30,915 | |||||||||||
|
Other
|
24,713 | (23,355 | ) | 1,358 | 24,630 | (22,580 | ) | 2,050 | |||||||||||
|
Total
intangible assets
|
$ | 806,256 | $ | (418,044 | ) | $ | 388,212 | $ | 796,236 | $ | (314,350 | ) | $ | 481,886 | |||||
A summary
of the intangible asset account activity is as follows:
|
At
December 31
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Beginning
balance, intangible assets, gross
|
$ | 796,236 | $ | 895,979 | |||
|
Adjustment
of previous acquisitions
|
- | (70,048 | ) | ||||
|
Effect
of change in exchange rates
|
10,020 | (29,695 | ) | ||||
|
Ending
balance, intangible assets, gross
|
$ | 806,256 | $ | 796,236 | |||
During
2008, intangible assets were adjusted by $70.0 million based on our completion
of the fair value assessment associated with the Actaris acquisition in
2007.
Intangible
assets are recorded in the functional currency of our international
subsidiaries; therefore, the carrying amount increases or decreases, with a
corresponding change in accumulated other comprehensive income, due to changes
in foreign currency exchange rates.
Intangible
asset amortization expense is as follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Amortization
of intangible assets
|
$ | 98.6 | $ | 120.4 | $ | 84.0 | ||||
Estimated
future annual amortization expense is as follows:
|
Years
ending December 31,
|
Estimated
Annual Amortization
|
|||
|
(in
thousands)
|
||||
|
2010
|
$ | 73,360 | ||
|
2011
|
62,777 | |||
|
2012
|
48,550 | |||
|
2013
|
39,352 | |||
|
2014
|
32,344 | |||
|
Beyond
2014
|
131,829 | |||
|
Total
intangible assets, net
|
$ | 388,212 | ||
Note
5: Goodwill
The
following table reflects goodwill allocated to each reporting segment at
December 31, 2009 and 2008:
|
Itron
North America
|
Itron
International
|
Total
Company
|
||||||||
|
(in
thousands)
|
||||||||||
|
Goodwill
balance at January 1, 2008
|
$ | 185,869 | $ | 1,080,264 | $ | 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
|
$ | 184,536 | $ | 1,101,317 | $ | 1,285,853 | ||||
|
Adjustment
of previous acquisitions
|
2,100 | - | 2,100 | |||||||
|
Effect
of change in exchange rates
|
1,836 | 15,810 | 17,646 | |||||||
|
Goodwill
balance at December 31, 2009
|
$ | 188,472 | $ | 1,117,127 | $ | 1,305,599 | ||||
In 2009,
we realigned our management reporting and geographic reporting structure between
our International and North America operations. Itron North America now includes
sales of gas and water meters in North America, which were previously part of
Itron International. The allocation of goodwill to our reporting units is based
on our current segment reporting structure; therefore we have reallocated $57.5
million between the operating segments. Historical segment information has been
restated from the segment information previously provided to conform to our
current segment reporting structure after the realignment.
In 2009,
$2.1 million of contingent consideration was paid in association with two
acquisitions in 2006, which is reflected as adjustment of previous
acquisitions.
In 2008,
the adjustment of previous
acquisitions for our Itron International Operating Segment represents an
adjustment to goodwill associated with the 2007 Actaris acquisition based on our
final determination of fair values of certain assets acquired and liabilities
assumed. Within our Itron North America Operating Segment, for each of our 2006
acquisitions, during 2008 certain conditions as outlined in the purchase
agreements were met, resulting in contingent consideration payable to the
shareholders of the respective acquisitions.
Note
6: Debt
The
components of our borrowings are as follows:
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Term
loans
|
|||||||
|
USD
denominated term loan
|
$ | 284,693 | $ | 375,744 | |||
|
EUR
denominated term loan
|
288,902 | 360,494 | |||||
|
Convertible
senior subordinated notes
|
208,169 | 306,337 | |||||
|
Senior
subordinated notes
|
- | 109,192 | |||||
|
Total
debt
|
781,764 | 1,151,767 | |||||
|
Current
portion of long-term debt
|
(10,871 | ) | (10,769 | ) | |||
|
Long-term
debt
|
$ | 770,893 | $ | 1,140,998 | |||
Credit
Facility
The 2007
Actaris acquisition was financed in part by a $1.2 billion credit facility. The
credit facility, dated April 18, 2007, was composed of the
following:
|
o
|
$605.1 million
first lien U.S. dollar denominated term
loan;
|
|
o
|
€335 million
first lien euro denominated term
loan;
|
|
o
|
£50 million
first lien pound sterling denominated term loan;
and
|
|
o
|
$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, 2009 and 2008 was €200.8 million and €254.1 million,
respectively. Interest rates on the credit facility are based on the
respective borrowing’s denominated London Interbank Offered Rate (LIBOR) or
the Wells Fargo Bank, National Association’s prime rate, plus an additional
margin subject to our consolidated leverage ratio. The additional interest rate
margin was 3.75% at December 31, 2009 and 1.75% at December 31, 2008. Our
interest rates were 3.99% for the U.S. dollar denominated and 4.49% for the euro
denominated term loans at December 31, 2009. 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. and our U.S. domestic operating 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.
On
April 24, 2009, we amended our credit facility to adjust the maximum total
leverage ratio and the minimum interest coverage ratio thresholds to increase
operational flexibility. The amendment also allows us to seek a $75 million
increase to the $115 million multicurrency revolving line-of-credit without
further amendment. The current lending participants may then choose to increase
their level of participation or approve the participation of additional lenders.
The revolver may also be increased beyond the $75 million with the approval of
the majority of revolver banks, the issuing agents, the swingline lender and the
administrative agent. Prepaid debt fees of approximately $3.7 million were
capitalized for the amendment and legal and advisory fees of $1.5 million were
expensed as the amendment did not substantially modify the original terms of the
loan. At December 31, 2009, we were in compliance with the debt covenants under
the credit facility.
At
December 31, 2009, there were no borrowings outstanding under the revolver and
$39.9 million was utilized by outstanding standby letters of credit resulting in
$75.1 million being available for additional borrowings.
We repaid
$166.5 million, $372.7 million, and $76.1 million of the term loans during 2009,
2008, and 2007, respectively. These repayments were made with cash flows from
operations and the sale of our common stock.
Senior
Subordinated Notes
In
May 2004, we issued $125 million of 7.75% senior subordinated notes
(subordinated notes), which were discounted to a price of 99.265 to yield 7.875%
and were due in May 2012. During 2008, we reacquired $15.4 million in principal
value of the subordinated notes. In 2009, we paid $113.2 million, including
accrued interest of $1.5 million, to redeem all of the subordinated notes. The
subordinated notes had a remaining principal value of $109.6 million. We
redeemed the notes at 101.938% of the principal amount, and recognized a loss on
extinguishment of $2.5 million, which included the remaining unamortized debt
discount of $336,000. Unamortized prepaid debt fees of $2.0 million were
recorded to interest expense.
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 of each year. 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 are met or events occur, 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 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 need to be bifurcated from the host contract and
accounted for as a freestanding derivative, as the conversion feature is indexed
to our own stock and would be classified within stockholders’ equity if it were
a freestanding instrument.
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:
|
o
|
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 amount payable will be less than
the $1,000 principal amount and will be settled in cash. Our closing stock price
at December 31, 2009 was $67.57.
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 note holders are
preserved.
The
convertible notes also contain purchase options, at the option of the holders,
which if exercised would 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 our U.S. domestic operating
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, 2009.
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, 2009 and 2008, the contingent conversion threshold
was not exceeded and, therefore, the aggregate principal amount of the
convertible notes is included in long-term debt.
On
January 1, 2009, we adopted FSP 14-1, which requires our convertible notes
to be separated between its liability and equity components, in a manner that
reflects our non-convertible debt borrowing rate and must be applied
retroactively to all periods presented. Our non-convertible debt borrowing rate
at the time of the issuance of our convertible notes was determined to be 7.38%,
which also reflects the effective interest rate on the liability component. See
Note 1 for disclosure about the financial statement impact of our adoption of
FSP 14-1.
The
carrying amounts of the debt and equity components are as follows:
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Face
value of convertible notes
|
$ | 223,604 | $ | 344,588 | |||
|
Unamortized
discount
|
(15,435 | ) | (38,251 | ) | |||
|
Net
carrying amount of debt component
|
$ | 208,169 | $ | 306,337 | |||
|
Carrying
amount of equity component
|
$ | 31,831 | $ | 41,177 | |||
The
interest expense relating to both the contractual interest coupon and
amortization of the discount on the liability component are as
follows:
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Contractual
interest coupon
|
$ | 5,839 | $ | 8,623 | |||
|
Amortization
of the discount on the liability component
|
9,673 | 13,442 | |||||
|
Total
interest expense on convertible notes
|
$ | 15,512 | $ | 22,065 | |||
Due to
the combination of put, call, and conversion options that are part of the terms
of the convertible note agreement, the remaining discount on the liability
component will be amortized over 18 months.
During
the first quarter of 2009, we entered into exchange agreements with certain
holders of our convertible notes to issue, in the aggregate, approximately 2.3
million shares of common stock, valued at $132.9 million, in exchange for, in
the aggregate, $121.0 million principal amount of the convertible notes,
representing 35% of the aggregate principal outstanding at the date of the
exchanges. All of the convertible notes we acquired pursuant to the exchange
agreements were retired upon the closing of the exchanges.
The
exchange agreements were treated as induced conversions as the holders received
a greater number of shares of common stock than would have been issued under the
original conversion terms of the convertible notes. At the time of the exchange
agreements, none of the conversion contingencies were met. Under the original
terms of the convertible notes, the amount payable on conversion was to be paid
in cash, and the remaining conversion obligation (stock price in excess of
conversion price) was payable in cash or shares, at our option. Under the terms
of the exchange agreements, all of the settlement was paid in shares. The
difference in the value of the shares of common stock issued under the exchange
agreement and the value of the shares used to derive the amount payable under
the original conversion agreement resulted in a loss on extinguishment of debt
of $23.3 million (the inducement loss). As required by FSP 14-1, upon
derecognition of the convertible notes, we remeasured the fair value of the
liability and equity components using a borrowing rate for similar
non-convertible debt that would be applicable to us at the date of the exchange
agreements. Because borrowing rates increased, the remeasurement of the
components of the convertible notes resulted in a gain on extinguishment of
$13.4 million (the revaluation gain). As a result, we recognized a net loss
on extinguishment of debt of $10.3 million, calculated as the inducement loss,
plus an allocation of advisory fees, less the revaluation gain. The remaining
settlement consideration of $9.5 million, including an allocation of advisory
fees, was recorded as a reduction of common stock.
