UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
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Commission
file number 000-22418
ITRON,
INC.
(Exact
name of registrant as specified in its charter)
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Washington
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91-1011792
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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2111
N Molter Road, Liberty Lake, Washington 99019
(509)
924-9900
(Address
and telephone number of registrant’s principal executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
stock, no par value
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NASDAQ
Global Select Market
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Preferred
share purchase rights
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NASDAQ
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 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. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer x
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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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, 2007 (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
$2,356,243,811.
As of
February 2, 2008, there were outstanding 30,673,066 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 May 6, 2008.
Itron, Inc.
Table
of Contents
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Page
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PART
I
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1
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9
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14
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15
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15
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15
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PART
II
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AND
ISSUER PURCHASES OF EQUITY SECURITIES
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16
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18
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RESULTS
OF OPERATIONS
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19
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33
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35
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38
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39
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40
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41
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42
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FINANCIAL
DISCLOSURE
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80
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80
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81
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PART
III
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82
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82
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RELATED
STOCKHOLDER MATTERS
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82
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82
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82
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PART
IV
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83
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85
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In this Annual Report on Form 10-K, the terms “we,” “us,”
“our,” “Itron” and the “Company” refer to Itron, Inc.
Certain
Forward-Looking Statements
This
document contains forward-looking statements concerning our operations,
financial performance, revenues, earnings growth, estimated stock-based
compensation expense, pension liabilities, cost reduction programs and other
items. These statements reflect our current plans and expectations and are based
on information currently available as of the date of this Annual Report on Form
10-K. When we use the words “expect,” “intend,” “anticipate,” “believe,” “plan,”
“project,” “estimate,” “future,” “objective,” “may,” “will,” “will continue” and
similar expressions they are intended to identify forward-looking statements.
Any statements that refer to expectations, projections or other
characterizations of future events or circumstances are also forward-looking
statements. Forward-looking statements rely on a number of assumptions and
estimates. These assumptions and estimates could be inaccurate and cause our
actual results to vary materially from expected results. Risks and uncertainties
include 1) the rate and timing of customer demand for our products, 2)
rescheduling or cancellations of current customer orders and commitments,
3) changes in estimated liabilities for product warranties, 4) changes in
domestic and foreign laws and regulations, 5) our dependence on new product
development and intellectual property, 6) current and future business
combinations, 7) changes in estimates for stock-based compensation or pension
costs, 8) changes in foreign currency exchange rates, 9) foreign business risks
and 10) other factors. You should not solely rely on these forward-looking
statements as they are only valid as of the date of this Annual Report on Form
10-K. We do not have any obligation to publicly update or revise any
forward-looking statement in this document. For a more complete description of
these and other risks, see “Risk Factors” in Item 1A.
PART
I
ITEM 1: BUSINESS
Available
Information
Documents
we provide to the Securities and Exchange Commission (SEC) are available free of
charge under the Investor Information section of our website at www.itron.com as soon as
practicable after they are filed with or furnished to the SEC. In addition,
these documents are available at the SEC’s website (http://www.sec.gov) and at the SEC’s
Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling
1-800-SEC-0330.
General
We
provide a comprehensive portfolio of products and services to utilities for the
energy and water markets throughout the world. Our strong position in meter data
collection and software solutions started with our introduction of handheld
computer-based systems in 1977. Through product innovations and several
acquisitions, we have become one of the world’s leading providers of metering,
data collection and software, serving our customers for over 100
years.
The
acquisition of Actaris Metering Systems SA (Actaris) in April 2007 for
approximately $1.7 billion increased our total assets to $3.1 billion at
December 31, 2007. The acquisition of Actaris creates an opportunity to share
technology and expertise around the world as worldwide electric, gas and water
utilities look for advanced metering and communication products to better serve
their markets.
The
Actaris acquisition significantly changes many aspects of our results of
operations, financial condition and cash flows, which are described in each
applicable area within this Annual Report on Form 10-K.
Market
Overview, Products, Systems and Solutions
We have
two operating segments, Itron North America and Actaris. See Item 7:
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for specific segment results. Itron North America generates the
majority of its revenue in the United States and Canada and offers electric
meters, electric, gas and water automated meter reading (AMR) and advanced
metering infrastructure (AMI) systems, software and services. Actaris generates
the majority of its revenue in Europe, Africa, South America and Asia and offers
electric, gas and water meters, AMR systems and services. We have retained the
Actaris brand and, therefore, our branding of Itron and Actaris products follow
the operating segments. The following are our major products and
services.
Meters
We
estimate there are approximately 2.6 billion meters worldwide. In the United
States and Canada we estimate there are 150 million electric meters, 70
million gas meters and 80 million water meters. In the rest of the world we
estimate there are approximately 1.3 billion electric meters, 300 million gas
meters and 700 million water meters. We also estimate that approximately 30% of
all water points are not metered.
Meters
measure the consumption of energy and water and are critical components of a
utility’s distribution infrastructure. The basic purpose of a meter is to
accurately measure consumption, provide long-term durability and meet certain
safety needs of the utility. Changes in technology are providing increased
capabilities, reliability and accuracy through the use of electronic technology
rather than traditional gear-based technology. Electronic technology also allows
for simple and cost-effective integration of embedded AMR
functionality.
Meter
growth has traditionally been driven by new construction and the replacement of
old meters. Meters are typically replaced at specified intervals, depending on
the type of meter and the specific regulatory oversight in the respective
country. Normal meter replacements are typically not affected by factors that
influence overall utility capital spending. Therefore, due to the combined
replacement of the current installed base and the increase in meter population,
we estimate the metering market will continue to grow between 3% and 5%
annually, although the adoption of AMR and AMI systems is likely to cause
volatility and affect these growth rates. We cannot predict how, and to what
extent, the current slowdown in the U.S. housing market will impact this
historical growth rate.
We
produce electricity, gas, water and heat meters and a variety of other
associated metering products for residential, commercial and industrial
(C&I) and transmission and distribution (T&D) customers. Our meters
comply with the standards established by each standard setting regulatory body
in each of the over 130 countries where we sell our products. The primary
differences between meters used in each different country are the physical
configuration and the certification requirements of the meters.
Electricity
Meters, Products and Systems
The
world’s demand for energy continues to grow. Utilities are faced with the
challenges of rising fuel costs and the burden of increasingly stringent
environmental regulations affecting their operations and costs. These challenges
drive the need to conserve energy specifically during peak hours, defer the
building of additional generation facilities and improve customer service. In
addition to our residential, C&I and T&D electricity meters, we also
offer several meter reading choices to help meet these challenges. In North
America, electricity meters may have AMR functionality using either Itron North
America’s AMR or AMI technology, or AMR technology provided by our competitors
embedded in the meter. Actaris’ AMR and AMI solutions are being deployed in
Europe and in other parts of the world. In addition,
pre-payment electricity meters are widely used in the United Kingdom and
South Africa. Actaris is one of the largest prepayment meter suppliers in the
world, offering one-way and two-way electricity prepayment systems, using smart
key, keypad and smart card communication technologies. AMR systems in Europe and
other parts of the world utilize GPRS (general packet radio service), radio
frequency (RF) or power line carrier (PLC) communication devices depending on
the customer’s choice. (See also AMR and AMI Systems
below).
Gas
Meters, Products and Systems
Investments
in the natural gas industry are rising and gas T&D networks are expanding as
a result of growing demand. Throughout most of the world, accelerating market
deregulation trends are allowing more and more customers to choose gas suppliers
based on price. With these industry changes, there is increased need to conserve
energy and improve customer service. Actaris’ residential and industrial gas
meters include diaphragm, turbine and rotary technologies. Actaris provides a
wide selection of regulators and safety devices for most applications in natural
gas distribution, from high pressure regulators used in city gate stations to
residential regulators. Our products and systems combine modern metering,
regulation and safety devices, AMR, prepayment, energy metering, load monitoring
and operating controls.
Water
& Heat Meters, Products and Systems
Water
conservation continues to be a worldwide concern. There are many efforts
underway to stimulate more efficient use of water and heat. Water utilities are
focused on increasing the efficiency of water production and minimizing waste in
consumption. Demand for water metering and heating and cooling metering (the
measurement of energy consumed in district heating and cooling distribution
systems and in heat cost allocations) are constantly growing. Actaris supplies a
complete range of water and heat meters and associated AMR systems for
residential and C&I markets including mechanical detection (turbine and
piston) and ultrasonic technology. All water and heat meters are pre-equipped
for remote data reading needs. Benefiting from almost 25 years of AMR
experience, we provide a range of modules (wireless and wired technology),
advanced leak detection systems and a variety of software for managing the
collection and transmission of data from our AMR systems, including meter data
for billing systems and our knowledge applications.
AMR
and AMI Systems
Of the
total 2.6 billion electric, gas and water meters worldwide, we estimate about 6%
have been upgraded to AMR or AMI capability. We estimate that of the 300 million
energy and water meters in the United States and Canada, between 35% and 40% are
read with AMR or AMI systems, of which about half are read with Itron North
America technology. Throughout the rest of the world, we estimate about 2% of
the meters are read with AMR or AMI systems primarily due to infrequent meter
reads. 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,
improve operating cash flow with shorter read-to-pay cycle times and enhance
customer service in the form of increased billing accuracy and timeliness of
billing cycles, as these utilities typically read meters each month. In many
parts of the world, meters are only read annually and bills are estimated
monthly or quarterly; however, with the increased demand for energy and water,
compounded by the scarcity of resources and concerns for the environment,
regulatory bodies worldwide are starting to require utilities to increase their
reading frequency.
We
believe AMI growth will be driven primarily by limited energy supplies
particularly at utilities with a high geographic concentration of customers.
Limited supplies of energy will force these utilities to utilize their current
energy supplies more efficiently. Many utilities are working to smooth
consumption during peak hours in order to reduce the need to buy or build new
sources of power generation in order to meet peak load demand. Construction
costs, combined with environmental and regulatory issues, make the addition of
new power generation assets a difficult endeavor. AMI will allow utilities to
communicate real-time pricing and usage information to their customers and
deploy time of use pricing strategies. As a result, AMI systems will help
decrease peak loads by allowing customers to make informed and real-time choices
about their energy consumption and associated costs.
AMI
systems have substantially more features and functions than AMR systems and
include such capabilities as the ability to remotely connect and disconnect
service to the meter, the ability to perform bi-directional metering and the
ability to communicate with in-home displays, smart thermostats and appliances.
AMI systems are generally implemented after extensive review by the utility’s
standard setting regulatory body and usually involve a limited trial of the
system before full deployment. While we believe most utilities will implement
AMR or AMI systems, the timing of these investments can be affected by many
factors including the rate of regulatory changes and utility capital spending
levels.
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o
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Itron
North America AMR systems
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For over
15 years, Itron North America has offered AMR technology that enables utilities
to migrate from one product offering, such as our handheld computer product, to
a mobile or fixed network, to achieve higher forms of automation and more
frequent meter reads. These AMR systems are comprised of AMR meters or modules,
data collection hardware and software.
Our North
America AMR meters and modules encode consumption, tamper and other information
from the meter and communicate the data via RF to our handheld, mobile and
network radio-based data collection technology. We embed our AMR technology into
our electronic electricity meters. Gas and water AMR modules can be retrofitted
to existing gas or water meters or installed in or on new meters.
Data
collection hardware consists of handheld computers, mobile AMR and fixed network
AMR. We provide several models of handheld computers that are used by meter
readers to walk a route. Most handheld units we sell today are radio-equipped
(handheld AMR); however, where there is not an AMR enabled meter, the meter
reader visually reads the meters and inputs the data. Mobile AMR uses a radio
transceiver located in a vehicle that communicates with all AMR-enabled meters
within range and receives meter reading, tamper and other information from the
meters. Mobile AMR is designed for reading concentrated deployments of
AMR-enabled meters. Fixed network AMR communicates with AMR-enabled meters
through an RF network on a more frequent basis. Concentrators are installed
within a utility’s territory and use a variety of public communication platforms
including GPRS, Ethernet, PSTN (public switched telephone networks), BPL
(broadband over power line) and others to transfer data between the
concentrators and a host processor at a utility
The data
collection systems manage the collection and transmission of data and provide
meter data for billing systems, data warehouses, Internet data presentment and
our knowledge applications.
Our water
fixed network and products are designed to cost-effectively address issues that
are unique to the water industry. In addition to fixed network AMR capabilities,
we provide an advanced water leak detection system and software for pipeline
management using patented acoustic technology that analyzes vibration patterns
from the distribution system. This technology significantly improves a
utilities’ ability to proactively maintain their water infrastructure and
provides them the ability to analyze the data collected to help pinpoint
leaks.
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o
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Actaris
AMR Systems
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Actaris
provides a range of AMR communication technologies for its electricity, gas,
water and heat metering products that provide consumption, tamper, outage and
leak detection and profile analysis. This information is transmitted from
modules embedded in the Actaris meter to either handheld computers and/or fixed
networks, allowing utilities to collect the data for billing systems and analyze
the meter data for better utility management. These communication technologies
include telephone (PSTN), RF, GSM (Global System for Mobile communications),
GPRS, PLC and Ethernet devices. Actaris’ AMR electric solutions also offer
single and multi-tariff capabilities and certain load shedding
functions.
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o
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Itron
North America AMI Systems
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Itron
North America offers AMI, or smart metering, systems with our OpenWay®
architecture. OpenWay is a standards-based, open-architecture smart metering
solution that helps utilities better manage limited energy supplies and provide
pertinent information about energy usage to energy consumers. The OpenWay system
provides two-way communication for residential and commercial electricity
meters, which allows for advanced data collection, and certain command and
control functions, including remote connect and disconnect, net metering,
integrated clock for critical peak pricing (CPP), time of use and CPP displays
on register, interval data storage, alarms and upgradeable firmware. Our AMI
software can be configured to include load management, demand response and
prepayment capabilities. Each OpenWay meter is equipped with a ZigBee® based
gateway (a low-power, short distance wireless standard) that enables the utility
to communicate with its customer’s designated in-home monitoring devices,
allowing the consumer to make more informed choices about energy consumption.
ZigBee technology has the ability to gather gas and water meter reads from AMR
enabled gas and water meters. The OpenWay system can utilize a variety of public
communication platforms to transfer data, including GPRS, Ethernet, PSTN, BPL,
WiFi, WiMax and others.
Other
Products
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o
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Meter Data
Management: Itron North America provides solutions for
residential and C&I meter data management. Our meter data management
software solutions provide functions that support the process of meter
data collection by using open and flexible interfaces, data validation,
estimation and editing, complex calculations and aggregation, time-of-use
information and interactive graphics. These databases are also used for
other complex data applications.
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o
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Knowledge
Applications: Itron North America provides utilities and large
C&I end-users with software knowledge applications, data warehouses
and analytic and visualization tools that use the meter and other data
collected. Our knowledge applications include modules for C&I complex
billing; web-based usage analysis for customers with advanced metering
data and C&I customers (customer care); distribution asset analysis;
load research and management; revenue protection, including theft
detection and identification of unbilled revenue; and central market data
collection and load settlement. We also offer forecasting services and
software products that are used by utilities, market operators, government
agencies and others for predicting load growth and requirements, revenue,
new facility requirements, customer reaction to proposed programs and
rates, day-ahead energy needs and longer-term energy
needs.
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o
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Consulting and
Analysis: Itron North America provides consulting and analysis
(C&A) services in the areas of market research, load research,
renewable and distribution generation program design and evaluation,
energy efficiency program evaluation and design, energy policies, rate
design and regulatory support. The C&A client base in these areas is
comprised of major energy utilities, research organizations, government
agencies and other institutional clients throughout the United
States.
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o
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Professional Services:
Itron North America offers professional services that help our customers
implement, install, project manage and maintain their meter reading
systems. Our service professionals assist our customers in identifying and
correcting operational issues, optimize the use of our innovative
solutions products and provide training and education. For Itron North
America products, we operate a call center 24 hours a day to help
customers with problems they may encounter. In addition, we have service
and repair depots for our handheld and AMR systems in several
locations.
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Managed Services:
Actaris’ managed service business provides a solution to allow utilities
to outsource their prepayment information technology needs. These managed
services include the issuing of prepayment devices (smart keys, smart
cards, mobile phone credit cards and tokens), automated processing of
transaction details, customer account management, maintenance of
historical financial transactions, business to business call centers and
personalized mailing services. In the United Kingdom, our managed services
are fully integrated into the nationwide industry standard utility data
transfer network, which allows data to be exchanged automatically with
other utilities in a standard
format.
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Operational
Capabilities
Sales
and Distribution
We have
two sales organizations: one for Itron North America and another for Actaris.
Both sales organizations use a combination of direct and indirect sales
channels. For the largest electric, gas and water utilities, with which we have
long-established relationships, we utilize a direct sales force with technical
support teams. For smaller utilities, we typically use an indirect sales force
that consists of distributors, representative agencies, partners and meter
manufacturer representatives. We also sell electricity and water AMR modules
through original equipment manufacturer arrangements with several major meter
manufacturers. In these arrangements, manufacturers incorporate our AMR modules
into new meters and then offer these AMR-enabled meters for sale. We also
license our North America AMR technology to certain meter manufacturers who
embed our AMR technology into their meters.
No single
customer represented more than 10% of total revenues for 2007 or 2005. One
customer, Progress Energy, represented 16% of total revenues for the year ended
December 31, 2006. During 2007, 2006 and 2005, our 10 largest customers in each
of those years accounted for approximately 14%, 40% and 26%, of total revenues,
respectively.
Manufacturing
Itron
North America has two primary manufacturing facilities in the United States: one
in Minnesota to manufacture gas and water AMR modules and one in South Carolina
to manufacture electricity meters. Contract manufacturers are used for certain
handheld systems, peripheral equipment and low volume AMR products.
Actaris
has manufacturing facilities throughout the world. The Actaris Electricity
division is headquartered in Felixstowe, United Kingdom, with principal
manufacturing facilities located in France, the United Kingdom, Hungary, Brazil,
Portugal and South Africa. The Actaris Gas division is headquartered in
Karlsruhe, Germany, with principal manufacturing facilities in Germany, the
United Kingdom, France, Italy, China, South America and the United States. The
Actaris Water division is headquartered in Mâcon, France, with principal
manufacturing facilities in France, Germany, Italy, the United States and
Brazil. All three business lines have a number of smaller local assembly, test,
service and calibration facilities to address local markets.
Our
products require a wide variety of components and materials. Although we have
multiple sources of supply for most of our material requirements, certain
components and raw materials are supplied by sole-source vendors, and our
ability to perform certain contracts depends on the availability of these
materials. In most instances, multiple vendors of raw materials are screened
during a qualification process to ensure that there will be no interruption of
supply should one of them discontinue operations. Nonetheless, in some
situations, there is a risk of shortages due to reliance on a limited number of
suppliers or because of price fluctuations due to the nature of the raw
materials, such as electrical components, plastics, copper and brass, which are
used in varying degrees in our meter products. See “Risk Factors” within
Item 1A, included in this Annual Report on Form 10-K, for a further
discussion related to risks.
Product
Development
Our
current product development focus is on improvements to existing technology as
well as the development of next-generation technology for electricity, gas and
water meters, data collection, communications technologies, data warehousing and
software knowledge applications. We spent approximately $95 million, $59
million and $47 million on product development in 2007, 2006 and 2005,
respectively. Actaris’ product development from the April 18, 2007 acquisition
date through December 31, 2007 was $28 million. Itron North America’s product
development was $67 million for the year ended December 31, 2007. During 2007,
Itron North America had a strong focus on our AMI solution
development.
Marketing
Our
marketing efforts focus on brand recognition and product solutions through an
integrated approach that includes participation in industry trade shows and
web-based seminars and the preparation and distribution of various brochures,
published papers, case studies, print advertising, direct mail, newsletters and
conferences. In addition, we direct customers to our global website that
provides information on all of our products and services.
We
maintain communications with our customers through integrated and targeted
marketing campaigns, market surveys, market trend analysis and at our annual
Itron North America Users’ Conference.
Employees
At
December 31, 2007, we had approximately 8,400 people, with approximately
2,600 in Itron North America and 5,800 at Actaris. We have not experienced any
work stoppages and consider our employee relations to be good.
Competition
We
provide a broad portfolio of products, systems and services to customers in the
utility industry and compete with a large number of competitors who also offer
similar products, systems and services. We believe that our competitive
advantage is based on established customer relationships, our track record of
reliable products, integrated solutions, product cost, product innovation,
upgradeable AMR systems and our knowledge application tools. During recent
years, vendor consolidation has occurred in the industry. In many of our
markets, there are participants who may be both competitors and
partners.
Our
primary competitors for our meters and products (including AMR and AMI
technology, software and services) are the ABB Group, Badger Meter, Inc., the
Bayard Group, Cooper Industries, Ltd., Dandong Visionseal Co., Datamatic, Ltd.,
Dresser, Inc., Echelon Corporation, the Elster Group, Emerson Electric Co.,
eMeter Corporation, EnergyICT NV, ESCO Technologies Inc., General Electric
Company, Holley Group Co., Ltd., Hydrometer, Iskraemeco, d.d., Oracle
Corporation, Roper Industries, Inc., Schneider Electric and Sensus Metering
Systems Inc. These competitors may offer a broad range of meters and related
products, or may specialize in a specific technology or service.
Bookings
and Backlog of Orders
Bookings
for a reported period represent contracts and firm purchase orders received
during the specified period. 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 twelve months. Bookings and backlog exclude maintenance-related activity
and agreements that do not represent firm purchase orders. Customer agreements
that contain cancellation for convenience terms are generally not reflected in
bookings and backlog until firm purchase orders are received. Backlog is not a
complete measure of our future business due to these customer agreements, as
well as significant book-and-ship orders. Bookings and backlog can fluctuate
significantly due to the timing of large project awards. In addition, annual or
multi-year contracts are subject to rescheduling and cancellation by customers
due to the long-term nature of the contracts. Beginning total backlog, plus
bookings, minus revenues, will not equal ending total backlog due to
miscellaneous contract adjustments, foreign currency fluctuations and other
factors.
Information
on bookings and backlog is summarized as follows:
|
Year
Ended
|
Total
Bookings
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Total
Backlog
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12-Month
Backlog
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||||||||
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(in
millions)
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|||||||||||
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December
31, 2007
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$ | 1,419 | $ | 659 | $ | 501 | |||||
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December
31, 2006
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652 | 392 | 225 | ||||||||
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December
31, 2005
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655 | 324 | 188 | ||||||||
In
December 2007, Itron reached an agreement valued at approximately $480 million
with Southern California Edison (SCE) to deploy Itron’s OpenWay meter and
communications system. This is the largest contract in our history. However, the
agreement may be cancelled by SCE for convenience and does not guarantee a
specified volume of meters; therefore, we booked only $11.2 million in 2007 for
which we received a firm purchase order. As firm purchase orders are received
from SCE during the four year deployment period, we will add them to
bookings.
Other
Business Considerations
Intellectual
Property
Itron
North America owns or licenses 287 U.S. and counterpart international patents
and has on file 84 U.S. and 158 counterpart international patent
applications. Actaris owns or licenses 58 U.S. and 521 international patents and
has on file 8 U.S. and 164 international patent applications. These patents
cover a range of technologies related to metering, portable handheld computers,
water leak detection and AMR related technologies.
We also
rely on a combination of copyrights and trade secrets to protect our products
and technologies. We have registered trademarks for most of our major product
lines in the United States and many foreign countries. Itron North America’s
registered trademarks include, but are not limited to, ITRON®,
“KNOWLEDGE TO SHAPE YOUR FUTURE®”,
CENTRON®,
MV-90®,
MV-90®xi,
ENDPOINT-LINK®,
ERT®, EEM
SUITE®,
OPENWAY®,
QUANTUM® Q1000,
SENTINEL® and
SERVICE-LINK®. Itron
North America’s unregistered trademarks include, but are not limited, to
CHOICECONNECT™, ITRON
ENTERPRISE EDITION™,
LD-PRO™,
METRIXND™,
MLOG™, SREAD™ and
UNILOG™.
Actaris’ registered trademarks include, but are not limited to, ACTARIS®,
AQUADIS®,
CYBLE®,
FLOSTAR®,
WOLTEX®,
FLODIS®,
ECHO®,
GALLUS®,
RF1®,
DELTA®,
FLUXI®,
CORUS®,
ACE®,
SL7000® and
PULSADIS®.
Disputes
over the ownership, registration and enforcement of intellectual property rights
arise in the ordinary course of our business. We license some of our technology
to other companies, some of which are our competitors. Currently, we are not a
party to any material intellectual property litigation.
Regulation
and Allocation of Radio Frequencies
Certain
of our products made for the U.S. market use radio frequencies that are
regulated by the Federal Communications Commission (FCC) pursuant to the
Communications Act of 1934, as amended. In general, a radio station license
issued by the FCC is required to operate a radio transmitter. The FCC issues
these licenses for a fixed term, and the licenses must be renewed periodically.
Because of interference constraints, the FCC can generally issue only a limited
number of radio station licenses for a particular frequency band in any one
area.
Although
radio licenses generally are required for radio stations, Part 15 of the FCC’s
rules permits certain low-power radio devices (Part 15 devices) to operate on an
unlicensed basis. Part 15 devices are designed for use on frequencies used by
others. These other users may include licensed users, which have priority over
Part 15 users. Part 15 devices cannot cause harmful interference to licensed
users and must be designed to accept interference from licensed radio devices.
Our AMR modules and AMR-equipped electronic residential electricity meters are
typically Part 15 devices that transmit information back to handheld, mobile or
fixed network AMR reading devices pursuant to these rules. Many of our AMR
systems utilize the 902-928 MHz band pursuant to the Part 15 rules for these
transmissions.
The FCC
has initiated a rulemaking proceeding in which it is considering adopting
“spectrum etiquette” requirements for unlicensed Part 15 devices operating in
the 902-928 MHz band. Although the outcome of the proceeding is uncertain, we do
not expect to have to make material changes to our equipment, and adoption of
some of the proposals that have been made in the proceeding could reduce the
potential for interference with our systems from other Part 15
devices.
The FCC
has also adopted service rules governing the use of the 1427-1432 MHz band. We
use this band in connection with various devices in our network solutions. Among
other things, the rules reserve parts of the band for general telemetry,
including utility telemetry, and provide that nonexclusive licenses will be
issued in accordance with Part 90 rules and the recommendations of frequency
coordinators. Telemetry licensees must comply with power limits and out-of-band
emission requirements that are designed to avoid interference with other users
of the band. Although the FCC issues licenses on a nonexclusive basis and it is
possible that the demand for spectrum will exceed supply, we believe we will
continue to have access to sufficient spectrum in the 1429.5-1432 MHz band under
favorable conditions.
Outside
of the United States, certain of our products require the use of radio
frequencies and are also subject to regulations in those jurisdictions where we
have deployed such equipment. In some jurisdictions, radio station licensees are
generally required to operate a radio transmitter and such licenses may be for a
fixed term and must be periodically renewed. In other jurisdictions, the rules
permit certain low power devices to operate on an unlicensed basis. Our AMR
modules and AMR-equipped electronic residential electricity meters typically are
devices that transmit information back to handheld, mobile or fixed network AMR
reading devices in unlicensed bands pursuant to rules regulating such use.
Generally, we use the unlicensed Industrial, Scientific and Medical (ISM) bands
with the various devices in our network solutions. In Europe, we generally use
the 433 MHz and 868 MHz bands. In the rest of the world, we use the
2.4000-2.4835 GHz band. In either case, although the availability of unlicensed
bands or radio station licenses for a particular frequency band in jurisdictions
outside of the United States may be limited, we believe we will continue to have
access to sufficient spectrum under favorable conditions.
Environmental
Regulations
In the
ordinary course of our business we use metals, solvents and similar materials
that are stored on-site. The waste created by use of these materials is
transported off-site on a regular basis by unaffiliated waste haulers and is
processed by unaffiliated contractors or vendors. We have made a concerted
effort to reduce or eliminate the use of mercury and other hazardous materials
in our products. We believe we are in compliance with laws, rules and
regulations applicable to the storage, discharge, handling, emission,
generation, manufacture and disposal of, or exposure to, toxic or other
hazardous substances in each of those jurisdictions in which we operate. Two
Environmental Protection Agency reports issued in 1992 and 1997 identified
several solid waste management units and areas of concern at one of our South
Carolina manufacturing facilities. In addition, trichloroethylene (TCE) soil and
groundwater contamination exist at this South Carolina facility from a TCE
storage tank that was removed in 1994. Schlumberger Limited (Schlumberger) and
various related parties, from which we purchased the operations of this facility
in 2004, entered into a consent agreement with the South Carolina Department of
Health and Environmental Control regarding certain related environmental
remedial activities. Under the terms of the 2004 acquisition agreement,
Schlumberger is retaining all liability for these matters.
The
European Union has enacted the Waste Electrical and Electronic Equipment
Directive, which makes producers of certain types of electrical equipment
financially responsible for specified collection, recycling, treatment and
disposal of past and future covered products. The deadline for the individual
member states of the European Union to enact the directive in their respective
countries was August 13, 2004 (such legislation, together with the
directive is referred to as the WEEE Legislation). Producers participating in
the market were financially responsible for implementing these responsibilities
under the WEEE Legislation beginning in August 2005. Implementation in
certain of the member states was delayed until 2007. Similar legislation has
been or may be enacted in other jurisdictions, including in the United States,
Canada, Mexico, China and Japan. China has passed similar legislation, which
took effect March 1, 2007. California has drafted electronic recycling laws
similar to the WEEE legislation, but such legislation has not as yet been
enacted. The liability for such environmental costs is accrued when considered
probable and the costs can be reasonably estimated. We have determined the
liability for our responsibilities under the WEEE Legislation to be immaterial
to our operations and financial position at December 31, 2007, and we do
not currently anticipate material capital expenditures for environmental control
facilities. We are continuing to evaluate the impact of the WEEE Legislation and
similar legislation in other jurisdictions as individual countries issue their
implementation guidance.
The
European Union has also enacted the Restriction of Hazardous Substances (RoHS)
directive, which went into effect on July 1, 2006. Of
the numerous hazardous substances defined in this directive, our only
products known to be affected at this time are low volume handhelds, which
have been updated to comply with the RoHS directive. We are continuing to
evaluate the impact of RoHS legislation and similar legislation in other
jurisdictions as individual countries issue their implementation
guidance.
Incorporation
MANAGEMENT
Executive
Officers of the Registrant
Set forth
below are the names, ages and titles of our executive officers as of February
25, 2008.
|
Name
|
Age
|
Position
|
||
|
LeRoy
D. Nosbaum
|
61
|
Chairman
of the Board and Chief Executive Officer
|
||
|
Steven
M. Helmbrecht
|
45
|
Sr.
Vice President and Chief Financial Officer
|
||
|
John
W. Holleran
|
53
|
Sr.
Vice President, General Counsel and Corporate Secretary
|
||
|
Philip
C. Mezey
|
48
|
Sr.
Vice President and Chief Operating Officer, Itron North
America
|
||
|
Malcolm
Unsworth
|
58
|
Sr.
Vice President and Chief Operating Officer, Actaris
|
||
|
Jared
P. Serff
|
40
|
Vice
President, Competitive Resources
|
LeRoy Nosbaum is Chairman of
the Board and Chief Executive Officer. Mr. Nosbaum has been a director and our
CEO since 2000 and Chairman of the Board since 2002. Since joining Itron in
1996, Mr. Nosbaum has held positions as Chief Operating Officer and Vice
President with responsibilities over manufacturing, product development,
operations and marketing. Before joining Itron, Mr. Nosbaum was with
Metricom Inc., a supplier of wireless data communications networking technology.
Prior to joining Metricom, Mr. Nosbaum was with Schlumberger from 1969 to
1989 in various roles, including General Manager of Schlumberger’s Integrated
Metering Systems Division.
Steve Helmbrecht is Sr. Vice
President and Chief Financial Officer. Mr. Helmbrecht joined Itron in 2002
as Vice President and General Manager, International and was named Sr. Vice
President and Chief Financial Officer in 2005. From 2000 to 2002,
Mr. Helmbrecht was Chief Financial Officer of LineSoft Corporation
(LineSoft), which was acquired by Itron in 2002. Prior to joining LineSoft,
Mr. Helmbrecht spent seven years with SS&C Technologies, Inc., a
software company focused on portfolio management and accounting systems for
institutional investors.
John Holleran is Sr. Vice
President, General Counsel and Corporate Secretary. Mr. Holleran joined
Itron in January 2007. Prior to joining Itron, Mr. Holleran spent over 25 years
with Boise Cascade Corporation where he served as Vice President and General
Counsel for eight years prior to his promotion in 1999 to Senior Vice President,
Human Resources and General Counsel, a position he held until 2004. In 2005, he
served as Executive Vice President, Administration, and Chief Legal Officer for
Boise Cascade, LLC, the paper and forest products company resulting from the
reorganization of Boise Cascade Corporation. In 2006 he was associated with
Holleran Law Offices PLLC.
