form_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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|
For
the quarterly period ended March 31,
2008
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OR
¨
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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
|
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)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated
filer ¨
Non-accelerated filer ¨ (Do not check if a
smaller reporting company) Smaller reporting company
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
As of
April 30, 2008, there were outstanding 30,784,601
shares of the registrant’s common stock, no par value, which is
the only class of common stock of the registrant.
Itron,
Inc.
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Page
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1
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2
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3
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4
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28
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40
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43
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44
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44
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44
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44
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45
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46
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Item 1: Financial Statements (Unaudited)
(UNAUDITED)
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Three
Months Ended March 31,
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2008
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|
2007
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(in
thousands, except per share data)
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Revenues
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$ |
478,476 |
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$ |
147,911 |
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Cost
of revenues
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|
315,917 |
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86,586 |
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Gross
profit
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|
162,559 |
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61,325 |
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Operating
expenses
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Sales
and marketing
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41,966 |
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|
14,920 |
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Product
development
|
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|
29,031 |
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|
15,821 |
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General
and administrative
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|
33,023 |
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|
14,244 |
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Amortization
of intangible assets
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31,252 |
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|
7,040 |
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Total
operating expenses
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135,272 |
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52,025 |
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Operating
income
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27,287 |
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|
9,300 |
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Other
income (expense)
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Interest
income
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|
1,424 |
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|
6,089 |
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Interest
expense
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|
(25,266 |
) |
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(5,497 |
) |
Other
income (expense), net
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|
188 |
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1,508 |
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Total
other income (expense)
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(23,654 |
) |
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2,100 |
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Income
before income taxes
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3,633 |
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|
11,400 |
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Income
tax provision
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|
(680 |
) |
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(4,220 |
) |
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Net
income
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$ |
2,953 |
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$ |
7,180 |
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Earnings
per share
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Basic
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$ |
0.10 |
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$ |
0.26 |
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Diluted
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$ |
0.09 |
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$ |
0.26 |
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Weighted
average number of shares outstanding
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Basic
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30,696 |
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27,198 |
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Diluted
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32,745 |
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27,980 |
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands)
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March
31,
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December
31,
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2008
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2007
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(unaudited)
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ASSETS
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Current
assets
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Cash
and cash equivalents
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$ |
95,519 |
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$ |
91,988 |
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Accounts
receivable, net
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|
361,094 |
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339,018 |
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Inventories
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185,361 |
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169,238 |
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Deferred
income taxes, net
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22,631 |
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10,733 |
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Other
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50,198 |
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42,459 |
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Total
current assets
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714,803 |
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653,436 |
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Property,
plant and equipment, net
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328,329 |
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323,003 |
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Prepaid
debt fees
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19,834 |
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21,616 |
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Deferred
income taxes, net
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|
87,400 |
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75,243 |
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Other
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12,596 |
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15,235 |
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Intangible
assets, net
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626,206 |
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695,900 |
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Goodwill
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1,418,556 |
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1,266,133 |
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Total
assets
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$ |
3,207,724 |
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$ |
3,050,566 |
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities
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Trade
payables
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$ |
221,720 |
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$ |
198,997 |
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Accrued
expenses
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68,173 |
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57,275 |
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Wages
and benefits payable
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76,022 |
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70,486 |
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Taxes
payable
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27,927 |
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17,493 |
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Current
portion of long-term debt
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357,338 |
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11,980 |
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Current
portion of warranty
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22,980 |
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21,277 |
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Deferred
income taxes, net
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- |
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5,437 |
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Unearned
revenue
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34,210 |
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20,912 |
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Total
current liabilities
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808,370 |
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403,857 |
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Long-term
debt
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1,218,792 |
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1,578,561 |
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Warranty
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18,823 |
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11,564 |
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Pension
plan benefits
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68,723 |
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60,623 |
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Deferred
income taxes, net
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|
164,818 |
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173,500 |
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Other
obligations
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57,993 |
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63,659 |
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Total
liabilities
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2,337,519 |
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2,291,764 |
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Commitments
and contingencies
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Shareholders'
equity
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Preferred
stock
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- |
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- |
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Common
stock
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|
616,361 |
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609,902 |
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Accumulated
other comprehensive income, net
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|
228,659 |
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|
126,668 |
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Retained
earnings
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|
25,185 |
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|
22,232 |
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Total
shareholders' equity
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|
870,205 |
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|
758,802 |
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Total
liabilities and shareholders' equity
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$ |
3,207,724 |
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$ |
3,050,566 |
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The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
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|
2008
|
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|
2007
|
|
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(in
thousands)
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|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,953 |
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|
$ |
7,180 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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|
44,318 |
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|
11,460 |
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Employee
stock plans income tax benefit
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|
- |
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|
1,969 |
|
Excess
tax benefits from stock-based compensation
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|
- |
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|
(1,611 |
) |
Stock-based
compensation
|
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|
3,890 |
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|
2,876 |
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Amortization
of prepaid debt fees
|
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|
1,858 |
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|
758 |
|
Deferred
income taxes, net
|
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|
(17,956 |
) |
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|
1,684 |
|
Other,
net
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|
86 |
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|
(1,989 |
) |
Changes
in operating assets and liabilities, net of acquisitions:
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Accounts
receivable
|
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|
(19,952 |
) |
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(14,303 |
) |
Inventories
|
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(16,237 |
) |
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1,668 |
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Trade
payables, accrued expenses and taxes payable
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|
36,501 |
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|
8,963 |
|
Wages
and benefits payable
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|
5,394 |
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(5,296 |
) |
Unearned
revenue
|
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|
13,889 |
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(2,006 |
) |
Warranty
|
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|
2,654 |
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|
1,692 |
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Effect
of foreign exchange rate changes
|
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|
7,867 |
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|
- |
|
Other,
net
|
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|
(8,845 |
) |
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(4,271 |
) |
Net
cash provided by operating activities
|
|
|
56,420 |
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|
|
8,774 |
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Investing
activities
|
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Proceeds
from the maturities of investments, held to maturity
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|
- |
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|
35,000 |
|
Acquisitions
of property, plant and equipment
|
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|
(13,117 |
) |
|
|
(8,622 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(95 |
) |
|
|
(149 |
) |
Other,
net
|
|
|
897 |
|
|
|
(5,736 |
) |
Net
cash (used in) provided by investing activities
|
|
|
(12,315 |
) |
|
|
20,493 |
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
|
(46,770 |
) |
|
|
- |
|
Issuance
of common stock
|
|
|
2,569 |
|
|
|
229,588 |
|
Excess
tax benefits from stock-based compensation
|
|
|
- |
|
|
|
1,611 |
|
Other,
net
|
|
|
3,587 |
|
|
|
- |
|
Net
cash (used in) provided by financing activities
|
|
|
(40,614 |
) |
|
|
231,199 |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
40 |
|
|
|
- |
|
Increase
in cash and cash equivalents
|
|
|
3,531 |
|
|
|
260,466 |
|
Cash
and cash equivalents at beginning of period
|
|
|
91,988 |
|
|
|
361,405 |
|
Cash
and cash equivalents at end of period
|
|
$ |
95,519 |
|
|
$ |
621,871 |
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
2,604 |
|
|
$ |
1,573 |
|
Pre-acquisition
costs incurred but not yet paid
|
|
|
- |
|
|
|
2,707 |
|
|
|
|
|
|
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|
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|
Supplemental
disclosure of cash flow information:
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Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
3,903 |
|
|
$ |
2,084 |
|
Interest
|
|
|
18,385 |
|
|
|
4,365 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2008
(UNAUDITED)
In this
Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
Note
1: Summary of Significant Accounting
Policies
We were
incorporated in the state of Washington in 1977. We provide a portfolio of
products and services to utilities for the energy and water markets throughout
the world.
Financial
Statement Preparation
The
condensed consolidated financial statements presented in this Quarterly Report
on Form 10-Q are unaudited and reflect entries necessary for the fair
presentation of the Condensed Consolidated Statements of Operations for the
three months ended March 31, 2008 and 2007, Condensed Consolidated Balance
Sheets as of March 31, 2008 and December 31, 2007 and Condensed
Consolidated Statements of Cash Flows for the three months ended
March 31, 2008 and 2007 of Itron, Inc. and its subsidiaries. All
entries required for the fair presentation of the financial statements are of a
normal recurring nature. Intercompany transactions and balances are eliminated
upon consolidation.
Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC) regarding
interim results. These condensed consolidated financial statements should be
read in conjunction with the 2007 audited financial statements and notes
included in our Annual Report on Form 10-K, as filed with the SEC on February
26, 2008. The results of operations for the three months ended March 31, 2008
are not necessarily indicative of the results expected for the full fiscal year
or for any other fiscal period.
Basis
of Consolidation
We
consolidate all entities in which we have a greater than 50% ownership interest.
We also consolidate entities in which we have a 50% or less investment and over
which we have control. We use the equity method of accounting for entities in
which we have a 50% or less investment and exercise significant influence.
Entities in which we have less than a 20% investment and where we do not
exercise significant influence are accounted for under the cost method. We
consider for consolidation any variable interest entity of which we are the
primary beneficiary. At March 31, 2008 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. The operating results of
this acquisition are included in our condensed consolidated financial statements
commencing on the date of the 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.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Condensed Consolidated Balance Sheets at fair value as either assets or
liabilities. The components and fair values of our derivative instruments are
determined using the fair value measurements of significant other observable
inputs (Level 2), as defined by SFAS 157, Fair Value Measurements. 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 Condensed Consolidated Statement of Operations.
We classify cash flows from our derivative programs as cash flows from operating
activities in the Condensed Consolidated Statements of Cash Flows. Derivatives
are not used for trading or speculative purposes. Counterparties to our currency
exchange and interest rate derivatives consist of major international financial
institutions. We monitor our positions and the credit ratings of our
counterparties when valuing our derivatives.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded for invoices issued to customers in accordance with our
contractual arrangements. Interest and late payment fees are minimal. Unbilled
receivables are recorded when revenues are recognized upon product shipment or
service delivery and invoicing occurs at a later date. The allowance for
doubtful accounts is based on our historical experience of bad debts and our
specific review of outstanding receivables at period end. Accounts receivable
are written-off against the allowance when we believe an account, or a portion
thereof, is no longer collectible.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method.
Cost includes raw materials and labor, plus applied direct and indirect
costs.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally thirty years for buildings and three to
five years for equipment, computers and furniture. Leasehold improvements are
capitalized over the term of the applicable lease, including renewable periods
if reasonably assured, or over the useful lives, whichever is shorter. Costs
related to internally developed software and software purchased for internal
uses are capitalized in accordance with Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, and are amortized over
the estimated useful lives of the assets. Repair and maintenance costs are
expensed as incurred. We have no major planned maintenance
activities.
Prepaid
Debt Fees
Prepaid
debt fees represent the capitalized direct costs incurred related to the
issuance of debt and are recorded as noncurrent assets. These costs are
amortized to interest expense over the lives of the respective borrowings using
the effective interest method. When debt is repaid early, or first becomes
convertible as in the case of our convertible senior subordinated notes
(convertible notes), the 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 Condensed Consolidated Statements of
Operations.
Business
Combinations
In
accordance with SFAS 141, Business Combinations, we
include in our results of operations the results of an acquired business from
the date of acquisition. Net assets of the company acquired and intangible
assets that arise from contractual/legal rights, or are capable of being
separated, are recorded at their fair values as of the date of acquisition. The
residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. Amounts allocated to
in-process research and development (IPR&D) are expensed in the period of
acquisition. Costs to complete the IPR&D are expensed 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:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Beginning
balance, January 1
|
|
$ |
32,841 |
|
|
$ |
18,148 |
|
Adjustment
of previous acquisition
|
|
|
6,307 |
|
|
|
- |
|
New
product warranties
|
|
|
2,667 |
|
|
|
696 |
|
Other
changes/adjustments to warranties
|
|
|
1,701 |
|
|
|
2,936 |
|
Claims
activity
|
|
|
(3,580 |
) |
|
|
(1,940 |
) |
Effect
of change in exchange rates
|
|
|
1,867 |
|
|
|
- |
|
Ending
balance, March 31
|
|
|
41,803 |
|
|
|
19,840 |
|
Less:
current portion of warranty
|
|
|
22,980 |
|
|
|
9,440 |
|
Long-term
warranty
|
|
$ |
18,823 |
|
|
$ |
10,400 |
|
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $4.4 and $3.6
million for the three months ended March 31, 2008 and 2007, respectively.
The increase in warranty expense for the three months ended March 31, 2008,
compared with the same period in 2007, is the result of the Actaris activity.
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
$3.2 million and $3.7 million for the three months ended March 31,
2008 and 2007, respectively. The IBNR accrual, which is included in wages and
benefits payable, was $2.7 million and $2.1 million at March 31, 2008 and
December 31, 2007, respectively. Some of the key drivers of the
fluctuations in the IBNR accrual are 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.
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.
Defined
Benefit Pension Plans
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 not
been recorded on undistributed earnings of international subsidiaries that are
permanently reinvested.
We
evaluate whether our tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements in accordance with
Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). Under FIN 48, we
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities based solely on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. We recognize interest
expense and penalties accrued related to unrecognized tax benefits in our
provision for income taxes.