Prepaid
Debt Fees & Accrued Interest Expense
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 notes, the related portion of
unamortized prepaid debt fees is written-off and included in interest expense.
Total unamortized prepaid debt fees were $8.6 million and $12.9 million at
December 31, 2009 and 2008, respectively. Accrued interest expense was $2.3
million and $4.5 million at December 31, 2009 and 2008,
respectively.
Minimum
Payments on Debt:
|
Minimum
Payments
|
||||
|
(in
thousands)
|
||||
|
2010
|
$ | 10,871 | ||
|
2011
|
234,475 | |||
|
2012
|
10,871 | |||
|
2013
|
10,871 | |||
|
2014
|
530,111 | |||
|
Total
minimum payments on debt
|
797,199 | |||
|
Convertible
notes unamortized discount
|
(15,435 | ) | ||
|
Total
debt
|
$ | 781,764 | ||
Note
7: 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. Refer to Note 1, Note 13, and Note
14 for additional disclosures on our derivative instruments.
The fair
values of our derivative instruments are determined using the income approach
and significant other observable inputs (also known as “Level 2”), as defined by
ASC 820-10-20, Fair Value
Measurements. 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, 2009 included interest rate yield curves (swap rates and futures)
and foreign exchange spot and forward rates, all of which are available in an
active market. We have utilized the mid-market pricing convention for these
inputs at December 31, 2009. 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 discounting our derivative liabilities to reflect the
potential credit risk to our counterparty by applying a 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) at December 31, 2009 and 2008
are as follows:
|
Fair
Value at December 31,
|
||||||||
|
Balance
Sheet Location
|
2009
|
2008
|
||||||
|
Asset
Derivatives
|
(in
thousands)
|
|||||||
|
Derivatives
not designated as hedging instruments under ASC 815-20
|
||||||||
|
Foreign
exchange forward contracts
|
Other
current assets
|
$ | 3,986 | $ | - | |||
|
Liability
Derivatives
|
||||||||
|
Derivatives
designated as hedging instruments under ASC 815-20
|
||||||||
|
Interest
rate swap contracts
|
Other
current liabilities
|
$ | (11,478 | ) | $ | (8,772 | ) | |
|
Interest
rate swap contracts
|
Other
noncurrent obligations
|
(3,676 | ) | (8,723 | ) | |||
|
Euro
denominated term loan *
|
Current
portion of long-term debt
|
(4,820 | ) | (4,752 | ) | |||
|
Euro
denominated term loan *
|
Long-term
debt
|
(284,082 | ) | (355,742 | ) | |||
|
Total
derivatives designated as hedging instruments under Subtopic
815-20
|
$ | (304,056 | ) | $ | (377,989 | ) | ||
|
Derivatives
not designated as hedging instruments under ASC 815-20
|
||||||||
|
Foreign
exchange forward contracts
|
Other
current liabilities
|
$ | (2,442 | ) | $ | (67 | ) | |
|
Total
liability derivatives
|
$ | (306,498 | ) | $ | (378,056 | ) | ||
* The
euro denominated term loan is a nonderivative financial instrument designated as
a hedge of our net investment in international operations. It is recorded at the
carrying value in the Consolidated Balance Sheets and not recorded at fair
value.
Other
comprehensive income (loss) during the reporting period for our derivative and
nonderivative instruments designated as hedging instruments (collectively, hedging instruments),
net of tax, was as follows:
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Net
unrealized loss on hedging instruments at January 1,
|
$ | (29,772 | ) | $ | (26,541 | ) | |
|
Unrealized
loss on derivative instruments
|
(6,776 | ) | (9,239 | ) | |||
|
Unrealized
gain (loss) on a nonderivative hedging instrument
|
(2,364 | ) | 6,485 | ||||
|
Realized
(gains) losses reclassified into net income (loss)
|
8,612 | (477 | ) | ||||
|
Net
unrealized loss on hedging instruments at December 31,
|
$ | (30,300 | ) | $ | (29,772 | ) | |
Cash
Flow Hedges
We are
exposed to interest rate risk through our credit facility. We enter into swaps
to achieve a fixed rate of interest on the hedged portion of debt in order to
increase our ability to forecast interest expense. The objective of these
swaps is to protect us from increases in the LIBOR base borrowing rates on our
floating rate credit facility. The swaps do not protect us from changes to the
applicable margin under our credit facility.
We have
entered into one-year pay-fixed receive one-month LIBOR interest rate swaps to
convert $200 million of our U.S. dollar term loan from a floating LIBOR interest
rate to a fixed interest rate, as follows:
|
Transaction
Date
|
Effective
Date of Swap
|
Notional
amount
|
Fixed
Interest Rate
|
||||||
|
(in
thousands)
|
|||||||||
|
June
26, 2008
|
June
30, 2008 - June 30, 2009
|
$ | 200,000 | 3.01% | |||||
|
October
27, 2008
|
June
30, 2009 - June 30, 2010
|
$ | 200,000 | 2.68% | |||||
|
July
1, 2009
|
June
30, 2010 - June 30, 2011
|
$ | 100,000 | 2.15% | |||||
|
July
1, 2009
|
June
30, 2010 - June 30, 2011
|
$ | 100,000 | 2.11% | |||||
At
December 31, 2009 and 2008, our U.S. dollar term loan had a balance of $284.7
million and $375.7 million, respectively. The cash flow hedges have been and are
expected to be highly effective in achieving offsetting cash flows attributable
to the hedged risk through the term of the hedge. Consequently, effective
changes in the fair value of the interest rate swap are recorded as a component
of OCI 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 amount of net losses expected to be reclassified into earnings in
the next 12 months is approximately $3.5 million, which was based on the
Bloomberg U.S. dollar swap yield curve as of December 31, 2009.
In 2007,
we entered into a pay fixed 6.59% receive three-month Euro Interbank Offered
Rate (EURIBOR), plus 2%, amortizing interest rate swap to convert a significant
portion of our euro denominated variable-rate term loan to fixed-rate debt, plus
or minus the variance in the applicable margin from 2%. 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, effective changes in the fair value of the interest rate swap are
recorded as a component of OCI 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 and was $252.9 million (€175.8 million) and $339.3 million
(€239.1 million) as of December 31, 2009 and 2008, respectively. The amount of
net losses expected to be reclassified into earnings in the next 12 months is
approximately $7.8 million (€5.4 million), which was based on the Bloomberg
euro swap yield curve as of December 31, 2009.
We will
continue to monitor and assess our interest rate risk and may institute
additional interest rate swaps or other derivative instruments to manage such
risk in the future.
The
before tax effect of our cash flow derivative instruments on the Consolidated
Balance Sheets and the Consolidated Statements of Operations for the years ended
December 31 is as follows:
|
Derivatives
in ASC 815-20 Cash Flow Hedging
|
Amount
of Gain (Loss)
Recognized
in OCI on
Derivative
|
Gain
(Loss) Reclassified from Accumulated
OCI
into Income (Effective Portion)
|
Gain
(Loss) Recognized in Income on
Derivative
(Ineffective Portion)
|
|||||||||||||||||||||||||||||
|
Relationships
|
(Effective
Portion)
|
Location
|
Amount
|
Location
|
Amount
|
|||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
|
Interest
rate swap contracts
|
$ | (11,023 | ) | $ | (14,945 | ) | $ | (1,715 | ) |
Interest
expense
|
$ | (13,975 | ) | $ | 804 | $ | 30 |
Interest
expense
|
$ | (302 | ) | $ | - | $ | - | |||||||
Net
Investment Hedges
We are
exposed to foreign exchange risk through our international subsidiaries. As a
result of our acquisition of an international company, we entered into a euro
denominated term loan, which exposes us to fluctuations in the euro foreign
exchange rate. Therefore, we have designated this foreign currency denominated
term loan as a hedge of our net investment in international operations. The
non-functional currency term loan is revalued into U.S. dollars at each balance
sheet date and the changes in value associated with currency fluctuations are
recorded as adjustments to long-term debt with offsetting gains and losses
recorded in OCI. The notional amount of the term loan declines each quarter due
to repayments and was $288.9 million (€200.8 million) and $360.5 million
(€254.1 million) as of December 31, 2009 and 2008, respectively. We had no hedge
ineffectiveness.
The
before tax and net of tax effect of our net investment hedge nonderivative
financial instrument on OCI for the years ended December 31 is as
follows:
|
Nonderivative
Financial Instruments in ASC 815-20 Net Investment Hedging
Relationships
|
Euro
Denominated Term Loan Designated as a Hedge of Our Net Investment in
International Operations
|
|||||||||
|
2009
|
2008
|
2007
|
||||||||
|
Gain
(loss) recognized in OCI on derivative (Effective Portion)
|
(in
thousands)
|
|||||||||
|
Before
tax
|
$ | (3,866 | ) | $ | 10,360 | $ | (41,104 | ) | ||
|
Net
of tax
|
$ | (2,364 | ) | $ | 6,485 | $ | (25,460 | ) | ||
Derivatives
Not Designated as Hedging Relationships
We are
also exposed to foreign exchange risk when we enter into non-functional currency
transactions, both intercompany and third-party. At each period end, foreign
currency monetary assets and liabilities are revalued with the change recorded
to other income and expense. In the second quarter of 2008, we began entering
into monthly foreign exchange forward contracts, not designated for hedge
accounting, with the intent to reduce earnings volatility associated with
certain of these balances. During the year ended December 31, 2009, we entered
into approximately 70 foreign currency option and forward transactions. The
notional amounts of the contracts ranged from less than $1 million to $60
million, offsetting our exposures primarily from the euro, British pound,
Canadian dollar, Czech koruna, and Hungarian forint.
During 2007, we entered into a cross currency interest rate swap for the purpose of converting our £50 million pound sterling denominated term loan and the pound sterling LIBOR variable interest rate to a U.S. dollar denominated term loan and a U.S. LIBOR interest rate (plus an additional margin of 210 basis points), which was not designated as an accounting hedge. The cross currency interest rate swap had terms similar to the pound sterling denominated term loan, including expected prepayments. This instrument was intended to reduce the impact of volatility between the pound sterling and the U.S. dollar. Therefore, gains and losses were recorded in other income and expense as an offset to the gains (losses) on the underlying term loan revaluation to the U.S. dollar. The amounts paid or received on the interest rate swap were recognized as adjustments to interest expense. In the second quarter of 2008, we repaid the £50 million pound sterling denominated loan.