Philip Mezey is Sr. Vice
President and Itron North America’s Chief Operating Officer. Mr. Mezey
joined Itron in March 2003 as Managing Director of Software Development for
Itron’s Energy Management Solutions Group as a result of Itron’s acquisition of
Silicon Energy Corp. (Silicon). He later was promoted to Group Vice President
and Manager of Software Solutions in 2004. In 2005 he became Sr. Vice President
Software Solutions, and was promoted to his current position in 2007 following
our acquisition of Actaris. Mr. Mezey joined Silicon in 2000 as Vice
President, Software Development. Prior to joining Silicon, Mr. Mezey was a
founding member of Indus, a leading provider of integrated asset and customer
management software.
Malcolm Unsworth is Sr. Vice
President and Actaris’ Chief Operating Officer, based in Luxembourg.
Mr. Unsworth joined Itron in July 2004 as Sr. Vice President, Hardware
Solutions upon our acquisition of Schlumberger’s electricity metering business.
Mr. Unsworth was promoted to his current position in 2007 following our
acquisition of Actaris. Mr. Unsworth spent 25 years with Schlumberger, and
served most recently as President of its electricity metering business from 2000
to 2004.
Jared Serff is Vice President,
Competitive Resources. Mr. Serff joined Itron in July 2004 as part of the
Schlumberger electricity metering acquisition. Mr. Serff spent six years
with Schlumberger, the last four of which were as Director of Human Resources
with Schlumberger’s electricity metering business where he was in charge of
personnel for all locations in Canada, Mexico, France and Taiwan, in addition to
the United States.
ITEM 1A: RISK FACTORS
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 the utility
industry. Purchases of our products may be deferred as a result of many factors
including mergers and acquisitions, regulatory decisions, weather conditions,
rising interest rates, slowdowns in new residential and commercial construction,
utility specific financial circumstances and general economic downturns. 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 (those without AMR and AMI features) are
typically based on annual or bi-annual bid-based agreements, with no defined
delivery dates. Customers can place purchase orders against these contracts as
their meter stocks deplete, which can create fluctuations in our sales
volumes.
Sales
cycles for AMR and AMI projects are generally long and unpredictable due to
budgeting, purchasing and regulatory approval processes that can take up to
several years to complete. Our utility customers typically issue requests for
quotes and proposals, establish evaluation committees, review different
technical options with vendors, analyze performance and cost/benefit
justifications and perform a regulatory review, in addition to applying the
normal budget approval process within a utility. Section 1252 of the U.S. Energy
Policy Act of 2005 requires electric utilities to consider offering their
customers time-based rates. The Act also directs these utilities and state
utility commissions to study and evaluate methods for implementing demand
response, to shift consumption away from peak hours and to improve power
generation. These requirements could change the process of evaluating and
approving technology purchases, which could extend or delay sales.
The
European Union has also issued a directive stating that customers should have a
choice in their electric and gas suppliers. The directive obligates member
states to take necessary measures to achieve a competitive, secure and
environmentally sustainable market in electricity and gas. Member states must
ensure that all household customers and small enterprises enjoy the right to be
supplied with electricity and gas of a specified quality at reasonable,
comparable and transparent prices. While we believe the opening of these markets
will provide opportunities for sales of our products, the pace at which these
markets will be opened could be slowed substantially by legislative and
regulatory delays, regulatory approvals related to the deployment of new
technology, capital budgets of the utilities and purchasing decisions by our
customers.
Our
quarterly results may fluctuate substantially.
We have
experienced variability of quarterly results, including losses, and believe our
quarterly results will continue to fluctuate as a result of many factors,
including costs related to acquisitions, in-process research and development
(IPR&D), intangible amortization expenses, stock-based compensation, legal
activity, unexpected warranty liabilities, restructuring charges, size and
timing of significant customer orders, FCC or other governmental actions,
changes in accounting standards or practices, changes in existing taxation rules
or practices, the gain or loss of significant customers, timing and levels of
new product developments, shifts in product or sales channel mix, the shortage
or change in price of certain components or materials, foreign currency
fluctuations, changes in interest rates, increased competition and pricing
pressure and general economic conditions affecting enterprise spending for the
utility industry.
Our
acquisitions of and investments in third parties carry risks and may affect
earnings due to charges associated with the acquisition or could cause
disruption to the management of our business.
We have
acquired nine companies since December 31, 2002, the largest of which is
our most recent acquisition of Actaris for $1.7 billion and the acquisition of
Schlumberger’s electricity metering business for $256 million in 2004. We expect
to complete additional acquisitions and investments in the future, both within
and outside of the United States. There are no assurances, however, we will be
able to successfully identify suitable candidates or negotiate appropriate
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 we would be able to do so on 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 and our
results of operations. Impairment of an investment or goodwill and intangible
assets may also result if these risks materialize. There can be no assurances
that an acquired business will perform as expected, accomplish our strategic
objective or generate significant revenues, profits or cash flows. During prior
years, we have incurred impairments and write-offs of minority interest
investments.
Acquisitions
and investments in third parties may involve the assumption of obligations,
significant write-offs or other charges associated with the acquisition, such as
acquired IPR&D. During 2007, we expensed $36.0 million in IPR&D
expense associated with our Actaris acquisition. During the fourth quarter of
2004, we expensed $6.4 million in IPR&D expense associated with the
acquisition of Schlumberger’s electricity metering business.
We
are subject to international business uncertainties.
A
substantial portion of our revenues are derived from operations conducted
outside the United States. International sales and operations may be subject to
risks such as the imposition of government controls, political instability,
terrorist activities, restrictions on the import or export of critical
technology, currency exchange rate fluctuations, adverse tax burdens,
availability of qualified third-party financing, generally longer receivable
collection periods than in the United States, trade restrictions, changes in
tariffs, labor disruptions, difficulties in staffing and managing foreign
operations, potential insolvency of international distributors, burdens of
complying with different permitting standards and a wide variety of foreign laws
and obstacles to the repatriation of earnings and cash. Fluctuations in the
value of the U.S. dollar may impact our ability to compete in international
markets. International expansion and market acceptance depend on our ability to
modify our technology to take into account such factors as the applicable
regulatory and business environment, labor costs and other economic conditions.
In addition, the laws of certain countries do not protect our products or
technologies to the same extent as do the laws of the United States. There can
be no assurance that these factors will not have a material adverse effect on
our future international sales and, consequently, on our business, financial
condition and results of operations.
We
depend on our ability to develop new products.
Our
future success will depend, in part, on our ability to continue to design and
manufacture new competitive products and to enhance and sustain our existing
products, including technological advances, changing customer requirements,
international market acceptance and other factors in the markets in which we
sell our products. This product development will require continued investment in
order to maintain our market position. We have made, and expect to continue to
make, substantial investments in technology development. However, we may
experience unforeseen problems in the development or performance of our
technologies or products. In addition, we may not meet our product development
schedules. Oftentimes, new products require certifications or regulatory
approvals before the products can be used and we cannot be certain that our new
products will be approved in a timely manner. Finally, we may not achieve market
acceptance of our new products and services.
A
significant portion of our revenues are generated from a limited number of
customers.
Historically,
our revenues have been concentrated with a limited number of customers, which
change over time. The ten largest customers accounted for 14%, 40% and 26% of
revenues for the years ended 2007, 2006 and 2005, respectively. One customer,
Progress Energy, accounted for 16% of total Company revenues in 2006. No single
customer represented more than 10% of total Company revenues in 2007 and 2005.
We are often a party to large, multi-year contracts that are subject to
cancellation or rescheduling by our customers due to many factors, such as
extreme, unexpected weather conditions that cause our customers to redeploy
resources, convenience, regulatory issues or possible acts of terrorism.
Cancellation or postponement of one or more of these significant contracts could
have a material adverse effect on us. In addition, if a large customer contract
is not replaced upon its expiration with new business of similar magnitude, our
financial and operating results would be adversely affected.
As we
enter into agreements related to the deployment of AMI products and technology,
the potential value of these contracts could be substantially larger than
contracts we have had with our customers in the past. These deployments could
also last several years, which would be longer than prior deployment agreements
with our customers. The terms and conditions of these AMI agreements related to
testing, contractual liabilities, warranties, performance and indemnities could
be substantially different than the terms and conditions associated with our
standard products and services.
We
are facing increasing competition.
We face
competitive pressures from a variety of companies in each of the markets we
serve. Some of our present and potential future competitors have, or may have
substantially greater financial, marketing, technical or manufacturing resources
and, in some cases, have greater name recognition and experience. Some
competitors may enter markets we serve and sell products at lower prices in
order to obtain market share. Our competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements.
They may also be able to devote greater resources to the development, promotion
and sale of their products and services than we can. Some competitors have made,
and others may make, strategic acquisitions or establish cooperative
relationships among themselves or with third parties that enhance their ability
to address the needs of our prospective customers. It is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Other companies may also drive
technological innovation and develop products that are equal or superior to our
products, which could reduce our market share, 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. If we
cannot compete successfully against current or future competitors, this will
have a material adverse effect 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 in the United
States, are subject to regulation by the FCC. Licenses for radio frequencies
must be obtained and periodically renewed. Licenses granted to us or our
customers may not be renewed on acceptable terms, if at all. The FCC may adopt
changes to the rules for our licensed and unlicensed frequency bands that are
incompatible with our business. In the past, the FCC has adopted changes to the
requirements for equipment using radio spectrum, and it is possible that the FCC
or the U.S. Congress will adopt additional changes.
We have
committed, and will continue to commit, significant resources to the development
of products that use particular radio frequencies. Action by the FCC could
require modifications to our products. The inability to modify our products to
meet such requirements, the possible delays in completing such modifications and
the cost of such modifications all could have a material adverse effect on our
future business, financial condition and results of operations.
Our
radio-based products currently employ both licensed and unlicensed radio
frequencies. There must be sufficient radio spectrum allocated by the FCC for
our intended uses. As to the licensed frequencies, there is some risk that there
may be insufficient available frequencies in some markets to sustain our planned
operations. The unlicensed frequencies are available for a wide variety of uses
and may not be entitled to protection from interference by other users who
operate in accordance with FCC rules. The unlicensed frequencies are also often
the subject of proposals to the FCC requesting a change in the rules under which
such frequencies may be used. If the unlicensed frequencies become unacceptably
crowded, restrictive or subject to changed rules governing their use, our
business could be materially adversely affected.
We are
also subject to regulatory requirements in jurisdictions outside of the United
States. In those jurisdictions, licensees are generally required to operate a
radio transmitter and such licenses may be for a fixed term and must be
periodically renewed. In some jurisdictions, the rules permit certain low power
devices to operate on an unlicensed basis. Most of our AMR modules and
AMR-equipped electronic residential electricity meters are devices that transmit
information back to handheld, mobile or fixed network AMR reading devices in
unlicensed bands pursuant to rules regulating such use. To the extent we wish to
introduce into a new market products designed for use in the United States or
another country, such products may require significant modification or redesign
in order to meet frequency requirements and other regulatory specifications.
Further, in some countries, limitations on frequency availability or the cost of
making necessary modifications may preclude us from selling our products in
those countries.
We
may face liability associated with the use of products for which patent
ownership or other intellectual property rights are claimed.
We may be
subject to claims or inquiries regarding alleged unauthorized use of a third
party’s intellectual property. An adverse outcome in any intellectual property
litigation could subject us to significant liabilities to third parties, require
us to license technology or other intellectual property rights from others,
require us to comply with injunctions to cease marketing or using certain
products or brands, or require us to redesign, re-engineer, or rebrand certain
products or packaging, any of which could affect our business, financial
condition and results of operations. If we are required to seek licenses under
patents or other intellectual property rights of others, we may not be able to
acquire these licenses on acceptable terms, if at all. In addition, the cost of
responding to an intellectual property infringement claim, in terms of legal
fees, expenses and the diversion of management resources, whether or not the
claim is valid, could have a material adverse effect on our business, financial
condition and results of operations.
If our
products infringe the intellectual property rights of others, we may be required
to indemnify our customers for any damages they suffer. We generally indemnify
our customers with respect to infringement by our products of the proprietary
rights of third parties. Third parties may assert infringement claims against
our customers. These claims may require us to initiate or defend protracted and
costly litigation on behalf of our customers, regardless of the merits of these
claims. If any of these claims succeed, we may be forced to pay damages on
behalf of our customers or may be required to obtain licenses for the products
they use. If we cannot obtain all necessary licenses on commercially reasonable
terms, our customers may be forced to stop using our products.
We
may be unable to adequately protect our intellectual property.
While we
believe that our patents, trademarks and other intellectual property have
significant value, it is uncertain that this intellectual property or any
intellectual property acquired or developed by us in the future, will provide
meaningful competitive advantages. There can be no assurance that our patents or
pending applications will not be challenged, invalidated or circumvented by
competitors or that rights granted thereunder will provide meaningful
proprietary protection. Moreover, competitors may infringe our patents or
successfully avoid them through design innovation. To combat infringement or
unauthorized use, we may need to commence litigation, which can be expensive and
time-consuming. In addition, in an infringement proceeding a court may decide
that a patent or other intellectual property right of ours is not valid or is
unenforceable, or may refuse to stop the other party from using the technology
or other intellectual property right at issue on the grounds that it is
non-infringing or the legal requirements for an injunction have not been met.
Policing unauthorized use of our intellectual property is difficult and
expensive, and we cannot provide assurance that we will be able to, or have the
resources to, prevent misappropriation of our proprietary rights, particularly
in countries where the laws may not protect such rights as fully as do the laws
of the United States.
We
may face product-failure exposure that exceeds our recorded
liability.
We
provide product warranties for varying lengths of time and establish allowances
in anticipation of warranty expenses. In addition, we record contingent
liabilities for additional product-failure related costs. These warranty and
related product-failure allowances may be inadequate due to undetected product
defects, unanticipated component failures, as well as changes in various
estimates for material, labor and other costs we may incur to replace projected
product failures. As a result, we may incur additional warranty and related
expenses in the future with respect to new or established
products.
Our
key manufacturing facilities are concentrated.
In the
event of a significant interruption in production at any of our manufacturing
facilities, considerable expense, time and effort could be required to establish
alternative production lines to meet contractual obligations, which would have a
material adverse effect on our business, financial condition and results of
operation.
A
number of key personnel are critical to the success of our
business.
Our
success depends in large part on the efforts of our highly qualified technical
and management personnel in all disciplines. The loss of one or more of these
employees and the inability to attract and retain qualified replacements could
have a material adverse effect on our business.
We
depend on certain key vendors.
Certain
of our products, subassemblies and system components are procured from limited
sources. Our reliance on such limited sources involves certain risks, including
the possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and costs. Any adverse change in the supply
of, or price for, these components could adversely affect our business,
financial condition and results of operations. In addition, we depend on a small
number of contract manufacturing vendors for a large portion of our low-volume
manufacturing business and all of our repair services for our domestic handheld
meter reading units. If any of these vendors should become unable to perform
their responsibilities, our operations could be materially
disrupted.
We
are subject to regulatory compliance.
We are
subject to various governmental regulations in all of the jurisdictions in which
we conduct business. Failure to comply with current or future regulations could
result in the imposition of substantial fines, suspension of production,
alteration of our production processes, cessation of operations or other
actions, which could materially and adversely affect our business, financial
condition and results of operations.
Changes
in environmental regulations, violations of the regulations or future
environmental liabilities could cause us to incur significant costs and
adversely affect our operations.
Our
business and our facilities are subject to a number of laws, regulations and
ordinances governing, among other things, the storage, discharge, handling,
emission, generation, manufacture, disposal, remediation of, or exposure to
toxic or other hazardous substances and certain waste products. Many of these
environmental laws and regulations subject current or previous owners or
operators of land to liability for the costs of investigation, removal or
remediation of hazardous materials. In addition, these laws and regulations
typically impose liability regardless of whether the owner or operator knew of,
or was responsible for, the presence of any hazardous materials and regardless
of whether the actions that led to the presence were conducted in compliance
with the law. In the ordinary course of our business, we use metals, solvents
and similar materials, which are stored on-site. The waste created by the use of
these materials is transported off-site on a regular basis by unaffiliated waste
haulers. Many environmental laws and regulations require generators of waste to
take remedial actions at, or in relation to, the off-site disposal location even
if the disposal was conducted in compliance with the law. The requirements of
these laws and regulations are complex, change frequently and could become more
stringent in the future. Failure to comply with current or future environmental
regulations could result in the imposition of substantial fines, suspension of
production, alteration of our production processes, cessation of operations or
other actions, which could materially and adversely affect our business,
financial condition and results of operations. There can be no assurance that a
claim, investigation or liability will not arise with respect to these
activities, or that the cost of complying with governmental regulations in the
future, will not have a material adverse effect on us.
We may in
the future be responsible for investigating and remediating contamination at the
sites we own or lease. With respect to one of our South Carolina facilities,
certain environmental remedial activities are required pursuant to a consent
agreement between Schlumberger (and various related parties), from which we
purchased the operations of this facility in 2004, and the South Carolina
Department of Health and Environmental Control (SCDHEC). Prior remedial
activities also were undertaken at this location under the guidance of the
United States Environmental Protection Agency. The consent agreement with the
SCDHEC requires Schlumberger to investigate and remediate groundwater and
related soil and surface water contamination and releases of any hazardous waste
or hazardous constituents that present an actual or potential threat to human
health and the environment. Under the terms of our 2004 acquisition agreement,
Schlumberger agreed to complete all remedial obligations associated with the
consent agreement, and agreed to indemnify us for all costs incurred as a result
of any releases and generation or transportation of hazardous materials prior to
the acquisition. Although we expect Schlumberger to comply with the terms of the
consent agreement and the acquisition, there is a risk that such remediation
will interfere with our future use of this South Carolina property, or if
Schlumberger did not comply, the remediation responsibility would transfer to
us.
We
potentially face costs and liabilities in connection with product take-back
legislation. The European Union has enacted the Waste Electrical and Electronic
Equipment Directive (WEEE), which makes producers of certain types of electrical
equipment financially responsible for specified collection, recycling, treatment
and disposal of past and future covered products. The deadline for the
individual member states of the European Union to enact the directive in their
respective countries was August 13, 2004. Producers participating in the
market became financially responsible for implementing their responsibilities
under the WEEE Legislation beginning in August 2005. Implementation in
certain European Union member states was delayed into 2007. Similar legislation
has been or may be enacted in other jurisdictions, including the United States,
Canada, Mexico, China and Japan. China has passed similar legislation, which
took effect March 1, 2007. California has drafted electronic recycling laws
similar to the WEEE legislation, but such legislation has not as yet been
enacted. Our potential liability resulting from the WEEE and similar
legislations could become substantial.
Our
credit facility (credit facility), and the indentures related to our senior
subordinated notes and our convertible senior subordinated notes, limit our
ability and the ability of most of our subsidiaries to take certain
actions.
Our
credit facility, senior subordinated notes (7.75% senior subordinated notes due
2012) and convertible notes (2.5% convertible senior subordinated notes due
2026) place restrictions on our ability and the ability of most of our
subsidiaries to, among other things:
|
·
|
incur
more debt;
|
|
·
|
pay
dividends and make distributions;
|
|
·
|
make
certain investments;
|
|
·
|
incur
capital expenditures above a set
limit;
|
|
·
|
redeem
or repurchase capital stock;
|
|
·
|
create
liens;
|
|
·
|
enter
into transactions with affiliates;
|
|
·
|
enter
into sale lease-back transactions;
|
|
·
|
merge
or consolidate; and
|
|
·
|
transfer
or sell assets.
|
Our
credit facility contains other customary covenants, including the requirement to
meet specified financial ratios. Our ability to borrow under our credit facility
will depend on the satisfaction of these covenants. Events beyond our control
can affect our ability to meet those covenants. Our credit facility is sensitive
to interest rate and foreign currency exchange rate risks that could impact our
financial position and results of operations.
Our
failure to comply with obligations under our borrowing arrangements may result
in declaration of an event of default. An event of default, if not cured or
waived, may permit acceleration of such indebtedness. In addition, indebtedness
under other instruments (such as our senior subordinated notes) that contain
cross-default or cross-acceleration provisions also may be accelerated and
become due and payable. We cannot be certain we will be able to remedy any such
defaults. If our indebtedness is accelerated, we cannot be certain that we will
have sufficient funds available to pay the accelerated indebtedness or that we
will have the ability to borrow sufficient funds to replace the accelerated
indebtedness on terms favorable to us or at all. In addition, in the case of an
event of default under our secured indebtedness such as our credit facility, the
lenders may be permitted to foreclose on our assets securing that
indebtedness.
Our
ability to service our indebtedness is dependent on our ability to generate
cash, which is influenced by many factors beyond our control.
Our
ability to make payments on or refinance our indebtedness, fund planned capital
expenditures and continue research and development will depend on our ability to
generate cash in the future. This is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. 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.
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 in light of acquisitions 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. Inferior 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.
The
accounting method for convertible debt securities with net share settlement
features, like our convertible notes, may be subject to change.
In August
2006, we issued $345 million of 2.5% convertible senior subordinated notes
(convertible notes) with a net share settlement feature. Our convertible notes
are not considered conventional convertible debt as defined in Emerging Issues
Task Force (EITF) 05-02, The
Meaning of Conventional Convertible Debt instruments in Issue 00-19, as
the number of shares, or cash, to be received by the holders was not fixed at
the inception of the obligation. For the purpose of calculating diluted earnings
per share, a convertible debt security providing for net share settlement of the
conversion value and meeting specified requirements under EITF Issue No. 00-19,
Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock (Net Share Convertibles), interest expense is
accounted for in the same manner as non-convertible debt, with the stated coupon
constituting interest expense and any shares issuable upon conversion of the
security being accounted for under the treasury stock method. The effect of the
treasury stock method is that the shares potentially issuable upon conversion of
the notes are not included in the calculation of our earnings per share except
to the extent that the conversion value of the notes exceeds their principal
amount, in which case the number of shares of our common stock necessary to
settle the conversion are treated as having been issued for earnings per share
purposes.
A
proposed Financial Accounting Standards Board (FASB) Staff Position (FSP)
addressing convertible instruments that may be settled in cash upon conversion
was issued on August 31, 2007 for a 45-day comment period that ended October 15,
2007. The FASB is expected to begin its redeliberations of the guidance in that
proposed FSP in February 2008. The proposed FSP requires, among other things,
the issuer to separately account for the liability and equity components of the
instrument in a manner that reflects the issuer’s non-convertible debt borrowing
rate. We cannot predict the outcome of the FASB deliberations or any other
changes in Generally Accepted Accounting Principles (GAAP) that may be made
affecting accounting for convertible debt securities. Any change in the
accounting method for convertible debt securities could have an adverse impact
on our past or future financial results. In addition, these impacts could
adversely affect the trading price of our common stock.
ITEM 1B: UNRESOLVED STAFF
COMMENTS
None.
ITEM 2: PROPERTIES
Our Itron
North America operating segment operations are located primarily in North
America. Our Actaris operating segment operations are located in Europe and
throughout the rest of the world.
The
following table lists the number of factories and sales and administration
offices by region.
|
Manufacturing,
Assembly,
Service
and
Distribution
|
Administration,
Sales
and
Other
|
|||||||
|
Owned
|
Leased
|
Owned
|
Leased
|
|||||
|
North
America
|
4
|
9
|
1
|
24
|
||||
|
Europe
|
15
|
4
|
-
|
23
|
||||
|
Asia/Pacific
|
2
|
4
|
-
|
25
|
||||
|
Other
(rest of world)
|
4
|
3
|
-
|
15
|
||||
|
Total
|
25
|
20
|
1
|
87
|
||||
Our
factory locations consist of manufacturing, assembly, service and distribution
facilities. Our sales and administration offices may also include various
product development operations. Our headquarters facility is located in Liberty
Lake, Washington. Our principal properties are owned and in good condition and
we believe our current facilities will be sufficient to support our operations
for the foreseeable future.
ITEM 3: LEGAL PROCEEDINGS
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with Statement of Financial Accounting Standards (SFAS) 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded when we determine that a loss is probable and the amount can be
reasonably estimated. Additionally, we disclose contingencies for which a
material loss is reasonably possible, but not probable. Legal contingencies at
December 31, 2007 were not material to our financial condition or results
of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. PT Berca claims that it had preemptive rights
in the joint venture and has sought to nullify the transaction in 2001 whereby
Schlumberger transferred its ownership interest in PT Mecoindo to an Actaris
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs, or approximately $14.1
million, in damages against the defendants and have invalidated the 2001
transfer of the Mecoindo interest to a subsidiary of Actaris. All of the parties
have appealed the matter and it is currently pending before the Indonesian
Supreme Court. We believe the claims are without merit and no liability has been
recorded. However, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may occur as a result of this
claim.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No
matters were submitted to a vote of shareholders of Itron, Inc. during the
fourth quarter of 2007.
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 2007 and 2006 as reported by the NASDAQ Global Select
Market.
|
2007
|
2006
|
||||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||||
|
First
Quarter
|
$ | 68.91 | $ | 51.15 | $ | 62.75 | $ | 39.44 | |||||||
|
Second
Quarter
|
$ | 78.72 | $ | 64.57 | $ | 73.72 | $ | 52.58 | |||||||
|
Third
Quarter
|
$ | 96.08 | $ | 73.55 | $ | 60.46 | $ | 44.76 | |||||||
|
Fourth
Quarter
|
$ | 112.92 | $ | 72.78 | $ | 57.50 | $ | 46.87 | |||||||
Performance
Graph
The
following graph compares the five-year cumulative total return to shareholders
on our common stock with the five-year cumulative total return of NASDAQ (U.S.
Companies) Index, our peer group of companies used for the year ended December
31, 2007 and our prior peer group of companies used for the year ended December
31, 2006.
The above
presentation assumes $100 invested on December 31, 2002 in the common stock
of Itron, Inc., the NASDAQ (U.S. Companies) Index and the peer group, with all
dividends reinvested. With respect to companies in the peer group, the returns
of each such corporation have been weighted to reflect relative stock market
capitalization at the beginning of each period plotted. The stock prices shown
above for our common stock are historical and not necessarily indicative of
future price performance.
As a
result of the acquisition of Actaris on April 18, 2007, we reassessed our peer
group to identify global companies that were either direct competitors or had
similar industry and business operating characteristics. Our new 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. Our previous peer group
included the following publicly traded companies: Analogic Corporation, Badger
Meter, Inc., EMS Technologies, Inc., ESCO Technologies Inc., Roper Industries,
Inc., Symbol Technologies, Inc. and Trimble Navigation Limited.
Holders
At
January 31, 2008 there were 324 holders of record of our common
stock.
Dividends
Since the
inception of the Company, we have not declared or paid cash dividends. In
addition, our credit facility dated April 18, 2007 and our senior
subordinated notes due 2012 prohibit the declaration or payment of a cash
dividend as long as these facilities are in place. Upon repayment of our
borrowings, we intend to retain future earnings for the development of our
business and do not anticipate paying cash dividends in the foreseeable
future.
Unregistered
Equity Security Sales
None.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL
DATA
The
selected consolidated financial data below is derived from our consolidated
financial statements, which have been audited by an independent registered
public accounting firm. 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,
|
||||||||||||||||||||
|
2007 (1)
|
2006
|
2005
|
2004 (2)
|
2003
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statements
of Operations Data
|
||||||||||||||||||||
|
Revenues
|
$ | 1,464,048 | $ | 644,042 | $ | 552,690 | $ | 399,194 | $ | 316,965 | ||||||||||
|
Cost
of revenues
|
976,761 | 376,600 | 319,069 | 228,525 | 173,411 | |||||||||||||||
|
Gross
profit
|
487,287 | 267,442 | 233,621 | 170,669 | 143,554 | |||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Sales
and marketing
|
125,842 | 63,587 | 56,642 | 45,279 | 40,985 | |||||||||||||||
|
Product
development
|
94,926 | 58,774 | 47,077 | 44,379 | 41,508 | |||||||||||||||
|
General
and administrative
|
100,071 | 52,213 | 44,428 | 35,490 | 26,641 | |||||||||||||||
|
Amortization
of intangible assets
|
84,000 | 31,125 | 38,846 | 27,901 | 9,618 | |||||||||||||||
|
In-process
research and development
|
35,975 | - | - | 6,400 | 900 | |||||||||||||||
|
Restructurings
|
- | - | 390 | 7,258 | 2,208 | |||||||||||||||
|
Total
operating expenses
|
440,814 | 205,699 | 187,383 | 166,707 | 121,860 | |||||||||||||||
|
Operating
income
|
46,473 | 61,743 | 46,238 | 3,962 | 21,694 | |||||||||||||||
|
Other
income (expense)
|
||||||||||||||||||||
|
Interest
income
|
10,477 | 9,497 | 302 | 166 | 159 | |||||||||||||||
|
Interest
expense
|
(89,965 | ) | (17,785 | ) | (18,944 | ) | (13,145 | ) | (2,638 | ) | ||||||||||
|
Other
income (expense), net
|
435 | (1,220 | ) | (68 | ) | (389 | ) | (1,316 | ) | |||||||||||
|
Total
other income (expense)
|
(79,053 | ) | (9,508 | ) | (18,710 | ) | (13,368 | ) | (3,795 | ) | ||||||||||
|
Income
(loss) before income taxes
|
(32,580 | ) | 52,235 | 27,528 | (9,406 | ) | 17,899 | |||||||||||||
|
Income
tax (provision) benefit
|
16,436 | (18,476 | ) | 5,533 | 4,149 | (7,421 | ) | |||||||||||||
|
Net
income (loss)
|
$ | (16,144 | ) | $ | 33,759 | $ | 33,061 | $ | (5,257 | ) | $ | 10,478 | ||||||||
|
Earnings
(loss) per share
|
||||||||||||||||||||
|
Basic
|
$ | (0.55 | ) | $ | 1.33 | $ | 1.41 | $ | (0.25 | ) | $ | 0.51 | ||||||||
|
Diluted
|
$ | (0.55 | ) | $ | 1.28 | $ | 1.33 | $ | (0.25 | ) | $ | 0.48 | ||||||||
|
Weighted
average number of shares outstanding
|
||||||||||||||||||||
|
Basic
|
29,584 | 25,414 | 23,394 | 20,922 | 20,413 | |||||||||||||||
|
Diluted
|
29,584 | 26,283 | 24,777 | 20,922 | 21,740 | |||||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Working capital (deficit)
(3)
|
$ | 218,861 | $ | 492,861 | $ | 116,079 | $ | 58,123 | $ | (1,846 | ) | |||||||||
|
Total
assets
|
3,100,549 | 988,522 | 598,884 | 557,151 | 303,489 | |||||||||||||||
|
Total
debt
|
1,590,541 | 469,324 | 166,929 | 278,235 | 52,269 | |||||||||||||||
|
Shareholders'
equity
|
758,802 | 390,982 | 317,534 | 184,430 | 177,244 | |||||||||||||||
|
(1)
|
On
April 18, 2007, we completed the acquisition of Actaris Metering Systems
SA (Actaris). Refer to Item 8: "Financial Statements and Supplementary
Data, Note 4: Business Combinations" for a discussion of the effects of
the acquisition. The Consolidated Statement of Operations for the year ended
December 31, 2007 includes the operating activities of the Actaris
acquisition from April 18, 2007 through December 31,
2007.
|
|
(2)
|
On
July 1, 2004, we completed the acquisition of Schlumberger's electricity
metering business. The Consolidated Statement of Operations for the year
ended December 31, 2004 includes the operating activities of this
acquisition from July 1, 2004 through December 31,
2004.
|
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with
Item 8: “Financial Statements and Supplementary Data.”
Results
of Operations
We derive
the majority of our revenues from sales of products and services to utilities.
Revenues include hardware, software, post-sale maintenance and professional
services. Cost of revenues includes materials, direct labor, warranty expense,
other manufacturing spending, distribution and documentation costs for software
applications and labor and operating costs for professional services.
Highlights
On April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris)
for €800 million (approximately $1.1 billion) plus the retirement of
approximately $642.9 million of debt. The acquisition was financed with a
$1.2 billion credit facility (credit facility), $225.2 million in net
proceeds from the sale of our common stock and cash on hand. The Actaris
acquisition includes all of Actaris’ electricity, gas and water meter
manufacturing and sales operations, located throughout the world. The
acquisition of Actaris creates an opportunity to share technology and expertise
around the world as worldwide electric, gas and water utilities look for
advanced metering and communication products to better serve their markets. The
operating results of the Actaris acquisition are included in our consolidated
financial statements commencing on the date of acquisition. The acquisition of
Actaris significantly changes many aspects of our results of operations,
financial condition and cash flows, which are described in each applicable area
within the discussion that follows.
