form10q.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 September 30,
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
October 31, 2007, there were outstanding 30,605,511 shares of the
registrant’s common stock, no par value, which is the only class of common stock
of the registrant.
Table
of Contents
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Page
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1
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2
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3
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4
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32
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44
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47
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48
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48
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48
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48
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48
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49
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PART
I: FINANCIAL INFORMATION
Item
1: Financial Statements (Unaudited)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands, except per share data)
|
|
Revenues
|
|
$ |
434,034
|
|
|
$ |
164,706
|
|
|
$ |
983,504
|
|
|
$ |
484,069
|
|
Cost
of revenues
|
|
|
289,224
|
|
|
|
97,281
|
|
|
|
652,655
|
|
|
|
280,838
|
|
Gross
profit
|
|
|
144,810
|
|
|
|
67,425
|
|
|
|
330,849
|
|
|
|
203,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
35,677
|
|
|
|
15,176
|
|
|
|
84,990
|
|
|
|
46,978
|
|
Product
development
|
|
|
26,495
|
|
|
|
15,626
|
|
|
|
67,837
|
|
|
|
43,416
|
|
General
and administrative
|
|
|
27,503
|
|
|
|
12,463
|
|
|
|
69,134
|
|
|
|
37,104
|
|
Amortization
of intangible assets
|
|
|
25,864
|
|
|
|
8,284
|
|
|
|
58,127
|
|
|
|
23,209
|
|
In-process
research and development
|
|
|
269
|
|
|
|
-
|
|
|
|
35,820
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
115,808
|
|
|
|
51,549
|
|
|
|
315,908
|
|
|
|
150,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
29,002
|
|
|
|
15,876
|
|
|
|
14,941
|
|
|
|
52,524
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
585
|
|
|
|
3,467
|
|
|
|
8,890
|
|
|
|
4,189
|
|
Interest
expense
|
|
|
(34,852 |
) |
|
|
(4,028 |
) |
|
|
(63,276 |
) |
|
|
(12,359 |
) |
Other
income (expense), net
|
|
|
(873 |
) |
|
|
(187 |
) |
|
|
6,068
|
|
|
|
(876 |
) |
Total
other income (expense)
|
|
|
(35,140 |
) |
|
|
(748 |
) |
|
|
(48,318 |
) |
|
|
(9,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(6,138 |
) |
|
|
15,128
|
|
|
|
(33,377 |
) |
|
|
43,478
|
|
Income
tax benefit (provision)
|
|
|
2,692
|
|
|
|
(5,913 |
) |
|
|
13,231
|
|
|
|
(16,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(3,446 |
) |
|
$ |
9,215
|
|
|
$ |
(20,146 |
) |
|
$ |
26,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.11 |
) |
|
$ |
0.36
|
|
|
$ |
(0.69 |
) |
|
$ |
1.05
|
|
Diluted
|
|
$ |
(0.11 |
) |
|
$ |
0.35
|
|
|
$ |
(0.69 |
) |
|
$ |
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,415
|
|
|
|
25,552
|
|
|
|
29,239
|
|
|
|
25,343
|
|
Diluted
|
|
|
30,415
|
|
|
|
26,336
|
|
|
|
29,239
|
|
|
|
26,251
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
85,135
|
|
|
$ |
361,405
|
|
Short-term
investments, held to maturity
|
|
|
-
|
|
|
|
34,583
|
|
Accounts
receivable, net
|
|
|
320,973
|
|
|
|
109,924
|
|
Inventories
|
|
|
185,752
|
|
|
|
52,496
|
|
Deferred
income taxes, net
|
|
|
27,291
|
|
|
|
20,916
|
|
Other
|
|
|
47,303
|
|
|
|
17,121
|
|
Total
current assets
|
|
|
666,454
|
|
|
|
596,445
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
317,626
|
|
|
|
88,689
|
|
Intangible
assets, net
|
|
|
703,961
|
|
|
|
112,682
|
|
Goodwill
|
|
|
1,218,378
|
|
|
|
126,266
|
|
Prepaid
debt fees
|
|
|
23,026
|
|
|
|
13,161
|
|
Deferred
income taxes, net
|
|
|
96,366
|
|
|
|
47,400
|
|
Other
|
|
|
16,832
|
|
|
|
3,879
|
|
Total
assets
|
|
$ |
3,042,643
|
|
|
$ |
988,522
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
204,918
|
|
|
$ |
35,803
|
|
Accrued
expenses
|
|
|
47,103
|
|
|
|
6,402
|
|
Wages
and benefits payable
|
|
|
63,912
|
|
|
|
24,214
|
|
Taxes
payable
|
|
|
19,119
|
|
|
|
1,717
|
|
Current
portion of long-term debt
|
|
|
356,798
|
|
|
|
-
|
|
Current
portion of warranty
|
|
|
17,687
|
|
|
|
7,999
|
|
Unearned
revenue
|
|
|
19,410
|
|
|
|
27,449
|
|
Total
current liabilities
|
|
|
728,947
|
|
|
|
103,584
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,255,376
|
|
|
|
469,324
|
|
Warranty
|
|
|
18,438
|
|
|
|
10,149
|
|
Pension
plan benefits
|
|
|
65,538
|
|
|
|
-
|
|
Deferred
income taxes, net
|
|
|
210,772
|
|
|
|
-
|
|
Other
obligations
|
|
|
66,071
|
|
|
|
14,483
|
|
Total
liabilities
|
|
|
2,345,142
|
|
|
|
597,540
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
605,182
|
|
|
|
351,018
|
|
Accumulated
other comprehensive income, net
|
|
|
74,089
|
|
|
|
1,588
|
|
Retained
earnings
|
|
|
18,230
|
|
|
|
38,376
|
|
Total
shareholders' equity
|
|
|
697,501
|
|
|
|
390,982
|
|
Total
liabilities and shareholders' equity
|
|
$ |
3,042,643
|
|
|
$ |
988,522
|
|
The
accompanying notes are an integral part of
these condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(20,146 |
) |
|
$ |
26,488
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
85,329
|
|
|
|
34,266
|
|
In-process
research and development
|
|
|
35,820
|
|
|
|
-
|
|
Employee
stock plans income tax benefits
|
|
|
2,020
|
|
|
|
12,686
|
|
Excess
tax benefits from stock-based compensation
|
|
|
-
|
|
|
|
(9,108 |
) |
Stock-based
compensation
|
|
|
8,998
|
|
|
|
6,811
|
|
Amortization
of prepaid debt fees
|
|
|
12,034
|
|
|
|
3,766
|
|
Deferred
income taxes, net
|
|
|
(47,418 |
) |
|
|
2,784
|
|
Other,
net
|
|
|
(944 |
) |
|
|
(1,208 |
) |
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(15,231 |
) |
|
|
9,416
|
|
Inventories
|
|
|
2,801
|
|
|
|
(8,549 |
) |
Trade
payables, accrued expenses and taxes payable
|
|
|
24,199
|
|
|
|
3,622
|
|
Wages
and benefits payable
|
|
|
(6,510 |
) |
|
|
1,088
|
|
Unearned
revenue
|
|
|
(8,390 |
) |
|
|
5,758
|
|
Warranty
|
|
|
764
|
|
|
|
3,328
|
|
Other
long-term obligations
|
|
|
6,022
|
|
|
|
(237 |
) |
Effect
of foreign exchange rate changes
|
|
|
11,307
|
|
|
|
-
|
|
Other,
net
|
|
|
(1,001 |
) |
|
|
(3,923 |
) |
Net
cash provided by operating activities
|
|
|
89,654
|
|
|
|
86,988
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from the maturities of investments, held to maturity
|
|
|
35,000
|
|
|
|
-
|
|
Purchases
of investments held to maturity
|
|
|
-
|
|
|
|
(170,434 |
) |
Acquisitions
of property, plant and equipment
|
|
|
(30,173 |
) |
|
|
(25,878 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(1,716,138 |
) |
|
|
(7,321 |
) |
Other,
net
|
|
|
53
|
|
|
|
1,507
|
|
Net
cash used in investing activities
|
|
|
(1,711,258 |
) |
|
|
(202,126 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
1,159,027
|
|
|
|
345,000
|
|
Payments
on debt
|
|
|
(37,278 |
) |
|
|
(42,703 |
) |
Issuance
of common stock
|
|
|
243,146
|
|
|
|
13,375
|
|
Excess
tax benefits from stock-based compensation
|
|
|
-
|
|
|
|
9,108
|
|
Prepaid
debt fees
|
|
|
(22,009 |
) |
|
|
(8,759 |
) |
Net
cash provided by financing activities
|
|
|
1,342,886
|
|
|
|
316,021
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
2,448
|
|
|
|
-
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(276,270 |
) |
|
|
200,883
|
|
Cash
and cash equivalents at beginning of period
|
|
|
361,405
|
|
|
|
33,638
|
|
Cash
and cash equivalents at end of period
|
|
$ |
85,135
|
|
|
$ |
234,521
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
2,277
|
|
|
$ |
3,452
|
|
Non-cash
affects of acquisitions
|
|
|
-
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
12,642
|
|
|
$ |
3,215
|
|
Interest
(net of amounts capitalized)
|
|
|
50,449
|
|
|
|
5,738
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 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 and nine months ended September 30, 2007 and 2006, Condensed Consolidated
Balance Sheets as of September 30, 2007 and December 31, 2006 and Condensed
Consolidated Statements of Cash Flows for the nine months ended September 30,
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 where we do not
exercise significant influence are accounted for under the cost method. We
consider for consolidation any variable interest entity of which we are the
primary beneficiary. We have no investments in 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 (U.S. 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/A, as filed with the SEC on
September 13, 2007. The results of operations for the three and nine months
ended September 30, 2007 are not necessarily indicative of the results expected
for the full fiscal year or for any other fiscal period.
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris),
which is reported as our Actaris operating segment. The operating results of
this acquisition are included in our condensed consolidated financial statements
commencing on the date of acquisition (see Note 4).
Cash
and Cash Equivalents
We
consider all highly liquid instruments with remaining maturities of three months
or less at the date of acquisition to be cash equivalents. Cash equivalents
are
recorded at cost, which approximates fair value.
Short-Term
Investments
Investment
securities are classified into one of three categories: held to maturity,
trading or available for sale. Debt securities that we have the intent and
ability to hold to maturity are classified as held to maturity and are reported
at amortized cost (including amortization of premium or accretion of discount).
Investment purchases and sales are accounted for on a trade date basis. Market
value at a period end is based upon quoted market prices for each security.
Realized gains and losses are determined using the specific identification
method and are included in earnings. Premiums and discounts are recognized
in
interest income using the effective interest method over the terms of the
securities. At September 30, 2007, we held no short-term investments. The U.S.
government and federal agency investments held at December 31, 2006 matured
during the first quarter of 2007.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded
on
the 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 other income (expense) in the Condensed
Consolidated Statement of Operations. We classify cash flows from our derivative
programs as cash flows from operating activities in the Condensed Consolidated
Statements of Cash Flows. Derivatives are not used for trading or speculative
purposes.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded for invoices issued to customers in accordance with
our
contractual arrangements. Interest and late payment fees are minimal. Unbilled
receivables are recorded when revenues are recognized upon product shipment
or
service delivery and invoicing occurs at a later date. The allowance for
doubtful accounts is based on our historical experience of bad debts and our
specific review of outstanding receivables at period end. Accounts receivable
are written-off against the allowance when we believe an account, or a portion
thereof, is no longer collectible.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method.
Cost includes raw materials and labor, plus applied direct and indirect costs,
including those costs required 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. 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.
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
amortized over the term of the applicable lease, including renewable periods
if
reasonably assured, or over the useful lives, whichever is shorter. Costs
related to internally developed software and software purchased for internal
uses are capitalized in accordance with Statement of Position 98-1,
Accounting for Costs of Computer Software Developed or Obtained for
Internal
Use, and are amortized over the estimated useful lives of the assets.
Repair and maintenance costs are expensed as incurred. We have no major planned
maintenance activities.
We
review
long-lived assets for impairment whenever events or circumstances indicate
the
carrying amount of an asset may not be recoverable. If there was an indication
of impairment, management would prepare an estimate of future undiscounted
cash
flows expected to result from the use of the asset over its remaining economic
life and its eventual disposition. If these cash flows were less than the
carrying amount of the asset, an impairment loss would be recognized to write
down the asset to its estimated fair value. Assets held for sale are classified
within other current assets in the Condensed Consolidated Balance Sheets
and are
reported at the lower of the carrying amount or fair value less costs to
sell,
and are no longer depreciated. During the three and nine months ended September
30, 2007, we reduced the carrying value of assets held for sale to reflect
the
fair value less costs to sell by $900,000 and $1.6 million, which was recorded
in general and administrative expense.
Prepaid
Debt Fees
Prepaid
debt fees represent the capitalized direct costs incurred related to the
issuance of debt and are recorded as noncurrent assets. These costs are
amortized to interest expense over the lives of the respective borrowings using
the effective interest method. 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.
Business
Combinations
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
as
of the date of acquisition. The residual balance of the purchase price,
after
fair value allocations to all identified assets and liabilities, represents
goodwill. Amounts allocated to in-process research and development (IPR&D)
are expensed in the period of acquisition.
Goodwill
and Intangible Assets
Goodwill
is tested for impairment as of October 1 of each year, or more frequently,
if a
significant impairment indicator occurs under the guidance of SFAS 142,
Goodwill and Other Intangible Assets. Goodwill is assigned to our
reporting units based on the expected benefit from the synergies arising from
each business combination, determined by using certain financial metrics,
including the incremental discounted cash flows associated with each reporting
unit. Intangible assets with a finite life are amortized based on estimated
discounted cash flows. Intangible assets are tested for impairment when events
or changes in circumstances indicate the carrying value may not be recoverable.
We use estimates in determining 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 September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
36,190
|
|
|
$ |
16,954
|
|
|
$ |
18,148
|
|
|
$ |
15,276
|
|
Actaris
acquisition opening balance/adjustments
|
|
|
(57 |
) |
|
|
-
|
|
|
|
17,833
|
|
|
|
-
|
|
New
product warranties
|
|
|
1,974
|
|
|
|
829
|
|
|
|
3,703
|
|
|
|
2,148
|
|
Other
changes/adjustments to warranties
|
|
|
1,433
|
|
|
|
2,591
|
|
|
|
4,687
|
|
|
|
7,103
|
|
Claims
activity
|
|
|
(3,786 |
) |
|
|
(1,770 |
) |
|
|
(8,663 |
) |
|
|
(5,923 |
) |
Effect
of change in foreign exchange rates
|
|
|
371
|
|
|
|
-
|
|
|
|
417
|
|
|
|
-
|
|
Ending
balance, September 30
|
|
|
36,125
|
|
|
|
18,604
|
|
|
|
36,125
|
|
|
|
18,604
|
|
Less:
current portion of warranty
|
|
|
(17,687 |
) |
|
|
(9,141 |
) |
|
|
(17,687 |
) |
|
|
(9,141 |
) |
Long-term
warranty
|
|
$ |
18,438
|
|
|
$ |
9,463
|
|
|
$ |
18,438
|
|
|
$ |
9,463
|
|
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $3.4 million for
the three months ended September 30, 2007 and 2006 and approximately $8.4
million and $9.3 million for the nine months ended September 30, 2007 and 2006,
respectively. Warranty expense is classified within cost of
revenues.
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 and related estimates
could materially affect our financial position and results of
operations.
Defined
Benefit Pension Plans
As
part
of the Actaris acquisition, we assumed Actaris’ defined benefit pension plans.
Actaris sponsors both funded and unfunded non-U.S. defined benefit pension
plans. SFAS 87, Employers' Accounting for Pensions, as
amended by SFAS 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans, requires the assets acquired and liabilities
assumed in a business combination to include a liability for the projected
benefit obligation in excess of plan assets or an asset for plan assets in
excess of the projected benefit obligation. SFAS 158 also requires employers
to
recognize on a prospective basis the funded status of their defined benefit
pension plans on their consolidated balance sheet and recognize as a component
of other comprehensive income (loss), net of tax, the actuarial gains or losses,
prior service costs or credits and transition assets or obligations, if any,
that arise during the period but are not recognized as components of net
periodic benefit cost. See Note 9 for additional disclosures required by
SFAS 158.
Income
Taxes
We
account for income taxes using the asset and liability method. Under this
method, deferred income taxes are recorded for the temporary differences between
the financial reporting basis and tax basis of our assets and liabilities.
These
deferred taxes are measured using the tax rates expected to be in effect when
the temporary differences reverse. We establish a valuation allowance for a
portion of the deferred tax asset when we believe it is more likely than not
that a portion of the deferred tax asset will not be utilized. Deferred tax
liabilities have been recorded on undistributed earnings of foreign subsidiaries
that are not permanently reinvested.
We
adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation 48, Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB 109 (FIN 48) on January 1, 2007. This interpretation
addresses the determination of whether tax benefits claimed or expected to
be
claimed on a tax return should be recorded in the financial statements. Under
FIN 48, we may recognize the tax benefit from an uncertain tax position only
if
it is more likely than not that the tax position will be sustained upon
examination by the taxing authorities based solely on the technical merits
of
the position. The tax benefits recognized in the financial statements from
such
a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement. FIN
48
requires increased disclosures, provides guidance on the derecognition,
classification, interest and penalties on income taxes and the accounting in
interim periods (see Note 10). 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 with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on
the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using an average rate for the relevant reporting period. Translation adjustments
resulting from this process are included, net of tax, in accumulated other
comprehensive income (loss) in shareholders’ equity. Gains and losses that arise
from exchange rate fluctuations for balances that are not denominated in the
functional currency are included in the Condensed Consolidated Statements of
Operations. Currency gains and losses of intercompany balances deemed to be
long-term in nature and considered to be hedges of the net investment in foreign
subsidiaries are included, net of tax, in accumulated other comprehensive income
(loss) in shareholders’ equity.
Revenue
Recognition
Revenues
consist primarily of hardware sales, software license fees, software
implementation, project management services installation, consulting and
post-sale maintenance support.
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 collect without
being contingent upon the delivery/performance of additional items.
Revenues
are recognized when (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services have been rendered, (3) the sales price is
fixed or determinable and (4) collectibility is reasonably assured. Hardware
revenues are generally recognized at the time of shipment, receipt by customer,
or, if applicable, upon completion of customer acceptance provisions. For
software arrangements with multiple elements, revenue recognition is also
dependent upon the availability of vendor-specific objective evidence (VSOE)
of
fair value for each of the elements. The lack of VSOE, or the existence of
extended payment terms or other inherent risks, may affect the timing of revenue
recognition for software arrangements. If implementation services are essential
to a software arrangement, revenue is recognized using either the
percentage-of-completion methodology if project costs can be estimated or the
completed contract methodology if project costs can not be reliably estimated.
Hardware and software post-sale maintenance support fees are recognized ratably
over the life of the related service contract.
Unearned
revenue is recorded for products or services that have been paid for by a
customer, but for which the criteria for revenue recognition have not been
met
as of the balance sheet date. Shipping and handling costs and incidental
expenses, which are commonly referred to as "out-of-pocket" expenses, billed
to
customers are recorded as revenue, with the associated costs charged to cost
of
revenues. We record sales, use and value added taxes billed to our customers
on
a net basis in our Condensed Consolidated Statements of Operations.
