form10-q1_2009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended March 31,
2009
|
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 000-22418
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).* Yes ¨ No ¨
* Itron
is a voluntary filer of Interactive Data File
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer x |
Accelerated
filer ¨ |
|
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company) |
Smaller
reporting company ¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
April 30, 2009 there were outstanding 36,801,662 shares of the
registrant’s common stock, no par value, which is the only class of common stock
of the registrant.
Table
of Contents
|
|
|
Page
|
PART
I: FINANCIAL INFORMATION
|
|
|
Item 1:
Financial Statements (Unaudited)
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
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|
|
33
|
|
|
48
|
|
|
49
|
|
|
|
|
PART
II: OTHER INFORMATION
|
|
|
|
50
|
|
|
50
|
|
|
50
|
|
|
50
|
|
|
51
|
|
|
|
|
|
52
|
Item 1: Financial Statements (Unaudited)
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands, except per share data)
|
|
Revenues
|
|
$ |
388,518 |
|
|
$ |
478,476 |
|
Cost
of revenues
|
|
|
258,934 |
|
|
|
315,917 |
|
Gross
profit
|
|
|
129,584 |
|
|
|
162,559 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
36,975 |
|
|
|
41,966 |
|
Product
development
|
|
|
31,158 |
|
|
|
29,031 |
|
General
and administrative
|
|
|
29,024 |
|
|
|
33,023 |
|
Amortization
of intangible assets
|
|
|
23,478 |
|
|
|
31,252 |
|
Total
operating expenses
|
|
|
120,635 |
|
|
|
135,272 |
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
8,949 |
|
|
|
27,287 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
535 |
|
|
|
1,424 |
|
Interest
expense
|
|
|
(16,845 |
) |
|
|
(28,537 |
) |
Loss
on extinguishment of debt, net
|
|
|
(10,340 |
) |
|
|
- |
|
Other
income (expense), net
|
|
|
(2,034 |
) |
|
|
188 |
|
Total
other income (expense)
|
|
|
(28,684 |
) |
|
|
(26,925 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(19,735 |
) |
|
|
362 |
|
Income
tax benefit
|
|
|
6 |
|
|
|
591 |
|
Net
income (loss)
|
|
$ |
(19,729 |
) |
|
$ |
953 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.55 |
) |
|
$ |
0.03 |
|
Diluted
|
|
$ |
(0.55 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
36,151 |
|
|
|
30,696 |
|
Diluted
|
|
|
36,151 |
|
|
|
32,745 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
102,091 |
|
|
$ |
144,390 |
|
Accounts
receivable, net
|
|
|
309,977 |
|
|
|
321,278 |
|
Inventories
|
|
|
162,244 |
|
|
|
164,210 |
|
Deferred
income taxes, net
|
|
|
28,711 |
|
|
|
31,807 |
|
Other
|
|
|
60,355 |
|
|
|
56,032 |
|
Total
current assets
|
|
|
663,378 |
|
|
|
717,717 |
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net
|
|
|
294,938 |
|
|
|
307,717 |
|
Prepaid
debt fees
|
|
|
11,155 |
|
|
|
12,943 |
|
Deferred
income taxes, net
|
|
|
34,482 |
|
|
|
30,917 |
|
Other
|
|
|
20,608 |
|
|
|
19,315 |
|
Intangible
assets, net
|
|
|
433,198 |
|
|
|
481,886 |
|
Goodwill
|
|
|
1,215,562 |
|
|
|
1,285,853 |
|
Total
assets
|
|
$ |
2,673,321 |
|
|
$ |
2,856,348 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
192,274 |
|
|
$ |
200,725 |
|
Other
current liabilities
|
|
|
66,469 |
|
|
|
66,365 |
|
Wages
and benefits payable
|
|
|
70,097 |
|
|
|
78,336 |
|
Taxes
payable
|
|
|
27,565 |
|
|
|
18,595 |
|
Current
portion of long-term debt
|
|
|
10,501 |
|
|
|
10,769 |
|
Current
portion of warranty
|
|
|
20,370 |
|
|
|
23,375 |
|
Unearned
revenue
|
|
|
36,582 |
|
|
|
24,329 |
|
Deferred
income taxes, net
|
|
|
1,927 |
|
|
|
1,927 |
|
Total
current liabilities
|
|
|
425,785 |
|
|
|
424,421 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
945,566 |
|
|
|
1,140,998 |
|
Warranty
|
|
|
14,468 |
|
|
|
14,880 |
|
Pension
plan benefits
|
|
|
53,511 |
|
|
|
55,810 |
|
Deferred
income taxes, net
|
|
|
90,835 |
|
|
|
102,720 |
|
Other
obligations
|
|
|
62,889 |
|
|
|
58,743 |
|
Total
liabilities
|
|
|
1,593,054 |
|
|
|
1,797,572 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
1,120,934 |
|
|
|
992,184 |
|
Accumulated
other comprehensive income (loss), net
|
|
|
(53,437 |
) |
|
|
34,093 |
|
Retained
earnings
|
|
|
12,770 |
|
|
|
50,291 |
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
(17,792 |
) |
Total
shareholders' equity
|
|
|
1,080,267 |
|
|
|
1,058,776 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,673,321 |
|
|
$ |
2,856,348 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(19,729 |
) |
|
$ |
953 |
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
36,236 |
|
|
|
44,318 |
|
Stock-based
compensation
|
|
|
4,487 |
|
|
|
3,890 |
|
Amortization
of prepaid debt fees
|
|
|
1,840 |
|
|
|
1,858 |
|
Amortization
of convertible debt discount
|
|
|
2,570 |
|
|
|
3,271 |
|
Loss
on extinguishment of debt, net
|
|
|
9,960 |
|
|
|
- |
|
Deferred
income taxes, net
|
|
|
(7,654 |
) |
|
|
(19,227 |
) |
Other,
net
|
|
|
3,102 |
|
|
|
86 |
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
11,301 |
|
|
|
(19,952 |
) |
Inventories
|
|
|
1,966 |
|
|
|
(16,237 |
) |
Accounts
payables, other current liabilities, and taxes payable
|
|
|
316 |
|
|
|
36,501 |
|
Wages
and benefits payable
|
|
|
(7,078 |
) |
|
|
5,394 |
|
Unearned
revenue
|
|
|
15,796 |
|
|
|
13,889 |
|
Warranty
|
|
|
(3,417 |
) |
|
|
2,654 |
|
Effect
of foreign exchange rate changes
|
|
|
(5,886 |
) |
|
|
7,867 |
|
Other,
net
|
|
|
(1,084 |
) |
|
|
(8,845 |
) |
Net
cash provided by operating activities
|
|
|
42,726 |
|
|
|
56,420 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Acquisitions
of property, plant, and equipment
|
|
|
(13,712 |
) |
|
|
(13,117 |
) |
Business
acquisitions & contingent consideration, net of cash equivalents
acquired
|
|
|
(1,217 |
) |
|
|
(95 |
) |
Other,
net
|
|
|
664 |
|
|
|
897 |
|
Net
cash used in investing activities
|
|
|
(14,265 |
) |
|
|
(12,315 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
|
(67,551 |
) |
|
|
(46,770 |
) |
Issuance
of common stock
|
|
|
724 |
|
|
|
2,569 |
|
Other,
net
|
|
|
(587 |
) |
|
|
3,587 |
|
Net
cash used in financing activities
|
|
|
(67,414 |
) |
|
|
(40,614 |
) |
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
(3,346 |
) |
|
|
40 |
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(42,299 |
) |
|
|
3,531 |
|
Cash
and cash equivalents at beginning of period
|
|
|
144,390 |
|
|
|
91,988 |
|
Cash
and cash equivalents at end of period
|
|
$ |
102,091 |
|
|
$ |
95,519 |
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
5,560 |
|
|
$ |
2,604 |
|
Exchange
of debt for common stock (see Note 6)
|
|
|
120,984 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
1,494 |
|
|
$ |
3,903 |
|
Interest
|
|
|
15,445 |
|
|
|
18,385 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2009
(UNAUDITED)
In this
Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron,” and the
“Company” refer to Itron, Inc.
Note
1: Summary of Significant Accounting
Policies
We were
incorporated in the state of Washington in 1977. We provide a portfolio of
products and services to utilities for the energy and water markets throughout
the world.
Financial
Statement Preparation
The
condensed consolidated financial statements presented in this Quarterly Report
on Form 10-Q are unaudited and reflect entries necessary for the fair
presentation of the Consolidated Statements of Operations for the three months
ended March 31, 2009 and 2008, Consolidated Balance Sheets as of
March 31, 2009 and December 31, 2008, and Consolidated Statements of
Cash Flows for the three months ended March 31, 2009 and 2008 of
Itron, Inc. and its subsidiaries. All entries required for the fair presentation
of the financial statements are of a normal recurring nature, except as
disclosed.
Certain
information and note disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles (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 2008 audited financial statements and notes included in our Annual Report on
Form 10-K, as filed with the SEC on February 26, 2009. The results of
operations for the three months ended March 31, 2009 are not necessarily
indicative of the results expected for the full fiscal year or for any other
fiscal period.
Basis
of Consolidation
We
consolidate all entities in which we have a greater than 50% ownership interest.
We also consolidate entities in which we have a 50% or less investment and over
which we have control. We use the equity method of accounting for entities in
which we have a 50% or less investment and exercise significant influence.
Entities in which we have less than a 20% investment and where we do not
exercise significant influence are accounted for under the cost method. We
consider for consolidation any variable interest entity of which we are the
primary beneficiary. At March 31, 2009, we had no material investments in
variable interest entities. Intercompany transactions and balances have been
eliminated upon consolidation.
In
December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51, which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as noncontrolling interests and will be reported as a
component of equity, separate from the parent’s equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. As the amount of our noncontrolling interests was not
material at March 31, 2009 or at December 31, 2008, the condensed
consolidated financial statements do not separately reflect the equity and net
income of the noncontrolling interest.
Change
in Accounting Principle
In
May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement), (FSP 14-1) addressing convertible instruments such as
our convertible senior subordinated notes (convertible notes). FSP 14-1 requires
the convertible debt to be separated into its liability and equity components in
a manner that reflects our non-convertible debt borrowing rate. We adopted
FSP 14-1 on January 1, 2009 and applied FSP 14-1 retrospectively to
all periods for during our convertible debt was outstanding. Our convertible
notes were issued in August 2006. Refer to Note 6 for further disclosure of
the terms of the convertible notes and the adoption of FSP 14-1.
The
impact of the adoption of FSP 14-1 on our results of operations, our financial
position, and our cash flows is as follows:
|
|
Three
Months Ended March 31, 2008
|
|
|
|
As
Previously Reported
|
|
|
Impact
of FSP 14-1
|
|
|
Upon
Adoption of FSP 14-1
|
|
|
|
(in
thousands, except per share data)
|
|
Consolidated
Statement of Operations
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(25,266 |
) |
|
$ |
(3,271 |
) |
|
$ |
(28,537 |
) |
Income
tax (provision) benefit
|
|
$ |
(680 |
) |
|
$ |
1,271 |
|
|
$ |
591 |
|
Net
income
|
|
$ |
2,953 |
|
|
$ |
(2,000 |
) |
|
$ |
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10 |
|
|
$ |
(0.07 |
) |
|
$ |
0.03 |
|
Diluted
|
|
$ |
0.09 |
|
|
$ |
(0.06 |
) |
|
$ |
0.03 |
|
|
|
At
December 31, 2008
|
|
|
|
As
Previously Reported
|
|
|
Impact
of FSP 14-1
|
|
|
Upon
Adoption of FSP 14-1
|
|
|
|
(in
thousands)
|
|
Consolidated
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes, net
|
|
$ |
45,783 |
|
|
$ |
(14,866 |
) |
|
$ |
30,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
1,179,249 |
|
|
$ |
(38,251 |
) |
|
$ |
1,140,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
951,007 |
|
|
$ |
41,177 |
|
|
$ |
992,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
$ |
- |
|
|
$ |
(17,792 |
) |
|
$ |
(17,792 |
) |
|
|
Three
Months Ended March 31, 2008
|
|
|
|
As
Previously Reported
|
|
|
Impact
of FSP 14-1
|
|
|
Upon
Adoption of FSP 14-1
|
|
|
|
(in
thousands)
|
|
Consolidated
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,953 |
|
|
$ |
(2,000 |
) |
|
$ |
953 |
|
Amortization
of convertible debt discount
|
|
$ |
- |
|
|
$ |
3,271 |
|
|
$ |
3,271 |
|
Deferred
income taxes, net
|
|
$ |
(17,956 |
) |
|
$ |
(1,271 |
) |
|
$ |
(19,227 |
) |
|
|
Three
Months Ended March 31, 2009
|
|
|
|
As
Reported
|
|
|
Impact
of FSP 14-1
|
|
|
As
Adjusted
|
|
|
|
(in
thousands, except per share data)
|
|
Consolidated
Statement of Operations
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(16,845 |
) |
|
$ |
2,570 |
|
|
$ |
(14,275 |
) |
Income
tax benefit (provision)
|
|
$ |
6 |
|
|
$ |
(989 |
) |
|
$ |
(983 |
) |
Net
loss
|
|
$ |
(19,729 |
) |
|
$ |
1,581 |
|
|
$ |
(18,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.55 |
) |
|
$ |
0.05 |
|
|
$ |
(0.50 |
) |
Diluted
|
|
$ |
(0.55 |
) |
|
$ |
0.05 |
|
|
$ |
(0.50 |
) |
Cash
and Cash Equivalents
We
consider all highly liquid instruments with remaining maturities of three months
or less at the date of acquisition to be cash equivalents.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Consolidated Balance Sheets at fair value as either assets or liabilities.
The components and fair values of our derivative instruments, which are
primarily interest rate swaps, are determined using the fair value measurements
of significant other observable inputs (Level 2), as defined by SFAS 157, Fair Value
Measurements.
The net
fair value of our derivative instruments may switch between a net asset and a
net liability depending on the mark-to-market at the end of the period. We
include the effect of our counterparty credit risk based on current published
credit default swap rates when the net fair value of our derivative instruments
are in a net asset position and the effect of our own nonperformance risk when
the net fair value of our derivative instruments are in a net liability
position. If the derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded as a component of other comprehensive income (OCI) and
are recognized in earnings when the hedged item affects earnings. If the
derivative is a net investment hedge, the effective portion of any unrealized
gain or loss is reported in accumulated OCI as a net unrealized gain or loss on
derivative instruments. Ineffective portions of fair value changes or the
changes in fair value of derivative instruments that do not qualify for hedging
activities are recognized in other income (expense) in the Consolidated
Statement of Operations. We classify cash flows from our derivative programs as
cash flows from operating activities in the Consolidated Statement of Cash
Flows.