Total
Company Revenues, Gross Profit and Margin and Unit Shipments
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2007
|
%
Change
|
2006
|
%
Change
|
2005
|
||||||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||
|
Revenues
|
$ | 1,464.0 | 127 | % | $ | 644.0 | 17 | % | $ | 552.7 | ||||||||||
|
Gross
Profit
|
$ | 487.3 | 82 | % | $ | 267.4 | 14 | % | $ | 233.6 | ||||||||||
|
Gross
Margin
|
33 | % | 42 | % | 42 | % | ||||||||||||||
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(in
millions)
|
|||||||||||
|
Revenues
by region
|
|||||||||||
|
Europe
|
$ | 623.6 | $ | 4.0 | $ | 5.6 | |||||
|
United
States and Canada
|
596.6 | 602.9 | 513.4 | ||||||||
|
Other
|
243.8 | 37.1 | 33.7 | ||||||||
|
Total
revenues
|
$ | 1,464.0 | $ | 644.0 | $ | 552.7 | |||||
Revenues
Revenues
increased $820.0 million in 2007, compared with 2006. Actaris contributed $833.7
million from the date of acquisition to December 31, 2007, which is the primary
reason for the increase in total revenue as well as the increase in revenue in
Europe and throughout the rest of the world. The decline in revenue in the
United States and Canada from 2006 to 2007 was due to the completion of a large
contract with Progress Energy. Revenues increased $91.3 million in 2006
compared with 2005, as a result of increased sales of electricity
meters.
No single
customer represented more than 10% of total revenues for 2007 or 2005. One
customer, Progress Energy, represented 16% of total revenues for the year ended
December 31, 2006. The 10 largest customers accounted for approximately 14%, 40%
and 26% in each of the years ending 2007, 2006 and 2005,
respectively.
Gross
Margins
Gross
margin was 33% in 2007, compared with 42% in both 2006 and 2005. Gross margin
for Actaris’ products and services is lower than Itron North America’s as a
result of Actaris’ product mix of higher meter only sales as compared with Itron
North America’s systems focused offerings. Business combination accounting rules
require the valuation of inventory on hand at the acquisition date to equal the
sales price, less costs to complete and a reasonable profit allowance for
selling effort. Accordingly, the historical cost of inventory acquired as part
of the Actaris acquisition was increased by $16.0 million, which lowered the
2007 total company gross margin by one percentage point.
Unit
Shipments
Meters
can be sold with and without automated meter reading (AMR). In addition, AMR can
be sold separately from the meter. Depending on customers’ preferences, we also
incorporate other vendors’ AMR technology in our meters. Meter and AMR shipments
are as follows:
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(in
thousands)
|
|||||||||||
|
Total
meters (with and without AMR)
|
|||||||||||
|
Electricity
|
9,450 | 6,625 | 4,675 | ||||||||
|
Gas
|
2,550 | - | - | ||||||||
|
Water
|
5,575 | - | - | ||||||||
|
Total
meters
|
17,575 | 6,625 | 4,675 | ||||||||
|
AMR
units (Itron and Actaris)
|
|||||||||||
|
Meters
with AMR
|
3,600 | 4,000 | 2,250 | ||||||||
|
AMR
modules
|
4,675 | 4,625 | 5,100 | ||||||||
|
Total
AMR units
|
8,275 | 8,625 | 7,350 | ||||||||
|
Meters
with other vendors' AMR
|
925 | 925 | 675 | ||||||||
Segment
Revenues, Gross Profit, Gross Margin and Operating Income (Loss) and Operating
Margin
We
changed our management structure with the acquisition of Actaris on April 18,
2007 and, as a result, now have two operating segments. The Actaris operating
segment consists of our Actaris operations, which are primarily located in
Europe and throughout the rest of the world outside of North America. The
remainder of our operations, primarily located in the United States and Canada,
have been combined into a single segment called Itron North America. The
operating segment information as set forth below is based on this new segment
reporting structure. In accordance with Statement of Financial Accounting
Standards (SFAS) 131, Disclosures about Segments of an
Enterprise and Related Information, historical segment information has
been restated from the segment information previously provided to conform to the
segment reporting structure after the April 2007 Actaris
acquisition.
We have
three measures of segment performance: revenue, gross profit (margin) and
operating income (margin). There were no intersegment revenues. Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Assets and liabilities are not used in
our measurement of segment performance and, therefore, are not allocated to our
segments. Substantially all depreciation expense is allocated to our
segments.
Segment
Products
|
Itron
North America
|
Electronic
electricity meters with and without AMR; gas and water AMR modules;
handheld, mobile and network AMR data collection technologies; advanced
metering infrastructure (AMI) technologies; software, installation,
implementation, maintenance support and other services.
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad and
smart card; two-way gas prepayment systems using smart card; AMR data
collection technologies; installation, implementation, maintenance support
and other services.
|
The
following tables and discussion highlight significant changes in trends or
components of each segment.
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
%
Change
|
2006
|
%
Change
|
2005
|
||||||||||||||||||||
|
(in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||||||
|
Segment
Revenues
|
||||||||||||||||||||||||
|
Itron
North America
|
$ | 630.3 | (2 | %) | $ | 644.0 | 17 | % | $ | 552.7 | ||||||||||||||
|
Actaris
|
833.7 | - | - | - | - | |||||||||||||||||||
|
Total
revenues
|
$ | 1,464.0 | 127 | % | $ | 644.0 | 17 | % | $ | 552.7 | ||||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
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
|
$ | 256.8 | 41 | % | $ | 267.4 | 42 | % | $ | 233.6 | 42 | % | ||||||||||||
|
Actaris
|
230.5 | 28 | % | - | - | - | - | |||||||||||||||||
|
Total
gross profit and margin
|
$ | 487.3 | 33 | % | $ | 267.4 | 42 | % | $ | 233.6 | 42 | % | ||||||||||||
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Operating
Income
(Loss)
|
Operating
Margin
|
Operating
Income
(Loss)
|
Operating
Margin
|
Operating
Income
(Loss)
|
Operating
Margin
|
|||||||||||||||||||
|
Segment
Operating Income (Loss) (in
millions)
|
(in
millions)
|
(in
millions)
|
||||||||||||||||||||||
|
and
Operating Margin
|
|
|
|
|||||||||||||||||||||
|
Itron
North America
|
$ | 74.6 | 12 | % | $ | 89.0 | 14 | % | $ | 69.9 | 13 | % | ||||||||||||
|
Actaris
|
3.9 | 0 | % | - | - | |||||||||||||||||||
|
Corporate
unallocated
|
(32.0 | ) | (27.3 | ) | (23.7 | ) | ||||||||||||||||||
|
Total
Company
|
$ | 46.5 | 3 | % | $ | 61.7 | 10 | % | $ | 46.2 | 8 | % | ||||||||||||
Itron North America: Revenues
decreased $13.7 million, or 2%, in 2007, compared with 2006. Shipments of
electricity meters decreased 23% in 2007, compared with 2006. During 2006, we
shipped over 2.2 million meters under the Progress Energy contract. This
accelerated delivery schedule, which was substantially complete at the end of
2006, increased our historical electricity meter production levels, resulting in
increased revenues and higher overhead absorption. Approximately 45% of our
meters sold in 2007 were equipped with our AMR technology, compared with 60% in
2006. Gross margin decreased one percentage point in 2007, compared with 2006,
as a result of product mix and lower overhead absorption.
Revenues
increased $91.3 million, or 17%, in 2006, compared with 2005, due to a 42%
increase in meter shipments. The growth in meter shipments was primarily related
to shipments of residential meters with AMR under a contract with Progress
Energy. Approximately 60% of our meters sold in 2006 were equipped with our AMR
technology, compared with 48% in 2005.
No single
customer represented more than 10% of Itron North America operating segment
revenues in 2007 and 2005. One customer, Progress Energy, accounted for 16% of
the Itron North America operating segment revenues in 2006.
Itron
North America operating expenses as a percentage of revenues were 29% in 2007,
compared with 28% and 30% in 2006 and 2005, respectively. Research and
development costs have increased as a percentage of revenue from 9% in 2006 and
2005 to approximately 11% in 2007 as a result of the development of our AMI
technologies. This increase was partially offset by a decline in intangible
asset amortization and lower bonus and profit sharing expenses.
Actaris: Actaris was acquired
on April 18, 2007. Revenues were $833.7 million for the period from acquisition
to December 31, 2007 with 40%, 32% and 28% from electricity, gas and water
meter products and services, respectively. Gross margin was 28% from the date of
acquisition to December 31, 2007. Business combination accounting rules require
the valuation of 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 was increased by
$16.0 million, which lowered gross margins by two percentage points from the
date of acquisition to December 31, 2007. The acquired inventory was sold in the
first quarter subsequent to the acquisition.
No single
customer represented more than 10% of the Actaris operating segment revenues for
the period from April 18, 2007 to December 31, 2007.
Operating
expenses for Actaris were $226.6 million for the period from acquisition to
December 31, 2007 of which $36.0 million represented in-process
research and development (IPR&D) related to the acquisition. Operating
expenses as a percentage of revenues were 27% from the date of acquisition to
December 31, 2007. Actaris product development and general and
administrative expenses may increase as we expand our product offering and
increase expenses for internal controls over financial reporting.
Corporate
unallocated: Operating
expenses not directly associated with an operating segment are classified as
“Corporate unallocated.” These expenses, as a percentage of total Company
revenues, were 2% in 2007, compared with 4% in 2006 and
2005.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues.
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
%
of Revenue
|
2006
|
%
of Revenue
|
2005
|
%
of Revenue
|
|||||||||||||||||||
|
(in millions)
|
(in millions)
|
(in millions)
|
||||||||||||||||||||||
|
Sales
and marketing
|
$ | 125.8 | 9 | % | $ | 63.6 | 10 | % | $ | 56.6 | 10 | % | ||||||||||||
|
Product
development
|
94.9 | 6 | % | 58.8 | 9 | % | 47.1 | 9 | % | |||||||||||||||
|
General
and administrative
|
100.1 | 7 | % | 52.2 | 8 | % | 44.8 | 8 | % | |||||||||||||||
|
Amortization
of intangible assets
|
84.0 | 6 | % | 31.1 | 5 | % | 38.9 | 7 | % | |||||||||||||||
|
In-process
research and development
|
36.0 | 2 | % | - | - | - | - | |||||||||||||||||
|
Total
operating expenses
|
$ | 440.8 | 30 | % | $ | 205.7 | 32 | % | $ | 187.4 | 34 | % | ||||||||||||
Operating
expenses for 2007 contain Actaris’ operating expenses from April 18, 2007.
Itron North America’s product development expenses have increased as a
percentage of revenue from 9% in 2006 to approximately 11% in 2007 as a result
of the development of our AMI technologies. Overall, product development
expenses declined as a percent of revenues from 9% to approximately 6% due to
Actaris’ lower product development expenses in 2007. Actaris product development
and general and administrative expenses may increase as we expand our product
offering and increase expenses for internal controls over financial reporting.
The increase in the amortization of intangible assets was the result of the
acquisition of Actaris.
For 2006,
total operating expenses included approximately $8.3 million associated
with our January 1, 2006 adoption of SFAS 123(R), Share-Based Payment, which
requires expensing of stock-based compensation commencing in the year of
adoption. Product development increased $11.7 million in 2006 compared with
2005. The 25% increase in product development in 2006 was primarily due to the
development of our AMI solution. The fluctuation in the amortization expense of
intangible assets is the result of the timing of our acquisitions and our
amortization methodology using the estimated discounted cash flows, which
typically results in higher amortization at the beginning of the asset’s life.
While total operating expenses have increased each year, they have decreased as
a percentage of revenue.
In-Process
Research and Development Expenses
Our
acquisition of Actaris resulted in $36.0 million of IPR&D expense,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended to
make key enhancements and improve functionality of our residential and
commercial and industrial meters. We value IPR&D using the income approach,
which uses the present value of the projected cash flows that are expected to be
generated over the next one to six years. The risk adjusted discount rate was 12
percent, which was based on an industry composite of weighted average cost of
capital, with certain premiums for equity risk and size, and the uncertainty
associated with the completion of the development effort and subsequent
commercialization. We estimate these research and development projects to be
approximately 70% complete at December 31, 2007, when compared against the
expected costs. We estimate the cost to complete these projects will be
approximately $7 million during 2008, which we will record as research and
development expense as the costs are incurred.
Our
future success depends, in part, on our ability to continue to design and
manufacture new competitive products and to enhance and sustain our existing
products. However, we may experience unforeseen problems in the development or
performance of our technologies or products, we may not meet our product
development schedules or we may not achieve market acceptance of our new
products or solutions.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Interest
income
|
$ | 10,477 | $ | 9,497 | $ | 302 | ||||||
|
Interest
expense
|
(76,443 | ) | (13,205 | ) | (13,807 | ) | ||||||
|
Amortization
of debt placement fees
|
(13,522 | ) | (4,580 | ) | (5,137 | ) | ||||||
|
Other
income (expense), net
|
435 | (1,220 | ) | (68 | ) | |||||||
|
Total
other income (expense)
|
$ | (79,053 | ) | $ | (9,508 | ) | $ | (18,710 | ) | |||
The
increase in interest income for 2007 and 2006, compared with 2005, was the
result of our higher cash and cash equivalent balances and short-term
investments. During August 2006, we issued $345 million 2.50% convertible senior
subordinated notes (convertible notes) and on March 1, 2007 we issued and sold
4.1 million shares of common stock, resulting in net proceeds of $225.2
million. Our average cash balances were $168.2 million in 2007, compared with
$135.2 million and $16.2 million in 2006 and 2005,
respectively.
The
increase in interest expense in 2007, compared with 2006 and 2005, is primarily
the result of the new $1.2 billion credit facility used to finance the Actaris
acquisition. Interest expense also increased in 2007 as a result of our
$345 million 2.50% convertible notes issued in August 2006. Interest
expense for 2006 was comparable with interest expense incurred in 2005. Average
outstanding borrowings were $1.3 billion in 2007, compared with
$273.7 million and $200.4 million in 2006 and 2005, respectively. The
fluctuation in borrowings in 2006 resulted from the issuance of
$345 million in convertible notes in the third quarter of 2006, offset by
our repayment of $42.7 million in previous borrowings earlier in the year.
In addition, we capitalized interest expense of approximately $900,000 in 2006
related to qualified expenditures for improvements to our new corporate
headquarters facility, which was substantially complete at September 30, 2006.
The interest expense in 2005 was related to the debt we issued in May and July
of 2004 to fund the acquisition of Schlumberger’s electricity metering business.
This debt consisted of $125 million in senior subordinated notes
(subordinated notes) and a $185 million senior secured term loan, which was
repaid in 2006.
The
increase in amortization of debt placement fees in 2007 is the result of the new
borrowings used to fund the Actaris acquisition. In addition, our debt fees for
the convertible notes were to be amortized through the date of the earliest put
or conversion option, which occurred at September 30, 2007; therefore we
expensed approximately $6.6 million of the remaining prepaid debt fees
associated with the convertible notes. Amortization of prepaid debt fees
fluctuated in 2006 as a result of the issuance of our convertible notes and the
voluntary prepayments of the senior secured term loan.
Other
income (expense) consists primarily of foreign currency gains and losses, which
can vary from period to period, as well as other non-operating events or
transactions. In 2007, other income included foreign currency gains of
$3.0 million as a result of 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 in 2007 also included $2.8 million in net
realized gains from foreign currency hedge range forward contracts that were
settled as part of the Actaris acquisition and a $1.0 million realized gain from
an overnight euro rate change prior to the acquisition of Actaris. These gains
in 2007 were offset by unrealized foreign currency exchange losses on working
capital accounts, including accrued interest balances on intercompany loans.
During 2006, in addition to foreign currency fluctuations, other income
(expense) also included higher banking fees and a $242,000 loss on the sale of
our investment in Servatron.
Income
Taxes
Our
actual income tax rates typically differ from the federal statutory rate of 35%,
and can vary from period to period, due to fluctuations in operating results,
new or revised tax legislation and accounting pronouncements, changes in the
level of business performed in domestic and foreign jurisdictions, research
credits and state income taxes.
Our
actual income tax rate was a benefit of 50.45% for 2007. We
recorded benefits from legislative reductions in tax rates in Germany and
the United Kingdom during the third quarter of 2007. 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 is not deductible and increases our
actual tax rate.
Itron’s
tax benefit for 2007 reflects a benefit associated with lower effective tax
rates on foreign earnings. We made an election under Internal Revenue Code
Section 338 with respect to the Actaris acquisition, which resulted in a reduced
global effective tax rate. Additionally, our reduced foreign tax liability
reflects the benefit of foreign interest expense deductions.
Effective
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). As a result of the
implementation of FIN 48, we recognized a $5.4 million increase in the liability
for unrecognized tax benefits, with a corresponding increase in deferred tax
assets. At January 1, 2007 and December 31, 2007, the amount of unrecognized tax
benefits was $5.4 million and $34.8 million, respectively. Approximately
$27.5 million of unrecognized tax benefits were acquired as part of the Actaris
acquisition on April 18, 2007. Other than $1.7 million in income tax obligations
related to FIN 48 that we expect to pay in 2008, we do not expect any
reasonably possible material changes to the estimated amount of liability
associated with our unrecognized tax benefits through December 31, 2008. The
amount of unrecognized tax benefits that, if recognized, would affect our
effective tax rate as of January 1, 2007 and December 31, 2007 were
$5.4 million and $8.4 million, respectively.
Our 2006
actual income tax rate for the year was 35%. Although our actual income tax rate
was the same as the statutory tax rate, this was due to several factors,
including state income taxes that increase the actual income tax rate and the
adoption of SFAS 123(R) and current year federal, state and Canadian R&D
credits that decrease the actual income tax rate. The tax provision was further
reduced by approximately $1.5 million due to prior year state and Canadian
R&D credits and the realization of deferred tax assets related to a foreign
subsidiary that had been fully reserved. On December 20, 2006, the Tax Relief
and Health Care Act was signed into law, extending the research tax credit for
qualified research expenses incurred throughout 2006 and 2007. We recorded
approximately $2.2 million in federal and state R&D credits after the
effective date of this legislation.
Our 2005
actual income tax rate was a benefit of 20%, which was lower than the statutory
tax rate due to the benefit of research credits and the completion of a research
credit study for the years 1997 through 2004, in which we recognized a
$5.9 million net tax credit as an offset to the provision for income taxes.
In addition, as part of a reorganization of our legal entities for operational
efficiencies, we recognized $8.0 million in deferred tax assets from prior years
that had been fully reserved, associated primarily with certain foreign
operations.
We are
subject to income tax in the U.S. federal jurisdiction and numerous foreign and
state jurisdictions. The Internal Revenues Service has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Due to the existence of net operating loss and tax credit carryforwards,
tax years subsequent to 1995 remain open to examination by the major tax
jurisdictions to which we are subject. Actaris’ subsidiaries in France are
currently under examination for the years 2004 through 2006. We reflect interest
and penalties related to unrecognized tax benefits in our provision for income
taxes. Accrued interest and penalties were $9,000 at January 1, 2007. At
December 31, 2007, accrued interest was $2.7 million and accrued penalties
were $2.2 million. The increase from January 1, 2007 to December 31,
2007 was the result of the Actaris acquisition on April 18, 2007.
Financial
Condition
Cash
Flow Information:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
millions)
|
||||||||||||
|
Operating
activities
|
$ | 133.3 | $ | 94.8 | $ | 79.6 | ||||||
|
Investing
activities
|
(1,714.4 | ) | (85.5 | ) | (30.6 | ) | ||||||
|
Financing
activities
|
1,310.4 | 318.5 | (27.0 | ) | ||||||||
|
Effect
of exchange rates on cash and cash equivalents
|
1.3 | - | - | |||||||||
|
Increase
(decrease) in cash and cash equivalents
|
$ | (269.4 | ) | $ | 327.8 | $ | 22.0 | |||||
The
Actaris acquisition on April 18, 2007 was funded with a $1.2 billion credit
facility, $225.2 million in net proceeds from the sale of 4.1 million
shares of common stock and cash on hand. The cash and cash equivalents balance
of $361.4 million at December 31, 2006 consisted primarily of the proceeds of
the $345 million of convertible notes issued in August 2006, which were
subsequently used in 2007 to fund the Actaris acquisition.
Operating activities: As a
result of the Actaris acquisition, cash provided by operating activities
increased $38.5 million. Increased revenue activity resulted in cash received
from customers of $1.4 billion for 2007, compared with $646.5 million for 2006,
partially offset by cash paid to suppliers and employees of $1.2 billion in
2007, compared with $542.8 million in 2006. This increase in operating activity
in 2007 was partially offset by a $70.1 million increase in net
interest paid and an increase in taxes paid of $18.3 million in 2007,
compared with 2006. Cash provided by operating activities increased
$15.2 million in 2006, compared with 2005. In 2006, increased revenues
generated an additional $107.8 million in cash, which was partially offset
by an increase of $99.0 million in cash paid to suppliers and employees. In
addition, we paid $16.1 million less in net interest and taxes. In 2006,
$9.7 million in excess tax benefits from stock-based compensation associated
with our January 1, 2006 adoption of SFAS 123(R) is reflected in financing
activities. In 2007, no excess tax benefits from stock-based compensation were
recognized due to the current year net tax loss resulting from increased
interest expense.
Investing activities: Cash
paid for the acquisition of Actaris was approximately $1.7 billion. In the
first quarter of 2007, $35.0 million in short-term investments matured with
the proceeds used to partially fund the acquisition. The acquisition of
property, plant and equipment was $40.6 million in 2007, which was partially
offset by the $7.2 million in proceeds from the sale of our prior headquarters
facility that was held for sale. During 2006, we invested $205.0 million in
short-term held to maturity investments from the net proceeds of our $345
million convertible notes issuance. The remaining proceeds were placed in cash
and cash equivalents. As the investments matured, $170.4 million was placed
in cash and cash equivalents. For 2006, property, plant and equipment purchases
were $31.7 million and were primarily related to capital improvements to
our new corporate headquarters and our enterprise resource planning system
upgrade. Investing activities in 2006 also included a total of $21.1 million
used for three small acquisitions, with no similar activity in 2005. During
2005, we used $32.0 million in cash for property, plant and equipment
purchases, of which $19.8 million was for the purchase of our new corporate
headquarters. We received $2.6 million in proceeds from the sale of a
manufacturing facility in Quebec, Canada in 2005.
Financing activities:
Proceeds from our new credit facility were $1.2 billion in 2007, with $22.1
million in debt placement fees. We subsequently repaid $76.1 million of the
credit facility during 2007. The revaluation of the euro and pound sterling
denominated loans to the U.S. dollar at December 31, 2007 resulted in an
increase of $38.2 million to the loan balances, which was recognized in other
comprehensive income. Net proceeds from the sale of common stock provided $225.2
million in 2007. Cash generated from the exercise of stock-based awards was
$22.4 million during 2007, compared with $15.3 million in 2006 and $24.9
million in 2005. There were no excess tax benefits from stock-based compensation
as a result of our current year net tax loss for 2007, compared with $9.7
million in 2006. In 2006, we received $345.0 million in gross proceeds from the
issuance of our convertible notes, with debt placement fees of
$8.8 million. During 2006, we paid off various debt balances from December
31, 2005, including $24.7 million of our term loan, $14.8 million of our
real estate term note and $3.2 million of project financing debt. During
2005, we made $126.2 million in payments on borrowings, $59.8 million of
which were net proceeds from an equity offering and received $14.8 million in
proceeds from a real estate term note, which was used to partially finance the
purchase of our new corporate headquarters building.
Effect of exchange rates on cash and
cash equivalents: As a result of the Actaris acquisition, the effect of
exchange rates on the cash balances of currencies held in foreign denominations
(primarily euros) was an increase of $1.3 million for 2007.
Disclosures about contractual obligations and commitments:
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, 2007, 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
|
$ | 823,331 | $ | 46,153 | $ | 83,403 | $ | 81,425 | $ | 612,350 | |||||||||
|
EUR
denominated term loan
|
626,971 | 35,245 | 68,700 | 66,404 | 456,622 | ||||||||||||||
|
GBP
denominated term loan
|
114,398 | 7,277 | 13,542 | 12,730 | 80,849 | ||||||||||||||
|
Senior subordinated notes
(1)
|
168,025 | 9,688 | 19,376 | 138,961 | - | ||||||||||||||
|
Convertible senior subordinated
notes (1)
|
508,875 | 8,625 | 17,250 | 17,250 | 465,750 | ||||||||||||||
|
Operating lease obligations
(2)
|
27,007 | 11,919 | 11,670 | 2,191 | 1,227 | ||||||||||||||
|
Purchase and service commitments
(3)
|
165,499 | 162,907 | 2,373 | 219 | - | ||||||||||||||
|
Other
long-term liabilities reflected on the balance
|
|||||||||||||||||||
|
sheet under
generally accepted accounting principles (4)
|
83,536 | 6,910 | 41,717 | 11,427 | 23,482 | ||||||||||||||
|
Total
|
$ | 2,517,642 | $ | 288,724 | $ | 258,031 | $ | 330,607 | $ | 1,640,280 | |||||||||
|
(1)
|
Borrowings
are disclosed within Item 8: Financial Statements and Supplementary
Data, Note 7 – Debt, with the addition of estimated interest
expense.
|
|
(2)
|
Operating
lease obligations are disclosed in Item 8: Financial Statements and
Supplementary Data, Note 13 – Commitments and Contingencies, and do not
include common area maintenance charges, real estate taxes and insurance
charges for which we are obligated.
|
|
(3)
|
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, 2007 if the
commitments were canceled.
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(4)
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Other
long-term liabilities consist of warranty obligations, estimated pension
benefit payments, FIN 48 liabilities and other obligations. FIN 48
liabilities totaling $38.0 million, which includes interest and penalties,
recorded as long-term liabilities, are not included in the above
contractual obligations and commitments table as we cannot make a
reasonably reliable estimate of the period of cash settlement with the
respective taxing authorities.
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Liquidity,
Sources and Uses of Capital:
We have
historically funded our operations and growth with cash flow from operations,
borrowings and issuances of common stock.
Credit
Facility
The
Actaris acquisition was financed in part by a $1.2 billion credit facility. The
credit facility, dated April 18, 2007, was comprised of a $605.1 million
first lien U.S. dollar denominated term loan; a €335 million first lien
euro denominated term loan; a £50 million first lien pound sterling
denominated term loan (collectively the term loans); and a $115 million
multicurrency revolving line-of-credit (revolver). Interest rates on the credit
facility are based on the respective borrowing’s denominated LIBOR
rate (U.S. dollar, euro or pound sterling) or the Wells Fargo Bank, National
Association’s prime rate, plus an additional margin subject to factors including
our consolidated leverage ratio. Our interest rates were 6.84%, 8.05% and 6.78%
for the U.S. dollar denominated, the pound sterling denominated and the euro
denominated term loans at December 31, 2007, respectively. 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. Prepaid debt fees
are amortized using the effective interest method through the term loans’
earliest maturity date, as defined by the credit agreement. The credit facility
is secured by substantially all of the assets of our operating subsidiaries,
except our foreign subsidiaries, and contains covenants, which contain certain
financial ratios and place restrictions on the incurrence of debt, the payment
of dividends, certain investments and mergers. We were in compliance with these
debt covenants at December 31, 2007. At December 31, 2007, there were no
borrowings outstanding under the revolver and $54.7 million was utilized by
outstanding standby letters of credit resulting in $60.3 million being available
for additional borrowings.
Senior
Subordinated Notes
Our
senior subordinated notes consist of $125 million aggregate principal amount of
7.75% notes, issued in May 2004 and due in 2012. The subordinated notes were
discounted to a price of 99.265 to yield 7.875%. The discount on the
subordinated notes is accreted resulting in a balance of $124.4 million at
December 31, 2007. Prepaid debt fees are amortized over the life of the
subordinated notes. The subordinated notes are registered with the Securities
and Exchange Commission (SEC) and are generally transferable. Fixed interest
payments of $4.8 million are required every six months, in May and
November. The notes are subordinated to our credit facility (senior secured
borrowings) and are guaranteed by all of our operating subsidiaries, except for
our foreign subsidiaries. The subordinated notes contain covenants, which place
restrictions on the incurrence of debt, the payment of dividends, certain
investments and mergers. The Actaris acquisition and the associated financing
were not prohibited under these covenants. We were in compliance with these debt
covenants at December 31, 2007. Some or all of the subordinated notes may be
redeemed at our option at any time on or after May 15, 2008, at their principal
amount plus a specified premium price of 103.875%, decreasing each year
thereafter.
Convertible
Senior Subordinated Notes
On August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC and
are generally transferable.
The
convertible notes may be converted at the option of the holder at an initial
conversion rate of 15.3478 shares of our common stock for each $1,000 principal
amount of the convertible notes (conversion price of $65.16 per share), under
the following circumstances, as defined in the indenture:
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during
any fiscal quarter commencing after September 30, 2006, if the closing
sale price per share of our common stock exceeds $78.19, which is 120% of
the conversion price of $65.16, for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter;
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between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
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o
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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;
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if
the convertible notes are called for
redemption;
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if
a fundamental change occurs; or
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upon
the occurrence of defined corporate
events.
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The
convertible notes also contain purchase options, at the option of the holders,
which may require us to repurchase all or a portion of the convertible notes on
August 1, 2011, August 1, 2016 and August 1, 2021 at the principal amount, plus
accrued and unpaid interest.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination. The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our foreign subsidiaries, all of which are wholly owned. The convertible
notes contain covenants, which place restrictions on the incurrence of debt and
certain mergers. The Actaris acquisition and the associated financing were not
prohibited under these covenants. We were in compliance with these debt
covenants at December 31, 2007.
At
December 31, 2007, the contingent conversion threshold was not exceeded and,
therefore, the aggregate principal amount of the convertible notes is included
in long-term debt. At September 30, 2007, the contingent conversion threshold of
our convertible notes was exceeded. As a result, the notes were convertible at
the option of the holder as of September 30, 2007 and through the fourth quarter
of 2007, and accordingly, the aggregate principal amount of the convertible
notes at September 30, 2007 was included in the current portion of
long-term debt; and since our debt fees were amortized through the date of the
earliest conversion option, in accordance with our policy we expensed
approximately $6.6 million of the remaining prepaid debt fees associated with
the convertible notes at September 30, 2007. As our stock price is subject to
fluctuation, the contingent conversion threshold may be exceeded during any
quarter prior to July 2011, and subject the notes to conversion. However, we
believe it is unlikely that a significant portion of the convertible notes would
be converted prior to maturity because the market value of the convertible notes
would likely exceed the value that holders of the convertible notes would
receive upon conversion. If holders elect to convert, however, we would be
required to settle the principal amount of the convertible notes in cash and the
conversion premium in cash or shares of our common stock. We would likely fund
the repayment with existing cash and cash equivalents, common stock issuances
and/or additional borrowings. No convertible notes were converted during the
fourth quarter of 2007.
Other
Sources and Uses of Capital
Prepaid
debt fees for all our outstanding borrowings are amortized over the respective
terms using the effective interest method. Total unamortized prepaid debt fees
were approximately $21.6 million and $13.2 million at December 31, 2007 and
2006, respectively.
Our net
deferred tax assets consist primarily of accumulated net operating loss
carryforwards 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. For
2007, we had an operating loss for federal and state income tax purposes
and did not pay cash taxes. However, we paid approximately $21.7 million in
local and foreign tax obligations. Approximately $5.5 million of the 2007
provision will be paid in 2008. Based on current projections, we expect to pay
no federal and state taxes and approximately $21.0 million in local and
foreign taxes in 2008.
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary and
Indonesia. These plans were assumed with the acquisition of Actaris. Our general
funding policy for these qualified pension plans is to contribute amounts at
least sufficient to satisfy regulatory funding standards of the respective
countries for each plan. We contributed $131,000 to the defined benefit pension
plans from the date of the Actaris acquisition through December 31, 2007.
Assuming that actual plan asset returns are consistent with our expected rate of
return in 2007 and beyond, and that interest rates remain constant, we expect to
contribute approximately $500,000 in 2008 to our defined benefit pension
plans.
Working
capital, which includes current assets less current liabilities, was $249.6
million at December 31, 2007, compared with $492.9 million at December 31, 2006.
The $243.3 million decrease in working capital resulted primarily from the
reduction of cash and cash equivalents from the proceeds used to partially fund
the acquisition of Actaris.
We expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from or to others,
distribution agreements, partnership arrangements and acquisitions of technology
or other companies. We expect these activities to be funded with existing cash,
cash flow from operations, borrowings and the issuance of common stock or other
securities. We believe existing sources of liquidity will be sufficient to fund
our existing operations and obligations for at least the next year and
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 and other factors described
under “Risk Factors” within Item 1A and “Quantitative and Qualitative
Disclosures About Market Risk” within Item 7A, included in this Annual Report on
Form 10-K.
Off-balance
sheet arrangements:
We had no
off-balance sheet financing agreements or guarantees at December 31, 2007
and 2006 that we believe were reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
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. In addition to the outstanding
standby letters of credit of $54.7 million issued under our credit facility’s
$115 million multicurrency revolver, our Actaris operating segment has a total
of $28.0 million of unsecured multicurrency revolving lines of credit with
various financial institutions with total outstanding standby letters of credit
of $5.9 million at December 31, 2007. Unsecured surety bonds in force were $13.8
million and $6.0 million at December 31, 2007 and 2006, respectively. The
increase in bonds was primarily the result of the Actaris acquisition. 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.