Product
and Software Development Costs
Product
and software development costs primarily include payroll and third party
contracting fees. For software we develop to be marketed or sold, SFAS 86,
Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed (as amended), requires the capitalization of development
costs after technological feasibility is established. Due to the relatively
short period of time between technological feasibility and the completion of
product and software development, and the immaterial nature of these costs,
we
generally do not capitalize product and software development
expenses.
Earnings
Per Share
Basic
earnings per share (EPS) is calculated using net income (loss) divided by the
weighted average common shares outstanding during the period. We compute
dilutive EPS by adjusting the weighted average number of common shares
outstanding to consider the effect of potentially dilutive securities, including
stock-based awards and our convertible senior subordinated notes (convertible
notes). Shares calculated to be contingently issuable are included in the
dilutive EPS calculation as of the beginning of the period when all necessary
conditions have been satisfied. For periods in which we report a net loss,
diluted net loss per share is the same as basic net loss per share.
Stock-Based
Compensation
SFAS
123(R), Share-Based Payment (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.
Reclassifications
As
a
result of the Actaris acquisition, certain prior year balances have been
reclassified to conform to the current year presentation. Such reclassifications
did not affect total revenues, operating income, net income, total current
or
long term assets or liabilities or net cash provided by operating
activities.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
and
expands disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, on a prospective basis. We
are
currently evaluating the impact of the adoption of SFAS 157 on our
consolidated 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. This statement permits entities to choose to measure many financial
assets and liabilities at fair value. Unrealized gains and losses on items
for
which the fair value option has been elected would be reported in net income.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We
have not yet determined if we will elect to apply any of the provisions of
SFAS
159 or what effect the adoption of SFAS 159 would have, if any, on our
consolidated financial statements.
Note
2: Earnings Per Share and Capital Structure
The
following table sets forth the computation of basic and diluted
EPS.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands, except per share data)
|
|
Net
income (loss) available to common shareholders
|
|
$ |
(3,446 |
) |
|
$ |
9,215
|
|
|
$ |
(20,146 |
) |
|
$ |
26,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding - Basic
|
|
|
30,415
|
|
|
|
25,552
|
|
|
|
29,239
|
|
|
|
25,343
|
|
Dilutive
effect of stock-based awards
|
|
|
-
|
|
|
|
784
|
|
|
|
-
|
|
|
|
908
|
|
Weighted
average number of shares outstanding - Diluted
|
|
|
30,415
|
|
|
|
26,336
|
|
|
|
29,239
|
|
|
|
26,251
|
|
Basic
earnings (loss) per common share
|
|
$ |
(0.11 |
) |
|
$ |
0.36
|
|
|
$ |
(0.69 |
) |
|
$ |
1.05
|
|
Diluted
earnings (loss) per common share
|
|
$ |
(0.11 |
) |
|
$ |
0.35
|
|
|
$ |
(0.69 |
) |
|
$ |
1.01
|
|
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 the 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 costs 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 September 30, 2007 and 2006, we
had
stock-based awards outstanding of approximately 1.6 million and 2.3 million
at
weighted average option exercise prices of $36.56 and $29.19, respectively.
Approximately 759,000 and 785,000 of stock-based awards were excluded from
the
calculation of diluted EPS for three and nine months ended September 30, 2007
and approximately 368,000 and 150,000 of stock-based awards were excluded from
the calculation of diluted EPS for the three and nine months ended September
30,
2006, because they were anti-dilutive. These stock-based awards could be
dilutive in future periods.
In
August
2006, we issued $345 million of convertible senior subordinated notes that,
if
converted in the future, would have a potentially dilutive effect on our EPS.
We
are required, pursuant to the indenture for the convertible notes, to settle
the
principal amount of the convertible notes in cash and may elect to settle the
remaining conversion obligation (stock price in excess of conversion price)
in
cash, shares or a combination. The effect on diluted EPS is calculated under
the
net share settlement method in accordance with the FASB’s Emerging Issues Task
Force (EITF) 04-8, The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share. Under the net share settlement method, we
include the amount of shares it would take to satisfy the conversion obligation,
assuming that all of the convertible notes are converted. The average closing
price of our common stock 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 and nine months ended September 30, 2007 exceeded the
conversion price of $65.16 and therefore, approximately 1.2 million and 521,000
shares, respectively, would have been dilutive if we had net income and included
the dilutive shares in the calculation of diluted EPS. These shares could be
dilutive in future periods.
On
March
1, 2007, we issued 4.1 million shares of common stock, no par value, for net
proceeds of $225.3 million, which were used to partially fund the
acquisition of Actaris on April 18, 2007.
We
have
authorized 10 million shares of preferred stock with no par value. In the event
of a liquidation, dissolution or winding up of the affairs of the corporation,
whether voluntary or involuntary, the holders of any outstanding stock will
be
entitled to be paid a preferential amount per share to be determined by the
Board of Directors prior to any payment to holders of common stock. Shares
of
preferred stock may be converted into common stock based on terms, conditions,
rates and subject to such adjustments as set by the Board of Directors. There
was no preferred stock issued or outstanding at September 30, 2007 and
December 31, 2006.
Note
3: Certain Balance Sheet Components
Accounts receivable, net
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Trade
(net of allowance for doubtful accounts of $7,031 and
$589)
|
|
$ |
312,601
|
|
|
$ |
100,162
|
|
Unbilled
revenue
|
|
|
8,372
|
|
|
|
9,762
|
|
Total
accounts receivable, net
|
|
$ |
320,973
|
|
|
$ |
109,924
|
|
A
summary
of the allowance for doubtful accounts activity is as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
5,679
|
|
|
$ |
469
|
|
|
$ |
589
|
|
|
$ |
598
|
|
Actaris
acquisition opening balance
|
|
|
741
|
|
|
|
-
|
|
|
|
5,632
|
|
|
|
-
|
|
Provision
(benefit) for doubtful accounts
|
|
|
623
|
|
|
|
(18 |
) |
|
|
1,013
|
|
|
|
(123 |
) |
Accounts
charged off
|
|
|
(231 |
) |
|
|
-
|
|
|
|
(390 |
) |
|
|
(24 |
) |
Effect
of change in exchange rates
|
|
|
219
|
|
|
|
-
|
|
|
|
187
|
|
|
|
-
|
|
Ending
balance, September 30
|
|
$ |
7,031
|
|
|
$ |
451
|
|
|
$ |
7,031
|
|
|
$ |
451
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of the inventory balances is as follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Materials
|
|
$ |
93,561
|
|
|
$ |
30,843
|
|
Work
in process
|
|
|
16,259
|
|
|
|
5,220
|
|
Finished
goods
|
|
|
75,932
|
|
|
|
16,433
|
|
Total
inventories
|
|
$ |
185,752
|
|
|
$ |
52,496
|
|
Property, plant and equipment, net
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Machinery
and equipment
|
|
$ |
184,532
|
|
|
$ |
75,571
|
|
Computers
and purchased software
|
|
|
60,957
|
|
|
|
40,368
|
|
Buildings,
furniture and improvements
|
|
|
132,314
|
|
|
|
45,670
|
|
Land
|
|
|
40,830
|
|
|
|
2,482
|
|
Total
cost
|
|
|
418,633
|
|
|
|
164,091
|
|
Accumulated
depreciation
|
|
|
(101,007 |
) |
|
|
(75,402 |
) |
Property,
plant and equipment, net
|
|
$ |
317,626
|
|
|
$ |
88,689
|
|
Depreciation
expense was $12.3 million and $3.7 million for the three months ended September
30, 2007 and 2006, respectively. Depreciation expense was $27.2 million and
$11.1 million for the nine months ended September 30, 2007 and 2006,
respectively.
Note
4: Business Combinations
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris)
for €800 million (approximately $1.1 billion) plus the retirement of $626.9
million of debt. The acquisition was financed with a $1.2 billion credit
facility (credit facility), $225.3 million in net proceeds from the sale of
4.1
million shares of common stock and cash on hand. The acquisition included all
of
Actaris’ electricity, gas and water meter manufacturing and sales operations,
located primarily outside of North America, and provided geographic expansion
of
our business and product offerings. The purchase price was a significant premium
to the assets acquired and liabilities assumed, due to expected synergies from
products and markets of the combined entity, which resulted in a substantial
amount of goodwill.
The
preliminary purchase price, net of cash acquired of $29.5 million, is summarized
as follows (in thousands):
Cash
consideration, net of cash acquired
|
|
$ |
1,697,535
|
|
Direct
transaction costs
|
|
|
18,726
|
|
Total
purchase price
|
|
$ |
1,716,261
|
|
We
have
made preliminary allocations of the purchase price to the assets acquired
and
liabilities assumed based on estimated fair value assessments; however, we
are
still completing those assessments, including an analysis of the discounted
cash
flows. Once we finalize the fair values, we may have changes in the following
areas: tangible and intangible assets, goodwill, commitments and contingencies,
liabilities, deferred taxes, uncertain tax positions and restructuring
activities. The following information reflects our preliminary allocation
of the
purchase price.
|
|
April
18, 2007
|
|
|
|
|
|
|
Fair
Value
|
|
|
Useful
Life
|
|
|
|
(in
thousands)
|
|
|
(in
years)
|
|
|
|
|
|
|
|
|
Fair
value of tangible assets acquired and liabilities assumed,
net
|
|
$ |
13,378
|
|
|
|
|
In-process
research and development (IPR&D)
|
|
|
35,820
|
|
|
|
|
Identified
intangible assets - amortizable
|
|
|
|
|
|
|
|
Core-developed
technology
|
|
|
222,705
|
|
|
|
9-15
|
|
Customer
relationships
|
|
|
277,026
|
|
|
|
20
|
|
Trademarks
and tradenames
|
|
|
118,417
|
|
|
|
10
|
|
Other
|
|
|
5,094
|
|
|
|
1
|
|
Goodwill
|
|
|
1,043,821
|
|
|
|
|
|
Total
net assets acquired
|
|
$ |
1,716,261
|
|
|
|
|
|
Significant
tangible assets acquired consisted of accounts receivable, inventory and
property, plant and equipment. Significant liabilities assumed consisted of
accounts payable, accrued expenses, wages and benefits payable, deferred taxes
and pension benefit obligations.
Our
acquisition of Actaris resulted in $35.8 million of IPR&D expense,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended
to
make key enhancements and improve functionality of our residential and
commercial and industrial meters. We value IPR&D using the income approach,
which uses the present value of the projected cash flows that are expected
to be
generated. The risk adjusted discount rate was 12 percent, which was based
on an
industry composite of weighted average cost of capital, with certain premiums
for equity risk and size, and the uncertainty associated with the completion
of
the development effort and subsequent commercialization.
The
preliminary values assigned to the identified intangible assets were estimated
using the income approach. Under the income approach, the fair value reflects
the present value of the projected cash flows that are expected to be generated.
The intangible assets will be amortized using the estimated discounted cash
flows assumed in the valuation models.
The
residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. For tax purposes,
goodwill is not deductible, as we acquired the stock of Actaris.
The
following pro forma results are based on the individual historical results
of
Itron, Inc. and Actaris (prior to the acquisition on April 18, 2007) with
adjustments to give effect to the combined operations as if the acquisition
had
occurred on January 1, 2006. The significant adjustments were as
follows:
o
|
Increased
amortization expense related to the acquired identified definite
lived
intangible assets of $16.0 million and $48.2 million for the three
and nine months ended September 30, 2006 and $23.3 million for the
nine
months ended September 30, 2007.
|
o
|
Additional
net interest expense of $12.7 million and $34.6 million for the three
and
nine months ended September 30, 2006 and $12.6 million for the nine
months
ended September 30, 2007, related to the borrowings incurred upon
acquisition, net of the retirement of Actaris’ previous
debt.
|
o
|
Adjustment
to revise the income tax provision utilizing Itron’s estimated statutory
rate of 31%.
|
The
pro
forma results are intended for information purposes only and do not purport
to
represent what the combined companies’ results of operations or financial
position would actually have been had the transaction in fact occurred at an
earlier date or project the results for any future date or period.
|
|
Pro
Forma
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended September 30,
|
|
|
|
September
30, 2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands, except per share data)
|
|
Revenues
|
|
$ |
411,179
|
|
|
$ |
1,307,732
|
|
|
$ |
1,196,815
|
|
Net
income (loss)
|
|
$ |
4,686
|
|
|
$ |
(10,693 |
) |
|
$ |
9,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
|
$ |
0.16
|
|
|
$ |
(0.35 |
) |
|
$ |
0.34
|
|
Diluted earnings
(loss) per share
|
|
$ |
0.15
|
|
|
$ |
(0.35 |
) |
|
$ |
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares assumed outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,639
|
|
|
|
30,122
|
|
|
|
29,430
|
|
Diluted
|
|
|
30,423
|
|
|
|
30,122
|
|
|
|
30,338
|
|
Note
5: Identified Intangible Assets
The
gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
|
At
September 30, 2007
|
|
|
At
December 31, 2006
|
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(in
thousands)
|
|
Core-developed
technology
|
|
$ |
394,219
|
|
|
$ |
(110,733 |
) |
|
$ |
283,486
|
|
|
$ |
162,930
|
|
|
$ |
(77,783 |
) |
|
$ |
85,147
|
|
Customer
contracts and relationships
|
|
|
307,240
|
|
|
|
(18,753 |
) |
|
|
288,487
|
|
|
|
16,888
|
|
|
|
(7,931 |
) |
|
|
8,957
|
|
Trademarks
and tradenames
|
|
|
149,748
|
|
|
|
(21,770 |
) |
|
|
127,978
|
|
|
|
26,210
|
|
|
|
(12,022 |
) |
|
|
14,188
|
|
Other
|
|
|
31,527
|
|
|
|
(27,517 |
) |
|
|
4,010
|
|
|
|
25,840
|
|
|
|
(21,450 |
) |
|
|
4,390
|
|
Total
identified intangible assets
|
|
$ |
882,734
|
|
|
$ |
(178,773 |
) |
|
$ |
703,961
|
|
|
$ |
231,868
|
|
|
$ |
(119,186 |
) |
|
$ |
112,682
|
|
A
summary
of the identifiable intangible asset account activity is as
follows:
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Beginning
balance, intangible assets, gross
|
|
$ |
231,868
|
|
|
$ |
211,328
|
|
Intangible
assets acquired (adjusted)
|
|
|
622,022
|
|
|
|
9,458
|
|
Effect
of change in exchange rates
|
|
|
28,844
|
|
|
|
404
|
|
Ending
balance, intangible assets, gross
|
|
$ |
882,734
|
|
|
$ |
221,190
|
|
The
increase in identified intangible assets in 2007 was primarily the result
of the
Actaris acquisition on April 18, 2007. In addition, a $1.2 million adjustment
to
the intangible assets was recorded for the Flow Metrix, Inc. (Flow Metrix)
acquisition based on the final determination of fair values of intangible
assets
acquired, which occurred in November 2006. Identified intangible assets
increased in 2006 as a result of the Quantum Consulting, Inc. (Quantum) and
ELO
Sistemas e Tecnologia Ltda. (ELO) acquisitions. Intangible assets are recorded
in the functional currency of our foreign subsidiaries; therefore, the carrying
amount of intangible assets can 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. Intangible asset amortization expense was $25.9 million and
$8.3 million for the three months ended September 30, 2007 and 2006,
respectively. Intangible asset amortization expense was $58.1 million and
$23.2 million for the nine months ended September 30, 2007 and 2006,
respectively.
Estimated
future annual amortization expense is as follows:
Years
Ending December 31,
|
|
Estimated
Annual Amortization
|
|
|
|
|
(in
thousands)
|
|
2007
(amount remaining at September 30, 2007)
|
|
$ |
25,850
|
|
2008
|
|
|
|
115,140
|
|
2009
|
|
|
|
105,287
|
|
2010
|
|
|
|
83,450
|
|
2011
|
|
|
|
72,652
|
|
Beyond
2011
|
|
|
301,582
|
|
|
Total
identified intangible assets, net
|
|
$ |
703,961
|
|
Note
6: Goodwill
The
following table reflects goodwill allocated to each operating segment during
the
nine months ended September 30, 2007 and 2006, respectively.
|
|
Itron
North
America
|
|
|
Actaris
|
|
|
Total
Company
|
|
|
|
(in
thousands)
|
|
Goodwill
balance, January 1, 2006
|
|
$ |
116,032
|
|
|
$ |
-
|
|
|
$ |
116,032
|
|
Goodwill
acquired
|
|
|
3,015
|
|
|
|
-
|
|
|
|
3,015
|
|
Effect
of change in exchange rates
|
|
|
539
|
|
|
|
-
|
|
|
|
539
|
|
Goodwill
balance, September 30, 2006
|
|
$ |
119,586
|
|
|
$ |
-
|
|
|
$ |
119,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance, January 1, 2007
|
|
$ |
126,266
|
|
|
$ |
-
|
|
|
$ |
126,266
|
|
Goodwill
acquired/adjusted
|
|
|
980
|
|
|
|
1,043,821
|
|
|
|
1,044,801
|
|
Effect
of change in exchange rates
|
|
|
1,853
|
|
|
|
45,458
|
|
|
|
47,311
|
|
Goodwill
balance, September 30, 2007
|
|
$ |
129,099
|
|
|
$ |
1,089,279
|
|
|
$ |
1,218,378
|
|
The
increase in goodwill in 2007 was primarily the result of the Actaris acquisition
on April 18, 2007. In addition, adjustments to goodwill were recorded during
the
first quarter of 2007 based on the final determination of fair values of
intangible assets acquired in the Flow Metrix acquisition, which occurred in
November 2006. Goodwill increased in 2006 as a result of the Quantum
acquisition, which occurred in the second quarter of 2006. Goodwill is recorded
in the functional currency of our foreign subsidiaries; therefore, 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
September 30,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Credit
facility
|
|
|
|
|
|
|
USD
denominated term loan
|
|
$ |
602,075
|
|
|
$ |
-
|
|
EUR
denominated term loan
|
|
|
450,271
|
|
|
|
-
|
|
GBP
denominated term loan
|
|
|
90,426
|
|
|
|
-
|
|
Convertible
senior subordinated notes
|
|
|
345,000
|
|
|
|
345,000
|
|
Senior
subordinated notes
|
|
|
124,402
|
|
|
|
124,324
|
|
|
|
|
1,612,174
|
|
|
|
469,324
|
|
Current
portion of debt
|
|
|
(356,798 |
) |
|
|
-
|
|
Total
long-term debt
|
|
$ |
1,255,376
|
|
|
$ |
469,324
|
|
Credit
Facility
The
Actaris acquisition was financed in part by a $1.2 billion credit facility.
The
credit facility was comprised of a $605.1 million first lien U.S. dollar
denominated term loan; a €335 million first lien euro denominated term
loan; a £50 million first lien pound sterling denominated term loan
(collectively the term loans); and a $115 million multicurrency revolving
line-of-credit (revolver). Interest rates on the credit facility are based
on the respective borrowing’s denominated LIBOR rate (U.S. dollar,
euro or pound sterling) or the Wells Fargo Bank, National Association’s prime
rate, plus an additional margin subject to factors including our consolidated
leverage ratio. Scheduled amortization of principal payments is 1% per year
(0.25% quarterly) with an excess cash flow provision for additional annual
principal repayment requirements. Maturities of the term loans and multicurrency
revolver are seven years and six years. Prepaid debt fees are amortized using
the effective interest method through the term loans’ earliest maturity date, as
defined by the credit agreement. The credit facility is secured by substantially
all of the assets of our operating subsidiaries, except our foreign
subsidiaries, and contains covenants, which contain certain financial ratios
and
place restrictions on the incurrence of debt, the payment of dividends, certain
investments and mergers. We were in compliance with these debt covenants
at
September 30, 2007. At September 30, 2007, there were no borrowings outstanding
under the revolver and $51.4 million was utilized by outstanding standby
letters
of credit resulting in $63.6 million being available for additional
borrowings.