Foreign
Exchange
Our
condensed consolidated financial statements are reported in U.S. dollars. Assets
and liabilities of international subsidiaries with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using an average rate for the relevant reporting period. Translation adjustments
resulting from this process are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity. Gains and losses that arise from
exchange rate fluctuations for balances that are not denominated in the
functional currency are included in the Condensed 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
international subsidiaries are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity.
Revenue
Recognition
Revenues
consist primarily of hardware sales, software license fees, software
implementation, project management services installation, consulting and
post-sale maintenance support. In determining appropriate revenue recognition,
we primarily consider the provisions of the following accounting
pronouncements: Staff Accounting Bulletin 104, Revenue recognition in Financial
Statements, FASB’s Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple
Deliverables, Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts and EITF 03-5, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software 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 Condensed 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.
Earnings
Per Share
Basic
earnings per share (EPS) is calculated using net income 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
SFAS
123(R), Share-Based
Payment, requires the measurement and recognition of compensation expense
for all stock-based awards made to employees and directors, based on estimated
fair values. We record stock-based compensation expenses under SFAS 123(R) for
awards of stock options, our Employee Stock Purchase Plan (ESPP) and issuance of
restricted and unrestricted stock awards and units. The fair value of stock
options and ESPP awards are estimated at the date of grant using the
Black-Scholes option-pricing model, which includes assumptions for the dividend
yield, expected volatility, risk-free interest rate and expected life. For
restricted and unrestricted stock awards and units, the fair value is the market
close price of our common stock on the date of grant. We expense stock-based
compensation using the straight-line method over the requisite service period. A
substantial portion of our stock-based compensation cannot be expensed for tax
purposes. The benefits of tax deductions in excess of the compensation cost
recognized are classified as financing cash inflows in the Condensed
Consolidated Statements of Cash Flows.
Fair
Value Measurement
SFAS 157,
Fair Value Measurement,
became effective on January 1, 2008 and establishes a framework for measuring
fair value, expands disclosures about fair value measurements of our financial
assets and liabilities and specifies a hierarchy of valuation techniques based
on whether the inputs used are observable or unobservable. The fair value
hierarchy prioritizes the inputs used in different valuation methodologies,
assigning the highest priority to unadjusted quoted prices for identical assets
and liabilities in actively traded markets (Level 1) and the lowest priority to
unobservable inputs (Level 3). Level 2 inputs consist of quoted prices for
similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in non-active markets; and model-derived
valuations in which significant inputs are corroborated by observable market
data either directly or indirectly through correlation or other means. The
disclosure requirements include the fair value measurement at the reporting date
and the level within the fair value hierarchy in which the fair value
measurements fall. For fair value measurements using Level 3 inputs, a
reconciliation of the beginning and ending balances is disclosed.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Due to various factors affecting future costs and operations,
actual results could differ materially from these estimates.
Reclassifications
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
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
February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years. We are currently assessing the impact of SFAS 157 for
nonfinancial assets and nonfinancial liabilities on our consolidated financial
statements.
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.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133,
which requires enhanced disclosures about how and why derivative instruments are
used, how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS 161 also requires the fair values of derivative
instruments and their gains and losses to be disclosed in a tabular format. SFAS
161 does not change how we record and account for derivative instruments. SFAS
161 is effective for fiscal years and interim periods beginning after November
15, 2008 and will be adopted by us in the first quarter of fiscal year
2009.
Note
2: Earnings Per Share and Capital Structure
The
following table sets forth the computation of basic and diluted
EPS.
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
(in
thousands, except per share data)
|
Net
income available to common shareholders
|
|
$ |
2,953 |
|
|
$ |
7,180 |
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding - Basic
|
|
|
30,696 |
|
|
|
27,198 |
Dilutive
effect of stock-based awards and convertible notes
|
|
|
2,049 |
|
|
|
782 |
Weighted
average number of shares outstanding - Diluted
|
|
|
32,745 |
|
|
|
27,980 |
Basic
earnings per common share
|
|
$ |
0.10 |
|
|
$ |
0.26 |
Diluted
earnings per common share
|
|
$ |
0.09 |
|
|
$ |
0.26 |
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 March 31, 2008 and 2007, we had
stock-based awards outstanding of approximately 1.5 million and 2.0 million at
weighted average option exercise prices of $39.18 and $30.65, respectively.
Approximately 53,000 and 593,000 stock-based awards were excluded from the
calculation of diluted EPS for the three months ended March 31, 2008 and 2007,
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, when
convertible, 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 March 31, 2008
and 2007 is used as the basis for determining the dilutive effect on EPS. The
average price of our common stock for the three months ended March 31, 2008
exceeded the conversion price of $65.16 and therefore, approximately 1.4 million
shares have been included as dilutive shares in the calculation of diluted EPS
at March 31, 2008. The average price of our common stock for the three months
ended March 31, 2007 did not exceed the conversion price of $65.16 and
therefore, did not have an effect on diluted earnings per share at March 31,
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 March 31, 2008 and
2007.
Note
3: Certain Balance Sheet Components
Accounts
receivable, net
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Trade
receivables (net of allowance of $6,236 and $6,391)
|
|
$ |
341,201 |
|
|
$ |
324,425 |
|
Unbilled
revenue
|
|
|
19,893 |
|
|
|
14,593 |
|
Total
accounts receivable, net
|
|
$ |
361,094 |
|
|
$ |
339,018 |
|
A
summary of the allowance for doubtful accounts activity is as
follows: |
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Beginning
balance, January 1
|
|
$ |
6,391 |
|
|
$ |
589 |
|
Provision
for doubtful accounts
|
|
|
167 |
|
|
|
86 |
|
Accounts
charged off
|
|
|
(482 |
) |
|
|
- |
|
Effects
of change in exchange rates
|
|
|
160 |
|
|
|
(60 |
) |
Ending
balance, March 31
|
|
$ |
6,236 |
|
|
$ |
615 |
|
Inventories
A
summary of the inventory balances is as follows: |
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Materials
|
|
$ |
91,082 |
|
|
$ |
81,636 |
|
Work
in process
|
|
|
17,800 |
|
|
|
16,859 |
|
Finished
goods
|
|
|
76,479 |
|
|
|
70,743 |
|
Total
inventories
|
|
$ |
185,361 |
|
|
$ |
169,238 |
|
Property, plant and
equipment, net
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Machinery
and equipment
|
|
$ |
202,156 |
|
|
$ |
192,562 |
|
Computers
and purchased software
|
|
|
68,328 |
|
|
|
66,412 |
|
Buildings,
furniture and improvements
|
|
|
145,036 |
|
|
|
140,386 |
|
Land
|
|
|
43,106 |
|
|
|
41,750 |
|
Total
cost
|
|
|
458,626 |
|
|
|
441,110 |
|
Accumulated
depreciation
|
|
|
(130,297 |
) |
|
|
(118,107 |
) |
Property,
plant and equipment, net
|
|
$ |
328,329 |
|
|
$ |
323,003 |
|
Depreciation
expense was $13.1 million and $4.4 million for the three months ended
March 31, 2008 and 2007, respectively.
Note
4: Business Combinations
On April
18, 2007, we completed the acquisition of 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 (credit facility),
$225.2 million in net proceeds from the sale of 4.1 million shares of
common stock and cash on hand. The acquisition included all of Actaris’
electricity, gas and water meter manufacturing and sales operations, located
primarily outside of North America, with the majority of locations in Europe,
and provided geographic expansion of our business as well as expansion of our
product offerings. The purchase price was a significant premium to the assets
acquired and liabilities assumed, due to expected synergies from products and
markets of the combined entity. The acquisition of Actaris creates an
opportunity to share technology and expertise on a global basis as worldwide
electric, gas and water utilities look for advanced metering and communication
products to better serve their markets; thus, the purchase price resulted in a
substantial amount of goodwill.
The
purchase price, net of cash acquired of $29.5 million, is summarized as follows
(in thousands):
Cash
consideration, net of cash acquired
|
|
$ |
1,697,505 |
Direct
transaction costs
|
|
|
18,966 |
Total
purchase price
|
|
$ |
1,716,471 |
We have
completed allocations of the purchase price to the assets acquired and
liabilities assumed based on fair value assessments. The following information
reflects our 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
|
|
$ |
26,463 |
|
|
|
In-process
research and development (IPR&D)
|
|
|
35,975 |
|
|
|
Identified
intangible assets - amortizable
|
|
|
|
|
|
|
Core-developed
technology
|
|
|
222,705 |
|
|
|
9-15
|
Customer
relationships
|
|
|
270,927 |
|
|
|
20 |
Trademarks
and trade names
|
|
|
48,370 |
|
|
|
3-10 |
Other
|
|
|
5,094 |
|
|
|
1 |
Goodwill
|
|
|
1,106,937 |
|
|
|
|
Total
net assets acquired
|
|
$ |
1,716,471 |
|
|
|
|
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
values assigned to the identified intangible assets were estimated using the
income approach. Under the income approach, the fair value reflects the present
value of the projected cash flows that are expected to be generated. We
validated the reasonableness of our fair value assumptions by comparing the
weighted average return on assets with our estimated weighted average cost of
capital and our internal rate of return. The intangible assets will be amortized
using the estimated discounted cash flows assumed in the valuation models. The
residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. For tax purposes,
goodwill is not deductible due to the fact we acquired the stock of
Actaris.
Note
5: Intangible Assets
The gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
|
At
March 31, 2008
|
|
|
At
December 31, 2007
|
|
|
Gross
Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
|
Gross
Assets
|
|
Accumulated
Amortization
|
|
Net
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
Core-developed
technology
|
|
$ |
421,279 |
|
|
$ |
(145,674 |
) |
|
$ |
275,605 |
|
|
$ |
403,665 |
|
|
$ |
(126,488 |
) |
|
$ |
277,177 |
Customer
contracts and relationships
|
|
|
334,274 |
|
|
|
(35,411 |
) |
|
|
298,863 |
|
|
|
312,709 |
|
|
|
(25,151 |
) |
|
|
287,558 |
Trademarks
and trade names
|
|
|
82,492 |
|
|
|
(33,478 |
) |
|
|
49,014 |
|
|
|
154,760 |
|
|
|
(26,877 |
) |
|
|
127,883 |
Other
|
|
|
25,245 |
|
|
|
(22,521 |
) |
|
|
2,724 |
|
|
|
24,845 |
|
|
|
(21,563 |
) |
|
|
3,282 |
Total
intangible assets
|
|
$ |
863,290 |
|
|
$ |
(237,084 |
) |
|
$ |
626,206 |
|
|
$ |
895,979 |
|
|
$ |
(200,079 |
) |
|
$ |
695,900 |
A summary
of the intangible asset account activity is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Beginning
balance, intangible assets, gross
|
|
$ |
895,979 |
|
|
$ |
231,868 |
|
Adjustment
of previous acquisitions
|
|
|
(70,048 |
) |
|
|
(1,220 |
) |
Effect
of change in exchange rates
|
|
|
37,359 |
|
|
|
413 |
|
Ending
balance, intangible assets, gross
|
|
$ |
863,290 |
|
|
$ |
231,061 |
|
The
increase in intangible assets from 2007 to 2008 was primarily the result of the
Actaris acquisition in the second quarter of 2007. During the first quarter of
2008, intangible assets decreased due to a $70.0 million adjustment to
trademarks and trade names based on our completion of our fair value assessment
associated with the Actaris acquisition. Intangible assets decreased in the
first quarter of 2007 due to a $1.2 million adjustment to intangible assets for
the Flow Metrix acquisition based on the final determination of fair values of
intangible assets acquired.
Intangible
assets are recorded in the functional currency of our international
subsidiaries; therefore, the carrying amount of intangible assets increase or
decrease, with a corresponding change in accumulated other comprehensive income,
due to changes in foreign currency exchange rates for those intangible assets
owned by our international subsidiaries. Intangible asset amortization expense
was $31.2 million and $7.1 million for the three months ended March
31, 2008 and 2007, respectively.
Estimated
future annual amortization expense is as follows:
Years
ending December 31,
|
|
Estimated
Annual Amortization
|
|
|
(in
thousands)
|
2008
(amount remaining at March 31, 2008)
|
|
$ |
94,806 |
2009
|
|
|
109,157 |
2010
|
|
|
79,166 |
2011
|
|
|
67,772 |
2012
|
|
|
52,742 |
Beyond
2012
|
|
|
222,563 |
Total
intangible assets, net
|
|
$ |
626,206 |
Note
6: Goodwill
The
following table reflects goodwill allocated to each reporting segment at
March 31, 2008 and 2007, respectively.
|
|
Itron
North America
|
|
|
Actaris
|
|
|
Total
Company
|
|
|
(in
thousands)
|
Goodwill
balance at January 1, 2007
|
|
$ |
125,855 |
|
|
$ |
411 |
|
|
$ |
126,266 |
Adjustment
of previous acquisitions
|
|
|
932 |
|
|
|
- |
|
|
|
932 |
Effect
of change in exchange rates
|
|
|
44 |
|
|
|
6 |
|
|
|
50 |
Goodwill
balance at March 31, 2007
|
|
$ |
126,831 |
|
|
$ |
417 |
|
|
$ |
127,248 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance at January 1, 2008
|
|
$ |
128,329 |
|
|
$ |
1,137,804 |
|
|
$ |
1,266,133 |
Adjustment
of previous acquisitions
|
|
|
- |
|
|
|
59,907 |
|
|
|
59,907 |
Effect
of change in exchange rates
|
|
|
(472 |
) |
|
|
92,988 |
|
|
|
92,516 |
Goodwill
balance at March 31, 2008
|
|
$ |
127,857 |
|
|
$ |
1,290,699 |
|
|
$ |
1,418,556 |
The
increase in goodwill between 2008 and 2007 was due to the goodwill acquired in
the Actaris acquisition on April 18, 2007. Goodwill was adjusted in 2008 and
2007 based on our final determination of certain fair values of assets acquired
and the payment of additional consideration for our 2007 and 2006 acquisitions.