Contingencies
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded when we determine that a loss is probable and the amount can be
reasonably estimated. Additionally, we disclose contingencies for which a
material loss is reasonably possible, but not probable. Legal contingencies at
December 31, 2007 were not material to our financial condition or results
of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. PT Berca claims that it had preemptive rights
in the joint venture and has sought to nullify the transaction in 2001 whereby
Schlumberger transferred its ownership interest in PT Mecoindo to an Actaris
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs, or approximately $14.1
million, in damages against the defendants and have invalidated the 2001
transfer of the Mecoindo interest to a subsidiary of Actaris. All of the parties
have appealed the matter and it is currently pending before the Indonesian
Supreme Court. We believe the claims are without merit and no liability has been
recorded. However, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may occur as a result of this
claim.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue Recognition: The
majority of our revenues are recognized when products are shipped to or received
by a customer or when services are provided. For arrangements involving multiple
elements, we determine the estimated fair value of each element and then
allocate the total arrangement consideration among the separate elements based
on the relative fair value percentages. Revenues for each element are then
recognized based on the type of element, such as 1) when the products are
shipped, 2) services are delivered, 3) percentage-of-completion when
implementation services are essential to the software’s performance, 4) upon
receipt of customer acceptance or 5) transfer of title. Fair values represent
the estimated price charged when an item is sold separately. We review our fair
values on an annual basis or more frequently if a significant trend is
noted.
We
recognize revenue for delivered elements when the delivered elements have
standalone value and we have objective and reliable evidence of fair value for
each undelivered element. If the fair value of any undelivered element included
in a multiple element arrangement cannot be objectively determined, revenue is
deferred until all elements are delivered and services have been performed, or
until fair value can objectively be determined for any remaining undelivered
elements.
If
implementation services are essential to a software arrangement, revenue is
recognized using either the percentage-of-completion methodology if project
costs can be estimated or the completed contract methodology if project costs
cannot be reliably estimated. The estimation of costs through completion
of a project is subject to many variables such as the length of time to
complete, subcontractor performance, supplier information and business volume
assumptions. Changes in underlying assumptions/estimates may adversely or
positively affect financial performance. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance
period.
Unearned
revenue is recorded for products or services for which cash has been
received from a customer but for which the criteria for revenue recognition
have not been met as of the balance sheet date. Unearned revenue relates to
payments received from customers in connection with product and service
invoicing for which revenue recognition criteria have not been met. Shipping and
handling costs and incidental expenses billed to customers are recorded as
revenue, with the associated cost charged to cost of revenues.
Warranty: We offer industry
standard warranties on our hardware products and large application software
products. We accrue the estimated cost of projected warranty claims based on
historical and projected product performance trends, business volume
assumptions, supplier information and other business and economic projections.
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 replace projected product failures, and we
may incur additional warranty and related expenses in the future with respect to
new or established products.
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.
Business Combinations: In
accordance with SFAS 141, Business Combinations, we
record the results of operations of an acquired business from the date of
acquisition. We make preliminary allocations of the purchase price to the assets
acquired and liabilities assumed based on estimated fair value assessments.
Until we finalize the fair values, we may have changes to the carrying values of
tangible and intangible assets, goodwill, commitments and contingencies,
liabilities, deferred taxes, uncertain tax positions and restructuring
activities. Amounts allocated to IPR&D are expensed in the period
of acquisition. Costs to complete the IPR&D are expensed in the subsequent
period as incurred. We may experience unforeseen problems in the development or
performance of the IPR&D, we may not meet our product development schedules
or we may not achieve market acceptance of these new products or
solutions.
Goodwill and Intangible
Assets: Goodwill and intangible assets result from our acquisitions. We
use estimates in determining the value assigned to goodwill and intangible
assets, including estimates of useful lives of intangible assets, discounted
future cash flows and fair values of the related operations. We test goodwill
for impairment each year as of October 1, under the guidance of SFAS 142, Goodwill and Other Intangible
Assets. At October 1, 2007, our Itron North America segment represents
one reporting unit, while our Actaris segment has three reporting units. We
forecast discounted future cash flows at the reporting unit level based on
estimated future revenues and operating costs, which take into consideration
factors such as existing backlog, expected future orders, supplier contracts and
general market conditions. Changes in our forecasts or cost of capital may
result in asset value adjustments, which could have a significant effect on our
current and future results of operations and financial condition. Intangible
assets with a finite life are amortized over that life based on estimated
discounted cash flows, and are tested for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable.
Stock-Based Compensation: We
measure compensation cost for stock-based awards at fair value and recognize
compensation cost over the service period for awards expected to vest. We use
the Black-Scholes option-pricing model, which requires the input of assumptions,
including the estimated length of time employees will retain their vested stock
options before exercising them (expected term) and the estimated volatility of
our common stock’s price over the expected term. Furthermore, in calculating
compensation for these awards, we are also required to estimate the approximate
number of options that will be forfeited prior to completing their vesting
requirement (forfeitures). We consider many factors when estimating expected
forfeitures, including types of awards, employee class and historical
experience. To the extent actual results or updated estimates differ from our
current estimates; such amounts will be recorded as a cumulative adjustment in
the period estimates are revised.
Defined Benefit Pension Plans: As part of the Actaris
acquisition, we assumed Actaris’ defined benefit pension plans. Actaris sponsors
both funded and unfunded non-U.S. defined benefit pension plans. FASB Statement
87, Employers' Accounting for
Pensions, as amended by SFAS 158, Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans, requires the assets acquired and
liabilities assumed in a business combination to include a liability for the
projected benefit obligation in excess of plan assets or an asset for plan
assets in excess of the projected benefit obligation, thereby eliminating any
previously existing net gain or loss, prior service cost or credit or transition
asset or obligation recognized in accumulated other comprehensive income. SFAS
158 also requires employers to recognize the funded status of their defined
benefit pension plans on their consolidated balance sheet and recognize as a
component of other comprehensive income, net of tax, the actuarial gains or
losses, prior service costs or credits and transition assets or obligations, if
any, that arise during the period but are not recognized as components of net
periodic benefit cost.
Several
statistical and other factors that attempt to anticipate future events are used
in calculating the expense and obligations related to these plans. These factors
are updated annually at December 31 and include assumptions about the discount
rate, expected rate of return on plan assets, turnover rates and rate of future
compensation increase. The discount rate is a significant assumption used to
value our pension benefit obligation. We use the average 15 year corporate bond
yield curve from the central banks of each respective country in which we have
an established benefit pension plan. The weighted average discount rate used to
measure the projected benefit obligation for the year ended December 31, 2007
was 5.48%. A change in the discount rate of 25 basis points would change our
pension benefit obligation by approximately $2 million. The financial and
actuarial assumptions used at December 31, 2007 may differ materially from
actual results due to changing market and economic conditions and higher or
lower withdrawal rates. These differences could result in a significant change
in the amount of pension expense recorded in future periods. Changes in annual
discount rates are recognized in other comprehensive income in the period
in which they occur.
Income Taxes: We estimate income taxes in each of the taxing
jurisdictions in which we operate. Changes in our effective tax rate are subject
to several factors, including fluctuations in operating results, new or revised
tax legislation and accounting pronouncements, changes in the level of business
performed in domestic and foreign jurisdictions, research credits and state
income taxes. Significant judgment is required in determining our annual tax
rate and in evaluating our tax positions. We assess the likelihood that deferred
tax assets, which include net operating loss carryforwards and temporary
differences expected to be deductible in future years, will be recoverable. The
realization of our deferred tax asset related to net operating loss
carryforwards is supported by projections of future profitability. If recovery
of the deferred tax asset is not more likely than not, we provide a
valuation allowance based on estimates of future taxable income in the
respective taxing jurisdiction and the amount of deferred taxes that are
expected to be realizable. If future taxable income is different than expected,
we will adjust the valuation allowances through income tax expense in future
periods, creating variability in our calculated tax rates. We are also subject
to audit in multiple taxing jurisdictions in which we operate. These audits can
involve complex issues, which may require an extended period of time to resolve.
We believe we have recorded adequate income tax provisions and FIN 48
reserves.
On
January 1, 2007, we adopted the provisions of FIN 48, which addresses whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained upon examination by the taxing authorities
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 requires increased disclosures,
provides guidance on de-recognition, classification, interest and penalties on
income taxes and the accounting in interim periods. As of January 1, 2007 and
December 31, 2007, the amount of unrecognized tax benefits was $5.4 million and
$34.8 million, of which $5.4 million and $8.4 million would, if
recognized, affect
our effective tax rate, respectively. In 2008, we expect to pay $1.7 million in
income tax obligations related to FIN 48. Additionally, the amount of the
unrecognized tax benefits will change in the next twelve months due to audits in
various foreign jurisdictions. However, we do not expect that change to have a
significant impact on our results of operations.
Legal Contingencies: We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, and related pronouncements. In accordance with
SFAS 5, a liability is recorded when we determine that a loss is probable
and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at December 31, 2007 and 2006 were not
material to our financial condition or results of operations.
Derivative Instruments: We
account for derivative instruments and hedging activities in accordance with
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Consolidated Balance Sheets at fair value as either assets or liabilities.
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; ineffective portions of fair
value changes or derivative instruments that do not qualify for hedging
activities are recognized in earnings. Derivatives are not used for trading or
speculative purposes.
Foreign Exchange: Our
consolidated financial statements are reported in U.S. dollars. Assets and
liabilities of foreign subsidiaries with a non-U.S. dollar functional currency
are translated to U.S. dollars at the exchange rates in effect on the balance
sheet date, or the last business day of the period, if applicable. Revenues and
expenses for these subsidiaries are translated to U.S. dollars using an average
rate for the relevant reporting period. Translation adjustments resulting from
this process are included, net of tax, in accumulated other comprehensive income
in shareholders’ equity. Gains and losses that arise from exchange rate
fluctuations for balances that are not denominated in the 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 considered
to be hedges of the net investment in foreign subsidiaries are included, net of
tax, in accumulated other comprehensive income in shareholders’
equity.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating the impact
of the adoption of SFAS 157 on our consolidated financial statements for
the first quarter of 2008 but have not yet determined if it will be material at
this time.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities –Including an amendment of FASB Statement No.
115. This statement permits entities to choose to measure many financial
assets and liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected would be reported in net income.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We
have not yet determined if we will elect to apply any of the provisions of SFAS
159 or what effect the adoption of SFAS 159 would have, if any, on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes, including the way
assets and liabilities are recognized in purchase accounting. SFAS 141(R) also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value and requires the expensing of acquisition-related
costs as incurred. SFAS 141(R) is effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We will apply SFAS 141(R) to any
acquisition after the effective date.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of fiscal year
2009. SFAS 160 is currently not expected to have a material effect on our
consolidated financial statements.
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 are using derivative
financial instruments to hedge certain foreign currency and interest rate
exposures. Our objective is to offset gains and losses resulting from these
exposures with losses and gains on the derivative contracts used to hedge them,
therefore reducing the impact of volatility on earnings or protecting fair
values of assets and liabilities. We use derivative contracts only to manage
existing underlying exposures. Accordingly, we do not use derivative contracts
for speculative purposes.
Interest
Rate Risk
The table
below provides information about our financial instruments that are sensitive to
changes in interest rates and the scheduled minimum repayment of principal over
the remaining lives of our debt at December 31, 2007. Weighted average variable
rates in the table are based on implied forward rates in the Wells Fargo swap
yield curve as of January 4, 2008, our estimated ratio of funded debt
to EBITDA, which determines our rate margin, and a static foreign exchange rate
at December 31, 2007.
|
2008
|
2009
|
2010
|
2011
|
2012
|
Beyond
2012
|
Total
|
|||||||||||||||||||||
|
(in
millions)
|
|||||||||||||||||||||||||||
|
Fixed
Rate Debt
|
|||||||||||||||||||||||||||
|
Convertible senior subordinated
notes (1)
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 345.0 | $ | 345.0 | |||||||||||||
|
Interest
rate
|
- | - | - | - | - | 2.50 | % | ||||||||||||||||||||
|
Senior subordinated notes
(2)
|
$ | - | $ | - | $ | - | $ | - | $ | 125.0 | $ | - | $ | 125.0 | |||||||||||||
|
Interest
rate
|
- | - | - | - | 7.75 | % | - | ||||||||||||||||||||
|
Variable Rate Debt
(3)
|
|||||||||||||||||||||||||||
|
U.S.
dollar term loan
|
$ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 566.8 | $ | 596.8 | |||||||||||||
|
Average
interest rate
|
6.63 | % | 6.22 | % | 5.79 | % | 5.88 | % | 6.03 | % | 6.19 | % | |||||||||||||||
|
Euro
term loan
|
$ | 4.9 | $ | 4.9 | $ | 4.9 | $ | 4.9 | $ | 4.9 | $ | 420.7 | $ | 445.2 | |||||||||||||
|
Average
interest rate
|
6.72 | % | 6.75 | % | 6.56 | % | 6.53 | % | 6.54 | % | 6.56 | % | |||||||||||||||
|
GBP
term loan
|
$ | 1.0 | $ | 1.0 | $ | 1.0 | $ | 1.0 | $ | 1.0 | $ | 74.1 | $ | 79.1 | |||||||||||||
|
Average
interest rate
|
7.95 | % | 7.74 | % | 7.21 | % | 7.14 | % | 7.11 | % | 7.08 | % | |||||||||||||||
|
Interest rate swap on euro term
loan
(4)
|
|||||||||||||||||||||||||||
|
Average
interest rate (Pay)
|
6.59 | % | 6.59 | % | 6.59 | % | 6.59 | % | 6.59 | % | 0.00 | % | |||||||||||||||
|
Average
interest rate (Receive)
|
6.72 | % | 6.75 | % | 6.56 | % | 6.53 | % | 6.54 | % | 0.00 | % | |||||||||||||||
|
Net/Spread
|
0.13 | % | 0.16 | % | (0.03 | %) | (0.06 | %) | (0.05 | %) | 0.00 | % | |||||||||||||||
|
Cross currency swap on GBP term
loan
(5)
|
|||||||||||||||||||||||||||
|
Average
interest rate (Pay)
|
6.73 | % | 6.32 | % | 5.89 | % | 5.98 | % | 0.00 | % | 0.00 | % | |||||||||||||||
|
Average
interest rate (Receive)
|
7.94 | % | 7.74 | % | 7.21 | % | 7.14 | % | 0.00 | % | 0.00 | % | |||||||||||||||
|
Net/Spread
|
1.21 | % | 1.42 | % | 1.32 | % | 1.16 | % | 0.00 | % | 0.00 | % | |||||||||||||||
|
(1)
|
$345.0
million of 2.50% convertible notes due on August 2026, with fixed interest
payments of $4.3 million due every six months, in February and August. The
convertible notes may be converted, at the option of the holder, under
certain circumstances. (see Note
7).
|
|
(2)
|
The
$125.0 million aggregate principal amount of 7.75% senior subordinated
notes, due in 2012, was discounted to 99.265 per $100 of principal to
yield 7.875% (see Note 7).
|
|
(3)
|
The
Actaris acquisition was financed in part by a $1.2 billion senior secured
credit facility. The facility is comprised of $605.1 million, €335 million
and £50 million term loans denominated in USD, EUR and GBP, respectively
(see Note 7).
|
|
(4)
|
Interest
rate swap to convert our €335 million euro denominated variable rate term
loan to a fixed-rate debt obligation at a rate of 6.59% for the term of
the loan, including expected prepayments. This variable-to-fixed interest
rate swap is considered a highly effective cash flow hedge (see Note
8).
|
|
(5)
|
Cross
currency interest rate swap to convert 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, including expected
prepayments. This instrument is not designated as an accounting hedge (see
Note 8).
|
Based on
a sensitivity analysis as of December 31, 2007, we estimate that if market
interest rates average one percentage point higher in 2008, than in the table
above, our earnings before income taxes in 2008 would decrease by approximately
$5.1 million.
As part
of the acquisition of Actaris on April 18, 2007, we entered into a $1.2 billion
credit facility, comprised of a $605.1 million first lien U.S. dollar
denominated term loan; a €335 million first lien euro denominated term
loan; a £50 million first lien pound sterling denominated term loan
(collectively the term loans); and a $115 million multicurrency revolving
line-of- credit (revolver). Interest rates on the credit facility are based
on the respective borrowing’s denominated LIBOR rate (U.S. dollar,
euro or pound sterling) or the Wells Fargo Bank, National Association’s prime
rate, plus an additional margin subject to factors including our consolidated
leverage ratio. Our interest rates were 6.84%, 8.05% and 6.78% for the U.S.
dollar denominated, the pound sterling denominated and the euro denominated term
loans at December 31, 2007, respectively. 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.
These
variable rate financial instruments are sensitive to changes in interest rates.
During the third quarter of 2007, we entered into an interest rate swap to
convert our €335 million euro denominated variable rate term loan to a
fixed-rate debt obligation at a rate of 6.59% for the term of the debt,
including expected prepayments. This variable-to-fixed interest rate swap is
considered a highly effective cash flow hedge. Consequently, changes in the fair
value of the interest rate swap are recorded as a component of other
comprehensive income and are recognized in earnings when the hedged item affects
earnings. The cash flow hedge is expected to be highly effective in achieving
offsetting cash flows attributable to the hedged risk during the term of the
hedge. The amounts paid or received on the hedge are recognized as adjustments
to interest expense. The notional amount of the swap was $445.2 million
(€302.5 million) and the fair value, recorded as a long-term liability, was
$1.7 million at December 31, 2007. The amount of net gains expected to be
reclassified into earnings in the next twelve months is approximately $611,000.
We will monitor and assess our interest rate risk and may institute additional
interest rate swaps or other derivative instruments to manage interest rate
risk.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of foreign countries and, therefore, face exposure
to adverse movements in foreign currency exchange rates. As a result of the
Actaris acquisition, commencing in the second quarter of 2007, a majority of our
revenues and operating expenses are now denominated in foreign currencies,
resulting in changes in our foreign currency exchange rate exposures that could
have a material effect on our financial results. International revenues were 59%
of total revenues for the year ended December 31, 2007, compared with 6% for the
year ended December 31, 2006, respectively.
Our
primary foreign currency exposure relates to non-U.S. dollar denominated
revenues, cost of revenues and operating expenses in our foreign subsidiary
operations, the most significant of which is the euro. Risk-sensitive financial
instruments in the form of intercompany trade receivables and notes are mostly
denominated in the local foreign currencies. As foreign currency exchange rates
change, intercompany trade receivables may affect current earnings, while
intercompany notes, for which settlement is not planned or anticipated in the
foreseeable future, may be revalued and result in unrealized translation gains
or losses that are reported in accumulated other comprehensive
income.
As a
result of the Actaris acquisition, effective June 29, 2007, we designated
certain portions of our foreign currency denominated term loans as hedges of our
net investment in foreign operations. Net losses of $41.1 million
($25.5 million after-tax) were reported as a net unrealized loss on
derivative instruments, a component of accumulated other comprehensive income,
which represented the effective hedges of net investments, for the year ended
December 31, 2007. During the third quarter of 2007, we also 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 has
terms similar to the pound sterling denominated term loan, including expected
prepayments. This instrument is intended to reduce the impact of volatility
between the pound sterling and the U.S. dollar. Therefore, gains and losses are
recorded in other income (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 are recognized as adjustments to interest
expense. The fair value of the cross currency swap, recorded as a long-term
liability, was $410,000. The pound sterling denominated notional amount of the
cross currency interest rate swap was $79.1 million (£39.6 million) at
December 31, 2007. The U.S. denominated notional amount was $79.3 million at
December 31, 2007. We expect the interest rate swap to reduce interest expense
by $810,000 during the next twelve months.
In future
periods, we may use a combination of derivative contracts to protect against
foreign currency exchange rate risks. Alternatively, we may choose not to hedge
certain foreign currency risks associated with our foreign currency exposures if
such exposures act as a natural foreign currency hedge for other offsetting
amounts denominated in the same currency.
Because
our earnings are affected by fluctuations in the value of the U.S. dollar
against foreign currencies, we have performed a sensitivity analysis assuming a
hypothetical 10% increase or decrease in the value of the dollar relative to the
currencies in which our transactions are denominated. At December 31, 2007, the
analysis indicated that a 10%
increase in the value of the U.S. dollar against our operations denominated in
foreign currencies would have increased our results from operations by
approximately $8.2 million. A 10% decrease in the value of the U.S. dollar
against our operations denominated in foreign currencies would have decreased
our results from operations by approximately $10.0 million at December 31, 2007.
The model assumes foreign currency exchange rates will shift in the same
direction and relative amount. However, exchange rates rarely move in the same
direction. This assumption may result in the overstatement or understatement of
the effect of changing exchange rates on assets and liabilities denominated in a
foreign currency. Consequently, the actual effects on operations in the future
may differ materially from results of the analysis for the year ended December
31, 2007.
We may be
exposed to certain market risks arising from particular transactions. As part of
our funding necessary to complete the Actaris acquisition, we entered into
foreign currency range forward contracts (transactions where put options were
sold and call options were purchased) to reduce our exposure to declines in the
value of the U.S. dollar and pound sterling relative to the euro denominated
purchase price. Under SFAS 133, the Actaris stock purchase agreement was
considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts could not be designated as fair value hedges. In April
2007, we completed the acquisition of Actaris and realized a $2.8 million
gain from the termination of the foreign currency range forward
contracts.
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
accounting principles generally accepted in the United States of America.
Management has included in our financial statements amounts based on estimates
and judgments that it believes are reasonable under the
circumstances.
Management’s
explanation and interpretation of our overall operating results and financial
position, with the basic financial statements presented, should be read in
conjunction with the entire report. The notes to consolidated financial
statements, an integral part of the basic financial statements, provide
additional detailed financial information. Our Board of Directors has an Audit
and Finance Committee composed of independent directors. The Committee meets
regularly with financial management and Ernst & Young LLP to review internal
control, auditing and financial reporting matters.
|
LeRoy
D. Nosbaum
|
Steven
M. Helmbrecht
|
|
Chairman
and Chief Executive Officer
|
Sr.
Vice President and Chief Financial
Officer
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of Itron Inc.
We have
audited the accompanying consolidated balance sheet of Itron Inc. (and
subsidiaries) as of December 31, 2007, and the related consolidated statement of
income, shareholders' equity, and cash flows for the year ended December 31,
2007. Our audit also included the financial statement schedule listed in the
Index at Item 15(a). 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
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 audit provides 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. (and
subsidiaries) at December 31, 2007, and the consolidated results of its
operations and its cash flows for the year ended December 31, 2007, 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, present fairly in all
material respects the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109
which was effective January 1, 2007. Also, as discussed in Note 1, the Company
adopted the provisions of Statement of Financial Accounting Standards Board No.
158, Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R), as of
December 31, 2007.
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, 2007, 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 25, 2008 expressed an
unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
25, 2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Itron,
Inc.
Liberty
Lake, Washington
We have
audited the accompanying consolidated balance sheet of Itron, Inc. and
subsidiaries (the “Company”) as of December 31, 2006, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for
each of the two years in the period ended December 31, 2006. Our audits
also included the financial statement schedule for the years ended December 31,
2006 and 2005 listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on the financial statements and
financial statement 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, such consolidated financial statements present fairly, in all material
respects, the financial position of Itron, Inc. and subsidiaries at
December 31, 2006, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule for the years
ended December 31, 2006 and 2005, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
123(R), Share-Based Payment, effective
January 1, 2006.
/s/
DELOITTE & TOUCHE LLP
Seattle,
Washington
February
22, 2007 (September 12, 2007, as to Notes 16 and 17)
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands, except per share data)
|
||||||||||||
|
Revenues
|
$ | 1,464,048 | $ | 644,042 | $ | 552,690 | ||||||
|
Cost
of revenues
|
976,761 | 376,600 | 319,069 | |||||||||
|
Gross
profit
|
487,287 | 267,442 | 233,621 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Sales
and marketing
|
125,842 | 63,587 | 56,642 | |||||||||
|
Product
development
|
94,926 | 58,774 | 47,077 | |||||||||
|
General
and administrative
|
100,071 | 52,213 | 44,818 | |||||||||
|
Amortization
of intangible assets
|
84,000 | 31,125 | 38,846 | |||||||||
|
In-process
research and development
|
35,975 | - | - | |||||||||
|
Total
operating expenses
|
440,814 | 205,699 | 187,383 | |||||||||
|
Operating
income
|
46,473 | 61,743 | 46,238 | |||||||||
|
Other
income (expense)
|
||||||||||||
|
Interest
income
|
10,477 | 9,497 | 302 | |||||||||
|
Interest
expense
|
(89,965 | ) | (17,785 | ) | (18,944 | ) | ||||||
|
Other
income (expense), net
|
435 | (1,220 | ) | (68 | ) | |||||||
|
Total
other income (expense)
|
(79,053 | ) | (9,508 | ) | (18,710 | ) | ||||||
|
Income
(loss) before income taxes
|
(32,580 | ) | 52,235 | 27,528 | ||||||||
|
Income
tax (provision) benefit
|
16,436 | (18,476 | ) | 5,533 | ||||||||
|
Net
income (loss)
|
$ | (16,144 | ) | $ | 33,759 | $ | 33,061 | |||||
|
Earnings
(loss) per share
|
||||||||||||
|
Basic
|
$ | (0.55 | ) | $ | 1.33 | $ | 1.41 | |||||
|
Diluted
|
$ | (0.55 | ) | $ | 1.28 | $ | 1.33 | |||||
|
Weighted
average number of shares outstanding
|
||||||||||||
|
Basic
|
29,584 | 25,414 | 23,394 | |||||||||
|
Diluted
|
29,584 | 26,283 | 24,777 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
|
At
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 91,988 | $ | 361,405 | ||||
|
Short-term
investments, held to maturity
|
- | 34,583 | ||||||
|
Accounts
receivable, net
|
339,018 | 109,924 | ||||||
|
Inventories
|
169,238 | 52,496 | ||||||
|
Deferred
income taxes, net
|
10,733 | 20,916 | ||||||
|
Other
|
42,459 | 17,121 | ||||||
|
Total
current assets
|
653,436 | 596,445 | ||||||
|
Property,
plant and equipment, net
|
323,003 | 88,689 | ||||||
|
Intangible
assets, net
|
695,900 | 112,682 | ||||||
|
Goodwill
|
1,266,133 | 126,266 | ||||||
|
Prepaid
debt fees
|
21,616 | 13,161 | ||||||
|
Deferred
income taxes, net
|
75,243 | 47,400 | ||||||
|
Other
|
15,235 | 3,879 | ||||||
|
Total
assets
|
$ | 3,050,566 | $ | 988,522 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Trade
payables
|
$ | 198,997 | $ | 35,803 | ||||
|
Accrued
expenses
|
57,275 | 6,402 | ||||||
|
Wages
and benefits payable
|
70,486 | 24,214 | ||||||
|
Taxes
payable
|
17,493 | 1,717 | ||||||
|
Current
portion of long-term debt
|
11,980 | - | ||||||
|
Current
portion of warranty
|
21,277 | 7,999 | ||||||
|
Deferred
income taxes, net
|
5,437 | - | ||||||
|
Unearned
revenue
|
20,912 | 27,449 | ||||||
|
Total
current liabilities
|
403,857 | 103,584 | ||||||
|
Long-term
debt
|
1,578,561 | 469,324 | ||||||
|
Warranty
|
11,564 | 10,149 | ||||||
|
Pension
plan benefits
|
60,623 | - | ||||||
|
Deferred
income taxes, net
|
173,500 | - | ||||||
|
Other
obligations
|
63,659 | 14,483 | ||||||
|
Total
liabilities
|
2,291,764 | 597,540 | ||||||
|
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,
|
||||||||
|
30,635,808
and 25,675,237 shares issued and outstanding
|
609,902 | 351,018 | ||||||
|
Accumulated
other comprehensive income, net
|
126,668 | 1,588 | ||||||
|
Retained
earnings
|
22,232 | 38,376 | ||||||
|
Total
shareholders' equity
|
758,802 | 390,982 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 3,050,566 | $ | 988,522 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
Shares
|
Amount
|
Accumulated
Other Comprehensive Income
|
Retained
Earnings (Accumulated
Deficit)
|
Total
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balances
at January 1, 2005
|
21,330 | $ | 211,920 | $ | 954 | $ | (28,444 | ) | $ | 184,430 | ||||||||||
|
Net
income
|
33,061 | 33,061 | ||||||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||||||
|
income
tax benefit of $248
|
(83 | ) | (83 | ) | ||||||||||||||||
|
Total
comprehensive income
|
32,978 | |||||||||||||||||||
|
Stock
issues:
|
||||||||||||||||||||
|
Issuance
of common stock
|
1,725 | 59,588 | 59,588 | |||||||||||||||||
|
Options
exercised
|
1,746 | 23,803 | 23,803 | |||||||||||||||||
|
Employee stock plans income tax benefits
|
15,146 | 15,146 | ||||||||||||||||||
|
Issuance
of stock-based compensation awards
|
6 | 180 | 180 | |||||||||||||||||
|
Employee
stock purchase plan
|
62 | 1,409 | 1,409 | |||||||||||||||||
|
Balances
at December 31, 2005
|
24,869 | $ | 312,046 | $ | 871 | $ | 4,617 | $ | 317,534 | |||||||||||
|
Net
income
|
33,759 | 33,759 | ||||||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||||||
|
income
tax provision of $494
|
717 | 717 | ||||||||||||||||||
|
Total
comprehensive income
|
34,476 | |||||||||||||||||||
|
Stock
issues:
|
||||||||||||||||||||
|
Options
exercised
|
751 | 13,081 | 13,081 | |||||||||||||||||
|
Employee
stock plans income tax benefits
|
13,547 | 13,547 | ||||||||||||||||||
|
Issuance
of stock-based compensation awards
|
7 | 292 | 292 | |||||||||||||||||
|
Employee
stock purchase plan
|
48 | 2,169 | 2,169 | |||||||||||||||||
|
Stock-based
compensation expense
|
9,397 | 9,397 | ||||||||||||||||||
|
Reclassification of liability associated with
|
||||||||||||||||||||
|
restricted stock awards upon adoption of
|
||||||||||||||||||||
|
SFAS 123(R)
|
486 | 486 | ||||||||||||||||||
|
Balances
at December 31, 2006
|
25,675 | $ | 351,018 | $ | 1,588 | $ | 38,376 | $ | 390,982 | |||||||||||
|
Net
loss
|
(16,144 | ) | (16,144 | ) | ||||||||||||||||
|
Foreign
currency translation adjustment, net of
|
||||||||||||||||||||
|
income
tax benefit of $778
|
147,616 | 147,616 | ||||||||||||||||||
|
Net
unrealized loss on derivative instruments,
|
||||||||||||||||||||
|
net of income tax benefit of $16,297
|
(26,522 | ) | (26,522 | ) | ||||||||||||||||
|
Net
hedging gains reclassified into net losses,
|
||||||||||||||||||||
|
net
of income tax provision of $11
|
19 | 19 | ||||||||||||||||||
|
Pension
plan benefits liability adjustment,
|
||||||||||||||||||||
|
net of income tax provision of $1,653
|
3,967 | 3,967 | ||||||||||||||||||
|
Total
comprehensive income
|
499,918 | |||||||||||||||||||
|
Stock
issues:
|
||||||||||||||||||||
|
Options
exercised
|
828 | 20,136 | 20,136 | |||||||||||||||||
|
Employee
stock plans income tax provision
|
(389 | ) | (389 | ) | ||||||||||||||||
|
Issuance
of stock-based compensation awards
|
6 | 304 | 304 | |||||||||||||||||
|
Employee
stock purchase plan
|
40 | 2,315 | 2,315 | |||||||||||||||||
|
Stock-based
compensation expense
|
11,352 | 11,352 | ||||||||||||||||||
|
Issuance
of common stock
|
4,087 | 225,166 | 225,166 | |||||||||||||||||
|
Balances
at December 31, 2007
|
30,636 | $ | 609,902 | $ | 126,668 | $ | 22,232 | $ | 758,802 | |||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Operating
activities
|
||||||||||||
|
Net
income (loss)
|
$ | (16,144 | ) | $ | 33,759 | $ | 33,061 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
126,440 | 46,234 | 51,572 | |||||||||
|
In-process
research and development
|
35,975 | - | - | |||||||||
|
Employee
stock plans income tax (provision) benefit
|
(389 | ) | 13,547 | 15,146 | ||||||||
|
Excess
tax benefits from stock-based compensation
|
- | (9,717 | ) | - | ||||||||
|
Stock-based
compensation
|
11,656 | 9,689 | 739 | |||||||||
|
Amortization
of prepaid debt fees
|
13,526 | 4,526 | 5,031 | |||||||||
|
Deferred
income taxes, net
|
(36,373 | ) | 1,624 | (22,017 | ) | |||||||
|
Other,
net
|
1,326 | 828 | 2,278 | |||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||||
|
Accounts
receivable
|
(40,718 | ) | (3,275 | ) | (14,183 | ) | ||||||
|
Inventories
|
19,419 | (1,599 | ) | (3,997 | ) | |||||||
|
Trade
payables, accrued expenses and taxes payable
|
10,033 | (8,278 | ) | 4,432 | ||||||||
|
Wages
and benefits payable
|
198 | (1,774 | ) | 9,282 | ||||||||
|
Unearned
revenue
|
2,660 | 5,698 | 156 | |||||||||
|
Warranty
|
1,761 | 2,872 | 3,831 | |||||||||
|
Effect
of foreign exchange rate changes
|
4,168 | - | - | |||||||||
|
Other,
net
|
(211 | ) | 639 | (5,714 | ) | |||||||
|
Net
cash provided by operating activities
|
133,327 | 94,773 | 79,617 | |||||||||
|
Investing
activities
|
||||||||||||
|
Proceeds
from the maturities of investments, held to maturity
|
35,000 | 170,434 | - | |||||||||
|
Purchases
of investments, held to maturity
|
- | (204,995 | ) | - | ||||||||
|
Acquisitions
of property, plant and equipment
|
(40,602 | ) | (31,739 | ) | (31,973 | ) | ||||||
|
Business
acquisitions, net of cash and cash equivalents acquired
|
(1,716,253 | ) | (21,121 | ) | - | |||||||
|
Other,
net
|
7,439 | 1,922 | 1,402 | |||||||||
|
Net
cash used in investing activities
|
(1,714,416 | ) | (85,499 | ) | (30,571 | ) | ||||||
|
Financing
activities
|
||||||||||||
|
Proceeds
from borrowings
|
1,159,023 | 345,000 | 14,800 | |||||||||
|
Payments
on debt
|
(76,099 | ) | (42,703 | ) | (126,196 | ) | ||||||
|
Issuance
of common stock
|
247,617 | 15,250 | 84,727 | |||||||||
|
Excess
tax benefits from stock-based compensation
|
- | 9,717 | - | |||||||||
|
Prepaid
debt fees
|
(22,083 | ) | (8,771 | ) | (391 | ) | ||||||
|
Other,
net
|
1,902 | - | 28 | |||||||||
|
Net
cash provided by (used in) financing activities
|
1,310,360 | 318,493 | (27,032 | ) | ||||||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
1,312 | - | - | |||||||||
|
Increase
(decrease) in cash and cash equivalents
|
(269,417 | ) | 327,767 | 22,014 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
361,405 | 33,638 | 11,624 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 91,988 | $ | 361,405 | $ | 33,638 | ||||||
|
Non-cash
transactions:
|
||||||||||||
|
Fixed
assets purchased but not yet paid
|
$ | 5,401 | $ | 6,631 | $ | 4,400 | ||||||
|
Non-cash
affects of acquisitions
|
- | 637 | - | |||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Income
taxes
|
$ | 21,714 | $ | 3,434 | $ | 1,281 | ||||||
|
Interest
(net of amount capitalized)
|
76,317 | 5,234 | 14,314 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Basis
of Consolidation
The
consolidated financial statements presented in this Annual Report on Form 10-K
include the Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005, Consolidated Balance Sheets as of
December 31, 2007 and 2006 and Consolidated Statements of Shareholders’
Equity and Cash Flows for the years ended December 31, 2007, 2006 and
2005 of Itron, Inc. and its subsidiaries.