This
credit facility replaced an original $185 million seven-year senior secured
credit facility we entered into in 2004. We repaid $24.7 million remaining
on
our 2004 senior secured term loan during the first quarter of 2006.
Senior
Subordinated Notes
Our
senior subordinated notes (subordinated notes) consist of $125 million aggregate
principal amount of 7.75% notes, issued in May 2004 and due in 2012. The
subordinated notes were discounted to a price of 99.265 to yield 7.875%.
The
discount on the subordinated notes is accreted resulting in a balance of
$124.4
million at September 30, 2007. Prepaid debt fees are amortized over the life
of
the subordinated notes. The subordinated notes are registered with the SEC
and
are generally transferable. Fixed interest payments of $4.8 million are
required every six months, in May and November. The notes are subordinated
to
our credit facility (senior secured borrowings) and are guaranteed by all
of our
operating subsidiaries, except our foreign subsidiaries. The subordinated
notes
contain covenants, which place restrictions on the incurrence of debt, the
payment of dividends, certain investments and mergers. The Actaris acquisition
and the associated financing were not prohibited under these covenants. We
were
in compliance with these debt covenants at September 30, 2007. Some or all
of
the subordinated notes may be redeemed at our option at any time on or after
May
15, 2008, at their principal amount plus a specified premium price of 103.875%,
decreasing each year thereafter.
Convertible
Senior Subordinated Notes
On
August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC
and
are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in EITF 05-02, The Meaning of
“Conventional Convertible Debt Instruments” in Issue 00-19, as the number
of shares, or cash, to be received by the holders was not fixed at the inception
of the obligation. We have concluded that the conversion feature of our
convertible notes does not require bifurcation from the host contract in
accordance with SFAS 133, as the conversion feature is indexed to the Company’s
own stock and would be classified within stockholders’ equity if it were a
freestanding instrument as provided by EITF 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.
The
convertible notes may be converted 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 $78.19, which is
120% of
the conversion price of $65.16, for at least 20 trading days in the
30
consecutive trading day period ending on the last trading day of
the
preceding fiscal quarter;
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
o
|
during
the five business days after any five consecutive trading day period
in
which the trading price of the convertible notes for each day was
less
than 98% of the conversion value of the convertible
notes;
|
o
|
if
the convertible notes are called for
redemption;
|
o
|
if
a fundamental change occurs; or
|
o
|
upon
the occurrence of defined corporate
events.
|
The
convertible notes also contain purchase options, at the option of the holders,
which may require us to repurchase all or a portion of the convertible notes
on
August 1, 2011, August 1, 2016 and August 1, 2021 at the principal amount,
plus
accrued and unpaid interest.
Upon
conversion, the principal amount of the convertible notes will be settled
in
cash and, at our option, the remaining conversion obligation (stock price
in
excess of conversion price) may be settled in cash, shares or a combination.
The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our foreign subsidiaries, all of which are wholly owned. The convertible
notes contain covenants, which place restrictions on the incurrence of debt
and
certain mergers. The Actaris acquisition and the associated financing were
not
prohibited under these covenants. We were in compliance with these debt
covenants at September 30, 2007.
At
September 30, 2007, the contingent conversion threshold of our convertible
notes
was exceeded, since the closing sale price per share of our common stock
exceeded $78.19, which is 120% of the conversion price of $65.16, for at
least
20 trading days in the 30 consecutive trading day period ending September
30,
2007. As a result, the notes are convertible at the option of the holder
as of
September 30, 2007, and accordingly, the aggregate principal amount of the
convertible notes is included in the current portion of long-term debt; and
since our debt fees are amortized through the date of the earliest conversion
option, we expensed approximately $6.6 million of the remaining prepaid debt
fees associated with the convertible notes.
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 $23.0 million and $13.2 million at September 30, 2007 and
December 31, 2006, respectively. Accrued interest expense was $4.6 million
and $4.8 million at September 30, 2007 and December 31, 2006,
respectively.
Note
8: Derivative Financial Instruments and Hedging Activities
As
a
result of the Actaris acquisition, we now have a greater exposure to foreign
currency exchange rate fluctuations and interest rate changes. As part of our
risk management strategy, we are using derivative instruments to hedge certain
foreign currency and interest rate exposures. Our objective is to offset gains
and losses resulting from these exposures with losses and gains on the
derivative contracts used to hedge them, thereby reducing the impact of
volatility on earnings or protecting fair values of assets and
liabilities.
During
the third quarter of 2007, we entered into an interest rate swap to convert
our
€335 million euro denominated variable rate term loan to a fixed-rate debt
obligation at a rate of 6.59% for the term of the debt, including expected
prepayments. This variable-to-fixed interest rate swap is considered a highly
effective cash-flow hedge. Consequently, changes in the fair value of the
interest rate swap are recorded as a component of other comprehensive income
(loss) and are recognized in earnings when the hedged item affects earnings.
The
cash flow hedge is expected to be highly effective in achieving offsetting
cash
flows attributable to the hedged risk during the term of the hedge. The amounts
paid or received on the hedge are recognized as adjustments to interest expense.
The notional amount of the swap was $450.3 million (€318.3 million) and the fair
value, recorded as a long-term liability, was $2.1 million at September 30,
2007. The amount of net losses expected to be reclassified into earnings in
the
next twelve months is approximately $663,000.
During
the third quarter of 2007, we entered into a cross currency interest rate
swap
for the purpose of converting our £50 million pound sterling denominated
term loan and the pound sterling LIBOR variable interest rate to a U.S.
dollar
denominated term loan and a U.S. LIBOR interest rate (plus an additional
margin
of 210 basis points), which was not designated as an accounting hedge.
The cross
currency interest rate swap has terms similar to the pound sterling denominated
term loan, including expected prepayments. This instrument is intended
to reduce
the impact of volatility between the pound sterling and the U.S. dollar.
Therefore, gains and losses are recorded in other income (expense), as
an offset
to the gains (losses) on the underlying term loan revaluation to the U.S.
dollar. The amounts paid or received on the interest rate swap are recognized
as
adjustments to interest expense. The fair value of the cross currency swap,
recorded as a long-term asset, was $1.9 million. The pound sterling denominated
notional amount of the cross currency interest rate swap was $90.4 million
(£44.8 million) at September 30, 2007. The U.S. denominated notional amount
was $89.5 million at September 30, 2007. We expect the interest rate swap
to
reduce interest expense by $868,000 during the next twelve
months.
Effective
June 29, 2007, we designated certain portions of our foreign currency
denominated term loans hedges of our net investment in foreign operations.
Losses of $22.8 million ($14.1 million after-tax) were reported as a component
of accumulated other comprehensive income (loss) within the unrealized
translation adjustment, which represented effective hedges of net investments,
for the three and nine months ended September 30, 2007. We had no hedge
ineffectiveness.
On
February 25, 2007, we signed a stock purchase agreement to acquire Actaris
and
entered into foreign currency range forward contracts (transactions where put
options were sold and call options were purchased) to reduce our exposure to
declines in the value of the U.S. dollar and pound sterling relative to the
euro
denominated purchase price. Under SFAS 133, the Actaris stock purchase agreement
is considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts can not be designated as fair value hedges. In April
2007, we completed the acquisition of Actaris and realized a $2.8 million gain
in other income (expense) from the termination of the foreign currency range
forward contracts.
Counterparties
to currency exchange and interest rate derivatives consist of major
international financial institutions. We continually monitor our positions
and
the credit ratings of the counterparties involved. While we may be exposed
to
potential losses due to the credit risk of non-performance by these
counterparties, losses are not anticipated.
Note
9: Pension Plan Benefits
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary and
Indonesia. These plans were assumed with the acquisition of Actaris. The defined
benefit obligation is calculated annually by using the projected unit credit
method and is updated quarterly. The measurement date for the pension plans
was
October 3, 2007, for the period ended September 30, 2007.
Our
general funding policy for these qualified pension plans is to contribute
amounts at least sufficient to satisfy regulatory funding standards of the
respective countries for each plan. Assuming that actual plan asset returns
are
consistent with our expected rate of return in 2007 and beyond, and that
interest rates remain constant, we expect to contribute approximately $55,000
in
the fourth quarter of 2007 to our defined benefit pension plans.
The
following table summarizes the benefit obligation, plan assets and funded status
of the defined benefit plans and amounts recognized in the Condensed
Consolidated Balance Sheet at September 30, 2007.
|
|
April
18, 2007 Through
|
|
|
|
September
30, 2007
|
|
|
|
(in
thousands)
|
|
Change
in benefit obligation:
|
|
|
|
Benefit
obligation at beginning of period (April 18, 2007)
|
|
$ |
71,452
|
|
Service
cost
|
|
|
928
|
|
Interest
cost
|
|
|
1,456
|
|
Settlements
and curtailments
|
|
|
(227 |
) |
Benefits
paid
|
|
|
(1,725 |
) |
Other
– foreign exchange rate changes
|
|
|
3,082
|
|
Benefit
obligation at end of period
|
|
|
74,966
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
Fair
value of plan assets at beginning of period (April 18,
2007)
|
|
|
6,420
|
|
Actual
return of plan assets
|
|
|
107
|
|
Company
contributions
|
|
|
42
|
|
Benefits
paid
|
|
|
(78 |
) |
Other
– foreign exchange rate changes
|
|
|
264
|
|
Fair
value of plan assets at end of period
|
|
|
6,755
|
|
Ending
balance at fair value (net pension plan benefit liability)
|
|
$ |
68,211
|
|
Amounts
recognized on the Condensed Consolidated Balance Sheet consist of:
|
|
At
September 30, 2007
|
|
|
|
(in
thousands)
|
|
Current
portion of pension plan liability in wages and benefits
payable
|
|
$ |
3,052
|
|
Long-term
portion of pension plan liability
|
|
|
65,538
|
|
Plan
assets in other long term assets
|
|
|
(379 |
) |
Net
pension plan benefit liability
|
|
$ |
68,211
|
|
The
total
accumulated benefit obligation for our defined benefit pension plans was $70.3
million at September 30, 2007.
Net
periodic pension benefit costs for our plans include the following
components:
|
|
Three
Months Ended
|
|
|
April
18, 2007 Through
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$ |
520
|
|
|
$ |
928
|
|
Interest
cost
|
|
|
812
|
|
|
|
1,456
|
|
Expected
return on plan assets
|
|
|
(60 |
) |
|
|
(107 |
) |
Settlements
and curtailments
|
|
|
(134 |
) |
|
|
(227 |
) |
Net
periodic benefit cost
|
|
$ |
1,138
|
|
|
$ |
2,050
|
|
The
significant actuarial weighted average assumptions used in determining the
benefit obligations and net periodic benefit cost for our benefit plans are
as
follows:
|
|
Period
Ended
|
|
|
|
September
30, 2007
|
|
Actuarial
assumptions used to determine benefit obligations at end of
period:
|
|
|
|
Discount
rate
|
|
|
4.99%
|
|
Expected
annual rate of compensation increase
|
|
|
3.15%
|
|
Actuarial
assumptions used to determine net periodic benefit cost for the
period:
|
|
|
|
|
Discount
rate
|
|
|
4.99%
|
|
Expected
rate of return on plan assets
|
|
|
3.77%
|
|
Expected
annual rate of compensation increase
|
|
|
3.15%
|
|
We
determine a discount rate for each individual defined benefit pension plan
based
on the estimated duration of each plan’s liabilities. For our euro denominated
defined benefit pension plans, we match the plans’ expected future benefit
payments against the Merrill Lynch Euro Corp. yield curve. Discount rates for
our defined benefit pension plans denominated in another currencies are selected
using a similar methodology applied on high quality corporate bond yield data
labeled in that currency.
Our
expected rate of return on plan assets is derived from a study of actual
historic returns achieved and anticipated future long-term performance of plan
assets. While the study gives consideration to recent trust performance and
historical returns, the assumption represents a long-term prospective
return.
We
have
one plan in which the fair value of plan assets exceeds the accumulated benefit
obligation. Therefore, for the pension plans in which the accumulated
benefit obligations exceed the fair value of plan assets, our total obligation
and the fair value of plan assets were as follows:
|
|
At
September 30, 2007
|
|
|
|
(in
thousands)
|
|
Projected
benefit obligation
|
|
$ |
73,442
|
|
Accumulated
benefit obligation
|
|
$ |
68,918
|
|
Fair
value of plan assets
|
|
$ |
4,851
|
|
The
target allocation for our pension plans assets is as follows:
|
|
At
September 30, 2007
|
|
Asset
category:
|
|
|
|
Short-term
investments and cash
|
|
|
7%
|
|
Insurance
funds
|
|
|
93%
|
|
Our
asset
investment strategy focuses on maintaining a portfolio using primarily insurance
funds, which are accounted for as investments and measured at fair value, in
order to achieve our long-term investment objectives on a risk adjusted basis.
Our actual invested positions in various securities change over time based
on
short and longer-term investment opportunities. Strategic pension plan asset
allocations are determined by the objective to achieve an investment return,
which together with the contributions paid, is sufficient to maintain reasonable
control over the various funding risks of the plans. Based upon current market
and economic environments, the actual asset allocation may periodically be
permitted to deviate from policy targets.
Annual
benefit payments, including amounts to be paid from Company assets for unfunded
plans, and reflecting expected future service, as appropriate, are expected
to
be paid as follows:
|
|
Estimated
Annual
|
|
Year
Ending December 31,
|
|
Benefit
Payments
|
|
|
|
(in
thousands)
|
|
2007
(amount remaining at September 30, 2007)
|
|
$ |
907
|
|
2008
|
|
|
3,345
|
|
2009
|
|
|
3,566
|
|
2010
|
|
|
4,140
|
|
2011
|
|
|
4,266
|
|
2012
- 2016
|
|
|
21,710
|
|
Note
10: Income Taxes
Our
actual income tax rates typically differ from the federal statutory rate of
35%,
and can vary from period to period, due to fluctuations in operating results,
new or revised tax legislation and accounting pronouncements, changes in the
level of business performed in domestic and international jurisdictions,
IPR&D, research credits and state income taxes. We estimate that our 2007
actual income tax rate will be approximately 40%.
Our
actual income tax rates were 44% and 40% for three and nine months ended
September 30, 2007. During 2007, IPR&D expense, which is not deductible and
therefore increases our actual tax rate, was offset by a benefit from
legislative reductions in tax rates in Germany and the United Kingdom. The
German Business Tax Reform 2008 was finalized on August 17, 2007, which
reduced the German tax rate from approximately 39% to 30%. On July 19, 2007,
the
United Kingdom enacted the Finance Act of 2007, which lowered the main
corporate tax rate from 30% to 28%.
At
September 30, 2006, our estimated annual effective income tax rate was 42%,
resulting in an actual income tax rate of 39% for the three and nine months
ended September 30, 2006. At September 30, 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 September 30,
2006.
Effective
January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). 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 on
January 1, 2007. As of September 30, 2007, the amount of unrecognized tax
benefits was $36.6 million of which approximately $29.3 million was
acquired as part of the Actaris acquisition on April 18, 2007. We do not expect
any reasonably possible material changes to the estimated amount of liabilities
associated with our unrecognized tax benefits through September 30, 2008. The
amounts of unrecognized tax benefits that would affect our actual tax rate
as of
January 1, 2007 and September 30, 2007 were $6.1 million and $7.5 million,
respectively.
We
are
subject to income tax in the U.S. federal jurisdiction and numerous foreign
and
state jurisdictions. The Internal Revenues Service has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Tax years subsequent to 1995 remain open to examination by the major
tax
jurisdictions to which we are subject. We reflect in our provision for
income taxes interest and penalties related to unrecognized tax benefits.
Accrued interest and penalties totaled $9,000 at January 1, 2007. At September
30, 2007, accrued interest was $4.3 million and accrued penalties were
$3.6 million. The increase from January 1, 2007 to September 30, 2007 was
the result of the Actaris acquisition on April 18, 2007.
Note
11: Stock-Based Compensation
We
record
stock-based compensation expense under SFAS 123(R) for awards of stock options,
our ESPP and issuance of restricted and unrestricted stock awards and units.
We
expense stock-based compensation using the straight-line method over the
requisite service period. For the three months ended September 30, 2007 and
2006, stock-based compensation expense was $3.1 million and $2.7 million,
before a related income tax benefit of $809,000 and $493,000, respectively.
For
the nine months ended September 30, 2007 and 2006, stock-based compensation
expense was $9.0 million and $6.8 million, before a related income tax
benefit of $2.2 million and $1.0 million, respectively.
The
fair
value of stock options and ESPP awards issued during the three and nine months
ended September 30, 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
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
(1)
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Dividend
yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected
volatility
|
|
|
-
|
|
|
|
43.2 |
% |
|
|
38.4 |
% |
|
|
43.1 |
% |
Risk-free
interest rate
|
|
|
-
|
|
|
|
4.9 |
% |
|
|
4.6 |
% |
|
|
4.9 |
% |
Expected
life (years)
|
|
|
-
|
|
|
|
4.59
|
|
|
|
4.94
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Dividend
yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected
volatility
|
|
|
26.2 |
% |
|
|
43.5 |
% |
|
|
24.9 |
% |
|
|
46.6 |
% |
Risk-free
interest rate
|
|
|
5.0 |
% |
|
|
5.1 |
% |
|
|
5.0 |
% |
|
|
4.6 |
% |
Expected
life (years)
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
0.25
|
|
(1)
There were no
Employee Stock Options granted for the three months ended September 30,
2007.
Expected
price volatility is based on a combination of historical volatility of our
common stock and the implied volatility of our traded options for the related
vesting period. We believe this combined approach is reflective of current
and
historical market conditions and an appropriate indicator of expected
volatility. The risk-free interest rate is the rate available as of the award
date on zero-coupon U.S. government issues with a remaining term equal to the
expected life of the award. The expected life is the weighted average expected
life for the entire award based on the fixed period of time between the date
the
award is granted and the date the award is fully exercised. Factors considered
in estimating the expected life include historical experience of similar awards,
with consideration for the contractual terms, vesting schedules and expectations
of future employee behavior. We have not paid dividends in the past and do
not
plan to pay any dividends in the foreseeable future.
Subject
to stock splits, dividends and other similar events, 5,875,000 shares of common
stock are reserved and authorized for issuance under our Amended and Restated
2000 Stock Incentive Plan, of which 990,456 shares remain available for issuance
at September 30, 2007. In addition, of the authorized shares under the plan,
no
more than 1.0 million shares can be issued as non-stock options (awards).
Awards consist of restricted stock units, restricted stock awards and the Board
of Directors’ unrestricted stock awards. Shares remaining for issuance as awards
were 822,274 at September 30, 2007.
Stock
Option Plans
Stock
options to purchase the Company’s common stock are granted with an exercise
price equal to the fair market value of the stock on the date of grant upon
approval by our Board of Directors. Options generally become exercisable in
three or four equal installments beginning one year from the date of grant
and
generally expire 10 years from the date of grant.
The
fair
value of each stock option granted is estimated on the date of grant using
the
Black-Scholes option-pricing model. No stock options were granted during the
three month period ended September 30, 2007. For the nine months ended September
30, 2007, we issued 200,000 shares with weighted average fair values of $27.21.