The
effect of our foreign exchange forward and cross currency swap derivative
instruments on the Consolidated Statements of Operations for the years ended
December 31 is as follows:
|
Derivatives
Not Designated as Hedging Instrument under ASC 815-20
|
Gain
(Loss) Recognized on Derivatives in Other Income (Expense)
|
|||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Foreign
exchange forward contracts
|
$ | (1,656 | ) | $ | 98 | $ | - | |||
|
Cross
currency interest rate swap
|
- | (1,709 | ) | 330 | ||||||
| $ | (1,656 | ) | $ | (1,611 | ) | $ | 330 | |||
Note
8: 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. The defined benefit obligation is calculated annually by using the
projected unit credit method. The measurement date for the pension plans was
December 31, 2009.
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 $397,000 and $445,000 to the defined
benefit pension plans for the years ended December 31, 2009 and 2008,
respectively. Assuming that actual plan asset returns are consistent with our
expected rate of return in 2009 and beyond, and that interest rates remain
constant, we expect to contribute approximately $500,000 in 2010 to our defined
benefit pension plans.
The
following tables summarize 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, 2009 and 2008.
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Change
in benefit obligation:
|
|||||||
|
Benefit
obligation at January 1,
|
$ | 66,823 | $ | 72,449 | |||
|
Service
cost
|
1,753 | 2,009 | |||||
|
Interest
cost
|
3,450 | 3,697 | |||||
|
Amendments
|
- | 83 | |||||
|
Actuarial
(gain) loss
|
3,830 | (4,048 | ) | ||||
|
Benefits
paid
|
(4,400 | ) | (4,450 | ) | |||
|
Other
– foreign currency exchange rate changes
|
1,806 | (2,917 | ) | ||||
|
Benefit
obligation at December 31,
|
$ | 73,262 | $ | 66,823 | |||
|
Change
in plan assets:
|
|||||||
|
Fair
value of plan assets at January 1,
|
$ | 7,449 | $ | 7,174 | |||
|
Actual
return on plan assets
|
65 | 354 | |||||
|
Company
contributions
|
397 | 445 | |||||
|
Benefits
paid
|
(259 | ) | (174 | ) | |||
|
Other
– foreign currency exchange rate changes
|
208 | (350 | ) | ||||
|
Fair
value of plan assets at December 31,
|
7,860 | 7,449 | |||||
|
Ending
balance at fair value (net pension plan benefit liability)
|
$ | 65,402 | $ | 59,374 | |||
Amounts
recognized on the Consolidated Balance Sheets consist of:
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Current
portion of pension plan liability in wages and benefits
payable
|
$ | 2,975 | $ | 4,299 | |||
|
Long-term
portion of pension plan liability
|
63,040 | 55,810 | |||||
|
Plan
assets in other long term assets
|
(613 | ) | (735 | ) | |||
|
Net
pension plan benefit liability
|
$ | 65,402 | $ | 59,374 | |||
Amounts
recognized in accumulated other comprehensive income (pre-tax) consist
of:
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Net
actuarial gain
|
$ | (4,976 | ) | $ | (9,536 | ) | |
|
Net
prior service cost
|
- | 27 | |||||
|
Accumulated
other comprehensive income
|
$ | (4,976 | ) | $ | (9,509 | ) | |
The total
accumulated benefit obligation for our defined benefit pension plans was $68.9
million and $62.7 million at December 31, 2009 and 2008,
respectively.
Net
periodic pension benefit costs for our plans include the following
components:
|
Year
ended December 31,
|
April
18, 2007 through
|
|||||||||
|
2009
|
2008
|
December
31, 2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Service
cost
|
$ | 1,753 | $ | 2,009 | $ | 1,523 | ||||
|
Interest
cost
|
3,450 | 3,697 | 2,365 | |||||||
|
Expected
return on plan assets
|
(282 | ) | (306 | ) | (184 | ) | ||||
|
Settlements
and curtailments
|
- | - | (362 | ) | ||||||
|
Amortization
of actuarial net gain
|
(509 | ) | (132 | ) | - | |||||
|
Amortization
of unrecognized prior service costs
|
25 | 56 | - | |||||||
|
Net
periodic benefit cost
|
$ | 4,437 | $ | 5,324 | $ | 3,342 | ||||
Amounts
recognized in other comprehensive income (pre-tax) are as follows:
|
Year
ended December 31,
|
April
18, 2007 through
|
|||||||||
|
2009
|
2008
|
December
31, 2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Net
actuarial (gain) loss
|
$ | 4,049 | $ | (4,048 | ) | $ | (5,620 | ) | ||
|
Prior
service cost
|
- | 83 | - | |||||||
|
Amortization
of net actuarial gain
|
509 | 132 | - | |||||||
|
Amortization
of prior service cost
|
(25 | ) | (56 | ) | - | |||||
|
Total
amounts recognized in other comprehensive income
|
$ | 4,533 | $ | (3,889 | ) | $ | (5,620 | ) | ||
The
estimated net actuarial gain that will be amortized from accumulated other
comprehensive income into net periodic benefit cost during 2010 is
$31,000.
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,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
Actuarial
assumptions used to determine benefit obligations at end of
period:
|
||||||||||
|
Discount
rate
|
5.60% | 6.12% | 5.41% | |||||||
|
Expected
annual rate of compensation increase
|
3.24% | 3.18% | 3.04% | |||||||
|
Actuarial
assumptions used to determine net periodic benefit cost for the
period:
|
||||||||||
|
Discount
rate
|
6.12% | 5.41% | 4.98% | |||||||
|
Expected
rate of return on plan assets
|
4.06% | 4.10% | 3.74% | |||||||
|
Expected
annual rate of compensation increase
|
3.18% | 3.04% | 3.15% | |||||||
We
determine a discount rate for our plans based on the estimated duration of each
plan’s liabilities. For our euro denominated defined benefit pension plans,
which consist of 95% of our benefit obligation, we match the plans’ expected
future benefit payments against a yield curve derived from select bonds (bonds
with market values that exceed €500 million, have a maturity greater than one
year with no special features, and have a spread between the bid and ask prices
of less than 5% of the average bid and ask prices). The yield curve derived for
most of the euro denominated plans was 5.50%.
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 projected 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,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Projected
benefit obligation
|
$ | 71,799 | $ | 65,482 | |||
|
Accumulated
benefit obligation
|
67,576 | 61,414 | |||||
|
Fair
value of plan assets
|
5,798 | 5,343 | |||||
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.
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.
The fair
values of our plan investments by asset category as of December 31, 2009 are as
follows:
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Unobservable Inputs
|
|||||||||
|
Total
|
(Level
1)
|
(Level
3)
|
||||||||
|
(in
thousands)
|
||||||||||
|
Cash
|
$ | 606 | $ | 606 | $ | - | ||||
|
Insurance
funds
|
7,254 | - | 7,254 | |||||||
|
Total
fair value of plan assets
|
$ | 7,860 | $ | 606 | $ | 7,254 | ||||
As the
plan assets are not significant to our total company assets, no further
breakdown is provided.
Annual
benefit payments, including amounts to be paid from our 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)
|
||||
|
2010
|
$ | 3,883 | ||
|
2011
|
4,095 | |||
|
2012
|
3,648 | |||
|
2013
|
4,622 | |||
|
2014
|
4,409 | |||
|
2015
- 2019
|
22,533 | |||
Note
9: Stock-Based Compensation
We record
stock-based compensation expense for awards of stock options, stock issued
pursuant to our ESPP, and the 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,
stock-based compensation expense and related tax benefit was as
follows:
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Stock
options
|
$ | 6,903 | $ | 8,839 | $ | 9,157 | ||||
|
Restricted
stock awards and units
|
9,306 | 6,885 | 1,802 | |||||||
|
Unrestricted
stock awards
|
254 | 269 | 304 | |||||||
|
ESPP
|
519 | 589 | 393 | |||||||
|
Total
stock-based compensation
|
$ | 16,982 | $ | 16,582 | $ | 11,656 | ||||
|
Related
tax benefit
|
$ | 4,329 | $ | 3,519 | $ | 2,854 | ||||
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,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||
|
Dividend
yield
|
- | - | - | - | - | - | |||||||||||||
|
Expected
volatility
|
50.2 | % | 44.8 | % | 38.9 | % | 64.1 | % | 48.5 | % | 26.7 | % | |||||||
|
Risk-free
interest rate
|
1.8 | % | 3.0 | % | 4.4 | % | 0.3 | % | 1.8 | % | 4.8 | % | |||||||
|
Expected
life (years)
|
4.9 | 4.5 | 4.8 | 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 term equal to the expected
life of the award. The expected life is the weighted average expected life of an
award based on the period of time between the date the award is granted and the
date an estimate of the award is fully exercised. Factors considered in
estimating the expected life include historical experience of similar awards,
contractual terms, vesting schedules, and expectations of future employee
behavior. We have not paid dividends in the past and do not plan to pay
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, 2009, shares available for issuance under the plan
as either options or awards were 533,407.
Stock
Options
Options
to purchase our 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 approves the grant. Options generally become exercisable
in three equal annual installments beginning one year from the date of grant and
generally expire 10 years from the date of grant. 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, 2009, 2008, and
2007 is as follows:
|
Shares
|
Weighted
Average Exercise Price per Share
|
Weighted
Average Remaining Contractual Life
|
Aggregate
Intrinsic Value
|
Weighted
Average Grant Date Fair Value
|
|||||||||||
|
(in
thousands)
|
(years)
|
(in
thousands)
|
|||||||||||||
|
Outstanding,
January 1, 2007
|
2,225 | $ | 29.78 | 7.46 | $ | 49,469 | |||||||||
|
Granted
|
230 | 68.45 | $ | 27.44 | |||||||||||
|
Exercised
|
(828 | ) | 24.24 | 43,064 | |||||||||||
|
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 | $ | 39.07 | ||||||||||
|
Exercised
|
(415 | ) | 26.42 | $ | 28,543 | ||||||||||
|
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 | |||||||||
|
Granted
|
50 | $ | 57.96 | $ | 25.94 | ||||||||||
|
Exercised
|
(146 | ) | 21.68 | $ | 4,889 | ||||||||||
|
Forfeited
|
(92 | ) | 84.33 | ||||||||||||
|
Expired
|
(7 | ) | 57.23 | ||||||||||||
|
Outstanding,
December 31, 2009
|
1,179 | $ | 52.93 | 5.90 | $ | 22,863 | |||||||||
|
Exercisable
and expected to vest, December 31, 2009
|
1,168 | $ | 52.67 | 5.88 | $ | 22,826 | |||||||||
|
Exercisable,
December 31, 2009
|
972 | $ | 47.39 | 5.40 | $ | 22,343 | |||||||||
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, 2009, total unrecognized stock-based compensation expense related
to nonvested stock options was approximately $3.9 million, which is expected to
be recognized over a weighted average period of approximately 15
months.