Derivatives
are not used for trading or speculative purposes. We have one counterparty to
our derivatives, which is a major international financial institution, with whom
we have a master netting agreement; however, our derivative positions are not
disclosed on a net basis. There are no credit-risk-related contingent features
within our derivative instruments. Refer to Note 7 and Note 12 for further
disclosures of our derivative instruments and their impact on comprehensive
income.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded for invoices issued to customers in accordance with our
contractual arrangements. Interest and late payment fees are minimal. Unbilled
receivables are recorded when revenues are recognized upon product shipment or
service delivery and invoicing occurs at a later date. The allowance for
doubtful accounts is based on our historical experience of bad debts and our
specific review of outstanding receivables at period end. Accounts receivable
are written-off against the allowance when we believe an account, or a portion
thereof, is no longer collectible.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method.
Cost includes raw materials and labor, plus applied direct and indirect
costs.
Property,
Plant, and Equipment
Property,
plant, and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally thirty years for buildings and three to
five years for equipment, computers, and furniture. Leasehold improvements are
capitalized and 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.
Prepaid
Debt Fees
Prepaid
debt fees represent the capitalized direct costs incurred related to the
issuance of debt and are recorded as noncurrent assets. These costs are
amortized to interest expense over the lives of the respective borrowings using
the effective interest method. When debt is repaid early, or first becomes
convertible as in the case of our convertible notes, the related portion of
unamortized prepaid debt fees is written-off and included in interest expense in
the Consolidated Statements of Operations.
Business
Combinations
SFAS
141(R), Business
Combinations, is effective for acquisitions after January 1, 2009.
On the date of acquisition, the assets acquired, liabilities assumed, and any
noncontrolling interests in the acquiree are recorded at their fair values. The
acquiree results of operations are also included as of the date of acquisition
in the consolidated results. Intangible assets that arise from contractual/legal
rights, or are capable of being separated, as well as in-process research and
development (IPR&D), are measured and recorded at fair value. If
practicable, assets acquired and liabilities assumed arising from contingencies
are measured and recorded at fair value. If not practicable, such assets and
liabilities are measured and recorded under the guidance of SFAS 5, Contingencies. We capitalize IPR&D
as an intangible asset and amortize the balance over its estimated useful life.
The residual balance of the purchase price, after fair value allocations to all
identified assets and liabilities, represents goodwill. Acquisition-related
costs are expensed as incurred. Restructuring costs are generally expensed in
periods subsequent to the acquisition date, and changes in deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period are recognized as a component of provision for income taxes.
Goodwill
and Intangible Assets
Goodwill
and intangible assets result from our acquisitions. We use estimates in
determining and assigning the fair value of goodwill and intangible assets,
including estimates of useful lives of intangible assets, the amount and timing
of related future cash flows, and fair values of the related operations. Our
intangible assets have finite lives, are amortized over their estimated useful
lives based on estimated discounted cash flows, and are tested for impairment
when events or changes in circumstances indicate the carrying value may not be
recoverable.
Goodwill
is 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. 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.
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.
Warranty
We offer
standard warranties on our hardware products and large application software
products. We accrue the estimated cost of projected warranty claims based on
historical and projected product performance trends and costs. Testing of new
products in the development stage helps identify and correct potential warranty
issues prior to manufacturing. Continuing quality control efforts during
manufacturing reduce our exposure to warranty claims. If our quality control
efforts fail to detect a fault in one of our products, we could experience an
increase in warranty claims. We track warranty claims to identify potential
warranty trends. If an unusual trend is noted, an additional warranty accrual
may be assessed and recorded when a failure event is probable and the cost can
be reasonably estimated. Management continually evaluates the sufficiency of the
warranty provisions and makes adjustments when necessary. The warranty
allowances may fluctuate due to changes in estimates for material, labor, and
other costs we may incur to repair or replace projected product failures, and we
may incur additional warranty and related expenses in the future with respect to
new or established products. The long-term warranty balance includes estimated
warranty claims beyond one year.
A summary
of the warranty accrual account activity is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Beginning
balance, January 1
|
|
$ |
38,255 |
|
|
$ |
32,841 |
|
Adjustment
of previous acquisition
|
|
|
- |
|
|
|
6,307 |
|
New
product warranties
|
|
|
1,534 |
|
|
|
2,667 |
|
Other
changes/adjustments to warranties
|
|
|
1,590 |
|
|
|
1,701 |
|
Claims
activity
|
|
|
(5,636 |
) |
|
|
(3,580 |
) |
Effect
of change in exchange rates
|
|
|
(905 |
) |
|
|
1,867 |
|
Ending
balance, March 31
|
|
|
34,838 |
|
|
|
41,803 |
|
Less:
current portion of warranty
|
|
|
20,370 |
|
|
|
22,980 |
|
Long-term
warranty
|
|
$ |
14,468 |
|
|
$ |
18,823 |
|
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $3.1 million and
$4.4 million for the three months ended March 31, 2009 and 2008,
respectively. Warranty expense is classified within cost of
revenues.
Health
Benefits
We are
self insured for a substantial portion of the cost of U.S. employee group health
insurance. We purchase insurance from a third party, which provides individual
and aggregate stop loss protection for these costs. Each reporting period, we
expense the costs of our health insurance plan including paid claims, the change
in the estimate of incurred but not reported (IBNR) claims, taxes, and
administrative fees (collectively the plan costs). Plan costs were approximately
$4.8 million and $5.1 million for the three months ended March 31, 2009 and
2008, respectively. The IBNR accrual, which is included in wages and benefits
payable, was $3.1 million and $3.0 million at March 31, 2009 and
December 31, 2008, respectively. Our IBNR accrual and expenses can
fluctuate due to the number of plan participants, claims activity, and
deductible limits. For our employees located outside of the United States,
health benefits are provided primarily through governmental social plans, which
are funded through employee and employer tax withholdings.
Contingencies
A loss
contingency is recorded if it is probable that an asset has been impaired or a
liability has been incurred and the amount of the loss can be reasonably
estimated. We evaluate, among other factors, the degree of probability of an
unfavorable outcome and our ability to make a reasonable estimate of the amount
of the ultimate loss. Changes in these factors and related estimates could
materially affect our financial position and results of operations.
Bonus
and Profit Sharing
We have
various employee bonus and profit sharing plans, which provide award amounts for
the achievement of annual financial and nonfinancial targets. If management
determines it probable that the targets will be achieved and the amounts can be
reasonably estimated, a compensation accrual is recorded based on the
proportional achievement of the financial and nonfinancial targets. Although we
monitor and accrue expenses quarterly based on our progress toward the
achievement of the annual targets, the actual results at the end of the year may
require awards that are significantly greater or less than the estimates made in
earlier quarters.
Defined
Benefit Pension Plans
Income
Taxes
Income
taxes are accounted for in accordance with SFAS 109, Accounting for Income Taxes.
Under this method, deferred income taxes are recorded for the temporary
differences between the financial reporting basis and tax basis of our assets
and liabilities in each of the tax jurisdictions in which we operate. These
deferred income taxes are measured using the tax rates expected to be in effect
when the temporary differences reverse. We establish a valuation allowance for
the deferred income tax asset when we believe it is more likely than not that a
portion of such asset will not be realized. Deferred income tax liabilities have
not been recorded on undistributed earnings of international subsidiaries that
are permanently reinvested.
We
evaluate whether our tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements in accordance with
Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109 (FIN 48). Under FIN
48, we recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained upon examination by
the taxing authorities based solely on the technical merits of the position. The
tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. We classify interest
expense and penalties related to unrecognized tax benefits and interest income
on tax overpayments as components of income tax expense.
Foreign
Exchange
Our
condensed consolidated financial statements are reported in U.S. dollars. Assets
and liabilities of international subsidiaries with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using a weighted average rate for the relevant reporting period. Translation
adjustments resulting from this process are included, net of tax, in accumulated
OCI in shareholders’ equity. Gains and losses that arise from exchange rate
fluctuations for balances that are not denominated in an entity’s functional
currency are included in the Consolidated Statements of Operations. Currency
gains and losses of intercompany balances deemed to be long-term in nature or
designated as hedges of the net investment in international subsidiaries are
included, net of tax, in accumulated other comprehensive income in shareholders’
equity.
Revenue
Recognition
Revenues
consist primarily of hardware sales, software license fees, software
implementation, project management services, installation, consulting, and
post-sale maintenance support. In determining appropriate revenue recognition,
we primarily consider the provisions of the following accounting
pronouncements: Staff Accounting Bulletin 104, Revenue Recognition in Financial
Statements, FASB’s Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple
Deliverables, Statement of Position (SOP) 97-2, Software Revenue Recognition,
SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts, and EITF 03-5, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software.
Revenue
arrangements with multiple deliverables are divided into separate units of
accounting if the delivered item(s) have value to the customer on a standalone
basis, there is objective and reliable evidence of fair value of both the
delivered and undelivered item(s), and delivery/performance of the undelivered
item(s) is probable. The total arrangement consideration is allocated among the
separate units of accounting based on their relative fair values and the
applicable revenue recognition criteria considered for each unit of accounting.
For our standard contract arrangements that combine deliverables such as
hardware, meter reading system software, installation, and project management
services, each deliverable is generally considered a single unit of accounting.
The amount allocable to a delivered item is limited to the amount that we are
entitled to collect and that is not contingent upon the delivery/performance of
additional items.
Revenues
are recognized when (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services have been rendered, (3) the sales price is
fixed or determinable, and (4) collectibility is reasonably assured. Hardware
revenues are generally recognized at the time of shipment, receipt by customer,
or, if applicable, upon completion of customer acceptance provisions. For
software arrangements with multiple elements, revenue recognition is also
dependent upon the availability of vendor-specific objective evidence (VSOE) of
fair value for each of the elements. The lack of VSOE, or the existence of
extended payment terms or other inherent risks, may affect the timing of revenue
recognition for software arrangements. If implementation services are essential
to a software arrangement, revenue is recognized using either the
percentage-of-completion methodology if project costs can be estimated or the
completed contract methodology if project costs cannot be reliably estimated.
Hardware and software post-sale maintenance support fees are recognized ratably
over the life of the related service contract.
Unearned
revenue is recorded when a customer pays for products or services where the
criteria for revenue recognition have not been met as of the balance sheet date.
Deferred cost is recorded for products or services for which ownership
(typically defined as title and risk of loss) has transferred to the customer,
but for which the criteria for revenue recognition have not been met as of the
balance sheet date. Previously recorded unearned revenue and deferred costs are
recognized when the applicable revenue recognition criteria are met. Shipping
and handling costs and incidental expenses billed to customers are recorded as
revenue, with the associated cost charged to cost of revenues. We record sales,
use, and value added taxes billed to our customers on a net basis in
our Consolidated Statements of Operations.
Product
and Software Development Costs
Product
and software development costs primarily include employee compensation and third
party contracting fees. For software we develop to be marketed or sold, 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.
Stock-Based
Compensation
SFAS
123(R), Share-Based
Payment, requires the measurement and recognition of compensation expense
for all stock-based awards made to employees and directors based on estimated
fair values. We record stock-based compensation expense under SFAS 123(R) for
awards of stock options, our Employee Stock Purchase Plan (ESPP), and issuance
of restricted and unrestricted stock awards and units. The fair values of stock
options and ESPP awards are estimated at the date of grant using the
Black-Scholes option-pricing model, which includes assumptions for the dividend
yield, expected volatility, risk-free interest rate, and expected life. For
restricted and unrestricted stock awards and units, the fair value is the market
close price of our common stock on the date of grant. We expense stock-based
compensation using the straight-line method over the vesting requirement. A
substantial portion of our stock-based compensation cannot be expensed for tax
purposes. When we have tax deductions in excess of the compensation cost, they
are classified as financing cash inflows in the Consolidated Statements of Cash
Flows.
Fair
Value Measurements
SFAS 157,
Fair Value
Measurements, became effective on January 1, 2008 and established a
framework for measuring fair value, expanded disclosures about fair value
measurements of our financial assets and liabilities and specified a hierarchy
of valuation techniques based on whether the inputs used are observable or
unobservable. The fair value hierarchy prioritizes the inputs used in different
valuation methodologies, assigning the highest priority to unadjusted quoted
prices for identical assets and liabilities in actively traded markets (Level 1)
and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist
of quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in non-active markets;
and model-derived valuations in which significant inputs are corroborated by
observable market data either directly or indirectly through correlation or
other means (inputs may include yield curves, volatility, credit risks, and
default rates). For fair value measurements using Level 3 inputs, a
reconciliation of the beginning and ending balances is required. FASB Staff
Position (FSP) FAS 157-2, Effective Date of FASB Statement
157, which delayed the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
became effective as of January 1, 2009. The adoption of this FSP did not
have a material effect on our nonfinancial assets and nonfinancial liabilities
in our condensed consolidated financial statements.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Due to various factors affecting future costs and operations,
actual results could differ materially from these estimates.
Reclassifications
See Change in Accounting Principal
for the impact of the adoption of FSP 14-1.
New
Accounting Pronouncements
In
December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, which amends SFAS 132(R), Employer’s Disclosures about
Pensions and Other Postretirement Benefits, to require additional fair
value disclosures about assets held in an employer’s defined benefit pension or
other postretirement plan. This FSP is effective for our December 31, 2009
Annual Report on Form 10-K.
In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP is effective for our
June 30, 2009 Quarterly Report on Form 10-Q.
Note
2: Earnings Per Share and Capital Structure
The
following table sets forth the computation of basic and diluted Earnings per
Share (EPS).
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands, except per share data)
|
|
Net
income (loss) available to common shareholders
|
|
$ |
(19,729 |
) |
|
$ |
953 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - Basic
|
|
|
36,151 |
|
|
|
30,696 |
|
Dilutive
effect of stock-based awards and convertible notes
|
|
|
- |
|
|
|
2,049 |
|
Weighted
average common shares outstanding - Diluted
|
|
|
36,151 |
|
|
|
32,745 |
|
Basic
earnings (loss) per common share
|
|
$ |
(0.55 |
) |
|
$ |
0.03 |
|
Diluted
earnings (loss) per common share
|
|
$ |
(0.55 |
) |
|
$ |
0.03 |
|
For
stock-based awards, the dilutive effect is calculated using the treasury stock
method. Under this method, the dilutive effect is computed as if the awards were
exercised at the beginning of the period (or at time of issuance, if later) and
assumes the related proceeds were used to repurchase common stock at the average
market price during the period. Related proceeds include the amount the employee
must pay upon exercise, future compensation cost associated with the stock
award, and the amount of excess tax benefits, if any. As a result of our net
loss for the three months ended March 31, 2009, there was no dilutive
effect to the weighted average common shares outstanding. For the three months
ended March 31, 2008, diluted weighted average common shares outstanding
included 696,000 incremental shares that would be issued upon the assumed
exercise of stock-based awards. Approximately 1,038,000 and 53,000 stock-based
awards were excluded from the calculation of diluted EPS for the three months
ended March 31, 2009 and 2008, respectively, because they were
anti-dilutive. These stock-based awards could be dilutive in future
periods.