For the three and nine months ended September 30, 2006, we issued 548,200 and
578,200 shares with a weighted average fair value of $20.74 and $21.00,
respectively. Compensation expense related to stock options recognized under
SFAS 123(R) for the three months ended September 30, 2007 and 2006 was $2.4
million and $2.3 million, respectively, and $7.2 million and
$5.9 million for the nine months ended September 30, 2007 and 2006,
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 nine months ended September 30, 2007 and
2006 is as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
per
Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
(years)
|
|
|
(in
thousands)
|
|
Outstanding,
January 1, 2006
|
|
|
2,443
|
|
|
$ |
21.24
|
|
|
|
6.89
|
|
|
$ |
46,189
|
|
Granted
|
|
|
578
|
|
|
|
49.29
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(674 |
) |
|
|
17.33
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(59 |
) |
|
|
32.47
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2006
|
|
|
2,288
|
|
|
$ |
29.19
|
|
|
|
7.69
|
|
|
$ |
61,096
|
|
Exercisable
and expected to vest, September 30, 2006
|
|
|
2,119
|
|
|
$ |
28.11
|
|
|
|
7.58
|
|
|
$ |
58,858
|
|
Exercisable,
September 30, 2006
|
|
|
1,059
|
|
|
$ |
17.77
|
|
|
|
6.17
|
|
|
$ |
40,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2007
|
|
|
2,225
|
|
|
$ |
29.78
|
|
|
|
7.46
|
|
|
$ |
49,469
|
|
Granted
|
|
|
200
|
|
|
|
66.94
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(737 |
) |
|
|
23.76
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(50 |
) |
|
|
44.01
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(7 |
) |
|
|
42.62
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2007
|
|
|
1,631
|
|
|
$ |
36.56
|
|
|
|
7.29
|
|
|
$ |
92,142
|
|
Exercisable
and expected to vest, September 30, 2007
|
|
|
1,472
|
|
|
$ |
35.18
|
|
|
|
7.14
|
|
|
$ |
85,208
|
|
Exercisable,
September 30, 2007
|
|
|
839
|
|
|
$ |
24.18
|
|
|
|
5.98
|
|
|
$ |
57,825
|
|
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 September 30, 2007, total
unrecognized stock-based compensation expense related to nonvested stock
options, net of estimated forfeitures, was approximately $11.5 million, which
is
expected to be recognized over a weighted average period of approximately 20
months.
Restricted
Stock Units
During
2007, we issued restricted stock units (RSU’s) with a cliff vesting period of
three years from the anniversary of the grant date as set forth in the award
agreements. Upon vesting, the RSU’s are converted into shares of the Company’s
stock on a one-for-one basis and issued to employees, subject to any deferral
elections made by a recipient or required by the plan. The RSU’s are reserved in
the recipients’ name at the grant date and issued upon vesting. The Company is
entitled to an income tax deduction in an amount equal to the taxable income
reported by the holder upon vesting of the RSU’s.
Total
compensation expense relating to RSU’s was $264,000 and $389,000 for the three
and nine months ended September 30, 2007, respectively. Unrecognized
compensation cost in connection with the RSU’s, net of estimated forfeitures,
totaled $2.7 million at September 30, 2007. The cost is expected to be
recognized over three years from the date of grant. Grants of RSU’s were
1,500 and 62,167 for the three and nine months ended September 30, 2007. There
were no RSU’s that were forfeited and returned to the plan at September 30,
2007.
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 that are attainable are established at the beginning of the
performance period based on a percentage of the participant’s base salary and
the fair market value of the Company’s common stock on the first business day of
the performance period. The maximum restricted stock units attainable at the
beginning of the year for the 2007 performance period consisted of 57,523
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 $225,000 and $171,000 for the three months ended September 30, 2007 and
2006, respectively. Total compensation expense recognized for the LTPP plan
was
$883,000 and $345,000 for the nine months ended September 30, 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 September 30, 2007 and
2006, we issued 1,728 and 2,232 shares of unrestricted stock to our Board of
Directors, with a weighted average grant-date fair value of $78.00 and $60.35,
respectively. The expense related to these awards for the three months ended
September 30, 2007 and 2006 was $134,000 and $135,000, respectively. During
the
nine months ended September 30, 2007 and 2006, we issued 4,938 and 5,628 shares
of unrestricted stock to our Board of Directors, with a weighted average
grant-date fair value of $61.61 and $50.59, respectively. The expense related
to
these awards for the nine months ended September 30, 2007 and 2006 was
$304,000 and $285,000, respectively. All awards were fully vested and expensed
when granted.
Employee
Stock Purchase Plan
Eligible
employees who have completed three months of service, work more than 20 hours
each week and are employed more than five months in any calendar year are
eligible to participate in our ESPP. Employees who own 5% or more of our common
stock are not eligible to participate in the ESPP. Under the terms of the ESPP,
eligible employees can choose payroll deductions each year of up to 10% of
their
regular cash compensation. Such deductions are applied toward the discounted
purchase price of our common stock. The purchase price of the common stock
is
85% of the fair market value of the stock at the end of each fiscal quarter.
Under the ESPP, we sold 32,920 and 38,701 shares to employees in the nine months
ended September 30, 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 nine months ended September
30, 2007 and 2006 was $9.78 and $8.64, respectively. The expense related to
ESPP
recognized under SFAS 123(R) for the three months ended September 30, 2007
and
2006 was $85,000 and $95,000, respectively. The expense related to ESPP
recognized under SFAS 123(R) for the nine months ended September 30, 2007 and
2006 was $277,000 and $287,000, respectively. We had no unrecognized
compensation cost at September 30, 2007 associated with the awards issued under
the ESPP.
Note
12: Commitments and Contingencies
Guarantees
and Indemnifications
Under
FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we
record a liability for certain types of guarantees and indemnifications for
agreements entered into or amended subsequent to December 31, 2002. We had
no such guarantees or indemnifications as of September 30, 2007 and
December 31, 2006.
We
maintain bid and performance bonds for certain customers. Bonds in force were
$26.1 million and $6.0 million at September 30, 2007 and December 31,
2006, respectively. The increase in bid bonds was primarily the result of the
Actaris acquisition. 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. In addition to the outstanding standby
letters of credit under our credit facility, our Actaris operating segment
has
unsecured revolving lines of credit totaling €7.2 million, £1.0 million and
$6.4 million, denominated in euros, pound sterling and U.S. dollars,
respectively, with total outstanding standby letters of credit of $2.1 million
at September 30, 2007. The total outstanding amounts of standby letters of
credit were $53.5 million and $23.0 million at September 30, 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.
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. Legal contingencies at September 30, 2007 and
December 31, 2006 were not material to our financial condition or results of
operations.
Note
13: Segment Information
Our
operating segments consist of Itron North America and Actaris, which reflect
the
way we are currently managing our business. The Itron North America operating
segment represents our operations prior to the Actaris acquisition, which are
primarily located in North America. The Actaris operating segment represents
the
operations of the Actaris acquisition, which are primarily located outside
of
North America. The operating segment information as set forth below, for the
three and nine months ended September 30, 2007 and 2006 is based on this new
segment reporting structure. In accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information, historical segment
information has been restated from the segment information previously provided
to conform to the segment reporting structure after the April 2007 Actaris
acquisition. At December 31, 2006, we reported three operating segments
reflecting the major product lines at that time.
We
have
three measures of segment performance: revenue, gross profit and operating
income. There were no intersegment revenues. Corporate operating expenses,
interest income, interest expense, other income (expense) and income tax expense
(benefit) are not allocated to the segments, nor included in the measure of
segment profit or loss. Assets and liabilities are not used in our measurement
of segment performance and, therefore, are not allocated to our segments.
Substantially all depreciation expense is allocated to our
segments.
Segment
Products
Itron
North America
|
Electricity
meters with and without automated meter reading (AMR); gas and water
AMR
modules; handheld, mobile and network AMR data collection technologies;
advanced metering infrastructure (AMI) technologies; software,
installation, implementation, maintenance support and other
services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water
and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad
and
smart card; two-way gas prepayment systems using smart card; AMR
data
collection technologies; installation, implementation, maintenance
support
and other services.
|
Segment
Information
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
153,170
|
|
|
$ |
164,706
|
|
|
$ |
452,993
|
|
|
$ |
484,069
|
|
Actaris
|
|
|
280,864
|
|
|
|
-
|
|
|
|
530,511
|
|
|
|
-
|
|
Total
Company
|
|
$ |
434,034
|
|
|
$ |
164,706
|
|
|
$ |
983,504
|
|
|
$ |
484,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
61,533
|
|
|
$ |
67,425
|
|
|
$ |
186,224
|
|
|
$ |
203,231
|
|
Actaris
|
|
|
83,277
|
|
|
|
-
|
|
|
|
144,625
|
|
|
|
-
|
|
Total
Company
|
|
$ |
144,810
|
|
|
$ |
67,425
|
|
|
$ |
330,849
|
|
|
$ |
203,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
18,157
|
|
|
$ |
21,990
|
|
|
$ |
51,053
|
|
|
$ |
72,084
|
|
Actaris
|
|
|
19,296
|
|
|
|
-
|
|
|
|
(12,354 |
) |
|
|
-
|
|
Corporate
unallocated
|
|
|
(8,451 |
) |
|
|
(6,114 |
) |
|
|
(23,758 |
) |
|
|
(19,560 |
) |
Total
Company
|
|
|
29,002
|
|
|
|
15,876
|
|
|
|
14,941
|
|
|
|
52,524
|
|
Total
other income (expense)
|
|
|
(35,140 |
) |
|
|
(748 |
) |
|
|
(48,318 |
) |
|
|
(9,046 |
) |
Income
(loss) before income taxes
|
|
$ |
(6,138 |
) |
|
$ |
15,128
|
|
|
$ |
(33,377 |
) |
|
$ |
43,478
|
|
No
single
customer represented more than 10% of total Company or individual segment
revenues for the three and nine months ended September 30,
2007.
One
customer, Progress Energy, accounted for 11% and 18% of total Company and Itron
North America segment revenues for the three and nine months ended September
30,
2006, respectively.
Revenues
by region were as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Revenues
by region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
214,684
|
|
|
$ |
720
|
|
|
$ |
403,134
|
|
|
$ |
2,730
|
|
United
States and Canada
|
|
|
148,856
|
|
|
|
151,906
|
|
|
|
433,751
|
|
|
|
456,869
|
|
Other
|
|
|
70,494
|
|
|
|
12,080
|
|
|
|
146,619
|
|
|
|
24,470
|
|
Total
revenues
|
|
$ |
434,034
|
|
|
$ |
164,706
|
|
|
$ |
983,504
|
|
|
$ |
484,069
|
|
Note
14: Other Comprehensive Income
Other
comprehensive income is reflected as an increase to shareholders’ equity and is
not reflected in our results of operations. Other comprehensive income during
the reporting periods, net of tax, was as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Net
income (loss)
|
|
$ |
(3,446 |
) |
|
$ |
9,215
|
|
|
$ |
(20,146 |
) |
|
$ |
26,488
|
|
Change
in foreign currency translation adjustments, net of tax
|
|
|
94,174
|
|
|
|
89
|
|
|
|
87,864
|
|
|
|
770
|
|
Unrealized
loss on derivative instruments, net of tax of $9,626
|
|
|
(15,448 |
) |
|
|
-
|
|
|
|
(15,448 |
) |
|
|
-
|
|
Reclassification
adjustment for losses realized in net earnings, net of tax of
$53
|
|
|
85
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
Total
other comprehensive income
|
|
$ |
75,365
|
|
|
$ |
9,304
|
|
|
$ |
52,355
|
|
|
$ |
27,258
|
|
Accumulated
other comprehensive income, net of tax, was approximately $74.1 million and
$1.6
million at September 30, 2007 and December 31, 2006, respectively, and
consisted of the adjustments for foreign currency translation and the unrealized
loss on our derivative instruments as indicated above.
Note
15: Consolidating Financial Information
Our
senior subordinated notes and convertible notes, issued by Itron, Inc. (the
Issuer) are guaranteed by our U.S. domestic subsidiaries, which are 100% owned,
and any future domestic subsidiaries. The guarantees are joint and several,
full, complete and unconditional. At the date of issuance, our convertible
notes
were not guaranteed by any of our subsidiaries; however, any future subsidiaries
that guarantee our obligations under the senior subordinated notes will
guarantee our convertible notes, joint and several, full, complete and
unconditional.
There
are
currently no restrictions on the ability of the subsidiary guarantors to
transfer funds to the parent company.
The
Actaris acquisition on April 18, 2007, consisted primarily of foreign entities,
which are considered non-guarantor subsidiaries of our senior subordinated
notes
and convertible notes. However, one legal entity located in the United States
is
considered a guarantor of the senior subordinated notes and convertible notes.
We have allocated a portion of our credit facility borrowings to this U.S.
legal
entity, based on its relative equity as compared with the entire Actaris
acquisition.
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
141,031
|
|
|
$ |
15,081
|
|
|
$ |
286,960
|
|
|
$ |
(9,038 |
) |
|
$ |
434,034
|
|
Cost
of revenues
|
|
|
84,674
|
|
|
|
12,045
|
|
|
|
201,492
|
|
|
|
(8,987 |
) |
|
|
289,224
|
|
Gross
profit
|
|
|
56,357
|
|
|
|
3,036
|
|
|
|
85,468
|
|
|
|
(51 |
) |
|
|
144,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
11,715
|
|
|
|
1,738
|
|
|
|
22,224
|
|
|
|
-
|
|
|
|
35,677
|
|
Product
development
|
|
|
16,844
|
|
|
|
591
|
|
|
|
9,111
|
|
|
|
(51 |
) |
|
|
26,495
|
|
General
and administrative
|
|
|
12,798
|
|
|
|
998
|
|
|
|
13,707
|
|
|
|
-
|
|
|
|
27,503
|
|
Amortization
of intangible assets
|
|
|
6,636
|
|
|
|
-
|
|
|
|
19,228
|
|
|
|
-
|
|
|
|
25,864
|
|
In-process
research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
269
|
|
|
|
-
|
|
|
|
269
|
|
Total
operating expenses
|
|
|
47,993
|
|
|
|
3,327
|
|
|
|
64,539
|
|
|
|
(51 |
) |
|
|
115,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
8,364
|
|
|
|
(291 |
) |
|
|
20,929
|
|
|
|
-
|
|
|
|
29,002
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
30,462
|
|
|
|
(34 |
) |
|
|
2,156
|
|
|
|
(31,999 |
) |
|
|
585
|
|
Interest
expense
|
|
|
(32,648 |
) |
|
|
(3,276 |
) |
|
|
(30,927 |
) |
|
|
31,999
|
|
|
|
(34,852 |
) |
Other
income (expense), net
|
|
|
1,640
|
|
|
|
(488 |
) |
|
|
(2,025 |
) |
|
|
-
|
|
|
|
(873 |
) |
Total
other income (expense)
|
|
|
(546 |
) |
|
|
(3,798 |
) |
|
|
(30,796 |
) |
|
|
-
|
|
|
|
(35,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
7,818
|
|
|
|
(4,089 |
) |
|
|
(9,867 |
) |
|
|
-
|
|
|
|
(6,138 |
) |
Income
tax benefit (provision)
|
|
|
3,995
|
|
|
|
783
|
|
|
|
(2,086 |
) |
|
|
-
|
|
|
|
2,692
|
|
Equity
in earnings (losses) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
(15,259 |
) |
|
|
745
|
|
|
|
-
|
|
|
|
14,514
|
|
|
|
-
|
|
Net
loss
|
|
$ |
(3,446 |
) |
|
$ |
(2,561 |
) |
|
$ |
(11,953 |
) |
|
$ |
14,514
|
|
|
$ |
(3,446 |
) |
Condensed
Consolidating Statement of Operations
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
156,867
|
|
|
$ |
-
|
|
|
$ |
15,209
|
|
|
$ |
(7,370 |
) |
|
$ |
164,706
|
|
Cost
of revenues
|
|
|
93,079
|
|
|
|
-
|
|
|
|
11,365
|
|
|
|
(7,163 |
) |
|
|
97,281
|
|
Gross
profit
|
|
|
63,788
|
|
|
|
-
|
|
|
|
3,844
|
|
|
|
(207 |
) |
|
|
67,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
13,640
|
|
|
|
-
|
|
|
|
1,536
|
|
|
|
-
|
|
|
|
15,176
|
|
Product
development
|
|
|
14,983
|
|
|
|
-
|
|
|
|
849
|
|
|
|
(206 |
) |
|
|
15,626
|
|
General
and administrative
|
|
|
11,519
|
|
|
|
-
|
|
|
|
944
|
|
|
|
-
|
|
|
|
12,463
|
|
Amortization
of intangible assets
|
|
|
7,741
|
|
|
|
-
|
|
|
|
543
|
|
|
|
-
|
|
|
|
8,284
|
|
Total
operating expenses
|
|
|
47,883
|
|
|
|
-
|
|
|
|
3,872
|
|
|
|
(206 |
) |
|
|
51,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