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. We had no investments in variable interest
entities.
On April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris),
which is reported as our Actaris operating segment. During 2006, we completed
three separate acquisitions, which are reported in our Itron North America
operating segment. The operating results of these acquisitions are included in
our consolidated financial statements commencing on the date of each acquisition
(see Note 4).
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. Cash equivalents are
recorded at cost, which approximates fair value.
Short-term
investments
Investment
securities are classified into one of three categories: held to maturity,
trading or available for sale. Debt securities that we have the intent and
ability to hold to maturity are classified as held to maturity and are reported
at amortized cost (including amortization of premium or accretion of discount).
Investment purchases and sales are accounted for on a trade date basis. Market
value at a period end is based upon quoted market prices for each security.
Realized gains and losses are determined using the specific identification
method and are included in earnings. Premiums and discounts are recognized in
interest income using the effective interest method over the terms of the
securities. The amortized cost and fair value of our U.S. government and federal
agency investments held to maturity at December 31, 2006 was $34.6 million.
These investments matured during the first quarter of 2007. Unrealized holding
gains and losses at December 31, 2006 were minimal. We held no short-term
investments at December 31, 2007.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Consolidated Balance Sheets at fair value as either assets or liabilities.
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
derivative instruments that do not qualify for hedging activities are recognized
in other income (expense) in the Consolidated Statement of Operations. We
classify cash flows from our derivative programs as cash flows from operating
activities in the Consolidated Statements of Cash Flows. Derivatives are not
used for trading or speculative purposes.
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,
including those costs required to be capitalized under SFAS 151, Inventory Costs—an amendment of ARB
43, Chapter 4, which was effective for inventory costs incurred on or
after January 1, 2006. Service inventories consist primarily of subassemblies
and components necessary to support post-sale maintenance.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally thirty years for buildings and three to
five years for equipment, computers and furniture. Leasehold improvements are
capitalized over the term of the applicable lease, including renewable periods
if reasonably assured, or over the useful lives, whichever is shorter. Costs
related to internally developed software and software purchased for internal
uses are capitalized in accordance with Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, and are amortized over
the estimated useful lives of the assets. Repair and maintenance costs are
expensed as incurred. We have no major planned maintenance
activities.
We review
long-lived assets for impairment whenever events or circumstances indicate the
carrying amount of an asset may not be recoverable. If there was an indication
of impairment, management would prepare an estimate of future undiscounted cash
flows expected to result from the use of the asset over its remaining economic
life and its eventual disposition. If these cash flows were less than the
carrying amount of the asset, an impairment loss would be recognized to write
down the asset to its estimated fair value. During 2007, we recorded in general
and administrative expense a $1.6 million impairment of our prior
headquarters facility, which was held for sale. Assets held for sale are
classified within other current assets in the Consolidated Balance Sheets and
are reported at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated. The building was sold in the fourth quarter
of 2007 for $7.2 million. There were no significant impairments of long-lived
assets in 2006.
Prepaid
Debt Fees
Prepaid
debt fees represent the capitalized direct costs incurred related to the
issuance of debt and are recorded as noncurrent assets. These costs are
amortized to interest expense over the lives of the respective borrowings using
the effective interest method. When debt is repaid early, or becomes convertible
as in the case of our convertible senior subordinated notes (convertible notes),
the portion of unamortized prepaid debt fees related to the early principal
repayment, or convertible notes, is written-off and included in interest expense
in the Consolidated Statements of Operations.
Business
Combinations
In
accordance with SFAS 141, Business Combinations, we
include in our results of operations the results of an acquired business from
the date of acquisition. Net assets of the company acquired and intangible
assets that arise from contractual/legal rights, or are capable of being
separated, are recorded at their fair values as of the date of acquisition. The
residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. The excess of the fair
value of the acquisition over the cost, resulting from contingent consideration,
is recorded as a liability. Contingent payments subsequently made are then
applied against the liability. Amounts allocated to in-process research and
development (IPR&D) are expensed in the period of acquisition. Costs to
complete the IPR&D are expensed in the subsequent periods as
incurred.
Goodwill
and Intangible Assets
Goodwill
and intangible assets result from our acquisitions. Goodwill is tested for
impairment as of October 1 of each year, or more frequently, if a significant
impairment indicator occurs under the guidance of SFAS 142, Goodwill and Other Intangible
Assets. Goodwill is assigned to our reporting units based on the expected
benefit from the synergies arising from each business combination, determined by
using certain financial metrics, including the incremental discounted cash flows
associated with each reporting unit. Intangible assets with a finite life are
amortized 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 use estimates in determining and assigning the
fair value of goodwill and intangible assets, including estimates of useful
lives of intangible assets, discounted future cash flows and fair values of the
related operations. In testing goodwill for impairment, we forecast discounted
future cash flows at the reporting unit level based on estimated future revenues
and operating costs, which take into consideration factors such as existing
backlog, expected future orders, supplier contracts and general market
conditions.
Warranty
We offer
standard warranties on our hardware products and large application software
products. Standard warranty accruals represent the estimated cost of projected
warranty claims and are based on historical and projected product performance
trends, business volume assumptions, supplier information and other business and
economic projections. 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 replace
projected product failures, and we may incur additional warranty and related
expenses in the future with respect to new or established products. The
long-term warranty balance includes estimated warranty claims beyond one
year.
A summary
of the warranty accrual account activity is as follows:
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Beginning
balance, January 1
|
$ | 18,148 | $ | 15,276 | ||||
|
Actaris
acquisition opening balance
|
12,935 | - | ||||||
|
New
product warranties
|
7,423 | 2,875 | ||||||
|
Other
changes/adjustments to warranties
|
6,596 | 7,229 | ||||||
|
Claims
activity
|
(12,890 | ) | (7,232 | ) | ||||
|
Effect
of change in exchange rates
|
629 | - | ||||||
|
Ending
balance, December 31
|
32,841 | 18,148 | ||||||
|
Less:
current portion of warranty
|
21,277 | 7,999 | ||||||
|
Long-term
warranty
|
$ | 11,564 | $ | 10,149 | ||||
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $14.0 million,
$10.1 million and $10.9 million for the three years ended December 31,
2007, 2006 and 2005, respectively. The increase in warranty expense for the year
ended December 31, 2007, compared with prior years, is the result of the Actaris
acquisition on April 18, 2007. Warranty expense is classified within cost of
revenues.
Health Benefits
We are
self insured for a substantial portion of the cost of U.S. employee group health
insurance. We purchase insurance from a third party, which provides individual
and aggregate stop loss protection for these costs. Each reporting period, we
expense the costs of our health insurance plan including paid claims, the change
in the estimate of incurred but not reported (IBNR) claims, taxes and
administrative fees (collectively the plan costs). Plan costs were approximately
$14.9 million, $14.5 million and $14.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively. The IBNR accrual, which is
included in wages and benefits payable, was $2.1 million and $1.9 million at
December 31, 2007 and 2006. Fluctuations in the IBNR accrual are the result
of the number of plan participants, claims activity and deductible
limits.
Contingencies
An
estimated loss for a 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 the ability to make a reasonable
estimate of the amount of the ultimate loss. Changes in these factors and
related estimates could materially affect our financial position and results of
operations.
Defined
Benefit Pension Plans
As part
of the Actaris acquisition, we assumed Actaris’ defined benefit pension plans.
Actaris sponsors both funded and unfunded non-U.S. defined benefit pension
plans. SFAS 87, Employers'
Accounting for Pensions, as amended by SFAS 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, requires the assets
acquired and liabilities assumed in a business combination to include a
liability for the projected benefit obligation in excess of plan assets or an
asset for plan assets in excess of the projected benefit obligation. SFAS 158
also requires employers to recognize on a prospective basis the funded status of
their defined benefit pension plans on their consolidated balance sheet and
recognize as a component of other comprehensive income, net of tax, the
actuarial gains or losses, prior service costs or credits and transition assets
or obligations, if any, that arise during the period but are not recognized as
components of net periodic benefit cost. See Note 9 for additional disclosures
required by SFAS 158.
Income
Taxes
We
account for income taxes using the asset and liability method. Under this
method, deferred income taxes are recorded for the temporary differences between
the financial reporting basis and tax basis of our assets and liabilities in
each of the taxing jurisdictions in which we operate. These deferred taxes are
measured using the tax rates expected to be in effect when the temporary
differences reverse. We establish a valuation allowance for a portion of the
deferred tax asset when we believe it is more likely than not that a portion of
the deferred tax asset will not be utilized. Deferred tax liabilities have been
recorded on undistributed earnings of foreign subsidiaries that are not
permanently reinvested.
We
adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation 48, Accounting
for Uncertainty in Income Taxes – an Interpretation of FASB 109 (FIN 48)
on January 1, 2007. This interpretation addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, we may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained upon examination by the taxing authorities
based solely on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. FIN 48 requires increased disclosures,
provides guidance on the de-recognition, classification, interest and penalties
on income taxes and the accounting in interim periods (see Note 12). We
recognize interest expense and penalties accrued related to unrecognized tax
benefits in our provision for income taxes.
Foreign
Exchange
Our
consolidated financial statements are reported in U.S. dollars. Assets and
liabilities of foreign subsidiaries with a non-U.S. dollar functional currency
are translated to U.S. dollars at the exchange rates in effect on the balance
sheet date, or the last business day of the period, if applicable. Revenues and
expenses for these subsidiaries are translated to U.S. dollars using an average
rate for the relevant reporting period. Translation adjustments resulting from
this process are included, net of tax, in accumulated other comprehensive income
in shareholders’ equity. Gains and losses that arise from exchange rate
fluctuations for balances that are not denominated in the 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 considered
to be hedges of the net investment in foreign subsidiaries are included, net of
tax, in accumulated other comprehensive income in shareholders’
equity.
Revenue
Recognition
Revenues
consist primarily of hardware sales, software license fees, software
implementation, project management services installation, consulting and
post-sale maintenance support. In determining appropriate revenue recognition,
we primarily consider the provisions of the following accounting
pronouncements: Staff Accounting Bulletin (SAB) 104, Revenue recognition in Financial
Statements, FASB’s Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple
Deliverables, Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts and EITF 03-5, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software in determining the appropriate revenue
recognition policy.
Revenue
arrangements with multiple deliverables are divided into separate units of
accounting if the delivered item(s) have value to the customer on a standalone
basis, there is objective and reliable evidence of fair value of both the
delivered and undelivered item(s) and delivery/performance of the undelivered
item(s) is probable. The total arrangement consideration is allocated among the
separate units of accounting based on their relative fair values and the
applicable revenue recognition criteria considered for each unit of accounting.
For our standard contract arrangements that combine deliverables such as
hardware, meter reading system software, installation and project management
services, each deliverable is generally considered a single unit of accounting.
The amount allocable to a delivered item is limited to the amount that we are
entitled to collect without being contingent upon the delivery/performance of
additional items.
Revenues
are recognized when (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services have been rendered, (3) the sales price is
fixed or determinable and (4) collectibility is reasonably assured. Hardware
revenues are generally recognized at the time of shipment, receipt by customer,
or, if applicable, upon completion of customer acceptance provisions. For
software arrangements with multiple elements, revenue recognition is also
dependent upon the availability of vendor-specific objective evidence (VSOE) of
fair value for each of the elements. The lack of VSOE, or the existence of
extended payment terms or other inherent risks, may affect the timing of revenue
recognition for software arrangements. If implementation services are essential
to a software arrangement, revenue is recognized using either the
percentage-of-completion methodology if project costs can be estimated or the
completed contract methodology if project costs cannot be reliably estimated.
Hardware and software post-sale maintenance support fees are recognized ratably
over the life of the related service contract.
Unearned
revenue is recorded for products or services for which cash has been received
from a customer, but for which the criteria for revenue recognition have not
been met as of the balance sheet date. Shipping and handling costs and
incidental expenses, which are commonly referred to as "out-of-pocket" expenses,
billed to customers are recorded as revenue, with the associated cost charged to
cost of revenues. We record sales, use and value added taxes billed to our
customers on a net basis in our Consolidated Statements of
Operations.
Product
and Software Development Costs
Product
and software development costs primarily include payroll and third party
contracting fees. For software we develop to be marketed or sold, SFAS 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed (as amended), requires
the capitalization of development costs after technological feasibility is
established. Due to the relatively short period of time between technological
feasibility and the completion of product and software development, and the
immaterial nature of these costs, we generally do not capitalize product and
software development expenses.
Advertising
Advertising
costs are expensed as incurred. Advertising expenses were $2.7 million, $1.2
million and $1.5 million for the years ended December 31, 2007, 2006 and
2005, respectively. The increase in advertising expense for the year ended
December 31, 2007, compared with prior years, is the result of the Actaris
acquisition on April 18, 2007.
Earnings
Per Share
Basic
earnings per share (EPS) is calculated using net income (loss) divided by the
weighted average common shares outstanding during the period. We compute
dilutive EPS by adjusting the weighted average number of common shares
outstanding to consider the effect of potentially dilutive securities, including
stock-based awards and our convertible notes. Shares calculated to be
contingently issuable are included in the dilutive EPS calculation as of the
beginning of the period when all necessary conditions have been satisfied. For
periods in which we report a net loss, diluted net loss per share is the same as
basic net loss per share.
Stock-Based
Compensation
On
January 1, 2006, we adopted SFAS 123(R), Share-Based Payment, which
requires the measurement and recognition of compensation expense for all
stock-based awards made to employees and directors based on estimated fair
values. SFAS 123(R) supersedes Accounting Principles Board Opinion 25,
Accounting for Stock Issued to
Employees. In March 2005, the Securities and Exchange Commission (SEC)
issued SAB 107 relating to SFAS 123(R). We have applied the provisions of SAB
107 in our adoption of SFAS 123(R).
We
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the
first day of our fiscal year 2006. Our consolidated financial statements for the
year ended December 31, 2007 and 2006 reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, our consolidated
financial statements for prior periods have not been restated to reflect the
impact of SFAS 123(R).
The
following table shows the effect on net earnings and earnings per share for the
year ended December 31, 2005 had compensation cost been recognized based upon
the estimated fair value on the grant date of stock options and employee stock
purchase plan (ESPP) awards in accordance with SFAS 123, Accounting for Stock-based
Compensation, as amended by SFAS 148, Accounting for Stock-Based
Compensation – Transition and Disclosure. Disclosures for the years ended
December 31, 2007 and 2006 are not presented because the amounts are recognized
in the consolidated financial statements.
|
Year
Ended
|
||||
|
December
31, 2005
|
||||
|
(in
thousands, except
per share data)
|
||||
|
Net
income
|
||||
|
As
reported
|
$ | 33,061 | ||
|
Deduct:
stock-based compensation, net of tax
|
(5,404 | ) | ||
|
Pro
forma net income
|
$ | 27,657 | ||
|
Basic
earnings per common share
|
||||
|
As
reported
|
$ | 1.41 | ||
|
Pro
forma
|
$ | 1.18 | ||
|
Diluted
earnings per common share
|
||||
|
As
reported
|
$ | 1.33 | ||
|
Pro
forma
|
$ | 1.12 | ||
The fair
value of stock options and ESPP awards issued during the years ended December
31, 2007, 2006 and 2005 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,
|
|||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Dividend
yield
|
- | - | - | - | - | - | ||||||||||||||||||
|
Expected
volatility
|
38.9 | % | 43.1 | % | 58.9 | % | 26.7 | % | 41.3 | % | 46.1 | % | ||||||||||||
|
Risk-free
interest rate
|
4.4 | % | 4.8 | % | 3.8 | % | 4.8 | % | 4.7 | % | 3.1 | % | ||||||||||||
|
Expected
life (years)
|
4.8 | 4.6 | 3.4 | 0.25 | 0.25 | 0.25 | ||||||||||||||||||
For 2007
and 2006, expected price volatility is based on a combination of historical
volatility of our common stock and the implied volatility of our traded options
for the related vesting period. We believe this combined approach is reflective
of current and historical market conditions and an appropriate indicator of
expected volatility. Prior to the adoption of SFAS 123(R), expected stock
price volatility was estimated using only historical volatility. The risk-free
interest rate is the rate available as of the award date on zero-coupon U.S.
government issues with a remaining term equal to the expected life of the award.
The expected life is the weighted average expected life for the entire award
based on the fixed period of time between the date the award is granted and the
date the award is fully exercised. Factors to be considered in estimating the
expected life include historical experience of similar awards, with
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. We have not paid dividends in the past and do not plan
to pay any dividends in the foreseeable future.
The fair
value of restricted and unrestricted stock awards is the market close price of
our common stock on the date of grant.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (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
As a
result of our Actaris acquisition, certain prior year balances have been
reclassified to conform to the current year presentation. Such reclassifications
did not affect total revenues, operating income, net income, total current or
long-term assets or liabilities or net cash provided by operating
activities.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating the impact
of the adoption of SFAS 157 on our consolidated financial statements for
the first quarter of 2008 but have not yet determined if it will be material at
this time.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities –Including an amendment of FASB Statement No.
115. This statement permits entities to choose to measure many financial
assets and liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected would be reported in net income.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We
have not yet determined if we will elect to apply any of the provisions of SFAS
159 or what effect the adoption of SFAS 159 would have, if any, on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes, including the way
assets and liabilities are recognized in purchase accounting. SFAS 141(R) also
changes the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value and requires the expensing of acquisition-related
costs as incurred. SFAS 141(R) is effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We will apply SFAS 141(R) to any
acquisition after the date of adoption.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, and will be adopted by us in the first quarter of fiscal year
2009. SFAS 160 is currently not expected to have a material effect on our
consolidated financial statements.
Note
2: Earnings Per Share and Capital Structure
The
following table sets forth the computation of basic and diluted
EPS.
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(in
thousands, except per share data)
|
|||||||||||
|
Net
income (loss) available to common shareholders
|
$ | (16,144 | ) | $ | 33,759 | $ | 33,061 | ||||
|
Weighted
average number of shares outstanding - Basic
|
29,584 | 25,414 | 23,394 | ||||||||
|
Dilutive
effect of stock-based awards
|
- | 869 | 1,383 | ||||||||
|
Weighted
average number of shares outstanding - Diluted
|
29,584 | 26,283 | 24,777 | ||||||||
|
Basic
earnings (loss) per common share
|
$ | (0.55 | ) | $ | 1.33 | $ | 1.41 | ||||
|
Diluted
earnings (loss) per common share
|
$ | (0.55 | ) | $ | 1.28 | $ | 1.33 | ||||
The
dilutive effect of stock-based awards is calculated using the treasury stock
method. Under this method, EPS 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. Weighted average common shares outstanding,
assuming dilution, include the incremental shares that would be issued upon the
assumed exercise of stock-based awards. At December 31, 2007, 2006 and 2005, we
had stock-based awards outstanding of approximately 1.6 million,
2.2 million and 2.4 million at weighted average option exercise prices of
$37.81, $29.78 and $21.24, respectively. Approximately 765,000, 270,000 and
15,000 stock-based awards were excluded from the calculation of diluted EPS for
the years ended December 31, 2007, 2006 and 2005, respectively, because they
were anti-dilutive. These stock-based awards could be dilutive in future
periods.
In August
2006, we issued $345 million of convertible senior subordinated notes that, if
converted in the future, would have a potentially dilutive effect on our EPS. 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. The effect on diluted EPS is calculated under the
net share settlement method in accordance with EITF 04-8, The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share. Under the net
share settlement method, we include the amount of shares it would take to
satisfy the conversion obligation, assuming that all of the convertible notes
are converted. The average closing price of our common stock at December 31,
2007 and 2006 is used as the basis for determining the dilutive effect on EPS.
The average price of our common stock for the year ended December 31, 2007
exceeded the conversion price of $65.16 and therefore, approximately 745,000
shares would have been dilutive if we had net income and included the dilutive
shares in the calculation of diluted EPS. The average price of our common stock
for the year ended December 31, 2006 did not exceed the conversion price of
$65.16 and therefore, did not have an effect on diluted earnings per share.
These shares could be dilutive in future periods.
On March
1, 2007, we issued and sold 4.1 million shares of common stock, no par value,
for net proceeds of $225.2 million, which were used to partially fund the
acquisition of Actaris on April 18, 2007.
We have
authorized 10 million shares of preferred stock with no par value. In the event
of a liquidation, dissolution or winding up of the affairs of the corporation,
whether voluntary or involuntary, the holders of any outstanding stock will be
entitled to be paid a preferential amount per share to be determined by the
Board of Directors prior to any payment to holders of common stock. Shares of
preferred stock may be converted into common stock based on terms, conditions,
rates and subject to such adjustments set by the Board of Directors. There was
no preferred stock issued or outstanding at December 31, 2007, 2006 and
2005.
Note
3: Certain Balance Sheet Components
|
Accounts
receivable, net
|
At
December 31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Trade
receivables (net of allowance of $6,391 and $589)
|
$ | 324,425 | $ | 100,162 | ||||
|
Unbilled
revenue
|
14,593 | 9,762 | ||||||
|
Total
accounts receivable, net
|
$ | 339,018 | $ | 109,924 | ||||
A summary
of the allowance for doubtful accounts activity is as follows:
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Beginning
balance, January 1
|
$ | 589 | $ | 598 | ||||
|
Actaris
acquisition opening balance
|
5,176 | - | ||||||
|
Provision
for doubtful accounts
|
1,046 | 52 | ||||||
|
Accounts
charged off
|
(808 | ) | (61 | ) | ||||
|
Effects
of change in exchange rates
|
388 | - | ||||||
|
Ending
balance, December 31
|
$ | 6,391 | $ | 589 | ||||
Inventories
A summary
of the inventory balances is as follows:
|
At
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Materials
|
$ | 81,636 | $ | 30,843 | ||||
|
Work
in process
|
16,859 | 5,220 | ||||||
|
Finished
goods
|
70,743 | 16,433 | ||||||
|
Total
inventories
|
$ | 169,238 | $ | 52,496 | ||||
Consigned
inventory, consisting of raw materials and finished goods, was $22.8
million and $4.0 million at December 31, 2007 and 2006. The increase in
consigned inventory for the year ended December 31, 2007, compared with 2006, is
the result of the Actaris acquisition on April 18, 2007.
|
Property,
plant and equipment, net
|
At
December 31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Machinery
and equipment
|
$ | 192,562 | $ | 75,571 | ||||
|
Computers
and purchased software
|
66,412 | 40,368 | ||||||
|
Buildings,
furniture and improvements
|
140,386 | 45,670 | ||||||
|
Land
|
41,750 | 2,482 | ||||||
|
Total
cost
|
441,110 | 164,091 | ||||||
|
Accumulated
depreciation
|
(118,107 | ) | (75,402 | ) | ||||
|
Property,
plant and equipment, net
|
$ | 323,003 | $ | 88,689 | ||||
Depreciation
expense was $42.4 million, $15.1 million and $12.8 million for the years ended
December 31, 2007, 2006 and 2005. The increase in depreciation expense for
the year ended December 31, 2007, compared with prior years, is the result of
the Actaris acquisition on April 18, 2007.
Note
4: Business Combinations
|
|
Actaris
Metering Systems
|
On April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris)
for €800 million (approximately $1.1 billion) plus the retirement of $642.9
million of debt. The acquisition was financed with a $1.2 billion credit
facility, $225.2 million in net proceeds from the sale of 4.1 million shares of
common stock and cash on hand. The acquisition included all of Actaris’
electricity, gas and water meter manufacturing and sales operations, located
primarily in Europe and the rest of the world, and provided geographic expansion
of our business and product offerings. The purchase price was a significant
premium to the assets acquired and liabilities assumed, due to expected
synergies from products and markets of the combined entity. The acquisition of
Actaris creates an opportunity to share technology and expertise around the
world as worldwide electric, gas and water utilities look for advanced metering
and communication products to better serve their markets; thus, the purchase
price resulted in a substantial amount of goodwill.
The
preliminary purchase price, net of cash acquired of $29.5 million, is summarized
as follows (in thousands):
|
Cash
consideration, net of cash acquired
|
$ | 1,697,505 | |
|
Direct
transaction costs
|
18,871 | ||
|
Total
purchase price
|
$ | 1,716,376 |
We have
made preliminary allocations of the purchase price to the assets acquired and
liabilities assumed based on estimated fair value assessments. We are continuing
to assess the useful lives of certain intangible assets, which will affect the
discounted cash flows used in the preliminary allocation. We are also collecting
information, particularly third party documents, and analyzing external factors,
to determine the fair values for litigation, warranties, deferred taxes and
uncertain tax positions, which would also affect goodwill. We are unable to
determine the impact to goodwill prior to the completion of our assessment. The
size and complexity of this international acquisition has required considerable
resources to validate information and complete analyses, including consultation
with outside legal counsel and the review of contract terms and conditions. The
following information reflects our preliminary allocation of the purchase
price.
|
April
18, 2007
|
|||||||
|
Fair
Value
|
Useful
Life
|
||||||
|
(in
thousands)
|
(in
years)
|
||||||
|
Fair
value of tangible assets acquired and liabilities assumed,
net
|
$ | 16,225 | |||||
|
In-process
research and development (IPR&D)
|
35,975 | ||||||
|
Identified
intangible assets - amortizable
|
|||||||
|
Core-developed
technology
|
222,705 |
9-15
|
|||||
|
Customer
relationships
|
270,927 |
20
|
|||||
|
Trademarks
and tradenames
|
118,419 |
10
|
|||||
|
Other
|
5,094 |
1
|
|||||
|
Goodwill
|
1,047,031 | ||||||
|
Total
net assets acquired
|
$ | 1,716,376 | |||||
Significant
tangible assets acquired consisted of accounts receivable, inventory and
property, plant and equipment. Significant liabilities assumed consisted of
accounts payable, accrued expenses, wages and benefits payable, deferred taxes,
uncertain tax positions and pension benefit obligations.
Our
acquisition of Actaris resulted in $36.0 million of IPR&D expense,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended to
make key enhancements and improve functionality of our residential and
commercial and industrial meters. We value IPR&D using the income approach,
which uses the present value of the projected cash flows that are expected to be
generated over the next one to six years. The risk adjusted discount rate was 12
percent, which was based on an industry composite of weighted average cost of
capital, with certain premiums for equity risk and size, and the uncertainty
associated with the completion of the development effort and subsequent
commercialization.
The
preliminary values assigned to the identified intangible assets were estimated
using the income approach. Under the income approach, the fair value reflects
the present value of the projected cash flows that are expected to be generated.
The intangible assets will be amortized using the estimated discounted cash
flows assumed in the valuation models. The residual balance of the purchase
price, after fair value allocations to all identified assets and liabilities,
represents goodwill. For tax purposes, goodwill is not deductible, as we
acquired the stock of Actaris.
The
following pro forma results are based on the individual historical results of
Itron, Inc. and Actaris (prior to the acquisition on April 18, 2007) with
adjustments to give effect to the combined operations as if the acquisition had
occurred on January 1, 2006. The significant adjustments were as
follows:
|
o
|
Increased
amortization expense related to the acquired identified definite lived
intangible assets of $27.3 million and $56.8 million for the years
ended December 31, 2007 and 2006.
|
|
o
|
Elimination
of amounts directly associated with the acquisition, including IPR&D
of $36.0 million and $16.0 million associated with the valuation of
inventory on hand at the acquisition date to equal the sales price, less
costs to complete and a reasonable profit allowance for selling
effort.
|
|
o
|
Additional
net interest expense of $12.6 million and $36.0 million for the years
ended December 31, 2007 and 2006, related to the borrowings incurred
upon acquisition, net of the retirement of Actaris’ previous
debt.
|
|
o
|
Adjustments
are tax affected utilizing Itron, Inc.’s estimated average statutory tax
rate of 36.6%.
|
The pro
forma results are intended for information purposes only and do not purport to
represent what the combined companies’ results of operations or financial
position would actually have been had the transaction in fact occurred at an
earlier date or project the results for any future date or period. Specifically,
as a majority of our revenues and operating expenses are now denominated in
foreign currencies, changes in foreign currency exchange rates could materially
affect our financial results.
|
Pro
Forma
|
||||||||
|
Year
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands, except per share data)
|
||||||||
|
Revenues
|
$ | 1,788,276 | $ | 1,625,292 | ||||
|
Net
income (loss)
|
$ | 178 | $ | (540 | ) | |||
|
Basic
earnings (loss) per share
|
$ | 0.01 | $ | (0.02 | ) | |||
|
Diluted
earnings (loss) per share
|
$ | 0.01 | $ | (0.02 | ) | |||
|
Weighted
average shares assumed outstanding
|
||||||||
|
Basic
|
30,245 | 29,501 | ||||||
|
Diluted
|
31,754 | 29,501 | ||||||
2006
Acquisitions
During
2006, we completed three separate acquisitions, which are reported in our Itron
North America operating segment (in
thousands).
|
Acquisition
Date
|
Entity
|
Purchase
Price
|
|||
|
April
1, 2006
|
Quantum
Consulting, Inc. (Quantum)
|
$ | 4,493 | ||
|
June
1, 2006
|
ELO
Sistemas e Tecnologia Ltda. (ELO)
|
$ | 11,657 | ||
|
November
21, 2006
|
Flow
Metrix, Inc. (Flow Metrix)
|
$ | 13,811 | ||
The
Quantum acquisition expanded our consulting services related to energy
efficiency, planning design and market research and the ELO acquisition expanded
our sales, manufacturing and services in South America. With the Flow Metrix
acquisition, we now provide advanced leak detection systems for underground
pipelines. The following financial information reflects the allocation of the
purchase price, after final adjustments recorded in 2007, based on
estimated fair values of assets and liabilities as of the date of
acquisition.
|
Quantum
|
ELO
|
Flow
Metrix
|
||||||||||
|
April
1, 2006
|
June
1, 2006
|
November
21, 2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Fair
value of tangible net assets acquired
|
$ | 467 | $ | 798 | $ | (3,531 | ) | |||||
|
Identified
intangible assets - amortizable
|
||||||||||||
|
Core-developed
technology
|
- | - | 7,400 | |||||||||
|
Customer
contracts and relationships
|
- | 6,957 | 740 | |||||||||
|
Tradenames
|
- | - | 410 | |||||||||
|
Other
|
1,030 | 1,731 | 500 | |||||||||
|
Goodwill
|
2,996 | 482 | 8,292 | |||||||||
|
Foreign
currency exchange rate change in
|
||||||||||||
|
contingent
purchase price liability (Goodwill)
|
- | 1,689 | - | |||||||||
|
Total
net assets acquired
|
$ | 4,493 | $ | 11,657 | $ | 13,811 | ||||||
The
Quantum acquisition includes additional contingent consideration of up to $1.0
million to be paid to Quantum shareholders if certain defined yearly financial
targets are achieved through 2008. These additional payments will increase the
purchase price and goodwill at the time the financial targets are achieved. The
2007 and 2006 financial targets were not achieved; therefore, no additional
consideration was recorded.