For our
convertible notes, the dilutive effect is calculated under the net share
settlement method in accordance with EITF 04-8, The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share. 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. 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 prices of
our common stock for the three months ended March 31, 2009 and 2008 are
used as the basis for determining the dilutive effect on EPS. The average price
of our common stock for the three months ended March 31, 2009 did not
exceed the conversion price of $65.16, and therefore, did not have an effect on
diluted earnings per share. The average price of our common stock for the three
months ended March 31, 2008 exceeded the conversion price of $65.16, and
therefore, approximately 1.4 million shares were included as dilutive shares in
the calculation of diluted EPS.
During
the first quarter of 2009, we entered into exchange agreements with certain
holders of our convertible notes to issue, in the aggregate, approximately 2.3
million shares of common stock valued at $132.9 million, in exchange for, in the
aggregate, $121.0 million principal amount of the convertible notes. See
Note 6 for further discussion.
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 preferred stock
will be entitled to be paid a preferential amount per share to be determined by
the Board of Directors prior to any payment to holders of common stock. Shares
of preferred stock may be converted into common stock based on terms,
conditions, rates, and subject to such adjustments set by the Board of
Directors. There was no preferred stock issued or outstanding at March 31,
2009 and December 31, 2008.
Note
3: Certain Balance Sheet Components
Accounts
receivable, net
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Trade
receivables (net of allowance of $5,213 and $5,954)
|
|
$ |
293,613 |
|
|
$ |
306,593 |
|
Unbilled
revenue
|
|
|
16,364 |
|
|
|
14,685 |
|
Total
accounts receivable, net
|
|
$ |
309,977 |
|
|
$ |
321,278 |
|
A summary
of the allowance for doubtful accounts activity is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Beginning
balance, January 1
|
|
$ |
5,954 |
|
|
$ |
6,391 |
|
Provision for
(release of) doubtful accounts
|
|
|
(118 |
) |
|
|
167 |
|
Accounts
charged off
|
|
|
(297 |
) |
|
|
(482 |
) |
Effects
of change in exchange rates
|
|
|
(326 |
) |
|
|
160 |
|
Ending
balance, March 31
|
|
$ |
5,213 |
|
|
$ |
6,236 |
|
Inventories
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Materials
|
|
$ |
82,609 |
|
|
$ |
85,153 |
|
Work in
process
|
|
|
14,993 |
|
|
|
14,556 |
|
Finished
goods
|
|
|
64,642 |
|
|
|
64,501 |
|
Total
inventories
|
|
$ |
162,244 |
|
|
$ |
164,210 |
|
Our
inventory levels may vary period to period as a result of our factory scheduling
and timing of contract fulfillments.
Consigned
inventory, consisting of raw materials and finished goods, was $14.4 million and
$19.1 million at March 31, 2009 and December 31, 2008,
respectively.
Property,
plant, and equipment, net
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Machinery and
equipment
|
|
$ |
231,105 |
|
|
$ |
217,740 |
|
Computers and
purchased software
|
|
|
61,966 |
|
|
|
62,525 |
|
Buildings,
furniture, and improvements
|
|
|
119,604 |
|
|
|
134,316 |
|
Land
|
|
|
33,606 |
|
|
|
36,130 |
|
Total
cost
|
|
|
446,281 |
|
|
|
450,711 |
|
Accumulated
depreciation
|
|
|
(151,343 |
) |
|
|
(142,994 |
) |
Property,
plant, and equipment, net
|
|
$ |
294,938 |
|
|
$ |
307,717 |
|
The gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
|
At
March 31, 2009
|
|
|
At
December 31, 2008
|
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(in
thousands)
|
|
Core-developed
technology
|
|
$ |
380,924 |
|
|
$ |
(197,531 |
) |
|
$ |
183,393 |
|
|
$ |
394,912 |
|
|
$ |
(188,953 |
) |
|
$ |
205,959 |
|
Customer
contracts and relationships
|
|
|
283,283 |
|
|
|
(62,059 |
) |
|
|
221,224 |
|
|
|
299,928 |
|
|
|
(56,966 |
) |
|
|
242,962 |
|
Trademarks
and trade names
|
|
|
73,768 |
|
|
|
(47,051 |
) |
|
|
26,717 |
|
|
|
76,766 |
|
|
|
(45,851 |
) |
|
|
30,915 |
|
Other
|
|
|
24,293 |
|
|
|
(22,429 |
) |
|
|
1,864 |
|
|
|
24,630 |
|
|
|
(22,580 |
) |
|
|
2,050 |
|
Total
intangible assets
|
|
$ |
762,268 |
|
|
$ |
(329,070 |
) |
|
$ |
433,198 |
|
|
$ |
796,236 |
|
|
$ |
(314,350 |
) |
|
$ |
481,886 |
|
A summary
of the intangible asset account activity is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Beginning
balance, intangible assets, gross
|
|
$ |
796,236 |
|
|
$ |
895,979 |
|
Adjustment
of previous acquisitions
|
|
|
- |
|
|
|
(70,048 |
) |
Effect
of change in exchange rates
|
|
|
(33,968 |
) |
|
|
37,359 |
|
Ending
balance, intangible assets, gross
|
|
$ |
762,268 |
|
|
$ |
863,290 |
|
During
2008, intangible assets were adjusted by $70.0 million based on our completion
of the fair value assessment associated with the Actaris Metering Systems SA
(Actaris) acquisition in 2007.
Intangible
assets are recorded in the functional currency of our international
subsidiaries; therefore, the carrying amount of intangible assets increase or
decrease, with a corresponding change in accumulated other comprehensive income,
due to changes in foreign currency exchange rates. Intangible asset amortization
expense was $23.5 million and $31.2 million for the three months ended
March 31, 2009 and 2008, respectively.
Estimated
future annual amortization expense is as follows:
Years
ending December 31,
|
|
Estimated
Annual Amortization
|
|
|
|
(in
thousands)
|
|
2009
(amount remaining at March 31, 2009)
|
|
$ |
71,241 |
|
2010
|
|
|
68,727 |
|
2011
|
|
|
58,850 |
|
2012
|
|
|
45,290 |
|
2013
|
|
|
36,638 |
|
Beyond
2013
|
|
|
152,452 |
|
Total
intangible assets, net
|
|
$ |
433,198 |
|
Note
5: Goodwill
The
following table reflects goodwill allocated to each reporting segment at
March 31, 2009 and 2008:
|
|
Itron
North America
|
|
|
Itron
International
|
|
|
Total
Company
|
|
|
|
(in
thousands)
|
|
Goodwill
balance at January 1, 2008
|
|
$ |
185,869 |
|
|
$ |
1,080,264 |
|
|
$ |
1,266,133 |
|
Adjustment
of previous acquisitions
|
|
|
- |
|
|
|
59,907 |
|
|
|
59,907 |
|
Effect
of change in exchange rates
|
|
|
(472 |
) |
|
|
92,988 |
|
|
|
92,516 |
|
Goodwill
balance at March 31, 2008
|
|
$ |
185,397 |
|
|
$ |
1,233,159 |
|
|
$ |
1,418,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance at January 1, 2009
|
|
$ |
184,535 |
|
|
$ |
1,101,318 |
|
|
$ |
1,285,853 |
|
Effect
of change in exchange rates
|
|
|
(253 |
) |
|
|
(70,038 |
) |
|
|
(70,291 |
) |
Goodwill
balance at March 31, 2009
|
|
$ |
184,282 |
|
|
$ |
1,031,280 |
|
|
$ |
1,215,562 |
|
We have
made refinements to our management reporting and geographic reporting structure
between our International and North America operations. Itron North America now
includes sales of gas and water meters in North America, which were previously
part of Itron International. Therefore, the allocation of goodwill to our
reporting units is based on our current segment reporting structure, and we have
reallocated $57.5 million between the operating segments.
Goodwill
associated with the Actaris acquisition in 2007 was adjusted in 2008 based on
our final determination of fair values of certain assets acquired and
liabilities assumed.
Goodwill
is recorded in the functional currency of our international subsidiaries;
therefore, goodwill balances may increase or decrease, with a corresponding
change in accumulated other comprehensive income, due to changes in foreign
currency exchange rates.
Note
6: Debt
The
components of our borrowings are as follows:
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Term
loans
|
|
|
|
|
|
|
USD
denominated term loan
|
|
$ |
329,230 |
|
|
$ |
375,744 |
|
EUR
denominated term loan
|
|
|
316,551 |
|
|
|
360,494 |
|
Convertible
senior subordinated notes
|
|
|
201,067 |
|
|
|
306,337 |
|
Senior
subordinated notes
|
|
|
109,219 |
|
|
|
109,192 |
|
|
|
|
956,067 |
|
|
|
1,151,767 |
|
Current
portion of debt
|
|
|
(10,501 |
) |
|
|
(10,769 |
) |
Total
long-term debt
|
|
$ |
945,566 |
|
|
$ |
1,140,998 |
|
Credit
Facility
The
Actaris acquisition in 2007 was financed in part by a $1.2 billion credit
facility. The credit facility, dated April 18, 2007, was composed 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) (see
Note 15 for discussion of the amendment to the credit facility dated
April 24, 2009). Our loan balances denominated in currencies other than the
U.S. dollar fluctuate due to currency exchange rates. The principal balances of
our euro denominated term loan at March 31, 2009 and December 31, 2008
were €238.3 million and €254.1 million, respectively. Interest rates on the
credit facility are based on the respective borrowing’s denominated
London Interbank Offered Rate (LIBOR) or the Wells Fargo Bank, National
Association’s prime rate, plus an additional margin of 1.75% subject to factors
including our consolidated leverage ratio. Our interest rates were 2.23% for the
U.S. dollar denominated and 4.72% for the euro denominated term loans at
March 31, 2009. Scheduled amortization of principal payments is 1% per year
(0.25% quarterly) with an excess cash flow provision for additional annual
principal repayment requirements. Maturities of the term loans and multicurrency
revolver are seven years and six years from the date of issuance, respectively.
The credit facility is secured by substantially all of the assets of Itron,
Inc., our operating subsidiaries, except our international subsidiaries, and
includes covenants, which contain certain financial ratios and place
restrictions on the incurrence of debt, the payment of dividends, certain
investments, incurrence of capital expenditures above a set limit and mergers.
We were in compliance with these debt covenants at March 31, 2009. At
March 31, 2009, there were no borrowings outstanding under the revolver and
$50.4 million was utilized by outstanding standby letters of credit resulting in
$64.6 million being available for additional borrowings.
We repaid
$67.6 million of the term loans during the first three months of 2009. These
repayments were made with cash flows from operations and cash on hand.
Repayments of $46.8 million were made during the first three months of
2008.
Senior
Subordinated Notes
In
May 2004, we issued $125 million of 7.75% senior subordinated notes
(subordinated notes) due in 2012, which were discounted to a price of 99.265 to
yield 7.875%. The subordinated notes are registered with the SEC and are
generally transferable. Fixed interest payments are required every six months,
in May and November. The notes are subordinated to our credit facility
(senior secured borrowings) and are guaranteed by all of our operating
subsidiaries, except for our international subsidiaries. The subordinated notes
contain covenants, which place restrictions on the incurrence of debt, the
payment of dividends, certain investments and mergers. We were in compliance
with these debt covenants at March 31, 2009. From time to time, we may
acquire a portion of the subordinated notes on the open market, resulting in the
early extinguishment of debt.
We did
not acquire any subordinated notes during the first three months of 2009 or
2008. The balance of the subordinated notes, including unaccreted discount, was
$109.2 million at March 31, 2009 and December 31,
2008. Currently, some or all of the subordinated notes may be redeemed at our
option at a redemption price of 103.875% of the principal amount, decreasing to
101.938% on May 15, 2009 and 100.000% on May 15, 2010.
Convertible
Senior Subordinated Notes
On
August 4, 2006, we issued $345 million of 2.50% convertible notes due
August 2026. Fixed interest payments are required every six months, in
February and August. For each six month period beginning August 2011,
contingent interest payments of approximately 0.19% of the average trading price
of the convertible notes will be made if certain thresholds and events are met,
as outlined in the indenture. The convertible notes are registered with the SEC
and are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in EITF 05-2, The Meaning of “Conventional
Convertible Debt Instruments” in Issue 00-19, as the number of shares, or
cash, to be received by the holders was not fixed at the inception of the
obligation. We have concluded that the conversion feature of our convertible
notes does not require bifurcation from the host contract in accordance with
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, (SFAS 133) as the
conversion feature is indexed to our own stock and would be classified
within stockholders’ equity if it were a freestanding instrument as provided by
EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.
The
convertible notes may be converted at the option of the holder at a conversion
rate of 15.3478 shares of our common stock for each $1,000 principal amount of
the convertible notes, under the following circumstances, as defined in the
indenture (filed with the SEC on November 6, 2006 as Exhibit 4.16 to our
Quarterly Report on Form 10-Q):
o
|
during
any fiscal quarter commencing after December 31, 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
amount payable upon conversion is the result of a formula based on the closing
prices of our common stock for 20 consecutive trading days following the
date of the conversion notice. Based on the conversion ratio of 15.3478 shares
per $1,000 principal amount of the convertible notes, if our stock price is
lower than the conversion price of $65.16, the amount payable will be less than
the $1,000 principal amount and will be settled in cash. Our closing stock price
at March 31, 2009 was $47.35.
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.
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 100% of the
principal amount, plus accrued and unpaid interest.
On or
after August 1, 2011, we have the option to redeem all or a portion of the
convertible notes at a redemption price equal to 100% of the principal amount
plus accrued and unpaid interest.
The
convertible notes are unsecured, subordinated to our credit facility (senior
secured borrowings), and are guaranteed by all of our operating subsidiaries,
except for our international subsidiaries. The convertible notes contain
covenants, which place restrictions on the incurrence of debt and certain
mergers. We were in compliance with these debt covenants at March 31,
2009.
As our
stock price is subject to fluctuation, the contingent conversion threshold may
be triggered during any quarter, prior to July 2011, and the notes become
convertible. At March 31, 2009 and December 31, 2008, the contingent
conversion threshold was not exceeded and, therefore, the aggregate principal
amount of the convertible notes is included in long-term debt.
On
January 1, 2009, we adopted FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement), (FSP 14-1). FSP 14-1 requires the convertible debt to
be separated between its liability and equity components, in a manner that
reflects our non-convertible debt borrowing rate, determined to be 7.38% at the
time of the issuance of the convertible notes, and must be applied retroactively
to all periods presented. See Note 1 for disclosure about the financial
statement impact of our adoption of FSP 14-1.
The
carrying amounts of the debt and equity components are as follows:
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Face
value of convertible debt
|
|
$ |
223,604 |
|
|
$ |
344,588 |
|
Unamortized
discount
|
|
|
(22,537 |
) |
|
|
(38,251 |
) |
Net
carrying amount of debt component
|
|
$ |
201,067 |
|
|
$ |
306,337 |
|
|
|
|
|
|
|
|
|
|
Carrying
amount of equity component
|
|
$ |
31,831 |
|
|
$ |
41,177 |
|
For the
three months ended March 31, 2009 and 2008, the effective interest rate on
the liability component was 7.38%, and interest expense relating to both the
contractual interest coupon and amortization of the discount on the liability
component was $4.2 million and $5.4 million, respectively. Due to the
combination of put, call, and conversion options that are part of the terms of
the convertible note agreement, the remaining discount on the liability
component will be amortized over 27 months.