15,905
|
|
|
|
-
|
|
|
|
(28 |
) |
|
|
(1 |
) |
|
|
15,876
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,560
|
|
|
|
-
|
|
|
|
29
|
|
|
|
(122 |
) |
|
|
3,467
|
|
Interest
expense
|
|
|
(3,961 |
) |
|
|
-
|
|
|
|
(190 |
) |
|
|
123
|
|
|
|
(4,028 |
) |
Other
income (expense), net
|
|
|
(154 |
) |
|
|
-
|
|
|
|
(33 |
) |
|
|
-
|
|
|
|
(187 |
) |
Total
other income (expense)
|
|
|
(555 |
) |
|
|
-
|
|
|
|
(194 |
) |
|
|
1
|
|
|
|
(748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
15,350
|
|
|
|
-
|
|
|
|
(222 |
) |
|
|
-
|
|
|
|
15,128
|
|
Income
tax (provision) benefit
|
|
|
(6,125 |
) |
|
|
-
|
|
|
|
212
|
|
|
|
-
|
|
|
|
(5,913 |
) |
Equity
in losses of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
(10 |
) |
|
|
(464 |
) |
|
|
-
|
|
|
|
474
|
|
|
|
-
|
|
Net
income (loss)
|
|
$ |
9,215
|
|
|
$ |
(464 |
) |
|
$ |
(10 |
) |
|
$ |
474
|
|
|
$ |
9,215
|
|
Condensed
Consolidating Statement of Operations
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
422,370
|
|
|
$ |
29,616
|
|
|
$ |
561,929
|
|
|
$ |
(30,411 |
) |
|
$ |
983,504
|
|
Cost
of revenues
|
|
|
249,668
|
|
|
|
23,301
|
|
|
|
409,939
|
|
|
|
(30,253 |
) |
|
|
652,655
|
|
Gross
profit
|
|
|
172,702
|
|
|
|
6,315
|
|
|
|
151,990
|
|
|
|
(158 |
) |
|
|
330,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
37,427
|
|
|
|
3,187
|
|
|
|
44,376
|
|
|
|
-
|
|
|
|
84,990
|
|
Product
development
|
|
|
49,997
|
|
|
|
1,031
|
|
|
|
16,957
|
|
|
|
(148 |
) |
|
|
67,837
|
|
General
and administrative
|
|
|
39,733
|
|
|
|
1,806
|
|
|
|
27,595
|
|
|
|
-
|
|
|
|
69,134
|
|
Amortization
of intangible assets
|
|
|
19,900
|
|
|
|
-
|
|
|
|
38,227
|
|
|
|
-
|
|
|
|
58,127
|
|
In-process
research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
35,820
|
|
|
|
-
|
|
|
|
35,820
|
|
Total
operating expenses
|
|
|
147,057
|
|
|
|
6,024
|
|
|
|
162,975
|
|
|
|
(148 |
) |
|
|
315,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
25,645
|
|
|
|
291
|
|
|
|
(10,985 |
) |
|
|
(10 |
) |
|
|
14,941
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
62,095
|
|
|
|
10
|
|
|
|
3,191
|
|
|
|
(56,406 |
) |
|
|
8,890
|
|
Interest
expense
|
|
|
(59,361 |
) |
|
|
(5,522 |
) |
|
|
(54,809 |
) |
|
|
56,416
|
|
|
|
(63,276 |
) |
Other
income (expense), net
|
|
|
9,468
|
|
|
|
(408 |
) |
|
|
(2,992 |
) |
|
|
-
|
|
|
|
6,068
|
|
Total
other income (expense)
|
|
|
12,202
|
|
|
|
(5,920 |
) |
|
|
(54,610 |
) |
|
|
10
|
|
|
|
(48,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
37,847
|
|
|
|
(5,629 |
) |
|
|
(65,595 |
) |
|
|
-
|
|
|
|
(33,377 |
) |
Income
tax benefit
|
|
|
5,045
|
|
|
|
652
|
|
|
|
7,534
|
|
|
|
-
|
|
|
|
13,231
|
|
Equity
in losses of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
(63,038 |
) |
|
|
(1,829 |
) |
|
|
-
|
|
|
|
64,867
|
|
|
|
-
|
|
Net
loss
|
|
$ |
(20,146 |
) |
|
$ |
(6,806 |
) |
|
$ |
(58,061 |
) |
|
$ |
64,867
|
|
|
$ |
(20,146 |
) |
Condensed
Consolidating Statement of Operations
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
465,899
|
|
|
$ |
-
|
|
|
$ |
45,326
|
|
|
$ |
(27,156 |
) |
|
$ |
484,069
|
|
Cost
of revenues
|
|
|
271,763
|
|
|
|
-
|
|
|
|
35,845
|
|
|
|
(26,770 |
) |
|
|
280,838
|
|
Gross
profit
|
|
|
194,136
|
|
|
|
-
|
|
|
|
9,481
|
|
|
|
(386 |
) |
|
|
203,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
42,555
|
|
|
|
-
|
|
|
|
4,423
|
|
|
|
-
|
|
|
|
46,978
|
|
Product
development
|
|
|
42,863
|
|
|
|
-
|
|
|
|
1,097
|
|
|
|
(544 |
) |
|
|
43,416
|
|
General
and administrative
|
|
|
34,741
|
|
|
|
-
|
|
|
|
2,204
|
|
|
|
159
|
|
|
|
37,104
|
|
Amortization
of intangible assets
|
|
|
22,458
|
|
|
|
-
|
|
|
|
751
|
|
|
|
-
|
|
|
|
23,209
|
|
Total
operating expenses
|
|
|
142,617
|
|
|
|
-
|
|
|
|
8,475
|
|
|
|
(385 |
) |
|
|
150,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
51,519
|
|
|
|
-
|
|
|
|
1,006
|
|
|
|
(1 |
) |
|
|
52,524
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,268
|
|
|
|
-
|
|
|
|
123
|
|
|
|
(202 |
) |
|
|
4,189
|
|
Interest
expense
|
|
|
(12,061 |
) |
|
|
-
|
|
|
|
(501 |
) |
|
|
203
|
|
|
|
(12,359 |
) |
Other
income (expense), net
|
|
|
(830 |
) |
|
|
-
|
|
|
|
(46 |
) |
|
|
-
|
|
|
|
(876 |
) |
Total
other income (expense)
|
|
|
(8,623 |
) |
|
|
-
|
|
|
|
(424 |
) |
|
|
1
|
|
|
|
(9,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
42,896
|
|
|
|
-
|
|
|
|
582
|
|
|
|
-
|
|
|
|
43,478
|
|
Income
tax (provision) benefit
|
|
|
(17,633 |
) |
|
|
-
|
|
|
|
643
|
|
|
|
-
|
|
|
|
(16,990 |
) |
Equity
in earnings (losses) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
1,225
|
|
|
|
(507 |
) |
|
|
-
|
|
|
|
(718 |
) |
|
|
-
|
|
Net
income (loss)
|
|
$ |
26,488
|
|
|
$ |
(507 |
) |
|
$ |
1,225
|
|
|
$ |
(718 |
) |
|
$ |
26,488
|
|
Condensed
Consolidating Balance Sheet
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
17,645
|
|
|
$ |
1,288
|
|
|
$ |
66,202
|
|
|
$ |
-
|
|
|
$ |
85,135
|
|
Accounts
receivable, net |
|
|
87,376
|
|
|
|
7,976
|
|
|
|
225,621
|
|
|
|
-
|
|
|
|
320,973
|
|
Intercompany accounts receivable |
|
|
12,504
|
|
|
|
48
|
|
|
|
8,053
|
|
|
|
(20,605 |
) |
|
|
-
|
|
Inventories |
|
|
56,843
|
|
|
|
6,084
|
|
|
|
123,932
|
|
|
|
(1,107 |
) |
|
|
185,752
|
|
Deferred
income taxes, net |
|
|
19,960
|
|
|
|
925
|
|
|
|
6,406
|
|
|
|
-
|
|
|
|
27,291
|
|
Other |
|
|
14,613
|
|
|
|
1,216
|
|
|
|
31,474
|
|
|
|
-
|
|
|
|
47,303
|
|
Intercompany
other |
|
|
20,151
|
|
|
|
84,964
|
|
|
|
14,800
|
|
|
|
(119,915 |
) |
|
|
-
|
|
Total
current assets
|
|
|
229,092
|
|
|
|
102,501
|
|
|
|
476,488
|
|
|
|
(141,627 |
) |
|
|
666,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
85,584
|
|
|
|
12,759
|
|
|
|
219,283
|
|
|
|
-
|
|
|
|
317,626
|
|
Intangible
assets, net
|
|
|
83,612
|
|
|
|
-
|
|
|
|
620,349
|
|
|
|
-
|
|
|
|
703,961
|
|
Goodwill
|
|
|
|
114,462
|
|
|
|
5,907
|
|
|
|
1,098,009
|
|
|
|
-
|
|
|
|
1,218,378
|
|
Prepaid
debt fees
|
|
|
21,715
|
|
|
|
1,311
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,026
|
|
Deferred
income taxes, net
|
|
|
64,852
|
|
|
|
-
|
|
|
|
31,514
|
|
|
|
-
|
|
|
|
96,366
|
|
Investment
in subsidiaries
|
|
|
18,526
|
|
|
|
44,669
|
|
|
|
(46,022 |
) |
|
|
(17,173 |
) |
|
|
-
|
|
Intercompany
notes receivable
|
|
|
1,801,403
|
|
|
|
-
|
|
|
|
49,120
|
|
|
|
(1,850,523 |
) |
|
|
-
|
|
Other
|
|
|
|
4,682
|
|
|
|
(331 |
) |
|
|
12,481
|
|
|
|
-
|
|
|
|
16,832
|
|
Total
assets |
|
$ |
2,423,928
|
|
|
$ |
166,816
|
|
|
$ |
2,461,222
|
|
|
$ |
(2,009,323 |
) |
|
$ |
3,042,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables |
|
$ |
37,157
|
|
|
$ |
4,798
|
|
|
$ |
162,963
|
|
|
$ |
-
|
|
|
$ |
204,918
|
|
Accrued
expenses |
|
|
10,748
|
|
|
|
451
|
|
|
|
35,904
|
|
|
|
-
|
|
|
|
47,103
|
|
Intercompany
accounts payable |
|
|
5,083
|
|
|
|
3,350
|
|
|
|
12,172
|
|
|
|
(20,605 |
) |
|
|
-
|
|
Wages
and benefits payable |
|
|
18,319
|
|
|
|
1,647
|
|
|
|
43,946
|
|
|
|
-
|
|
|
|
63,912
|
|
Taxes
payable |
|
|
(5,390 |
) |
|
|
(1,189 |
) |
|
|
25,698
|
|
|
|
-
|
|
|
|
19,119
|
|
Current
portion of long-term debt |
|
|
355,898
|
|
|
|
900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
356,798
|
|
Current
portion of warranty |
|
|
7,672
|
|
|
|
200
|
|
|
|
9,815
|
|
|
|
-
|
|
|
|
17,687
|
|
Short-term
intercompany advances |
|
|
90,170
|
|
|
|
6,485
|
|
|
|
23,260
|
|
|
|
(119,915 |
) |
|
|
-
|
|
Unearned
revenue |
|
|
12,863
|
|
|
|
-
|
|
|
|
6,547
|
|
|
|
-
|
|
|
|
19,410
|
|
Total
current liabilities |
|
|
532,520
|
|
|
|
16,642
|
|
|
|
320,305
|
|
|
|
(140,520 |
) |
|
|
728,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,166,565
|
|
|
|
88,811
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,255,376
|
|
Warranty
|
|
|
|
10,163
|
|
|
|
-
|
|
|
|
8,275
|
|
|
|
-
|
|
|
|
18,438
|
|
Pension
plan benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
65,538
|
|
|
|
-
|
|
|
|
65,538
|
|
Deferred
income taxes, net
|
|
|
73
|
|
|
|
(717 |
) |
|
|
211,416
|
|
|
|
-
|
|
|
|
210,772
|
|
Intercompany
notes payable
|
|
|
1,442
|
|
|
|
47,260
|
|
|
|
1,801,821
|
|
|
|
(1,850,523 |
) |
|
|
-
|
|
Other
obligations
|
|
|
15,664
|
|
|
|
-
|
|
|
|
50,407
|
|
|
|
-
|
|
|
|
66,071
|
|
Total
liabilities |
|
|
1,726,427
|
|
|
|
151,996
|
|
|
|
2,457,762
|
|
|
|
(1,991,043 |
) |
|
|
2,345,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock |
|
|
605,182
|
|
|
|
25,110
|
|
|
|
43,059
|
|
|
|
(68,169 |
) |
|
|
605,182
|
|
Accumulated
other comprehensive income (loss), net |
|
|
74,089
|
|
|
|
(2,033 |
) |
|
|
22,951
|
|
|
|
(20,918 |
) |
|
|
74,089
|
|
Retained
earnings (accumulated deficit) |
|
|
18,230
|
|
|
|
(8,257 |
) |
|
|
(62,550 |
) |
|
|
70,807
|
|
|
|
18,230
|
|
Total
shareholders' equity |
|
|
697,501
|
|
|
|
14,820
|
|
|
|
3,460
|
|
|
|
(18,280 |
) |
|
|
697,501
|
|
|
Total
liabilities and shareholders' equity
|
|
$ |
2,423,928
|
|
|
$ |
166,816
|
|
|
$ |
2,461,222
|
|
|
$ |
(2,009,323 |
) |
|
$ |
3,042,643
|
|
Condensed
Consolidating Balance Sheet
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
353,483
|
|
|
$ |
-
|
|
|
$ |
7,922
|
|
|
$ |
-
|
|
|
$ |
361,405
|
|
Short-term
investments, held to maturity
|
|
|
34,583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,583
|
|
Accounts
receivable, net
|
|
|
95,041
|
|
|
|
-
|
|
|
|
14,883
|
|
|
|
-
|
|
|
|
109,924
|
|
Intercompany
accounts receivable
|
|
|
6,486
|
|
|
|
-
|
|
|
|
3,263
|
|
|
|
(9,749 |
) |
|
|
-
|
|
Inventories
|
|
|
49,233
|
|
|
|
-
|
|
|
|
3,263
|
|
|
|
-
|
|
|
|
52,496
|
|
Deferred
income taxes, net
|
|
|
19,758
|
|
|
|
-
|
|
|
|
1,158
|
|
|
|
-
|
|
|
|
20,916
|
|
Other
|
|
|
15,394
|
|
|
|
-
|
|
|
|
1,727
|
|
|
|
-
|
|
|
|
17,121
|
|
Intercompany
other
|
|
|
1,698
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
(6,698 |
) |
|
|
-
|
|
Total
current assets
|
|
|
575,676
|
|
|
|
-
|
|
|
|
37,216
|
|
|
|
(16,447 |
) |
|
|
596,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
86,594
|
|
|
|
-
|
|
|
|
2,095
|
|
|
|
-
|
|
|
|
88,689
|
|
Intangible
assets, net
|
|
|
104,731
|
|
|
|
-
|
|
|
|
7,951
|
|
|
|
-
|
|
|
|
112,682
|
|
Goodwill
|
|
|
113,481
|
|
|
|
-
|
|
|
|
12,785
|
|
|
|
-
|
|
|
|
126,266
|
|
Prepaid
debt fees
|
|
|
13,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,161
|
|
Deferred
income taxes, net
|
|
|
44,702
|
|
|
|
-
|
|
|
|
2,698
|
|
|
|
-
|
|
|
|
47,400
|
|
Intercompany
notes receivable
|
|
|
12,257
|
|
|
|
-
|
|
|
|
1,242
|
|
|
|
(13,499 |
) |
|
|
-
|
|
Other
|
|
|
33,880
|
|
|
|
531
|
|
|
|
1,390
|
|
|
|
(31,922 |
) |
|
|
3,879
|
|
Total
assets
|
|
$ |
984,482
|
|
|
$ |
531
|
|
|
$ |
65,377
|
|
|
$ |
(61,868 |
) |
|
$ |
988,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
33,602
|
|
|
$ |
-
|
|
|
$ |
2,201
|
|
|
$ |
-
|
|
|
$ |
35,803
|
|
Accrued
expenses
|
|
|
6,392
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
6,402
|
|
Intercompany
accounts payable
|
|
|
3,263
|
|
|
|
-
|
|
|
|
6,486
|
|
|
|
(9,749 |
) |
|
|
-
|
|
Wages
and benefits payable
|
|
|
22,673
|
|
|
|
-
|
|
|
|
1,541
|
|
|
|
-
|
|
|
|
24,214
|
|
Taxes
payable
|
|
|
1,053
|
|
|
|
-
|
|
|
|
664
|
|
|
|
-
|
|
|
|
1,717
|
|
Current
portion of warranty
|
|
|
7,850
|
|
|
|
-
|
|
|
|
149
|
|
|
|
-
|
|
|
|
7,999
|
|
Short-term
intercompany advances
|
|
|
5,001
|
|
|
|
-
|
|
|
|
1,697
|
|
|
|
(6,698 |
) |
|
|
-
|
|
Unearned
revenue
|
|
|
26,004
|
|
|
|
-
|
|
|
|
1,445
|
|
|
|
-
|
|
|
|
27,449
|
|
Total
current liabilities
|
|
|
105,838
|
|
|
|
-
|
|
|
|
14,193
|
|
|
|
(16,447 |
) |
|
|
103,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
469,324
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
469,324
|
|
Warranty
|
|
|
10,149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,149
|
|
Intercompany
notes payable
|
|
|
1,241
|
|
|
|
-
|
|
|
|
12,258
|
|
|
|
(13,499 |
) |
|
|
-
|
|
Other
obligations
|
|
|
6,948
|
|
|
|
-
|
|
|
|
7,535
|
|
|
|
-
|
|
|
|
14,483
|
|
Total
liabilities
|
|
|
593,500
|
|
|
|
-
|
|
|
|
33,986
|
|
|
|
(29,946 |
) |
|
|
597,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
351,018
|
|
|
|
1,982
|
|
|
|
30,113
|
|
|
|
(32,095 |
) |
|
|
351,018
|
|
Accumulated
other comprehensive income, net
|
|
|
1,588
|
|
|
|
-
|
|
|
|
5,767
|
|
|
|
(5,767 |
) |
|
|
1,588
|
|
Retained
earnings (accumulated deficit)
|
|
|
38,376
|
|
|
|
(1,451 |
) |
|
|
(4,489 |
) |
|
|
5,940
|
|
|
|
38,376
|
|
Total
shareholders' equity
|
|
|
390,982
|
|
|
|
531
|
|
|
|
31,391
|
|
|
|
(31,922 |
) |
|
|
390,982
|
|
Total
liabilities and shareholders' equity
|
|
$ |
984,482
|
|
|
$ |
531
|
|
|
$ |
65,377
|
|
|
$ |
(61,868 |
) |
|
$ |
988,522
|
|
Condensed
Consolidating Statement of Cash Flows
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(20,146 |
) |
|
$ |
(6,806 |
) |
|
$ |
(58,061 |
) |
|
$ |
64,867
|
|
|
$ |
(20,146 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
32,590
|
|
|
|
933
|
|
|
|
51,806
|
|
|
|
-
|
|
|
|
85,329
|
|
In-process
research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
35,820
|
|
|
|
-
|
|
|
|
35,820
|
|
Employee
stock plans income tax benefits
|
|
|
2,020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,020
|
|
Stock-based
compensation
|
|
|
8,998
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,998
|
|
Amortization
of prepaid debt fees
|
|
|
11,804
|
|
|
|
230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,034
|
|
Deferred
income taxes, net
|
|
|
(11,660 |
) |
|
|
(2,110 |
) |
|
|
(33,648 |
) |
|
|
-
|
|
|
|
(47,418 |
) |
Equity
in earnings of non-guarantor subsidiaries
|
|
|
62,803
|
|
|
|
1,829
|
|
|
|
-
|
|
|
|
(64,632 |
) |
|
|
-
|
|
Other,
net
|
|
|
(3,759 |
) |
|
|
3,038
|
|
|
|
12
|
|
|
|
(235 |
) |
|
|
(944 |
) |
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
613
|
|
|
|
(1,538 |
) |
|
|
(14,306 |
) |
|
|
-
|
|
|
|
(15,231 |
) |
Inventories
|
|
|
(6,557 |
) |
|
|
1,025
|
|
|
|
8,333
|
|
|
|
-
|
|
|
|
2,801
|
|
Trade
payables, accrued expenses and taxes payable
|
|
|
5,049
|
|
|
|
1,235
|
|
|
|
17,915
|
|
|
|
-
|
|
|
|
24,199
|
|
Wages
and benefits payable
|
|
|
(4,354 |
) |
|
|
149
|
|
|
|
(2,305 |
) |
|
|
-
|
|
|
|
(6,510 |
) |
Unearned
revenue
|
|
|
(5,586 |
) |
|
|
-
|
|
|
|
(2,804 |
) |
|
|
-
|
|
|
|
(8,390 |
) |
Warranty
|
|
|
(164 |
) |
|
|
75
|
|
|
|
853
|
|
|
|
-
|
|
|
|
764
|
|
Other
long-term obligations
|
|
|
2,285
|
|
|
|
-
|
|
|
|
3,737
|
|
|
|
-
|
|
|
|
6,022
|
|
Intercompany
transactions, net
|
|
|
(4,198 |
) |
|
|
3,302
|
|
|
|
896
|
|
|
|
-
|
|
|
|
-
|
|
Effect
of foreign exchange rate changes
|
|
|
-
|
|
|
|
-
|
|
|
|
11,307
|
|
|
|
-
|
|
|
|
11,307
|
|
Other,
net
|
|
|
2,460
|
|
|
|
469
|
|
|
|
(3,930 |
) |
|
|
-
|
|
|
|
(1,001 |
) |
Net
cash provided by (used in) operating activities
|
|
|
72,198
|
|
|
|
1,831
|
|
|
|
15,625
|
|
|
|
-
|
|
|
|
89,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the maturities of investments, held to maturity
|
|
|
35,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,000
|
|
Acquisitions
of property, plant and equipment
|
|
|
(17,443 |
) |
|
|
6,124
|
|
|
|
(18,854 |
) |
|
|
-
|
|
|
|
(30,173 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(1,716,138 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,716,138 |
) |
Cash
transferred to non-guarantor subsidiaries
|
|
|
(22,492 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
22,492
|
|
|
|
-
|
|
Intercompany
notes, net
|
|
|
(4,399 |
) |
|
|
-
|
|
|
|
(47,878 |
) |
|
|
52,277
|
|
|
|
-
|
|
Other,
net
|
|
|
(25,651 |
) |
|
|
(53,169 |
) |
|
|
78,873
|
|
|
|
-
|
|
|
|
53
|
|
Net
cash provided by (used in) investing activities
|
|
|
(1,751,123 |
) |
|
|
(47,045 |
) |
|
|
12,141
|
|
|
|
74,769
|
|
|
|
(1,711,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
1,159,026
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,159,027
|
|
Payments
on debt
|
|
|
(37,278 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(37,278 |
) |
Issuance
of common stock
|
|
|
243,146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243,146
|
|
Prepaid
debt fees
|
|
|
(20,538 |
) |
|
|
(2,646 |
) |
|
|
1,175
|
|
|
|
-
|
|
|
|
(22,009 |
) |
Cash
transferred from parent
|
|
|
-
|
|
|
|
-
|
|
|
|
22,492
|
|
|
|
(22,492 |
) |
|
|
-
|
|
Intercompany
notes payable
|
|
|
272
|
|
|
|
47,606
|
|
|
|
4,399
|
|
|
|
(52,277 |
) |
|
|
-
|
|
Other,
net
|
|
|
(1,541 |
) |
|
|
1,541
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,343,087
|
|
|
|
46,502
|
|
|
|
28,066
|
|
|
|
(74,769 |
) |
|
|
1,342,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
2,448
|
|
|
|
-
|
|
|
|
2,448
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(335,838 |
) |
|
|
1,288
|
|
|
|
58,280
|
|
|
|
-
|
|
|
|
(276,270 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
353,483
|
|
|
|
-
|
|
|
|
7,922
|
|
|
|
-
|
|
|
|
361,405
|
|
Cash
and cash equivalents at end of period
|
|
$ |
17,645
|
|
|
$ |
1,288
|
|
|
$ |
66,202
|
|
|
$ |
-
|
|
|
$ |
85,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
operating and investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
364
|
|
|
$ |
-
|
|
|
$ |
1,913
|
|
|
$ |
-
|
|
|
$ |
2,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