Goodwill is recorded in the functional currency of our international
subsidiaries; therefore, goodwill balances may increase or decrease, with a
corresponding change in accumulated other comprehensive income, due to changes
in international currency exchange rates.
On
January 1, 2008, we consolidated certain operations between our two operating
segments as a result of our continued integration of the Actaris acquisition.
The allocation of goodwill to our reporting units is based on the new segment
reporting structure and in accordance with SFAS 142, goodwill by segment has
been reallocated to conform to the new segment reporting structure.
Note
7: Debt
The
components of our borrowings are as follows:
|
|
At
March 31,
2008
|
|
|
At
December 31,
2007
|
|
|
|
(in
thousands)
|
|
Credit
facility
|
|
|
|
|
|
|
USD
denominated term loan
|
|
$ |
575,282 |
|
|
$ |
596,793 |
|
EUR
denominated term loan
|
|
|
452,630 |
|
|
|
445,228 |
|
GBP
denominated term loan
|
|
|
78,761 |
|
|
|
79,091 |
|
Convertible
senior subordinated notes
|
|
|
345,000 |
|
|
|
345,000 |
|
Senior
subordinated notes
|
|
|
124,457 |
|
|
|
124,429 |
|
|
|
|
1,576,130 |
|
|
|
1,590,541 |
|
Current
portion of debt
|
|
|
(357,338 |
) |
|
|
(11,980 |
) |
Total
long-term debt
|
|
$ |
1,218,792 |
|
|
$ |
1,578,561 |
|
Credit
Facility
The
Actaris acquisition in 2007 was financed in part by a $1.2 billion credit
facility. The credit facility, dated April 18, 2007, was 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.
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 Itron, Inc., our operating
subsidiaries, except our international 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 March 31, 2008. At March 31, 2008, there were no
borrowings outstanding under the revolver and $52.5 million was utilized by
outstanding standby letters of credit resulting in $62.5 million being available
for additional borrowings. This credit facility replaced an original senior
secured credit facility we entered into in 2004.
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 $124.5
million at March 31, 2008. 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 international subsidiaries. The
subordinated notes contain covenants, which place restrictions on the incurrence
of debt, the payment of dividends, certain investments and mergers. We were in
compliance with these debt covenants at March 31, 2008. 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 05-2, The Meaning of “Conventional
Convertible Debt Instruments” in Issue 00-19, as the number of shares, or
cash, to be received by the holders was not fixed at the inception of the
obligation. We have concluded that the conversion feature of our convertible
notes does not require bifurcation from the host contract in accordance with
SFAS 133, as the conversion feature is indexed to the Company’s own stock and
would be classified within stockholders’ equity if it were a freestanding
instrument as provided by EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.
The
convertible notes may be converted at the option of the holder at 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 international subsidiaries, all of which are wholly owned. The
convertible notes contain covenants, which place restrictions on the incurrence
of debt and certain mergers. We were in compliance with these debt covenants at
March 31, 2008.
At March
31, 2008, the contingent conversion threshold was exceeded as the closing sale
price per share of our common stock exceeded $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 March 31, 2008. As a result, the
notes are convertible at the option of the holder as of March 31, 2008 and
through the second quarter of 2008, and accordingly, the aggregate principal
amount of the convertible notes at March 31, 2008 is included in the current
portion of long-term debt. 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. 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.
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 $19.8 million and $21.6 million at March 31, 2008 and
December 31, 2007, respectively. Accrued interest expense was $10.0 million
and $5.0 million at March 31, 2008 and December 31, 2007,
respectively.
Note
8: Derivative Financial Instruments and Hedging
Activities
As part
of our risk management strategy, we use derivative instruments to hedge certain
foreign currency and interest rate exposures. Our objective is to offset gains
and losses resulting from these exposures with losses and gains on the
derivative contracts used to hedge them, thereby reducing the impact of
volatility on earnings or protecting fair values of assets and
liabilities.
In 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
currently, and expected to be, highly effective in achieving offsetting cash
flows attributable to the hedged risk through 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 $452.6 million (€286.7 million) and the fair
value, recorded as a long-term liability, was $5.1 million at March 31,
2008. The amount of net gains expected to be reclassified into earnings in the
next twelve months is approximately $645,000.
In 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 $368,000 and the pound sterling
denominated notional amount of the cross currency interest rate swap was $78.8
million (£39.6 million) at March 31, 2008. The U.S. denominated notional
amount was $79.3 million at March 31, 2008. We expect the cross currency
interest rate swap to reduce interest expense by $2.2 million during the next
twelve months.
In the
second quarter of 2007, we designated certain portions of our foreign currency
denominated term loans as hedges of our net investment in international
operations. Net losses of $32.4 million ($20.0 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 three months ended March 31, 2008. We had no hedge
ineffectiveness.
In the
first quarter of 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
was considered an unrecognized firm commitment for a business acquisition;
therefore, these foreign currency range forward contracts could not be
designated as fair value hedges. At March 31, 2007, we recognized income of $1.6
million as a component of other income, net, for the unrealized gain on the
change in fair values of the foreign currency range forward contracts. In April
2007, we completed the acquisition of Actaris and realized a $2.8 million
gain in other income (expense) from the termination of the foreign currency
range forward contracts, resulting in an additional $1.2 million gain, which was
recorded in the second quarter of 2007.
The
components and fair values of our derivative instruments are determined using
the fair value measurements of significant other observable inputs (Level 2), as
defined by SFAS 157. We use observable market inputs based on the type of
derivative and the nature of the underlying instrument. The key inputs include
interest rate yield curves, foreign exchange rates, the spot price of the
underlying instrument and volatility, which are all Level 2 inputs. We utilize
the mid-market pricing convention for these inputs, which represents the
mid-point of the observable rates at the reporting date. Counterparties to our
currency exchange and interest rate derivatives consist of major international
financial institutions. We monitor our positions and the credit ratings of our
counterparties when valuing our derivative instruments. While we may be exposed
to potential losses due to the credit risk of non-performance by these
counterparties, losses are not anticipated.
The fair
values of our derivative instruments determined using the fair value measurement
of significant other observable inputs (Level 2) are as follows:
|
|
At
March 31,
2008
|
Long-term
liability:
|
|
(in
thousands)
|
Interest
rate swap
|
|
$ |
5,130 |
Cross
currency swap
|
|
|
368 |
Total
derivative instruments valued using Level 2 inputs
|
|
$ |
5,498 |
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 on April 18,
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. At December 31, 2007, we expected to
contribute $500,000 to our defined benefit pension plans in 2008. For the three
months ended March 31, 2008, we contributed $60,000 to the defined benefit
pension plans.
Net
periodic pension benefit costs for our plans include the following
components:
|
|
Three
Months Ended
|
|
|
|
March
31, 2008
|
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$ |
558 |
|
Interest
cost
|
|
|
929 |
|
Expected
return on plan assets
|
|
|
(76 |
) |
Amortization
of actuarial net gain
|
|
|
(37 |
) |
Amortization
of unrecognized prior service cost
|
|
|
15 |
|
Net
periodic benefit cost
|
|
$ |
1,389 |
|
Note
10: Stock-Based Compensation
We record
stock-based compensation expense under SFAS 123(R) for awards of stock options,
our ESPP and issuance of restricted and unrestricted stock awards and units. We
expense stock-based compensation using the straight-line method over the
requisite service period. For the three months ended March 31, 2008 and 2007,
stock-based compensation expense was $3.9 million and $2.9 million and the
related tax benefit was $875,000 and $698,000, respectively. There was no
stock-based compensation expense capitalized at March 31, 2008 and 2007. 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 $2.6 million and $4.4
million for the three months ended March 31, 2008 and 2007,
respectively.
The fair
value of stock options and ESPP awards issued during the three months ended
March 31, 2008 and 2007 were estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
Employee
Stock Options
|
|
|
ESPP
|
|
|
|
Three
Months Ended March 31,
|
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Dividend
yield
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Expected
volatility
|
|
|
41.1 |
% |
|
|
41.2 |
% |
|
|
64.8 |
% |
|
|
24.3 |
% |
Risk-free
interest rate
|
|
|
3.1 |
% |
|
|
4.7 |
% |
|
|
3.3 |
% |
|
|
5.1 |
% |
Expected
life (years)
|
|
|
4.15 |
|
|
|
4.94 |
|
|
|
0.25 |
|
|
|
0.25 |
|
For 2008
and 2007, 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. 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.
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 821,890 shares remain available for issuance
at March 31, 2008. 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 678,045 at March 31,
2008.
Stock
Options
Stock
options to purchase the Company’s common stock are granted to employees and the
Board of Directors 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 during the three months ended March 31, 2008 and
2007 were $35.33 and $26.76 per share, respectively. Compensation expense
related to stock options recognized under SFAS 123(R) for the three months
ended March 31, 2008 and 2007 was $2.3 million and $2.4 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.
A summary
of our stock option activity for the three months ended March 31, 2008 and 2007
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, 2007
|
|
|
2,225 |
|
|
$ |
29.78 |
|
|
|
7.46 |
|
|
$ |
49,469 |
Granted
|
|
|
20 |
|
|
|
62.52 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(187 |
) |
|
|
20.74 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(35 |
) |
|
|
44.29 |
|
|
|
|
|
|
|
|
Expired
|
|
|
(7 |
) |
|
|
42.62 |
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2007
|
|
|
2,016 |
|
|
$ |
30.65 |
|
|
|
7.31 |
|
|
$ |
69,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
and expected to vest, March 31, 2007
|
|
|
1,803 |
|
|
$ |
29.34 |
|
|
|
7.15 |
|
|
$ |
64,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2007
|
|
|
880 |
|
|
$ |
17.56 |
|
|
|
5.64 |
|
|
$ |
41,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2008
|
|
|
1,561 |
|
|
$ |
37.81 |
|
|
|
6.98 |
|
|
$ |
90,769 |
Granted
|
|
|
9 |
|
|
|
95.96 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(93 |
) |
|
|
21.26 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5 |
) |
|
|
45.73 |
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2008
|
|
|
1,472 |
|
|
$ |
39.18 |
|
|
|
6.96 |
|
|
$ |
75,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
and expected to vest, March 31, 2008
|
|
|
1,321 |
|
|
$ |
37.68 |
|
|
|
6.81 |
|
|
$ |
69,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2008
|
|
|
736 |
|
|
$ |
25.45 |
|
|
|
5.58 |
|
|
$ |
47,731 |
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 March 31, 2008, total unrecognized stock-based compensation expense related
to nonvested stock options, net of estimated forfeitures, was approximately $8.2
million, which is expected to be recognized over a weighted average period of
approximately 16 months. During the three months ended March 31, 2008 and 2007,
total intrinsic value of stock options exercised was $6.7 million and $7.5
million, respectively.
Restricted
Stock Units
During
the three months ended March 31, 2008, we granted 120,000 restricted stock units
(RSUs) with a cliff vesting period of generally three years from the anniversary
of the grant date as set forth in the award agreements. We did not grant RSUs
during the three months ended March 31, 2007. Upon vesting, the RSUs 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 RSUs is the market close price of our
common stock on the date of grant. Compensation expense is recognized over the
vesting period 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 RSUs.
Compensation
expense is recognized only for those awards expected to vest, with forfeitures
estimated based on our historical experience and future expectations.
Approximately 2,000 RSUs were forfeited and returned to the plan during the
first quarter of 2008. For the three months ended March 31, 2008 total
compensation expense relating to RSUs was $882,000 and unrecognized compensation
expense was $9.5 million, which is expected to be recognized over a
weighted average period of approximately 27 months. The aggregate intrinsic
value of RSUs outstanding was $16.6 million and the weighted average grant
date fair value was $76.68 per share at March 31, 2008.
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 and, other than for retirement, the awards will not be settled in shares
of the Company’s common stock until the date they would otherwise vest. The fair
value of an award is the market close price of our common stock on the date of
grant.
Restricted
awards that are attainable are established at the beginning of the performance
period based on a percentage of the participant’s base salary and the fair
market value of the Company’s common stock on the first business day of the
performance period. The maximum restricted awards attainable at the beginning of
the year for the 2008 performance period consisted of 48,346 shares at a grant
date fair value of $77.74 per share. The awards for 2007 consisted of 21,392
shares at a grant date fair value of $62.52 per share.
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 $404,000 and $277,000 for the three months
ended March 31, 2008 and 2007, respectively. As of March 31, 2008, total
unrecognized compensation expense was $4.2 million, which is expected to be
recognized through 2011.