During
the first quarter of 2009, we entered into exchange agreements with certain
holders of our convertible notes to issue, in the aggregate, approximately, 2.3
million shares of common stock, valued at $132.9 million, in exchange for, in
the aggregate, $121.0 million principal amount of the convertible notes,
representing 35% of the aggregate principal outstanding at the date of the
exchanges. All of the
convertible notes we acquired pursuant to the exchange agreements were retired
upon the closing of the exchanges.
In
accordance with FSP 14-1, the exchange agreements were treated as induced
conversions as the holders received a greater number of shares of common stock
than would have been issued under the original conversion terms of the
convertible notes. At the time of the exchange agreements, none of the
conversion contingencies were met. Under the original terms of the convertible
notes, the amount payable on conversion was to be paid in cash, and the
remaining conversion obligation (stock price in excess of conversion price) was
payable in cash or shares, at our option. Under the terms of the exchange
agreements, all of the settlement was paid in shares. The difference in the
value of the shares of common stock issued under the exchange agreement and the
value of the shares used to derive the amount payable under the original
conversion agreement resulted in a loss on extinguishment of debt of $23.3
million (the inducement loss). As required by FSP 14-1, upon derecognition of
the convertible notes, we remeasured the fair value of the liability and equity
components using a borrowing rate for similar non-convertible debt that would be
applicable to us at the date of the exchange agreements. Because borrowing rates
have increased, the remeasurement of the components of the convertible notes
resulted in a gain on extinguishment of $13.4 million (the revaluation
gain). As a result, we recognized a net loss on extinguishment of debt of $10.3
million, calculated as the inducement loss, plus an allocation of advisory fees
less the revaluation gain.
Prepaid
Debt Fees & Interest Expense
Prepaid
debt fees for our outstanding borrowings are amortized over their respective
terms using the effective interest method. Total unamortized prepaid debt fees
were $11.2 million and $12.9 million at March 31, 2009 and
December 31, 2008, respectively. Accrued interest expense was $3.9 million
and $4.5 million at March 31, 2009 and December 31, 2008,
respectively.
Note
7: Derivative Financial Instruments and Hedging
Activities
As part
of our risk management strategy, we use derivative instruments to hedge certain
foreign currency and interest rate exposures. Refer to Note 1 and Note 12 for
additional disclosures on our derivative instruments.
The fair
values of our derivative instruments are determined using the income approach
and significant other observable inputs (Level 2), as defined by SFAS 157. We
have used observable market inputs based on the type of derivative and the
nature of the underlying instrument. The key inputs used at March 31, 2009
included interest rate yield curves (swap rates and futures) and foreign
exchange spot and forward rates, all of which are available in an active market.
We have utilized the mid-market pricing convention for these inputs at
March 31, 2009. We include the effect of our counterparty credit risk based
on current published credit default swap rates when the net fair value of our
derivative instruments are in a net asset position and the effect of our own
nonperformance risk when the net fair value of our derivative instruments are in
a net liability position. We have considered our own nonperformance risk by
discounting our derivative liabilities to reflect the potential credit risk to
our counterparty by applying a current market indicative credit spread to
all cash flows.
The fair
values of our derivative instruments determined using the fair value measurement
of significant other observable inputs (Level 2) at March 31, 2009 and
December 31, 2008 are as follows:
|
Asset
Derivatives
|
|
|
At
March 31, 2009
|
|
At
December 31, 2008
|
|
|
Balance
Sheet Location
|
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
|
Fair
Value
|
|
|
(in
thousands)
|
|
Derivatives
not designated as hedging instruments under SFAS 133
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
Other
current assets
|
|
$
|
123
|
|
|
|
$
|
-
|
|
|
Liability
Derivatives
|
|
|
At
March 31, 2009
|
|
At
December 31, 2008
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
(in
thousands)
|
|
Derivatives
designated as hedging instruments under SFAS 133
|
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
Other
current liabilities
|
|
$ |
(12,543 |
) |
Other
current liabilities
|
|
$ |
(8,772 |
) |
Interest
rate swap contracts
|
Long-term
other obligations
|
|
|
(6,948 |
) |
Long-term
other obligations
|
|
|
(8,723 |
) |
*
Euro denominated term loan
|
Other
current liabilities
|
|
|
(4,450 |
) |
Other
current liabilities
|
|
|
(4,752 |
) |
*
Euro denominated term loan
|
Long-term
other obligations
|
|
|
(312,101 |
) |
Long-term
other obligations
|
|
|
(355,742 |
) |
Total
derivatives designated as hedging instruments under SFAS
133
|
|
|
$ |
(336,042 |
) |
|
|
$ |
(377,989 |
) |
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under SFAS 133
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forward contracts
|
Other
current liabilities
|
|
$ |
(1,043 |
) |
Other
current liabilities
|
|
$ |
(67 |
) |
Total
liability derivatives
|
|
|
$ |
(337,085 |
) |
|
|
$ |
(378,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
asset and liability derivatives, net
|
|
$ |
(336,962 |
) |
|
|
$ |
(378,056 |
) |
* These
derivative instruments as defined by SFAS 133, as amended, are not recorded at
fair value, but at the carrying value in the Consolidated Balance
Sheets.
Other
comprehensive income (loss) during the reporting period for our derivatives, net
of tax, was as follows (in thousands):
Net
unrealized loss on derivative instruments, net of tax at December 31,
2008
|
|
$ |
(23,768 |
) |
Unrealized
loss on derivative instruments, net of tax
|
|
|
(11,428 |
) |
Realized
losses reclassified into net loss, net of tax
|
|
|
1,575 |
|
Net
unrealized loss on derivative instruments, net of tax at March 31,
2009
|
|
$ |
(33,621 |
) |
Cash
Flow Hedges
We are
exposed to interest rate risk through our credit facility. We enter into swaps
to achieve a fixed rate of interest on the hedged portion of debt in order to
increase our ability to forecast interest expense. The objective of these
swaps is to protect us from changes in borrowing rates on our floating rate
credit facility where LIBOR is consistently applied.
In 2008,
we entered into a one-year pay-fixed 3.01% receive one-month LIBOR interest rate
swap effective June 30, 2008, to convert $200 million of our USD term loan,
which had a remaining balance of $329.2 million at March 31, 2009, from a
floating interest rate to a fixed interest rate. The interest rate on the USD
term loan will continue to contain an additional margin per the credit facility
agreement. In 2008, we also entered into a forward starting one-year pay-fixed
2.68% receive one-month LIBOR interest rate swap, effective June 30, 2009
when the current one-year interest rate swap expires. The cash flow hedge is
currently, and is expected to be, highly effective in achieving offsetting cash
flows attributable to the hedged risk through the term of the hedge.
Consequently, changes in the fair value of the interest rate swap are recorded
as a component of OCI and are recognized in earnings when the hedged item
affects earnings. The amounts paid or received on the hedge are recognized as
adjustments to interest expense. The amount of net losses expected to be
reclassified into earnings in the next 12 months is approximately $4.0 million,
which was based on the Bloomberg U.S. dollar and euro swap yield curves as of
March 31, 2009.
In 2007,
we entered into a pay-fixed 6.59% receive three-month Euro Interbank Offered
Rate (Euribor) amortizing interest rate swap to convert a significant portion of
our €335 million euro denominated variable-rate term loan to fixed-rate debt.
The cash flow hedge is currently, and is expected to be, highly effective in
achieving offsetting cash flows attributable to the hedged risk through the term
of the hedge. Consequently, changes in the fair value of the interest rate swap
are recorded as a component of OCI and are recognized in earnings when the
hedged item affects earnings. The amounts paid or received on the hedge are
recognized as adjustments to interest expense. The notional amount of the swap
is reduced each quarter and was $296.6 million (€223.3 million) at
March 31, 2009. The amount of net losses expected to be reclassified into
earnings in the next 12 months is approximately $6.4 million, which was based on
the Bloomberg U.S. dollar and euro swap yield curves as of March 31,
2009.
We will
continue to monitor and assess our interest rate risk and may institute
additional interest rate swaps or other derivative instruments to manage such
risk in the future.
The
effect of our cash flow derivative instruments on the Consolidated Statement of
Operations for the three months ended March 31 is as follows:
Derivatives
in SFAS 133 Cash Flow Hedging Relationships
|
|
Location
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
Amount
of Gain (Loss) Recognized in OCI on Derivative (Effective
Portion)
|
|
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
|
Location
of Gain (Loss) Recognized in Income on Derivative (Ineffective
Portion)
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative (Ineffective
Portion)
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
(in
thousands)
|
Interest
rate swap contracts
|
|
Interest
expense
|
|
$ |
(4,507 |
) |
|
$ |
(3,384 |
) |
|
$ |
(2,557 |
) |
|
$ |
206 |
|
Interest
expense
|
|
$ |
(48 |
) |
|
$ |
- |
Net
Investment Hedges
We are
exposed to foreign exchange risk through our international subsidiaries. As a
result of our acquisition of a foreign company, we entered into a euro
denominated term loan, which exposes us to fluctuations in the euro foreign
exchange rate. Therefore, we have designated this foreign currency denominated
term loan as a hedge of our net investment in international operations. Changes
in the spot-to-spot value are recorded as adjustments to long-term debt with
offsetting unrealized gains and losses recorded in OCI. The notional amount of
the term loan is reduced each quarter as a result of repayments and was $316.6
million (€238.3 million) at March 31, 2009. We had no hedge
ineffectiveness.
The
effect of our net investment hedge derivative instrument on OCI for the three
months ended March 31 is a follows:
Derivatives
in SFAS 133 Net Investment Hedging Relationships
|
|
Amount
of Gain (Loss) Recognized in OCI on Derivative (Effective
Portion)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Euro
denominated term loan designated as hedge of our net investment in
international operations
|
|
$ |
22,940 |
|
|
$ |
(32,410 |
) |
Our net
unrealized gain, net of tax, was $14.2 million and net unrealized loss, net of
tax, was $20.0 million for the three months ended March 31, 2009 and 2008,
respectively.
Derivatives
Not Designated as Hedging Relationships
We are
also exposed to foreign exchange risk through our intercompany financing
transactions. At each period end, foreign currency monetary assets and
liabilities, including intercompany balances, are revalued with the change
recorded to other income and expense. In the second quarter of 2008, we began
entering into monthly foreign exchange forward contracts, not designated for
hedge accounting under SFAS 133, with the intent to reduce earnings volatility
associated with certain foreign currency balances of intercompany financing
transactions. During the three months ended March 31, 2009, the notional
amount of our outstanding forward contracts ranged from $2 million to $12
million offsetting exposures from the euro, British pound, Czech koruna, and
Hungarian forint.
During
2007, we entered into a cross currency interest rate swap for the purpose of
converting our £50 million pound sterling denominated term loan and the
pound sterling LIBOR variable interest rate to a U.S. dollar denominated term
loan and a U.S. LIBOR interest rate (plus an additional margin of 210 basis
points), which was not designated as an accounting hedge. The cross currency
interest rate swap had terms similar to the pound sterling denominated term
loan, including expected prepayments. This instrument was intended to reduce the
impact of volatility between the pound sterling and the U.S. dollar. Therefore,
gains and losses were recorded in other income and expense as an offset to the
gains (losses) on the underlying term loan revaluation to the U.S. dollar. The
amounts paid or received on the interest rate swap were recognized as
adjustments to interest expense. The pound sterling denominated notional amount
of the cross currency interest rate swap was $78.8 million (£39.6 million)
at March 31, 2008. The U.S. denominated notional amount was $79.3 million
at March 31, 2008. In the second quarter of 2008, we repaid the
£50 million pound sterling denominated loan.
The
effect of our foreign exchange forward derivative instruments on the
Consolidated Statement of Operations for the three months ended March 31 is
as follows:
Derivatives
Not Designated as Hedging Instrument under SFAS 133
|
|
Location
of Gain (Loss) Recognized in Income on Derivative
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(in
thousands)
|
|
Foreign
exchange forward contracts
|
|
Other
income (expense)
|
|
$ |
79 |
|
|
$ |
- |
|
Cross
currency interest rate swap
|
|
Other
income (expense)
|
|
|
- |
|
|
|
12 |
|
|
|
|
|
$ |
79 |
|
|
$ |
12 |
|
Note
8: Defined Benefit Pension Plans
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary, and
Indonesia. These plans were assumed with the acquisition of Actaris. The defined
benefit obligation is calculated annually by using the projected unit credit
method. The measurement date for the pension plans was December 31,
2008.
Our
general funding policy for these qualified pension plans is to contribute
amounts sufficient to satisfy regulatory funding standards of the respective
countries for each plan. Our expected contribution assumes that actual plan
asset returns are consistent with our expected rate of return and that interest
rates remain constant. For 2009, we expect to contribute a total of $400,000 to
our defined benefit plans. For the three months ended March 31, 2009 and
2008, we contributed approximately $26,000 and $60,000, respectively, to the
defined benefit pension plans.
Net
periodic pension benefit costs for our plans include the following
components:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$ |
462 |
|
|
$ |
558 |
|
Interest
cost
|
|
|
880 |
|
|
|
929 |
|
Expected
return on plan assets
|
|
|
(71 |
) |
|
|
(76 |
) |
Amortization
of actuarial net gain
|
|
|
(85 |
) |
|
|
(37 |
) |
Amortization
of unrecognized prior service costs
|
|
|
7 |
|
|
|
15 |
|
Net
periodic benefit cost
|
|
$ |
1,193 |
|
|
$ |
1,389 |
|
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 vesting
requirement period. For the three months ended March 31, 2009 and 2008,
stock-based compensation expense was $4.5 million and $3.9 million and the
related tax benefit was $1.3 million and $875,000, respectively. We have not
capitalized any stock-based compensation expense. We issue new shares of common
stock upon the exercise of stock options or when vesting conditions on
restricted awards are fully satisfied.
The fair
value of stock options and ESPP awards issued were estimated at the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
|
|
Employee
Stock Options
|
|
|
ESPP
|
|
|
|
Three
Months Ended March 31,
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Dividend
yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expected
volatility
|
|
|
50.2%
|
|
|
|
41.1%
|
|
|
|
99.8%
|
|
|
|
64.8%
|
|
Risk-free
interest rate
|
|
|
1.8%
|
|
|
|
3.1%
|
|
|
|
0.8%
|
|
|
|
3.3%
|
|
Expected
life (years)
|
|
|
4.91
|
|
|
|
4.15
|
|
|
|
0.25
|
|
|
|
0.25
|
|
Expected
volatility is based on a combination of historical volatility of our common
stock and the implied volatility of our traded options for the related expected
life period. We believe this combined approach is reflective of current and
historical market conditions and an appropriate indicator of expected
volatility. The risk-free interest rate is the rate available as of the award
date on zero-coupon U.S. government issues with a term equal to the expected
life of the award. The expected life is the weighted average expected life of an
award based on the period of time between the date the award is granted and the
date the award is fully exercised. Factors considered in estimating the expected
life include historical experience of similar awards, with consideration to the
contractual terms, vesting schedules, and expectations of future employee
behavior. We have not paid dividends in the past and do not plan to pay
dividends in the foreseeable future.