2,703
|
|
|
$ |
-
|
|
|
$ |
9,939
|
|
|
$ |
-
|
|
|
$ |
12,642
|
|
Interest
|
|
|
46,804
|
|
|
|
3,012
|
|
|
|
633
|
|
|
|
-
|
|
|
|
50,449
|
|
Condensed
Consolidating Statement of Cash Flows
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
26,488
|
|
|
$ |
(507 |
) |
|
$ |
1,225
|
|
|
$ |
(718 |
) |
|
$ |
26,488
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
32,952
|
|
|
|
-
|
|
|
|
1,314
|
|
|
|
-
|
|
|
|
34,266
|
|
Employee
stock plans income tax benefits
|
|
|
12,686
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,686
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(9,108 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,108 |
) |
Stock-based
compensation
|
|
|
6,811
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,811
|
|
Amortization
of prepaid debt fees
|
|
|
3,718
|
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
3,766
|
|
Deferred
income taxes, net
|
|
|
3,965
|
|
|
|
-
|
|
|
|
(1,181 |
) |
|
|
-
|
|
|
|
2,784
|
|
Equity
in earnings (losses) of non-guarantor subsidiaries
|
|
|
(1,225 |
) |
|
|
507
|
|
|
|
-
|
|
|
|
718
|
|
|
|
-
|
|
Other,
net
|
|
|
(1,190 |
) |
|
|
-
|
|
|
|
(18 |
) |
|
|
-
|
|
|
|
(1,208 |
) |
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
14,337
|
|
|
|
-
|
|
|
|
(4,921 |
) |
|
|
-
|
|
|
|
9,416
|
|
Inventories
|
|
|
(9,161 |
) |
|
|
-
|
|
|
|
612
|
|
|
|
-
|
|
|
|
(8,549 |
) |
Long-term
note receivable, net
|
|
|
1,298
|
|
|
|
-
|
|
|
|
(1,298 |
) |
|
|
-
|
|
|
|
-
|
|
Trade
payables, accrued expenses and taxes payable
|
|
|
3,499
|
|
|
|
-
|
|
|
|
123
|
|
|
|
-
|
|
|
|
3,622
|
|
Wages
and benefits payable
|
|
|
926
|
|
|
|
-
|
|
|
|
162
|
|
|
|
-
|
|
|
|
1,088
|
|
Unearned
revenue
|
|
|
5,468
|
|
|
|
-
|
|
|
|
290
|
|
|
|
-
|
|
|
|
5,758
|
|
Warranty
|
|
|
3,254
|
|
|
|
-
|
|
|
|
74
|
|
|
|
-
|
|
|
|
3,328
|
|
Other
long-term obligations
|
|
|
(237 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(237 |
) |
Intercompany
transactions, net
|
|
|
(7,958 |
) |
|
|
-
|
|
|
|
7,958
|
|
|
|
-
|
|
|
|
-
|
|
Other,
net
|
|
|
(4,230 |
) |
|
|
-
|
|
|
|
307
|
|
|
|
-
|
|
|
|
(3,923 |
) |
Net
cash provided by operating activities
|
|
|
82,293
|
|
|
|
-
|
|
|
|
4,695
|
|
|
|
-
|
|
|
|
86,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of investments held to maturity
|
|
|
(170,434 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(170,434 |
) |
Acquisitions
of property, plant and equipment
|
|
|
(25,220 |
) |
|
|
-
|
|
|
|
(658 |
) |
|
|
-
|
|
|
|
(25,878 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(5,932 |
) |
|
|
-
|
|
|
|
(1,389 |
) |
|
|
-
|
|
|
|
(7,321 |
) |
Cash
transferred to parent
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,295 |
) |
|
|
1,295
|
|
|
|
-
|
|
Cash
transferred to non-guarantor subsidiaries
|
|
|
(500 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
|
|
-
|
|
Intercompany
notes, net
|
|
|
(4,622 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
4,622
|
|
|
|
-
|
|
Other,
net
|
|
|
83
|
|
|
|
-
|
|
|
|
1,424
|
|
|
|
-
|
|
|
|
1,507
|
|
Net
cash used in investing activities
|
|
|
(206,625 |
) |
|
|
-
|
|
|
|
(1,918 |
) |
|
|
6,417
|
|
|
|
(202,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
345,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
345,000
|
|
Payments
on debt
|
|
|
(39,476 |
) |
|
|
-
|
|
|
|
(3,227 |
) |
|
|
-
|
|
|
|
(42,703 |
) |
Issuance
of common stock
|
|
|
13,375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,375
|
|
Excess
tax benefits from stock-based compensation
|
|
|
9,108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,108
|
|
Prepaid
debt fees
|
|
|
(8,759 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,759 |
) |
Intercompany
notes, net
|
|
|
-
|
|
|
|
-
|
|
|
|
4,622
|
|
|
|
(4,622 |
) |
|
|
-
|
|
Cash
received from parent
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
|
|
(500 |
) |
|
|
-
|
|
Cash
transferred from non-guarantor subsidiaries
|
|
|
1,295
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,295 |
) |
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
320,543
|
|
|
|
-
|
|
|
|
1,895
|
|
|
|
(6,417 |
) |
|
|
316,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
196,211
|
|
|
|
-
|
|
|
|
4,672
|
|
|
|
-
|
|
|
|
200,883
|
|
Cash
and cash equivalents at beginning of period
|
|
|
28,064
|
|
|
|
-
|
|
|
|
5,574
|
|
|
|
-
|
|
|
|
33,638
|
|
Cash
and cash equivalents at end of period
|
|
$ |
224,275
|
|
|
$ |
-
|
|
|
$ |
10,246
|
|
|
$ |
-
|
|
|
$ |
234,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
operating and investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
2,950
|
|
|
$ |
-
|
|
|
$ |
502
|
|
|
$ |
-
|
|
|
$ |
3,452
|
|
Non-cash
affects of acquisitions
|
|
|
-
|
|
|
|
-
|
|
|
|
637
|
|
|
|
-
|
|
|
|
637
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
2,936
|
|
|
$ |
-
|
|
|
$ |
279
|
|
|
$ |
-
|
|
|
$ |
3,215
|
|
Interest
(net of amounts capitalized)
|
|
|
5,488
|
|
|
|
-
|
|
|
|
250
|
|
|
|
-
|
|
|
|
5,738
|
|
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, pension liability, cost reduction programs and other
items. These statements reflect our current plans and expectations and are
based
on information currently available as of the date of this Quarterly Report
on
Form 10-Q. When we use the words “expect,” “intend,” “anticipate,” “believe,”
“plan,” “project,” “estimate,” “future,” “objective,” “may,” “will,” “will
continue” and similar expressions they are intended to identify forward-looking
statements. Any statements that refer to expectations, projections or other
characterizations of future events or circumstances are also forward-looking
statements. Forward-looking statements rely on a number of assumptions and
estimates. These assumptions and estimates could be inaccurate and cause our
actual results to vary materially from expected results. Risks and uncertainties
include 1) the rate and timing of customer demand for our products, 2)
rescheduling or cancellations of current customer orders, 3) changes in
estimated liabilities for product warranties, 4) changes in domestic and foreign
laws and regulations, 5) our dependence on new product development and
intellectual property, 6) current and future business combinations, 7) changes
in estimates for stock-based compensation or pensions costs, 8) changes in
foreign currency exchange rates, 9) foreign business risks and 10) other
factors. You should not rely on these forward-looking statements as they speak
only 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.
Revenues include hardware, software, post-sale maintenance and professional
services. Cost of revenues includes materials, direct labor, warranty expense,
other manufacturing spending, distribution and documentation costs for software
applications and labor and operating costs for professional services.
Overview
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris)
for €800 million (approximately $1.1 billion) plus the retirement of
approximately $626.9 million of debt. The acquisition was financed with a $1.2
billion credit facility (credit facility), $225.3 million in net proceeds from
the sale of our common stock and cash on hand. The Actaris acquisition includes
all of Actaris’ electricity, gas and water meter manufacturing and sales
operations, located 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. Our combined company now has more than 8,000 utility
customers, over 30 manufacturing facilities, operates in more than 60 countries
and has more than 8,500 employees. Actaris will continue to operate
fundamentally as it did before the acquisition.
The
acquisition of Actaris significantly changes many aspects of our results of
operations, financial condition and cash flows, which are described in each
applicable area within the discussion that follows.
At
September 30, 2007, the contingent conversion threshold of our convertible
notes
was exceeded. As a result, the notes are convertible at the option of the
holder
as of September 30, 2007, and accordingly, the aggregate principal amount
of the
convertible notes is included in the current portion of long-term debt; and
since our debt fees are amortized through the date of the earliest conversion
option, we expensed approximately $6.6 million of the remaining prepaid debt
fees associated with the convertible notes.
Total
Company Revenues, Gross Profit and Margin and Unit
Shipments
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
|
(in
millions, except gross margin)
|
|
|
|
|
|
(in
millions, except gross margin)
|
|
|
|
|
Revenues
|
|
$ |
434.0
|
|
|
$ |
164.7
|
|
|
|
164%
|
|
|
$ |
983.5
|
|
|
$ |
484.1
|
|
|
|
103%
|
|
Gross
Profit
|
|
$ |
144.8
|
|
|
$ |
67.4
|
|
|
|
115%
|
|
|
$ |
330.8
|
|
|
$ |
203.2
|
|
|
|
63%
|
|
Gross
Margin
|
|
|
33 |
% |
|
|
41 |
% |
|
|
|
|
|
|
34 |
% |
|
|
42 |
% |
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
millions)
|
|
Revenues
by region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
214.6
|
|
|
$ |
0.7
|
|
|
$ |
403.1
|
|
|
$ |
2.7
|
|
United
States and Canada
|
|
|
148.9
|
|
|
|
151.9
|
|
|
|
433.8
|
|
|
|
456.9
|
|
Other
|
|
|
70.5
|
|
|
|
12.1
|
|
|
|
146.6
|
|
|
|
24.5
|
|
Total
revenues
|
|
$ |
434.0
|
|
|
$ |
164.7
|
|
|
$ |
983.5
|
|
|
$ |
484.1
|
|
Revenues
Revenues
increased $269.3 million and $499.4 million for the three and nine months
September 30, 2007. Actaris contributed $280.8 million and $530.5 million to
revenues for the three and nine months ended September 30, 2007. Itron North
America revenues decreased approximately 7% and 6% for the three and nine months
ended September 30, 2007, compared with the same periods in 2006.
No
single
customer represented more than 10% of total Company revenues for the three
and
nine months ended September 30, 2007. One customer, Progress Energy,
accounted for 11% and 18% of total Company revenues for the three and nine
months ended September 30, 2006.
Gross
Profit and Margin
Gross
margin was 33% and 34% for the three and nine months ended September 30,
2007,
compared with 41% and 42% for the same periods last year. Business combination
accounting rules require the valuation of inventory on hand at the acquisition
date to equal the sales price, less costs to complete and a reasonable profit
allowance for selling effort. Accordingly, the historical cost of inventory
acquired as part of the Actaris acquisition was increased by $16.0 million,
which lowered total company gross margin by approximately two percentage
points
for the nine months ended September 30, 2007. The inventory adjustment had
no
impact to gross margin in the third quarter as the acquired inventory was
sold
prior to June 30, 2007. Gross margin for Actaris’ products and services is
lower than Itron North America’s as a result of Actaris’ product mix of higher
meter sales as compared with Itron North America’s systems focused
offerings.
Unit
Shipments
Meters
can be sold with and without AMR. In addition, AMR can be sold separately from
the meter. We also use other vendors’ AMR technology in our meters. Meter and
AMR shipments are as follows:
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(in
thousands)
|
Total
meters (with and without AMR)
|
|
|
|
|
|
|
|
|
Electricity
|
2,625
|
|
1,575
|
|
6,225
|
|
5,175
|
|
Gas
|
900
|
|
-
|
|
1,675
|
|
-
|
|
Water
|
1,775
|
|
-
|
|
3,625
|
|
-
|
|
|
Total
meters
|
5,300
|
|
1,575
|
|
11,525
|
|
5,175
|
|
|
|
|
|
|
|
|
|
|
AMR
units (Itron and Actaris)
|
|
|
|
|
|
|
|
|
Meters
with AMR
|
850
|
|
850
|
|
2,250
|
|
3,325
|
|
AMR
modules
|
1,150
|
|
1,275
|
|
3,500
|
|
3,525
|
|
|
Total
AMR units
|
2,000
|
|
2,125
|
|
5,750
|
|
6,850
|
|
|
|
|
|
|
|
|
|
|
Meters
with other vendors' AMR
|
225
|
|
325
|
|
650
|
|
700
|
Segment
Revenues, Gross Profit and Margin and Operating Income (Loss) and Operating
Margin
Our
operating segments consist of Itron North America and Actaris, which reflect
the
way we are currently managing our business. The Itron North America operating
segment represents our operations prior to the Actaris acquisition, which are
primarily located in North America. The Actaris operating segment represents
the
operations of the Actaris acquisition, which are primarily located outside
of
North America. The operating segment information as set forth below, for the
three and nine months ended September 30, 2007 and 2006 is based on this new
segment reporting structure. In accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information, historical segment
information has been restated from the segment information previously provided
to conform to the segment reporting structure after the April 2007 Actaris
acquisition. At December 31, 2006, we reported three operating segments
reflecting the major product lines at that time.
We
have
three measures of segment performance: revenue, gross profit (margin) and
operating income (margin). There were no intersegment revenues. Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Assets and liabilities are not used
in
our measurement of segment performance and, therefore, are not allocated to
our
segments. Substantially all depreciation expense is allocated to our
segments.
Segment
Products
Itron
North America
|
Electricity
meters with and without AMR; gas and water AMR modules; handheld,
mobile
and network AMR data collection technologies; advanced metering
infrastructure (AMI) technologies; software, installation, implementation,
maintenance support and other services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water
and
heat meters; diaphragm, turbine and rotary gas meters; one-way and
two-way
electricity prepayment systems, including smart key, keypad and smart
card; two-way gas prepayment systems using smart card; AMR data collection
technologies; installation, implementation, maintenance support and
other
services.
|
|
The
following tables and discussion highlight significant changes in
trends or
components of each segment.
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
153.2
|
|
|
$ |
164.7
|
|
|
|
-7%
|
|
|
|
|
|
$ |
453.0
|
|
|
$ |
484.1
|
|
|
|
-6%
|
|
|
|
|
Actaris
|
|
|
280.8
|
|
|
|
-
|
|
|
|
100%
|
|
|
|
|
|
|
530.5
|
|
|
|
-
|
|
|
|
100%
|
|
|
|
|
Total
revenues
|
|
$ |
434.0
|
|
|
$ |
164.7
|
|
|
|
164%
|
|
|
|
|
|
$ |
983.5
|
|
|
$ |
484.1
|
|
|
|
103%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
|
2006
|
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
Segment
Gross Profit and Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
61.5
|
|
|
|
40%
|
|
|
$ |
67.4
|
|
|
|
41%
|
|
|
$ |
186.2
|
|
|
|
41%
|
|
|
$ |
203.2
|
|
|
|
42%
|
|
Actaris
|
|
|
83.3
|
|
|
|
30%
|
|
|
|
-
|
|
|
|
|
|
|
|
144.6
|
|
|
|
27%
|
|
|
|
-
|
|
|
|
|
|
Total
gross profit and margin
|
|
$ |
144.8
|
|
|
|
33%
|
|
|
$ |
67.4
|
|
|
|
41%
|
|
|
$ |
330.8
|
|
|
|
34%
|
|
|
$ |
203.2
|
|
|
|
42%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
|
2006
|
|
|
|
Operating
Income
(Loss)
|
|
Operating
Margin
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
Operating
Income
(Loss)
|
|
Operating
Margin
|
|
Operating
Income
(Loss)
|
|
|
Operating
Margin
|
|
Segment
Operating Income (Loss)
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
and
Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
18.2
|
|
|
|
12%
|
|
|
$ |
22.0
|
|
|
|
13%
|
|
|
$ |
51.1
|
|
|
|
11%
|
|
|
$ |
72.1
|
|
|
|
15%
|
|
Actaris
|
|
|
19.3
|
|
|
|
7%
|
|
|
|
-
|
|
|
|
|
|
|
|
(12.4 |
) |
|
|
-2%
|
|
|
|
-
|
|
|
|
|
|
Corporate
unallocated
|
|
|
(8.5 |
) |
|
|
|
|
|
|
(6.1 |
) |
|
|
|
|
|
|
(23.8 |
) |
|
|
|
|
|
|
(19.6 |
) |
|
|
|
|
Total
operating income and margin
|
|
$ |
29.0
|
|
|
|
7%
|
|
|
$ |
15.9
|
|
|
|
10%
|
|
|
$ |
14.9
|
|
|
|
2%
|
|
|
$ |
52.5
|
|
|
|
11%
|
|
Itron
North America: Revenues decreased $11.5 million, or 7%, in
the third quarter of 2007, and $31.1 million, or 6%, in the nine months ended
September 30, 2007, compared with the same periods in 2006. Shipments of
electricity meters decreased 27% and 33% for the three and nine months ended
September 30, 2007, compared with the same periods in 2006, respectively. During
the third quarter and first nine months of 2006, we shipped over 200,000 and
1.9
million meters under the Progress Energy contract, respectively. This
accelerated delivery schedule, which was substantially complete at the end
of
2006, increased our historical electricity meter production levels, resulting
in
increased revenues and higher overhead absorption. Due to the timing of gas
and
water AMR system contracts, shipments of AMR modules decreased 15% for the
three
months ended September 30, 2007, while shipments remained relatively
constant for the nine months ended September 30, 2007, compared with the same
periods last year, respectively. Gross margin decreased one percentage point
for
both the three and nine months ended September 30, 2007, compared with the
same
periods in 2006, as a result of product mix and lower overhead
absorption.