A summary
of the award activity for the three months ended March 31, 2008 and 2007 is as
follows:
|
|
Number
of Awards
|
|
Nonvested,
January 1, 2007
|
|
|
47,498 |
|
Forfeited
|
|
|
(381 |
) |
Nonvested,
March 31, 2007
|
|
|
47,117 |
|
|
|
|
|
|
Nonvested,
January 1, 2008
|
|
|
44,909 |
|
Issued
|
|
|
21,392 |
|
Nonvested,
March 31, 2008
|
|
|
66,301 |
|
The
weighted average grant date fair value per share of nonvested awards was $61.66
and $61.15 for the three months ended March 31, 2008 and 2007, respectively. The
weighted average grant date fair value of awards forfeited in the three months
ended March 31, 2007 was $59.16. The aggregate intrinsic value of awards
outstanding was $6.0 million with an expected weighted average vesting period of
22 months at March 31, 2008.
Unrestricted
Stock Awards
We issue
unrestricted stock awards to our Board of Directors as part of the Board of
Directors’ compensation. Awards are fully vested at issuance and are expensed
when issued. The fair value of unrestricted stock awards is the market close
price of our common stock on the date of grant. During the three months ended
March 31, 2008 and 2007, we issued a total of 1,404 and 2,910 shares of these
awards with a weighted average grant date fair value of $95.96 and $51.38 per
share, respectively. The expense related to these awards for the three months
ended March 31, 2008 and 2007 was $135,000 and $150,000,
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 7,695 and 11,518 shares to employees in the three months
ended March 31, 2008 and 2007, 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 three months ended March 31,
2008 and 2007 was $16.18 and $8.03 per share, respectively. The expense related
to ESPP recognized under SFAS 123(R) for the three months ended March 31,
2008 and 2007 was $134,000 and $95,000, respectively. We had no unrecognized
compensation cost at March 31, 2008 and 2007 associated with the awards issued
under the ESPP. There were approximately 334,000 shares of common stock
available for future issuance under the employee stock purchase plan at March
31, 2008.
Note
11: 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 international jurisdictions,
IPR&D, research credits and state income taxes.
Our
actual income tax rate was 19% for the three months ended March 31, 2008,
compared with 37% for the same period in 2007. The change in the tax rate is due
to increased operating results in international jurisdictions as a result of the
Actaris acquisition, as well as a tax benefit in the first quarter of 2008
related to subsidiary interest expense.
Unrecognized
tax benefits in accordance with FIN 48 were $35.6 million and $34.8 million at
March 31, 2008 and December 31, 2007, respectively. 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 three months ended
March 31, 2008 and 2007, we recognized approximately $477,000 and $3,000,
respectively, in interest and penalties. At March 31, 2008 and December 31,
2007, accrued interest was $3.0 million and $2.7 million, respectively, and
accrued penalties were $2.5 million and $2.2 million, respectively. 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 March 31, 2008 and December 31, 2007 were $9.1 million and $8.4
million, respectively. At March 31, 2008, we expect to pay approximately
$316,000 in income tax obligations related to FIN 48 in 2008. We are not able to
reasonably estimate the timing of future cash flows relating to the remaining
balance.
Note
12: Commitments and Contingencies
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 March 31, 2008 and 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 $52.5 million issued under our credit facility’s
$115 million multicurrency revolver, our Actaris operating segment has a total
of $33.9 million of unsecured multicurrency revolving lines of credit with
various financial institutions with total outstanding standby letters of credit
of $7.8 million at March 31, 2008. Unsecured surety bonds in force were $12.1
million and $13.8 million at March 31, 2008 and December 31, 2007,
respectively. In the event any such bonds or letters of credit are called, we
would be obligated to reimburse the issuer of the letter of credit or bond;
however, we do not believe that any currently outstanding bonds or letters of
credit will be called.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. 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 March 31, 2008 were not material to our
financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. 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 intend to continue vigorously defending our interest. In
addition, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may incur as a result of this
claim. In any event, we do not believe that an adverse outcome is likely to have
a material adverse impact to our financial condition or results of
operations.
In March
2008, IP Co. LLC filed a complaint in the U.S. District Court for the Eastern
District of Texas against Itron, Inc., CenterPoint Energy and Eaton Corp.
alleging infringement of a patent owned by IP Co. LLC. The complaint alleges
that one U.S. patent, concerning wireless mesh networking systems that optimize
data sent across a general area, is being infringed by the defendants. The
complaint seeks unspecified damages as well as injunctive relief. We believe
these claims are without merit and we intend to vigorously defend our interests.
In any event, we do not believe an adverse outcome is likely to have a material
adverse impact to our financial condition or results of operations.
Note
13: Other Comprehensive Income
Other
comprehensive income is reflected as an increase to shareholders’ equity and is
not reflected in our results of operations. Other comprehensive income during
the reporting periods, net of tax, was as follows:
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
(in
thousands)
|
Net
income
|
|
$ |
2,953 |
|
|
$ |
7,180 |
Foreign
currency translation adjustment,
|
|
|
|
|
|
|
|
net
of income tax benefit of $1,727 and $77
|
|
|
123,922 |
|
|
|
232 |
Net
unrealized loss on derivative instruments,
|
|
|
|
|
|
|
|
net
of income tax benefit of $13,666
|
|
|
(22,128 |
) |
|
|
- |
Net
hedging gains reclassified into net losses,
|
|
|
|
|
|
|
|
net
of income tax provision of $79
|
|
|
127 |
|
|
|
- |
Pension
plan benefits liability adjustment
|
|
|
|
|
|
|
|
net
of income tax provision of $29
|
|
|
70 |
|
|
|
- |
Total
other comprehensive income
|
|
$ |
104,944 |
|
|
$ |
7,412 |
Accumulated
other comprehensive income, net of tax, was approximately $228.7 million and
$126.7 million at March 31, 2008 and December 31, 2007, respectively, and
consisted of the adjustments for foreign currency translation, the unrealized
loss on our derivative instruments, the hedging gain and the pension liability
adjustment as indicated above.
Note
14: Segment Information
We
changed our management structure with the acquisition of Actaris on April 18,
2007 to reflect two operating segments. On January 1, 2008, we made additional
refinements to these two operating segments as we continue to integrate the
Actaris acquisition and realign our operations. The Actaris operating segment
consists primarily of the operations from the Actaris acquisition, as well as
other Itron operations not located in North America that are now included in the
Actaris segment. The first quarter 2007 results for these reclassified Itron
operations are included in the Actaris segment for comparative purposes. The
operations of the Actaris operating segment are primarily located in Europe,
with approximately 5% of operations located in the United States and
approximately 20% located throughout the rest of the world. The remainder of our
operations, primarily located in the United States and Canada, have been
combined into a single operating 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, 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 18, 2007 Actaris acquisition and the
January 1, 2008 refinement.
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, consulting, maintenance support
and other services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad and
smart card; two-way gas prepayment systems using smart card; AMR data
collection technologies; installation, implementation, maintenance support
and other services.
|
Segment
Information
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
150,210 |
|
|
$ |
141,691 |
|
Actaris
|
|
|
328,266 |
|
|
|
6,220 |
|
Total
Company
|
|
$ |
478,476 |
|
|
$ |
147,911 |
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
58,568 |
|
|
$ |
60,652 |
|
Actaris
|
|
|
103,991 |
|
|
|
673 |
|
Total
Company
|
|
$ |
162,559 |
|
|
$ |
61,325 |
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
17,377 |
|
|
$ |
18,464 |
|
Actaris
|
|
|
19,698 |
|
|
|
(1,705 |
) |
Corporate
unallocated
|
|
|
(9,788 |
) |
|
|
(7,459 |
) |
Total
Company
|
|
|
27,287 |
|
|
|
9,300 |
|
Total
other income (expense)
|
|
|
(23,654 |
) |
|
|
2,100 |
|
Income
before income taxes
|
|
$ |
3,633 |
|
|
$ |
11,400 |
|
No single
customer represented more than 10% of total Company revenues or Actaris segment
revenues for the three months ended March 31, 2008. One customer accounted for
15% of Itron North America revenues for the three months ended March 31,
2008. One customer accounted for 10% of total Company revenues and Itron North
America segment revenues for the three months ended March 31, 2007. Two separate
customers accounted for 11% and 16% of revenues for the restated March 31, 2007
Actaris segment.
Revenues
by region were as follows:
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
(in
thousands)
|
Revenues
by region
|
|
|
|
|
|
Europe
|
|
$ |
238,652 |
|
|
$ |
1,454 |
United
States and Canada
|
|
|
161,172 |
|
|
|
136,458 |
Other
|
|
|
78,652 |
|
|
|
9,999 |
Total
revenues
|
|
$ |
478,476 |
|
|
$ |
147,911 |
Note
15: 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 international
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.
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in
thousands)
|
|
Revenues
|
$ |
146,007 |
|
$ |
21,107 |
|
$ |
321,691 |
|
$ |
(10,329 |
) |
$ |
478,476 |
|
Cost
of revenues
|
|
89,736 |
|
|
15,421 |
|
|
221,029 |
|
|
(10,269 |
) |
|
315,917 |
|
Gross
profit
|
|
56,271 |
|
|
5,686 |
|
|
100,662 |
|
|
(60 |
) |
|
162,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
13,131 |
|
|
2,043 |
|
|
26,792 |
|
|
- |
|
|
41,966 |
|
Product
development
|
|
17,212 |
|
|
780 |
|
|
11,099 |
|
|
(60 |
) |
|
29,031 |
|
General
and administrative
|
|
13,234 |
|
|
840 |
|
|
18,949 |
|
|
- |
|
|
33,023 |
|
Amortization
of intangible assets
|
|
5,663 |
|
|
- |
|
|
25,589 |
|
|
- |
|
|
31,252 |
|
Total
operating expenses
|
|
49,240 |
|
|
3,663 |
|
|
82,429 |
|
|
(60 |
) |
|
135,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
7,031 |
|
|
2,023 |
|
|
18,233 |
|
|
- |
|
|
27,287 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
30,685 |
|
|
54 |
|
|
1,081 |
|
|
(30,396 |
) |
|
1,424 |
|
Interest
expense
|
|
(24,952 |
) |
|
(113 |
) |
|
(30,597 |
) |
|
30,396 |
|
|
(25,266 |
) |
Other
income (expense), net
|
|
1,675 |
|
|
(569 |
) |
|
(918 |
) |
|
- |
|
|
188 |
|
Total
other income (expense)
|
|
7,408 |
|
|
(628 |
) |
|
(30,434 |
) |
|
- |
|
|
(23,654 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
14,439 |
|
|
1,395 |
|
|
(12,201 |
) |
|
- |
|
|
3,633 |