Restricted
Stock Units
Certain
employees and senior management receive restricted stock units (RSU’s) or
restricted stock awards (RSA’s) (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
generally vest over a three year period. Compensation expense, net of
forfeitures, is recognized over the vesting period.
Subsequent
to vesting, the restricted awards are converted into shares of our common stock
on a one-for-one basis and issued to employees. We are entitled to an income tax
deduction in an amount equal to the taxable income reported by the employees
upon vesting of the restricted awards.
The
following tables summarize restricted award activity for the years ended
December 31, 2009, 2008, and 2007:
|
Number
of
Restricted
Awards
|
Weighted
Average
Grant
Date
Fair Value
|
Aggregate
Intrinsic
Value
|
||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||
|
Outstanding,
January 1, 2007
|
22 | |||||||||
|
Granted
|
94 | $ | 67.20 | |||||||
|
Released
|
(1 | ) | $ | 80 | ||||||
|
Forfeited
|
(4 | ) | ||||||||
|
Outstanding,
December 31, 2007
|
111 | |||||||||
|
Granted
|
215 | $ | 84.26 | |||||||
|
Released
|
(1 | ) | $ | 84 | ||||||
|
Forfeited
|
(12 | ) | ||||||||
|
Outstanding,
December 31, 2008
|
313 | |||||||||
|
Granted
|
60 | $ | 69.39 | |||||||
|
Released
|
(30 | ) | $ | 1,956 | ||||||
|
Forfeited
|
(17 | ) | ||||||||
|
Outstanding,
December 31, 2009
|
326 | |||||||||
|
Vested,
December 31, 2009
|
7 | $ | 442 | |||||||
|
Expected
to vest, December 31, 2009
|
302 | $ | 20,396 | |||||||
The
aggregate intrinsic value in the table above is the market value of the stock
released or vested, before applicable income taxes, based on the closing price
on the stock release dates or at the end of the period for stock vested but not
released. At December 31, 2009, unrecognized compensation expense was
$8.6 million, which is expected to be recognized over a weighted average
period of approximately 16 months.
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.
The
following table summarizes unrestricted stock award activity for the years ended
December 31:
|
2009
|
2008
|
2007
|
||||||||
|
Shares
of unrestricted stock issued
|
4,284 | 2,744 | 4,938 | |||||||
|
Weighted
average grant date fair value
|
$ | 59.40 | $ | 97.94 | $ | 61.61 | ||||
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. The sale of the stock occurs at the
beginning of the subsequent quarter.
The
following table summarizes ESPP activity for the years ended December
31:
|
2009
|
2008
|
2007
|
||||||||
|
Shares
of stock sold to employees
|
61,407 | 33,149 | 39,840 | |||||||
|
Weighted
average fair value per share(1)
|
$ | 8.54 | $ | 15.36 | $ | 10.90 | ||||
|
(1)
Relating to awards associated with the offering periods during the years
ended December 31.
|
||||||||||||
The fair
value of ESPP awards is estimated using the Black-Scholes option-pricing model.
At December 31, 2009, all compensation cost associated with the ESPP had been
recognized. There were approximately 247,000 shares of common stock available
for future issuance under the ESPP at December 31, 2009.
Note
10: 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 U.S.
Internal Revenue Service limit. We provide a 50% match on the first 6% of the
employee salary deferral, subject to statutory limitations. In 2009, we
temporarily suspended the employee savings plan match effective April 1 through
December 31. The expense for our matching contribution was as
follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Employee
savings plan matching contribution
|
$ | 1.5 | $ | 3.4 | $ | 3.5 | ||||
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 as follows:
|
`
|
Year
Ended December 31,
|
|||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Bonus
and profit sharing expense
|
$ | 7.6 | $ | 15.2 | $ | 12.9 | ||||
Note
11: 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,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Current:
|
||||||||||
|
Federal
|
$ | - | $ | - | $ | 316 | ||||
|
State
and local
|
- | (82 | ) | 76 | ||||||
|
Foreign
|
20,392 | 42,120 | 18,647 | |||||||
|
Total
current
|
20,392 | 42,038 | 19,039 | |||||||
|
Deferred:
|
||||||||||
|
Federal
|
(39,311 | ) | (8,081 | ) | (8,670 | ) | ||||
|
State
and local
|
(3,341 | ) | (1,807 | ) | (434 | ) | ||||
|
Foreign
|
(28,118 | ) | (33,429 | ) | (31,921 | ) | ||||
|
Total
deferred
|
(70,770 | ) | (43,317 | ) | (41,025 | ) | ||||
|
Change
in valuation allowance
|
6,553 | 50 | 1,287 | |||||||
|
Total
benefit for income taxes
|
$ | (43,825 | ) | $ | (1,229 | ) | $ | (20,699 | ) | |
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,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Income
(loss) before income taxes
|
||||||||||
|
Domestic
|
$ | 34,946 | $ | 68,968 | $ | 39,809 | ||||
|
Foreign
|
(81,020 | ) | (50,386 | ) | (83,359 | ) | ||||
|
Total
income (loss) before income taxes
|
$ | (46,074 | ) | $ | 18,582 | $ | (43,550 | ) | ||
|
Expected
federal income tax provision (benefit)
|
$ | (16,126 | ) | $ | 6,504 | $ | (15,243 | ) | ||
|
Tax
credits
|
(23,224 | ) | (4,341 | ) | (2,091 | ) | ||||
|
State
income tax benefit, net of federal effect
|
(3,193 | ) | (1,391 | ) | (1,260 | ) | ||||
|
Change
in valuation allowance
|
6,553 | 50 | 1,287 | |||||||
|
Acquired
in process research and development
|
- | - | 11,002 | |||||||
|
Uncertain
tax positions, including interest and penalties
|
12,053 | 5,555 | 4,188 | |||||||
|
Change
in tax rates
|
482 | (1,222 | ) | (12,316 | ) | |||||
|
Stock-based
compensation
|
1,648 | 1,212 | 113 | |||||||
|
Foreign
earnings
|
(18,224 | ) | (24,822 | ) | (15,279 | ) | ||||
|
U.S.
tax on foreign earnings
|
7,932 | 15,470 | 9,474 | |||||||
|
U.S.
tax benefit of foreign branch loss
|
(6,262 | ) | - | - | ||||||
|
Other,
net
|
(5,464 | ) | 1,756 | (574 | ) | |||||
|
Total
benefit for income taxes
|
$ | (43,825 | ) | $ | (1,229 | ) | $ | (20,699 | ) | |
Our tax
benefits for 2009, 2008, and 2007 reflect benefits associated with lower
statutory tax rates on foreign earnings as compared with our U.S. federal
statutory rate, and the benefit of foreign interest expense deductions. 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. Furthermore,
during 2009, we recorded deferred tax assets for foreign tax credit
carryforwards resulting from the election to claim foreign taxes as a credit
instead of a deduction on our fiscal 2007 and 2008 U.S. tax
returns.
Deferred
tax assets and liabilities consist of the following:
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Deferred
tax assets
|
|||||||
|
Loss
carryforwards
|
$ | 70,897 | $ | 62,538 | |||
|
Tax
credits
|
51,835 | 21,995 | |||||
|
Depreciation
and amortization
|
9,364 | 19,219 | |||||
|
Derivatives
|
12,728 | 13,754 | |||||
|
Warranty
reserves
|
9,222 | 9,652 | |||||
|
Accrued
expenses
|
7,211 | 8,090 | |||||
|
Equity
compensation
|
8,979 | 6,014 | |||||
|
Pension
plan benefits expense
|
6,372 | 5,200 | |||||
|
Inventory
valuation
|
3,714 | 2,376 | |||||
|
Other
deferred tax assets, net
|
8,852 | 5,237 | |||||
|
Total
deferred tax assets
|
189,174 | 154,075 | |||||
|
Valuation
allowance
|
(22,425 | ) | (16,219 | ) | |||
|
Net
deferred tax assets
|
166,749 | 137,856 | |||||
|
Deferred
tax liabilities
|
|||||||
|
Depreciation
and amortization
|
(115,972 | ) | (149,715 | ) | |||
|
Convertible
debt
|
(18,524 | ) | (27,491 | ) | |||
|
Tax
effect of accumulated translation
|
(1,676 | ) | (1,064 | ) | |||
|
Other
deferred tax liabilities, net
|
(2,203 | ) | (1,509 | ) | |||
|
Total
deferred tax liabilities
|
(138,375 | ) | (179,779 | ) | |||
|
Net
deferred tax assets (liabilities)
|
$ | 28,374 | $ | (41,923 | ) | ||
We record
valuation allowances to reduce deferred 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 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 tax attribute carryforwards. Although realization
is not assured, management believes it is more likely than not that all of the
deferred tax assets will be realized. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward periods are reduced or current
tax planning strategies are not implemented.
At
December 31, 2009, we had federal loss carryforwards of $97.0 million that
expire during the years 2020 through 2029. The remaining portion of the loss
carryforwards are composed primarily of Itron International’s losses in various
foreign jurisdictions. The majority of these losses can be carried forward
indefinitely. At December 31, 2009, there was a valuation allowance of $22.4
million associated with Itron International’s foreign loss carryforwards. We
also had federal research and development tax credits of $25.0 million, which
begin to expire in 2019. We have unused alternative minimum tax credits of $2.5
million at December 31, 2009, which are available to reduce future income tax
liabilities. The alternative minimum tax credits may be carried forward
indefinitely. We have foreign tax credits of $26.7 million, which begin to
expire in 2017.
Our
deferred tax assets at December 31, 2009 do not include the tax effect on $57.8
million of excess tax benefits from employee stock option exercises. Common
stock will be increased by $22.2 million if and when such excess tax benefits
reduce cash taxes payable.
We do not
provide U.S. deferred 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
$36.9 million and $30.8 million at December 31, 2009 and 2008,
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 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 in
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.
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
|
2,037 | |||
|
Gross
decrease to positions in prior years
|
(798 | ) | ||
|
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 | ||
|
Gross
increase to positions in prior years
|
8,958 | |||
|
Gross
decrease to positions in prior years
|
(4,360 | ) | ||
|
Gross
increases to current period tax positions
|
5,471 | |||
|
Audit
settlements
|
(2,032 | ) | ||
|
Effect
of change in exchange rates
|
525 | |||
|
Unrecognized
tax benefits at December 31, 2009
|
$ | 46,206 |
|
At
December 31,
|
||||||||
| 2009 |
2008
|
2007
|
||||||
|
(in
millions)
|
||||||||
|
The
amount of unrecognized tax benefits that, if recognized,
would
affect our effective tax rate
|
$ | 46.1 |
$37.0
|
$8.4
|
||||
We
classify interest expense and penalties related to unrecognized tax liabilities
and interest income on tax overpayments as components of income tax expense.
