form10-q.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
|
|
For
the quarterly period ended March 31,
2007
|
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the transition period from
to
|
Commission
file number 0-22418
_______________
ITRON,
INC.
(Exact
name of registrant as specified in its charter)
____________________
|
|
Washington
|
91-1011792
|
(State
of incorporation)
|
(I.R.S.
Employer Identification
Number)
|
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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
As
of April 30, 2007, there were
outstanding 30,012,678 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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PART
I: FINANCIAL INFORMATION
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Item
1: Financial Statements (Unaudited)
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1
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2
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3
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4
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21
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32
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33
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Item
1: Legal Proceedings
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34
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Item
1A: Risk Factors
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34
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Item
2: Unregistered Sales of Equity Securities and Use of
Proceeds
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34
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Item
4: Submission of Matters to a Vote of Security
Holders
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34
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Item
5: Other Information
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34
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Item
6: Exhibits
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34
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35
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PART
I: FINANCIAL INFORMATION
Item
1: Financial Statements (Unaudited)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended March 31,
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|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands, except per share data)
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|
|
|
|
|
|
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Revenues
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Sales
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$ |
135,649
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$ |
142,934
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Service
|
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|
12,262
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|
|
|
12,619
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|
Total
revenues
|
|
|
147,911
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|
|
|
155,553
|
|
|
|
|
|
|
|
|
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|
Cost
of revenues
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|
|
|
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|
|
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Sales
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|
79,129
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|
|
|
81,842
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Service
|
|
|
7,457
|
|
|
|
6,937
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|
Total
cost of revenues
|
|
|
86,586
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|
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|
88,779
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|
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|
|
|
|
|
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Gross
profit
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|
61,325
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|
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|
66,774
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|
Operating
expenses
|
|
|
|
|
|
|
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Sales
and marketing
|
|
|
14,920
|
|
|
|
15,481
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|
Product
development
|
|
|
15,821
|
|
|
|
12,870
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|
General
and administrative
|
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|
14,244
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|
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|
12,122
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|
Amortization
of intangible assets
|
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|
7,040
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|
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|
7,313
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|
Total
operating expenses
|
|
|
52,025
|
|
|
|
47,786
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|
|
|
|
|
|
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|
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Operating
income
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|
|
9,300
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|
|
|
18,988
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|
Other
income (expense)
|
|
|
|
|
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Interest
income
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|
6,089
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|
|
|
362
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|
Interest
expense
|
|
|
(5,497 |
) |
|
|
(5,746 |
) |
Other
income (expense), net
|
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|
1,508
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|
|
|
(448 |
) |
Total
other income (expense)
|
|
|
2,100
|
|
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|
(5,832 |
) |
|
|
|
|
|
|
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Income
before income taxes
|
|
|
11,400
|
|
|
|
13,156
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|
Income
tax provision
|
|
|
(4,220 |
) |
|
|
(6,087 |
) |
|
|
|
|
|
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Net
income
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|
$ |
7,180
|
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|
$ |
7,069
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Earnings
per share
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|
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|
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|
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Basic
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$ |
0.26
|
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|
$ |
0.28
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Diluted
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$ |
0.26
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$ |
0.27
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Weighted
average number of shares outstanding
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Basic
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|
27,198
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|
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|
25,057
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Diluted
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|
27,980
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|
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|
26,071
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|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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|
March
31,
|
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|
December
31,
|
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|
2007
|
|
|
2006
|
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(in
thousands)
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ASSETS
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Current
assets
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Cash
and cash equivalents
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$ |
621,871
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|
$ |
361,405
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|
Short-term
investments, held to maturity
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|
-
|
|
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|
34,583
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|
Accounts
receivable, net
|
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|
124,227
|
|
|
|
109,924
|
|
Inventories
|
|
|
50,734
|
|
|
|
52,496
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|
Deferred
income taxes, net
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|
20,278
|
|
|
|
20,916
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Other
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|
23,087
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|
17,121
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Total
current assets
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|
840,197
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|
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|
596,445
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Property,
plant and equipment, net
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|
87,833
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|
88,689
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Intangible
assets, net
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|
104,761
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|
112,682
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Goodwill
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|
127,248
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|
126,266
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|
Deferred
income taxes, net
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|
52,701
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|
47,400
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Other
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|
26,398
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|
17,040
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Total
assets
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|
$ |
1,239,138
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|
$ |
988,522
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities
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Accounts
payable and accrued expenses
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$ |
50,361
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$ |
43,922
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Wages
and benefits payable
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18,918
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24,214
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Current
portion of warranty
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|
9,440
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|
7,999
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Unearned
revenue
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|
25,306
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|
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|
27,449
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|
Total
current liabilities
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|
104,025
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|
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|
103,584
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|
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Long-term
debt
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|
469,349
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469,324
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|
Warranty
|
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|
10,400
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|
10,149
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|
Contingent
purchase price
|
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|
6,272
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|
|
|
5,879
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|
Other
obligations
|
|
|
16,265
|
|
|
|
8,604
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|
Total
liabilities
|
|
|
606,311
|
|
|
|
597,540
|
|
|
|
|
|
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Commitments
and contingencies
|
|
|
|
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Shareholders'
equity
|
|
|
|
|
|
|
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|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
585,451
|
|
|
|
351,018
|
|
Accumulated
other comprehensive income, net
|
|
|
1,820
|
|
|
|
1,588
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|
Retained
earnings
|
|
|
45,556
|
|
|
|
38,376
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|
Total
shareholders' equity
|
|
|
632,827
|
|
|
|
390,982
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Total
liabilities and shareholders' equity
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|
$ |
1,239,138
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|
$ |
988,522
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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,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,180
|
|
|
$ |
7,069
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,460
|
|
|
|
10,938
|
|
Employee
stock plans income tax benefits
|
|
|
1,969
|
|
|
|
5,366
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(1,611 |
) |
|
|
(4,280 |
) |
Stock-based
compensation
|
|
|
2,876
|
|
|
|
2,053
|
|
Amortization
of prepaid debt fees
|
|
|
758
|
|
|
|
2,772
|
|
Deferred
income taxes, net
|
|
|
1,684
|
|
|
|
236
|
|
Unrealized
gain on foreign currency contracts
|
|
|
(1,557 |
) |
|
|
-
|
|
Other,
net
|
|
|
(432 |
) |
|
|
424
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(14,303 |
) |
|
|
20,791
|
|
Inventories
|
|
|
1,668
|
|
|
|
(3,058 |
) |
Accounts
payable and accrued expenses
|
|
|
8,963
|
|
|
|
2,644
|
|
Wages
and benefits payable
|
|
|
(5,296 |
) |
|
|
(4,612 |
) |
Unearned
revenue
|
|
|
(2,006 |
) |
|
|
1,452
|
|
Warranty
|
|
|
1,692
|
|
|
|
(165 |
) |
Other
long-term obligations
|
|
|
200
|
|
|
|
(470 |
) |
Other,
net
|
|
|
(4,471 |
) |
|
|
(3,768 |
) |
Net
cash provided by operating activities
|
|
|
8,774
|
|
|
|
37,392
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from the maturities of investments, held to maturity
|
|
|
35,000
|
|
|
|
-
|
|
Acquisitions
of property, plant and equipment
|
|
|
(8,622 |
) |
|
|
(6,251 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(149 |
) |
|
|
-
|
|
Deferred
pre-acquisition costs
|
|
|
(5,821 |
) |
|
|
-
|
|
Other,
net
|
|
|
85
|
|
|
|
295
|
|
Net
cash provided by (used in) investing activities
|
|
|
20,493
|
|
|
|
(5,956 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
|
-
|
|
|
|
(34,885 |
) |
Issuance
of common stock
|
|
|
229,588
|
|
|
|
6,192
|
|
Excess
tax benefits from stock-based compensation
|
|
|
1,611
|
|
|
|
4,280
|
|
Net
cash provided by (used in) financing activities
|
|
|
231,199
|
|
|
|
(24,413 |
) |
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
260,466
|
|
|
|
7,023
|
|
Cash
and cash equivalents at beginning of period
|
|
|
361,405
|
|
|
|
33,638
|
|
Cash
and cash equivalents at end of period
|
|
$ |
621,871
|
|
|
$ |
40,661
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
1,573
|
|
|
$ |
2,531
|
|
Pre-acquisition
costs incurred but not yet paid
|
|
|
2,707
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
2,084
|
|
|
$ |
108
|
|
Interest
|
|
|
4,365
|
|
|
|
375
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
ITRON,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March
31, 2007
(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
Basis
of Consolidation
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, 2007 and 2006, Condensed Consolidated Balance
Sheets as of March 31, 2007 and December 31, 2006 and Condensed Consolidated
Statements of Cash Flows for the three months ended March 31, 2007 and 2006
of
Itron and our consolidated 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.
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 do not exercise
significant influence are accounted for under the cost method. We consider
for
consolidation any variable interest entity of which we are the primary
beneficiary. We are not the primary beneficiary of any variable interest
entities.
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 2006 audited financial statements and notes
included in our Annual Report on Form 10-K, as filed with the SEC on February
23, 2007. The results of operations for the three months ended March 31, 2007
are not necessarily indicative of the results expected for the full fiscal
year
or for any other fiscal period (see Note 13).
Cash
and Cash Equivalents
We
consider all highly liquid instruments with remaining maturities of three months
or less at the date of acquisition to be cash equivalents. Cash equivalents
are
recorded at cost, which approximates fair value.
Short-Term
Investments
Investment
securities are classified into one of three categories: held to maturity,
trading or available for sale. Debt securities that we have the intent and
ability to hold to maturity are classified as held to maturity and are reported
at amortized cost (including amortization of premium or accretion of discount).
Investment purchases and sales are accounted for on a trade date basis. Market
value at a period end is based upon quoted market prices for each security.
Realized gains and losses are determined using the specific identification
method and are included in earnings. Premiums and discounts are recognized
in
interest income using the effective interest method over the terms of the
securities. At March 31, 2007, we held no short-term investments. The U.S.
government and federal agency investments held at December 31, 2006 matured
during the quarter.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133), as amended. All derivative
instruments, whether designated in hedging relationships or not, are required
to
be recorded on the Condensed Consolidated Balance Sheets at fair value as either
assets or liabilities. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative
is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded as a component of other comprehensive
income (loss) and are recognized in earnings when the hedged item affects
earnings. Ineffective portions of fair value changes or derivative instruments
that do not qualify for hedging activities are recognized in earnings.
Derivatives are not used for trading or speculative purposes.
On
February 25, 2007, we signed a stock purchase agreement to acquire Actaris
Metering Systems (Actaris) and entered into foreign currency range forward
contracts (transactions where put options were sold and call options were
purchased) to reduce our exposure to declines in the value of the U.S. dollar
and pound sterling relative to the euro denominated purchase price. Under SFAS
133, the Actaris stock purchase agreement is considered an unrecognized firm
commitment; therefore, these foreign currency range forward contracts can 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
from the termination of the foreign currency range forward contracts, resulting
in an additional $1.2 million gain to be recorded in the second quarter of
2007.