|
Income
tax benefit (provision)
|
|
1,770 |
|
|
(386 |
) |
|
(2,064 |
) |
|
- |
|
|
(680 |
) |
Equity
in earnings (losses) of guarantor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
non-guarantor subsidiaries, net
|
|
(13,256 |
) |
|
392 |
|
|
- |
|
|
12,864 |
|
|
- |
|
Net
income (loss)
|
$ |
2,953 |
|
$ |
1,401 |
|
$ |
(14,265 |
) |
$ |
12,864 |
|
$ |
2,953 |
|
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in
thousands)
|
|
Revenues
|
$ |
141,347 |
|
$ |
- |
|
$ |
17,678 |
|
$ |
(11,114 |
) |
$ |
147,911 |
|
Cost
of revenues
|
|
82,821 |
|
|
- |
|
|
14,817 |
|
|
(11,052 |
) |
|
86,586 |
|
Gross
profit
|
|
58,526 |
|
|
- |
|
|
2,861 |
|
|
(62 |
) |
|
61,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
12,319 |
|
|
- |
|
|
2,601 |
|
|
- |
|
|
14,920 |
|
Product
development
|
|
15,703 |
|
|
- |
|
|
166 |
|
|
(48 |
) |
|
15,821 |
|
General
and administrative
|
|
13,340 |
|
|
- |
|
|
904 |
|
|
- |
|
|
14,244 |
|
Amortization
of intangible assets
|
|
6,609 |
|
|
- |
|
|
431 |
|
|
- |
|
|
7,040 |
|
Total
operating expenses
|
|
47,971 |
|
|
- |
|
|
4,102 |
|
|
(48 |
) |
|
52,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
10,555 |
|
|
- |
|
|
(1,241 |
) |
|
(14 |
) |
|
9,300 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
6,296 |
|
|
- |
|
|
37 |
|
|
(244 |
) |
|
6,089 |
|
Interest
expense
|
|
(5,397 |
) |
|
- |
|
|
(358 |
) |
|
258 |
|
|
(5,497 |
) |
Other
income (expense), net
|
|
1,497 |
|
|
- |
|
|
11 |
|
|
- |
|
|
1,508 |
|
Total
other income (expense)
|
|
2,396 |
|
|
- |
|
|
(310 |
) |
|
14 |
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
12,951 |
|
|
- |
|
|
(1,551 |
) |
|
- |
|
|
11,400 |
|
Income
tax provision
|
|
(3,230 |
) |
|
- |
|
|
(990 |
) |
|
- |
|
|
(4,220 |
) |
Equity
in losses of guarantor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
non-guarantor subsidiaries, net
|
|
(2,541 |
) |
|
(2,879 |
) |
|
- |
|
|
5,420 |
|
|
- |
|
Net
income (loss)
|
$ |
7,180 |
|
$ |
(2,879 |
) |
$ |
(2,541 |
) |
$ |
5,420 |
|
$ |
7,180 |
|
Condensed
Consolidating Balance Sheet
|
March
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$ |
30,284 |
|
$ |
3,117 |
|
$ |
62,118 |
|
$ |
- |
|
$ |
95,519 |
|
Accounts
receivable, net
|
|
86,626 |
|
|
10,605 |
|
|
263,863 |
|
|
- |
|
|
361,094 |
|
Intercompany
accounts receivable
|
|
9,436 |
|
|
112 |
|
|
5,309 |
|
|
(14,857 |
) |
|
- |
|
Inventories
|
|
54,470 |
|
|
6,678 |
|
|
125,330 |
|
|
(1,117 |
) |
|
185,361 |
|
Deferred
income taxes, net
|
|
14,791 |
|
|
2,613 |
|
|
5,227 |
|
|
- |
|
|
22,631 |
|
Other
|
|
17,605 |
|
|
(120 |
) |
|
32,713 |
|
|
- |
|
|
50,198 |
|
Intercompany
other
|
|
2,989 |
|
|
39 |
|
|
6,337 |
|
|
(9,365 |
) |
|
- |
|
Total
current assets
|
|
216,201 |
|
|
23,044 |
|
|
500,897 |
|
|
(25,339 |
) |
|
714,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
85,151 |
|
|
12,367 |
|
|
230,811 |
|
|
- |
|
|
328,329 |
|
Prepaid
debt fees
|
|
19,834 |
|
|
- |
|
|
- |
|
|
- |
|
|
19,834 |
|
Deferred
income taxes, net
|
|
86,844 |
|
|
1,367 |
|
|
(811 |
) |
|
- |
|
|
87,400 |
|
Other
|
|
1,755 |
|
|
115 |
|
|
10,726 |
|
|
- |
|
|
12,596 |
|
Intangible
assets, net
|
|
71,355 |
|
|
- |
|
|
554,851 |
|
|
- |
|
|
626,206 |
|
Goodwill
|
|
113,846 |
|
|
10,730 |
|
|
1,293,980 |
|
|
- |
|
|
1,418,556 |
|
Investment
in subsidiaries
|
|
107,272 |
|
|
77,212 |
|
|
(71,005 |
) |
|
(113,479 |
) |
|
- |
|
Intercompany
notes receivable
|
|
1,893,168 |
|
|
3,553 |
|
|
9,192 |
|
|
(1,905,913 |
) |
|
- |
|
Total
assets
|
$ |
2,595,426 |
|
$ |
128,388 |
|
$ |
2,528,641 |
|
$ |
(2,044,731 |
) |
$ |
3,207,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
$ |
40,994 |
|
$ |
5,491 |
|
$ |
175,235 |
|
$ |
- |
|
$ |
221,720 |
|
Accrued
expenses
|
|
15,717 |
|
|
283 |
|
|
52,173 |
|
|
- |
|
|
68,173 |
|
Intercompany
accounts payable
|
|
2,867 |
|
|
3,102 |
|
|
8,888 |
|
|
(14,857 |
) |
|
- |
|
Wages
and benefits payable
|
|
22,666 |
|
|
2,081 |
|
|
51,275 |
|
|
- |
|
|
76,022 |
|
Taxes
payable
|
|
1,246 |
|
|
624 |
|
|
26,057 |
|
|
- |
|
|
27,927 |
|
Current
portion of long-term debt
|
|
357,338 |
|
|
- |
|
|
- |
|
|
- |
|
|
357,338 |
|
Current
portion of warranty
|
|
8,643 |
|
|
150 |
|
|
14,187 |
|
|
- |
|
|
22,980 |
|
Short-term
intercompany advances
|
|
5,000 |
|
|
2,655 |
|
|
1,710 |
|
|
(9,365 |
) |
|
- |
|
Unearned
revenue
|
|
25,326 |
|
|
62 |
|
|
8,822 |
|
|
- |
|
|
34,210 |
|
Total
current liabilities
|
|
479,797 |
|
|
14,448 |
|
|
338,347 |
|
|
(24,222 |
) |
|
808,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
1,218,794 |
|
|
- |
|
|
(2 |
) |
|
- |
|
|
1,218,792 |
|
Warranty
|
|
10,849 |
|
|
100 |
|
|
7,874 |
|
|
- |
|
|
18,823 |
|
Pension
plan benefits
|
|
- |
|
|
- |
|
|
68,723 |
|
|
- |
|
|
68,723 |
|
Intercompany
notes payable
|
|
1,413 |
|
|
7,776 |
|
|
1,896,724 |
|
|
(1,905,913 |
) |
|
- |
|
Deferred
income taxes, net
|
|
1 |
|
|
969 |
|
|
163,848 |
|
|
- |
|
|
164,818 |
|
Other
obligations
|
|
14,367 |
|
|
22 |
|
|
43,604 |
|
|
- |
|
|
57,993 |
|
Total
liabilities
|
|
1,725,221 |
|
|
23,315 |
|
|
2,519,118 |
|
|
(1,930,135 |
) |
|
2,337,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Common
stock
|
|
616,361 |
|
|
95,783 |
|
|
98,022 |
|
|
(193,805 |
) |
|
616,361 |
|
Accumulated
other comprehensive income, net
|
|
228,659 |
|
|
13,807 |
|
|
639 |
|
|
(14,446 |
) |
|
228,659 |
|
Retained
earnings (accumulated deficit)
|
|
25,185 |
|
|
(4,517 |
) |
|
(89,138 |
) |
|
93,655 |
|
|
25,185 |
|
Total
shareholders' equity
|
|
870,205 |
|
|
105,073 |
|
|
9,523 |
|
|
(114,596 |
) |
|
870,205 |
|
Total
liabilities and shareholders' equity
|
$ |
2,595,426 |
|
$ |
128,388 |
|
$ |
2,528,641 |
|
$ |
(2,044,731 |
) |
$ |
3,207,724 |
|
Condensed
Consolidating Balance Sheet
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$ |
27,937 |
|
$ |
1,664 |
|
$ |
62,387 |
|
$ |
- |
|
$ |
91,988 |
|
Accounts
receivable, net
|
|
95,908 |
|
|
7,151 |
|
|
235,959 |
|
|
- |
|
|
339,018 |
|
Intercompany
accounts receivable
|
|
15,359 |
|
|
25 |
|
|
5,855 |
|
|
(21,239 |
) |
|
- |
|
Inventories
|
|
50,049 |
|
|
6,584 |
|
|
113,804 |
|
|
(1,199 |
) |
|
169,238 |
|
Deferred
income taxes, net
|
|
5,528 |
|
|
1,294 |
|
|
3,911 |
|
|
- |
|
|
10,733 |
|
Other
|
|
13,322 |
|
|
17 |
|
|
29,120 |
|
|
- |
|
|
42,459 |
|
Intercompany
other
|
|
7,729 |
|
|
7,800 |
|
|
19,365 |
|
|
(34,894 |
) |
|
- |
|
Total
current assets
|
|
215,832 |
|
|
24,535 |
|
|
470,401 |
|
|
(57,332 |
) |
|
653,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
85,036 |
|
|
12,543 |
|
|
225,424 |
|
|
- |
|
|
323,003 |
|
Prepaid
debt fees
|
|
21,616 |
|
|
- |
|
|
- |
|
|
- |
|
|
21,616 |
|
Deferred
income taxes, net
|
|
85,963 |
|
|
1,275 |
|
|
(11,995 |
) |
|
- |
|
|
75,243 |
|
Other
|
|
1,762 |
|
|
15 |
|
|
13,458 |
|
|
- |
|
|
15,235 |
|
Intangible
assets, net
|
|
77,017 |
|
|
- |
|
|
618,883 |
|
|
- |
|
|
695,900 |
|
Goodwill
|
|
113,846 |
|
|
10,001 |
|
|
1,142,286 |
|
|
- |
|
|
1,266,133 |
|
Investment
in subsidiaries
|
|
118,733 |
|
|
71,943 |
|
|
(66,192 |
) |
|
(124,484 |
) |
|
- |
|
Intercompany
notes receivable
|
|
1,764,792 |
|
|
3,282 |
|
|
8,656 |
|
|
(1,776,730 |
) |
|
- |
|
Total
assets
|
$ |
2,484,597 |
|
$ |
123,594 |
|
$ |
2,400,921 |
|
$ |
(1,958,546 |
) |
$ |
3,050,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
1,335 |
|
|
(158 |
) |
|
16,316 |
|
|
- |
|
|
17,493 |
|
Current
portion of long-term debt
|
|
11,980 |
|
|
- |
|
|
- |
|
|
- |
|
|
11,980 |
|
Current
portion of warranty
|
|
8,411 |
|
|
151 |
|
|
12,715 |
|
|
- |
|
|
21,277 |
|
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
|
|
118,155 |
|
|
23,249 |
|
|
318,586 |
|
|
(56,133 |
) |
|
403,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
1,578,563 |
|
|
- |
|
|
(2 |
) |
|
- |
|
|
1,578,561 |
|
Warranty
|
|
10,104 |
|
|
100 |
|
|
1,360 |
|
|
- |
|
|
11,564 |
|
Pension
plan benefits
|
|
1 |
|
|
- |
|
|
60,622 |
|
|
- |
|
|
60,623 |
|
Intercompany
notes payable
|
|
1,474 |
|
|
7,153 |
|
|
1,768,103 |
|
|
(1,776,730 |
) |
|
- |
|
Deferred
income taxes, net
|
|
962 |
|
|
- |
|
|
172,538 |
|
|
- |
|
|
173,500 |
|
Other
obligations
|
|
16,536 |
|
|
25 |
|
|
47,098 |
|
|
- |
|
|
63,659 |
|
Total
liabilities
|
|
1,725,795 |
|
|
30,527 |
|
|
2,368,305 |
|
|
(1,832,863 |
) |
|
2,291,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Common
stock
|
|
609,902 |
|
|
90,437 |
|
|
97,021 |
|
|
(187,458 |
) |
|
609,902 |
|
Accumulated
other comprehensive income, net
|
|
126,668 |
|
|
8,548 |
|
|
10,468 |
|
|
(19,016 |
) |
|
126,668 |
|
Retained
earnings (accumulated deficit)
|
|
22,232 |
|
|
(5,918 |
) |
|
(74,873 |
) |
|
80,791 |
|
|
22,232 |
|
Total
shareholders' equity
|
|
758,802 |
|
|
93,067 |
|
|
32,616 |
|
|
(125,683 |
) |
|
758,802 |
|
Total
liabilities and shareholders' equity
|
$ |
2,484,597 |
|
$ |
123,594 |
|
$ |
2,400,921 |
|
$ |
(1,958,546 |
) |
$ |
3,050,566 |
|
Condensed
Consolidating Statement of Cash Flows
|
|
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Operating
activities
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Net
income (loss)
|
$ |
2,953 |
|
$ |
1,401 |
|
$ |
(14,265 |
) |
$ |
12,864 |
|
$ |
2,953 |
|
Adjustments
to reconcile net income (loss) to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
10,139 |
|
|
544 |
|
|
33,635 |
|
|
- |
|
|
44,318 |
|
Stock-based
compensation
|
|
3,890 |
|
|
- |
|
|
- |
|
|
- |
|
|
3,890 |
|
Amortization
of prepaid debt fees
|
|
1,858 |
|
|
- |
|
|
- |
|
|
- |
|
|
1,858 |
|
Deferred
income taxes, net
|
|
(17,073 |
) |
|
(1,171 |
) |
|
288 |
|
|
- |
|
|
(17,956 |
) |
Equity
in (earnings) losses of guarantor
and
non-guarantor subsidiaries, net
|
|
13,256 |
|
|
(392 |
) |
|
- |
|
|
(12,864 |
) |
|
- |
|
Other,
net
|
|
62 |
|
|
12 |
|
|
12 |
|
|
- |
|
|
86 |
|
Changes
in operating assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
9,282 |
|
|
(3,454 |
) |
|
(25,780 |
) |
|
- |
|
|
(19,952 |
) |
Inventories
|
|
(4,503 |
) |
|
(94 |
) |
|
(11,640 |
) |
|
- |
|
|
(16,237 |
) |
Trade
payables, accrued expenses
and
taxes payable
|
|
7,016 |
|
|
1,295 |
|
|
28,190 |
|
|
- |
|
|
36,501 |
|
Wages
and benefits payable
|
|
5,247 |
|
|
331 |
|
|
(184 |
) |
|
- |
|
|
5,394 |
|
Unearned
revenue
|
|
10,797 |
|
|
62 |
|
|
3,030 |
|
|
- |
|
|
13,889 |
|
Warranty
|
|
977 |
|
|
(1 |
) |
|
1,678 |
|
|
- |
|
|
2,654 |
|
Effect
of foreign exchange rate changes
|
|
- |
|
|
- |
|
|
7,867 |
|
|
- |
|
|
7,867 |
|
Intercompany
transactions, net
|
|
3,460 |
|
|
2,245 |
|
|
(5,705 |
) |
|
- |
|
|
- |
|
Other,
net
|
|
(5,699 |
) |
|
34 |
|
|
(3,180 |
) |
|
- |
|
|
(8,845 |
) |
Net
cash provided by operating activities
|
|
41,662 |
|
|
812 |
|
|
13,946 |
|
|
- |
|
|
56,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of property, plant and equipment
|
|
(5,268 |
) |
|
- |
|
|
(7,849 |
) |
|
- |
|
|
(13,117 |
) |
Business
acquisitions, net of cash and
cash
equivalents acquired
|
|
(95 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(95 |
) |
Cash
transferred to parent
|
|
- |
|
|
7,806 |
|
|
- |
|
|
(7,806 |
) |
|
- |
|
Cash
transferred to guarantor subsidiaries
|
|
- |
|
|
- |
|
|
7,806 |
|
|
(7,806 |
) |
|
- |
|
Cash
transferred to non-guarantor subsidiaries
|
|
6,947 |
|
|
(46 |
) |
|
- |
|
|
(6,901 |
) |
|
- |
|
Intercompany
notes, net
|
|
73,018 |
|
|
(271 |
) |
|
(536 |
) |
|
(72,211 |
) |
|
- |
|
Other,
net
|
|
136,272 |
|
|
335 |
|
|
(135,710 |
) |
|
- |
|
|
897 |
|
Net
cash provided by (used in) investing activities
|
|
210,874 |
|
|
7,824 |
|
|
(136,289 |
) |
|
(94,724 |
) |
|