Interest and penalties recognized, and accrued interest and penalties recorded,
are as follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Interest
and penalties recognized
|
$ | 1.4 | $ | 1.2 | $ | 1.2 | ||||
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
millions)
|
|||||||
|
Accrued
interest
|
$ | 4.1 | $ | 3.2 | |||
|
Accrued
penalties
|
3.4 | 2.9 | |||||
At
December 31, 2009, we expect to pay $765,000 in income taxes, interest, and
penalties related to uncertain tax positions over the next twelve months. We are
not able to reasonably estimate the timing of future cash flows relating to the
remaining balance.
We
believe it reasonably possible that our unrecognized tax benefits may decrease
by approximately $11.3 million within the next twelve months due to a change in
the method of depreciation for certain foreign subsidiaries, expiration of
statute of limitations, and a final ruling related to an audit.
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 2007
|
|
|
Germany
|
Subsequent
to 2004
|
|
|
Spain
|
Subsequent
to 2005
|
|
|
United
Kingdom
|
Subsequent
to 2002
|
Note
12: Commitments and Contingencies
Commitments
Operating
lease rental expense for warehouse, manufacturing, and office facilities and
equipment was as follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Rental
expense
|
$ | 15.9 | $ | 15.6 | $ | 12.4 | ||||
Future
minimum lease payments at December 31, 2009, under noncancelable operating
leases with initial or remaining terms in excess of one year are as
follows:
|
Minimum
Payments
|
|||||
|
(in
thousands)
|
|||||
|
2010
|
$ | 10,260 | |||
|
2011
|
6,520 | ||||
|
2012
|
4,915 | ||||
|
2013
|
3,387 | ||||
|
2014
|
2,153 | ||||
|
Beyond
2014
|
1,666 | ||||
|
Future
minimum lease payments
|
$ | 28,901 | |||
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, 2009, in
addition to the outstanding standby letters of credit of $39.9 million issued
under our credit facility’s $115 million multicurrency revolver, our Itron
International operating segment has a total of $38.7 million of unsecured
multicurrency revolving lines of credit with various financial institutions with
total outstanding standby letters of credit of $13.0 million. At
December 31, 2008, Itron International had 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.
Unsecured surety bonds in force were $71.4 million and $33.1 million at December
31, 2009 and 2008, respectively. 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. We also provide
an indemnification to our customers 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 our
indemnifications generally do not limit the maximum potential payments. It is
not possible to predict the maximum potential amount of future payments under
these or similar agreements.
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. 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. Liabilities recorded for legal contingencies at December 31, 2009 were
not material to our financial condition or results of operations.
On August
28, 2009, Itron and PT Berca completed a settlement agreement in which
litigation against several Itron International subsidiaries and the successor in
interest to another company previously owned by Schlumberger Limited
(Schlumberger) was dismissed. PT Berca had claimed that it had preemptive rights
in the PT Mecoindo joint venture and had sought to nullify the transaction in
2001 whereby Schlumberger transferred its ownership interest in PT Mecoindo to
an Itron International subsidiary. The plaintiff also sought to collect damages
for the earnings it otherwise would have earned had its alleged preemptive
rights been observed. In connection with the settlement, certain portions of the
debt of PT Mecoindo were converted to equity and PT Mecoindo was restructured so
that Itron and PT Berca became approximately 51:49 owners of PT Mecoindo as of
August 28, 2009 and ownership will become equal as of August 28, 2010. This
settlement did not, and is not expected to, have a material impact on our
financial condition or results of operations.
On
December 18, 2009, we received a statement of claim in the matter of an
arbitration between Cinclus Technology (Cinclus) and Itron Metering Solutions UK
Ltd (Itron UK). The claim relates to an alleged defect in meters sold to Cinclus
during 2007 for installation on a project Cinclus was managing for E.ON, a
utility with customers in Sweden. On December 23, 2009, we received a
statement of claim in the matter of an arbitration between Cinclus and Itron UK
relating to an alleged defect in meters sold to Cinclus during 2007 - 2009 for
installation on a project Cinclus was managing for Fortum, a utility with
customers in Sweden. Both arbitrations have been filed with the Arbitration
Institute of the Stockholm Chamber of Commerce. In both arbitrations, Cinclus
claims the meters provided by Itron UK fail to meet specifications because in
certain environments the meters are affected by external events, which impairs
the meter’s capability to measure energy accurately. Cinclus asserts that all
meters must be replaced at Itron UK’s cost and expense, including the cost of
field work to replace the meters, plus other losses and damages to be specified
at a later date. Itron UK has denied all of the allegations and will defend
these claims. We do not believe this matter will have a material adverse effect
on our business or financial condition, although an unfavorable outcome could
have a material adverse effect on Itron’s results of operations for the period
in which such a loss is recognized.
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 and the IBNR
accrual, which is included in wages and benefits payable, are as
follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Plan
costs
|
$ | 19.8 | $ | 20.0 | $ | 14.9 | ||||
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
millions)
|
|||||||
|
IBNR
accrual
|
$ | 3.3 | $ | 3.0 | |||
Our IBNR
accrual and expenses may fluctuate due to the number of plan participants,
claims activity, and deductible limits. 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.
Warranty
A summary
of the warranty accrual account activity is as follows:
|
Year
Ended December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Beginning
balance, January 1
|
$ | 38,255 | $ | 32,841 | |||
|
Actaris
acquisition opening balance/adjustments
|
- | 7,655 | |||||
|
New
product warranties
|
7,437 | 8,046 | |||||
|
Other
changes/adjustments to warranties
|
7,612 | 6,104 | |||||
|
Claims
activity
|
(20,222 | ) | (15,500 | ) | |||
|
Effect
of change in exchange rates
|
791 | (891 | ) | ||||
|
Ending
balance, December 31
|
33,873 | 38,255 | |||||
|
Less:
current portion of warranty
|
20,941 | 23,375 | |||||
|
Long-term
warranty
|
$ | 12,932 | $ | 14,880 | |||
Total
warranty expense, which is classified within cost of revenues and consists of
new product warranties issued and other changes and adjustments to warranties,
is as follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Warranty
expense
|
$ | 15.0 | $ | 14.2 | $ | 14.0 | ||||
Note
13: 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, net of tax, were as follows:
|
At
December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(in
thousands)
|
|||||||
|
Foreign
currency translation adjustment
|
$ | 98,165 | $ | 57,173 | |||
|
Net
unrealized loss on derivative instruments
|
(17,077 | ) | (10,301 | ) | |||
|
Net
unrealized loss on nonderivative hedging instrument
|
(21,339 | ) | (18,975 | ) | |||
|
Net
hedging (gains) losses reclassified into net income (loss)
|
8,116 | (496 | ) | ||||
|
Pension
plan benefits liability adjustment
|
3,265 | 6,692 | |||||
|
Total
accumulated other comprehensive income
|
$ | 71,130 | $ | 34,093 | |||
Note
14: Fair Values of Financial Instruments
The fair
values provided are representative of fair values only at December 31, 2009 and
December 31, 2008 and do not reflect subsequent changes in the economy,
interest rates, tax rates, and other variables that may affect the determination
of fair value.
|
At
December 31, 2009
|
At
December 31, 2008
|
||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||
|
(in
thousands)
|
|||||||||||||
|
Assets
|
|||||||||||||
|
Cash
and cash equivalents
|
$ | 121,893 | $ | 121,893 | $ | 144,390 | $ | 144,390 | |||||
|
Foreign
exchange forwards
|
3,986 | 3,986 | - | - | |||||||||
|
Liabilities
|
|||||||||||||
|
Term
loans
|
|||||||||||||
|
USD
denominated term loan
|
$ | 284,693 | $ | 284,693 | $ | 375,744 | $ | 317,128 | |||||
|
EUR
denominated term loan
|
288,902 | 288,902 | 360,494 | 308,073 | |||||||||
|
Convertible
senior subordinated notes
|
208,169 | 282,859 | 306,337 | 380,985 | |||||||||
|
Senior
subordinated notes
|
- | - | 109,192 | 95,478 | |||||||||
|
Interest
rate swaps
|
15,154 | 15,154 | 17,495 | 17,495 | |||||||||
|
Foreign
exchange forwards
|
2,442 | 2,442 | 67 | 67 | |||||||||
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 term loans
are not registered with the SEC but are generally transferable through banks
that hold the debt and make a market. The fair value is based on quoted prices
from recent trades of the term loans. At December 31, 2009, the quoted exit
price was 100.00; therefore, the fair value was the same as the carrying
value.
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. The carrying value is lower than the
face value of the convertible notes as a result of separating the liability and
equity components. The face value of the convertible notes was $223.6 million at
December 31, 2009 and $344.6 million at December 31, 2008. See Note 6 for
further discussion.
Derivatives: See Note 7 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).
Note
15: Segment Information
We have
two operating segments: Itron North America and Itron International. Itron North
America generates a majority of its revenues in the United States and Canada,
while Itron International generates a majority of its revenues in Europe, and
the balance primarily in Africa, South America, and Asia/Pacific. On January 1,
2009, we realigned our management reporting and geographic reporting structure
between our International and North America operations. Itron North America now
includes sales of gas and water meters in North America, which were previously
part of Itron International. Therefore, the operating segment information as set
forth below is based on our current segment reporting structure. Historical
segment information has been restated from the segment information previously
provided to conform to our current segment reporting structure after the
January 1, 2009 realignment.