Subject
to stock splits, dividends, and other similar events, 5,875,000 shares of common
stock are reserved and authorized for issuance under our Amended and Restated
2000 Stock Incentive Plan. Of the authorized shares under the plan, no more than
1.0 million shares can be issued as non-stock options (awards). Awards
consist of restricted stock units, restricted stock awards, and unrestricted
stock awards. At March 31, 2009, shares available for issuance as either
options or awards were 449,597.
Stock
Options
Options
to purchase our common stock are granted to employees and the Board of Directors
with an exercise price equal to the market close price of the stock on the date
the Board of Directors approve the grant. Options generally become exercisable
in three equal installments beginning one year from the date of grant and
generally expire 10 years from the date of grant.
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average grant date fair value
of the stock options granted during the three months ended March 31, 2009
and 2008 were $25.94 and $35.33 per share, respectively. Compensation expense
related to stock options for the three months ended March 31, 2009 and 2008
was $2.3 million in each period. Compensation expense is recognized only for
those options expected to vest, with forfeitures estimated based on our
historical experience and future expectations.
A summary
of our stock option activity for the three months ended March 31, 2009 and
2008 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, 2008
|
|
|
1,561 |
|
|
$ |
37.81 |
|
|
|
6.98 |
|
|
$ |
90,769 |
|
Granted
|
|
|
9 |
|
|
|
95.96 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(93 |
) |
|
|
21.26 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5 |
) |
|
|
45.73 |
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2008
|
|
|
1,472 |
|
|
|
39.18 |
|
|
|
6.96 |
|
|
$ |
75,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
and expected to vest, March 31, 2008
|
|
|
1,321 |
|
|
$ |
37.68 |
|
|
|
6.81 |
|
|
$ |
69,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2008
|
|
|
736 |
|
|
$ |
25.45 |
|
|
|
5.58 |
|
|
$ |
47,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2009
|
|
|
1,374 |
|
|
$ |
51.53 |
|
|
|
6.99 |
|
|
$ |
25,809 |
|
Granted
|
|
|
50 |
|
|
|
57.96 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(7 |
) |
|
|
25.05 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(17 |
) |
|
|
59.64 |
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009
|
|
|
1,400 |
|
|
|
51.80 |
|
|
|
6.86 |
|
|
$ |
11,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
and expected to vest, March 31, 2009
|
|
|
1,308 |
|
|
$ |
49.44 |
|
|
|
6.71 |
|
|
$ |
11,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2009
|
|
|
805 |
|
|
$ |
36.02 |
|
|
|
5.68 |
|
|
$ |
11,672 |
|
The
aggregate intrinsic value in the table above is the amount by which the market
value of the underlying stock exceeded the exercise price of the outstanding
options before applicable income taxes, based on the closing stock price on the
last business day of the period, which represents amounts that would have been
received by the optionees had all options been exercised on that date. As of
March 31, 2009, total unrecognized stock-based compensation expense related
to nonvested stock options, net of estimated forfeitures, was approximately $8.1
million, which is expected to be recognized over a weighted average period of
approximately 21 months. During the three months ended March 31, 2009 and
2008, the total intrinsic value of stock options exercised was $198,000 and $6.7
million, respectively.
Restricted
Stock Units
Certain
employees and senior management receive restricted stock units or restricted
stock awards (collectively “restricted awards”) as a component of their total
compensation. The fair value of a restricted award is the market close price of
our common stock on the date of grant. Restricted awards generally vest over a
three year period. Compensation expense, net of forfeitures, is recognized over
the vesting period.
Upon
vesting, the restricted awards are converted into shares of our common stock on
a one-for-one basis and issued to employees. We are entitled to an income tax
deduction in an amount equal to the taxable income reported by the employee upon
vesting of the restricted awards. Total compensation expense recognized for
restricted awards was $1.9 million and $1.3 million for the three months
ended March 31, 2009 and 2008, respectively. As of March 31, 2009,
unrecognized compensation expense, net of estimated forfeitures, was
$12.9 million, which is expected to be recognized over a weighted average
period of approximately 23 months. The total fair value of awards that
vested was $1.3 million during the three months ended March 31, 2009. No
awards vested during the three months ended March 31, 2008.
The
following table summarizes restricted award activity for the three months ended
March 31, 2009 and 2008:
|
|
Number
of Restricted Awards
(in
thousands)
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
Nonvested,
January 1, 2008
|
|
|
111 |
|
|
$ |
66.92 |
|
Granted
|
|
|
141 |
|
|
|
78.36 |
|
Vested
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(2 |
) |
|
|
67.43 |
|
Nonvested,
March 31, 2008
|
|
|
250 |
|
|
$ |
73.39 |
|
|
|
|
|
|
|
|
|
|
Nonvested,
January 1, 2009
|
|
|
313 |
|
|
$ |
78.55 |
|
Granted
|
|
|
54 |
|
|
|
70.76 |
|
Vested
|
|
|
(20 |
) |
|
|
59.16 |
|
Forfeited
|
|
|
(4 |
) |
|
|
76.25 |
|
Nonvested,
March 31, 2009
|
|
|
343 |
|
|
$ |
78.47 |
|
Unrestricted
Stock Awards
We issue
unrestricted stock awards to our Board of Directors as part of their
compensation. Awards are fully vested at issuance and are expensed when issued.
The fair value of unrestricted stock awards is the market close price of our
common stock on the date of grant. During the three months ended March 31,
2009 and 2008, we issued 1,816 and 1,404 shares of unrestricted stock with a
weighted average grant date fair value of $65.95 and $95.96 per share,
respectively. The expense related to these awards for the three months ended
March 31, 2009 and 2008 was $120,000 and $135,000,
respectively.
Employee
Stock Purchase Plan
Under the
terms of the ESPP, eligible employees can elect to deduct up to 10% of their
regular cash compensation to purchase our common stock at a discounted price.
The purchase price of the common stock is 85% of the fair market value of the
stock at the end of each fiscal quarter. The sale of the stock occurs at the
beginning of the subsequent quarter. Under the ESPP, we sold 12,919 and 7,695
shares to employees during the three months ended March 31, 2009 and 2008,
respectively. The fair value of ESPP awards is estimated using the Black-Scholes
option-pricing model. The weighted average fair value of the ESPP awards
associated with the three month offering period ended March 31, 2009 and
2008 was $7.10 and $16.18 per share, respectively. The expense related to ESPP
for the three months ended March 31, 2009 and 2008 was $141,000 and
$134,000, respectively. At March 31, 2009, all compensation cost associated
with the ESPP had been recognized. There were approximately 296,000 shares of
common stock available for future issuance under the ESPP at March 31,
2009.
Note
10: Income Taxes
Our tax
provision (benefit) as a percentage of income (loss) before tax typically
differs 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 conducted in
domestic and international jurisdictions, research credits, state income taxes,
adjustments to valuation allowances, and interest expense and penalties related
to uncertain tax positions, among other items.
Estimated
foreign exchange rates, the forecasted and realized mix of earnings in different
tax jurisdictions, and foreign interest expense deductions have decreased our
effective tax rate for 2009, as compared with 2008. For the three months ended
March 31, 2009, our tax benefit as a percentage of loss before tax
was minimal.
Unrecognized
tax benefits in accordance with FIN 48 were $35.9 million and $37.6 million at
March 31, 2009 and December 31, 2008, respectively. The decrease in
the balance of our unrecognized tax benefits was primarily due to currency
exchange rates. We classify interest expense and penalties related to
unrecognized tax benefits and interest income on tax overpayments as components
of income tax expense. During the three months ended March 31, 2009 and
2008, we recognized approximately $687,000 and $477,000, respectively, in
interest and penalties. At March 31, 2009 and December 31, 2008,
accrued interest was $3.4 million and $3.2 million, respectively, and
accrued penalties were $2.9 million in each period. Unrecognized tax benefits
that would affect our tax provision at March 31, 2009 and December 31,
2008 were $35.4 million and $37.0 million, respectively. At March 31, 2009,
we expect to pay no income taxes, interest, or penalties related to FIN 48
over the next twelve months. We are not able to reasonably estimate the timing
of future cash flows relating to the remaining balance.
Note
11: Commitments and Contingencies
Guarantees
and Indemnifications
We are
often required to obtain letters of credit or bonds in support of our
obligations for customer contracts. These letters of credit or bonds typically
provide a guarantee to the customer for future performance, which usually covers
the installation phase of a contract and may on occasion cover the operations
and maintenance phase of outsourcing contracts. At March 31, 2009, in
addition to the outstanding standby letters of credit of $50.4 million issued
under our credit facility’s $115 million multicurrency revolver, our Itron
International operating segment has a total of $30.1 million of unsecured
multicurrency revolving lines of credit with various financial institutions with
total outstanding standby letters of credit of $7.7 million. At
December 31, 2008, Itron International had a total of $28.8 million of
unsecured multicurrency revolving lines of credit with various financial
institutions with total outstanding standby letters of credit of $6.7 million.
Unsecured surety bonds in force were $33.5 million and $33.1 million at
March 31, 2009 and December 31, 2008, respectively. In the event any
such bonds or letters of credit are called, we would be obligated to reimburse
the issuer of the letter of credit or bond; however, we do not believe that any
currently outstanding bonds or letters of credit will be called.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages, and attorney’s fees awarded against a
customer with respect to such a claim provided that (a) the customer
promptly notifies us in writing of the claim and (b) we have the sole
control of the defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Legal
Matters
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at March 31, 2009 were not material to our
financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Itron
International subsidiaries. PT Berca is the minority shareholder in PT Mecoindo
and has sued several Itron International subsidiaries and the successor in
interest to another company previously owned by Schlumberger Limited
(Schlumberger). PT Berca claims that it had preemptive rights in the joint
venture and has sought to nullify the transaction in 2001 whereby Schlumberger
transferred its ownership interest in PT Mecoindo to an Itron International
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs ($11.2 million) in damages,
plus accrued interest at 18% annually, against the defendants and have
invalidated the 2001 transfer of the Mecoindo interest to a subsidiary of Itron
International. All of the parties have appealed the matter to the Indonesian
Supreme Court. In addition, Itron International has notified Schlumberger that
it will seek to have Schlumberger indemnify Itron International from any damages
it may incur as a result of this claim.
During
the first quarter of 2009, all of the parties agreed to settle the litigation,
including the indemnification claims against Schlumberger. Pursuant to
Indonesian law and regulations, the settlement could take several months to
become final. This settlement is not expected to have a material impact on our
financial condition or results of operations.
Note
12: Other Comprehensive Income (Loss)
Other
comprehensive income (loss) is reflected as a net increase (decrease) to
shareholders’ equity and is not reflected in our results of operations. Other
comprehensive income (loss) during the reporting periods, net of tax, was as
follows:
|
|
At
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Net
income (loss)
|
|
$ |
(19,729 |
) |
|
$ |
953 |
|
Foreign
currency translation adjustment,
|
|
|
|
|
|
|
|
|
net
of income tax benefit of $1,532 and $1,727
|
|
|
(77,732 |
) |
|
|
123,922 |
|
Net
unrealized loss on derivative instruments,
|
|
|
|
|
|
|
|
|
net
of income tax benefit of $7,006 and $13,666
|
|
|
(11,428 |
) |
|
|
(22,128 |
) |
Net
hedging loss (gains) reclassified into net losses,
|
|
|
|
|
|
|
|
|
net
of income tax benefit of $982 and $79
|
|
|
1,575 |
|
|
|
127 |
|
Pension
plan benefits liability adjustment,
|
|
|
|
|
|
|
|
|
net
of income tax provision of $23 and $29
|
|
|
55 |
|
|
|
70 |
|
Total
other comprehensive income (loss)
|
|
$ |
(107,259 |
) |
|
$ |
102,944 |
|
Accumulated
other comprehensive loss, net of tax, was $53.4 million at March 31, 2009.
Accumulated comprehensive income, net of tax, was $34.1 million at
December 31, 2008. These amounts consisted of the adjustments for foreign
currency translation, the unrealized gain (loss) on our derivative instruments,
the hedging gain (loss), and the pension liability adjustment as indicated
above.
Note
13: Segment Information
We have
two operating segments: Itron International and Itron North America. Itron
International was previously referred to as the Actaris operating segment. We
are now operating under the Itron brand on a worldwide basis. Itron
International generates a majority of its revenues in Europe, Africa, South
America, and Asia/Pacific, while Itron North America generates a majority of its
revenues in the United States and Canada. We have made refinements to our
management reporting and geographic reporting structure between our
International and North America operations. Itron North America now includes
sales of gas and water meters in North America, which were previously part of
Itron International. Therefore, the operating segment information as set forth
below is based on our current segment reporting structure. In accordance 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 our current segment reporting structure after the January 1,
2009 refinement.
We have
three measures of segment performance: revenue, gross profit (margin), and
operating income (margin). Intersegment revenues were minimal. Corporate
operating expenses, interest income, interest expense, other income (expense),
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Depreciation and amortization expenses
are allocated to our segments. For the three months ended March 31, 2009
and 2008, Itron North America depreciation and amortization expense was $11.4
million and $11.9 million. Depreciation and amortization expense for Itron
International for the three months ended March 31, 2009 and 2008 was $24.8
million and $32.4 million.
Segment
Products
Itron
North America
|
Electronic
and smart electricity meters; gas and water meters; electricity, gas, and
water AMR and AMI/smart meter modules; handheld, mobile, and network AMR
data collection technologies; AMI network technologies; software,
installation, implementation, consulting, maintenance, support, and other
services.
|
|
|
Itron
International
|
Electromechanical,
electronic, and smart electricity meters; mechanical and ultrasonic water
and heat meters; diaphragm, turbine, and rotary gas meters; one-way
and two-way electricity prepayment systems, including smart key, keypad,
and smart card; two-way gas prepayment systems using smart card; AMR and
AMI data collection technologies; installation, implementation,
maintenance support, and other managed
services.
|
Segment
Information
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
139,386 |
|
|
$ |
169,828 |
|
Itron
International
|
|
|
249,132 |
|
|
|
308,648 |
|
Total
Company
|
|
$ |
388,518 |
|
|
$ |
478,476 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
52,319 |
|
|
$ |
64,217 |
|
Itron
International
|
|
|
77,265 |
|
|
|
98,342 |
|
Total
Company
|
|
$ |
129,584 |
|
|
$ |
162,559 |
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
7,793 |
|
|
$ |
18,188 |
|
Itron
International
|
|
|
9,785 |
|
|
|
18,887 |
|
Corporate
unallocated
|
|
|
(8,629 |
) |
|
|
(9,788 |
) |
Total
Company
|
|
|
8,949 |
|
|
|
27,287 |
|
Total
other income (expense)
|
|
|
(28,684 |
) |
|
|
(26,925 |
) |
Income
(loss) before income taxes
|
|
$ |
(19,735 |
) |
|
$ |
362 |
|
No single
customer represented more than 10% of total Company or Itron International
operating segment revenues for the three months ended March 31, 2009 and
2008. No customer accounted for more than 10% of Itron North America operating
segment revenues for the three months ended March 31, 2009. One customer
accounted for 13% of Itron North America operating segment revenues for the
three months ended March 31, 2008.