(12,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
(46,770 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(46,770 |
) |
Issuance
of common stock
|
|
2,569 |
|
|
- |
|
|
- |
|
|
- |
|
|
2,569 |
|
Cash
received from parent
|
|
- |
|
|
- |
|
|
(6,947 |
) |
|
6,947 |
|
|
- |
|
Cash
received from guarantor subsidiaries
|
|
(7,806 |
) |
|
- |
|
|
46 |
|
|
7,760 |
|
|
- |
|
Cash
received from non-guarantor subsidiaries
|
|
- |
|
|
(7,806 |
) |
|
- |
|
|
7,806 |
|
|
- |
|
Intercompany
notes payable
|
|
(201,356 |
) |
|
623 |
|
|
128,522 |
|
|
72,211 |
|
|
- |
|
Other,
net
|
|
3,174 |
|
|
- |
|
|
413 |
|
|
- |
|
|
3,587 |
|
Net
cash (used in) provided by financing activities
|
|
(250,189 |
) |
|
(7,183 |
) |
|
122,034 |
|
|
94,724 |
|
|
(40,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes
on cash and cash equivalents
|
|
- |
|
|
- |
|
|
40 |
|
|
- |
|
|
40 |
|
Increase
(decrease) in cash and cash equivalents
|
|
2,347 |
|
|
1,453 |
|
|
(269 |
) |
|
- |
|
|
3,531 |
|
Cash
and cash equivalents at beginning of period
|
|
27,937 |
|
|
1,664 |
|
|
62,387 |
|
|
- |
|
|
91,988 |
|
Cash
and cash equivalents at end of period
|
$ |
30,284 |
|
$ |
3,117 |
|
$ |
62,118 |
|
$ |
- |
|
$ |
95,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
$ |
1,109 |
|
$ |
160 |
|
$ |
1,335 |
|
$ |
- |
|
$ |
2,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
$ |
69 |
|
$ |
- |
|
$ |
3,834 |
|
$ |
- |
|
$ |
3,903 |
|
Interest
|
|
18,050 |
|
|
(10 |
) |
|
345 |
|
|
- |
|
|
18,385 |
|
Condensed
Consolidating Statement of Cash Flows
|
|
Three
Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Combined
Guarantor
Subsidiaries
|
|
Combined
Non-guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
(in
thousands)
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$ |
7,180 |
|
$ |
(2,879 |
) |
$ |
(2,541 |
) |
$ |
5,420 |
|
$ |
7,180 |
|
Adjustments
to reconcile net income (loss) to
net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
10,826 |
|
|
- |
|
|
634 |
|
|
- |
|
|
11,460 |
|
Employee
stock plans income tax benefits
|
|
1,969 |
|
|
- |
|
|
- |
|
|
- |
|
|
1,969 |
|
Excess
tax benefits from stock-based compensation
|
|
(1,611 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(1,611 |
) |
Stock-based
compensation
|
|
2,876 |
|
|
- |
|
|
- |
|
|
- |
|
|
2,876 |
|
Amortization
of prepaid debt fees
|
|
758 |
|
|
- |
|
|
- |
|
|
- |
|
|
758 |
|
Deferred
income taxes, net
|
|
831 |
|
|
- |
|
|
853 |
|
|
- |
|
|
1,684 |
|
Equity
in losses of guarantor and
non-guarantor subsidiaries, net
|
|
2,541 |
|
|
2,879 |
|
|
- |
|
|
(5,420 |
) |
|
- |
|
Other,
net
|
|
(1,989 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(1,989 |
) |
Changes
in operating assets and liabilities,
net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(14,594 |
) |
|
- |
|
|
291 |
|
|
- |
|
|
(14,303 |
) |
Inventories
|
|
3,386 |
|
|
- |
|
|
(1,718 |
) |
|
- |
|
|
1,668 |
|
Long-term
note receivable, net
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Trade
payables, accrued expenses and taxes payable
|
|
8,717 |
|
|
- |
|
|
246 |
|
|
- |
|
|
8,963 |
|
Wages
and benefits payable
|
|
(5,448 |
) |
|
- |
|
|
152 |
|
|
- |
|
|
(5,296 |
) |
Unearned
revenue
|
|
(1,533 |
) |
|
- |
|
|
(473 |
) |
|
- |
|
|
(2,006 |
) |
Warranty
|
|
1,702 |
|
|
- |
|
|
(10 |
) |
|
- |
|
|
1,692 |
|
Intercompany
transactions, net
|
|
(3,623 |
) |
|
- |
|
|
3,623 |
|
|
- |
|
|
- |
|
Other,
net
|
|
(1,261 |
) |
|
- |
|
|
(3,010 |
) |
|
- |
|
|
(4,271 |
) |
Net
cash provided by (used in) operating activities
|
|
10,727 |
|
|
- |
|
|
(1,953 |
) |
|
- |
|
|
8,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the maturities of investments, held to maturity
|
|
35,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
35,000 |
|
Acquisitions
of property, plant and equipment
|
|
(8,224 |
) |
|
- |
|
|
(398 |
) |
|
- |
|
|
(8,622 |
) |
Business
acquisitions, net of cash and
cash equivalents acquired
|
|
(149 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(149 |
) |
Cash
transferred to parent
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Cash
transferred to non-guarantor subsidiaries
|
|
(173 |
) |
|
- |
|
|
- |
|
|
173 |
|
|
- |
|
Intercompany
notes, net
|
|
- |
|
|
- |
|
|
2,407 |
|
|
(2,407 |
) |
|
- |
|
Other,
net
|
|
(5,970 |
) |
|
- |
|
|
234 |
|
|
- |
|
|
(5,736 |
) |
Net
cash provided by investing activities
|
|
20,484 |
|
|
- |
|
|
2,243 |
|
|
(2,234 |
) |
|
20,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
229,588 |
|
|
- |
|
|
- |
|
|
- |
|
|
229,588 |
|
Excess
tax benefits from stock-based compensation
|
|
1,611 |
|
|
- |
|
|
- |
|
|
- |
|
|
1,611 |
|
Cash
transferred from parent
|
|
- |
|
|
- |
|
|
173 |
|
|
(173 |
) |
|
- |
|
Cash
transferred from non-guarantor subsidiaries
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Intercompany
notes payable
|
|
(2,407 |
) |
|
- |
|
|
- |
|
|
2,407 |
|
|
- |
|
Net
cash provided by financing activities
|
|
228,792 |
|
|
- |
|
|
173 |
|
|
2,234 |
|
|
231,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
260,003 |
|
|
- |
|
|
463 |
|
|
- |
|
|
260,466 |
|
Cash
and cash equivalents at beginning of period
|
|
353,483 |
|
|
- |
|
|
7,922 |
|
|
- |
|
|
361,405 |
|
Cash
and cash equivalents at end of period
|
$ |
613,486 |
|
$ |
- |
|
$ |
8,385 |
|
$ |
- |
|
$ |
621,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
$ |
1,573 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
1,573 |
|
Pre-acquisition
costs incurred but not yet paid
|
|
2,707 |
|
|
- |
|
|
- |
|
|
- |
|
|
2,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
$ |
2,036 |
|
$ |
- |
|
$ |
48 |
|
$ |
- |
|
$ |
2,084 |
|
Interest
|
|
4,265 |
|
|
- |
|
|
100 |
|
|
- |
|
|
4,365 |
|
ITEM 7: Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In this
Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
The
following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes included in this
report and with our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC) on February 26, 2008.
Documents
we provide to the 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.
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 Quarterly Report on
Form 10-Q. 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 or litigation,
4) changes in domestic and international 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)
international 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 Quarterly Report on Form 10-Q. 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” within
Item 1A included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007, which was filed with the SEC on February 26,
2008.
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
Our
financial results for the three months ended March 31, 2008 reflect both the
operations of Itron North America and Actaris Metering Systems SA (Actaris).
Actaris was acquired on April 18, 2007, therefore our prior year 2007 operating
results reflect only Itron North America’s operations and a small portion of
Itron North America’s operations outside North America that were transferred to
our Actaris operating segment on January 1, 2008 and have been restated for
comparative purposes. 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 the discussion that
follows.
At March
31, 2008, the contingent conversion threshold of our senior subordinated
convertible notes (convertible notes) was exceeded. As a result, the notes are
convertible at the option of the holder as of March 31, 2008, and accordingly,
the aggregate principal amount of the convertible notes is included in the
current portion of long-term debt and the shares issuable upon conversion of the
convertible notes are included in the calculation of dilutive earnings per
share.
Total
Company Revenues, Gross Profit and Margin and Unit Shipments
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
(in
millions), except gross margin |
|
Revenues
|
|
$ |
478.5 |
|
|
$ |
147.9 |
|
|
|
224%
|
Gross
Profit
|
|
$ |
162.6 |
|
|
$ |
61.3 |
|
|
|
165%
|
Gross
Margin
|
|
|
34 |
% |
|
|
41 |
% |
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
(in
millions)
|
Revenues
by region
|
|
|
|
|
|
Europe
|
|
$ |
238.6 |
|
|
$ |
1.5 |
United
States and Canada
|
|
|
161.2 |
|
|
|
136.4 |
Other
|
|
|
78.7 |
|
|
|
10.0 |
Total
revenues
|
|
$ |
478.5 |
|
|
$ |
147.9 |
Revenues
Revenues
increased $330.6 million for the first quarter of 2008, compared with the first
quarter of 2007. The primary reason for the increase in total and by region was
the acquisition of Actaris, which contributed $328.3 million for the three
months ended March 31, 2008.
No single
customer represented more than 10% of total revenues for the first quarter of
2008. One customer, Southwest Gas Corporation, represented 10% of total revenues
for the first quarter of 2007. Our 10 largest customers accounted for
approximately 17% and 31% in each of the three months ending March 31, 2008 and
2007, respectively.
Gross
Margins
Gross
margin was 34% in 2008, compared with 41% in 2007. Gross margin for Actaris’
products and services is lower than Itron North America’s due to Actaris’
results including a higher percentage of meter-only sales as compared with Itron
North America’s systems focused offerings.
Unit
Shipments
Meters
can be sold with and without automated meter reading (AMR). In addition, AMR can
be sold separately from meters. Depending on customers’ preferences, we
incorporate other vendors’ AMR technology in our meters. Meter and AMR shipments
are as follows:
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
(in
thousands)
|
Total
meters (with and without AMR)
|
|
|
|
Electricity
- Itron North America
|
|
|
1,300 |
|
|
|
1,150 |
Electricity
- Actaris
|
|
|
1,450 |
|
|
|
- |
Gas
|
|
|
900 |
|
|
|
- |
Water
|
|
|
2,300 |
|
|
|
- |
Total
meters
|
|
|
5,950 |
|
|
|
1,150 |
|
|
|
|
|
|
|
|
AMR
units (Itron and Actaris)
|
|
|
|
|
Meters
with AMR
|
|
|
1,325 |
|
|
|
500 |
AMR
modules
|
|
|
1,075 |
|
|
|
1,200 |
Total
AMR units
|
|
|
2,400 |
|
|
|
1,700 |
|
|
|
|
|
|
|
|
Meters
with other vendors' AMR
|
|
|
250 |
|
|
|
250 |
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 to reflect two operating segments. On January 1, 2008, we made additional
refinements to these two operating segments as we continue to integrate the
Actaris acquisition and realign our operations. The Actaris operating segment
consists primarily of the operations from the Actaris acquisition, as well as
other Itron operations not located in North America that are now included in the
Actaris segment. The first quarter 2007 results for these reclassified Itron
operations are included in the Actaris segment for comparative purposes. The
operations of the Actaris operating segment are primarily located in Europe,
with approximately 5% of operations located in the United States and
approximately 20% located throughout the rest of the world. The remainder of our
operations, primarily located in the United States and Canada, have been
combined into a single operating 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, 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 18, 2007 Actaris acquisition and the
January 1, 2008 refinement.
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, consulting, maintenance support and other
services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad and
smart card; two-way gas prepayment systems using smart card; AMR 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.