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, gain (loss) on
extinguishment of debt, 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 expense allocated to our segments was as follows:
|
Year
ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
millions)
|
||||||||||
|
Itron
North America
|
$ | 48.3 | $ | 43.6 | $ | 45.3 | ||||
|
Itron
International
|
107.4 | 130.1 | 81.1 | |||||||
|
Total
Company
|
$ | 155.7 | $ | 173.7 | $ | 126.4 | ||||
Segment
Products
|
Itron
North America
|
Electronic
and smart electricity meters; gas and water meters; electricity, gas, and
water automated meter reading (AMR) and advanced metering infrastructure
(AMI)/smart meter modules; handheld, mobile, and network AMR data
collection technologies; AMI network technologies; software, installation,
implementation, consulting, maintenance support, and other
services.
|
|
Itron
International
|
Electromechanical,
electronic, and smart 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.
|
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Revenues
|
||||||||||
|
Itron
North America
|
$ | 615,762 | $ | 696,714 | $ | 637,449 | ||||
|
Itron
International
|
1,071,685 | 1,212,899 | 826,599 | |||||||
|
Total
Company
|
$ | 1,687,447 | $ | 1,909,613 | $ | 1,464,048 | ||||
|
Gross
profit
|
||||||||||
|
Itron
North America
|
$ | 211,826 | $ | 263,920 | $ | 257,505 | ||||
|
Itron
International
|
325,630 | 382,937 | 229,782 | |||||||
|
Total
Company
|
$ | 537,456 | $ | 646,857 | $ | 487,287 | ||||
|
Operating
income (loss)
|
||||||||||
|
Itron
North America
|
$ | 36,933 | $ | 73,434 | $ | 72,603 | ||||
|
Itron
International
|
37,612 | 74,070 | 5,918 | |||||||
|
Corporate
unallocated
|
(29,518 | ) | (37,682 | ) | (32,048 | ) | ||||
|
Total
Company
|
45,027 | 109,822 | 46,473 | |||||||
|
Total
other income (expense)
|
(91,101 | ) | (91,240 | ) | (90,023 | ) | ||||
|
Income
(loss) before income taxes
|
$ | (46,074 | ) | $ | 18,582 | $ | (43,550 | ) | ||
No single customer represented more than 10% of total Company or operating segment revenues for the years ended December 31, 2009, 2008, and 2007.
Total
assets by operating segment were as follows:
|
At
December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Itron
North America/Corporate(1)
|
$ | 753,403 | $ | 844,555 | $ | 704,252 | ||||
|
Itron
International
|
2,137,065 | 2,025,083 | 2,355,995 | |||||||
|
Eliminations
|
(35,847 | ) | (13,290 | ) | (29,789 | ) | ||||
|
Total
assets
|
$ | 2,854,621 | $ | 2,856,348 | $ | 3,030,458 | ||||
|
(1) We do
not allocate assets between the Itron North America operating segment and
Corporate.
|
||||||||||
Revenues
by region were as follows:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
Europe
|
$ | 806,540 | $ | 916,288 | $ | 623,625 | ||||
|
United
States and Canada
|
606,472 | 647,966 | 596,585 | |||||||
|
Other
|
274,435 | 345,359 | 243,838 | |||||||
|
Total
revenues
|
$ | 1,687,447 | $ | 1,909,613 | $ | 1,464,048 | ||||
Property,
plant, and equipment, net, by geographic area were as follows:
|
At
December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
||||||||||
|
United
States
|
$ | 116,081 | $ | 96,952 | $ | 85,036 | ||||
|
Outside
United States
|
202,136 | 210,765 | 237,967 | |||||||
|
Total
property, plant, and equipment, net
|
$ | 318,217 | $ | 307,717 | $ | 323,003 | ||||
Note
16: Consolidating Financial Information
Our
subordinated notes and convertible notes, issued by Itron, Inc., are guaranteed
by our U.S. domestic operating 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.
On
January 1, 2009, we transferred a substantial portion of our guarantor
subsidiary operations located in the United States into the parent company. This
change in legal entities implemented on January 1, 2009 is reflected in the
below consolidating statements as of and for the year ended December 31, 2009.
We have not restated the comparative prior period results due to the complexity
of the transfer and the immaterial nature of the operations.
|
Consolidating
Statement of Operations
|
|||||||||||||||
|
Year
Ended December 31, 2009
|
|||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
Revenues
|
$ | 603,426 | $ | 4,095 | $ | 1,124,562 | $ | (44,636 | ) | $ | 1,687,447 | ||||
|
Cost
of revenues
|
399,179 | 3,994 | 791,454 | (44,636 | ) | 1,149,991 | |||||||||
|
Gross
profit
|
204,247 | 101 | 333,108 | - | 537,456 | ||||||||||
|
Operating
expenses
|
|||||||||||||||
|
Sales
and marketing
|
55,552 | - | 96,853 | - | 152,405 | ||||||||||
|
Product
development
|
76,957 | - | 45,357 | - | 122,314 | ||||||||||
|
General
and administrative
|
41,821 | - | 77,316 | - | 119,137 | ||||||||||
|
Amortization
of intangible assets
|
23,506 | - | 75,067 | - | 98,573 | ||||||||||
|
Total
operating expenses
|
197,836 | - | 294,593 | - | 492,429 | ||||||||||
|
Operating
income
|
6,411 | 101 | 38,515 | - | 45,027 | ||||||||||
|
Other
income (expense)
|
|||||||||||||||
|
Interest
income
|
113,850 | 3,659 | 725 | (117,048 | ) | 1,186 | |||||||||
|
Interest
expense
|
(73,441 | ) | - | (114,137 | ) | 117,267 | (70,311 | ) | |||||||
|
Loss
on extinguishment of debt, net
|
(12,800 | ) | - | - | - | (12,800 | ) | ||||||||
|
Other
income (expense), net
|
(2,799 | ) | (30 | ) | (6,128 | ) | (219 | ) | (9,176 | ) | |||||
|
Total
other income (expense)
|
24,810 | 3,629 | (119,540 | ) | - | (91,101 | ) | ||||||||
|
Income
(loss) before income taxes
|
31,221 | 3,730 | (81,025 | ) | - | (46,074 | ) | ||||||||
|
Income
tax benefit (provision)
|
42,907 | (32 | ) | 950 | - | 43,825 | |||||||||
|
Equity
in losses of guarantor and
|
|||||||||||||||
|
non-guarantor
subsidiaries, net
|
(76,377 | ) | (19,363 | ) | - | 95,740 | - | ||||||||
|
Net
loss
|
$ | (2,249 | ) | $ | (15,665 | ) | $ | (80,075 | ) | $ | 95,740 | $ | (2,249 | ) | |
|
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
|
(93,706 | ) | (183 | ) | (120,937 | ) | 120,649 | (94,177 | ) | ||||||
|
Other
income (expense), net
|
2,023 | (808 | ) | (4,248 | ) | - | (3,033 | ) | |||||||
|
Total
other income (expense)
|
30,181 | (1,002 | ) | (120,419 | ) | - | (91,240 | ) | |||||||
|
Income
(loss) before income taxes
|
68,450 | 464 | (50,332 | ) | - | 18,582 | |||||||||
|
Income
tax benefit (provision)
|
7,779 | (131 | ) | (6,419 | ) | - | 1,229 | ||||||||
|
Equity
in losses of guarantor and non-guarantor
|
|||||||||||||||
|
subsidiaries,
net
|
(56,418 | ) | (876 | ) | - | 57,294 | - | ||||||||
|
Net
income (loss)
|
$ | 19,811 | $ | (543 | ) | $ | (56,751 | ) | $ | 57,294 | $ | 19,811 | |||
|
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
|
(99,995 | ) | (2,994 | ) | (84,212 | ) | 86,266 | (100,935 | ) | ||||||
|
Other
income (expense), net
|
9,143 | (798 | ) | (7,910 | ) | - | 435 | ||||||||
|
Total
other income (expense)
|
1,301 | (3,740 | ) | (87,587 | ) | 3 | (90,023 | ) | |||||||
|
Income
(loss) before income taxes
|
42,139 | (3,023 | ) | (82,666 | ) | - | (43,550 | ) | |||||||
|
Income
tax benefit
|
7,305 | 1,112 | 12,282 | - | 20,699 | ||||||||||
|
Equity
in losses of guarantor and
|
|||||||||||||||
|
non-guarantor
subsidiaries, net
|
(72,295 | ) | (2,556 | ) | - | 74,851 | - | ||||||||
|
Net
loss
|
$ | (22,851 | ) | $ | (4,467 | ) | $ | (70,384 | ) | $ | 74,851 | $ | (22,851 | ) | |
|
Consolidating
Balance Sheet
|
|||||||||||||||
|
December
31, 2009
|
|||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined
Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
ASSETS
|
|||||||||||||||
|
Current
assets
|
|||||||||||||||
|
Cash
and cash equivalents
|
$ | 16,385 | $ | 379 | $ | 105,129 | $ | - | $ | 121,893 | |||||
|
Accounts
receivable, net
|
117,104 | 2,316 | 218,528 | - | 337,948 | ||||||||||
|
Intercompany
accounts receivable
|
9,524 | 52 | 1,572 | (11,148 | ) | - | |||||||||
|
Inventories
|
71,581 | - | 98,881 | (378 | ) | 170,084 | |||||||||
|
Deferred
tax assets current, net
|
13,085 | (44 | ) | 7,721 | - | 20,762 | |||||||||
|
Other
current assets
|
32,349 | 108 | 42,772 | - | 75,229 | ||||||||||
|
Intercompany
other
|
32,456 | 3,658 | 4,999 | (41,113 | ) | - | |||||||||
|
Total
current assets
|
292,484 | 6,469 | 479,602 | (52,639 | ) | 725,916 | |||||||||
|
Property,
plant, and equipment, net
|
116,081 | - | 202,136 | - | 318,217 | ||||||||||
|
Prepaid
debt fees
|
8,628 | - | - | - | 8,628 | ||||||||||
|
Deferred
tax assets noncurrent, net
|
67,195 | - | 22,737 | - | 89,932 | ||||||||||
|
Other
noncurrent assets
|
5,625 | - | 12,492 | - | 18,117 | ||||||||||
|
Intangible
assets, net
|
58,168 | - | 330,044 | - | 388,212 | ||||||||||
|
Goodwill
|
174,781 | - | 1,130,818 | - | 1,305,599 | ||||||||||
|
Investment
in subsidiaries
|
(9,081 | ) | (12,444 | ) | - | 21,525 | - | ||||||||
|
Intercompany
notes receivable
|
1,723,587 | 94,511 | - | (1,818,098 | ) | - | |||||||||
|
Total
assets
|
$ | 2,437,468 | $ | 88,536 | $ | 2,177,829 | $ | (1,849,212 | ) | $ | 2,854,621 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||||||||||
|
Current
liabilities
|
|||||||||||||||
|
Accounts
payable
|
$ | 67,480 | $ | 66 | $ | 151,709 | $ | - | $ | 219,255 | |||||
|
Other
current liabilities
|
21,147 | - | 43,436 | - | 64,583 | ||||||||||
|
Intercompany
accounts payable
|
1,674 | 184 | 9,290 | (11,148 | ) | - | |||||||||
|
Wages
and benefits payable
|
20,621 | 102 | 50,869 | - | 71,592 | ||||||||||
|
Taxes
payable
|
1,776 | (43 | ) | 12,644 | - | 14,377 | |||||||||
|
Current
portion of long-term debt
|
10,871 | - | - | - | 10,871 | ||||||||||
|
Current
portion of warranty
|
8,418 | - | 12,523 | - | 20,941 | ||||||||||
|
Unearned
revenue
|
36,421 | - | 3,719 | - | 40,140 | ||||||||||
|
Deferred
tax liabilities current, net
|
(1,550 | ) | - | 3,175 | - | 1,625 | |||||||||
|
Short-term
intercompany advances
|
8,661 | 2,450 | 30,002 | (41,113 | ) | - | |||||||||
|
Total
current liabilities
|
175,519 | 2,759 | 317,367 | (52,261 | ) | 443,384 | |||||||||