Revenues
by region were as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Europe
|
|
$ |
197,477 |
|
|
$ |
238,652 |
|
United
States and Canada
|
|
|
134,851 |
|
|
|
161,172 |
|
Other
|
|
|
56,190 |
|
|
|
78,652 |
|
Total
revenues
|
|
$ |
388,518 |
|
|
$ |
478,476 |
|
|
|
|
|
|
|
|
|
|
Note
14: Consolidating Financial Information
Our
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. There are currently no restrictions on the ability
of the subsidiary guarantors to transfer funds to the parent
company.
On
January 1, 2009, we transferred a substantial portion of our guarantor
subsidiary operations located in the United States into the parent company. This
change in legal entities implemented on January 1, 2009 is reflected in the
below consolidating statements as of and for the three months ended
March 31, 2009. We have not restated the comparative prior period results
due to the complexity of the transfer and the immaterial nature of the
operations.
Consolidating
Statement of Operations
|
|
Three
Months Ended March 31, 2009
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
135,609 |
|
|
$ |
1,226 |
|
|
$ |
264,676 |
|
|
$ |
(12,993 |
) |
|
$ |
388,518 |
|
Cost
of revenues
|
|
|
85,182 |
|
|
|
1,124 |
|
|
|
185,621 |
|
|
|
(12,993 |
) |
|
|
258,934 |
|
Gross
profit
|
|
|
50,427 |
|
|
|
102 |
|
|
|
79,055 |
|
|
|
- |
|
|
|
129,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
13,886 |
|
|
|
- |
|
|
|
23,089 |
|
|
|
- |
|
|
|
36,975 |
|
Product
development
|
|
|
20,255 |
|
|
|
- |
|
|
|
10,903 |
|
|
|
- |
|
|
|
31,158 |
|
General
and administrative
|
|
|
11,976 |
|
|
|
- |
|
|
|
17,048 |
|
|
|
- |
|
|
|
29,024 |
|
Amortization
of intangible assets
|
|
|
5,885 |
|
|
|
- |
|
|
|
17,593 |
|
|
|
- |
|
|
|
23,478 |
|
Total
operating expenses
|
|
|
52,002 |
|
|
|
- |
|
|
|
68,633 |
|
|
|
- |
|
|
|
120,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
(1,575 |
) |
|
|
102 |
|
|
|
10,422 |
|
|
|
- |
|
|
|
8,949 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
26,546 |
|
|
|
1,021 |
|
|
|
293 |
|
|
|
(27,325 |
) |
|
|
535 |
|
Interest
expense
|
|
|
(17,804 |
) |
|
|
- |
|
|
|
(26,366 |
) |
|
|
27,325 |
|
|
|
(16,845 |
) |
Loss
on extinguishment of debt, net
|
|
|
(10,340 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,340 |
) |
Other
income (expense), net
|
|
|
(926 |
) |
|
|
16 |
|
|
|
(1,124 |
) |
|
|
- |
|
|
|
(2,034 |
) |
Total
other income (expense)
|
|
|
(2,524 |
) |
|
|
1,037 |
|
|
|
(27,197 |
) |
|
|
- |
|
|
|
(28,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(4,099 |
) |
|
|
1,139 |
|
|
|
(16,775 |
) |
|
|
- |
|
|
|
(19,735 |
) |
Income
tax benefit (provision)
|
|
|
2,922 |
|
|
|
- |
|
|
|
(2,916 |
) |
|
|
- |
|
|
|
6 |
|
Equity
in losses of guarantor and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries, net
|
|
|
(18,552 |
) |
|
|
(2,089 |
) |
|
|
- |
|
|
|
20,641 |
|
|
|
- |
|
Net
loss
|
|
$ |
(19,729 |
) |
|
$ |
(950 |
) |
|
$ |
(19,691 |
) |
|
$ |
20,641 |
|
|
$ |
(19,729 |
) |
Consolidating
Statement of Operations
|
|
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
146,007 |
|
|
$ |
21,107 |
|
|
$ |
321,691 |
|
|
$ |
(10,329 |
) |
|
$ |
478,476 |
|
Cost
of revenues
|
|
|
89,736 |
|
|
|
15,421 |
|
|
|
221,029 |
|
|
|
(10,269 |
) |
|
|
315,917 |
|
Gross
profit
|
|
|
56,271 |
|
|
|
5,686 |
|
|
|
100,662 |
|
|
|
(60 |
) |
|
|
162,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
13,131 |
|
|
|
2,043 |
|
|
|
26,792 |
|
|
|
- |
|
|
|
41,966 |
|
Product
development
|
|
|
17,212 |
|
|
|
780 |
|
|
|
11,099 |
|
|
|
(60 |
) |
|
|
29,031 |
|
General
and administrative
|
|
|
13,234 |
|
|
|
840 |
|
|
|
18,949 |
|
|
|
- |
|
|
|
33,023 |
|
Amortization
of intangible assets
|
|
|
5,663 |
|
|
|
- |
|
|
|
25,589 |
|
|
|
- |
|
|
|
31,252 |
|
Total
operating expenses
|
|
|
49,240 |
|
|
|
3,663 |
|
|
|
82,429 |
|
|
|
(60 |
) |
|
|
135,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7,031 |
|
|
|
2,023 |
|
|
|
18,233 |
|
|
|
- |
|
|
|
27,287 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
30,685 |
|
|
|
54 |
|
|
|
1,081 |
|
|
|
(30,396 |
) |
|
|
1,424 |
|
Interest
expense
|
|
|
(28,223 |
) |
|
|
(113 |
) |
|
|
(30,597 |
) |
|
|
30,396 |
|
|
|
(28,537 |
) |
Other
income (expense), net
|
|
|
1,675 |
|
|
|
(569 |
) |
|
|
(918 |
) |
|
|
- |
|
|
|
188 |
|
Total
other income (expense)
|
|
|
4,137 |
|
|
|
(628 |
) |
|
|
(30,434 |
) |
|
|
- |
|
|
|
(26,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
11,168 |
|
|
|
1,395 |
|
|
|
(12,201 |
) |
|
|
- |
|
|
|
362 |
|
Income
tax benefit (provision)
|
|
|
3,041 |
|
|
|
(386 |
) |
|
|
(2,064 |
) |
|
|
- |
|
|
|
591 |
|
Equity
in earnings (losses) of guarantor and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries, net
|
|
|
(13,256 |
) |
|
|
392 |
|
|
|
- |
|
|
|
12,864 |
|
|
|
- |
|
Net
income (loss)
|
|
$ |
953 |
|
|
$ |
1,401 |
|
|
$ |
(14,265 |
) |
|
$ |
12,864 |
|
|
$ |
953 |
|
Consolidating
Balance Sheet
|
|
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
40,856 |
|
|
$ |
217 |
|
|
$ |
61,018 |
|
|
$ |
- |
|
|
$ |
102,091 |
|
Accounts
receivable, net
|
|
|
84,749 |
|
|
|
1,972 |
|
|
|
223,256 |
|
|
|
- |
|
|
|
309,977 |
|
Intercompany
accounts receivable
|
|
|
7,746 |
|
|
|
133 |
|
|
|
856 |
|
|
|
(8,735 |
) |
|
|
- |
|
Inventories
|
|
|
57,772 |
|
|
|
- |
|
|
|
104,955 |
|
|
|
(483 |
) |
|
|
162,244 |
|
Deferred
income taxes, net
|
|
|
21,151 |
|
|
|
(12 |
) |
|
|
7,572 |
|
|
|
- |
|
|
|
28,711 |
|
Other
|
|
|
18,005 |
|
|
|
210 |
|
|
|
42,140 |
|
|
|
- |
|
|
|
60,355 |
|
Intercompany
other
|
|
|
6,291 |
|
|
|
- |
|
|
|
5,002 |
|
|
|
(11,293 |
) |
|
|
- |
|
Total
current assets
|
|
|
236,570 |
|
|
|
2,520 |
|
|
|
444,799 |
|
|
|
(20,511 |
) |
|
|
663,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net
|
|
|
113,780 |
|
|
|
- |
|
|
|
181,158 |
|
|
|
- |
|
|
|
294,938 |
|
Prepaid
debt fees
|
|
|
11,155 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,155 |
|
Deferred
income taxes, net
|
|
|
11,934 |
|
|
|
- |
|
|
|
22,548 |
|
|
|
- |
|
|
|
34,482 |
|
Other
|
|
|
9,050 |
|
|
|
- |
|
|
|
11,558 |
|
|
|
- |
|
|
|
20,608 |
|
Intangible
assets, net
|
|
|
75,788 |
|
|
|
- |
|
|
|
357,410 |
|
|
|
- |
|
|
|
433,198 |
|
Goodwill
|
|
|
172,681 |
|
|
|
- |
|
|
|
1,042,881 |
|
|
|
- |
|
|
|
1,215,562 |
|
Investment
in subsidiaries
|
|
|
37,636 |
|
|
|
4,830 |
|
|
|
- |
|
|
|
(42,466 |
) |
|
|
- |
|
Intercompany
notes receivable
|
|
|
1,595,089 |
|
|
|
94,557 |
|
|
|
1,165 |
|
|
|
(1,690,811 |
) |
|
|
- |
|
Total
assets
|
|
$ |
2,263,683 |
|
|
$ |
101,907 |
|
|
$ |
2,061,519 |
|
|
$ |
(1,753,788 |
) |
|
$ |
2,673,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
40,800 |
|
|
$ |
417 |
|
|
$ |
151,057 |
|
|
$ |
- |
|
|
$ |
192,274 |
|
Other
current liabilities
|
|
|
21,592 |
|
|
|
- |
|
|
|
44,877 |
|
|
|
- |
|
|
|
66,469 |
|
Intercompany
accounts payable
|
|
|
990 |
|
|
|
79 |
|
|
|
7,666 |
|
|
|
(8,735 |
) |
|
|
- |
|
Wages
and benefits payable
|
|
|
25,228 |
|
|
|
127 |
|
|
|
44,742 |
|
|
|
- |
|
|
|
70,097 |
|
Taxes
payable
|
|
|
5,601 |
|
|
|
66 |
|
|
|
21,898 |
|
|
|
- |
|
|
|
27,565 |
|
Current
portion of long-term debt
|
|
|
10,501 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,501 |
|
Current
portion of warranty
|
|
|
7,060 |
|
|
|
- |
|
|
|
13,310 |
|
|
|
- |
|
|
|
20,370 |
|
Unearned
revenue
|
|
|
28,245 |
|
|
|
- |
|
|
|
8,337 |
|
|
|
- |
|
|
|
36,582 |
|
Deferred
income taxes, net
|
|
|
(1,539 |
) |
|
|
- |
|
|
|
3,466 |
|
|
|
- |
|
|
|
1,927 |
|
Short-term
intercompany advances
|
|
|
5,002 |
|
|
|
1,700 |
|
|
|
4,591 |
|
|
|
(11,293 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
143,480 |
|
|
|
2,389 |
|
|
|
299,944 |
|
|
|
(20,028 |
) |
|
|
425,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
945,566 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
945,566 |
|
Warranty
|
|
|
11,281 |
|
|
|
- |
|
|
|
3,187 |
|
|
|
- |
|
|
|
14,468 |
|
Pension
plan benefits
|
|
|
- |
|
|
|
- |
|
|
|
53,511 |
|
|
|
- |
|
|
|
53,511 |
|
Intercompany
notes payable
|
|
|
95,722 |
|
|
|
- |
|
|
|
1,595,089 |
|
|
|
(1,690,811 |
) |
|
|
- |
|
Deferred
income taxes, net
|
|
|
(34,842 |
) |
|
|
- |
|
|
|
125,677 |
|
|
|
- |
|
|
|
90,835 |
|
Other
obligations
|
|
|
22,209 |
|
|
|
- |
|
|
|
40,680 |
|
|
|
- |
|
|
|
62,889 |
|
Total
liabilities
|
|
|
1,183,416 |
|
|
|
2,389 |
|
|
|
2,118,088 |
|
|
|
(1,710,839 |
) |
|
|
1,593,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
1,120,934 |
|
|
|
106,190 |
|
|
|
78,994 |
|
|
|
(185,184 |
) |
|
|
1,120,934 |
|
Accumulated
other comprehensive income (loss), net
|
|
|
(53,437 |
) |
|
|
(9,199 |
) |
|
|
11,389 |
|
|
|
(2,190 |
) |
|
|
(53,437 |
) |
Retained
earnings (accumulated deficit)
|
|
|
12,770 |
|
|
|
2,527 |
|
|
|
(146,952 |
) |
|
|
144,425 |
|
|
|
12,770 |
|
Total
shareholders' equity
|
|
|
1,080,267 |
|
|
|
99,518 |
|
|
|
(56,569 |
) |
|
|
(42,949 |
) |
|
|
1,080,267 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,263,683 |
|
|
$ |
101,907 |
|
|
$ |
2,061,519 |
|
|
$ |
(1,753,788 |
) |
|
$ |
2,673,321 |
|
Consolidating
Balance Sheet
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
67,404 |
|
|
$ |
3,180 |
|
|
$ |
73,806 |
|
|
$ |
- |
|
|
$ |
144,390 |
|
Accounts
receivable, net
|
|
|
89,458 |
|
|
|
7,868 |
|
|
|
223,952 |
|
|
|
- |
|
|
|
321,278 |
|
Intercompany
accounts receivable
|
|
|
11,221 |
|
|
|
594 |
|
|
|
3,323 |
|
|
|
(15,138 |
) |
|
|
- |
|
Inventories
|
|
|
52,248 |
|
|
|
7,276 |
|
|
|
105,280 |
|
|
|
(594 |
) |
|
|
164,210 |
|
Deferred
income taxes, net
|
|
|
20,546 |
|
|
|
3,517 |
|
|
|
7,744 |
|
|
|
- |
|
|
|
31,807 |
|
Other
|
|
|
18,360 |
|
|
|
243 |
|
|
|
37,429 |
|
|
|
- |
|
|
|
56,032 |
|
Intercompany
other
|
|
|
6,824 |
|
|
|
(26 |
) |
|
|
6,302 |
|
|
|
(13,100 |
) |
|
|
- |
|
Total
current assets
|
|
|
266,061 |
|
|
|
22,652 |
|
|
|
457,836 |
|
|
|
(28,832 |
) |
|
|
717,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net
|
|
|
96,952 |
|
|
|
16,296 |
|
|
|
194,469 |
|
|
|
- |
|
|
|
307,717 |
|
Prepaid
debt fees
|
|
|
12,943 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,943 |
|
Deferred
income taxes, net
|
|
|
53,950 |
|
|
|
989 |
|
|
|
(24,022 |
) |
|
|
- |
|
|
|
30,917 |
|
Other
|
|
|
7,205 |
|
|
|
- |
|
|
|
12,110 |
|
|
|
- |
|
|
|
19,315 |
|
Intangible
assets, net
|
|
|
54,370 |
|
|
|
27,303 |
|
|
|
400,213 |
|
|
|
- |
|
|
|
481,886 |
|
Goodwill
|
|
|
115,140 |
|
|
|
57,540 |
|
|
|
1,113,173 |
|
|
|
- |
|
|
|
1,285,853 |
|
Investment
in subsidiaries
|
|
|
46,393 |
|
|
|
151,268 |
|
|
|
(146,364 |
) |
|
|
(51,297 |
) |
|
|
- |
|
Intercompany
notes receivable
|
|
|
1,706,034 |
|
|
|
- |
|
|
|
2,325 |
|
|
|
(1,708,359 |
) |
|
|
- |
|
Total
assets
|
|
$ |
2,359,048 |
|
|
$ |
276,048 |
|
|
$ |
2,009,740 |
|
|
$ |
(1,788,488 |
) |
|
$ |
2,856,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
36,962 |
|
|
$ |
5,198 |
|
|
$ |
158,565 |
|
|
$ |
- |
|
|
$ |
200,725 |
|
Other
current liabilities
|
|
|
19,307 |
|
|
|
126 |
|
|
|
46,932 |
|
|
|
- |
|
|
|
66,365 |
|
Intercompany
accounts payable
|
|
|
3,070 |
|
|
|
1,881 |
|
|
|
10,187 |
|
|
|
(15,138 |
) |
|
|
- |
|
Wages
and benefits payable
|
|
|
25,271 |
|
|
|
1,972 |
|
|
|
51,093 |
|
|
|
- |
|
|
|
78,336 |
|
Taxes
payable
|
|
|
2,369 |
|
|
|
3,496 |
|
|
|
12,730 |
|
|
|
- |