The ELO
acquisition was transacted in Brazilian reais and contained contingent
consideration, payable if certain financial targets were achieved over a five
year period or under certain defined conditions. At the date of acquisition,
contingent consideration of approximately $5.6 million was recorded as a
long-term liability, payable upon the contingent consideration terms. During
2007, increases in foreign currency exchange rates increased the contingent
consideration payable to $7.3 million. During the fourth quarter of 2007,
certain conditions were met resulting in contingent consideration of
approximately $7.8 million payable to the ELO shareholders, resulting in a
goodwill balance of $482,000 at December 31, 2007.
The Flow
Metrix acquisition provides for additional consideration of up to $3.0 million
if certain technological and integration milestones are achieved within the
first three years from the date of acquisition. These additional payments will
increase the purchase price and goodwill at the time the milestones are
achieved. At December 31, 2007, no additional payments have been
required.
The
values assigned to the identified intangible assets for the 2006 acquisitions
were estimated using the income approach. Under the income approach, the fair
value reflects the present value of the projected cash flows that are expected
to be generated. The intangible assets will be amortized based on the estimated
discounted cash flows assumed in the valuation models. For tax purposes, the
goodwill of Quantum and Flow Metrix are not deductible as we acquired the stock
of these companies. The ELO acquisition was structured such that we received an
increase in basis for tax purposes equal to the cash consideration paid. With
the payment of contingent consideration to the ELO shareholders, intangible
assets and goodwill are deductible for tax purposes.
Pro forma
results are not presented for the acquisitions of Quantum, ELO and Flow Metrix
as they are not considered material business combinations in accordance with
SFAS 141.
Note
5: Identified Intangible Assets
The gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
At
December 31, 2007
|
At
December 31, 2006
|
||||||||||||||||||||||
|
Gross
Assets
|
Accumulated
Amortization
|
Net
|
Gross
Assets
|
Accumulated
Amortization
|
Net
|
||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||
|
Core-developed
technology
|
$ | 403,665 | $ | (126,488 | ) | $ | 277,177 | $ | 162,930 | $ | (77,783 | ) | $ | 85,147 | |||||||||
|
Customer
contracts and relationships
|
312,709 | (25,151 | ) | 287,558 | 16,888 | (7,931 | ) | 8,957 | |||||||||||||||
|
Trademarks
and tradenames
|
154,760 | (26,877 | ) | 127,883 | 26,210 | (12,022 | ) | 14,188 | |||||||||||||||
|
Other
|
24,845 | (21,563 | ) | 3,282 | 25,840 | (21,450 | ) | 4,390 | |||||||||||||||
|
Total
identified intangible assets
|
$ | 895,979 | $ | (200,079 | ) | $ | 695,900 | $ | 231,868 | $ | (119,186 | ) | $ | 112,682 | |||||||||
A summary
of the identifiable intangible asset account activity is as
follows:
|
At
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
(in
thousands)
|
|||||||
|
Beginning
balance, intangible assets, gross
|
$ | 231,868 | $ | 211,328 | |||
|
Business
acquisitions
|
617,145 | 19,988 | |||||
|
Adjustment
of previous acquisitions
|
(1,220 | ) | - | ||||
|
Disposals
|
(6,992 | ) | - | ||||
|
Effect
of change in exchange rates
|
55,178 | 552 | |||||
|
Ending
balance, intangible assets, gross
|
$ | 895,979 | $ | 231,868 | |||
The
increase in identified intangible assets in 2007 was primarily the result of the
Actaris acquisition on April 18, 2007. In addition, a $1.2 million adjustment to
intangible assets was recorded for the 2006 Flow Metrix acquisition based on the
final determination of fair values of intangible assets acquired. Identified
intangible assets acquired in 2006 were the result of the Quantum, ELO and Flow
Metrix acquisitions. Intangible assets are recorded in the functional currency
of our foreign subsidiaries; therefore, the carrying amount of intangible assets
increase or decrease, with a corresponding change in accumulated other
comprehensive income, due to changes in foreign currency exchange rates for
those intangible assets owned by our foreign subsidiaries. Intangible asset
amortization expense was $84.0 million in 2007, $31.1 million in 2006 and
$38.8 million in 2005.
Estimated
future annual amortization expense is as follows:
|
Years
ending December 31,
|
Estimated
Annual Amortization
|
||
|
(in
thousands)
|
|||
|
2008
|
$ | 118,890 | |
|
2009
|
108,794 | ||
|
2010
|
86,327 | ||
|
2011
|
75,162 | ||
|
2012
|
60,300 | ||
|
Beyond
2012
|
246,427 | ||
|
Total
identified intangible assets, net
|
$ | 695,900 | |
Note
6: Goodwill
The
following table reflects goodwill allocated to each reporting segment at
December 31, 2007 and 2006.
|
Itron
North America
|
Actaris
|
Total
Company
|
|||||||||
|
(in
thousands)
|
|||||||||||
|
Goodwill
balance at December 31, 2005
|
$ | 116,032 | $ | - | $ | 116,032 | |||||
|
Goodwill
acquired
|
10,177 | - | 10,177 | ||||||||
|
Effect
of change in exchange rates
|
57 | - | 57 | ||||||||
|
Goodwill
balance at December 31, 2006
|
126,266 | - | 126,266 | ||||||||
|
Goodwill
acquired
|
- | 1,047,031 | 1,047,031 | ||||||||
|
Adjustment
of previous acquisitions
|
846 | - | 846 | ||||||||
|
Effect
of change in exchange rates
|
2,159 | 89,831 | 91,990 | ||||||||
|
Goodwill
balance at December 31, 2007
|
$ | 129,271 | $ | 1,136,862 | $ | 1,266,133 | |||||
Goodwill acquired in 2007 was the result of the Actaris acquisition on April 18, 2007. Adjustments to goodwill in 2007 were based on the final determination of certain fair values and the payment of additional consideration for our 2006 acquisitions. Goodwill acquired in 2006 was the result of the Quantum and Flow Metrix acquisitions. Goodwill is recorded in the functional currency of our foreign subsidiaries; therefore, goodwill balances may increase or decrease, with a corresponding change in accumulated other comprehensive income, due to changes in foreign currency exchange rates.
As a
result of the Actaris acquisition, our operating segments as set forth above are
based on our new segment reporting structure. In accordance with SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, historical segment information has
been restated from the segment information previously provided to conform to the
segment reporting structure after the April 2007 Actaris acquisition. As a
result, goodwill assigned to our previous operating segments was combined as
Itron North America. At the date of our reorganization, we determined there to
be no impairment in the previous segments in accordance with SFAS
142.
Note
7: Debt
The
components of our borrowings are as follows:
|
At
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
(in
thousands)
|
|||||||
|
Credit
facility
|
|||||||
|
USD
denominated term loan
|
$ | 596,793 | $ | - | |||
|
EUR
denominated term loan
|
445,228 | - | |||||
|
GBP
denominated term loan
|
79,091 | - | |||||
|
Convertible
senior subordinated notes
|
345,000 | 345,000 | |||||
|
Senior
subordinated notes
|
124,429 | 124,324 | |||||
| 1,590,541 | 469,324 | ||||||
|
Current
portion of debt
|
(11,980 | ) | - | ||||
|
Total
long-term debt
|
$ | 1,578,561 | $ | 469,324 | |||
Credit
Facility
The
Actaris acquisition was financed in part by a $1.2 billion credit facility
(credit facility). The credit facility, dated April 18, 2007, was comprised of a
$605.1 million first lien U.S. dollar denominated term loan; a
€335 million first lien euro denominated term loan; a £50 million
first lien pound sterling denominated term loan (collectively the term loans);
and a $115 million multicurrency revolving line-of-credit (revolver).
Interest rates on the credit facility are based on the
respective borrowing’s denominated LIBOR rate (U.S. dollar, euro or pound
sterling) or the Wells Fargo Bank, National Association’s prime rate, plus an
additional margin subject to factors including our consolidated leverage ratio.
Our interest rates were 6.84%, 8.05% and 6.78% for the U.S. dollar denominated,
the pound sterling denominated and the euro denominated term loans at December
31, 2007, respectively. 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.
Prepaid debt fees are amortized using the effective interest method through the
term loans’ earliest maturity date, as defined by the credit agreement. The
credit facility is secured by substantially all of the assets of our operating
subsidiaries, except our foreign subsidiaries, and contains covenants, which
contain certain financial ratios and place restrictions on the incurrence of
debt, the payment of dividends, certain investments, incurrence of capital
expenditures above a set limit and mergers. We were in compliance with these
debt covenants at December 31, 2007. At December 31, 2007, there were no
borrowings outstanding under the revolver and $54.7 million was utilized by
outstanding standby letters of credit resulting in $60.3 million being available
for additional borrowings.
This
credit facility replaced an original senior secured credit facility we entered
into in 2004 to finance the acquisition of Schlumberger’s electricity metering
business. During the first quarter of 2006 we repaid the remaining balance of
$24.7 million on the term loan portion of the original senior secured
credit facility.
Senior
Subordinated Notes
Our
senior subordinated notes (subordinated notes) consist of $125 million aggregate
principal amount of 7.75% notes, issued in May 2004 and due in 2012. The
subordinated notes were discounted to a price of 99.265 to yield 7.875%. The
discount on the subordinated notes is accreted resulting in a balance of $124.4
million at December 31, 2007. Prepaid debt fees are amortized over the life of
the subordinated notes. The subordinated notes are registered with the SEC and
are generally transferable. Fixed interest payments of $4.8 million are
required every six months, in May and November. The notes are subordinated to
our credit facility (senior secured borrowings) and are guaranteed by all of our
operating subsidiaries, except for our foreign subsidiaries. The subordinated
notes contain covenants, which place restrictions on the incurrence of debt, the
payment of dividends, certain investments and mergers. The Actaris acquisition
and the associated financing were not prohibited under these covenants. We were
in compliance with these debt covenants at December 31, 2007. Some or all of the
subordinated notes may be redeemed at our option at any time on or after May 15,
2008, at their principal amount plus a specified premium price of 103.875%,
decreasing each year thereafter.
Convertible
Senior Subordinated Notes
On August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC and
are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in EITF 05-02, The Meaning of “Conventional
Convertible Debt Instruments” in Issue 00-19, as the number of shares, or
cash, to be received by the holders was not fixed at the inception of the
obligation. We have concluded that the conversion feature of our convertible
notes does not require bifurcation from the host contract in accordance with
SFAS 133, as the conversion feature is indexed to the Company’s own stock and
would be classified within stockholders’ equity if it were a freestanding
instrument as provided by EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.
The
convertible notes may be converted at the option of the holder at an initial
conversion rate of 15.3478 shares of our common stock for each $1,000 principal
amount of the convertible notes (conversion price of $65.16 per share), under
the following circumstances, as defined in the indenture:
|
o
|
during
any fiscal quarter commencing after September 30, 2006, if the closing
sale price per share of our common stock exceeds $78.19, which is 120% of
the conversion price of $65.16, for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter;
|
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
|
o
|
during
the five business days after any five consecutive trading day period in
which the trading price of the convertible notes for each day was less
than 98% of the conversion value of the convertible
notes;
|
|
o
|
if
the convertible notes are called for
redemption;
|
|
o
|
if
a fundamental change occurs; or
|
|
o
|
upon
the occurrence of defined corporate
events.
|
The
convertible notes also contain purchase options, at the option of the holders,
which may require us to repurchase all or a portion of the convertible notes on
August 1, 2011, August 1, 2016 and August 1, 2021 at the principal amount, plus
accrued and unpaid interest.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination. The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our foreign subsidiaries, all of which are wholly owned. The convertible
notes contain covenants, which place restrictions on the incurrence of debt and
certain mergers. The Actaris acquisition and the associated financing were not
prohibited under these covenants. We were in compliance with these debt
covenants at December 31, 2007.
At
December 31, 2007, the contingent conversion threshold was not exceeded and,
therefore, the aggregate principal amount of the convertible notes is included
in long-term debt. At September 30, 2007, the contingent conversion threshold of
our convertible notes was exceeded. As a result, the notes were convertible at
the option of the holder as of September 30, 2007 and through the fourth quarter
of 2007, and accordingly, the aggregate principal amount of the convertible
notes at September 30, 2007 was included in the current portion of
long-term debt; and since our debt fees were amortized through the date of the
earliest conversion option, in accordance with our policy we expensed
approximately $6.6 million of the remaining prepaid debt fees associated with
the convertible notes at September 30, 2007. As our stock price is subject to
fluctuation, the contingent conversion threshold may be exceeded during any
quarter prior to July 2011, and the notes subject to conversion.
Real
Estate Term Note
On
December 30, 2005, we signed a real estate term note (real estate note) for
$14.8 million, secured by real property, with principal payments of $740,000,
plus interest, payable quarterly, commencing April 1, 2006 and continuing
through January 1, 2011. During 2006, we completed the repayment of the
real estate note.
Project
Financing
In May
1998, in conjunction with project financing for one of our outsourcing
contracts, we issued a note secured by the assets of the project with monthly
interest payments at an annual interest rate of 7.6%, maturing May 31, 2009.
During April 2006, we repaid the balance of the project financing loan,
which included $107,000 in prepayment fees.
Prepaid
Debt Fees & Interest Expense
Prepaid
debt fees for our outstanding borrowings are amortized over the respective terms
using the effective interest method. Total unamortized prepaid debt fees were
approximately $21.6 million and $13.2 million at December 31, 2007 and 2006,
respectively. For the year ended December 31, 2006, total interest cost was
$18.7 million, of which $900,000 was capitalized as part of our new corporate
headquarters capital improvements. There was no capitalized interest in 2007.
Accrued interest expense was $5.0 million and $4.8 million at December 31, 2007
and 2006, respectively.
Minimum
Payments on Debt
|
Minimum
Payments
|
|||
|
(in
thousands)
|
|||
|
2008
|
$ | 11,980 | |
|
2009
|
11,980 | ||
|
2010
|
11,980 | ||
|
2011
|
11,980 | ||
|
2012
|
136,409 | ||
|
Beyond
2012
|
1,406,212 | ||
|
Total
debt
|
$ | 1,590,541 | |
Note
8: Derivative Financial Instruments and Hedging
Activities
As a
result of the Actaris acquisition, we now have a greater exposure to foreign
currency exchange rate fluctuations and interest rate changes. As part of our
risk management strategy, we are using derivative instruments to hedge certain
foreign currency and interest rate exposures. Our objective is to offset gains
and losses resulting from these exposures with losses and gains on the
derivative contracts used to hedge them, thereby reducing the impact of
volatility on earnings or protecting fair values of assets and
liabilities.
During
the third quarter of 2007, we entered into an interest rate swap to convert our
€335 million euro denominated variable rate term loan to a fixed-rate debt
obligation at a rate of 6.59% for the term of the debt, including expected
prepayments. This variable-to-fixed interest rate swap is considered a highly
effective cash flow hedge. Consequently, changes in the fair value of the
interest rate swap are recorded as a component of other comprehensive income and
are recognized in earnings when the hedged item affects earnings. The cash flow
hedge is expected to be highly effective in achieving offsetting cash flows
attributable to the hedged risk during the term of the hedge. The amounts paid
or received on the hedge are recognized as adjustments to interest expense. The
notional amount of the swap was $445.2 million (€302.5 million) and the fair
value, recorded as a long-term liability, was $1.7 million at December 31, 2007.
The amount of net gains expected to be reclassified into earnings in the next
twelve months is approximately $611,000.
During
the third quarter of 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 has terms similar to the pound sterling denominated
term loan, including expected prepayments. This instrument is intended to reduce
the impact of volatility between the pound sterling and the U.S. dollar.
Therefore, gains and losses are recorded in other income (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 are recognized as
adjustments to interest expense. The fair value of the cross currency swap,
recorded as a long-term liability, was $410,000 and the pound sterling
denominated notional amount of the cross currency interest rate swap was $79.1
million (£39.6 million) at December 31, 2007. The U.S. denominated notional
amount was $79.3 million at December 31, 2007. We expect the interest rate swap
to reduce interest expense by $810,000 during the next twelve
months.
Effective
June 29, 2007, we designated certain portions of our foreign currency
denominated term loans as hedges of our net investment in foreign operations.
Net losses of $41.1 million ($25.5 million after-tax) were reported as a net
unrealized loss on derivative instruments, a component of accumulated other
comprehensive income, which represented effective hedges of net investments, for
the year ended December 31, 2007. We had no hedge ineffectiveness.
On
February 25, 2007, we signed a stock purchase agreement to acquire Actaris and
entered into foreign currency range forward contracts (transactions where put
options were sold and call options were purchased) to reduce our exposure to
declines in the value of the U.S. dollar and pound sterling relative to the euro
denominated purchase price. Under SFAS 133, the Actaris stock purchase agreement
is considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts cannot be designated as fair value hedges. In April
2007, we completed the acquisition of Actaris and realized a $2.8 million gain
in other income (expense) from the termination of these foreign currency range
forward contracts.
Counterparties
to our currency exchange and interest rate derivatives consist of major
international financial institutions. We continually monitor our positions and
the credit ratings of the counterparties involved. While we may be exposed to
potential losses due to the credit risk of non-performance by these
counterparties, losses are not anticipated.
Note
9: Pension Plan Benefits
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary and
Indonesia. These plans were assumed with the acquisition of Actaris. The defined
benefit obligation is calculated annually by using the projected unit credit
method. The measurement date for the pension plans was December 31,
2007.
Our
general funding policy for these qualified pension plans is to contribute
amounts at least sufficient to satisfy regulatory funding standards of the
respective countries for each plan. We contributed $131,000 to the defined
benefit pension plans from the date of the Actaris acquisition through December
31, 2007. Assuming that actual plan asset returns are consistent with our
expected rate of return in 2007 and beyond, and that interest rates remain
constant, we expect to contribute approximately $500,000 in 2008 to our defined
benefit pension plans.
The
following table summarizes the benefit obligation, plan assets and funded status
of the defined benefit plans and amounts recognized in the Consolidated Balance
Sheet at December 31, 2007.
|
Period
Ended
|
||||
|
December
31, 2007
|
||||
|
(in
thousands)
|
||||
|
Change
in benefit obligation:
|
||||
|
Benefit
obligation at beginning of period (April 18, 2007)
|
$ | 71,452 | ||
|
Service
cost
|
1,523 | |||
|
Interest
cost
|
2,365 | |||
|
Settlements
and curtailments
|
(362 | ) | ||
|
Actuarial
gain
|
(5,620 | ) | ||
|
Benefits
paid
|
(2,843 | ) | ||
|
Other
– foreign currency exchange rate changes
|
5,934 | |||
|
Benefit
obligation at December 31, 2007
|
72,449 | |||
|
Change
in plan assets:
|
||||
|
Fair
value of plan assets at beginning of period (April 18,
2007)
|
6,420 | |||
|
Actual
return of plan assets
|
230 | |||
|
Company
contributions
|
131 | |||
|
Benefits
paid
|
(113 | ) | ||
|
Other
– foreign currency exchange rate changes
|
506 | |||
|
Fair
value of plan assets at December 31, 2007
|
7,174 | |||
|
Ending
balance at fair value (net pension plan benefit liability)
|
$ | 65,275 | ||
Amounts
recognized on the Consolidated Balance Sheet consist of:
|
At
December 31, 2007
|
||||
|
(in
thousands)
|
||||
|
Current
portion of pension plan liability in wages and benefits
payable
|
$ | 5,210 | ||
|
Long-term
portion of pension plan liability
|
60,623 | |||
|
Plan
assets in other long term assets
|
(558 | ) | ||
|
Net
pension plan benefit liability
|
$ | 65,275 | ||
The total
accumulated benefit obligation for our defined benefit pension plans was $68.0
million at December 31, 2007.
Net
periodic pension benefit costs for our plans include the following
components:
|
Period
Ended
|
||||
|
December
31, 2007
|
||||
|
(in
thousands)
|
||||
|
Service
cost
|
$ | 1,523 | ||
|
Interest
cost
|
2,365 | |||
|
Expected
return on plan assets
|
(184 | ) | ||
|
Settlements
and curtailments
|
(362 | ) | ||
|
Net
periodic benefit cost from April 18, 2007 through December 31,
2007
|
$ | 3,342 | ||
The
significant actuarial weighted average assumptions used in determining the
benefit obligations and net periodic benefit cost for our benefit plans are as
follows:
|
Period
Ended
|
||||
|
December
31, 2007
|
||||
|
Actuarial
assumptions used to determine benefit obligations at end of
period:
|
||||
|
Discount
rate
|
5.48 | % | ||
|
Expected
annual rate of compensation increase
|
3.08 | % | ||
|
Actuarial
assumptions used to determine net periodic benefit cost for the
period:
|
||||
|
Discount
rate
|
5.48 | % | ||
|
Expected
rate of return on plan assets
|
4.10 | % | ||
|
Expected
annual rate of compensation increase
|
3.08 | % | ||
We
determine a discount rate for each individual defined benefit pension plan based
on the estimated duration of each plan’s liabilities. For our euro denominated
defined benefit pension plans, we match the plans’ expected future benefit
payments against the average 15 year corporate bond yield curve from the central
banks of each respective country in which we have an established benefit pension
plan.
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 gives consideration to recent trust performance and
historical returns, the assumption represents a long-term prospective
return.
We have
one plan in which the fair value of plan assets exceeds the benefit obligation
and the accumulated benefit obligation. Therefore, for the pension plans in
which the accumulated benefit obligations exceeds the fair value of plan assets,
our total obligation and the fair value of plan assets are as
follows:
|
At
December 31, 2007
|
||||
|
(in
thousands)
|
||||
|
Projected
benefit obligation
|
$ | 70,974 | ||
|
Accumulated
benefit obligation
|
$ | 66,685 | ||
|
Fair
value of plan assets
|
$ | 5,141 | ||
The
target allocation for our pension plans assets is as follows:
|
At
December 31, 2007
|
||||
|
Asset
category:
|
||||
|
Short-term
investments and cash
|
8 | % | ||
|
Insurance
funds
|
92 | % | ||
Our asset investment strategy focuses on maintaining a portfolio using primarily insurance funds, which are accounted for as investments and measured at fair value, in order to achieve our long-term investment objectives on a risk adjusted basis. Our actual invested positions in various securities change over time based on short and longer-term investment opportunities. Strategic pension plan asset allocations are determined by the objective to achieve an investment return, which together with the contributions paid, is sufficient to maintain reasonable control over the various funding risks of the plans. Based upon current market and economic environments, the actual asset allocation may periodically be permitted to deviate from policy targets.
Annual
benefit payments, including amounts to be paid from Company assets for unfunded
plans, and reflecting expected future service, as appropriate, are expected to
be paid as follows:
|
Year
Ending December 31,
|
Estimated
Annual Benefit Payments
|
|||
|
(in
thousands)
|
||||
|
2008
|
$ | 5,210 | ||
|
2009
|
4,975 | |||
|
2010
|
4,298 | |||
|
2011
|
4,663 | |||
|
2012
|
4,617 | |||
|
2013
- 2017
|
22,568 | |||
Note
10: Stock-Based Compensation
Effective
January 1, 2006, we prospectively adopted SFAS 123(R), which requires the
measurement and recognition of compensation expense for all stock-based awards
made to employees and directors based on estimated fair values. We record
stock-based compensation expense under SFAS 123(R) for awards of stock options,
our employee stock purchase plan (ESPP) and issuance of restricted and
unrestricted stock awards and units. We expense stock-based compensation using
the straight-line method over the requisite service period. For the years ended
December 31, 2007 and 2006, stock-based compensation expense was $11.7 million
and $9.7 million and the related tax benefit was $2.9 million and $1.7
million, respectively. There was no stock-based compensation expense capitalized
at December 31, 2007 and 2006. We issue new shares of common stock upon the
exercise of stock options or when vesting conditions on restricted awards are
fully satisfied. Cash received from the exercise of stock options and similar
awards was $20.1 million and $13.1 million for the years ended December 31, 2007
and 2006, respectively.
Stock-based
compensation expense of $739,000 for the year ended December 31, 2005 was
related to the issuance of unrestricted stock and ESPP that we recognized under
previous accounting standards. There was no stock-based compensation expense
related to employee stock options recognized during the year ended December 31,
2005.
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 which 966,386 shares remain available for issuance
at December 31, 2007. In addition, 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. Shares remaining for issuance as awards were 818,874
at December 31, 2007.
Stock
Option Plans
Stock
options to purchase the Company’s common stock are granted with an exercise
price equal to the fair market value of the stock on the date of grant upon
approval by our Board of Directors. Options generally become exercisable in
three or four equal installments beginning one year from the date of grant and
generally expire 10 years from the date of grant.
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average grant date fair values
of the stock options granted in 2007, 2006 and 2005 were $27.44, $21.01 and
$16.57 per share, respectively. Compensation expense related to stock options
recognized under SFAS 123(R) for the years ended December 31, 2007 and 2006 was
$9.2 million and $8.6 million, respectively. Compensation expense is
recognized only for those options expected to vest, with forfeitures estimated
at the date of grant based on our historical experience and future expectations.
Prior to the adoption of SFAS 123(R), the effect of forfeitures on the pro
forma expense amounts (provided in Note 1 in accordance with SFAS 123, as
amended by SFAS 148) was recognized as the forfeitures occurred.
A summary
of our stock option activity for the years ended December 31, 2007, 2006 and
2005 is as follows:
|
Shares
|
Weighted
Average Exercise Price per Share
|
Weighted
Average Remaining Contractual Life
|
Aggregate
Intrinsic Value
|
||||||||||||
|
(in
thousands)
|
(years)
|
(in
thousands)
|
|||||||||||||
|
Outstanding,
January 1, 2005
|
3,884 | $ | 15.24 | 6.03 | $ | 34,003 | |||||||||
|
Granted
|
627 | 36.80 | |||||||||||||
|
Exercised
|
(1,746 | ) | 13.64 | ||||||||||||
|
Forfeited
|
(322 | ) | 18.64 | ||||||||||||
|
Expired
|
- | - | |||||||||||||
|
Outstanding,
December 31, 2005
|
2,443 | $ | 21.24 | 6.89 | $ | 46,189 | |||||||||
|
Exercisable
and expected to vest, December 31, 2005
|
2,313 | $ | 20.73 | 6.81 | $ | 44,922 | |||||||||
|
Exercisable,
December 31, 2005
|
1,157 | $ | 13.66 | 5.55 | $ | 30,804 | |||||||||
|
Granted
|
600 | 49.39 | |||||||||||||
|
Exercised
|
(751 | ) | 17.32 | ||||||||||||
|
Forfeited
|
(67 | ) | 33.55 | ||||||||||||
|
Expired
|
- | - | |||||||||||||
|
Outstanding,
December 31, 2006
|
2,225 | $ | 29.78 | 7.46 | $ | 49,469 | |||||||||
|
Exercisable
and expected to vest, December 31, 2006
|
2,004 | $ | 28.55 | 7.31 | $ | 46,986 | |||||||||
|
Exercisable,
December 31, 2006
|
1,032 | $ | 18.13 | 5.98 | $ | 34,797 | |||||||||
|
Granted
|
230 | 68.45 | |||||||||||||
|
Exercised
|
(828 | ) | 24.24 | ||||||||||||
|
Forfeited
|
(59 | ) | 44.28 | ||||||||||||
|
Expired
|
(7 | ) | 42.62 | ||||||||||||
|
Outstanding,
December 31, 2007
|
1,561 | $ | 37.81 | 6.98 | $ | 90,769 | |||||||||
|
Exercisable
and expected to vest, December 31, 2007
|
1,405 | $ | 36.26 | 6.82 | $ | 83,896 | |||||||||
|
Exercisable,
December 31, 2007
|
798 | $ | 23.84 | 5.51 | $ | 57,582 | |||||||||
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 and before applicable income taxes, based on our closing stock price as
of 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, 2007, total unrecognized stock-based compensation expense
related to nonvested stock options, net of estimated forfeitures, was
approximately $10.1 million, which is expected to be recognized over a weighted
average period of approximately 19 months. During the years ended December 31,
2007, 2006 and 2005, total intrinsic value of stock options exercised was $43.1
million, $30.3 million and $45.4 million, respectively.
|
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||||||
|
Shares
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
per
Share
|
Shares
|
Weighted
Average
Exercise
Price
per
Share
|
||||||||||||||||
|
(in
thousands)
|
(years)
|
(in
thousands)
|
||||||||||||||||||
|
Range of Exercise Prices
|
||||||||||||||||||||
| $4.87 - $14.17 | 224 | 2.84 | $ | 7.44 | 224 | $ | 7.44 | |||||||||||||
| $14.85 - $20.64 | 251 | 5.28 | 19.15 | 251 | 19.15 | |||||||||||||||
| $21.18 - $30.32 | 85 | 6.76 | 22.78 | 70 | 21.97 | |||||||||||||||
| $37.40 - $42.62 | 272 | 7.23 | 37.42 | 126 | 37.40 | |||||||||||||||
| $42.63 - $48.51 | 451 | 8.48 | 48.51 | 113 | 48.51 | |||||||||||||||
| $48.52 - $62.52 | 58 | 8.77 | 57.78 | 11 | 54.84 | |||||||||||||||
| $62.53 - $78.56 | 220 | 9.40 | 69.11 | 3 | 70.99 | |||||||||||||||
| 1,561 | 6.98 | $ | 37.81 | 798 | $ | 23.84 | ||||||||||||||
Restricted
Stock Units
During
2007, we granted 68,467 restricted stock units (RSU’s) with a cliff vesting
period of three years from the anniversary of the grant date as set forth in the
award agreements. Upon vesting, the RSU’s are converted into shares of the
Company’s common stock on a one-for-one basis and issued to employees, subject
to any deferral elections made by a recipient or required by the plan. The fair
value of RSU’s is the market close price of our common stock on the date of
grant. Compensation expense is recognized over three years from the date of
grant. The Company is entitled to an income tax deduction in an amount equal to
the taxable income reported by the holder upon vesting of the
RSU’s.
Compensation
expense is recognized only for those awards expected to vest, with forfeitures
estimated based on our historical experience and future expectations.
Approximately 2,900 RSU’s were forfeited in 2007. As of December 31, 2007, total
compensation expense relating to RSU’s was $659,000 and unrecognized
compensation expense was $2.8 million, which is expected to be recognized
over a weighted average period of approximately 29 months. The aggregate
intrinsic value of RSU’s outstanding was $6.3 million and the weighted average
grant date fair value was $68.78 per share at December 31, 2007.
Long-Term
Performance Plan
We have a
Long-Term Performance Plan (LTPP) for senior management, of which the issuance
of restricted stock awards and restricted stock units (awards) are contingent on
the attainment of yearly goals. Awards are issued in the year following
attainment, as approved by the Board of Directors. The awards are converted into
shares of the Company’s common stock subsequent to a three year cliff vesting
period, on a one-to-one basis and issued to employees, subject to any deferral
elections made by the recipient or required by the plan. An employee who
terminates employment during a vesting period will receive a pro-rata portion of
their issued awards based on the number of months worked during the vesting
period. The fair value of an award is the market close price of our common stock
on the date of grant.
The
estimated awards for 2007, subject to Board of Director approval, consist of
approximately 21,500 shares at a grant date fair value of $62.52 per share. The
awards for 2006 and 2005 consisted of 25,065 and 30,542 shares, with associated
fair values of $62.90 and $59.16 per share, respectively.
Compensation
expense is recognized over the one year performance and three year vesting
period for those awards expected to vest, with forfeitures estimated based on
our historical experience and future expectations. Total compensation expense
recognized for the LTPP plan was $1,143,000, $436,000 and $485,000 for the years
ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007,
total unrecognized compensation expense was $2.1 million, which is expected to
be recognized through 2011.
A summary
of the award activity for the years ended December 31, 2007 and 2006 is as
follows:
|
Number
of Awards
|
||||
|
Nonvested,
January 1, 2006
|
- | |||
|
Issued
|
30,542 | |||
|
Vested
|
(1,171 | ) | ||
|
Forfeited
|
(6,938 | ) | ||
|
Nonvested,
December 31, 2006
|
22,433 | |||
|
Issued
|
25,065 | |||
|
Vested
|
(1,011 | ) | ||
|
Forfeited
|
(1,578 | ) | ||
|
Nonvested,
December 31, 2007
|
44,909 | |||
The
weighted average grant date fair value per share of nonvested awards was $61.25
and $59.16 for the years ended December 31, 2007 and 2006, respectively. The
weighted average grant date fair value of awards vested and forfeited in 2007
and 2006 was $59.16. The total fair value of awards vested was $80,000 and
$66,000 for the years ended December 31, 2007 and 2006, respectively. The
aggregate intrinsic value of awards outstanding was $4.3 million with an
expected weighted average vesting period of 20 months at December 31,
2007.