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
(in
millions)
|
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
150.2 |
|
|
$ |
141.7 |
|
|
|
6% |
Actaris
|
|
|
328.3 |
|
|
|
6.2 |
|
|
>100%
|
Total
revenues
|
|
$ |
478.5 |
|
|
$ |
147.9 |
|
|
|
224% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
|
Gross
Profit
|
|
Gross
Margin
|
|
Gross
Profit
|
|
Gross
Margin
|
Segment
Gross Profit and Margin
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
Itron
North America
|
|
$ |
58.6 |
|
|
|
39% |
|
|
$ |
60.6 |
|
|
|
43% |
Actaris
|
|
|
104.0 |
|
|
|
32% |
|
|
|
0.7 |
|
|
|
11% |
Total
gross profit and margin
|
|
$ |
162.6 |
|
|
|
34% |
|
|
$ |
61.3 |
|
|
|
41% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
Operating
Income
|
|
|
Operating
|
|
|
Operating
Income
|
|
|
Operating
|
Segment
Operating Income (Loss) |
(Loss)
|
|
|
|
Margin |
|
|
(Loss) |
|
|
|
Margin |
and
Operating Margin
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
Itron
North America
|
|
$ |
17.4 |
|
|
|
12% |
|
|
$ |
18.5 |
|
|
|
13% |
Actaris
|
|
|
19.7 |
|
|
|
6% |
|
|
|
(1.7 |
) |
|
|
(27%) |
Corporate
unallocated
|
|
|
(9.8 |
) |
|
|
|
|
|
|
(7.5 |
) |
|
|
|
Total
Company
|
|
$ |
27.3 |
|
|
|
6% |
|
|
$ |
9.3 |
|
|
|
6% |
Itron North America: Revenues
increased $8.5 million, or 6%, in the first quarter of 2008, compared with the
first quarter of 2007 due to a 13% increase in meter shipments, partially offset
by lower standalone AMR shipments. Approximately 60% of our meters sold in the
first quarter of 2008 were equipped with our AMR technology, compared with 43%
for the same period in 2007. Gross margin decreased four percentage points in
the first quarter of 2008, compared with the first quarter of 2007, as a result
of lower standalone AMR module shipments and increased services
costs.
One
customer represented 15% of Itron North America operating segment revenues in
the first quarter of 2008. A different customer accounted for 10% of the Itron
North America operating segment revenues for the first quarter of
2007.
Itron
North America operating expenses as a percentage of revenues were 27% in the
first quarter of 2008, compared with 30% in the first quarter of 2007. This
decrease is primarily the result of higher revenue in 2008.
Actaris: Actaris was acquired
on April 18, 2007. As we continue to integrate the Actaris acquisition and
realign our operations, certain operations not located in North America that
were previously reported within the Itron North America operating segment were
moved to the Actaris operating segment on January 1, 2008. Therefore, historical
segment information has been restated to conform to the January 1, 2008
reporting presentation. Actaris revenues were $328.3 million for the period
ended March 31, 2008 with 38%, 30% and 32% from electricity, gas and water meter
products and services, respectively.
No single
customer represented more than 10% of Actaris operating segment revenues in the
first quarter of 2008. Two separate customers accounted for 11% and 16% of
revenues for the restated March 31, 2007 Actaris segment.
Operating
expenses for Actaris were $84.3 million, or 26% of revenues for the period ended
March 31, 2008.
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 the first quarter of 2008, compared with 5% in the first
quarter of 2007.
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:
Quarter
Ended
|
|
Total
Bookings
|
|
|
Total
Backlog
|
|
|
12-Month
Backlog
|
|
|
(in
millions)
|
March
31, 2008
|
|
$ |
484 |
|
|
$ |
683 |
|
|
$ |
552 |
December
31, 2007
|
|
|
448 |
|
|
|
659 |
|
|
|
501 |
September
31, 2007
|
|
|
440 |
|
|
|
668 |
|
|
|
494 |
June
30, 2007
|
|
|
413 |
|
|
|
656 |
|
|
|
491 |
March
31, 2007
|
|
|
118 |
|
|
|
376 |
|
|
|
225 |
December
31, 2006
|
|
|
211 |
|
|
|
392 |
|
|
|
225 |
In
December 2007, we reached an agreement valued at approximately $480 million with
Southern California Edison (SCE) to deploy our OpenWay meter and communications
system. This represents our largest contract to date. The agreement is subject
to regulatory approval, may be cancelled by SCE for convenience and does not
guarantee a specified volume of meters; therefore, we booked $11.2 million in
the fourth quarter of 2007, which represents firm purchase orders received. As
firm purchase orders are received from SCE during the expected four year
deployment period, we will add them to bookings. There were no additional
bookings recorded for SCE in the first quarter of 2008.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues.
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
%
of Revenue
|
|
|
2007
|
|
|
%
of Revenue
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
Sales
and marketing
|
|
$ |
42.0 |
|
|
|
9 |
% |
|
$ |
14.9 |
|
|
|
10 |
% |
Product
development
|
|
|
29.0 |
|
|
|
6 |
% |
|
|
15.8 |
|
|
|
11 |
% |
General
and administrative
|
|
|
33.0 |
|
|
|
7 |
% |
|
|
14.2 |
|
|
|
9 |
% |
Amortization
of intangible assets
|
|
|
31.3 |
|
|
|
6 |
% |
|
|
7.1 |
|
|
|
5 |
% |
Total
operating expenses
|
|
$ |
135.3 |
|
|
|
28 |
% |
|
$ |
52.0 |
|
|
|
35 |
% |
While
total operating expenses have increased, they have decreased as a percentage of
revenue. Overall, product development expenses declined as a percent of revenues
to 6% from 11% due to Actaris’ lower product development expenses. This decrease
was partially offset by Itron North America’s product development expenses
having increased as a percentage of revenue to approximately 12% for the first
quarter of 2008 from 11% for the first quarter of 2007 as a result of the
development of our AMI technologies. 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.
In-Process
Research and Development Expenses
Our
acquisition of Actaris resulted in $36.0 million of in-process research and
development (IPR&D) expense in 2007, 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 80% complete at March 31,
2008, when compared with the expected costs. We estimate the cost to complete
these projects will be approximately $5 million during the remainder of
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. We may experience unforeseen problems in the development or
performance of our technologies or products, and therefore may not meet our
product development schedules or may not achieve market acceptance of our new
products or solutions.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Interest
income
|
|
$ |
1,424 |
|
|
$ |
6,089 |
|
Interest
expense
|
|
|
(23,408 |
) |
|
|
(4,739 |
) |
Amortization
of debt placement fees
|
|
|
(1,858 |
) |
|
|
(758 |
) |
Other
income (expense), net
|
|
|
188 |
|
|
|
1,508 |
|
Total
other income (expense)
|
|
$ |
(23,654 |
) |
|
$ |
2,100 |
|
The
decrease in interest income for the three months ended March 31, 2008, compared
with the same period in 2007, was the result of our lower cash and cash
equivalent balances and short-term investments. Our average cash and cash
equivalent balance was $84.9 million for the three months ended March 31, 2008,
compared with $436.3 million for the same period in 2007. Our cash balance
at March 31, 2007 resulted from the proceeds of our August 2006 issuance of $345
million 2.50% convertible notes and our March 1, 2007 sale of 4.1 million
shares of common stock, resulting in net proceeds of $225.2 million, which
were used to fund a portion of the Actaris acquisition.
The
increase in interest expense in the first quarter of 2008, compared with the
same period in 2007, is primarily the result of the $1.2 billion credit facility
(credit facility) used to finance the Actaris acquisition. Average outstanding
borrowings were $1.6 billion in the first quarter of 2008, compared with
$469.3 million for the same period in 2007.
The
increase in amortization of debt placement fees in the first quarter of 2008 is
the result of the new borrowings used to fund the Actaris
acquisition.
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 the first quarter of 2008, other income resulted primarily from
net foreign currency gains due to the strengthening of the euro against the U.S.
dollar, offset by higher banking fees. In the first quarter of 2007, other
income included the unrealized gain of $1.6 million on the change in fair
values of the foreign currency range forward contracts entered into to reduce
our exposure to declines in the U.S. dollar and pound sterling relative to the
euro denominated purchase price of Actaris.
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 international
jurisdictions, research credits and state income taxes.
Our
actual income tax rate was 19% for the three months ended March 31, 2008,
compared with 37% for the same period in 2007. The change in the tax rate is due
to increased operating results in international jurisdictions as a result of the
Actaris acquisition, as well as a tax benefit in the first quarter of 2008
related to subsidiary interest expense.
Our tax
provision for the first quarter of 2008 reflects a benefit associated with lower
effective tax rates on international 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
international tax liability reflects the benefit of international interest
expense deductions.
We
evaluate whether our tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements in accordance with
Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). Under FIN 48, we
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities based solely on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. We recognize interest
expense and penalties accrued related to unrecognized tax benefits in our
provision for income taxes.
Financial
Condition
Cash
Flow Information:
|
|
Three
Months Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
(in
millions)
|
Operating
activities
|
|
$ |
56.4 |
|
|
$ |
8.8 |
Investing
activities
|
|
|
(12.3 |
) |
|
|
20.5 |
Financing
activities
|
|
|
(40.6 |
) |
|
|
231.2 |
Increase
in cash and cash equivalents
|
|
$ |
3.5 |
|
|
$ |
260.5 |
Cash and
cash equivalents at March 31, 2008 were $95.5 million compared with $621.9
million at the same time last year. The March 31, 2007 cash balance consisted
primarily of proceeds from $345 million of convertible notes issued in August
2006 and $225.2 million in net proceeds from the sale of 4.1 million shares
of common stock in March 2007, which was subsequently used to partially fund the
Actaris acquisition on April 18, 2007.
Operating activities: As a
result of the Actaris acquisition, cash provided by operating activities
increased $47.6 million in the first three months of 2008 compared with the same
period in 2007. Increased revenue activity resulted in cash received from
customers of $472.4 million in the first quarter of 2008, compared with $131.6
million for the same period in 2007, partially offset by cash paid to suppliers
and employees of $395.1 million in the first quarter of 2008, compared with
$120.9 million in the same period in 2007. This increase in operating
activity in the first quarter of 2008 was partially offset by an $18.7 million
increase in net interest paid and an increase in taxes paid of $1.8 million in
2008, compared with the same period in 2007. In the first quarter of 2007, $1.6
million in excess tax benefits from stock-based compensation associated with our
January 1, 2006 adoption of SFAS 123(R), Share-Based Payment, is
reflected in financing activities. In 2008, no excess tax benefits from
stock-based compensation were recognized due to net tax losses resulting from
increased interest expense.
Investing activities: The
acquisition of property, plant and equipment was $13.1 million in the first
quarter of 2008, compared with $8.6 million in the first quarter of 2007. In the
first quarter of 2007, $35.0 million in short-term investments matured with
the proceeds used to partially fund the Actaris acquisition.
Financing activities: During
the first quarter of 2008, we repaid $46.8 million on the credit facility. Cash
generated from the exercise of stock-based awards was $2.6 million during
the first three months of 2008, compared with $4.4 million for the same
period in 2007. Net proceeds from the sale of common stock provided $225.2
million in the first quarter of 2007.
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 $40,000 for the first three months of
2008.
Off-balance
sheet arrangements:
We had no
off-balance sheet financing agreements or guarantees at March 31, 2008 and
December 31, 2007 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.
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 in 2007 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.
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 Itron, Inc., our operating
subsidiaries, except our international 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 March 31, 2008. At March 31, 2008, there were no
borrowings outstanding under the revolver and $52.5 million was utilized by
outstanding standby letters of credit resulting in $62.5 million being available
for additional borrowings. This credit facility replaced an original senior
secured credit facility we entered into in 2004.
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 $124.5
million at March 31, 2008. 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 international subsidiaries. The
subordinated notes contain covenants, which place restrictions on the incurrence
of debt, the payment of dividends, certain investments and mergers. We were in
compliance with these debt covenants at March 31, 2008. 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 FASB’s Emerging Issues Task Force
(EITF) 05-2, The Meaning of
“Conventional Convertible Debt Instruments” in Issue 00-19, as the number
of shares, or cash, to be received by the holders was not fixed at the inception
of the obligation. We have concluded that the conversion feature of our
convertible notes does not require bifurcation from the host contract in
accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as the conversion feature is indexed
to the Company’s own stock and would be classified within stockholders’ equity
if it were a freestanding instrument as provided by EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.
The
convertible notes may be converted at the option of the holder at 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 international subsidiaries, all of which are wholly owned. The
convertible notes contain covenants, which place restrictions on the incurrence
of debt and certain mergers. We were in compliance with these debt covenants at
March 31, 2008.
At March
31, 2008, the contingent conversion threshold was exceeded as the closing sale
price per share of our common stock exceeded $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 March 31, 2008. As a result, the notes are convertible
at the option of the holder as of March 31, 2008 and through the second quarter
of 2008, and accordingly, the aggregate principal amount of the convertible
notes at March 31, 2008 is included in the current portion of long-term debt. 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. 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.