|
|
|
18,595 |
|
Current
portion of long-term debt
|
|
|
10,803 |
|
|
|
- |
|
|
|
(34 |
) |
|
|
- |
|
|
|
10,769 |
|
Current
portion of warranty
|
|
|
8,481 |
|
|
|
264 |
|
|
|
14,630 |
|
|
|
- |
|
|
|
23,375 |
|
Unearned
revenue
|
|
|
17,365 |
|
|
|
- |
|
|
|
6,964 |
|
|
|
- |
|
|
|
24,329 |
|
Deferred
income taxes, net
|
|
|
- |
|
|
|
- |
|
|
|
1,927 |
|
|
|
- |
|
|
|
1,927 |
|
Short-term
intercompany advances
|
|
|
5,001 |
|
|
|
2,704 |
|
|
|
5,395 |
|
|
|
(13,100 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
128,629 |
|
|
|
15,641 |
|
|
|
308,389 |
|
|
|
(28,238 |
) |
|
|
424,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,140,998 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,140,998 |
|
Warranty
|
|
|
11,228 |
|
|
|
317 |
|
|
|
3,335 |
|
|
|
- |
|
|
|
14,880 |
|
Pension
plan benefits
|
|
|
(1 |
) |
|
|
- |
|
|
|
55,811 |
|
|
|
- |
|
|
|
55,810 |
|
Intercompany
notes payable
|
|
|
1,190 |
|
|
|
4,635 |
|
|
|
1,702,534 |
|
|
|
(1,708,359 |
) |
|
|
- |
|
Deferred
income taxes, net
|
|
|
- |
|
|
|
10,615 |
|
|
|
92,105 |
|
|
|
- |
|
|
|
102,720 |
|
Other
obligations
|
|
|
18,228 |
|
|
|
2,389 |
|
|
|
38,126 |
|
|
|
- |
|
|
|
58,743 |
|
Total
liabilities
|
|
|
1,300,272 |
|
|
|
33,597 |
|
|
|
2,200,300 |
|
|
|
(1,736,597 |
) |
|
|
1,797,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
992,184 |
|
|
|
246,982 |
|
|
|
(47,520 |
) |
|
|
(199,462 |
) |
|
|
992,184 |
|
Accumulated
other comprehensive income, net
|
|
|
34,093 |
|
|
|
1,930 |
|
|
|
(11,416 |
) |
|
|
9,486 |
|
|
|
34,093 |
|
Retained
earnings (accumulated deficit)
|
|
|
50,291 |
|
|
|
(6,461 |
) |
|
|
(131,624 |
) |
|
|
138,085 |
|
|
|
50,291 |
|
Cumulative
effect of change in accounting principle |
|
|
(17,792 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17,792 |
) |
Total
shareholders' equity
|
|
|
1,058,776 |
|
|
|
242,451 |
|
|
|
(190,560 |
) |
|
|
(51,891 |
) |
|
|
1,058,776 |
|
Total
liabilities and shareholders' equity
|
|
$ |
2,359,048 |
|
|
$ |
276,048 |
|
|
$ |
2,009,740 |
|
|
$ |
(1,788,488 |
) |
|
$ |
2,856,348 |
|
|
|
Three
Months Ended March 31, 2009
|
|
(in
thousands)
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(19,729 |
) |
|
$ |
(950 |
) |
|
$ |
(19,691 |
) |
|
$ |
20,641 |
|
|
$ |
(19,729 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,422 |
|
|
|
- |
|
|
|
24,814 |
|
|
|
- |
|
|
|
36,236 |
|
Stock-based
compensation
|
|
|
4,487 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,487 |
|
Amortization
of prepaid debt fees
|
|
|
1,840 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,840 |
|
Amortization
of convertible debt discount
|
|
|
2,570 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
2,570 |
|
Loss
on extinguishment of debt, net
|
|
|
9,960 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,960 |
|
Deferred
income taxes, net
|
|
|
(3,315 |
) |
|
|
- |
|
|
|
(4,339 |
) |
|
|
- |
|
|
|
(7,654 |
) |
Equity
in losses of guarantor and non-guarantor subsidiaries, net
|
|
|
18,552 |
|
|
|
2,089 |
|
|
|
- |
|
|
|
(20,641 |
) |
|
|
- |
|
Other,
net
|
|
|
3,045 |
|
|
|
- |
|
|
|
57 |
|
|
|
- |
|
|
|
3,102 |
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
11,165 |
|
|
|
(560 |
) |
|
|
696 |
|
|
|
- |
|
|
|
11,301 |
|
Inventories
|
|
|
1,641 |
|
|
|
- |
|
|
|
325 |
|
|
|
- |
|
|
|
1,966 |
|
Accounts
payables, other current liabilities and taxes payable
|
|
|
(2,486 |
) |
|
|
161 |
|
|
|
2,641 |
|
|
|
- |
|
|
|
316 |
|
Wages
and benefits payable
|
|
|
(1,842 |
) |
|
|
(46 |
) |
|
|
(5,190 |
) |
|
|
- |
|
|
|
(7,078 |
) |
Unearned
revenue
|
|
|
14,418 |
|
|
|
- |
|
|
|
1,378 |
|
|
|
- |
|
|
|
15,796 |
|
Warranty
|
|
|
(1,949 |
) |
|
|
- |
|
|
|
(1,468 |
) |
|
|
- |
|
|
|
(3,417 |
) |
Effect
of foreign exchange rate changes
|
|
|
- |
|
|
|
- |
|
|
|
(5,886 |
) |
|
|
- |
|
|
|
(5,886 |
) |
Intercompany
transactions, net
|
|
|
(237 |
) |
|
|
291 |
|
|
|
(54 |
) |
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
(1,455 |
) |
|
|
13 |
|
|
|
358 |
|
|
|
- |
|
|
|
(1,084 |
) |
Net
cash provided by (used in) operating activities
|
|
|
48,087 |
|
|
|
998 |
|
|
|
(6,359 |
) |
|
|
- |
|
|
|
42,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of property, plant, and equipment
|
|
|
(5,874 |
) |
|
|
- |
|
|
|
(7,838 |
) |
|
|
- |
|
|
|
(13,712 |
) |
Business
acquisitions & contingent consideration, net of cash equivalents
acquired
|
|
|
(1,217 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,217 |
) |
Current
intercompany notes, net
|
|
|
598 |
|
|
|
- |
|
|
|
1,217 |
|
|
|
(1,815 |
) |
|
|
- |
|
Long-term
intercompany notes receivable, net
|
|
|
3,731 |
|
|
|
(1,021 |
) |
|
|
1,135 |
|
|
|
(3,845 |
) |
|
|
- |
|
Other,
net
|
|
|
(2,567 |
) |
|
|
- |
|
|
|
3,231 |
|
|
|
- |
|
|
|
664 |
|
Net
cash used in investing activities
|
|
|
(5,329 |
) |
|
|
(1,021 |
) |
|
|
(2,255 |
) |
|
|
(5,660 |
) |
|
|
(14,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
|
(67,551 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(67,551 |
) |
Issuance
of common stock
|
|
|
724 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
724 |
|
Current
intercompany notes, net
|
|
|
(1,217 |
) |
|
|
- |
|
|
|
(598 |
) |
|
|
1,815 |
|
|
|
- |
|
Long-term
intercompany notes payable, net
|
|
|
(3,615 |
) |
|
|
- |
|
|
|
(230 |
) |
|
|
3,845 |
|
|
|
- |
|
Other,
net
|
|
|
(587 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(587 |
) |
Net
cash used in financing activities
|
|
|
(72,246 |
) |
|
|
- |
|
|
|
(828 |
) |
|
|
5,660 |
|
|
|
(67,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
- |
|
|
|
- |
|
|
|
(3,346 |
) |
|
|
- |
|
|
|
(3,346 |
) |
Decrease
in cash and cash equivalents
|
|
|
(29,488 |
) |
|
|
(23 |
) |
|
|
(12,788 |
) |
|
|
- |
|
|
|
(42,299 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
67,404 |
|
|
|
3,180 |
|
|
|
73,806 |
|
|
|
- |
|
|
|
144,390 |
|
Cash
transferred from guarantor to parent
|
|
|
2,940 |
|
|
|
(2,940 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cash
and cash equivalents at end of period
|
|
$ |
40,856 |
|
|
$ |
217 |
|
|
$ |
61,018 |
|
|
$ |
- |
|
|
$ |
102,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
2,266 |
|
|
$ |
- |
|
|
$ |
3,294 |
|
|
$ |
- |
|
|
$ |
5,560 |
|
Exchange of
debt for common stock (see Note 6)
|
|
|
120,984 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
120,984 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
301 |
|
|
$ |
- |
|
|
$ |
1,193 |
|
|
$ |
- |
|
|
$ |
1,494 |
|
Interest, net
of amounts capitalized
|
|
|
15,294 |
|
|
|
115 |
|
|
|
36 |
|
|
|
- |
|
|
|
15,445 |
|
Consolidating
Statement of Cash Flows
|
|
Three
Months Ended March 31, 2008
|
|
(in
thousands) |
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
953 |
|
|
$ |
1,401 |
|
|
$ |
(14,265 |
) |
|
$ |
12,864 |
|
|
$ |
953 |
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
10,139 |
|
|
|
544 |
|
|
|
33,635 |
|
|
|
- |
|
|
|
44,318 |
|
Stock-based
compensation
|
|
|
3,890 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,890 |
|
Amortization
of prepaid debt fees
|
|
|
1,858 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,858 |
|
Amortization
of convertible debt discount
|
|
|
3,271 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,271 |
|
Deferred
income taxes, net
|
|
|
(18,344 |
) |
|
|
(1,171 |
) |
|
|
288 |
|
|
|
- |
|
|
|
(19,227 |
) |
Equity
in (earnings) losses of guarantor and non-guarantor subsidiaries,
net
|
|
|
13,256 |
|
|
|
(392 |
) |
|
|
- |
|
|
|
(12,864 |
) |
|
|
- |
|
Other,
net
|
|
|
62 |
|
|
|
12 |
|
|
|
12 |
|
|
|
- |
|
|
|
86 |
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
9,282 |
|
|
|
(3,454 |
) |
|
|
(25,780 |
) |
|
|
- |
|
|
|
(19,952 |
) |
Inventories
|
|
|
(4,503 |
) |
|
|
(94 |
) |
|
|
(11,640 |
) |
|
|
- |
|
|
|
(16,237 |
) |
Accounts
payables, other current liabilities and taxes payable
|
|
|
7,016 |
|
|
|
1,295 |
|
|
|
28,190 |
|
|
|
- |
|
|
|
36,501 |
|
Wages
and benefits payable
|
|
|
5,247 |
|
|
|
331 |
|
|
|
(184 |
) |
|
|
- |
|
|
|
5,394 |
|
Unearned
revenue
|
|
|
10,797 |
|
|
|
62 |
|
|
|
3,030 |
|
|
|
- |
|
|
|
13,889 |
|
Warranty
|
|
|
977 |
|
|
|
(1 |
) |
|
|
1,678 |
|
|
|
- |
|
|
|
2,654 |
|
Effect
of foreign exchange rate changes
|
|
|
- |
|
|
|
- |
|
|
|
7,867 |
|
|
|
- |
|
|
|
7,867 |
|
Intercompany
transactions, net
|
|
|
3,460 |
|
|
|
2,245 |
|
|
|
(5,705 |
) |
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
(5,699 |
) |
|
|
34 |
|
|
|
(3,180 |
) |
|
|
- |
|
|
|
(8,845 |
) |
Net
cash provided by operating activities
|
|
|
41,662 |
|
|
|
812 |
|
|
|
13,946 |
|
|
|
- |
|
|
|
56,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of property, plant, and equipment
|
|
|
(5,268 |
) |
|
|
- |
|
|
|
(7,849 |
) |
|
|
- |
|
|
|
(13,117 |
) |
Business
acquisitions & contingent consideration, net of cash equivalents
acquired
|
|
|
(95 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(95 |
) |
Current
intercompany notes, net
|
|
|
6,947 |
|
|
|
7,760 |
|
|
|
7,806 |
|
|
|
(22,513 |
) |
|
|
- |
|
Long-term
intercompany notes receivable, net
|
|
|
73,018 |
|
|
|
(271 |
) |
|
|
(536 |
) |
|
|
(72,211 |
) |
|
|
- |
|
Other,
net
|
|
|
136,272 |
|
|
|
335 |
|
|
|
(135,710 |
) |
|
|
- |
|
|
|
897 |
|
Net
cash provided by (used in) investing activities
|
|
|
210,874 |
|
|
|
7,824 |
|
|
|
(136,289 |
) |
|
|
(94,724 |
) |
|
|
(12,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
|
(46,770 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(46,770 |
) |
Issuance
of common stock
|
|
|
2,569 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,569 |
|
Current
intercompany notes, net
|
|
|
(7,806 |
) |
|
|
(7,806 |
) |
|
|
(6,901 |
) |
|
|
22,513 |
|
|
|
- |
|
Long-term
intercompany notes payable, net
|
|
|
(201,356 |
) |
|
|
623 |
|
|
|
128,522 |
|
|
|
72,211 |
|
|
|
- |
|
Other,
net
|
|
|
3,174 |
|
|
|
- |
|
|
|
413 |
|
|
|
- |
|
|
|
3,587 |
|
Net
cash (used in) provided by financing activities
|
|
|
(250,189 |
) |
|
|
(7,183 |
) |
|
|
122,034 |
|
|
|
94,724 |
|
|
|
(40,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
|
|
- |
|
|
|
40 |
|
Increase
(decrease) in cash and cash equivalents
|
|
|
2,347 |
|
|
|
1,453 |
|
|
|
(269 |
) |
|
|
- |
|
|
|
3,531 |
|
Cash
and cash equivalents at beginning of period
|
|
|
27,937 |
|
|
|
1,664 |
|
|
|
62,387 |
|
|
|
- |
|
|
|
91,988 |
|
Cash
and cash equivalents at end of period
|
|
$ |
30,284 |
|
|
$ |
3,117 |
|
|
$ |
62,118 |
|
|
$ |
- |
|
|
$ |
95,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures incurred but not yet paid
|
|
$ |
1,109 |
|
|
$ |
160 |
|
|
$ |
1,335 |
|
|
$ |
- |
|
|
$ |
2,604 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
69 |
|
|
$ |
- |
|
|
$ |
3,834 |
|
|
$ |
- |
|
|
$ |
3,903 |
|
Interest
|
|
|
18,050 |
|
|
|
(10 |
) |
|
|
345 |
|
|
|
- |
|
|
|
18,385 |
|
Note
15: Subsequent Event
On
April 24, 2009, we completed an amendment to our credit facility dated
April 18, 2007. The amendment adjusts the maximum total leverage ratio and
the minimum interest coverage ratio thresholds to increase operational
flexibility. The amendment also provides us with the uncommitted option to
increase the $115 million multicurrency revolving line-of-credit by an
additional $75 million without a further amendment to the credit facility.