Unrestricted
Stock Awards
We issue
unrestricted stock awards to our Board of Directors as part of the Board of
Directors’ compensation. All awards are fully vested and expensed when granted.
During the years ended December 31, 2007 and 2006, we issued 4,938 and 5,762
shares of unrestricted stock with a weighted average grant date fair value of
$61.61 and $50.71 per share, respectively. The expense related to these awards
for the years ended December 31, 2007 and 2006 was $304,000 and $292,000,
respectively.
Employee
Stock Purchase Plan
Eligible
employees who have completed three months of service, work more than 20 hours
each week and are employed more than five months in any calendar year are
eligible to participate in our ESPP. Employees who own 5% or more of our common
stock are not eligible to participate in the ESPP. Under the terms of the ESPP,
eligible employees can choose payroll deductions each year of up to 10% of their
regular cash compensation. Such deductions are applied toward the discounted
purchase price of our common stock. The purchase price of the common stock is
85% of the fair market value of the stock at the end of each fiscal quarter.
Under the ESPP, we sold 39,840, 48,442 and 62,498 shares to employees in the
years ended December 31, 2007, 2006 and 2005, respectively. The fair value of
ESPP awards issued is estimated using the Black-Scholes option-pricing model.
The weighted average fair value of the ESPP awards issued in the years ended
December 31, 2007, 2006 and 2005 was $10.90, $8.63 and $6.85 per share,
respectively. The expense related to ESPP recognized under SFAS 123(R) for the
years ended December 31, 2007 and 2006 was $393,000 and $386,000, respectively.
We had no unrecognized compensation cost at December 31, 2007 and 2006
associated with the awards issued under the ESPP. There were approximately
342,000 shares of common stock available for future issuance under the employee
stock purchase plan at December 31, 2007.
Note
11: Employee Savings Plans and Bonus, Profit
Sharing
Employee
Savings Plan
We have
an employee incentive savings plan in which substantially all of our U.S.
employees are eligible to participate. Employees may contribute, on a
tax-deferred basis, from 1% to 50% of their salary, up to the annual Internal
Revenue Service limit. We provide a 50% match on the first 6% of the employee
salary deferral, subject to statutory limitations. The expense for our matching
contribution was $3.5 million, $3.0 million and $2.3 million for the years ended
December 31, 2007, 2006 and 2005.
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 $12.9 million, $9.4 million and $9.7 million for the years
ended December 31, 2007, 2006 and 2005.
Note
12: Income Taxes
The
following table summarizes the provision (benefit) for U.S. federal, state and
foreign taxes on income from continuing operations:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 316 | $ | 2,428 | $ | - | ||||||
|
State
and local
|
76 | 1,319 | 528 | |||||||||
|
Foreign
|
18,345 | 290 | 356 | |||||||||
|
Total
current
|
18,737 | 4,037 | 884 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(4,407 | ) | 15,052 | (8,063 | ) | |||||||
|
State
and local
|
(434 | ) | 1,093 | 1,864 | ||||||||
|
Foreign
|
(42,473 | ) | (1,504 | ) | 5,301 | |||||||
|
Total
deferred
|
(47,314 | ) | 14,641 | (898 | ) | |||||||
|
Change
in valuation allowance
|
12,141 | (202 | ) | (5,519 | ) | |||||||
|
Total
provision (benefit) for income taxes
|
$ | (16,436 | ) | $ | 18,476 | $ | (5,533 | ) | ||||
The
change in valuation allowance, as noted in the table that summarizes the
provision (benefit), includes amounts related to foreign interest expense
deductions, which are reported as a component of foreign earnings in the
reconciliation of the effective tax rate.
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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Income
(loss) before income taxes
|
||||||||||||
|
Domestic
|
$ | 50,779 | $ | 52,068 | $ | 25,666 | ||||||
|
Foreign
|
(83,359 | ) | 167 | 1,862 | ||||||||
|
Total
income (loss) before income taxes
|
$ | (32,580 | ) | $ | 52,235 | $ | 27,528 | |||||
|
Expected
federal income tax provision (benefit)
|
$ | (11,404 | ) | $ | 18,282 | $ | 9,635 | |||||
|
Tax
credits
|
(2,091 | ) | (2,433 | ) | (2,114 | ) | ||||||
|
State
income tax provision (benefit), net of federal effect
|
(1,260 | ) | 2,501 | 1,488 | ||||||||
|
Realization
of prior years' deferred tax assets
|
- | (615 | ) | (8,534 | ) | |||||||
|
Change
in valuation allowance
|
1,287 | (202 | ) | (5,519 | ) | |||||||
|
Acquired
in process research and development
|
11,002 | - | - | |||||||||
|
Uncertain
tax positions, including interest and penalties
|
4,188 | - | - | |||||||||
|
Foreign
earnings
|
(6,646 | ) | (837 | ) | (501 | ) | ||||||
|
Change
in tax rates
|
(12,316 | ) | - | - | ||||||||
|
Stock-based
compensation
|
113 | 1,876 | - | |||||||||
|
Other,
net
|
691 | (96 | ) | 12 | ||||||||
|
Total
provision (benefit) for income taxes
|
$ | (16,436 | ) | $ | 18,476 | $ | (5,533 | ) | ||||
Our tax
benefit for the year reflects a benefit associated with lower effective tax
rates on foreign earnings. We made an election under Internal Revenue Code
Section 338 with respect to the Actaris acquisition which resulted in a reduced
global effective tax rate. Additionally, our reduced foreign tax liability
reflects the benefit of foreign interest expense deductions.
We
recorded benefits from legislative reductions in tax rates in Germany and the
United Kingdom during the third quarter. The German Business Tax Reform
2008 was finalized on August 17, 2007, which reduced the German tax rate
from 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%.
Deferred
income tax assets and liabilities consist of the following:
|
At
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets
|
||||||||
|
Loss
carryforwards
|
$ | 67,237 | $ | 25,266 | ||||
|
Tax
credits
|
24,442 | 17,429 | ||||||
|
Derivatives
|
17,363 | - | ||||||
|
Depreciation
and amortization
|
15,706 | 12,040 | ||||||
|
Other,
net
|
12,812 | 857 | ||||||
|
Accrued
expenses
|
10,040 | 14,896 | ||||||
|
Pension
plan benefits expense
|
6,753 | - | ||||||
|
Total
deferred tax assets
|
154,353 | 70,488 | ||||||
|
Valuation
allowance
|
(27,523 | ) | (1,083 | ) | ||||
|
Net
deferred tax asset
|
126,830 | 69,405 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Depreciation
and amortization
|
(207,334 | ) | - | |||||
|
Other,
net
|
(10,055 | ) | (191 | ) | ||||
|
Tax
effect of accumulated translation
|
(1,869 | ) | (939 | ) | ||||
|
Total
deferred tax liabilities
|
(219,258 | ) | (1,130 | ) | ||||
|
Net
deferred tax assets (liabilities)
|
$ | (92,428 | ) | $ | 68,275 | |||
In
accordance with SFAS 109, Accounting for Income Taxes,
we record valuation allowances to reduce deferred tax assets to the extent we
believe these assets will not more likely than not be realized. In making such
determination, 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 carryback losses to
prior years.
At December 31, 2007, we had deferred tax assets related to
federal loss carryforwards of $21.0 million that expire during the years 2018
through 2027. The remaining portion of the loss carryforwards are comprised
primarily of Actaris’ losses in various foreign jurisdictions. The majority of
these losses can be carried forward indefinitely, while the remainder expire
beginning in 2008 through 2016. At December 31, 2007, there was a valuation
allowance of $25.9 million associated with Actaris’ foreign loss carryforwards.
We also had federal research and development tax credits of $19.5 million, which
begin to expire in 2018. We have unused alternative minimum tax credits of $2.5
million at December 31, 2007, which are available to reduce future income tax
liabilities. The alternative minimum tax credits may be carried forward
indefinitely.
As a
result of SFAS 123(R), our deferred tax assets at December 31, 2007 do not
include the tax effect on $34.2 million of excess tax benefits from employee
stock option exercise that are a component of our net operating loss carryover
for tax purposes. Equity (paid in capital) will be increased by $13.0 million if
and when such excess tax benefits reduce taxes payable.
We are
subject to income tax in the U.S. federal jurisdiction and numerous foreign and
state jurisdictions. The Internal Revenue Service has completed its examination
of our federal income tax returns for the tax years through 1995. Due to the
existence of net operating loss and tax credit carryforwards, tax years
subsequent to 1995 remain open to examination by the major tax jurisdiction to
which we are subject. Actaris’ subsidiaries in France are currently
under examination for the years 2004 through 2006. Due to the geographic breadth
of our operations, numerous tax audits may be ongoing throughout the world at
any point in time. Tax liabilities are recorded based on estimates of additional
taxes which will be due upon the conclusion of these audits. Estimates of these
tax liabilities are made based upon prior experience and are updated in light of
changes in facts and circumstances. Due to the uncertain and complex application
of tax regulations, it is possible that the ultimate resolution of audits may
result in liabilities which could be different from these estimates.
In 2008,
we expect to pay $1.7 million in income tax obligations related to FIN 48.
Additionally, the amount of the unrecognized tax benefits will change in the
next twelve months due to audits in various foreign
jurisdictions. However, we do not expect that change to have a
significant impact on our results of operations.
In accordance with Accounting Principles Board Opinion 23, Accounting for Income Taxes-Special Areas, we do not provide U.S. deferred income taxes on temporary differences related to our foreign investments that are considered permanent in duration. These temporary differences consist primarily of undistributed foreign earnings of $11.1 million at December 31, 2007. Foreign taxes have been provided on these undistributed foreign earnings. Determination of the amount of deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions.
We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007. The interpretation clarifies the
accounting for uncertain tax positions and requires companies to recognize the
impact of a tax position in their financial statements, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. As a result of the implementation of Interpretation 48, we
recognized a $5.4 million increase in the liability for unrecognized tax
benefits, with a corresponding increase in deferred tax assets. Our
implementation did not require an adjustment to retained
earnings.
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 |
We
classify interest expense and penalties related to unrecognized tax benefits and
interest income on tax overpayments as components of income tax expense. During
the year ended December 31, 2007, we recognized approximately $1.2 million in
interest and penalties. At December 31, 2007, accrued interest was $2.7 million
and accrued penalties were $2.2 million. We do not expect our unrecognized tax
benefits to change significantly over the next 12 months. The amount of
unrecognized tax benefits that would affect our actual tax rate at January 1,
2007 and December 31, 2007 were $5.4 million and $8.4 million, respectively.
During 2008, we expect to pay approximately $1.7 million in income tax
obligations related to FIN 48. We are not able to reasonably estimate the timing
of future cash flows relating to the remaining balance.
We 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 2003
|
|
|
Germany
|
Subsequent
to 2003
|
|
|
Spain
|
Subsequent
to 1997
|
|
|
United
Kingdom
|
Subsequent
to 2000
|
Note
13: Commitments and Contingencies
Commitments
Operating
lease rental expense for warehouse, manufacturing and office facilities and
equipment was $12.4 million in 2007, $7.0 million in 2006 and $7.6 million
in 2005. The increase in rental expense for the year ended December 31, 2007,
compared with prior years, is the result of the Actaris acquisition on April 18,
2007.
Future
minimum lease payments at December 31, 2007, under noncancelable operating
leases with initial or remaining terms in excess of one year are as
follows:
|
Minimum
Payments
|
||||
|
(in
thousands)
|
||||
|
2008
|
$ | 11,919 | ||
|
2009
|
7,502 | |||
|
2010
|
4,168 | |||
|
2011
|
1,733 | |||
|
2012
|
458 | |||
|
Beyond
2012
|
1,227 | |||
|
Future
minimum lease payments
|
$ | 27,007 | ||
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
Under
FASB Interpretation 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, we record a liability for certain types of
guarantees and indemnifications for agreements entered into or amended
subsequent to December 31, 2002. We had no such guarantees or
indemnifications as of December 31, 2007.
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. In addition to the outstanding
standby letters of credit of $54.7 million issued under our credit facility’s
$115 million multicurrency revolver, our Actaris operating segment has a total
of $28.0 million of unsecured multicurrency revolving lines of credit with
various financial institutions with total outstanding standby letters of credit
of $5.9 million at December 31, 2007. Unsecured surety bonds in force were $13.8
million and $6.0 million at December 31, 2007 and 2006, respectively. The
increase in bonds was primarily the result of the Actaris acquisition. In the
event any such bonds or letters of credit are called, we would be obligated to
reimburse the issuer of the letter of credit or bond; however, we do not believe
that any currently outstanding bonds or letters of credit will be
called.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Legal
Matters
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at December 31, 2007 and 2006 were not
material to our financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. PT Berca claims that it had preemptive rights
in the joint venture and has sought to nullify the transaction in 2001 whereby
Schlumberger transferred its ownership interest in PT Mecoindo to an Actaris
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs or approximately $14.1
million, in damages against the defendants and have invalidated the 2001
transfer of the Mecoindo interest to a subsidiary of Actaris. All of the parties
have appealed the matter and it is currently pending before the Indonesian
Supreme Court. We believe the claims are without merit and no liability has been
recorded. However, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may occur as a result of this
claim.
Note
14: 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.
Note
15: Fair Values of Financial Instruments
The
estimated fair value of financial instruments has been determined by using
available market information and appropriate valuation methodologies. The values
provided are representative of fair values only as of December 31, 2007 and
2006, and do not reflect subsequent changes in the economy, interest and tax
rates and other variables that may affect determination of fair value. The
following methods and assumptions were used in estimating fair
values.
Cash and cash equivalents:
Due to the liquid nature of these instruments, the carrying value approximates
fair value.
Short-term investments, held to
maturity: The fair value is based on quoted market prices, which
approximates the carrying amount because of the short maturity of these
instruments.
Credit facility: The fair
value is based on the latest quoted market price at December 31, 2007. The
foreign currency component is revalued at spot rates as of December 31,
2007.
Convertible senior subordinated
notes: The convertible notes are registered with the SEC and are
generally transferable. The fair value is based on the latest quoted market
price at December 31, 2007.
Senior subordinated notes:
The senior subordinated notes are registered with the SEC and are generally
transferable. The 2007 fair value is based on the latest quoted market price at
December 31, 2007.
Derivatives: The carrying
value approximates fair value of the derivatives.
|
At
December 31, 2007
|
At
December 31, 2006
|
|||||||||||||||
|
Carrying
Amount
|
Fair Value
|
Carrying
Amount
|
Fair Value
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 91,988 | $ | 91,988 | $ | 361,405 | $ | 361,405 | ||||||||
|
Short-term
investments, held to maturity
|
- | - | 34,583 | 34,590 | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Credit
facility
|
||||||||||||||||
|
USD
denominated term loan
|
596,793 | 581,873 | - | - | ||||||||||||
|
EUR
denominated term loan
|
445,228 | 427,975 | - | - | ||||||||||||
|
GBP
denominated term loan
|
79,091 | 77,311 | - | - | ||||||||||||
|
Convertible
senior subordinated notes
|
345,000 | 554,532 | 345,000 | 366,435 | ||||||||||||
|
Senior
subordinated notes
|
124,429 | 122,344 | 124,324 | 128,438 | ||||||||||||
|
Interest
rate swap
|
1,744 | 1,744 | - | - | ||||||||||||
|
Cross
currency swap
|
410 | 410 | - | - | ||||||||||||
Note
16: Segment Information
We
changed our management structure with the acquisition of Actaris on April 18,
2007 and, as a result, now have two operating segments. The Actaris operating
segment consists of our Actaris operations, which are primarily located in
Europe and throughout the rest of the world outside of North America. The
remainder of our operations, primarily located in the United States and Canada,
have been combined into a single segment called Itron North America. The
operating segment information as set forth below is based on this new segment
reporting structure. In accordance with SFAS 131, historical segment information
has been restated from the segment information previously provided to conform to
the segment reporting structure after the April 2007 Actaris
acquisition.
We have
three measures of segment performance: revenue, gross profit (margin) and
operating income (margin). There were no intersegment revenues. Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Assets and liabilities are not used in
our measurement of segment performance and, therefore, are not allocated to our
segments. Substantially all depreciation expense is allocated to our
segments.
Segment
Products
|
Itron
North America
|
Electronic
electricity meters with and without automated meter reading (AMR); gas and
water AMR modules; handheld, mobile and network AMR data collection
technologies; advanced metering infrastructure (AMI) technologies;
software, installation, implementation, maintenance support and other
services.
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad and
smart card; two-way gas prepayment systems using smart card; AMR data
collection technologies; installation, implementation, maintenance support
and other services.
|
Segment
Information
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Revenues
|
||||||||||||
|
Itron
North America
|
$ | 630,304 | $ | 644,042 | $ | 552,690 | ||||||
|
Actaris
|
833,744 | - | - | |||||||||
|
Total
Company
|
$ | 1,464,048 | $ | 644,042 | $ | 552,690 | ||||||
|
Gross
margin
|
||||||||||||
|
Itron
North America
|
$ | 256,784 | $ | 267,442 | $ | 233,621 | ||||||
|
Actaris
|
230,503 | - | - | |||||||||
|
Total
Company
|
$ | 487,287 | $ | 267,442 | $ | 233,621 | ||||||
|
Operating
income (loss)
|
||||||||||||
|
Itron
North America
|
$ | 74,631 | $ | 89,028 | $ | 69,953 | ||||||
|
Actaris
|
3,878 | - | - | |||||||||
|
Corporate
unallocated
|
(32,036 | ) | (27,285 | ) | (23,715 | ) | ||||||
|
Total
Company
|
46,473 | 61,743 | 46,238 | |||||||||
|
Total
other income (expense)
|
(79,053 | ) | (9,508 | ) | (18,710 | ) | ||||||
|
Income
(loss) before income taxes
|
$ | (32,580 | ) | $ | 52,235 | $ | 27,528 | |||||
No single
customer represented more than 10% of total Company or individual segment
revenues for the year ended December 31, 2007 and 2005.
One
customer, Progress Energy, accounted for 16% of Itron North America segment
revenues for the year ended December 31, 2006.
Revenues
by region were as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Revenues
by region
|
||||||||||||
|
Europe
|
$ | 623,625 | $ | 3,999 | $ | 5,608 | ||||||
|
United
States and Canada
|
596,585 | 602,942 | 513,411 | |||||||||
|
Other
|
243,838 | 37,101 | 33,671 | |||||||||
|
Total
revenues
|
$ | 1,464,048 | $ | 644,042 | $ | 552,690 | ||||||
Note 17: Consolidating Financial Information
Our
senior subordinated notes and convertible notes, issued by Itron, Inc. (the
Issuer) are guaranteed by our U.S. domestic subsidiaries, which are 100% owned,
and any future domestic subsidiaries. The guarantees are joint and several,
full, complete and unconditional. At the date of issuance, our convertible notes
were not guaranteed by any of our subsidiaries; however, any future subsidiaries
that guarantee our obligations under the senior subordinated notes will
guarantee our convertible notes, joint and several, full, complete and
unconditional.
There are
currently no restrictions on the ability of the subsidiary guarantors to
transfer funds to the parent company.
The
Actaris acquisition on April 18, 2007, consisted primarily of foreign entities,
which are considered non-guarantor subsidiaries of our senior subordinated notes
and convertible notes. However, one legal entity located in the United States is
considered a guarantor of the senior subordinated notes and convertible notes.
We have allocated a portion of our credit facility borrowings to this U.S. legal
entity, based on its relative equity as compared with the entire Actaris
acquisition.
|
Consolidating
Statement of Operations
|
||||||||||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Revenues
|
$ | 586,552 | $ | 44,543 | $ | 879,147 | $ | (46,194 | ) | $ | 1,464,048 | |||||||||
|
Cost
of revenues
|
348,341 | 34,723 | 639,679 | (45,982 | ) | 976,761 | ||||||||||||||
|
Gross
profit
|
238,211 | 9,820 | 239,468 | (212 | ) | 487,287 | ||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Sales
and marketing
|
51,169 | 4,872 | 69,801 | - | 125,842 | |||||||||||||||
|
Product
development
|
66,974 | 1,637 | 26,524 | (209 | ) | 94,926 | ||||||||||||||
|
General
and administrative
|
52,737 | 2,594 | 44,740 | - | 100,071 | |||||||||||||||
|
Amortization
of intangible assets
|
26,493 | - | 57,507 | - | 84,000 | |||||||||||||||
|
In-process
research and development
|
- | - | 35,975 | - | 35,975 | |||||||||||||||
|
Total
operating expenses
|
197,373 | 9,103 | 234,547 | (209 | ) | 440,814 | ||||||||||||||
|
Operating
income
|
40,838 | 717 | 4,921 | (3 | ) | 46,473 | ||||||||||||||
|
Other
income (expense)
|
||||||||||||||||||||
|
Interest
income
|
92,153 | 52 | 4,535 | (86,263 | ) | 10,477 | ||||||||||||||
|
Interest
expense
|
(89,025 | ) | (2,994 | ) | (84,212 | ) | 86,266 | (89,965 | ) | |||||||||||
|
Other
income (expense), net
|
9,143 | (798 | ) | (7,910 | ) | - | 435 | |||||||||||||
|
Total
other income (expense)
|
12,271 | (3,740 | ) | (87,587 | ) | 3 | (79,053 | ) | ||||||||||||
|
Income
(loss) before income taxes
|
53,109 | (3,023 | ) | (82,666 | ) | - | (32,580 | ) | ||||||||||||
|
Income
tax benefit
|
3,042 | 1,112 | 12,282 | - | 16,436 | |||||||||||||||
|
Equity
in losses of guarantor and
|
||||||||||||||||||||
|
non-guarantor
subsidiaries
|
(72,295 | ) | (2,556 | ) | - | 74,851 | - | |||||||||||||
|
Net
loss
|
$ | (16,144 | ) | $ | (4,467 | ) | $ | (70,384 | ) | $ | 74,851 | $ | (16,144 | ) | ||||||
|
Consolidating
Statement of Operations
|
||||||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Revenues
|
$ | 618,526 | $ | - | $ | 61,968 | $ | (36,452 | ) | $ | 644,042 | |||||||||
|
Cost
of revenues
|
364,228 | - | 48,160 | (35,788 | ) | 376,600 | ||||||||||||||
|
Gross
profit
|
254,298 | - | 13,808 | (664 | ) | 267,442 | ||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Sales
and marketing
|
56,937 | - | 6,650 | - | 63,587 | |||||||||||||||
|
Product
development
|
58,208 | - | 1,389 | (823 | ) | 58,774 | ||||||||||||||
|
General
and administrative
|
48,997 | - | 3,058 | 158 | 52,213 | |||||||||||||||
|
Amortization
of intangible assets
|
29,801 | - | 1,324 | - | 31,125 | |||||||||||||||
|
Total
operating expenses
|
193,943 | - | 12,421 | (665 | ) | 205,699 | ||||||||||||||
|
Operating
income
|
60,355 | - | 1,387 | 1 | 61,743 | |||||||||||||||
|
Other
income (expense)
|
||||||||||||||||||||
|
Interest
income
|
9,705 | - | 175 | (383 | ) | 9,497 | ||||||||||||||
|
Interest
expense
|
(17,444 | ) | - | (723 | ) | 382 | (17,785 | ) | ||||||||||||
|
Other
income (expense), net
|
(818 | ) | - | (402 | ) | - | (1,220 | ) | ||||||||||||
|
Total
other income (expense)
|
(8,557 | ) | - | (950 | ) | (1 | ) | (9,508 | ) | |||||||||||
|
Income
before income taxes
|
51,798 | - | 437 | - | 52,235 | |||||||||||||||
|
Income
tax (provision) benefit
|
(19,532 | ) | - | 1,056 | - | (18,476 | ) | |||||||||||||
|
Equity
in earnings (losses) of guarantor and
|
||||||||||||||||||||
|
non-guarantor
subsidiaries
|
1,493 | (1,451 | ) | - | (42 | ) | - | |||||||||||||
|
Net
income (loss)
|
$ | 33,759 | $ | (1,451 | ) | $ | 1,493 | $ | (42 | ) | $ | 33,759 | ||||||||
|
Consolidating
Statement of Operations
|
||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||
|
Parent
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Revenues
|
$ | 533,833 | $ | 48,615 | $ | (29,758 | ) | $ | 552,690 | |||||||
|
Cost
of revenues
|
310,726 | 38,009 | (29,666 | ) | 319,069 | |||||||||||
|
Gross
profit
|
223,107 | 10,606 | (92 | ) | 233,621 | |||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Sales
and marketing
|
51,552 | 5,087 | 3 | 56,642 | ||||||||||||
|
Product
development
|
46,922 | 424 | (269 | ) | 47,077 | |||||||||||
|
General
and administrative
|
42,721 | 1,929 | 168 | 44,818 | ||||||||||||
|
Amortization
of intangible assets
|
38,846 | - | - | 38,846 | ||||||||||||
|
Total
operating expenses
|
180,041 | 7,440 | (98 | ) | 187,383 | |||||||||||
|
Operating
income
|
43,066 | 3,166 | 6 | 46,238 | ||||||||||||
|
Other
income (expense)
|
||||||||||||||||
|
Interest
income
|
408 | 29 | (135 | ) | 302 | |||||||||||
|
Interest
expense
|
(18,655 | ) | (430 | ) | 141 | (18,944 | ) | |||||||||
|
Other
income (expense), net
|
2 | (58 | ) | (12 | ) | (68 | ) | |||||||||
|
Total
other income (expense)
|
(18,245 | ) | (459 | ) | (6 | ) | (18,710 | ) | ||||||||
|
Income
before income taxes
|
24,821 | 2,707 | - | 27,528 | ||||||||||||
|
Income
tax benefit (provision)
|
5,882 | (349 | ) | - | 5,533 | |||||||||||
|
Equity
in earnings of
|
||||||||||||||||
|
non-guarantor
subsidiaries
|
2,358 | - | (2,358 | ) | - | |||||||||||
|
Net
income
|
$ | 33,061 | $ | 2,358 | $ | (2,358 | ) | $ | 33,061 | |||||||
|
Consolidating
Balance Sheet
|
||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined
Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 27,937 | $ | 1,664 | $ | 62,387 | $ | - | $ | 91,988 | ||||||||||
|
Accounts
receivable, net
|
95,908 | 7,151 | 235,959 | - | 339,018 | |||||||||||||||
|
Intercompany
accounts receivable
|
15,359 | 25 | 5,855 | (21,239 | ) | - | ||||||||||||||
|
Inventories
|
50,049 | 6,584 | 113,804 | (1,199 | ) | 169,238 | ||||||||||||||
|
Deferred
income taxes, net
|
5,528 | 1,294 | 3,911 | - | 10,733 | |||||||||||||||
|
Other
|
13,322 | 17 | 29,120 | - | 42,459 | |||||||||||||||
|
Intercompany
other
|
7,729 | 7,800 | 19,365 | (34,894 | ) | - | ||||||||||||||
|
Total
current assets
|
215,832 | 24,535 | 470,401 | (57,332 | ) | 653,436 | ||||||||||||||
|
Property,
plant and equipment, net
|
85,036 | 12,543 | 225,424 | - | 323,003 | |||||||||||||||
|
Intangible
assets, net
|
77,017 | - | 618,883 | - | 695,900 | |||||||||||||||
|
Goodwill
|
113,846 | 10,001 | 1,142,286 | - | 1,266,133 | |||||||||||||||
|
Prepaid
debt fees
|
21,616 | - | - | - | 21,616 | |||||||||||||||
|
Deferred
income taxes, net
|
85,963 | 1,275 | (11,995 | ) | - | 75,243 | ||||||||||||||
|
Investment
in subsidiaries
|
118,733 | 71,943 | (66,192 | ) | (124,484 | ) | - | |||||||||||||
|
Intercompany
notes receivable
|
1,764,792 | 3,282 | 8,656 | (1,776,730 | ) | - | ||||||||||||||
|
Other
|
1,762 | 15 | 13,458 | - | 15,235 | |||||||||||||||
|
Total
assets
|
$ | 2,484,597 | $ | 123,594 | $ | 2,400,921 | $ | (1,958,546 | ) | $ | 3,050,566 | |||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Trade
payables
|
$ | 39,701 | $ | 4,336 | $ | 154,960 | $ | - | $ | 198,997 | ||||||||||
|
Accrued
expenses
|
7,124 | 546 | 49,605 | - | 57,275 | |||||||||||||||
|
Intercompany
accounts payable
|
4,258 | 1,842 | 15,139 | (21,239 | ) | - | ||||||||||||||
|
Wages
and benefits payable
|
17,419 | 1,750 | 51,317 | - | 70,486 | |||||||||||||||
|
Taxes
payable
|
(36,113 | ) | (158 | ) | 53,764 | - | 17,493 | |||||||||||||
|
Current
portion of long-term debt
|
11,980 | - | - | - | 11,980 | |||||||||||||||
|
Current
portion of warranty
|
8,411 | 151 | 12,715 | - | 21,277 | |||||||||||||||
|
Deferred
income taxes, net
|
- | - | 5,437 | - | 5,437 | |||||||||||||||
|
Short-term
intercompany advances
|
12,807 | 14,782 | 7,305 | (34,894 | ) | - | ||||||||||||||
|
Unearned
revenue
|
15,120 | - | 5,792 | - | 20,912 | |||||||||||||||
|
Total
current liabilities
|
80,707 | 23,249 | 356,034 | (56,133 | ) | 403,857 | ||||||||||||||
|
Long-term
debt
|
1,578,563 | - | (2 | ) | - | 1,578,561 | ||||||||||||||
|
Warranty
|
10,104 | 100 | 1,360 | - | 11,564 | |||||||||||||||
|
Pension
plan benefits
|
1 | - | 60,622 | - | 60,623 | |||||||||||||||
|
Intercompany
notes payable
|
1,474 | 7,153 | 1,768,103 | (1,776,730 | ) | - | ||||||||||||||
|
Deferred
income taxes, net
|
962 | - | 172,538 | - | 173,500 | |||||||||||||||
|
Other
obligations
|
16,536 | 25 | 47,098 | - | 63,659 | |||||||||||||||
|
Total
liabilities
|
1,688,347 | 30,527 | 2,405,753 | (1,832,863 | ) | 2,291,764 | ||||||||||||||
|
Shareholders'
equity
|
||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | |||||||||||||||
|
Common
stock
|
609,902 | 90,437 | 97,021 | (187,458 | ) | 609,902 | ||||||||||||||
|
Accumulated
other comprehensive income, net
|
126,668 | 8,548 | 10,468 | (19,016 | ) | 126,668 | ||||||||||||||
|
Retained
earnings (accumulated deficit)
|
22,232 | (5,918 | ) | (74,873 | ) | 80,791 | 22,232 | |||||||||||||
|
Total
shareholders' equity
|
758,802 | 93,067 | 32,616 | (125,683 | ) | 758,802 | ||||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 2,447,149 | $ | 123,594 | $ | 2,438,369 | $ | (1,958,546 | ) | $ | 3,050,566 | |||||||||
|
Consolidating
Balance Sheet
|
||||||||||||||||||||
|
December
31, 2006
|
||||||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined
Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 353,483 | $ | - | $ | 7,922 | $ | - | $ | 361,405 | ||||||||||
|
Short-term
investments, held to maturity
|
34,583 | - | - | - | 34,583 | |||||||||||||||
|
Accounts
receivable, net
|
95,041 | - | 14,883 | - | 109,924 | |||||||||||||||
|
Intercompany
accounts receivable
|
6,486 | - | 3,263 | (9,749 | ) | - | ||||||||||||||
|
Inventories
|
49,233 | - | 3,263 | - | 52,496 | |||||||||||||||
|
Deferred
income taxes, net
|
19,758 | - | 1,158 | - | 20,916 | |||||||||||||||
|
Other
|
15,394 | - | 1,727 | - | 17,121 | |||||||||||||||
|
Intercompany
other
|
1,698 | - | 5,000 | (6,698 | ) | - | ||||||||||||||
|
Total
current assets
|
575,676 | - | 37,216 | (16,447 | ) | 596,445 | ||||||||||||||
|
Property,
plant and equipment, net
|
86,594 | - | 2,095 | - | 88,689 | |||||||||||||||
|
Intangible
assets, net
|
104,731 | - | 7,951 | - | 112,682 | |||||||||||||||
|
Goodwill
|
113,481 | - | 12,785 | - | 126,266 | |||||||||||||||
|
Prepaid
debt fees
|
13,161 | - | - | - | 13,161 | |||||||||||||||
|
Deferred
income taxes, net
|
44,702 | - | 2,698 | - | 47,400 | |||||||||||||||
|
Intercompany
notes receivable
|
12,257 | - | 1,242 | (13,499 | ) | - | ||||||||||||||
|
Other
|
33,880 | 531 | 1,390 | (31,922 | ) | 3,879 | ||||||||||||||
|
Total
assets
|
$ | 984,482 | $ | 531 | $ | 65,377 | $ | (61,868 | ) | $ | 988,522 | |||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||
|
Current
liabilities
|
||||||||||||||||||||
|
Trade
payables
|
$ | 33,602 | $ | - | $ | 2,201 | $ | - | $ | 35,803 | ||||||||||
|
Accrued
expenses
|
6,392 | - | 10 | - | 6,402 | |||||||||||||||
|
Intercompany
accounts payable
|
3,263 | - | 6,486 | (9,749 | ) | - | ||||||||||||||
|
Wages
and benefits payable
|
22,673 | - | 1,541 | - | 24,214 | |||||||||||||||
|
Taxes
payable
|
1,053 | - | 664 | - | 1,717 | |||||||||||||||
|
Current
portion of warranty
|
7,850 | - | 149 | - | 7,999 | |||||||||||||||
|
Short-term
intercompany advances
|
5,001 | - | 1,697 | (6,698 | ) | - | ||||||||||||||
|
Unearned
revenue
|
26,004 | - | 1,445 | 27,449 | ||||||||||||||||
|
Total
current liabilities
|