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. Accounts
receivable are written-off against the allowance when we believe an account,
or
a portion thereof, is no longer collectible.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method.
Cost includes raw materials and labor, plus applied direct and indirect costs,
including those costs required under SFAS 151, Inventory Costs—an amendment
of ARB 43, Chapter 4 (SFAS 151), which was effective for inventory costs
incurred on or after January 1, 2006. SFAS 151 did not have a material effect
on
our financial statements. Service inventories consist primarily of subassemblies
and components necessary to support post-sale maintenance. A large portion
of
our low-volume manufacturing and all of our domestic handheld meter reading
unit
repair services are provided by an outside vendor. Consigned inventory is not
deemed material to our operations.
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. Project
management costs incurred in connection with installation and equipment used
in
outsourcing contracts are capitalized and depreciated using the straight-line
method over the shorter of the useful life or the term of the contract. 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. 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 in other noncurrent assets. These costs are
amortized to interest expense over the lives of the respective borrowings using
the effective interest method. Debt fees associated with convertible notes
are
amortized through the date of the earliest put or conversion option. When debt
is repaid early, the portion of unamortized prepaid debt fees related to the
early principal repayment is written-off and included in interest expense in
the
Condensed Consolidated Statements of Operations.
Acquisitions
In
accordance with SFAS 141, Business Combinations, we record the results
of operations 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
at
the date of acquisition. The balance of the purchase price after fair value
allocations represents goodwill. The excess of the fair value of the acquisition
over the cost represents contingent consideration and is recorded as a
liability. Contingent payments subsequently made are then applied against the
liability. Amounts allocated to in-process research and development (IPR&D)
are expensed in the period of acquisition.
Goodwill
and Intangible Assets
Goodwill
is tested for impairment as of October 1 of each year, or more frequently,
if a
significant event occurs under the guidance of SFAS 142, Goodwill and Other
Intangible Assets (SFAS 142). Goodwill is assigned to our reporting units
based on the expected benefit from the combined synergies, determined by using
the incremental discounted cash flows associated with each reporting unit.
Intangible assets with a finite life are amortized based on estimated discounted
cash flows unless discounted cash flows can not be relied upon, in which case
the intangible assets are amortized straight-line over their estimated useful
lives. 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 the 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1
|
|
$ |
18,148
|
|
|
$ |
15,276
|
|
New
product warranties
|
|
|
696
|
|
|
|
585
|
|
Other
changes/adjustments to warranties
|
|
|
2,936
|
|
|
|
1,365
|
|
Claims
activity
|
|
|
(1,940 |
) |
|
|
(2,115 |
) |
Ending
balance, March 31
|
|
|
19,840
|
|
|
|
15,111
|
|
Less:
current portion of warranty
|
|
|
(9,440 |
) |
|
|
(7,162 |
) |
Long-term
warranty
|
|
$ |
10,400
|
|
|
$ |
7,949
|
|
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $3.6 million and
$2.0 million for the three months ended March 31, 2007 and 2006, respectively.
Warranty expense is classified within cost of sales.
Health Benefits
We
are
self insured for a substantial portion of the cost of 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
$3.7 million and $3.0 million for the three months ended March 31,
2007 and 2006, respectively. The IBNR accrual, which is included in wages and
benefits payable, was $2.1 million and $1.9 million at March 31, 2007 and
December 31 2006, respectively. Fluctuations in the IBNR accrual are the result
of the number of plan participants, claims activity and deductible
limits.
Contingencies
An
estimated loss for a contingency is recorded if it is probable that an asset
has
been impaired or a liability has been incurred and the amount of the loss can
be
reasonably estimated. We evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. Changes in these factors could materially affect
our financial position, results of operations and cash flows.
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.
These
deferred taxes are measured using the tax rates expected to be in effect when
the temporary differences reverse. We establish a valuation allowance for a
portion of the deferred tax asset when we believe it is more likely than not
that a portion of the deferred tax asset will not be utilized. Deferred tax
liabilities have been recorded on undistributed earnings of foreign
subsidiaries.
We
adopted the provisions of the Financial Accounting Standards Board (FASB)
Interpretation 48, Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB 109 (FIN 48) on January 1, 2007. This interpretation
addresses the determination of whether tax benefits claimed or expected to
be
claimed on a tax return should be recorded in the financial statements. Under
FIN 48, we may recognize the tax benefit from an uncertain tax position only
if
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such
a
position should be measured based on the largest benefit that has a greater
than
fifty percent likelihood of being realized upon ultimate settlement. FIN 48
also
provides guidance on derecognizing, classification, interest and penalties
on
income taxes, accounting in interim periods and requires increased disclosures
(see Note 8). 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 foreign subsidiaries are translated to U.S. dollars at the
exchange rates in effect on the balance sheet date. Revenues and expenses for
these subsidiaries are translated 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 (loss) in
shareholders’ equity. Gains and losses that arise from exchange rate
fluctuations for balances that are not denominated in the local currency are
included in the Condensed Consolidated Statements of Operations unless those
balances arose from intercompany transactions deemed to be long-term in nature.
Currency gains and losses for this exception are included, net of tax, in
accumulated other comprehensive income (loss) in shareholders’
equity.
Revenue Recognition
Sales
consist of hardware, software license fees, custom software development, field
and project management service and engineering, consulting, implementation,
installation and professional service revenues. Service revenues include
post-sale maintenance support and outsourcing services. Outsourcing services
include installation, operation and maintenance of meter reading systems to
provide meter information to a customer for billing and management purposes.
Outsourcing services can be provided for systems we own, as well as those owned
by our customers.
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 the 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 bill and collect
and is not contingent upon the delivery/performance of additional
items.
Revenues
are recognized when (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services have been rendered, (3) the sales price is
fixed or determinable and (4) collectibility is reasonably assured. Hardware
revenues are generally recognized at the time of shipment, receipt by customer,
or, if applicable, upon completion of customer acceptance provisions. For
software arrangements with multiple elements, revenue recognition is also
dependent upon the availability of vendor-specific objective evidence (VSOE)
of
fair value for each of the elements. The lack of VSOE, or the existence of
extended payment terms or other inherent risks, may affect the timing of revenue
recognition for software arrangements. If implementation services are essential
to a software arrangement, revenue is recognized using either the percentage
of
completion methodology if project costs can be estimated or the completed
contract methodology if project costs can not be reliably estimated. Hardware
and software post-sale maintenance support fees are recognized ratably over
the
life of the related service contract. Under outsourcing arrangements, revenue
is
recognized as services are provided. Certain consulting services are recognized
as services are performed.
Unearned
revenue is recorded for products or services that have not been provided but
have been invoiced under contractual agreements or paid for by a customer,
or
when products or services have been provided but the criteria for revenue
recognition have not been met. Shipping and handling costs billed to customers
are recorded as revenue, with the associated cost charged to cost of sales.
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, financial
accounting standards require 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 (loss) divided by the
weighted average common shares outstanding during the period. We compute
dilutive earnings per share by adjusting the weighted average number of common
shares outstanding to consider the effect of potentially dilutive securities,
including stock-based awards and convertible notes. Shares that are 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 (SFAS 123(R)), 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 can not 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.
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. Because of various factors affecting future costs and
operations, actual results could differ from estimates.
New Accounting
Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007, on a prospective basis. We are currently evaluating the impact of
the
adoption of SFAS 157 on our financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (SFAS 159). This statement permits entities to choose to measure many
financial assets and liabilities at fair value. Unrealized gains and losses
on
items for which the fair value option has been elected would be reported in
net
income. SFAS 159 is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact of the adoption of SFAS 159 on
our
financial statements.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$ |
7,180
|
|
|
$ |
7,069
|
|
Weighted
average number of shares outstanding
|
|
|
27,198
|
|
|
|
25,057
|
|
Basic
|
|
$ |
0.26
|
|
|
$ |
0.28
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$ |
7,180
|
|
|
$ |
7,069
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
27,198
|
|
|
|
25,057
|
|
Dilutive
effect of stock-based awards
|
|
|
782
|
|
|
|
1,014
|
|
Adjusted
weighted average number of shares outstanding
|
|
|
27,980
|
|
|
|
26,071
|
|
Diluted
|
|
$ |
0.26
|
|
|
$ |
0.27
|
|
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, 2007 and 2006, we had
stock-based awards outstanding of approximately 2.0 million and 2.1 million
at
weighted average option exercise prices of $30.65 and $22.41, respectively.
Approximately 593,000 and 55,000 stock-based awards were excluded from the
calculation of diluted EPS for the three months ended March 31, 2007 and 2006,
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
(convertible notes) that if converted in the future, would have a potentially
dilutive effect on our earnings per share. Under the indenture for the
convertible notes, upon conversion we are required 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 earnings per share is calculated
under the net share settlement method in accordance with the FASB’s Emerging
Issues Task Force 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 for each of the periods presented 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, 2007 did not exceed the conversion
price of $65.16 and therefore, our convertible notes did not have an effect
on
diluted earnings per share.
On
March
1, 2007, we issued 4.1 million shares of common stock, no par value, to certain
institutional investors pursuant to a securities purchase agreement dated
February 25, 2007, for aggregate proceeds of $235.0 million. Net proceeds were
$225.3 million.
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, 2007 and
2006.
Note
3: Certain Balance Sheet Components
Accounts
receivable, net
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Trade
(net of allowance for doubtful accounts of $615 and $589)
|
|
$ |
110,626
|
|
|
$ |
100,162
|
|
Unbilled
revenue
|
|
|
13,601
|
|
|
|
9,762
|
|
Total
accounts receivable, net
|
|
$ |
124,227
|
|
|
$ |
109,924
|
|
A
summary
of the allowance for doubtful accounts activity is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1
|
|
$ |
589
|
|
|
$ |
598
|
|
Provision
(benefit) for doubtful accounts
|
|
|
86
|
|
|
|
(197 |
) |
Recoveries
|
|
|
-
|
|
|
|
-
|
|
Accounts
charged off
|
|
|
(60 |
) |
|
|
(22 |
) |
Ending
balance, March 31
|
|
$ |
615
|
|
|
$ |
379
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of the inventory balances is as follows:
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Materials
|
|
$ |
27,667
|
|
|
$ |
29,650
|
|
Work
in process
|
|
|
5,380
|
|
|
|
5,220
|
|
Finished
goods
|
|
|
16,568
|
|
|
|
16,433
|
|
Total
manufacturing inventories
|
|
|
49,615
|
|
|
|
51,303
|
|
Service
inventories
|
|
|
1,119
|
|
|
|
1,193
|
|
Total
inventories
|
|
$ |
50,734
|
|
|
$ |
52,496
|
|
Other
current assets
Assets
held for sale are classified within other current assets and are reported at
the
lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated. During 2006, our previous headquarters building in Spokane Valley,
Washington was listed for sale. The net carrying value of this building of
approximately $8.0 million is recorded in other current assets. We are continuing
to
actively market the building and expect to sell the building during 2007.