No
single
customer represented more than 10% of Itron North America operating segment
revenues for the three and nine months ended September 30, 2007. One customer,
Progress Energy, accounted for 11% and 18% of the Itron North America operating
segment revenues for the three and nine months ended September 30, 2006,
respectively.
Itron
North America operating expenses as a percentage of revenues were 28% and 30%
for the three and nine months ended September 30, 2007, compared with 28% and
27% for the same periods in 2006, respectively. Research and development costs
have increased as a percentage of revenue from 9% in 2006 to approximately
11%
in 2007 as a result of the development of our AMI technologies.
Actaris: Actaris
was acquired on April 18, 2007. Revenues were $280.8 million for the three
months ended September 30, 2007 and $530.5 million from the date of acquisition
to September 30, 2007 with 40%, 32% and 28% from electricity, gas and water
meter products and services, respectively. Gross margin was 30% for the third
quarter of 2007 and 27% from the date of acquisition to September 30, 2007.
Business combination accounting rules require the valuation of inventory on
hand
at the acquisition date to equal the sales price, less costs to complete and
a
reasonable profit allowance for selling effort. Accordingly, the historical
cost
of inventory acquired was increased by $16.0 million, which lowered gross
margins by three percentage points from the date of acquisition to September
30,
2007. The acquired inventory was sold prior to June 30, 2007, resulting
in no gross margin impact in the third quarter.
No
single
customer represented more than 10% of the Actaris operating segment revenues
for
the three months ended September 30, 2007 or from the period April 18, 2007
to
September 30, 2007.
Operating
expenses for Actaris were $64.0 million for the three months ended September
30,
2007 and $157.0 million for the period from acquisition to September 30,
2007 of which $269,000 and $35.8 million represented in-process research and
development (IPR&D) related to the acquisition for each of the respective
periods. Operating expenses as a percentage of revenues were 23% for the three
months ended September 30, 2007, and 30% from the date of acquisition to
September 30, 2007. We anticipate that operating expenses for Actaris will
be lower as a percentage of revenue, compared with Itron North America, as
a
result of more meter product sales versus meter system sales, partially offset
by higher amortization expense of intangible assets.
Corporate
unallocated: Operating expenses not directly associated
with an operating segment are classified as “Corporate unallocated.” These
expenses, as a percentage of total Company revenues, were 2% for the three
and
nine months ended September 30, 2007, compared with 4% in each of the same
periods of 2006.
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 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)
|
|
September
30, 2007
|
|
$ |
440
|
|
|
$ |
668
|
|
|
$ |
494
|
|
June
30, 2007
|
|
|
413
|
|
|
|
656
|
|
|
|
491
|
|
March
31, 2007
|
|
|
118
|
|
|
|
376
|
|
|
|
225
|
|
December
31, 2006
|
|
|
211
|
|
|
|
392
|
|
|
|
225
|
|
September
30, 2006
|
|
|
128
|
|
|
|
325
|
|
|
|
194
|
|
June
30, 2006
|
|
|
107
|
|
|
|
351
|
|
|
|
225
|
|
At
June
30, 2007, total backlog increased due to acquired backlog from the Actaris
acquisition.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
%
of Revenue
|
|
|
2006
|
|
|
%
of Revenue
|
|
|
2007
|
|
|
%
of Revenue
|
|
|
2006
|
|
|
%
of Revenue
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
Sales
and marketing
|
|
$ |
35.7
|
|
|
|
8%
|
|
|
$ |
15.2
|
|
|
|
9%
|
|
|
$ |
85.0
|
|
|
|
8%
|
|
|
$ |
47.0
|
|
|
|
10%
|
|
Product
development
|
|
|
26.5
|
|
|
|
6%
|
|
|
|
15.6
|
|
|
|
9%
|
|
|
|
67.8
|
|
|
|
7%
|
|
|
|
43.4
|
|
|
|
9%
|
|
General
and administrative
|
|
|
27.5
|
|
|
|
7%
|
|
|
|
12.4
|
|
|
|
8%
|
|
|
|
69.2
|
|
|
|
7%
|
|
|
|
37.1
|
|
|
|
8%
|
|
Amortization
of intangible assets
|
|
|
25.8
|
|
|
|
6%
|
|
|
|
8.3
|
|
|
|
5%
|
|
|
|
58.1
|
|
|
|
6%
|
|
|
|
23.2
|
|
|
|
4%
|
|
In-process
research and development
|
|
|
0.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35.8
|
|
|
|
4%
|
|
|
|
-
|
|
|
|
-
|
|
Total
operating expenses
|
|
$ |
115.8
|
|
|
|
27%
|
|
|
$ |
51.5
|
|
|
|
31%
|
|
|
$ |
315.9
|
|
|
|
32%
|
|
|
$ |
150.7
|
|
|
|
31%
|
|
Operating
expenses for the nine months ended September 30, 2007 contain Actaris’ operating
expenses from April 18, 2007, the date of acquisition. Actaris’ operating
expenses as a percentage of revenue are typically lower than our historical
operations due to more meter product sales versus meter system sales. Itron
North America’s product development expenses have increased as a percentage of
revenue from 9% in 2006 to approximately 11% in 2007 as a result of the
development of our AMI technologies. Overall, product development expenses
declined as a percent of revenues from 9% to approximately 6% due to Actaris’
lower product development expenses. We expect Actaris’ product development
expenses to increase as demand for advanced metering technologies grows.
Although we expect general and administrative expenses to decrease as a
percentage of revenue as a result of efficiencies of scale from the acquisition
of Actaris, in the near term we expect to incur higher professional service
fees
and indirect costs, which includes the enhancement of internal controls over
financial reporting.
In-Process
Research and Development Expenses
Our
acquisition of Actaris resulted in $35.8 million of IPR&D expense,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended
to
make key enhancements and improve functionality of our residential and
commercial and industrial meters. We value IPR&D using the income approach,
which uses the present value of the projected cash flows that are expected
to be
generated. The risk adjusted discount rate was 12 percent, which was based
on an
industry composite of weighted average cost of capital, with certain premiums
for equity risk and size, and the uncertainty associated with the completion
of
the development effort and subsequent commercialization. We estimate these
research and development projects to be approximately 60% complete at September
30, 2007, when compared against the costs Actaris incurred prior to the
acquisition. We estimate the cost to complete these projects will be
approximately $10 million, primarily over the next twelve months, which we
will record as research and development expense as the costs are
incurred.
Our
future success depends, in part, on our ability to continue to design and
manufacture new competitive products and to enhance and sustain our existing
products. However, we may experience unforeseen problems in the development
or
performance of our technologies or products, we may not meet our product
development schedules or we may not achieve market acceptance of our new
products or solutions.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Interest
income
|
|
$ |
585
|
|
|
$ |
3,467
|
|
|
$ |
8,890
|
|
|
$ |
4,189
|
|
Interest
expense
|
|
|
(25,631 |
) |
|
|
(3,417 |
) |
|
|
(51,242 |
) |
|
|
(8,593 |
) |
Amortization
of debt placement fees
|
|
|
(9,221 |
) |
|
|
(611 |
) |
|
|
(12,034 |
) |
|
|
(3,766 |
) |
Other
income (expense), net
|
|
|
(873 |
) |
|
|
(187 |
) |
|
|
6,068
|
|
|
|
(876 |
) |
Total
other income (expense)
|
|
$ |
(35,140 |
) |
|
$ |
(748 |
) |
|
$ |
(48,318 |
) |
|
$ |
(9,046 |
) |
The
increase in interest income of $4.7 million for the nine months ended
September 30, 2007, compared with the same period in 2006, was the result
of our higher cash and cash equivalent balances and short-term investments
from
our August 2006 issuance of $345 million 2.50% convertible senior subordinated
notes (convertible notes) and our March 1, 2007 issuance of $225.3 million
in
net proceeds from the sale of 4.1 million shares of common stock. Our average
cash balances were $86.9 million and $194.7 million for the three and nine
months ended September 30, 2007, compared with $169.3 million and
$84.3 million for the same periods in 2006, respectively.
The
increase in interest expense in the three and nine months ended September 30,
2007, compared with the same periods in 2006, is primarily the result of the
new
$1.2 billion credit facility used to finance the Actaris acquisition. Interest
expense also increased as a result of our $345 million 2.50% convertible notes
issued in August 2006. Average outstanding borrowings were $1.6 billion and
$1.2
billion for the three and nine months ended September 30, 2007, compared with
$341.8 million and $207.8 million for the same periods in 2006,
respectively. The increase in amortization of debt placement fees is the result
of these new borrowings. In addition, at September 30, 2007, as a result of
our
convertible notes exceeding the conversion threshold, and as our debt fees
are
amortized through the date of the earliest put or conversion option, we expensed
approximately $6.6 million of the remaining prepaid debt fees associated with
these convertible notes.
Other
income (expense) for the three months ended September 30, 2007 consisted
primarily of foreign currency fluctuations during the period. For the nine
months ended September 30, 2007, foreign currency fluctuations also included
$3.0 million in unrealized gains on our euro denominated borrowings, which
are
now designated as a hedge of a net investment in foreign operations, $2.8
million in net realized gains from foreign currency hedge range forward
contracts that were settled as part of the Actaris acquisition and a $1.0
million realized gain from an overnight euro rate change prior to the
acquisition of Actaris.
Income
Taxes
Our
actual income tax rates typically differ from the federal statutory rate of
35%,
and can vary from period to period, due to fluctuations in operating results,
new or revised tax legislation and accounting pronouncements, changes in the
level of business performed in domestic and international jurisdictions,
research credits and state income taxes. We estimate that our 2007 actual income
tax rate will be approximately 40%.
Our
actual income tax rates were 44% and 40% for three and nine months ended
September 30, 2007. During 2007, IPR&D expense, which is not deductible and
therefore increases our actual tax rate, was offset by a benefit from
legislative reductions in tax rates in Germany and the United Kingdom. The
German Business Tax Reform 2008 was finalized on August 17, 2007, which
reduced the German tax rate from approximately 39% to 30%. On July 19, 2007,
the
United Kingdom enacted the Finance Act of 2007, which lowered the main
corporate tax rate from 30% to 28%.
At
September 30, 2006, our estimated annual effective income tax rate was 42%,
while our actual income tax rate was 39% for the three and nine months ended
September 30, 2006. At September 30, 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 September 30,
2006.
Effective
January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). 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 and September 30, 2007, the amount of unrecognized tax benefits
was $6.1 million and $36.6 million, respectively. Approximately $29.3
million of unrecognized tax benefits were acquired as part of the Actaris
acquisition on April 18, 2007. We do not expect any reasonably possible material
changes to the estimated amount of liability associated with our unrecognized
tax benefits through September 30, 2008. The amount of unrecognized tax benefits
that would affect our actual tax rate as of January 1, 2007 and September 30,
2007 were $6.1 million and $7.5 million, respectively.
We
are
subject to income tax in the U.S. federal jurisdiction and numerous foreign
and
state jurisdictions. The Internal Revenues Service has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Tax years subsequent to 1995 remain open to examination by the major
tax
jurisdictions to which we are subject. We reflect in our provision for
income taxes interest and penalties related to unrecognized tax benefits.
Accrued interest and penalties were $9,000 at January 1, 2007. At September
30,
2007, accrued interest was $4.3 million and accrued penalties were $3.6 million.
The increase from January 1, 2007 to September 30, 2007 was the result of
the Actaris acquisition on April 18, 2007.
Financial
Condition
Cash
Flow Information:
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
millions)
|
|
Operating
activities
|
|
$ |
89.7
|
|
|
$ |
87.0
|
|
Investing
activities
|
|
|
(1,711.3 |
) |
|
|
(202.1 |
) |
Financing
activities
|
|
|
1,342.9
|
|
|
|
316.0
|
|
Effect
of exchange rates on cash and cash equivalents
|
|
|
2.4
|
|
|
|
-
|
|
Increase
(decrease) in cash and cash equivalents
|
|
$ |
(276.3 |
) |
|
$ |
200.9
|
|
The
Actaris acquisition on April 18, 2007 was funded with a $1.2 billion credit
facility, $225.3 million in net proceeds from the sale of 4.1 million
shares of common stock and cash on hand.
Operating
activities: Increased revenue activity resulted in cash received from
customers of $960.0 million for the nine months ended September 30, 2007,
compared with $499.2 million for the nine months ended September 30, 2006.
Cash
paid to suppliers and employees also increased, and was $417.8 million more
for
the nine months ended September 30, 2007, compared with the same period in
2006. This increase in operating activity was partially offset by a $39.9
million increase in net interest expense and an increase in taxes paid of
$9.4
million in the nine months ended September 30, 2007, compared with the same
period in 2006.
Investing
activities: Cash paid for the acquisition of Actaris was approximately
$1.7 billion. In the first quarter of 2007, $35.0 million in
short-term investments matured with the proceeds used to partially fund the
acquisition. We had invested $170.4 million in short-term investments from
the $345 million in proceeds received from our convertible note offering in
the
third quarter of 2006. The acquisition of property, plant and equipment
increased $4.3 million in the first nine months of 2007, compared with the same
period in 2006, primarily due to Actaris’ activity subsequent to the
acquisition.
Financing
activities: Proceeds from our new credit facility were $1.2 billion. Debt
placement fees associated with this facility were $22.0 million. Net proceeds
from the sale of common stock provided $225.3 million. Cash generated from
the
exercise of stock-based awards was $17.8 million during the nine months
ended September 30, 2007, compared with $13.4 million in the same period in
2006. There were no excess tax benefits from stock-based compensation as a
result of out net loss for the nine months ended September 30, 2007, compared
with $9.1 million for the same period in 2006. During the nine months ended
September 30, 2007, we repaid $37.3 million on the credit facility. During
the
first nine months of 2006, we paid off various debt balances, including the
remaining $24.7 million balance on our term loan, $14.8 million on our real
estate term note and $3.2 million of project financing debt.
Effect
of exchange rates on cash and cash equivalents: The effect of exchange
rates on the cash balances of currencies held in foreign denominations
(primarily euros) was an increase of $2.4 million for the first nine months
of
2007.
We
had no
off-balance sheet financing agreements or guarantees at September 30, 2007
and
December 31, 2006 that we believe were reasonably likely to have a current
or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
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.
The
Actaris acquisition was financed in part by a $1.2 billion credit facility.
The
credit facility was comprised of a $605.1 million first lien U.S. dollar
denominated term loan; a €335 million first lien euro denominated term
loan; a £50 million first lien pound sterling denominated term loan
(collectively the term loans); and a $115 million multicurrency revolving
line-of-credit (revolver). Interest rates on the credit facility are based
on the respective borrowing’s denominated LIBOR rate (U.S. dollar,
euro or pound sterling) or the Wells Fargo Bank, National Association’s prime
rate, plus an additional margin subject to factors including our consolidated
leverage ratio. Scheduled amortization of principal payments is 1% per year
(0.25% quarterly) with an excess cash flow provision for additional annual
principal repayment requirements. Maturities of the term loans and multicurrency
revolver are seven years and six years. Prepaid debt fees are amortized using
the effective interest method through the term loans’ earliest maturity date, as
defined by the credit agreement. The credit facility is secured by substantially
all of the assets of our operating subsidiaries, except our foreign
subsidiaries, and contains covenants, which contain certain financial ratios
and
place restrictions on the incurrence of debt, the payment of dividends, certain
investments and mergers. We were in compliance with these debt covenants
at
September 30, 2007. At September 30, 2007, there were no borrowings outstanding
under the revolver and $51.4 million was utilized by outstanding standby
letters
of credit resulting in $63.6 million being available for additional
borrowings.
This
credit facility replaced an original $185 million seven-year senior secured
credit facility we entered into in 2004. We repaid $24.7 million remaining
on
our 2004 senior secured term loan during the first quarter of 2006.
Senior
Subordinated Notes
Our
senior subordinated notes (subordinated notes) consist of $125 million aggregate
principal amount of 7.75% notes, issued in May 2004 and due in 2012. The
subordinated notes were discounted to a price of 99.265 to yield 7.875%. The
discount on the subordinated notes is accreted resulting in a balance of $124.4
million at September 30, 2007. The subordinated notes are registered with the
SEC and are generally transferable. Fixed interest payments of $4.8 million
are required every six months, in May and November. The notes are subordinated
to our credit facility (senior secured borrowings) and are guaranteed by all
of
our operating subsidiaries, except our foreign subsidiaries. The subordinated
notes contain covenants, which place restrictions on the incurrence of debt,
the
payment of dividends, certain investments and mergers. The Actaris acquisition
and the associated financing were not prohibited under these covenants. We
were
in compliance with these debt covenants at September 30, 2007. Some or all
of
the subordinated notes may be redeemed at our option at any time on or after
May
15, 2008, at their principal amount plus a specified premium price of 103.875%,
decreasing each year thereafter.
Convertible
Senior Subordinated Notes
On
August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC
and
are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in 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 Statement of Financial Accounting Standards
133, Accounting for Derivative Instruments and Hedging Activities (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 $78.19, which is
120% of
the conversion price of $65.16, for at least 20 trading days in the
30
consecutive trading day period ending on the last trading day of
the
preceding fiscal quarter;
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
o
|
during
the five business days after any five consecutive trading day period
in
which the trading price of the convertible notes for each day was
less
than 98% of the conversion value of the convertible
notes;
|
o
|
if
the convertible notes are called for
redemption;
|
o
|
if
a fundamental change occurs; or
|
o
|
upon
the occurrence of defined corporate
events.
|
The
convertible notes also contain purchase options, at the option of the holders,
which may require us to repurchase all or a portion of the convertible notes
on
August 1, 2011, August 1, 2016 and August 1, 2021 at the principal amount,
plus
accrued and unpaid interest.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination.
The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our foreign subsidiaries, all of which are wholly owned. The convertible
notes contain covenants, which place restrictions on the incurrence of debt
and
certain mergers. The Actaris acquisition and the associated financing were
not
prohibited under these covenants. We were in compliance with these debt
covenants at September 30, 2007.