|
Long-term
debt
|
770,893 | - | - | - | 770,893 | ||||||||||
|
Warranty
|
9,919 | - | 3,013 | - | 12,932 | ||||||||||
|
Pension
plan benefits
|
- | - | 63,040 | - | 63,040 | ||||||||||
|
Intercompany
notes payable
|
94,511 | - | 1,723,587 | (1,818,098 | ) | - | |||||||||
|
Deferred
tax liabilities noncurrent, net
|
(37,176 | ) | - | 117,871 | - | 80,695 | |||||||||
|
Other
noncurrent obligations
|
23,287 | - | 59,876 | - | 83,163 | ||||||||||
|
Total
liabilities
|
1,036,953 | 2,759 | 2,284,754 | (1,870,359 | ) | 1,454,107 | |||||||||
|
Shareholders'
equity
|
|||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | ||||||||||
|
Common
stock
|
1,299,134 | 107,165 | 80,723 | (187,888 | ) | 1,299,134 | |||||||||
|
Accumulated
other comprehensive income (loss), net
|
71,130 | (9,200 | ) | 19,689 | (10,489 | ) | 71,130 | ||||||||
|
Retained
earnings (accumulated deficit)
|
30,250 | (12,188 | ) | (207,336 | ) | 219,524 | 30,250 | ||||||||
|
Total
shareholders' equity
|
1,400,514 | 85,777 | (106,924 | ) | 21,147 | 1,400,514 | |||||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,437,467 | $ | 88,536 | $ | 2,177,830 | $ | (1,849,212 | ) | $ | 2,854,621 | ||||
|
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
tax assets current, net
|
20,546 | 3,517 | 7,744 | - | 31,807 | ||||||||||
|
Other
current assets
|
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
tax assets noncurrent, net
|
53,950 | 989 | (24,022 | ) | - | 30,917 | |||||||||
|
Other
noncurrent assets
|
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
|
$ | 2,359,048 | $ | 276,048 | $ | 2,009,740 | $ | (1,788,488 | ) | $ | 2,856,348 | ||||
|
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
tax liabilities current, 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
|
1,140,998 | - | - | - | 1,140,998 | ||||||||||
|
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
tax liabilities noncurrent, net
|
- | 10,615 | 92,105 | - | 102,720 | ||||||||||
|
Other
noncurrent obligations
|
18,228 | 2,389 | 38,126 | - | 58,743 | ||||||||||
|
Total
liabilities
|
1,300,272 | 33,597 | 2,200,300 | (1,736,597 | ) | 1,797,572 | |||||||||
|
Shareholders'
equity
|
|||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | ||||||||||
|
Common
stock
|
992,184 | 246,982 | (47,520 | ) | (199,462 | ) | 992,184 | ||||||||
|
Accumulated
other comprehensive income (loss), 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 | ||||||||
|
Cumulative
effect of change in accounting principle
|
(17,792 | ) | - | - | - | (17,792 | ) | ||||||||
|
Total
shareholders' equity
|
1,058,776 | 242,451 | (190,560 | ) | (51,891 | ) | 1,058,776 | ||||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,359,048 | $ | 276,048 | $ | 2,009,740 | $ | (1,788,488 | ) | $ | 2,856,348 | ||||
|
Consolidating
Statement of Cash Flows
|
|||||||||||||||
|
Year
ended December 31, 2009
|
|||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
Operating
activities
|
|||||||||||||||
|
Net
loss
|
$ | (2,249 | ) | $ | (15,665 | ) | $ | (80,075 | ) | $ | 95,740 | $ | (2,249 | ) | |
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||||||||||
|
Depreciation
and amortization
|
48,089 | - | 107,648 | - | 155,737 | ||||||||||
|
Stock-based
compensation
|
16,982 | - | - | - | 16,982 | ||||||||||
|
Amortization
of prepaid debt fees
|
8,258 | - | - | - | 8,258 | ||||||||||
|
Amortization
of convertible debt discount
|
9,673 | - | - | - | 9,673 | ||||||||||
|
Loss
on extinguishment of debt, net
|
9,960 | - | - | - | 9,960 | ||||||||||
|
Deferred
income taxes, net
|
(48,503 | ) | 32 | (15,745 | ) | - | (64,216 | ) | |||||||
|
Equity
in losses of guarantor and non-guarantor subsidiaries, net
|
76,377 | 19,363 | - | (95,740 | ) | - | |||||||||
|
Other
adjustments, net
|
(1,424 | ) | - | 4,526 | - | 3,102 | |||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|||||||||||||||
|
Accounts
receivable
|
(21,190 | ) | (904 | ) | 19,132 | - | (2,962 | ) | |||||||
|
Inventories
|
(12,273 | ) | - | 15,808 | - | 3,535 | |||||||||
|
Accounts
payables, other current liabilities, and taxes payable
|
18,904 | (299 | ) | (8,732 | ) | - | 9,873 | ||||||||
|
Wages
and benefits payable
|
(6,449 | ) | (71 | ) | (1,741 | ) | - | (8,261 | ) | ||||||
|
Unearned
revenue
|
18,704 | - | (3,868 | ) | - | 14,836 | |||||||||
|
Warranty
|
(1,953 | ) | - | (3,320 | ) | - | (5,273 | ) | |||||||
|
Intercompany
transactions, net
|
(2,081 | ) | 1,227 | 854 | - | - | |||||||||
|
Other
operating, net
|
(7,370 | ) | 115 | (953 | ) | - | (8,208 | ) | |||||||
|
Net
cash provided by operating activities
|
103,455 | 3,798 | 33,534 | - | 140,787 | ||||||||||
|
Investing
activities
|
|||||||||||||||
|
Acquisitions
of property, plant, and equipment
|
(21,679 | ) | - | (31,227 | ) | - | (52,906 | ) | |||||||
|
Business
acquisitions & contingent consideration, net of cash
equivalents
acquired
|
(4,317 | ) | - | - | - | (4,317 | ) | ||||||||
|
Current
intercompany notes, net
|
(19,837 | ) | (3,658 | ) | 1,217 | 22,278 | - | ||||||||
|
Long-term
intercompany notes receivable, net
|
4,765 | (975 | ) | 1,135 | (4,925 | ) | - | ||||||||
|
Other
investing, net
|
(792 | ) | 974 | 3,047 | - | 3,229 | |||||||||
|
Net
cash used in investing activities
|
(41,860 | ) | (3,659 | ) | (25,828 | ) | 17,353 | (53,994 | ) | ||||||
|
Financing
activities
|
|||||||||||||||
|
Payments
on debt
|
(275,796 | ) | - | - | - | (275,796 | ) | ||||||||
|
Issuance
of common stock
|
166,372 | - | - | - | 166,372 | ||||||||||
|
Prepaid
debt fees
|
(3,936 | ) | - | - | - | (3,936 | ) | ||||||||
|
Current
intercompany notes, net
|
2,441 | - | 19,837 | (22,278 | ) | - | |||||||||
|
Long-term
intercompany notes payable, net
|
(4,635 | ) | - | (290 | ) | 4,925 | - | ||||||||
|
Other
financing, net
|
- | - | (761 | ) | - | (761 | ) | ||||||||
|
Net
cash (used in) provided by financing activities
|
(115,554 | ) | - | 18,786 | (17,353 | ) | (114,121 | ) | |||||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
4,831 | 4,831 | |||||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
(53,959 | ) | 139 | 31,323 | - | (22,497 | ) | ||||||||
|
Cash
and cash equivalents at beginning of period
|
67,404 | 3,180 | 73,806 | - | 144,390 | ||||||||||
|
Cash
transferred from guarantor to parent
|
2,940 | (2,940 | ) | - | - | - | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 16,385 | $ | 379 | $ | 105,129 | $ | - | $ | 121,893 | |||||
|
Non-cash
transactions:
|
|||||||||||||||
|
Fixed
assets purchased but not yet paid
|
$ | 4,287 | $ | - | $ | (568 | ) | $ | - | $ | 3,719 | ||||
|
Exchange
of debt for common stock (see Note 6)
|
120,984 | - | - | - | 120,984 | ||||||||||
|
Supplemental
disclosure of cash flow information:
|
|||||||||||||||
|
Cash
paid during the period for:
|
|||||||||||||||
|
Income
taxes
|
$ | 559 | $ | - | $ | 31,161 | $ | - | $ | 31,720 | |||||
|
Interest,
net of amounts capitalized
|
54,157 | 115 | 231 | - | 54,503 | ||||||||||
|
Consolidating
Statement of Cash Flows
|
|||||||||||||||
|
Year
ended December 31, 2008
|
|||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
Operating
activities
|
|||||||||||||||
|
Net
income (loss)
|
$ | 19,811 | $ | (543 | ) | $ | (56,751 | ) | $ | 57,294 | $ | 19,811 | |||
|
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 | ||||||||||
|
Amortization
of convertible debt discount
|
13,442 | - | - | 13,442 | |||||||||||
|
Deferred
income taxes, net
|
(140 | ) | 7,949 | (51,126 | ) | - | (43,317 | ) | |||||||
|
Equity
in (earnings) losses of guarantor and non-guarantor subsidiaries,
net
|
56,418 | 876 | - | (57,294 | ) | - | |||||||||
|
Other
adjustments, net
|
(131 | ) | 113 | (2,159 | ) | - | (2,177 | ) | |||||||
|
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 | ) | ||||||||
|
Intercompany
transactions, net
|
(225 | ) | 2,645 | (2,420 | ) | - | - | ||||||||
|
Other
operating, net
|
(6,220 | ) | (44,659 | ) | 29,463 | - | (21,416 | ) | |||||||
|
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 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 | ) | - | |||||||||
|
Current
intercompany notes, net
|
(5,352 | ) | 3,282 | 6,302 | (4,232 | ) | - | ||||||||
|
Long-term
intercompany notes receivable, net
|
- | - | - | - | - | ||||||||||
|
Other
investing, 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
financing, 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:
|
|||||||||||||||
|
Fixed
assets purchased but not yet paid
|
$ | 19 | $ | - | $ | 2,777 | $ | - | $ | 2,796 | |||||
|
Exchange
of debt for common stock (see Note 6)
|
29 | - | - | - | 29 | ||||||||||
|
Contingent
consideration payable for previous acquisitions
|
1,295 | - | - | - | 1,295 | ||||||||||
|
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 | ||||||||||
|
Consolidating
Statement of Cash Flows
|
|||||||||||||||
|
Year
Ended December 31, 2007
|
|||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||
|
(in
thousands)
|
|||||||||||||||
|
Operating
activities
|
|||||||||||||||
|
Net
loss
|
$ | (22,851 | ) | $ | (4,467 | ) | $ | (70,384 | ) | $ | 74,851 | $ | (22,851 | ) | |
|
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 | ||||||||||
|
Amortization
of convertible debt discount
|
10,970 | - | - | - | 10,970 | ||||||||||
|
Deferred
income taxes, net
|
(23,708 | ) | (3,765 | ) | (13,552 | ) | - | (41,025 | ) | ||||||
|
Equity
in losses of non-guarantor subsidiaries
|
72,295 | 2,556 | - | (74,851 | ) | - | |||||||||
|
Other
adjustments, 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 | ||||||||||
|
Intercompany
transactions, net
|
(7,878 | ) | 1,817 | 6,061 | - | - | |||||||||
|
Other
operating, net
|
(5,698 | ) | 382 | 9,273 | - | 3,957 | |||||||||
|
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
investing, 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
financing, 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