Property,
plant and equipment, net
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$ |
61,916
|
|
|
$ |
59,485
|
|
Equipment
used in outsourcing
|
|
|
16,086
|
|
|
|
16,086
|
|
Computers
and purchased software
|
|
|
42,212
|
|
|
|
40,368
|
|
Buildings,
furniture and improvements
|
|
|
44,434
|
|
|
|
45,670
|
|
Land
|
|
|
2,482
|
|
|
|
2,482
|
|
Total
cost
|
|
|
167,130
|
|
|
|
164,091
|
|
Accumulated
depreciation
|
|
|
(79,297 |
) |
|
|
(75,402 |
) |
Property,
plant and equipment, net
|
|
$ |
87,833
|
|
|
$ |
88,689
|
|
Depreciation
expense was $4.4 million and $3.6 million for the three months ended March
31,
2007 and 2006, respectively.
Quantum
Consulting, Inc.
On
April
1, 2006, we completed the acquisition of Quantum Consulting, Inc. (Quantum),
an
energy consulting firm. The acquisition expands our consulting services related
to energy efficiency, planning design and market research in our Software
Solutions segment. The purchase price, including a working capital adjustment
of
$96,000 and net of cash acquired of $81,000, is summarized as follows (in
thousands):
Cash
consideration, net of cash acquired
|
|
$ |
4,015
|
|
Direct
transaction costs
|
|
|
478
|
|
Total
purchase price
|
|
$ |
4,493
|
|
Of
the
purchase price consideration, $400,000 is retained in an escrow account for
indemnifications made by Quantum. The amount in escrow will be released at
predetermined intervals through April 2008. Additional contingent consideration
of up to $1.0 million will be paid to Quantum shareholders if certain defined
financial targets are achieved in each year through 2008. These additional
payments will increase the purchase price and goodwill at the time the financial
targets are achieved. The 2006 financial target was not achieved; therefore,
no
additional consideration was required at December 31, 2006. An additional
payment will also be made to Quantum shareholders, of up to $1.0 million,
if certain key individuals remain employees through March 2009. A substantial
portion of the payment will be recognized as compensation expense over the
retention period.
The
following financial information reflects the allocation of the purchase price
based on estimated fair values of assets and liabilities as of the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired has been recorded as goodwill.
|
|
April
1, 2006
|
|
|
|
|
|
|
Fair
Value
|
|
|
Useful
Life
|
|
|
|
(in
thousands)
|
|
|
(in
months)
|
|
|
|
|
|
|
|
|
Fair
value of tangible net assets acquired
|
|
$ |
467
|
|
|
|
|
Identified
intangible assets - amortizable
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
|
670
|
|
|
|
55
|
|
Contract
backlog
|
|
|
360
|
|
|
|
38
|
|
Goodwill
|
|
|
2,996
|
|
|
|
|
|
Total
net assets acquired
|
|
$ |
4,493
|
|
|
|
|
|
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. The
intangible assets will be amortized over the estimated useful lives of the
estimated discounted cash flows assumed in the valuation models. Goodwill and
intangible assets were allocated to our Software Solutions segment in accordance
with SFAS 142. For tax purposes, goodwill is not deductible as we acquired
the
stock of Quantum.
ELO
Sistemas e Tecnologia Ltda.
On
June
1, 2006, we completed the acquisition of ELO Sistemas e Tecnologia Ltda. (ELO)
for an initial cash payment of approximately $1.9 million and a working capital
adjustment of $102,000. Cash consideration also included the settlement of
a
$637,000 payable from ELO to us for inventory purchased by ELO prior to the
acquisition. Additional contingent consideration will be payable if certain
financial targets are achieved over the next five years. The 2006 financial
target was not achieved; therefore, no additional consideration was required
at
December 31, 2006. Operations reside in Campinas, Brazil and include sales,
manufacturing, service and maintenance, consulting and administrative functions
related to meters, automated meter reading (AMR) technology and related systems
in South America. The purchase price, net of cash acquired of $10,000, is
summarized as follows (in thousands):
Cash
consideration, net of cash acquired
|
|
$ |
2,641
|
|
Direct
transaction costs
|
|
|
1,210
|
|
Total
purchase price
|
|
$ |
3,851
|
|
The
purchase price was allocated to the tangible and intangible assets acquired
and
liabilities assumed based on their estimated fair values as of the date of
acquisition. The estimated fair value of the net assets acquired and liabilities
assumed exceeded the initial cash consideration paid by approximately $5.5
million, resulting in negative goodwill. In a business combination with
contingent consideration, the lesser of the maximum amount of contingent
consideration or the total amount of negative goodwill should be recorded as
a
liability. As the purchase agreement does not limit the maximum contingent
consideration payable, the full amount of the negative goodwill is reflected
as
a long-term liability. If contingent payments are made, we will apply the
payments against the contingent liability. Payments in excess of the contingent
liability balance, if any, will be recorded as goodwill.
The
following financial information reflects the allocation of the purchase price
based on estimated fair values of assets and liabilities as of the date of
acquisition.
|
|
June
1, 2006
|
|
|
|
|
|
|
Fair
Value
|
|
|
Useful
Life
|
|
|
|
(in
thousands)
|
|
|
(in
months)
|
|
|
|
|
|
|
|
|
Fair
value of tangible net assets acquired
|
|
$ |
798
|
|
|
|
|
Identified
intangible assets - amortizable
|
|
|
|
|
|
|
|
Customer
relationships/contracts
|
|
|
6,957
|
|
|
|
175
|
|
Contract
backlog
|
|
|
1,731
|
|
|
|
12
|
|
Contingent
purchase price liability
|
|
|
(5,635 |
) |
|
|
|
|
Total
net assets acquired
|
|
$ |
3,851
|
|
|
|
|
|
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. The
intangible assets will be amortized over the estimated useful lives of the
estimated discounted cash flows assumed in the valuation models. Goodwill and
intangible assets were allocated to our Hardware Solutions segment in accordance
with SFAS 142. Due to changes in foreign currency exchange rates, the contingent
purchase price liability can increase or decrease, with a corresponding change
in accumulated other comprehensive income (loss). The contingent purchase price
liability was approximately $6.3 million at March 31, 2007. This acquisition
was
structured such that we received an increase in basis for tax purposes equal
to
the cash consideration paid. In future years, intangible assets and goodwill
will be recognized (and deductible) for tax purposes as contingent consideration
payments are made.
Flow
Metrix, Inc.
On
November 21, 2006, we completed the acquisition of Flow Metrix, Inc. (Flow
Metrix). Flow Metrix develops and manufactures advanced leak detection systems
for underground pipelines, which complements our fixed network water products.
The purchase price, which included a working capital adjustment of $167,000
paid
in the first quarter of 2007 and net of cash acquired of $2.0 million, is
summarized as follows (in thousands):
Cash
consideration, net of cash acquired
|
|
$ |
13,119
|
|
Direct
transaction costs
|
|
|
692
|
|
Total
purchase price
|
|
$ |
13,811
|
|
Of
the
purchase price consideration, $2.8 million was retained in an escrow account
for
working capital adjustments and indemnifications made by Flow Metrix. Additional
contingent consideration of up to $3.0 million will be paid if certain
technological and integration milestones are achieved within the first three
years. These additional payments will increase the purchase price and goodwill
at the time the milestones are achieved. The agreement also provides us a one
year option to purchase additional technology targeted at energy pipeline
integrity for an additional payment of $1.5 million.
The
following information reflects the allocation of the purchase price based on
estimated fair values of assets and liabilities as of the date of the
acquisition.
|
|
November
21, 2006
|
|
|
|
|
|
|
Fair
Value
|
|
|
Useful
Life
|
|
|
|
(in
thousands)
|
|
|
(in
months)
|
|
|
|
|
|
|
|
|
Fair
value of net liabilities assumed
|
|
$ |
(3,408 |
) |
|
|
|
Identified
intangible assets - amortizable
|
|
|
|
|
|
|
|
Core-developed
technology
|
|
|
7,400
|
|
|
|
120
|
|
Customer
contracts
|
|
|
740
|
|
|
|
120
|
|
Tradenames
|
|
|
410
|
|
|
|
120
|
|
Other
|
|
|
500
|
|
|
|
12
|
|
Goodwill
|
|
|
8,169
|
|
|
|
|
|
Total
net assets acquired
|
|
$ |
13,811
|
|
|
|
|
|
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. The
intangible assets will be amortized over the estimated useful lives of the
estimated discounted cash flows assumed in the valuation models. Goodwill and
intangible assets were allocated to our Hardware Solutions segment in accordance
with SFAS 142. For tax purposes, goodwill is not deductible as we acquired
the
stock of Flow Metrix.
Note
5: Identified Intangible Assets
The
gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
|
At
March 31, 2007
|
|
|
At
December 31, 2006
|
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core-developed
technology
|
|
$ |
161,730
|
|
|
$ |
(82,980 |
) |
|
$ |
78,750
|
|
|
$ |
162,930
|
|
|
$ |
(77,783 |
) |
|
$ |
85,147
|
|
Patents
|
|
|
7,088
|
|
|
|
(5,151 |
) |
|
|
1,937
|
|
|
|
7,088
|
|
|
|
(5,059 |
) |
|
|
2,029
|
|
Capitalized
software
|
|
|
5,065
|
|
|
|
(5,065 |
) |
|
|
-
|
|
|
|
5,065
|
|
|
|
(5,065 |
) |
|
|
-
|
|
Distribution
and production rights
|
|
|
3,935
|
|
|
|
(3,418 |
) |
|
|
517
|
|
|
|
3,935
|
|
|
|
(3,384 |
) |
|
|
551
|
|
Customer
contracts
|
|
|
17,219
|
|
|
|
(8,154 |
) |
|
|
9,065
|
|
|
|
16,888
|
|
|
|
(7,931 |
) |
|
|
8,957
|
|
Trademarks
and tradenames
|
|
|
26,120
|
|
|
|
(13,006 |
) |
|
|
13,114
|
|
|
|
26,210
|
|
|
|
(12,022 |
) |
|
|
14,188
|
|
Other
|
|
|
9,904
|
|
|
|
(8,526 |
) |
|
|
1,378
|
|
|
|
9,752
|
|
|
|
(7,942 |
) |
|
|
1,810
|
|
Total
identified intangible assets
|
|
$ |
231,061
|
|
|
$ |
(126,300 |
) |
|
$ |
104,761
|
|
|
$ |
231,868
|
|
|
$ |
(119,186 |
) |
|
$ |
112,682
|
|
A
summary
of the identifiable intangible asset account activity is as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Beginning
balance, January 1
|
|
$ |
231,868
|
|
|
$ |
211,328
|
|
Flow
Metrix acquisition adjustment
|
|
|
(1,220 |
) |
|
|
-
|
|
Effect
of change in exchange rates
|
|
|
413
|
|
|
|
-
|
|
Ending
balance, total intangible assets, gross
|
|
$ |
231,061
|
|
|
$ |
211,328
|
|
The
decrease in identified intangible assets was the result of an adjustment to
the
assets of Flow Metrix, based on the final determination of fair values of
intangible assets acquired. The carrying amount of intangible assets can also
increase or decrease, with a corresponding change in accumulated other
comprehensive income (loss), due to changes in foreign currency exchange rates
for those intangible assets owned by our foreign subsidiaries. At March 31,
2007, the intangible assets associated with the ELO acquisition increased
$413,000 as a result of a change in foreign currency rates. Intangible asset
amortization expense was $7.1 million and $7.3 million for the three months
ended March 31, 2007 and 2006, respectively.