At
September 30, 2007, the contingent conversion threshold of our convertible
notes
was exceeded, since the closing sale price per share of our common stock
exceeded $78.19, which is 120% of the conversion price of $65.16, for at
least
20 trading days in the 30 consecutive trading day period ending September
30,
2007. As a result, the notes are convertible at the option of the holder
as of
September 30, 2007, and accordingly, the aggregate principal amount of the
convertible notes is included in the current portion of long-term debt; and
since our debt fees are amortized through the date of the earliest conversion
option, we expensed approximately $6.6 million of the remaining prepaid debt
fees associated with the convertible notes. We believe it is unlikely that
a
significant portion of the convertible notes would be converted prior to
maturity because the market value of the convertible notes exceeds the value
that holders of the convertible notes would receive upon conversion. However,
if
holders elect to convert, we would be required to settle the principal amount
of
the convertible notes in cash and the conversion premium in cash or shares
of
our common stock. We would likely fund the repayment with existing cash and
cash
equivalents, common stock issuances and/or additional borrowings.
Guarantees,
Indemnifications and Other Commitments
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 September 30, 2007
and December 31, 2006.
We
maintain bid and performance bonds for certain customers. Bonds in force were
$26.1 million and $6.0 million at September 30, 2007 and December 31,
2006, respectively. The increase in bid bonds was primarily the result of the
Actaris acquisition. 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. In addition to the outstanding standby
letters of credit under our credit facility, our Actaris operating segment
has
unsecured revolving lines of credit totaling €7.2 million, £1.0 million and
$6.4 million, denominated in euros, pound sterling and U.S. dollars,
respectively, with total outstanding standby letters of credit of $2.1 million
at September 30, 2007. The total outstanding amounts of standby letters of
credit were $53.5 million and $23.0 million at September 30, 2007 and December
31, 2006, respectively.
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. 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, state,
local and foreign tax purposes to be approximately $14.8 million. Approximately
$5.5 million of the 2007 provision will be paid in 2008.
Working
capital, which includes current assets less current liabilities, was ($62.5)
million at September 30, 2007, compared with $492.9 million at December 31,
2006. The $555.4 million decrease in working capital resulted from the aggregate
principal amount of the convertible notes being included in the current portion
of long-term debt and
the reduction of cash and cash equivalents from the proceeds used to partially
fund the acquisition of Actaris.
We
expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from or to others,
distribution agreements, partnership arrangements and acquisitions of technology
or other companies. We expect these activities to be funded with existing cash,
cash flow from operations, borrowings and the issuance of common stock or other
securities. We believe existing sources of liquidity will be sufficient to
fund
our existing operations and obligations for at least the next year and
foreseeable future, but offer no assurances. Our liquidity could be affected
by
the stability of the energy and water industries, competitive pressures,
international risks, intellectual property claims and other factors described
under “Risk Factors” within Item 1A 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, and related
pronouncements. In accordance with SFAS 5, a liability is recorded when we
determine that a loss is probable and the amount can be reasonably estimated.
Additionally, we disclose contingencies for which a material loss is reasonably
possible, but not probable. Legal contingencies at September 30, 2007 and
December 31, 2006 were not material to our financial condition and results
of
operations.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments.
We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue
Recognition: The majority of our revenues are recognized when products are
shipped to or received by a customer or when services are provided. 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.
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. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance
period.
Unearned
revenue is recorded for products or services that have been paid for by a
customer but for which the criteria for revenue recognition have not been met
as
of the balance sheet date. The majority of unearned revenue relates to annual
billings for post-sale maintenance and support agreements, but this may vary
due
to the timing of revenue recognition requirements being met on active contracts.
Shipping and handling costs and incidental expenses billed to customers are
recorded as revenue, with the associated cost charged to cost of
revenues.
Warranty:
We offer industry standard warranties on our hardware products and large
application software products. 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.
Business
Combinations: In accordance with SFAS 141, Business Combinations,
we record the results of operations of an acquired business from the date of
acquisition. We make preliminary allocations of the purchase price to the assets
acquired and liabilities assumed based on estimated fair value assessments.
Once
we finalize the fair values, we may have changes to the carrying values of
tangible and intangible assets, goodwill, commitments and contingencies,
liabilities, deferred taxes, uncertain tax positions and restructuring
activities. Amounts initially allocated to IPR&D are expensed in
the period of acquisition, with the costs to complete the IPR&D expensed in
the subsequent period incurred. We may experience unforeseen problems in the
development or performance of the IPR&D; we may not meet our product
development schedules; or we may not achieve market acceptance of these new
products or solutions.
Goodwill
and Intangible Assets: Goodwill and intangible assets result from our
acquisitions. We use estimates in determining the value 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 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. At October 1, 2007, our
Itron North America segment represents one reporting unit, while our Actaris
segment has three reporting units. Intangible assets with a finite life are
amortized based on estimated discounted cash flows and are tested for impairment
when events or changes in circumstances indicate the carrying value may not
be
recoverable.
Stock-Based
Compensation: We measure compensation cost for stock-based awards at fair
value and recognize compensation 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.
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.
Defined
Benefit Pension Plans: As part of the Actaris
acquisition, we assumed Actaris’ defined benefit pension plans. Actaris sponsors
both funded and unfunded non-U.S. defined benefit pension plans. FASB Statement
87, Employers' Accounting for Pensions, as amended by
SFAS 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, requires the assets acquired and liabilities assumed
in a business combination to include a liability for the projected benefit
obligation in excess of plan assets or an asset for plan assets in excess of
the
projected benefit obligation, thereby eliminating any previously existing net
gain or loss, prior service cost or credit or transition asset or obligation
recognized in accumulated other comprehensive income (loss). SFAS 158 also
requires employers to recognize the funded status of their defined benefit
pension plans on their consolidated balance sheet and recognize as a component
of other comprehensive income (loss), net of tax, the actuarial gains or losses,
prior service costs or credits and transition assets or obligations, if any,
that arise during the period but are not recognized as components of net
periodic benefit cost. We use a discount rate that is based on the date of
acquisition, which will be updated on an annual basis as of December 31 of each
year.
In future reporting periods, the adjustment for a change in the discount rate
will be recognized in other comprehensive income (loss) in the period in which
it occurs.
Deferred
Income Taxes: On January 1, 2007, we adopted the provisions of FIN 48,
which addresses whether tax benefits claimed or expected to be claimed on
a tax
return should be recorded in the financial statements. Under FIN 48, we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination
by the
taxing authorities based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should
be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN 48 requires increased
disclosures, provides guidance on derecognition, classification, interest
and
penalties on income taxes and the accounting in interim periods. As of January
1, 2007 and September 30, 2007, the amount of unrecognized tax benefits was
$6.1
million and $36.6 million, of which $6.1 million and $7.5 million
would, if recognized, affect our actual tax rate, respectively. We do not
expect
any reasonably possible material changes to the estimated amount of liability
associated with our unrecognized tax benefits through September 30,
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. Legal contingencies at September 30, 2007
and December 31, 2006 were not material to our financial condition and
results of operations.
Derivative
Instruments: We account for derivative instruments and hedging activities
in accordance with SFAS 133, as amended. All derivative instruments, whether
designated in hedging relationships or not, are recorded on the Condensed
Consolidated Balance Sheets at fair value as either assets or liabilities.
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.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
and
expands disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, on a prospective basis. We
are
currently evaluating the impact of the adoption of SFAS 157 on our
consolidated 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. 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 have not yet determined if we will elect to apply any of the provisions
of SFAS 159 or what effect the adoption of SFAS 159 would have, if any, on
our
consolidated financial statements.
Item
3: Quantitative
and Qualitative
Disclosures About Market Risk
In
the
normal course of business, we are exposed to interest rate and foreign currency
exchange rate risks that could impact our financial position and results of
operations. As part of our risk management strategy, we are using derivative
financial instruments to hedge certain foreign currency and interest rate
exposures. Our objective is to offset gains and losses resulting from these
exposures with losses and gains on the derivative contracts used to hedge them,
therefore reducing the impact of volatility on earnings or protecting fair
values of assets and liabilities. We use derivative contracts only to manage
existing underlying exposures. Accordingly, we do not use derivative contracts
for speculative purposes.
Interest
Rate Risk
The
table
below provides information about our financial instruments that are sensitive
to
changes in interest rates. Weighted average variable rates in the table are
based on implied forward rates in the Wells Fargo swap yield curve as of
October 1, 2007 and our estimated ratio of funded debt to EBITDA,
which determines our rate margin. The table below illustrates the scheduled
minimum repayment of principal over the remaining lives of our debt at September
30, 2007.
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Beyond
2011
|
|
|
Total
|
|
|
|
(in
millions)
|
|
Fixed
Rate Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
senior subordinated
notes (1)
|
|
$ |
345.0
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
345.0
|
|
Interest
rate
|
|
|
2.50 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
subordinated notes
(2)
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
125.0
|
|
|
$ |
125.0
|
|
Interest
rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate Debt
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Dollar Term Loan
|
|
$ |
1.5
|
|
|
$ |
6.0
|
|
|
$ |
6.0
|
|
|
$ |
6.0
|
|
|
$ |
6.0
|
|
|
$ |
576.6
|
|
|
$ |
602.1
|
|
Average
interest rate
|
|
|
7.18 |
% |
|
|
6.95 |
% |
|
|
6.67 |
% |
|
|
6.73 |
% |
|
|
6.81 |
% |
|
|
6.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
term loan
|
|
$ |
1.2
|
|
|
$ |
4.7
|
|
|
$ |
4.7
|
|
|
$ |
4.7
|
|
|
$ |
4.7
|
|
|
$ |
430.1
|
|
|
$ |
450.1
|
|
Average
interest rate
|
|
|
6.73 |
% |
|
|
6.68 |
% |
|
|
6.52 |
% |
|
|
6.51 |
% |
|
|
6.52 |
% |
|
|
6.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GBP
term loan
|
|
$ |
0.3
|
|
|
$ |
1.0
|
|
|
$ |
1.0
|
|
|
$ |
1.0
|
|
|
$ |
1.0
|
|
|
$ |
86.1
|
|
|
$ |
90.4
|
|
Average
interest rate
|
|
|
8.32 |
% |
|
|
8.08 |
% |
|
|
7.70 |
% |
|
|
7.64 |
% |
|
|
7.59 |
% |
|
|
7.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swap on Euro Term
Loan
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Pay)
|
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
|
|
Average
interest rate (Receive)
|
|
|
6.73 |
% |
|
|
6.68 |
% |
|
|
6.52 |
% |
|
|
6.51 |
% |
|
|
6.52 |
% |
|
|
6.55 |
% |
|
|
|
|
Net/Spread
|
|
|
0.14 |
% |
|
|
0.09 |
% |
|
|
-0.06 |
% |
|
|
-0.08 |
% |
|
|
-0.07 |
% |
|
|
-0.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross
Currency Swap on GBP Term
Loan
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Pay)
|
|
|
7.28 |
% |
|
|
7.05 |
% |
|
|
6.77 |
% |
|
|
6.83 |
% |
|
|
6.91 |
% |
|
|
|
|
|
|
|
|
Average
interest rate (Receive)
|
|
|
8.32 |
% |
|
|
8.08 |
% |
|
|
7.70 |
% |
|
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7.64 |
% |
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|
7.59 |
% |
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Net/Spread
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|
1.04 |
% |
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|
1.03 |
% |
|
|
0.93 |
% |
|
|
0.81 |
% |
|
|
0.68 |
% |
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(1)
On
September 30, 2007, our $345.0 million of 2.50% convertible notes
due on
August 2026, with fixed interest payments of $4.3 million due every
six
months in February and August, exceeded the conversion threshold.
As a
result, the notes are convertible at the option of the holder as
of
September 30, 2007, and accordingly, the aggregate principal amount
of the
convertible notes is included in the current portion of long-term
debt
(see Note 7).
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(2)
The $125.0
million aggregate principal amount of 7.75% senior subordinated
notes, due
in 2012, was discounted to 99.265 per $100 of principal to yield
7.875%
(see Note 7).
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(3)
The Actaris
acquisition was financed in part by a $1.2 billion senior secured
credit
facility. The facility is comprised of $605.1 million, €335 million and
£50 million term loans denominated in USD, EUR and GBP, respectively
(see
Note 7).
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(4)
Interest
rate swap to convert our €335 million euro denominated variable rate term
loan to a fixed-rate debt obligation at a rate of 6.59% for the
term of
the loan, including expected prepayments (see Note
8).
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(5)
Cross
currency interest rate swap to convert our £50 million pound sterling
denominated term loan and the pound sterling LIBOR variable interest
rate
to a U.S. dollar denominated term loan and a U.S. LIBOR interest
rate,
plus an additional margin of 210 basis points, including expected
prepayments (see Note 8).
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|
Based
on
a sensitivity analysis as of September 30, 2007, we estimate that if market
interest rates average one percentage point higher in 2007, than in the table
above, our earnings before income taxes in the last quarter of 2007 would
decrease by approximately $2.9 million.
As
part
of the acquisition of Actaris Metering Systems SA (Actaris) on April 18,
2007,
we entered into a $1.2 billion credit facility, comprised of a $605.1 million
first lien U.S. dollar denominated term loan; a €335 million first lien
euro denominated term loan; a £50 million first lien pound sterling
denominated term loan (collectively the term loans); and a $115 million
multicurrency revolving credit facility (revolver). Interest rates on the
credit
facility are based on the respective borrowing denominated LIBOR rate
(U.S. dollar, euro or pound sterling) or the Wells Fargo Bank, National
Association’s prime rate, plus an additional margin subject to factors including
our consolidated leverage ratio. Scheduled amortization of principal payments
is
1% per year (0.25% quarterly) with an excess cash flow provision for additional
annual principal repayment requirements. Maturities of the term loans and
multicurrency revolver are seven years and six years from the date of issuance,
respectively.
These
variable rate financial instruments are sensitive to changes in interest
rates.
During the third quarter of 2007, we entered into an interest rate swap to
convert our €335 million euro denominated variable rate term loan to a
fixed-rate debt obligation. This variable-to-fixed interest rate swap is
considered a highly effective cash-flow hedge. Consequently, changes in the
fair
value of the interest rate swap are recorded as a component of other
comprehensive income (loss) and are recognized in earnings when the hedged
item
affects earnings. The cash flow hedge is expected to be highly effective
in
achieving offsetting cash flows attributable to the hedged risk during the
term
of the hedge. The amounts paid or received on the hedge are recognized as
adjustments to interest expense. The notional amount of the swap was $450.3
million (€318.3 million) and the fair value, recorded as a long-term liability,
was $2.1 million at September 30, 2007. The amount of net losses expected
to be
reclassified into earnings in the next twelve months is approximately $663,000.
We will monitor and assess our interest rate risk and may institute additional
interest rate swaps or other derivative instruments to manage interest rate
risk.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of foreign countries and, therefore, face exposure
to adverse movements in foreign currency exchange rates. As a result of the
Actaris acquisition, commencing in the second quarter of 2007, a majority of
our
revenues and operating expenses are now denominated in foreign currencies,
resulting in changes in our foreign currency exchange rate exposures that could
have a material effect on our financial results. International revenues were
66%
and 56% of total revenues for the three and nine months ended September 30,
2007, compared with 8% and 6% for the three and nine months ended September
30,
2006, respectively.
Our
primary foreign currency exposure relates to non-U.S. dollar denominated
revenues, cost of revenues and operating expenses in our foreign subsidiary
operations, the most significant of which is the euro. Risk-sensitive financial
instruments in the form of intercompany trade receivables and notes are mostly
denominated in the local foreign currencies. As foreign currency exchange rates
change, intercompany trade receivables may affect current earnings, while
intercompany notes, for which settlement is not planned or anticipated in the
foreseeable future, may be revalued and result in unrealized translation gains
or losses that are reported in accumulated other comprehensive income
(loss).
As
a
result of the Actaris Metering Systems (Actaris) acquisition, effective
June 29,
2007, we designated certain portions of our foreign currency denominated
term
loans hedges of our net investment in foreign operations. Losses of $22.8
million ($14.1 million after-tax) were reported as a component of accumulated
other comprehensive income (loss) within the unrealized translation adjustment,
which represented effective hedges of net investments, for the three and
nine
months ended September 30, 2007. During the third quarter of 2007, we also
entered into a cross currency interest rate swap for the purpose of converting
our £50 million pound sterling denominated term loan and the pound sterling
LIBOR variable interest rate to a U.S. dollar denominated term loan and
a U.S.
LIBOR interest rate (plus an additional margin of 210 basis points), which
was
not designated as an accounting hedge. The cross currency interest rate
swap has
terms similar to the pound sterling denominated term loan, including expected
prepayments. This instrument is intended to reduce the impact of volatility
between the pound sterling and the U.S. dollar. Therefore, gains and losses
are
recorded in other income (expense), as an offset to the gains (losses)
on the
underlying term loan revaluation to the U.S. dollar. The amounts paid or
received on the interest rate swap are recognized as adjustments to interest
expense. The fair value of the cross currency swap, recorded as a long-term
asset, was $1.9 million. The pound sterling denominated notional amount
of the
cross currency interest rate swap was $90.4 million (£44.8 million) at
September 30, 2007. The U.S. denominated notional amount was $89.5 million
at
September 30, 2007. We expect the interest rate swap to reduce interest
expense
by $868,000 during the next twelve months.
In
future
periods, we may use a combination of derivative contracts to protect against
foreign currency exchange rate risks. Alternatively, we may choose not to hedge
certain foreign currency risks associated with our foreign currency exposures
if
such exposures acts as a natural foreign currency hedge for other offsetting
amounts denominated in the same currency.
Because
our earnings are affected by fluctuations in the value of the U.S. dollar
against foreign currencies, we have performed a sensitivity analysis assuming
a
hypothetical 10% increase or decrease in the value of the dollar relative to
the
currencies in which our transactions are denominated. At September 30, 2007,
the
analysis indicated that such market movements would have changed our results
from operations by approximately $7 million. 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 nine months ended September 30, 2007.
We
may be
exposed to certain market risks arising from particular transactions. As part
of
our funding necessary to complete the Actaris acquisition, we entered into
foreign currency range forward contracts (transactions where put options were
sold and call options were purchased) to reduce our exposure to declines in
the
value of the U.S. dollar and pound sterling relative to the euro denominated
purchase price. Under SFAS 133, the Actaris stock purchase agreement was
considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts could not be designated as fair value hedges. In April
2007, we completed the acquisition of Actaris and realized a $2.8 million
gain from the termination of the foreign currency range forward
contracts.
Item
4: Controls and
Procedures
(a)
|
Evaluation
of disclosure controls and procedures. An evaluation was performed
under the supervision and with the participation of our Company’s
management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Company’s
disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934
as
amended. Based on that evaluation, the Company’s management, including the
Chief Executive Officer and Chief Financial Officer, concluded that
the
Company’s disclosure controls and procedures were effective as of
September 30, 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)
|
Changes
in internal controls over financial reporting. There have been no
changes in internal control over financial reporting during the quarter
ended September 30, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
|
PART
II: OTHER INFORMATION
Item
1: Legal
Proceedings
We
are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood
of
any adverse judgments or outcomes related to legal matters, as well as ranges
of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue
in
accordance with 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. Legal
contingencies at September 30, 2007 and December 31, 2006 were not material
to
our financial condition and results of operations.
There
were no material changes during the third 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
4: Submission of Matters to a
Vote of Security Holders
No
matters were submitted to a vote of shareholders of Itron during the third
quarter of 2007.
Item
5: Other
Information
(a)
No
information was required to be disclosed in a report on Form 8-K during the
third quarter of 2007 that was not reported.
(b)
Not
applicable.
Exhibit
Number
|
Description
of Exhibits
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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 6th day of November, 2007.
|
By:
|
/s/
STEVEN M. HELMBRECHT
|
|
|
Steven
M. Helmbrecht
Sr.
Vice President and Chief Financial
Officer
|