105,838 | - | 14,193 | (16,447 | ) | 103,584 | ||||||||||||||
|
Long-term
debt
|
469,324 | - | - | - | 469,324 | |||||||||||||||
|
Warranty
|
10,149 | - | - | - | 10,149 | |||||||||||||||
|
Intercompany
notes payable
|
1,241 | - | 12,258 | (13,499 | ) | - | ||||||||||||||
|
Other
obligations
|
6,948 | - | 7,535 | - | 14,483 | |||||||||||||||
|
Total
liabilities
|
593,500 | - | 33,986 | (29,946 | ) | 597,540 | ||||||||||||||
|
Shareholders'
equity
|
||||||||||||||||||||
|
Preferred
stock
|
- | - | - | - | - | |||||||||||||||
|
Common
stock
|
351,018 | 1,982 | 30,113 | (32,095 | ) | 351,018 | ||||||||||||||
|
Accumulated
other comprehensive income, net
|
1,588 | - | 5,767 | (5,767 | ) | 1,588 | ||||||||||||||
|
Retained
earnings (accumulated deficit)
|
38,376 | (1,451 | ) | (4,489 | ) | 5,940 | 38,376 | |||||||||||||
|
Total
shareholders' equity
|
390,982 | 531 | 31,391 | (31,922 | ) | 390,982 | ||||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 984,482 | $ | 531 | $ | 65,377 | $ | (61,868 | ) | $ | 988,522 | |||||||||
|
Consolidating
Statement of Cash Flows
|
|||||||||||||||
|
Year
Ended December 31, 2007
|
|||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||
|
Operating
activities
|
(in
thousands)
|
||||||||||||||
|
Net
loss
|
$ | (16,144 | ) | $ | (4,467 | ) | $ | (70,384 | ) | $ | 74,851 | $ | (16,144 | ) | |
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||||||||||
|
Depreciation
and amortization
|
43,754 | 1,474 | 81,212 | - | 126,440 | ||||||||||
|
In-process
research and development
|
- | - | 35,975 | - | 35,975 | ||||||||||
|
Employee
stock plans income tax (provision) benefits
|
(389 | ) | - | - | - | (389 | ) | ||||||||
|
Stock-based
compensation
|
11,656 | - | - | - | 11,656 | ||||||||||
|
Amortization
of prepaid debt fees
|
13,526 | - | - | - | 13,526 | ||||||||||
|
Deferred
income taxes, net
|
(19,056 | ) | (3,765 | ) | (13,552 | ) | - | (36,373 | ) | ||||||
|
Equity
in losses of non-guarantor subsidiaries
|
72,295 | 2,556 | - | (74,851 | ) | - | |||||||||
|
Other,
net
|
1,224 | 17 | 85 | - | 1,326 | ||||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|||||||||||||||
|
Accounts
receivable
|
(14,358 | ) | (713 | ) | (25,647 | ) | - | (40,718 | ) | ||||||
|
Inventories
|
329 | 525 | 18,565 | - | 19,419 | ||||||||||
|
Trade
payables, accrued expenses and taxes payable
|
12,259 | 1,875 | (4,101 | ) | - | 10,033 | |||||||||
|
Wages
and benefits payable
|
(5,254 | ) | 252 | 5,200 | - | 198 | |||||||||
|
Unearned
revenue
|
3,823 | - | (1,163 | ) | - | 2,660 | |||||||||
|
Warranty
|
516 | 126 | 1,119 | - | 1,761 | ||||||||||
|
Effect
of foreign exchange rate changes
|
- | - | 4,168 | - | 4,168 | ||||||||||
|
Intercompany
transactions, net
|
(7,878 | ) | 1,817 | 6,061 | - | - | |||||||||
|
Other,
net
|
(5,698 | ) | 382 | 5,105 | - | (211 | ) | ||||||||
|
Net
cash provided by operating activities
|
90,605 | 79 | 42,643 | - | 133,327 | ||||||||||
|
Investing
activities
|
|||||||||||||||
|
Proceeds
from the maturities of investments, held to maturity
|
35,000 | - | - | - | 35,000 | ||||||||||
|
Proceeds
from the sale of property, plant and equipment
|
(350 | ) | (3 | ) | 353 | - | - | ||||||||
|
Acquisitions
of property, plant and equipment
|
(20,847 | ) | 5,852 | (25,607 | ) | - | (40,602 | ) | |||||||
|
Business
acquisitions, net of cash and cash equivalents acquired
|
(1,716,253 | ) | - | - | - | (1,716,253 | ) | ||||||||
|
Cash
transferred to parent
|
- | (7,806 | ) | - | 7,806 | - | |||||||||
|
Cash
transferred to guarantor subsidiaries
|
(250 | ) | - | (7,806 | ) | 8,056 | - | ||||||||
|
Cash
transferred to non-guarantor subsidiaries
|
(5,658 | ) | - | - | 5,658 | - | |||||||||
|
Intercompany
notes, net
|
120,673 | (3,282 | ) | (41,857 | ) | (75,534 | ) | - | |||||||
|
Other,
net
|
(140,889 | ) | (9,113 | ) | 157,441 | - | 7,439 | ||||||||
|
Net
cash (used in) provided by investing activities
|
(1,728,574 | ) | (14,352 | ) | 82,524 | (54,014 | ) | (1,714,416 | ) | ||||||
|
Financing
activities
|
|||||||||||||||
|
Proceeds
from borrowings
|
1,159,025 | - | (2 | ) | - | 1,159,023 | |||||||||
|
Payments
on debt
|
(76,099 | ) | - | - | - | (76,099 | ) | ||||||||
|
Change
in short-term borrowing, net
|
(1,902 | ) | - | 1,902 | - | - | |||||||||
|
Issuance
of common stock
|
247,617 | - | - | - | 247,617 | ||||||||||
|
Excess
tax benefits from stock-based compensation
|
- | - | - | - | - | ||||||||||
|
Prepaid
debt fees
|
(22,083 | ) | - | - | - | (22,083 | ) | ||||||||
|
Cash
transferred from parent
|
- | 250 | 5,658 | (5,908 | ) | - | |||||||||
|
Cash
transferred from guarantor subsidiaries
|
7,806 | - | - | (7,806 | ) | - | |||||||||
|
Cash
transferred from non-guarantor subsidiaries
|
- | 7,806 | - | (7,806 | ) | - | |||||||||
|
Intercompany
notes payable
|
(3,843 | ) | 7,881 | (79,572 | ) | 75,534 | - | ||||||||
|
Other,
net
|
1,902 | - | - | - | 1,902 | ||||||||||
|
Net
cash provided by (used in) financing activities
|
1,312,423 | 15,937 | (72,014 | ) | 54,014 | 1,310,360 | |||||||||
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
- | - | 1,312 | - | 1,312 | ||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
(325,546 | ) | 1,664 | 54,465 | - | (269,417 | ) | ||||||||
|
Cash
and cash equivalents at beginning of period
|
353,483 | - | 7,922 | - | 361,405 | ||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 27,937 | $ | 1,664 | $ | 62,387 | $ | - | $ | 91,988 | |||||
|
Non-cash
transactions:
|
|||||||||||||||
|
Fixed
assets purchased but not yet paid
|
$ | 1,502 | $ | - | $ | 3,899 | $ | - | $ | 5,401 | |||||
|
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 | ||||||||||
|
Consolidating
Statement of Cash Flows
|
||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||
|
Parent
|
Combined
Guarantor Subsidiaries
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Operating
activities
|
||||||||||||||||
|
Net
income (loss)
|
$ | 33,759 | $ | (1,451 | ) | $ | 1,493 | $ | (42 | ) | $ | 33,759 | ||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||||||
|
Depreciation
and amortization
|
44,153 | - | 2,081 | - | 46,234 | |||||||||||
|
Employee
stock plans income tax benefits
|
13,547 | - | - | 13,547 | ||||||||||||
|
Excess
tax benefits from stock-based compensation
|
(9,717 | ) | - | - | - | (9,717 | ) | |||||||||
|
Stock-based
compensation
|
9,689 | - | - | - | 9,689 | |||||||||||
|
Amortization
of prepaid debt fees
|
4,526 | - | - | - | 4,526 | |||||||||||
|
Deferred
income taxes, net
|
3,764 | - | (2,140 | ) | - | 1,624 | ||||||||||
|
Equity
in (earnings) losses of non-guarantor subsidiaries
|
(1,493 | ) | 1,451 | - | 42 | - | ||||||||||
|
Other,
net
|
846 | - | (18 | ) | - | 828 | ||||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||||||||
|
Accounts
receivable
|
3,863 | - | (7,138 | ) | - | (3,275 | ) | |||||||||
|
Inventories
|
(1,948 | ) | - | 349 | - | (1,599 | ) | |||||||||
|
Long-term
note receivable, net
|
- | - | - | - | - | |||||||||||
|
Trade
payables, accrued expenses and taxes payable
|
(5,212 | ) | - | (3,066 | ) | - | (8,278 | ) | ||||||||
|
Wages
and benefits payable
|
(1,966 | ) | - | 192 | - | (1,774 | ) | |||||||||
|
Unearned
revenue
|
5,033 | - | 665 | - | 5,698 | |||||||||||
|
Warranty
|
3,319 | - | (447 | ) | - | 2,872 | ||||||||||
|
Intercompany
transactions, net
|
(8,404 | ) | - | 8,404 | - | - | ||||||||||
|
Other,
net
|
63 | - | 576 | - | 639 | |||||||||||
|
Net
cash provided by operating activities
|
93,822 | - | 951 | - | 94,773 | |||||||||||
|
Investing
activities
|
||||||||||||||||
|
Proceeds
from the maturities of investments, held to maturity
|
170,381 | - | 53 | - | 170,434 | |||||||||||
|
Purchases
of investments, held to maturity
|
(204,995 | ) | - | - | - | (204,995 | ) | |||||||||
|
Acquisitions
of property, plant and equipment
|
(30,702 | ) | - | (1,037 | ) | - | (31,739 | ) | ||||||||
|
Business
acquisitions, net of cash and cash equivalents acquired
|
(19,889 | ) | - | (1,232 | ) | - | (21,121 | ) | ||||||||
|
Cash
transferred to parent
|
- | - | (3,303 | ) | 3,303 | - | ||||||||||
|
Cash
transferred to non-guarantor subsidiaries
|
(760 | ) | - | - | 760 | - | ||||||||||
|
Intercompany
notes, net
|
- | - | 8,133 | (8,133 | ) | - | ||||||||||
|
Other,
net
|
672 | - | 1,250 | - | 1,922 | |||||||||||
|
Net
cash (used in) provided by investing activities
|
(85,293 | ) | - | 3,864 | (4,070 | ) | (85,499 | ) | ||||||||
|
Financing
activities
|
||||||||||||||||
|
Proceeds
from borrowings
|
345,000 | - | - | - | 345,000 | |||||||||||
|
Payments
on debt
|
(39,476 | ) | - | (3,227 | ) | - | (42,703 | ) | ||||||||
|
Issuance
of common stock
|
15,250 | - | - | - | 15,250 | |||||||||||
|
Excess
tax benefits from stock-based compensation
|
9,717 | - | - | - | 9,717 | |||||||||||
|
Prepaid
debt fees
|
(8,771 | ) | - | - | - | (8,771 | ) | |||||||||
|
Cash
transferred from parent
|
- | - | 760 | (760 | ) | - | ||||||||||
|
Cash
transferred from non-guarantor subsidiaries
|
3,303 | - | - | (3,303 | ) | - | ||||||||||
|
Intercompany
notes payable
|
(8,133 | ) | - | - | 8,133 | - | ||||||||||
|
Net
cash provided by (used in) financing activities
|
316,890 | - | (2,467 | ) | 4,070 | 318,493 | ||||||||||
|
Increase
in cash and cash equivalents
|
325,419 | - | 2,348 | - | 327,767 | |||||||||||
|
Cash
and cash equivalents at beginning of period
|
28,064 | - | 5,574 | - | 33,638 | |||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 353,483 | $ | - | $ | 7,922 | $ | - | $ | 361,405 | ||||||
|
Non-cash
transactions:
|
||||||||||||||||
|
Fixed
assets purchased but not yet paid
|
$ | 6,129 | $ | - | $ | 502 | $ | - | $ | 6,631 | ||||||
|
Non-cash
affects of acquisitions (Note 5)
|
- | - | 637 | - | 637 | |||||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||||||
|
Cash
paid during the year for:
|
||||||||||||||||
|
Income
taxes
|
$ | 3,082 | $ | - | $ | 352 | $ | - | $ | 3,434 | ||||||
|
Interest
(net of amount capitalized)
|
4,941 | - | 293 | - | 5,234 | |||||||||||
|
Consolidating
Statement of Cash Flows
|
||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||
|
Parent
|
Combined Non-guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Operating
activities
|
||||||||||||||||
|
Net
income
|
$ | 33,061 | $ | 2,358 | $ | (2,358 | ) | $ | 33,061 | |||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||||||
|
Depreciation
and amortization
|
50,771 | 801 | - | 51,572 | ||||||||||||
|
Employee
stock plans income tax benefits
|
15,146 | - | - | 15,146 | ||||||||||||
|
Stock-based
compensation
|
739 | - | - | 739 | ||||||||||||
|
Amortization
of prepaid debt fees
|
5,031 | - | - | 5,031 | ||||||||||||
|
Deferred
income taxes, net
|
(21,865 | ) | (152 | ) | - | (22,017 | ) | |||||||||
|
Equity
in earnings of non-guarantor subsidiaries
|
(2,358 | ) | - | 2,358 | - | |||||||||||
|
Other,
net
|
2,795 | (517 | ) | - | 2,278 | |||||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||||||||
|
Accounts
receivable
|
(15,544 | ) | 1,361 | - | (14,183 | ) | ||||||||||
|
Inventories
|
(5,209 | ) | 1,212 | - | (3,997 | ) | ||||||||||
|
Trade
payables, accrued expenses and taxes payable
|
5,110 | (678 | ) | - | 4,432 | |||||||||||
|
Wages
and benefits payable
|
9,788 | (506 | ) | - | 9,282 | |||||||||||
|
Unearned
revenue
|
343 | (187 | ) | - | 156 | |||||||||||
|
Warranty
|
4,044 | (213 | ) | - | 3,831 | |||||||||||
|
Intercompany
transactions, net
|
(6,725 | ) | 6,725 | - | - | |||||||||||
|
Other,
net
|
(5,752 | ) | 38 | - | (5,714 | ) | ||||||||||
|
Net
cash provided by operating activities
|
69,375 | 10,242 | - | 79,617 | ||||||||||||
|
Investing
activities
|
||||||||||||||||
|
Acquisitions
of property, plant and equipment
|
(31,675 | ) | (298 | ) | - | (31,973 | ) | |||||||||
|
Cash
transferred to parent
|
- | (2,500 | ) | 2,500 | - | |||||||||||
|
Cash
transferred to non-guarantor subsidiaries
|
465 | - | (465 | ) | - | |||||||||||
|
Intercompany
notes, net
|
5,957 | - | (5,957 | ) | - | |||||||||||
|
Other,
net
|
1,851 | (1,863 | ) | 1,414 | 1,402 | |||||||||||
|
Net
cash used in investing activities
|
(23,402 | ) | (4,661 | ) | (2,508 | ) | (30,571 | ) | ||||||||
|
Financing
activities
|
||||||||||||||||
|
Proceeds
from borrowings
|
14,800 | - | - | 14,800 | ||||||||||||
|
Payments
on debt
|
(125,399 | ) | (797 | ) | - | (126,196 | ) | |||||||||
|
Issuance
of common stock
|
84,727 | 1,414 | (1,414 | ) | 84,727 | |||||||||||
|
Prepaid
debt fees
|
(391 | ) | - | - | (391 | ) | ||||||||||
|
Cash
transferred from parent
|
- | (465 | ) | 465 | - | |||||||||||
|
Cash
transferred from non-guarantor subsidiaries
|
2,500 | - | (2,500 | ) | - | |||||||||||
|
Intercompany
notes, net
|
- | (5,957 | ) | 5,957 | - | |||||||||||
|
Other,
net
|
- | 28 | - | 28 | ||||||||||||
|
Net
cash used in financing activities
|
(23,763 | ) | (5,777 | ) | 2,508 | (27,032 | ) | |||||||||
|
Increase
(decrease) in cash and cash equivalents
|
22,210 | (196 | ) | - | 22,014 | |||||||||||
|
Cash
and cash equivalents at beginning of period
|
5,854 | 5,770 | - | 11,624 | ||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 28,064 | $ | 5,574 | $ | - | $ | 33,638 | ||||||||
|
Non-cash
transactions:
|
||||||||||||||||
|
Fixed
assets purchased but not yet paid
|
$ | 4,400 | $ | - | $ | - | $ | 4,400 | ||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||||||
|
Cash
paid during the year for:
|
||||||||||||||||
|
Income
taxes
|
$ | 977 | $ | 304 | $ | - | $ | 1,281 | ||||||||
|
Interest
(net of amount capitalized)
|
14,036 | 278 | - | 14,314 | ||||||||||||
Note
18: Quarterly Results (Unaudited)
Quarterly
results are as follows:
|
First
|
Second
|
Third
|
Fourth
|
Total
|
|||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
|||||||||||||||||
|
(in
thousands, except per share and stock price data)
|
|||||||||||||||||||||
|
2007
|
|||||||||||||||||||||
|
Statement
of operations data:
|
|||||||||||||||||||||
|
Total
revenues
|
$ | 147,911 | $ | 401,559 | $ | 434,034 | $ | 480,544 | $ | 1,464,048 | |||||||||||
|
Gross
profit
|
$ | 61,325 | $ | 124,714 | $ | 144,810 | $ | 156,438 | $ | 487,287 | |||||||||||
|
Net
income
|
$ | 7,180 | $ | (23,880 | ) | $ | (3,446 | ) | $ | 4,002 | $ | (16,144 | ) | ||||||||
|
Basic
earnings per share
|
$ | 0.26 | $ | (0.79 | ) | $ | (0.11 | ) | $ | 0.13 | $ | (0.55 | ) | ||||||||
|
Diluted
earnings per share
|
$ | 0.26 | $ | (0.79 | ) | $ | (0.11 | ) | $ | 0.12 | $ | (0.55 | ) | ||||||||
|
Stock
Price:
|
|||||||||||||||||||||
|
High
|
$ | 68.91 | $ | 78.72 | $ | 96.08 | $ | 112.92 | $ | 112.92 | |||||||||||
|
Low
|
$ | 51.15 | $ | 64.57 | $ | 73.55 | $ | 72.78 | $ | 51.15 | |||||||||||
|
2006
|
|||||||||||||||||||||
|
Statement
of operations data:
|
|||||||||||||||||||||
|
Total
revenues
|
$ | 155,553 | $ | 163,810 | $ | 164,706 | $ | 159,973 | $ | 644,042 | |||||||||||
|
Gross
profit
|
$ | 66,774 | $ | 69,032 | $ | 67,425 | $ | 64,211 | $ | 267,442 | |||||||||||
|
Net
income
|
$ | 7,069 | $ | 10,204 | $ | 9,215 | $ | 7,271 | $ | 33,759 | |||||||||||
|
Basic
earnings per share
|
$ | 0.28 | $ | 0.40 | $ | 0.36 | $ | 0.28 | $ | 1.33 | |||||||||||
|
Diluted
earnings per share
|
$ | 0.27 | $ | 0.39 | $ | 0.35 | $ | 0.28 | $ | 1.28 | |||||||||||
|
Stock
Price:
|
|||||||||||||||||||||
|
High
|
$ | 62.75 | $ | 73.72 | $ | 60.46 | $ | 57.50 | $ | 73.72 | |||||||||||
|
Low
|
$ | 39.44 | $ | 52.58 | $ | 44.76 | $ | 46.87 | $ | 39.44 | |||||||||||
ITEM 9: CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There
were no disagreements with our independent accountants on accounting and
financial disclosure matters within the two year period ended December 31,
2007, or in any period subsequent to such date, through the date of this
report.
ITEM 9A: CONTROLS AND
PROCEDURES
|
(i)
|
Evaluation
of disclosure controls and
procedures.
|
|
|
An
evaluation was performed under the supervision and with the participation
of our Company’s management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of the Company’s disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange
Act of 1934 as amended. Based on that evaluation, the Company’s
management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures
were effective as of December 31, 2007. 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, 2007.
|
|
|
We
completed the acquisition of Actaris on April 18, 2007. This business
represents a separate segment with total assets of $2.4 billion as of
December 31, 2007 and revenues of $834 million from the date of
acquisition through December 31, 2007. Actaris is also a separate control
environment. The evaluation of disclosure controls and procedures referred
to in (i) above included Actaris. However, we have excluded this segment
from management’s report on internal control over financial reporting, as
permitted by SEC guidance, for the year ended December 31,
2007.
|
|
|
The
effectiveness of our internal control over financial reporting as of
December 31, 2007 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, 2007.
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, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal controls over
financial reporting.
|
|
(c)
|
Report of Independent
Registered Public Accounting
Firm.
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders Itron, Inc.
We have
audited Itron Inc.’s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Itron, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Itron, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, 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 sheet of Itron, Inc.
as of December 31, 2007, and the related consolidated statements of
operation, stockholders’ equity, and cash flows for the year ended
December 31, 2007 of Itron, Inc. and our report dated February 25,
2008 expressed an unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Seattle,
Washington
February
25, 2008
ITEM 9B: OTHER INFORMATION
No
information was required to be disclosed in a report on Form 8-K during the
fourth quarter of 2007 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 6, 2008
(the 2007 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—Executive Officers of the Registrant” in PART I of
this Annual Report on Form 10-K.
The
section entitled “Section 16(a) Beneficial Ownership Reporting Compliance”
appearing in the 2007 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 2007 Proxy Statement
sets forth certain information with respect to the Registrant’s code of conduct
and ethics as required by Item 406 of Regulation S-K and is incorporate herein
by reference.
There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant’s board of directors during 2007, as set
forth by Item 407(c)(3).
The
section entitled “Corporate Governance” appearing in the 2007 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
section entitled “Executive Compensation” and “Compensation of Directors”
appearing in the 2007 Proxy Statement sets forth certain information with
respect to the compensation of directors and management of the Registrant as
required by Item 402 of Regulation S-K and is incorporated herein by
reference.
The
section entitled “Corporate Governance” appearing in the 2007 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 2007 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 2007
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 2007 Proxy Statement sets forth certain information
with respect to the ownership of the Registrant’s common stock as required by
Item 403 of Regulation S-K and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
The
section entitled “Transactions with Related Persons” appearing in the 2007 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 2007 Proxy Statement
sets forth certain information with respect to director independence as required
by Item 407(a) of Regulation S-K and is incorporated herein by
reference.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND
SERVICES
The
section entitled “Independent Registered Public Accounting Firm’s Fees and
Services” appearing in the 2007 Proxy Statement sets forth certain information
with respect to the principal accounting fees and services and the Audit/Finance
Committee’s policy on pre-approval of audit and permissible non-audit services
performed by the Registrant’s independent auditors as required by Item 9(e) of
Schedule 14A and is incorporated herein by reference.
PART
IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT
SCHEDULE
(a)
(1) Financial Statement:
The
financial statements required by this item are submitted in Item 8 of this
Annual Report on Form 10-K.
(a)
(2) Financial Statement Schedule:
Schedule
II: Valuation and Qualifying Accounts
(3)
Exhibits:
|
Exhibit
|
||
|
Number
|
Description
of Exhibits
|
|
|
2.1
|
Stock
purchase agreement between the stockholders of Actaris Metering Systems
S.A, 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 S.A, 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. (attached hereto)
|
|
|
4.1
|
Rights
Agreement between Itron, Inc. and Mellon Investor Services LLC, as Rights
Agent, dated as of December 11, 2002. (Filed as Exhibit 4.1 to Itron,
Inc.’s Registration of Securities on Form 8-A, filed on December 12,
2002—File No. 0-22418)
|
|
|
4.2
|
Form
of Itron, Inc.’s 7.75% Exchange Note due 2012. (Filed as Exhibit 4.6 to
Itron, Inc.’s Report on Form S-4, filed on September 3, 2004—File No.
333-118782)
|
|
|
4.3
|
Indenture
relating to Itron, Inc.’s 7.75% senior subordinated notes due 2012, dated
as of May 10, 2004. (Filed as Exhibit 4.7 to Itron, Inc.’s Report on Form
S-4, filed on September 3, 2004—File
No. 333-118782)
|
|
|
4.4
|
Registration
Rights Agreement among Itron, Inc. domestic subsidiaries listed on
Schedule I thereto and Bear, Stearns & Co. Inc. dated May 10, 2004.
(Filed as Exhibit 4.8 to Itron, Inc.’s Report on Form S-4/A, filed on
September 9, 2004—File No. 333-118782)
|
|
|
4.5
|
Indenture
relating to Itron, Inc.’s 2.50% convertible senior subordinated notes due
2026, dated as of August 4, 2006. (Filed as Exhibit 4.16 to Itron, Inc.’s
Quarterly Report on Form 10-Q, filed on November 6, 2006—File
No. 0-22418)
|
|
|
4.6
|
Credit
Agreement dated April 18, 2007, among Itron, Inc. and the subsidiary
guarantors and UBS Securities LLC, Wells Fargo Bank, National Association
and Mizuho Corporate Bank, Ltd. (Filed as Exhibit 4.1 to Itron, Inc.'s
Report on Form 8-K, filed on April 24, 2007—File No.
0-22418)
|
|
|
4.7
|
Security
Agreement dated April 18, 2007, among Itron, Inc. and the subsidiary
guarantors and Wells Fargo Bank, National Association as Collateral Agent.
(Filed as Exhibit 4.2 to Itron, Inc.'s Report on Form 8-K, filed on April
24, 2007—File No. 0-22418)
|
|
Exhibit
|
||
|
Number
|
Description
of Exhibits
|
|
|
10.1
|
Form
of Change in Control Agreement between Itron, Inc. and certain of its
executive officers.* (Filed as Exhibit 10.2 to Itron Inc.’s Report on Form
8-K, filed on February 17, 2006—File No. 0-22418)
|
|
|
10.2
|
Schedule
of certain executive officers who are parties to Change in Control
Agreements with Itron, Inc.* (see Exhibit 10.1 hereto)
|
|
|
10.3
|
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)
|
|
|
10.4
|
Terms
of the Amended and Restated Equity Grant Program for Nonemployee Directors
under the Itron, Inc. Amended and Restated 2000 Stock Incentive Plan.
(attached hereto)
|
|
|
10.5
|
Executive
Deferred Compensation Plan.* (Filed as Exhibit 10.12 to Itron, Inc.’s
Registration Statement on Form S-1 (Registration #33-49832), as amended,
filed on July 22, 1992)
|
|
|
10.6
|
Executive
Deferred Compensation Plan, Amendment No. Two, dated December 4, 2006.*
(Filed as Exhibit 10.6 to Itron, Inc.’s Current Report on Form 8-K, filed
on December 7, 2006—File No. 0-22418)
|
|
|
10.7
|
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)
|
|
|
10.8
|
Schedule
of directors and executive officers who are parties to Indemnification
Agreements with Itron, Inc.* (see Exhibit 10.7 hereto)
|
|
|
10.9
|
2002
Employee Stock Purchase Plan. (Filed as Appendix B to Itron, Inc.’s Proxy
Statement for the Annual Meeting of Shareholders to be held on May 3,
2005—File No. 0-22418)
|
|
|
10.10
|
Amended
Long-Term Performance Plan dated February 22, 2007 between Itron, Inc. and
certain of its executive officers.* (Filed as Exhibit 10.1 to Itron,
Inc.’s Report on Form 8-K, filed on February 28, 2007—File No.
0-22418)
|
|
|
10.11
|
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)
|
|
|
10.12
|
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)
|
|
|
10.13
|
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)
|
|
|
10.14
|
Foreign
Assignment Program Agreement between Itron, Inc. and certain of its
officers.* (Filed as Exhibit 10.1 to Itron, Inc.'s Report on Form 8-K,
filed on April 24, 2007—File No. 0-22418)
|
|
|
12.1
|
Statement
re Computation of Ratios.
|
|
|
21.1
|
Subsidiaries
of Itron, Inc.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm—Ernst & Young
LLP.
|
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm—Deloitte & Touche
LLP.
|
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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*
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Management
contract or compensatory plan or
arrangement.
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Liberty
Lake, State of Washington, on the 25th day of February, 2008.
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ITRON,
INC.
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By:
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/S/ STEVEN M.
HELMBRECHT
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Steven
M. Helmbrecht
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Sr.
Vice President and Chief Financial
Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on the 25th day of February, 2008.
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Signature
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Title
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/S/ LEROY D.
NOSBAUM
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LeRoy
D. Nosbaum
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Chairman
of the Board and Chief Executive Officer (Principal Executive
Officer)
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/S/ STEVEN M.
HELMBRECHT
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Steven
M. Helmbrecht
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Sr.
Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer)
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/S/ MICHAEL B.
BRACY
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Michael
B. Bracy
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Director
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/S/ TED C.
DEMERRITT
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Ted
C. DeMerritt
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Director
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/S/ KIRBY
A. DYESS
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Kirby
A. Dyess
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Director
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/S/ JON E.
ELIASSEN
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Jon
E. Eliassen
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Director
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/S/ CHARLES
H. GAYLORD, JR.
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Charles
H. Gaylord, Jr.
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Director
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/S/ THOMAS S.
GLANVILLE
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Thomas
S. Glanville
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Director
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/S/
SHARON L.
NELSON
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Sharon
L. Nelson
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Director
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/S/ GARY
E. PRUITT
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Gary
E. Pruitt
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Director
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/S/ GRAHAM M.
WILSON
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Graham
M. Wilson
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Director
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Schedule
II: VALUATION AND QUALIFYING
ACCOUNTS
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Acquisition
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Additions
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Effects
of
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||||||||||||||||||||
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Balance at
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opening
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charged to
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change
in
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|||||||||||||||||||
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beginning
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balance
/
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costs
and
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exchange
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Balance at end of period
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||||||||||||||||||
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Description
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of
period
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adjustments
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expenses
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Deductions
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rates
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Current
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Noncurrent
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|||||||||||||||
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(in
thousands)
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Year
ended December 31, 2007:
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||||||||||||||||||||||
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Short
and long-term warranty
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$ | 18,148 | $ | 12,935 | (1) | $ | 14,019 | $ | 12,890 | $ | 629 | $ | 21,277 | $ | 11,564 | |||||||
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Allowance
for doubtful accounts
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589 | 5,176 | (1) | 1,046 | (808 | ) | 388 | 6,391 | - | |||||||||||||
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FIN
48 Unrecognized tax benefits
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5,431 | 31,824 | (1) | 4,188 | (1,375 | ) | (351 | ) | - | 39,717 | ||||||||||||
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Deferred
tax assets valuation allowance
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1,083 | 14,381 | (1) | 12,265 | - | - | - | 27,729 | ||||||||||||||
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Year
ended December 31, 2006:
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||||||||||||||||||||||
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Short
and long-term warranty
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$ | 15,276 | $ | - | $ | 10,104 | $ | 7,232 | $ | - | $ | 7,999 | $ | 10,149 | ||||||||
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Allowance
for doubtful accounts
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598 | - | 52 | (61 | ) | - | 589 | - | ||||||||||||||
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Year
ended December 31, 2005:
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||||||||||||||||||||||
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Short
and long-term warranty
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$ | 13,574 | $ | (2,128 | ) (2) | $ | 10,929 | $ | 7,099 | $ | - | $ | 8,497 | $ | 6,779 | |||||||
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Allowance
for doubtful accounts
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1,312 | (164 | ) | (165 | ) | (385 | ) | - | 598 | - | ||||||||||||
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(1)
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On April 18, 2007, we completed the acquisition of Actaris Metering
Systems, SA.
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(2)
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On July 1, 2004, we completed the acquisition of our Electricity Metering
business and continued to make adjustments to the purchase
price
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through June 2005 as the valuation of assets and liabilities were
finalized.
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86