Estimated
future annual amortization expense is as follows:
Years
ending December 31,
|
|
Estimated
Annual Amortization
|
|
|
|
|
(in
thousands)
|
|
2007
|
|
|
$ |
20,458
|
|
2008
|
|
|
|
23,781
|
|
2009
|
|
|
|
20,031
|
|
2010
|
|
|
|
14,059
|
|
2011
|
|
|
|
11,814
|
|
Beyond
2011
|
|
|
14,618
|
|
|
Total
identified intangible assets, net
|
|
$ |
104,761
|
|
Note
6: Goodwill
The
following table reflects goodwill
allocated to each reporting segment during the three months ended March 31,
2007
and 2006, respectively.
|
|
Hardware
Solutions
|
|
|
Software
Solutions
|
|
|
Total
Company
|
|
|
|
(in
thousands)
|
|
Goodwill
balance, January 1, 2006
|
|
$ |
98,087
|
|
|
$ |
17,945
|
|
|
$ |
116,032
|
|
Effect
of change in exchange rates
|
|
|
6
|
|
|
|
(1 |
) |
|
|
5
|
|
Goodwill
balance, March 31, 2006
|
|
$ |
98,093
|
|
|
$ |
17,944
|
|
|
$ |
116,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance, January 1, 2007
|
|
$ |
105,303
|
|
|
$ |
20,963
|
|
|
$ |
126,266
|
|
Goodwill
adjustments
|
|
|
953
|
|
|
|
(21 |
) |
|
|
932
|
|
Effect
of change in exchange rates
|
|
|
42
|
|
|
|
8
|
|
|
|
50
|
|
Goodwill
balance, March 31, 2007
|
|
$ |
106,298
|
|
|
$ |
20,950
|
|
|
$ |
127,248
|
|
Goodwill
balances may also increase or decrease, with a corresponding change in
accumulated other comprehensive income (loss), due to changes in foreign
currency exchange rates.
Note
7: Debt
The
components of our borrowings are as follows:
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Senior
subordinated notes
|
|
$ |
124,349
|
|
|
$ |
124,324
|
|
Convertible
senior subordinated notes
|
|
|
345,000
|
|
|
|
345,000
|
|
Total
long-term debt
|
|
$ |
469,349
|
|
|
$ |
469,324
|
|
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%, with
a
balance of $124.3 million at March 31, 2007. The subordinated notes are
registered with the SEC and are generally transferable. The discount on the
subordinated notes is accreted and the prepaid debt fees are amortized over
the
life of the notes. Fixed interest payments of $4.8 million are required
every six months, in May and November. The notes are subordinated to our senior
secured borrowings and are guaranteed by all of our operating subsidiaries,
except for our foreign subsidiaries, all of which are wholly owned. As of
December 31, 2006, all guarantor operating subsidiaries were merged into Itron
parent. The subordinated notes contain covenants, which place restrictions
on
the incurrence of debt, the payment of dividends, certain investments and
mergers. The Actaris acquisition and the associated financing were not
prohibited under these covenants (see Note 13). We were in compliance with
these
debt covenants at March 31, 2007. Some or all of the subordinated notes may
be
redeemed at our option at any time on or after May 15, 2008, at their principal
amount plus a specified premium. At any time after May 15, 2008, we may, at
our
option, redeem the subordinated notes at a redemption 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 Emerging Issues Task Force (EITF)
05-02, The Meaning of “Conventional Convertible Debt Instruments” in Issue
00-19, as the number of shares, or cash, to be received by the holders was
not fixed at the inception of the obligation. 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 under the following circumstances, 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), 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 120% of the conversion
price 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 put options, which may require us, at the
option of the holder, 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 indebtedness. The convertible notes are currently not guaranteed
by any of our operating subsidiaries. However, the convertible notes will be
unconditionally guaranteed, joint and severally, by any future subsidiaries
that
guarantee our senior subordinated notes. The convertible notes contain
covenants, which place restrictions on the incurrence of debt and certain
mergers. The Actaris acquisition and the associated financing were not
prohibited under these covenants (see Note 13). We were in compliance with
these
debt covenants at March 31, 2007. The aggregate principal amount of the
convertible notes is included in long-term debt as they can not be converted
prior to July 2011, unless certain defined events occur. At such time the
holders have the ability to convert, we will reclassify the convertible notes
from long-term to current to reflect the holders’ conversion
rights.
Senior
Secured Credit Facility
We
repaid
the $24.7 million remaining on our original $185 million seven-year senior
secured term loan during the first quarter of 2006. The credit facility included
a $55 million five-year senior secured revolving credit line (revolver). At
March 31, 2007, there were no borrowings outstanding under the revolver and
$24.7 million was utilized by outstanding standby letters of credit resulting
in
$30.3 million available for additional borrowings. On April 18, 2007, this
credit facility was terminated and replaced as part of the Actaris acquisition
financing (see Note 13).
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 $12.4 million and $13.2 million at March 31, 2007 and
December 31, 2006, respectively. Accrued interest expense was $5.2 million
and $4.8 million at March 31, 2007 and December 31, 2006,
respectively.
Note
8: 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, research credits
and state income taxes. We estimate that our 2007 annual effective income tax
rate will be approximately 38%.
At
March
31, 2006, our estimated annual effective income tax rate was 44%, while our
actual income tax rate was 46% for the three months ended March 31, 2006. At
March 31, 2006, our effective tax rate did not include a federal research
credit, as the credit had expired. In December 2006, the Tax Relief and Health
Care Act was signed into law, extending the research tax credit for qualified
research expenses incurred throughout 2006 and 2007. This legislation
reduced our estimated 2007 annual effective tax rate as compared with
the estimated 2006 annual effective tax rate at March 31, 2006.
Effective
January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109. Although our implementation of FIN
48 did not require a cumulative effect adjustment to retained earnings, we
recorded $6.1 million of deferred tax assets and noncurrent liabilities to
conform to the balance sheet presentation requirements of FIN 48. As of
January 1, 2007, the amount of unrecognized tax benefits was $6.1 million,
of
which $6.1 million would, if recognized, affect our actual tax rate.
We do not expect any reasonably possible material changes to the estimated
amount of liability associated with our unrecognized tax benefits
through March 31, 2008.
We
are
subject to income tax in the U.S. federal jurisdiction and numerous state
jurisdictions. The Internal Revenues Service (IRS) has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Tax years subsequent to 1995 remain open to examination by the major
tax
jurisdictions to which we are subject. We classify interest and penalties
related to unrecognized tax benefits in our provision for income taxes. Accrued
interest and penalties were $9,000 and $12,000 at January 1, 2007 and March
31,
2007, respectively.
Note
9: Stock-Based Compensation
We
record
stock-based compensation expense under SFAS 123(R) for awards of stock options,
our Employee Stock Purchase Plan (ESPP) and issuance of restricted and
unrestricted stock awards and units. We expense stock-based compensation using
the straight-line method over the requisite service period. For the three months
ended March 31, 2007 and 2006, stock-based compensation expense was
$2.9 million and $2.1 million, before a related income tax benefit of
$698,000 and $272,000.
The
fair
value of stock options and ESPP awards issued during the three months ended
March 31, 2007 and 2006 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,
|
|
|
|
2007
|
|
|
2006
(1)
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected
volatility
|
|
|
41.2 |
% |
|
|
-
|
|
|
|
24.3 |
% |
|
|
42.3 |
% |
Risk-free
interest rate
|
|
|
4.7 |
% |
|
|
-
|
|
|
|
5.1 |
% |
|
|
4.2 |
% |
Expected
life (years)
|
|
|
4.94
|
|
|
|
-
|
|
|
|
0.25
|
|
|
|
0.25
|
|
(1)
No
stock option
grants were made to employees during the three months ended March 31,
2006.
Expected
price volatility is based on a combination of historical volatility of our
common stock and the implied volatility of our traded options, for the related
vesting period. We believe this combined approach is more reflective of current
and historical market conditions and a better indicator of expected volatility.
The risk-free interest rate is the rate available as of the award date on
zero-coupon U.S. government issues with a remaining term equal to the expected
life of the award. The expected life is the weighted average expected life
for
the entire award based on the fixed period of time between the date the award
is
granted and the date the award is fully exercised. Factors considered in
estimating the expected life are historical experience of similar awards, giving
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.
Stock
Option Plans
Stock
options to purchase the Company’s common stock are granted with an exercise
price equal to the fair market value of the stock on the date of grant upon
approval by our Board of Directors. Options generally become exercisable in
three or four equal installments beginning a 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 fair value of stock
options granted in the three months ended March 31, 2007 was $26.76. No stock
options were granted during the three month period ended March 31, 2006.
Compensation expense related to stock options recognized under SFAS 123(R)
for
the three months ended March 31, 2007 and 2006 was $2.4 million and
$1.8 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, 2007 and
2006
is as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
(years)
|
|
|
(in
thousands)
|
|
Outstanding,
January 1, 2006
|
|
|
2,443
|
|
|
$ |
21.24
|
|
|
|
6.89
|
|
|
$ |
46,189
|
|
Exercised
|
|
|
(381 |
) |
|
|
14.92
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2006
|
|
|
2,062
|
|
|
$ |
22.41
|
|
|
|
7.42
|
|
|
$ |
77,195
|
|
Exercisable
and expected to vest, March 31, 2006
|
|
|
1,946
|
|
|
$ |
21.93
|
|
|
|
7.34
|
|
|
$ |
73,799
|
|
Exercisable,
March 31, 2006
|
|
|
867
|
|
|
$ |
13.56
|
|
|
|
5.81
|
|
|
$ |
40,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
aggregate intrinsic value in the table above is 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, 2007, total unrecognized
stock-based compensation expense related to nonvested stock options, net of
estimated forfeitures, was approximately $11.7 million, which is expected to
be
recognized over a weighted average period of approximately 19
months.
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 employee stock purchase plan. 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 11,518 and 15,241 shares
to
employees in the three months ended March 31, 2007 and 2006, respectively.
The
fair value of ESPP awards issued is estimated using the Black-Scholes
option-pricing model. The weighted average fair value of the ESPP awards issued
in the three months ended March 31, 2007 and 2006 was $8.03 and $6.52,
respectively. The expense related to ESPP recognized under SFAS 123(R) for
the
three months ended March 31, 2007 and 2006 was $95,000 and $80,000,
respectively. We had no unrecognized compensation cost at March 31, 2007
associated with the awards issued under the ESPP.
Long-Term
Performance Plan
We
have a
Long-Term Performance Plan (LTPP) for senior management, payments of which
are
contingent on the attainment of yearly goals payable in the Company’s common
stock with a three-year cliff vesting period. Restricted stock units will be
used for the 2007 plan. Restricted stock awards were used for the 2006 and
2005
plans.