Other
Sources and Uses of Capital
We are
often required to obtain letters of credit or bonds in support of our
obligations for customer contracts. These letters of credit or bonds typically
provide a guarantee to the customer for future performance, which usually covers
the installation phase of a contract and may on occasion cover the operations
and maintenance phase of outsourcing contracts. In addition to the outstanding
standby letters of credit of $52.5 million issued under our credit facility’s
$115 million multicurrency revolver, our Actaris operating segment has a total
of $33.9 million of unsecured multicurrency revolving lines of credit with
various financial institutions with total outstanding standby letters of credit
of $7.8 million at March 31, 2008. Unsecured surety bonds in force were $12.1
million and $13.8 million at March 31, 2008 and December 31, 2007,
respectively. In the event any such bonds or letters of credit are called, we
would be obligated to reimburse the issuer of the letter of credit or bond;
however, we do not believe that any currently outstanding bonds or letters of
credit will be called.
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 $19.8 million and $21.6 million at March 31, 2008 and
December 31, 2007, respectively. Accrued interest expense was $10.0 million
and $5.0 million at March 31, 2008 and December 31, 2007,
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. Based on current projections, we
expect to pay minimal U.S. federal and state taxes and approximately
$28.6 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 on April 18,
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. At December 31, 2007, we expected to
contribute $500,000 to our defined benefit pension plans in 2008. For the three
months ended March 31, 2008, we contributed $60,000 to the defined benefit
pension plans.
Working
capital, which includes current assets less current liabilities, was ($93.6)
million at March 31, 2008, compared with $249.6 million at December 31, 2007.
The $343.2 million decrease in working capital resulted primarily from the
$345 million aggregate principal amount of the convertible notes being
included in the current portion of long-term debt at March 31, 2008, which was
previously classified as a long-term liability.
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 the remainder of the year and into
the foreseeable future, but offer no assurances. Our liquidity could be affected
by the stability of the energy and water industries, competitive pressures,
international risks, intellectual property claims, capital market
fluctuations and other factors described under “Risk Factors” within Item
1A of Part 1 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, which was filed with the SEC on February 26, 2008, as well as
in our “Quantitative and Qualitative Disclosures About Market Risk” within Item
3 of Part 1, included in this Quarterly Report on Form 10-Q.
Contingencies
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at March 31, 2008 were not material to our
financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. 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 intend to continue vigorously defending our interest. In
addition, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may incur as a result of this
claim. In any event, we do not believe that an adverse outcome is likely to have
a material adverse impact to our financial condition or results of
operations.
In March
2008, IP Co. LLC filed a complaint in the U.S. District Court for the Eastern
District of Texas against Itron, Inc., CenterPoint Energy and Eaton Corp.
alleging infringement of a patent owned by IP Co. LLC. The complaint alleges
that one U.S. patent, concerning wireless mesh networking systems that optimize
data sent across a general area, is being infringed by the defendants. The
complaint seeks unspecified damages as well as injunctive relief. We believe
these claims are without merit and we intend to vigorously defend our interests.
In any event, we do not believe an adverse outcome is likely to have a material
adverse impact to our financial condition or results of operations.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue Recognition: The
majority of our revenues are recognized when products are shipped to or received
by a customer or when services are provided. For arrangements involving multiple
elements, we determine the estimated fair value of each element and then
allocate the total arrangement consideration among the separate elements based
on the relative fair value percentages. Revenues for each element are then
recognized based on the type of element, such as 1) when the products are
shipped, 2) services are delivered, 3) percentage-of-completion when
implementation services are essential to 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,
changes in wages, subcontractor performance, supplier information and business
volume assumptions. Changes in underlying assumptions/estimates may adversely or
positively affect financial performance. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance
period.
Unearned
revenue is recorded 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.
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.
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.
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 international
jurisdictions, research credits and state income taxes. Significant
judgment is required in determining our annual tax rate and in evaluating our
tax positions. At the end of each interim period, we make our best estimate of
the effective tax rate expected to be applicable for the full fiscal year and
the impact of discrete items, if any, and adjust the quarterly rate, as
necessary. 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. 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. These audits can
involve complex issues, which may require an extended period of time to resolve.
We believe we have recorded adequate income tax provisions and FIN 48
reserves.
We
evaluate whether our tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements in accordance with FIN 48.
Under FIN 48, we recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained upon
examination by the taxing authorities based solely on the technical merits of
the position. The tax benefits recognized in the financial statements from such
a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement. We
recognize interest expense and penalties accrued related to unrecognized tax
benefits in our provision for income taxes. We believe we have recorded adequate
income tax provisions.
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 March 31, 2008 were not material to our
financial condition or results of operations.
Derivative Instruments: Derivative
Instruments: We account for derivative instruments and hedging activities
in accordance with SFAS 133, as amended. All derivative instruments, whether
designated in hedging relationships or not, are recorded on the Condensed
Consolidated Balance Sheets at fair value as either assets or liabilities. The
components and fair values of our derivative instruments are determined using
the fair value measurements of significant other observable inputs (Level 2), as
defined by SFAS 157, Fair
Value Measurements. 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 Condensed
Consolidated Statement of Operations. We classify cash flows from our derivative
programs as cash flows from operating activities in the Condensed Consolidated
Statements of Cash Flows. Derivatives are not used for trading or speculative
purposes. Counterparties to our currency exchange and interest rate derivatives
consist of major international financial institutions. We monitor our positions
and the credit ratings of our counterparties when valuing our
derivatives.
Foreign Exchange: Our
condensed consolidated financial statements are reported in U.S. dollars. Assets
and liabilities of international subsidiaries with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using an average rate for the relevant reporting period. Translation adjustments
resulting from this process are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity. Gains and losses that arise from
exchange rate fluctuations for balances that are not denominated in the
functional currency are included in the Condensed 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
international subsidiaries are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, which
replaces SFAS 141. SFAS 141(R) retains the fundamental purchase method of
accounting for acquisitions, but requires a number of changes, 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
February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157, which delays the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years. We are currently assessing the impact of SFAS 157 for
nonfinancial assets and nonfinancial liabilities on our consolidated financial
statements.
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.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement 133,
which requires enhanced disclosures about how and why derivative instruments are
used, how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. SFAS 161 also requires the fair values of derivative
instruments and their gains and losses to be disclosed in a tabular format. SFAS
161 does not change how we record and account for derivative instruments. SFAS
161 is effective for fiscal years and interim periods beginning after November
15, 2008 and will be adopted by us in the first quarter of fiscal year
2009.
Item 3: Quantitative and Qualitative
Disclosures About Market Risk
In the
normal course of business, we are exposed to interest rate and foreign currency
exchange rate risks that could impact our financial position and results of
operations. As part of our risk management strategy, we use derivative financial
instruments to hedge certain foreign currency and interest rate exposures. Our
objective is to offset gains and losses resulting from these exposures with
losses and gains on the derivative contracts used to hedge them, therefore
reducing the impact of volatility on earnings or protecting fair values of
assets and liabilities. We use derivative contracts only to manage existing
underlying exposures. Accordingly, we do not use derivative contracts for
speculative purposes.
Interest
Rate Risk
The table
below provides information about our financial instruments that are sensitive to
changes in interest rates and the scheduled minimum repayment of principal over
the remaining lives of our debt at March 31, 2008. Weighted average variable
rates in the table are based on implied forward rates in the Wells Fargo swap
yield curve as of April 16, 2008, our estimated ratio of funded debt
to EBITDA, which determines our rate margin, and a static foreign exchange rate
at March 31, 2008.
|
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
|
$ |
4.5 |
|
|
$ |
6.1 |
|
|
$ |
6.1 |
|
|
$ |
6.1 |
|
|
$ |
6.1 |
|
|
$ |
546.4 |
|
|
$ |
575.3 |
Average
interest rate
|
|
4.67 |
% |
|
|
4.49 |
% |
|
|
4.41 |
% |
|
|
4.72 |
% |
|
|
5.03 |
% |
|
|
5.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
term loan
|
$ |
4.0 |
|
|
$ |
5.3 |
|
|
$ |
5.3 |
|
|
$ |
5.3 |
|
|
$ |
5.3 |
|
|
$ |
427.4 |
|
|
$ |
452.6 |
Average
interest rate
|
|
6.73 |
% |
|
|
6.73 |
% |
|
|
6.25 |
% |
|
|
6.17 |
% |
|
|
6.16 |
% |
|
|
6.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GBP
term loan
|
$ |
0.7 |
|
|
$ |
1.0 |
|
|
$ |
1.0 |
|
|
$ |
1.0 |
|
|
$ |
1.0 |
|
|
$ |
74.1 |
|
|
$ |
78.8 |
Average
interest rate
|
|
8.00 |
% |
|
|
7.84 |
% |
|
|
7.10 |
% |
|
|
7.04 |
% |
|
|
7.01 |
% |
|
|
6.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
6.73 |
% |
|
|
6.73 |
% |
|
|
6.25 |
% |
|
|
6.17 |
% |
|
|
6.16 |
% |
|
|
0.00 |
% |
|
|
|
Net/Spread
|
|
0.14 |
% |
|
|
0.14 |
% |
|
|
(0.34 |
%) |
|
|
(0.42 |
%) |
|
|
(0.43 |
%) |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency swap on GBP term
loan
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Pay)
|
|
4.77 |
% |
|
|
4.59 |
% |
|
|
4.51 |
% |
|
|
4.82 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
Average
interest rate (Receive)
|
|
8.00 |
% |
|
|
7.84 |
% |
|
|
7.10 |
% |
|
|
7.04 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
|
Net/Spread
|
|
3.23 |
% |
|
|
3.25 |
% |
|
|
2.59 |
% |
|
|
2.22 |
% |
|
|
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. On
March 31, 2008, the convertible notes exceeded the conversion threshold.
As a result, the notes are convertible at the option of the holder as of
March 31, 2008, and accordingly, the aggregate principal amount of the
convertible notes is included in the current portion of long-term debt
(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. As a result of the expected
prepayments, the interest rate swap will terminate before the maturity of
the term loan. 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. As a result of the expected prepayments, the cross currency
interest rate swap will terminate before the maturity of the term loan.
This instrument is not designated as an accounting hedge (see Note
8).
|
Based on
a sensitivity analysis as of March 31, 2008, 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
$3.7 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. 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.
In 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 currently, and expected to be, highly effective in achieving offsetting
cash flows attributable to the hedged risk through 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 $452.6 million (€286.7 million) and
the fair value, recorded as a long-term liability, was $5.1 million at March 31,
2008. The amount of net gains expected to be reclassified into earnings in the
next twelve months is approximately $645,000. 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 international 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 66%
of total revenues for the three months ended March 31, 2008, compared with 8%
for the three months ended March 31, 2007, respectively.
Our
primary foreign currency exposure relates to non-U.S. dollar denominated
revenues, cost of revenues and operating expenses in our international
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.
In the
second quarter of 2007, we designated certain portions of our foreign currency
denominated term loans as hedges of our net investment in international
operations. Net losses of $32.4 million ($20.0 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 three months ended March 31, 2008.
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 $368,000. The pound sterling denominated
notional amount of the cross currency interest rate swap was $78.8 million
(£39.6 million) at March 31, 2008. The U.S. denominated notional amount was
$79.3 million at March 31, 2008. We expect the interest rate swap to reduce
interest expense by $2.2 million 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 March 31, 2008, 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 $1.0 million, as the increase in value
of the U.S. dollar reduced the net loss in operations denominated in foreign
currencies. 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 $1.2 million at March 31, 2008. 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 three months ended March
31, 2008.
Item 4: Controls and
Procedures
(a)
|
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 March 31,
2008. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control
objectives.
|
(b)
|
Changes in internal controls
over financial reporting. There have been no changes in internal
control over financial reporting during the quarter ended March 31, 2008
that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial
reporting.
|
PART II: OTHER INFORMATION
Item 1: 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 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 March 31, 2008 were not material to our
financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Actaris
subsidiaries. PT Berca is the minority shareholder in PT Mecoindo and has sued
several Actaris subsidiaries and the successor in interest to another company
previously owned by Schlumberger. 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 intend to continue vigorously defending our interest. In
addition, Actaris has notified Schlumberger that it will seek to have
Schlumberger indemnify Actaris from any damages it may incur as a result of this
claim. In any event, we do not believe that an adverse outcome is likely to have
a material adverse impact to our financial condition or results of
operations.
In March
2008, IP Co. LLC filed a complaint in the U.S. District Court for the Eastern
District of Texas against Itron, Inc., CenterPoint Energy and Eaton Corp.
alleging infringement of a patent owned by IP Co. LLC. The complaint alleges
that one U.S. patent, concerning wireless mesh networking systems that optimize
data sent across a general area, is being infringed by the defendants. The
complaint seeks unspecified damages as well as injunctive relief. We believe
these claims are without merit and we intend to vigorously defend our interests.
In any event, we do not believe an adverse outcome is likely to have a material
adverse impact to our financial condition or results of operations.
There
were no material changes during the first quarter of 2008 from risk factors as
previously disclosed in Item 1A included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, which was filed with the SEC on
February 26, 2008.
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 first
quarter of 2008.
Item 5: Other Information
(a) No
information was required to be disclosed in a report on Form 8-K during the
first quarter of 2008 that was not reported.
(b) Not
applicable.
Exhibit
Number |
|
Description
of Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant
to the requirements 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.
|
|
|
ITRON,
INC.
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May
5, 2008
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By:
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/S/ STEVEN M.
HELMBRECHT
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Date
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Steven
M. Helmbrecht
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Sr.
Vice President and Chief Financial
Officer
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