|
$ | (5,129 | ) | $ | - | $ | 3,899 | $ | - | $ | (1,230 | ) | |||
|
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 | ||||||||||
Note
17: Quarterly Results (Unaudited)
|
First
|
Second
|
Third
|
Fourth
|
Total
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||||
|
(in
thousands, except per common share and stock price data)
|
|||||||||||||||||
|
2009
|
|||||||||||||||||
|
Statement
of operations data:
|
|||||||||||||||||
|
Revenues
|
$ | 388,518 | $ | 413,748 | $ | 408,358 | $ | 476,823 | $ | 1,687,447 | |||||||
|
Gross
profit
|
129,584 | 133,109 | 129,479 | 145,284 | 537,456 | ||||||||||||
|
Net
income (loss)
|
(19,729 | ) | 15,289 | (2,962 | ) | 5,153 | (2,249 | ) | |||||||||
|
Basic
earnings per common share
|
$ | (0.55 | ) | $ | 0.40 | $ | (0.07 | ) | $ | 0.13 | $ | (0.06 | ) | ||||
|
Diluted
earnings per common share
|
$ | (0.55 | ) | $ | 0.40 | $ | (0.07 | ) | $ | 0.13 | $ | (0.06 | ) | ||||
|
Stock
Price:
|
|||||||||||||||||
|
High
|
$ | 66.66 | $ | 62.19 | $ | 67.89 | $ | 69.49 | $ | 69.49 | |||||||
|
Low
|
$ | 40.10 | $ | 42.77 | $ | 50.15 | $ | 54.92 | $ | 40.10 | |||||||
|
2008
(1)
|
|||||||||||||||||
|
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 (loss)
|
953 | 11,089 | 5,600 | 2,169 | 19,811 | ||||||||||||
|
Basic
earnings per common share
|
$ | 0.03 | $ | 0.34 | $ | 0.16 | $ | 0.06 | $ | 0.60 | |||||||
|
Diluted
earnings per common share
|
$ | 0.03 | $ | 0.31 | $ | 0.15 | $ | 0.06 | $ | 0.57 | |||||||
|
Stock
Price:
|
|||||||||||||||||
|
High
|
$ | 100.00 | $ | 106.25 | $ | 105.99 | $ | 90.10 | $ | 106.25 | |||||||
|
Low
|
$ | 70.48 | $ | 88.77 | $ | 84.71 | $ | 34.25 | $ | 34.25 | |||||||
|
(1)
|
On
January1, 2009, we adopted FSP 14-1 relating to our convertible notes. See
Note 1 for the impact of the adoption of FSP 14-1 on our results of
operations.
|
Note
18: Subsequent Events
We have
evaluated subsequent events through February 24, 2010, the date of issuance of
our consolidated financial statements.
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 three year period ended
December 31, 2009, 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 as of December 31, 2009, the Company’s disclosure
controls and procedures were effective to ensure the information required
to be disclosed by an issuer in the reports that it files or submits under
the Securities Exchange Act of 1934 is accumulated and communicated to our
management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. 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, 2009.
|
|
|
The
effectiveness of our internal control over financial reporting as of
December 31, 2009 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, 2009. 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, 2009 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 Shareholders of Itron, Inc.
We have
audited Itron, Inc.’s internal control over financial reporting as of
December 31, 2009, 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 Annual 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, 2009, 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, 2009 and 2008, and the related consolidated statements
of operations, shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2009 and our report dated
February 24, 2010 expressed an unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
24, 2010
ITEM 9B: OTHER INFORMATION
No
information was required to be disclosed in a report on Form 8-K during the
fourth quarter of 2009 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 4, 2010 (the
2009 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 2009 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 2009 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. Our code of ethics can be accessed on our website, at www.itron.com under
the investor relations section.
There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant’s board of directors during 2009, as set
forth by Item 407(c)(3) of Regulation S-K.
The
section entitled “Corporate Governance” appearing in the 2009 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 2009 Proxy Statement set forth certain information with respect
to the compensation of directors and management of Itron as required by Item 402
of Regulation S-K and are incorporated herein by reference.
The
section entitled “Corporate Governance” appearing in the 2009 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 2009 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 2009
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 2009 Proxy Statement sets forth certain information
with respect to the ownership of our 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 2009 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 2009 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 Audit Fees and
Services” appearing in the 2009 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 our 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
(a)
(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 16, 2002 - File
No. 0-22418)
|
|
| 4.2 | 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) | |
|
4.3
|
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)
|
|
Exhibit
|
||
|
Number
|
Description
of Exhibits
|
|
|
4.4
|
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)
|
|
|
4.5
|
Amendment
No. 1 dated April 24, 2009 to the Credit Agreement dated April 18, 2007
among Itron, Inc. and the subsidiary guarantors, the lenders, and issuing
banks, and Wells Fargo Bank, National Association (Filed as Exhibit 4.1 to
Itron, Inc.'s Current Report on Form 8-K, filed on April 27, 2009 - File
No. 0-22418)
|
|
|
4.6
|
Amendment
No. 2 dated February 12, 2010 to the Credit Agreement dated April 18,
2007 among Itron, Inc. and the subsidiary guarantors, and the lenders. (attached hereto)
|
|
|
10.1
|
Form
of Change in Control Severance Agreement for Executive Officers. * (Filed
as Exhibit 10.7 to Itron, Inc.'s Current Report on Form 8-K, filed on
February 18, 2010 - File No. 0-22418)
|
|
|
10.2
|
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)
|
|
|
10.3
|
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)
|
|
|
10.4
|
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)
|
|
|
10.5
|
Schedule
of directors and executive officers who are parties to Indemnification
Agreements with Itron, Inc. * (attached
hereto)
|
|
|
10.6
|
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)
|
|
|
10.7
|
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)
|
|
|
10.8
|
Form
of Non-Qualified Stock Option Grant Notice and Agreement for Nonemployee
Directors under the Itron, Inc. Amended and Restated 2000 Stock Incentive
Plan. (Filed as Exhibit 10.9 to Itron, Inc.'s Annual Report on Form 10-K,
filed on February 26, 2009 - File No. 0-22418)
|
|
|
10.9
|
Form
of Restricted Stock Unit Award Notice and Agreement for U.S. Participants
for use in connection with the Company’s Long-Term Performance Plan (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, 2010 - File No. 0-22418)
|
|
|
10.10
|
Form
of Restricted Stock Unit Award Notice and Agreement for International
Participants (excluding France) 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, 2010 - File No.
0-22418)
|
|
|
10.11
|
Form
of Restricted Stock Unit Award Notice and Agreement for Participants in
France 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, 2010 - File No. 0-22418)
|
|
|
10.12
|
Form
of Restricted Stock Unit Award Notice and Agreement for all Participants
(excluding France) 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, 2010 - File No.
0-22418)
|
|
Exhibit
|
||
|
Number
|
Description
of Exhibits
|
|
|
10.13
|
Form
of Restricted Stock Unit Award Notice and Agreement for Participants in
France 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, 2010 - File No.
0-22418)
|
|
|
10.14
|
Form
of Stock Option Grant Notice and Agreement for use in connection with both
incentive and non-qualified stock options granted under 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, 2010 -
File No. 0-22418)
|
|
|
10.15
|
Executive
Deferred Compensation Plan.* (Filed as Exhibit 10.19 to Itron, Inc.'s
Annual Report on form 10-K, Filed on February 26, 2009 - File No.
0-22418)
|
|
|
10.16
|
Amended
and Restated 2002 Employee Stock Purchase Plan. (Filed as Exhibit 10.20 to
Itron's Annual Report on Form 10-K, filed on February 26, 2009 - File No.
0-22418)
|
|
|
10.17
|
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)
|
|
|
10.18
|
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)
|
|
|
10.19
|
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
|
||
|
31.1
|
||
|
31.2
|
||
|
32.1
|
||
| * | Management contract or compensatory plan or arrangement. |
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 24th day of February, 2010.
|
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 24th day of February, 2010.
|
Signature
|
Title
|
|
|
/S/ MALCOLM UNSWORTH
|
||
|
Malcolm
Unsworth
|
President
and Chief Executive Officer (Principal Executive Officer),
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
|
Chairman
of the Board
|
|
|
/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
|
|
Acquisition
|
Additions
|
||||||||||||
|
Balance at
|
adjustments(1)/
|
charged to
|
Balance at
|
||||||||||
|
beginning
|
and
other
|
costs
and
|
end of period
|
||||||||||
|
Description
|
of
period
|
adjustments
|
expenses
|
Noncurrent
|
|||||||||
|
(in
thousands)
|
|||||||||||||
|
Year
ended December 31, 2009:
|
|||||||||||||
|
Deferred
tax assets valuation allowance
|
$ | 16,219 | $ | (347 | ) | $ | 6,553 | $ | 22,425 | ||||
|
Year
ended December 31, 2008:
|
|||||||||||||
|
Deferred
tax assets valuation allowance(1)
|
$ | 13,203 | $ | 2,966 | $ | 50 | $ | 16,219 | |||||
|
(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.
|
89