Restricted
stock units 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
restricted stock units established at the beginning of the year for the 2007
performance period consisted of 50,020 restricted stock units at a grant-date
fair value of $62.52.
The
2006
and 2005 restricted stock awards were granted in the year following attainment,
as approved by our Board of Directors, with the value of the award based on
a
percentage of the participant’s base salary and the performance objectives for
the period. The restricted stock award for 2005 consisted of 30,542 shares
of
restricted stock issued on February 15, 2006, at a grant-date fair value of
$59.16. The restricted stock award for 2006 consisted of 25,065 shares of
restricted stock issued on February 23, 2007, at a grant-date fair value of
$62.90.
Under
each of the plans, compensation expense is recognized only 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 $277,000 and $37,000 for the three months ended March 31, 2007 and 2006,
respectively.
Board
of Directors’ Unrestricted Stock Awards
We
issue
unrestricted stock awards to our Board of Directors as part of the Board of
Directors’ compensation. During the three months ended March 31, 2007 and 2006,
we issued 2,910 and 2,976 shares of unrestricted stock to our Board of
Directors, with a weighted average grant-date fair value of $51.38 and $40.29,
respectively. The expense related to these awards for the three months ended
March 31, 2007 and 2006 was $150,000 and $120,000, respectively. All awards
were
fully vested and expensed when granted.
Note
10: 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. No
liabilities were required for agreements entered into as of March 31, 2007
and
December 31, 2006.
We
maintain bid and performance bonds for certain customers. Bonds in force were
$6.6 million and $6.0 million at March 31, 2007 and December 31, 2006,
respectively. Bid bonds guarantee that we will enter into a contract consistent
with the terms of the bid. Performance bonds 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.
We
also
have standby letters of credit to guarantee our performance under certain
contracts. The outstanding amounts of standby letters of credit were $24.7
million and $23.0 million at March 31, 2007 and December 31, 2006,
respectively.
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.
On
March
1, 2007, we issued 4,086,958 million shares of common stock, no par value,
to
certain institutional investors pursuant to a securities purchase agreement
dated February 25, 2007, for aggregate proceeds of $235.0 million. The common
shares were issued pursuant to an exception from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder. We agreed to register resales of these
shares no later than July 2, 2007. In the event we are unable to register
the
shares, liquidating damages based on 1% of the aggregate proceeds, divided
by
30, will be payable each day to the holders of such common stock (not to
exceed
9% of the aggregate proceeds).
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 (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. At March 31, 2007, there were no material legal
contingencies requiring accrual or disclosure.
Note
11: Segment Information
We
have
two operating segments: Hardware Solutions and Software Solutions. As of
January
1, 2007, Hardware Solutions is considered a single operating segment as we
no
longer report Electricity Metering and Meter Data Collection as separate
segments. For these two operating segments, we have three primary measures
of
segment performance: revenue, gross profit (margin) and operating income.
Revenues for each segment are reported according to major products. There
are no
inter-segment revenues. Hardware Solutions cost of sales includes materials,
direct labor, warranty expense and other manufacturing spending, along with
other labor and operating costs for installation and project management.
Software Solutions cost of sales includes distribution and documentation
costs
for software applications sold, along with other labor and operating costs
for
custom software implementation, project management, consulting and systems
support. Hardware Solutions and Software Solutions cost of services include
materials, labor and overhead. Operating expenses directly associated with
each
segment include sales, marketing, product development and administrative
expenses.
Corporate
operating expenses, amortization expense, 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. We do not
allocate assets and liabilities to our segments. Approximately 50% of
depreciation expense was allocated to the segments at March 31, 2007 and 2006,
with the remaining portion unallocated and reported under corporate
unallocated.
We
classify sales in the United States and Canada as domestic revenues.
International revenues were $11.3 million for the three months ended March
31,
2007, compared with $5.2 million for the three months ended March 31, 2006.
Our acquisition of ELO on June 1, 2006 contributed to the increase in
international revenues in 2007.
Segment
Products
Hardware
Solutions
|
Residential,
commercial and industrial (C&I) and generation, transmission and
distribution (GT&D) electricity meters; residential and commercial AMR
standalone modules; OEM (original equipment manufacturer) equipment,
contract manufacturing and royalties for our AMR technology in other
vendors’ electricity meters; mobile and network AMR data collection
technologies; handheld computers for meter data collection or mobile
workforce applications; related installation, implementation, maintenance
support and other services.
|
|
|
Software
Solutions
|
Software
knowledge applications for commercial, industrial and residential
meter
data collection and management; distribution system design and
optimization; energy and water management; asset optimization; mobile
workforce solutions; forecasting; related implementation, consulting
and
maintenance support services.
|
Segment
Information
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
|
|
|
|
|
Hardware
Solutions
|
|
$ |
132,205
|
|
|
$ |
142,129
|
|
Software
Solutions
|
|
|
15,706
|
|
|
|
13,424
|
|
Total
Company
|
|
$ |
147,911
|
|
|
$ |
155,553
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
|
|
|
Hardware
Solutions
|
|
$ |
54,083
|
|
|
$ |
60,612
|
|
Software
Solutions
|
|
|
7,242
|
|
|
|
6,162
|
|
Total
Company
|
|
$ |
61,325
|
|
|
$ |
66,774
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
Hardware
Solutions
|
|
$ |
34,166
|
|
|
$ |
42,981
|
|
Software
Solutions
|
|
|
(1,318 |
) |
|
|
(2,489 |
) |
Corporate
unallocated
|
|
|
(23,548 |
) |
|
|
(21,504 |
) |
Total
Company
|
|
|
9,300
|
|
|
|
18,988
|
|
Total
other income (expense)
|
|
|
2,100
|
|
|
|
(5,832 |
) |
Income
before income taxes
|
|
$ |
11,400
|
|
|
$ |
13,156
|
|
One
customer accounted for 10% of total Company revenues for the three months ended
March 31, 2007. A different customer accounted for 22% of total Company revenues
for the three months ended March 31, 2006.
One
customer accounted for 11% of Hardware Solutions segment revenues for the three
months ended March 31, 2007. A different customer accounted for 24% of Hardware
Solutions segment revenues for the three months ended March 31,
2006.
One
customer represented 17% of Software Solutions revenues for the three months
ended March 31, 2007. No single customer represented more than 10% of Software
Solutions revenues for the three months ended March 31, 2006.
Note
12: Other Comprehensive Income
Other
comprehensive income is reflected as an increase (decrease) to shareholders’
equity and are not reflected in our results of operations. Other comprehensive
income during the period, net of tax, was as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,180
|
|
|
$ |
7,069
|
|
Change
in foreign currency translation adjustments, net of tax
|
|
|
232
|
|
|
|
(110 |
) |
Total
comprehensive income
|
|
$ |
7,412
|
|
|
$ |
6,959
|
|
Accumulated
other comprehensive income, net of tax, was approximately $1.8 million and
$1.6
million at March 31, 2007 and December 31, 2006, respectively, and consisted
of
the adjustments for foreign currency translation as indicated
above.
Note
13: Subsequent Event
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems (Actaris)
for
approximately $1.063 billion (net of cash received) plus the retirement of
approximately $644.0 million of debt. The acquisition was financed with a
$1.2 billion senior secured credit facility, $235 million from the issuance
of 4.1 million shares of common stock to certain institutional investors and
cash on hand. The Actaris acquisition includes all of Actaris’ electricity, gas
and water meter manufacturing and sales operations, located primarily outside
of
North America. This
acquisition will allow Actaris to offer Itron’s AMR and advanced metering
infrastructure (AMI) technologies, software and systems to customers outside
of
North America and expand Actaris’ gas and water opportunities in North
America.
The
$1.2
billion senior secured credit facility (credit facility) is comprised of a
$605.1 million first lien U.S. denominated term loan; a €335 million first
lien euro denominated term loan; a £50 million first lien GBP denominated term
loan (collectively the term loans); and a $115 million multicurrency
revolving line-of-credit (multicurrency revolver), which was undrawn at close.
Interest
rates on the credit facility are based on the respective borrowing
denominated LIBOR rate (US 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,
respectively, from the date of issuance with certain acceleration features
relating to our current outstanding subordinated notes.
While
this is a material acquisition, we have not yet allocated the purchase price
to
the major assets and liabilities acquired, nor have we yet determined the
fair
values of intangible assets, goodwill, contingent liabilities and in-process
research and development. There are no contingent payments or commitments
associated with the stock purchase agreement.
Item 2: 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 23, 2007.
Our
SEC
filings are available free of charge under the Investors section of our website
at www.itron.com as soon as practicable after they are filed with or
furnished to the SEC. In addition, our filings are available at the SEC’s
website (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, 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 “expects,” “intends,” “anticipates,” “believes,” “plans,”
“projects,” “estimates,” “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, 3) changes in
estimated liabilities for product warranties, 4) changes in laws and regulations
(including Federal Communications Commission (FCC) licensing actions),
5) our dependence on new product development and intellectual property, 6)
current and future acquisitions, 7) changes in estimates for stock-based
compensation, 8) changes in foreign currency exchange rates, 9) foreign business
risks and 10) other factors. You should not solely rely on these forward-looking
statements as they are only valid as of the date of this 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, 2006, which
was filed with the SEC on February 23, 2007.
Results
of Operations
We
derive
the majority of our revenues from sales of products and services to utilities.
Sales revenues may include hardware, software licenses, custom software
development, field and project management services and engineering, consulting
and installation services. Service revenues include post-sale maintenance
support and outsourcing services. Outsourcing services include installation,
operation and maintenance of meter reading systems to provide meter information
to a customer for billing and management purposes for systems we own as well
as
those owned by our customers. Cost of sales includes materials, direct labor,
warranty expense and other manufacturing spending, along with other labor and
operating costs for installation and project management. Cost of sales also
includes distribution and documentation costs for software applications sold,
along with labor and operating costs for custom software implementation, project
management, consulting and systems support. Cost of services includes materials,
labor and overhead.
Overview
Total
revenues of $147.9 million for the first quarter of 2007 were $7.7 million
lower
than 2006 first quarter revenues of $155.6 million. Hardware Solutions revenues
of $132.2 million were $10.0 million lower than the first quarter of 2006.
During the first quarter of 2006, Hardware Solutions shipped more than 900,000
meters and recognized revenue of $32.5 million from our contract with
Progress Energy, which was substantially completed at the end of
2006.
Total
backlog at March 31, 2007 was $376 million, compared with $387 million at March
31, 2006. There was no backlog at March 31, 2007 related to the Progress Energy
contract, compared with $64 million at March 31, 2006.
On
March
1, 2007, we issued 4.1 million shares of common stock to certain institutional
investors for aggregate proceeds of $235 million, resulting in additional
interest income and cash balances for the first quarter of 2007. On April 18,
2007, we completed the acquisition of Actaris Metering Systems (Actaris) for
approximately $1.063 billion (net of cash received) plus the retirement of
approximately $644.0 million of debt. We financed the acquisition with a $1.2
billion senior secured credit facility, $235 million from the sale of our common
stock and cash on hand. The Actaris acquisition includes all of Actaris’
electricity, gas and water meter manufacturing and sales operations, located
primarily outside of North America. This acquisition will allow Actaris to
offer
Itron’s automated meter reading (AMR) and advanced metering infrastructure (AMI)
technologies, software and systems to customers outside of North America and
expand Actaris’ gas and water meter opportunities in North America. The combined
Company will have more than 8,000 utility customers, over 30 manufacturing
facilities, operate in more than 60 countries and have more than 8,500
employees. Actaris will continue to operate fundamentally as it did before
the
acquisition. The operating results of the Actaris acquisition will be included
in our second quarter 2007 condensed consolidated financial statements
commencing on the date of the acquisition.
Revenues
and Gross Margins
Total
Revenues and Gross Margins
The
following tables summarize our revenues, gross profit and gross margin for
the
three months ended March 31, 2007 and 2006.
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
2007
|
|
|
%
Change
|
|
|
2006
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
135.6
|
|
|
|
-5 |
% |
|
$ |
142.9
|
|
|
|
|
|
Service
|
|
|
12.3
|
|
|
|
-3 |
% |
|
|
12.7
|
|
|
|
|
|
Total
revenues
|
|
$ |
147.9
|
|
|
|
-5 |
% |
|
$ |
155.6
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
Gross
Profit and Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
56.5
|
|
|
|
42 |
% |
|
$ |
61.1
|
|
|
|
43 |
% |
Service
|
|
|
4.8
|
|
|
|
39 |
% |
|
|
5.7
|
|
|
|
45 |
% |
Total
gross profit and margin
|
|
$ |
61.3
|
|
|
|
41 |
% |
|
$ |
66.8
|
|
|
|
43 |
% |
Revenues
Sales
revenues decreased $7.3 million for the first quarter of 2007, compared with
the
first quarter of 2006, as a result of reduced electricity meter shipments.
During 2006, as we worked to fulfill an accelerated delivery schedule for our
contract with Progress Energy, our electricity meter production was increased.
Service revenues were comparable period over period.
One
customer, Southwest Gas Corporation, represented 10% of total revenues for
the
first quarter of 2007. One customer, Progress Energy, represented 22% of total
revenues for the first quarter of 2006. The ten largest customers accounted
for
approximately 31% and 44% for the three months ended March 31, 2007 and 2006,
respectively.
Gross
Profit and Margin
As
a
percentage of revenue, sales gross margin for the first quarter in 2007 was
42%,
compared with 43% for the first quarter of 2006. This one percentage point
decrease is the result of lower manufacturing volumes for our meters, partially
offset by a more favorable product mix during the quarter. Service gross margin
was 39% for the first quarter of 2007, compared with 45% for the first quarter
of 2006.
Segment
Revenues, Gross Profit and Margin and Operating Income
(Loss)
We
have
two operating segments: Hardware Solutions and Software Solutions. As of January
1, 2007, Hardware Solutions is considered a single operating segment as we
no
longer report Electricity Metering and Meter Data Collection as separate
segments. For these two operating segments, we have three primary measures
of
segment performance: revenue, gross profit (margin) and operating income.
Revenues for each segment are reported according to major products. There are
no
inter-segment revenues. Hardware Solutions cost of sales includes materials,
direct labor, warranty expense and other manufacturing spending, along with
other labor and operating costs for installation and project management.
Software Solutions cost of sales includes distribution and documentation costs
for software applications sold, along with other labor and operating costs
for
custom software implementation, project management, consulting and systems
support. Hardware Solutions and Software Solutions cost of services include
materials, labor and overhead. Operating expenses directly associated with
each
segment include sales, marketing, product development and administrative
expenses.
Corporate
operating expenses, amortization expense, 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. We do not
allocate assets and liabilities to our segments. Approximately 50% of
depreciation expense was allocated to the segments at March 31, 2007 and 2006,
with the remaining portion unallocated and reported under corporate
unallocated.
We
classify sales in the United States and Canada as domestic revenues.
International revenues were $11.3 million for the three months ended March
31,
2007, compared with $5.2 million for the three months ended March 31, 2006.
Our acquisition of ELO Sistemas e Tecnologia Ltda. on June 1, 2006 contributed
to the increase in international revenues in 2007.
Segment
Products
Hardware
Solutions
|
Residential,
commercial and industrial (C&I) and generation, transmission and
distribution (GT&D) electricity meters; residential and commercial AMR
standalone modules; OEM (original equipment manufacturer) equipment,
contract manufacturing and royalties for our AMR technology in other
vendors’ electricity meters; mobile and network AMR data collection
technologies; handheld computers for meter data collection or mobile
workforce applications; related installation, implementation, maintenance
support and other services.
|
|
|
Software
Solutions
|
Software
knowledge applications for commercial, industrial and residential
meter
data collection and management; distribution system design and
optimization; energy and water management; asset optimization; mobile
workforce solutions; forecasting; related implementation, consulting
and
maintenance support services.
|
|
The
following tables and discussion highlight significant changes in
trends or
components of each segment.
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
2007
|
|
|
%
Change
|
|
|
2006
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
Solutions
|
|
$ |
132.2
|
|
|
|
-7 |
% |
|
$ |
142.2
|
|
|
|
|
|
Software
Solutions
|
|
|
15.7
|
|
|
|
17 |
% |
|
|
13.4
|
|
|
|
|
|
Total
revenues
|
|
$ |
147.9
|
|
|
|
-5 |
% |
|
$ |
155.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
Segment
Gross Profit and Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
Solutions
|
|
$ |
54.1
|
|
|
|
41 |
% |
|
$ |
60.6
|
|
|
|
43 |
% |
Software
Solutions
|
|
|
7.2
|
|
|
|
46 |
% |
|
|
6.2
|
|
|
|
46 |
% |
Total
gross profit and margin
|
|
$ |
61.3
|
|
|
|
41 |
% |
|
$ |
66.8
|
|
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
Segment
Operating Income (Loss)
|
|
(in
millions)
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
and
Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
Solutions
|
|
$ |
34.2
|
|
|
|
26 |
% |
|
$ |
43.0
|
|
|
|
30 |
% |
Software
Solutions
|
|
|
(1.3 |
) |
|
|
-8 |
% |
|
|
(2.5 |
) |
|
|
-19 |
% |
Corporate
unallocated
|
|
|
(23.6 |
) |
|
|
|
|
|
|
(21.5 |
) |
|
|
|
|
Total
operating income and margin
|
|
$ |
9.3
|
|
|
|
6 |
% |
|
$ |
19.0
|
|
|
|
12 |
% |
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2007
|
|
2006
|
Unit
Shipments
|
(in
thousands)
|
|
Meters
|
|
|
|
|
|
Meters
with Itron AMR
|
500
|
|
1,200
|
|
|
Meters
with other AMR
|
250
|
|
150
|
|
|
Meters
with no AMR
|
400
|
|
375
|
|
|
|
Total
meters
|
1,150
|
|
1,725
|
|
|
|
|
|
|
|
|
AMR
units
|
|
|
|
|
|
AMR
standalone modules
|
1,200
|
|
1,075
|
|
|
Licensed
AMR (other vendors' meters)
|
-
|
|
125
|
|
|
|
Total
AMR units
|
1,200
|
|
1,200
|
|
|
|
|
|
|
|
|
Total
Itron AMR units
|
1,700
|
|
2,400
|
Hardware
Solutions: Revenues decreased $10.0 million in the first
quarter of 2007, compared with the first quarter of 2006 due to reduced
electricity meter shipments. During the first quarter of 2006, we shipped over
900,000 meters under the Progress Energy contract. This accelerated delivery
schedule, which was completed at the end of 2006, temporarily increased our
typical electricity meter production levels, resulting in higher overhead
absorption. For the three months ended March 31, 2007, gross margin decreased
two percentage points as a result of our lower overhead absorption compared
with
the prior year period and increased warranty expense.
One
customer accounted for 11% of Hardware Solutions revenues for the three months
ended March 31, 2007. Progress Energy represented 24% Hardware Solutions
revenues for the three months ended March 31, 2006.
Hardware
Solutions operating expenses were $19.9 million and $17.6 million for the
three months ended March 31, 2007 and 2006, respectively. Research and
development costs have increased as a result of the development of our AMI
solution.
Software
Solutions: Revenues increased $2.3 million for the first
quarter of 2007, compared with the first quarter of 2006, due to increases
in
software license sales for a broad mix of products and consulting services.
Gross margin remained constant at 46% for the three months ended March 31,
2007
and 2006, due to offsetting product mix fluctuations. Software licenses were
31%
and 25% of segment revenues for the three months ended March 31, 2007 and 2006,
respectively.
One
customer accounted for 17% of Software Solutions segment revenues for the three
months ended March 31, 2007. No customer represented more than 10% of Software
Solutions revenues for the three months ended March 31, 2006.
Gross
profit for Software Solutions is not yet sufficient to cover current operating
expenses due primarily to significant investments in product development. As
a
percentage of revenue, operating costs decreased to 54% for 2007, compared
with
65% for the first quarter of 2006.
Corporate
unallocated: Operating expenses not directly associated
with a segment are classified as “Corporate unallocated.” The largest single
component of these is amortization of intangible assets, which was $7.1 million
and $7.3 million for the three months ended March 31, 2007 and 2006,
respectively.
New
Order Bookings and Backlog
Bookings
for a reported period represent contracts and 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.
Backlog is not a complete measure of our future business as we have a
significant portion of our business that is book-and-ship. 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, less sales revenues will not always
equal ending total backlog due to miscellaneous contract adjustments and other
factors.
Information
on new orders during the quarter and backlog at quarter-end is summarized as
follows:
Quarter
Ended
|
|
Total
Bookings
|
|
|
Total
Backlog
|
|
|
12-Month
Backlog
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
$ |
118
|
|
|
$ |
376
|
|
|
$ |
225
|
|
December
31, 2006
|
|
|
211
|
|
|
|
392
|
|
|
|
225
|
|
September
30, 2006
|
|
|
128
|
|
|
|
325
|
|
|
|
194
|
|
June
30, 2006
|
|
|
107
|
|
|
|
351
|
|
|
|
225
|
|
March
31, 2006
|
|
|
206
|
|
|
|
387
|
|
|
|
241
|
|
December
31, 2005
|
|
|
149
|
|
|
|
324
|
|
|
|
188
|
|
September
30, 2005
|
|
|
212
|
|
|
|
325
|
|
|
|
198
|
|
June
30, 2005
|
|
|
177
|
|
|
|
243
|
|
|
|
151
|
|
Total
backlog was $376 million at March 31, 2007, compared with $387 million one
year
ago. Twelve month backlog was $225 million at March 31, 2007, compared with
$241
million one year ago. During the first quarter of 2006, approximately $64
million of shippable and total backlog was related to a contract with one
customer, Progress Energy.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
%
of Revenue
|
|
|
2006
|
|
|
%
of Revenue
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
14.9
|
|
|
|
10 |
% |
|
$ |
15.5
|
|
|
|
10 |
% |
Product
development
|
|
|
15.8
|
|
|
|
11 |
% |
|
|
12.9
|
|
|
|
8 |
% |
General
and administrative
|
|
|
14.2
|
|
|
|
9 |
% |
|
|
12.1
|
|
|
|
8 |
% |
Amortization
of intangible assets
|
|
|
7.1
|
|
|
|
5 |
% |
|
|
7.3
|
|
|
|
5 |
% |
Total
operating expenses
|
|
$ |
52.0
|
|
|
|
35 |
% |
|
$ |
47.8
|
|
|
|
31 |
% |
For
the
three months ended March 31, 2007, product development increased $2.9 million,
compared with the same period in 2006, and was primarily due to the development
of our AMI solution. General and administrative expenses were higher in the
first quarter of 2007, compared with the first quarter of 2006, due to increased
professional services and depreciation associated with our new enterprise
resource planning (ERP) system, indirect costs related to the acquisition of
Actaris and higher expenses related to maintaining two corporate facilities.
Our
previous headquarters building in Spokane Valley, Washington is listed for
sale.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
6,089
|
|
|
$ |
362
|
|
Interest
expense
|
|
|
(4,739 |
) |
|
|
(2,970 |
) |
Amortization
of debt placement fees
|
|
|
(758 |
) |
|
|
(2,776 |
) |
Other
income (expense), net
|
|
|
1,508
|
|
|
|
(448 |
) |
Total
other income (expense)
|
|
$ |
2,100
|
|
|
$ |
(5,832 |
) |
Interest
income increased nearly $6 million as a result of our average cash balances
increasing to $436 million for the three months ended March 31, 2007, compared
with $45 million for the three months ended March 31, 2006. Our increase in
cash
was the result of our August 2006 issuance of $345 million 2.5% convertible
senior subordinated notes (convertible notes) and our March 1, 2007 issuance
of
$235 million in common stock.
The
increase in interest expense for the first quarter of 2007, compared with the
first quarter of 2006, was the result of accrued interest on our $345 million
2.50% convertible senior subordinated notes issued in August 2006. Average
outstanding borrowings were $469.3 million for the three months ended March
31,
2007, compared with $154.9 million for the same period in
2006.
Amortization
of prepaid debt fees has fluctuated as a result of the issuance of our
convertible notes and the voluntary prepayments of our senior secured term
loan.
Other
income (expense) for the three months ended March 31, 2007 consists primarily
of
an unrealized gain on foreign currency contracts. On February 25, 2007, we
signed a stock purchase agreement to acquire Actaris Metering Systems (Actaris)
and entered into foreign currency range forward contracts (transactions where
both 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 Statement of Financial Accounting
Standards 133, Accounting for Derivative Instruments and Hedging Activities,
(SFAS 133), as amended, the Actaris stock purchase agreement
is considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts can not be designated as fair value hedges. At March
31,
2007, we recognized income of $1.6 million 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 from
the termination of the foreign currency range forward contracts, resulting
in an
additional $1.2 million gain to be recorded in the second quarter of
2007.
Other
income (expense) also consists of foreign currency gains and losses, which
can
vary from period to period, as well as other nonoperating events or
transactions. For the three month period ended March 31, 2006, other income
(expense) included a $242,000 loss on the sale of our investment in
Servatron.
Income
Taxes
Our
actual income tax rates typically differ from the federal statutory rate
of 35%,
and can vary from period to period, due to fluctuations in operating results,
new or revised tax legislation and accounting pronouncements, research credits
and state income taxes. We estimate that our 2007 annual effective income
tax
rate will be approximately 38%.
At
March
31, 2006, our estimated annual effective income tax rate was 44%, while our
actual income tax rate was 46% for the three months ended March 31, 2006.
At
March 31, 2006, our effective tax rate did not include a federal research
credit, as the credit had expired. In December 2006, the Tax Relief and Health
Care Act was signed into law, extending the research tax credit for qualified
research expenses incurred throughout 2006 and 2007. This legislation
reduced our estimated 2007 annual effective tax rate as compared with
the estimated 2006 annual effective tax rate at March 31, 2006.
Effective
January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109. Although our implementation of FIN
48 did not require a cumulative effect adjustment to retained earnings, we
recorded $6.1 million of deferred tax assets and noncurrent liabilities to
conform to the balance sheet presentation requirements of FIN 48. As of
January 1, 2007, the amount of unrecognized tax benefits was $6.1 million,
of
which $6.1 million would, if recognized, affect our actual tax rate.
We do not expect any reasonably possible material changes to the estimated
amount of liability associated with our unrecognized tax benefits
through March 31, 2008.
We
are
subject to income tax in the U.S. federal jurisdiction and numerous state
jurisdictions. The Internal Revenues Service (IRS) has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Tax years subsequent to 1995 remain open to examination by the major
tax
jurisdictions to which we are subject. We classify interest and penalties
related to unrecognized tax benefits in our provision for income taxes. Accrued
interest and penalties were $9,000 and $12,000 at January 1, 2007 and March
31,
2007, respectively.
Financial
Condition
Cash
Flow Information:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
8.8
|
|
|
$ |
37.4
|
|
Investing
activities
|
|
|
20.5
|
|
|
|
(6.0 |
) |
Financing
activities
|
|
|
231.2
|
|
|
|
(24.4 |
) |
Increase
in cash and cash equivalents
|
|
$ |
260.5
|
|
|
$ |
7.0
|
|
The
increase in cash and cash equivalents was primarily the result of our issuance
of 4.1 million shares of common stock for aggregate proceeds of $235 million
on
March 1, 2007, which were used to partially fund the acquisition of Actaris
on
April 18, 2007.
Operating
activities: Cash provided by operating activities decreased $28.6 million
in the first three months of 2007, compared with the same period in 2006. This
decrease is primarily the result of an increase in accounts receivable due
to
delayed invoicing and decreased collection activity related to our conversion
to
a new ERP system on January 1, 2007. This delayed invoicing resulted in
cash received from customers of $131.6 million for the three months ended March
31, 2007, compared with $177.8 million for the three months ended March 31,
2006. Cash paid to suppliers and employees decreased $15.1 million for the
three
months ended March 31, 2007, compared with the three months ended March 31,
2006.
Investing
activities: In the first quarter of 2007, $35.0 million in short-term
investments matured with the proceeds placed in cash and cash equivalents.
The
deferred pre-acquisition costs related to the Actaris acquisition were
approximately $5.8 million. The acquisition of property, plant and
equipment was consistent for each of the three months ended March 31, 2007
and
2006.
Financing
activities: Net proceeds from the sale of common stock provided $225.3
million. Cash generated from the exercise of stock-based awards was
$4.3 million during the first three months of 2007, compared with
$6.2 million for the same period in 2006. Excess tax benefits from
stock-based compensation were $1.6 million in the first quarter of 2007,
compared with $4.3 million for the same period in 2006. During the first quarter
of 2006, we paid off the remaining $24.7 million balance on our term loan
and also made an optional prepayment of $10.0 million on our real estate term
note.
We
had no
off-balance sheet financing agreements at March 31, 2007 and December 31, 2006,
except for operating lease commitments.
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.
We
issued
$345 million of 2.50% convertible notes in August 2006, which are 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 may be converted under the following circumstances, 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), 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 120% of the conversion
price 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 put options, which may require us, at the
option of the holder, 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 indebtedness. The convertible notes are currently not guaranteed
by any of our operating subsidiaries. However, the convertible notes will be
unconditionally guaranteed, joint and severally, by any future subsidiaries
that
guarantee our senior subordinated notes. The convertible notes contain
covenants, which place restrictions on the incurrence of debt and certain
mergers. The Actaris acquisition and the associated financing were not
prohibited under these covenants. We were in compliance with these debt
covenants at March 31, 2007. The aggregate principal amount of the convertible
notes is included in long-term debt as they can not be converted prior to July
2011, unless certain defined events occur. At such time the holders have the
ability to convert, we will reclassify the convertible notes from long-term
to
current to reflect the holders’ conversion rights.
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%, with
a
balance of $124.3 million at March 31, 2007. The subordinated notes are
registered with the SEC and are generally transferable. The discount on the
subordinated notes is accreted and the prepaid debt fees are amortized over
the
life of the notes. Fixed interest payments of $4.8 million are required
every six months, in May and November. The notes are subordinated to
our senior subordinated borrowings and are guaranteed by all of our
operating subsidiaries, except for our foreign subsidiaries, all of which are
wholly owned. The subordinated notes contain covenants, which place restrictions
on the incurrence of debt, the payment of dividends, certain investments and
mergers. The Actaris acquisition and the associated financing were not
prohibited under these covenants. We were in compliance with these debt
covenants at March 31, 2007. Some or all of the subordinated notes may be
redeemed at our option at any time on or after May 15, 2008, at their principal
amount plus a specified premium. At any time after May 15, 2008, we may, at
our
option, redeem the subordinated notes at a redemption price of 103.875%,
decreasing each year thereafter.
We
repaid
the $24.7 million remaining on our original $185 million seven-year senior
secured term loan during the first quarter of 2006. The credit facility
associated with the senior secured term loan included a $55 million five-year
senior secured revolving credit line (revolver). At March 31, 2007, there were
no borrowings outstanding under the revolver and $24.7 million was utilized
by
outstanding standby letters of credit resulting in $30.3 million available
for
additional borrowings. On April 18, 2007, this credit facility was terminated
and replaced as part of the Actaris acquisition financing.
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems (Actaris)
for
approximately $1.063 billion (net of cash received) plus the retirement of
approximately $644.0 million of debt. The acquisition was financed with a
$1.2 billion senior secured credit facility, $235 million from the issuance
of 4.1 million shares of common stock to certain institutional investors and
cash on hand. The $1.2 billion senior secured credit facility (credit facility)
is comprised of a $605.1 million first lien U.S. denominated term loan; a
€335 million first lien euro denominated term loan; a £50 million first
lien GBP denominated term loan (collectively the term loans); and a
$115 million multicurrency revolving line-of-credit (multicurrency
revolver), which was undrawn at close. Interest on the credit facility is
variable, subject to numerous factors. 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, respectively, from
the
date of issuance with certain acceleration features relating to our current
outstanding subordinated notes.
We
maintain bid and performance bonds for certain customers. Bonds in force were
$6.6 million and $6.0 million at March 31, 2007 and December 31, 2006,
respectively. Bid bonds guarantee that we will enter into a contract consistent
with the terms of the bid. Performance bonds 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.
On
March
1, 2007, we issued 4,086,958 million shares of common stock, no par value,
to
certain institutional investors pursuant to a securities purchase agreement
dated February 25, 2007, for aggregate proceeds of $235.0 million. The common
shares were issued pursuant to an exception from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder. We agreed to register resales of these
shares no later than July 2, 2007. In the event we are unable to register the
shares, liquidating damages based on 1% of the aggregate proceeds, divided
by
30, will be payable each day to the holders of such common stock (not to exceed
9% of the aggregate proceeds).
Our
net
deferred tax assets consist primarily of accumulated net operating losses and
tax credits that can be carried forward, some of which are limited by Internal
Revenue Code Sections 382 and 383 (Section 382 and Section 383). The limited
deferred tax assets resulted primarily from acquisitions. We expect to utilize
tax loss carryforwards and available tax credits to offset taxes otherwise
due
on regular taxable income in upcoming years. For 2007, we expect cash payments
for federal tax purposes to be approximately $13 million based on current
projections that net operating loss carryforwards not limited by
Section 382 will be fully utilized and our remaining tax credits not
limited by Section 383 and the Alternative Minimum Tax will be fully
utilized in 2007 and 2008.
Working
capital, which includes current assets less current liabilities, was $736.2
million at March 31, 2007, compared with $492.9 million at December 31, 2006.
A
substantial portion of the $243.3 million increase in working capital resulted
from the net proceeds of our issuance of 4.1 million shares of common stock
for
aggregate proceeds of $235 million on March 1, 2007. The proceeds were used
to
partially fund the acquisition of Actaris.
We
expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from or to others,
distribution agreements, partnership arrangements and acquisitions of technology
or other companies. We expect these activities to be funded with existing cash,
cash flow from operations, borrowings and the issuance of common stock or other
securities. We believe existing sources of liquidity will be sufficient to
fund
our existing operations and obligations for at least the next year and
foreseeable future, but offer no assurances. Our liquidity could be affected
by
the stability of the energy and water industries, competitive pressures,
international risks, intellectual property claims and other factors described
under “Risk Factors” within Item 1A of Part 1 of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, which was filed with
the SEC on February 23, 2007, 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 (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. At March 31, 2007, there were no material legal
contingencies requiring accrual or disclosure.
We
generally provide within our sales contracts an indemnification related to
the
infringement of any patent, copyright, trademark or other intellectual property
right on software or equipment, 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. We have
certain customer arrangements with multiple elements. For such arrangements,
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 performance, 4) upon customer acceptance provisions
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. In the absence of fair value of a delivered element,
we allocate revenue first to the fair value of the undelivered elements and
the
residual revenue to the delivered elements. If the fair value of any undelivered
element included in a multiple element arrangement can not 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.
Under
outsourcing arrangements, revenue is recognized as services are provided.
Hardware and software post-sale maintenance support fees are recognized ratably
over the performance period. Certain consulting services are recognized as
services are performed. Revenue can vary significantly from period to period
based on the timing of orders and the application of revenue recognition
criteria. Use of the percentage of completion method for revenue recognition
requires estimating the cost to complete a project. 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.
Unearned
revenue is recorded for products or services when the criteria for revenue
recognition have not been met. The majority of unearned revenue relates to
annual billings for post-sale maintenance and support agreements. Shipping
and
handling costs billed to customers are recorded as revenue, with the associated
cost charged to cost of sales.
Warranty:
We offer industry 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.
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.
Goodwill
and Intangible Assets: Goodwill and intangible assets result from our
acquisitions. We use estimates in determining the 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. We
test
goodwill for impairment each year as of October 1, under the guidance of SFAS
142, Goodwill and Other Intangible Assets. We forecast discounted
future cash flows at the reporting unit level, which consists of our segments,
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 based on estimated discounted
cash flows, unless discounted cash flows can not be relied upon, in which case
the intangible assets are amortized straight-line, over estimated useful lives
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 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 approximate
the 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.
Deferred
Income Taxes: We adopted the provisions of FIN 48 on January 1, 2007. This
interpretation addresses the determination of whether tax benefits claimed
or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, we may recognize the tax benefit from an uncertain
tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has
a
greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognizing, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. As of January 1, 2007, the amount of
unrecognized tax benefits was $6.1 million, of which $6.1 million would, if
recognized, affect our actual tax rate. We do not expect any
reasonably possible material changes to the estimated amount of liability
associated with our unrecognized tax benefits through March 31,
2008.
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 less than probable.
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 required to be recorded on
the
Condensed Consolidated Balance Sheets at fair value as either assets or
liabilities. If the derivative is designated as a fair value hedge, the changes
in the fair value of the derivative and of the hedged item attributable to
the
hedged risk are recognized in earnings. If the derivative is designated as
a
cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded as a component of other comprehensive income (loss)
and
are recognized in earnings when the hedged item affects earnings; ineffective
portions of fair value changes or derivative instruments that do not qualify
for
hedging activities are recognized in earnings. Derivatives are not used for
trading or speculative purposes.
Compensation
Plans: We have compensation plans that offer a range of award amounts for
the achievement of various annual performance and financial targets. Actual
award amounts will be 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
must 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 various results. An accrual is recorded if management
deems 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 assessments
made in earlier quarters.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007, on a prospective basis. We are currently evaluating the impact of
the
adoption of SFAS 157 on our financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (SFAS 159). This statement permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains
and
losses on items for which the fair value option has been elected would be
reported in net income. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of the adoption of
SFAS 159 on our financial statements.
Subsequent
Event
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems (Actaris)
for
approximately $1.063 billion (net of cash received) plus the retirement of
approximately $644.0 million of debt. The acquisition was financed with a
$1.2 billion senior secured credit facility, $235 million from the issuance
of 4.1 million shares of common stock to certain institutional investors and
cash on hand. The Actaris acquisition includes all of Actaris’ electricity, gas
and water meter manufacturing and sales operations, located primarily outside
of
North America.
The
$1.2
billion senior secured credit facility is comprised of a $605.1 million first
lien U.S. denominated term loan; a €335 million first lien euro denominated
term loan; a £50 million first lien GBP denominated term loan; and a
$115 million multicurrency revolving line-of-credit, which was undrawn at
close.
Item
3: Quantitative and Qualitative
Disclosures About Market Risk
Interest
Rate Risk: We had no outstanding debt subject to variable interest rates at
March 31, 2007.
As
part
of the Actaris Metering Systems (Actaris) on April 18, 2007, we entered into
a
$1.2 billion senior secured credit facility (credit facility), comprised of
a
$605.1 million first lien U.S. denominated term loan; a €335 million first
lien euro denominated term loan; a £50 million first lien GBP denominated term
loan (collectively the term loans); and a $115 million multicurrency
revolving line-of-credit (multicurrency revolver), which was undrawn at close.
Interest rates on the credit facility are based on the
respective borrowing denominated LIBOR rate (US 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, respectively, from the date of issuance with certain
acceleration features relating to our current outstanding subordinated notes.
These variable rate financial instruments are sensitive to changes in interest
rates. We will monitor and assess our interest rate risk and may institute
interest rate swaps.
Foreign
Currency Exchange Rate Risk: We may be exposed to certain
market risks arising from particular transactions. As part of our funding
necessary to complete the Actaris Metering Systems (Actaris) acquisition, we
entered into foreign currency range forward contracts (transactions where put
options were sold and call options were purchased) to reduce our exposure to
declines in the value of the U.S. dollar and pound sterling relative to the
euro
denominated purchase price. Under SFAS 133, the Actaris stock purchase agreement
is considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts can 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 from the termination of the foreign currency
range forward contracts, resulting in an additional $1.2 million gain to be
recorded in the second quarter of 2007.
We
conduct business in a number of foreign countries and, therefore, face exposure
to adverse movements in foreign currency exchange rates. Our primary foreign
currency exposure has related to non-U.S. dollar denominated sales, cost of
sales and operating expenses in our foreign subsidiary operations. We have
not
used derivative instruments to manage foreign currency exchange rate risks;
as
such, our consolidated results of operations in U.S. dollars are subject to
fluctuation as foreign exchange rates change. International revenues were 8%
of
total revenues for the three months ended March 31, 2007. The Actaris
acquisition includes manufacturing and sales primarily outside of the United
States. Commencing in the second quarter of 2007, a majority of our revenues
and
operating expenses will be denominated in foreign currencies, resulting in
changes in our foreign currency exchange rate exposures that could have a
material effect on our financial results.
Risk-sensitive
financial instruments in the form of intercompany trade receivables are mostly
denominated in U.S. dollars, while intercompany notes may be denominated in
local foreign currencies. As foreign currency exchange rates change,
intercompany trade receivables may affect current earnings, while intercompany
notes may be revalued and result in unrealized translation gains or losses
that
are reported in accumulated other comprehensive income (loss).
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, 2007, the
analysis indicated that such market movements would not have had a material
effect on our consolidated results of operations or on the fair value of any
risk-sensitive financial instruments. 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, 2007. We may, in the future,
experience greater fluctuations in U.S. dollar earnings from fluctuations in
foreign currency exchange rates, particularly due to the Actaris acquisition.
We
will continue to monitor and assess the effect of currency fluctuations and
may
institute hedging alternatives.
(a)
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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, 2007.There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of
the
controls and procedures. Accordingly, even effective disclosure controls
and procedures can only provide reasonable assurance of achieving
their
control objectives.
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(b)
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Changes
in internal controls over financial reporting. Other than the
implementation of a new enterprise resource planning system (new
ERP
system) that is described in the following paragraph, there have
been no
changes in internal control over financial reporting during the quarter
ended March 31, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
|
Effective
January 1, 2007, we implemented a new ERP system for business operations
within the Company. The implementation of the new ERP system has resulted in
material changes to our processes and procedures affecting internal control
over
financial reporting. This implementation was not in response to an identified
material weakness or significant deficiency in our internal control over
financial reporting. The Company’s management believes it has established and
implemented adequate internal control over financial reporting with respect
to
the new ERP system.
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 Statement of Financial Accounting Standards (SFAS) 5,
Accounting for Contingencies. 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 less than probable. At March 31,
2007,
there were no material legal contingencies requiring accrual or
disclosure.
Item
1A: Risk Factors
There
were no material changes during the first quarter of 2007 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, 2006, which was filed with the SEC on
February 23, 2007.
Item
2: Unregistered Sales of Equity Securities and Use of
Proceeds
On
March
1, 2007, we issued 4,086,958 million shares of common stock, no par value,
to
certain institutional investors pursuant to a securities purchase agreement
dated February 25, 2007, for aggregate proceeds of $235.0 million, or $57.50
per
share, which represents a 5% discount from the five-day average share closing
price during the week of February 12, 2007 of $60.52. Net proceeds of $225.3
million were used to partially finance the acquisition of Actaris Metering
Systems (Actaris) on April 18, 2007.
The
common shares were issued pursuant to an exception from registration afforded
by
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder. We agreed to register resales of these
shares no later than July 2, 2007.
Item
4: Submission of Matters to a Vote of Security
Holders
No
matters were submitted to a vote of shareholders of Itron during the first
quarter of 2007.
Item
5: Other Information
(a)
No
information was required to be disclosed in a report on Form 8-K during the
first quarter of 2007 that was not reported.
(b)
Not
applicable.
Item
6: Exhibits
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, in the City of Liberty Lake, State
of Washington, on the 7th of
May,
2007.
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By:
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/s/
STEVEN M. HELMBRECHT
|
|
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Steven
M. Helmbrecht
Sr.
Vice President and Chief Financial
Officer
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