Interest rates on the credit facility will continue to be based on the
respective borrowing’s denominated LIBOR, plus an additional margin. The
additional margin will increase and is dependent on our total leverage ratio, in
accordance with the terms of the amendment. The additional margin was 1.75% at
March 31, 2009, increasing to 3.5% on April 24, 2009. Debt fees of
approximately $3.7 million were incurred for the amendment, as well as other
legal and advisory fees.
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 for the year ended December 31,
2008 filed with the Securities and Exchange Commission (SEC) on
February 26, 2009.
Documents
we provide to the Securities and Exchange Commission are available free of
charge under the Investors section of our website at www.itron.com as soon as
practicable after they are filed with or furnished to the SEC. In addition,
these documents are available at the SEC’s website (http://www.sec.gov) and at the SEC’s
Headquarters at 100 F Street, NE, Washington, DC 20549, or by calling
1-800-SEC-0330.
Certain
Forward-Looking Statements
This
document contains forward-looking statements concerning our operations,
financial performance, revenues, earnings growth, estimated stock-based
compensation expense, pension liabilities, 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.
Forward-looking statements rely on a number of assumptions and estimates. These
assumptions and estimates could be inaccurate and cause our actual results to
vary materially from expected results. Risks and uncertainties include
1) the rate and timing of customer demand for our products, 2) rescheduling
or cancellations of current customer orders and commitments, 3) changes in
estimated liabilities for product warranties and/or litigation, 4) our
dependence on new product development and performance, 5) changes in domestic
and international laws and regulations, 6) future business combinations, 7)
changes in estimates for stock-based compensation or pension costs, 8) changes
in foreign currency exchange rates, 9) international business risks, 10) our own
and our customers’ or suppliers’ access to and cost of capital, and 11) other
factors. You should not solely rely on these forward-looking statements as they
are only valid as of the date of this Quarterly Report on Form 10-Q. We do not
have any obligation to publicly update or revise any forward-looking statement
in this document. For a more complete description of these and other risks, see
“Risk Factors” within Item 1A included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008, which was filed with the SEC
on February 26, 2009 and Item 1A included in this Quarterly Report on Form
10-Q for material changes to our risk factors as of March 31,
2009.
Results
of Operations
We derive
the majority of our revenues from sales of products and services to utilities.
Revenues include hardware, software, managed services, and consulting. Cost of
revenues includes materials, labor, overhead, warranty expense, and distribution
and documentation costs for software.
Highlights
During
the first quarter of 2009, we strengthened our financial position by completing
an exchange of our convertible debt for equity, resulting in a reduction of our
convertible debt obligation by $121.0 million. In addition, we repaid $67.6
million of our credit facility term loans during the quarter.
During
the first three months of 2009, we recorded $625 million in quarterly bookings,
which included $257 million in bookings for the San Diego Gas & Electric
Advanced Metering Infrastructure (AMI) contract. Total backlog at March 31,
2009 was $1.5 billion. A significant portion of our backlog consists of three
AMI contracts, most of which is excluded from our 12-month backlog at
March 31, 2009 as these are multi-year contracts.
Total
Company Revenues, Gross Profit and Margin, and Unit Shipments
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
|
|
(in
millions, except gross margin)
|
|
|
|
|
Revenues
|
|
$ |
388.5 |
|
|
$ |
478.5 |
|
|
|
(19%)
|
|
Gross
Profit
|
|
$ |
129.6 |
|
|
$ |
162.6 |
|
|
|
(20%)
|
|
Gross
Margin
|
|
|
33 |
% |
|
|
34 |
% |
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
Revenues
by region
|
|
|
|
|
|
|
Europe
|
|
$ |
197.5 |
|
|
$ |
238.6 |
|
United
States and Canada
|
|
|
134.8 |
|
|
|
161.2 |
|
Other
|
|
|
56.2 |
|
|
|
78.7 |
|
Total
revenues
|
|
$ |
388.5 |
|
|
$ |
478.5 |
|
Revenues
Revenues
were $388.5 million for the first quarter of 2009, compared with $478.5 million
for the first quarter of 2008. The decrease of $90 million was primarily driven
by foreign exchange rates, fewer electric meters shipped during the
quarter due to the completion of a number of AMR contracts in 2008, and the
economic downturn.
No single
customer represented more than 10% of total revenues for the first quarter of
2009 and 2008. Our 10 largest customers accounted for approximately 15% and 17%
of total revenues for the three months ended March 31, 2009 and
2008.
Gross
Margins
Gross
margin was 33% in the first quarter of 2009, compared with 34% in the first
quarter of 2008. A number of AMR contracts were completed in 2008, resulting in
a lower margin product mix in the first quarter of 2009.
Unit
Shipments
Meters
can be sold with and without AMR functionality. In addition, AMR modules can be
sold separately from the meter. Depending on customers’ preferences, we also
incorporate other vendors’ AMR technology in our meters. Meter and AMR shipments
are as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(units
in thousands)
|
|
Total
meters (with or without AMR)
|
|
|
|
|
|
|
Electricity
- Itron North America
|
|
|
840 |
|
|
|
1,300 |
|
Electricity
- Itron International
|
|
|
1,810 |
|
|
|
1,850 |
|
Gas
|
|
|
910 |
|
|
|
900 |
|
Water
|
|
|
2,355 |
|
|
|
2,325 |
|
Total
meters
|
|
|
5,915 |
|
|
|
6,375 |
|
|
|
|
|
|
|
|
|
|
AMR
units (North America and International)
|
|
|
|
|
|
|
|
|
Meters
with AMR
|
|
|
790 |
|
|
|
1,325 |
|
AMR
modules
|
|
|
1,000 |
|
|
|
1,075 |
|
Total
AMR units
|
|
|
1,790 |
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
Meters
with other vendors' AMR
|
|
|
185 |
|
|
|
250 |
|
Operating
Segment Results
We have two operating
segments: Itron International and Itron North America. Itron International was
previously referred to as the Actaris operating segment. We are now operating
under the Itron brand on a worldwide basis. Itron International
generates a majority of its revenues in Europe, Africa, South America, and
Asia/Pacific, while Itron North America generates a majority of its revenues in
the United States and Canada. We have made refinements to our management
reporting and geographic reporting structure between our International
and North America operations. Itron North America now includes sales of gas and
water meters in North America, which were previously part of Itron
International. Therefore, the operating segment information as set forth below
is based on our current segment reporting structure. In accordance with
Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments
of an Enterprise and Related Information, historical segment
information has been restated from the segment information previously provided
to conform to our current segment reporting structure after the January 1,
2009 refinement.
We have
three measures of segment performance: revenue, gross profit (margin), and
operating income (margin). Intersegment revenues were minimal. Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Depreciation and amortization expenses
are allocated to our segments. For the three months ended March 31, 2009
and 2008, Itron North America depreciation and amortization expense was $11.4
million and $11.9 million. Depreciation and amortization expense for Itron
International for the three months ended March 31, 2009 and 2008 was $24.8
million and $32.4 million.
Segment
Products
Itron
North America
|
Electronic
and smart electricity meters; gas and water meters; electricity, gas, and
water AMR and AMI/smart meter modules; handheld, mobile, and network AMR
data collection technologies; AMI network technologies; software,
installation, implementation, consulting, maintenance, support, and other
services.
|
|
|
Itron
International
|
Electromechanical,
electronic, and smart electricity meters; mechanical and ultrasonic water
and heat meters; diaphragm, turbine, and rotary gas meters; one-way and
two-way electricity prepayment systems, including smart key, keypad, and
smart card; two-way gas prepayment systems using smart card; AMR and AMI
data collection technologies; installation, implementation, maintenance
support, and other managed
services.
|
The
following tables and discussion highlight significant changes in trends or
components of each operating segment.
|
|
Three
Months Ended March 31,
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
|
(in
millions)
|
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
139.4 |
|
|
$ |
169.8 |
|
|
|
(18%)
|
Itron
International
|
|
|
249.1 |
|
|
|
308.7 |
|
|
|
(19%)
|
Total
revenues
|
|
$ |
388.5 |
|
|
$ |
478.5 |
|
|
|
(19%)
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Segment
Gross Profit and Margin
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
Itron
North America
|
|
$ |
52.3 |
|
|
|
38%
|
|
|
$ |
64.2 |
|
|
|
38%
|
|
Itron
International
|
|
|
77.3 |
|
|
|
31%
|
|
|
|
98.4 |
|
|
|
32%
|
|
Total
gross profit and margin
|
|
$ |
129.6 |
|
|
|
33%
|
|
|
$ |
162.6 |
|
|
|
34%
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
Segment
Operating Income (Loss)
|
and
Operating Margin
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
Itron
North America
|
|
$ |
7.8 |
|
|
|
6%
|
|
|
$ |
18.2 |
|
|
|
11%
|
|
Itron
International
|
|
|
9.8 |
|
|
|
4%
|
|
|
|
18.9 |
|
|
|
6%
|
|
Corporate
unallocated
|
|
|
(8.7 |
) |
|
|
|
|
|
|
(9.8 |
) |
|
|
|
|
Total
Company
|
|
$ |
8.9 |
|
|
|
2%
|
|
|
$ |
27.3 |
|
|
|
6%
|
|
Itron North America: Revenues
of $139.4 million for the first quarter of 2009 were $30.4 million, or 18%,
lower than the first quarter of 2008. This decrease is the result of fewer
shipments of electricity meters due to the completion of a number of AMR
contracts in 2008 and the economic downturn. Gross margin remained constant. As
a result of gas and water meter sales being added to the product mix
of tron North America, historical segment information has been updated,
thus decreasing the historical gross margin by one percentage
point.
No
customer represented more than 10% of Itron North America operating segment
revenues in the first quarter of 2009. One customer accounted for 13% of Itron
North America operating segment revenues for the first quarter of
2008.
Itron
North America operating expenses decreased $1.5 million, or 3%, primarily due to
lower sales, general and administrative expenses, and amortization of intangible
assets. Operating expenses as a percentage of revenues were 32% in the first
quarter of 2009, compared with 27% in the first quarter of 2008, as a result of
lower revenues in the first quarter of 2009.
Itron International: Revenues
of $249.1 million for the first quarter of 2009 decreased $59.6 million, or 19%,
compared with the first quarter of 2008. The impact of the strengthening of the
U.S. dollar against other currencies accounted for nearly 90% of the current
quarter revenue decrease. While meter shipments remained constant quarter over
quarter, the remainder of the revenue decrease was due primarily to changes in
product mix. Gross margin decreased one percentage point due to the completion
of a smart metering project in Sweden and a higher mix of service revenue with
lower margin in South America.
Business
line revenues for Itron International were as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Electricity
|
|
|
37%
|
|
|
|
40%
|
|
Gas
|
|
|
28%
|
|
|
|
27%
|
|
Water
|
|
|
35%
|
|
|
|
33%
|
|
No single
customer represented more than 10% of Itron International operating segment
revenues in the first quarter of 2009 and 2008.
Operating
expenses for Itron International were $67.5 million and $79.5 million for the
three months ended March 31, 2009 and 2008, or 27% and 26% of revenues for
the respective periods. Excluding the effect of foreign exchange, operating
expenses decreased primarily as a result of lower amortization of intangibles
assets.
Corporate
unallocated: Operating
expenses not directly associated with an operating segment are classified as
“Corporate unallocated.” These expenses decreased in the first quarter of 2009
compared with the first quarter of 2008 primarily due to lower compensation and
consulting fees associated with financial integration and the Sarbanes-Oxley Act
of 2002 compliance. As a percentage of total revenues, corporate unallocated
expenses were 2% in the first quarter of 2009 and 2008.
Bookings
and Backlog of Orders
Bookings
for a reported period represent customer contracts and purchase orders received
during the period that have met certain conditions, such as regulatory approval.
Total backlog represents committed but undelivered contracts and purchase orders
at period end. Twelve-month backlog represents the portion of total backlog that
we estimate will be recognized as revenue over the next 12 months. Backlog is
not a complete measure of our future business as we have significant
book-and-ship orders. Bookings and backlog can fluctuate significantly due to
the timing of large project awards. In addition, annual or multi-year contracts
are subject to rescheduling and cancellation by customers due to the long-term
nature of the contracts. Beginning total backlog, plus bookings, minus revenues,
will not equal ending total backlog due to miscellaneous contract adjustments,
foreign currency fluctuations, and other factors.
Information
on bookings and backlog is summarized as follows:
Quarter
Ended
|
|
Quarterly
Bookings
|
|
|
Ending
Total
Backlog
|
|
|
Ending
12-Month
Backlog
|
|
|
|
(in
millions)
|
|
March
31, 2009
|
|
$ |
625 |
|
|
$ |
1,526 |
|
|
$ |
471 |
|
December
31, 2008
|
|
|
733 |
|
|
|
1,309 |
|
|
|
507 |
|
September
30, 2008
|
|
|
894 |
|
|
|
1,012 |
|
|
|
436 |
|
June
30, 2008
|
|
|
432 |
|
|
|
609 |
|
|
|
493 |
|
March
31, 2008
|
|
|
484 |
|
|
|
683 |
|
|
|
552 |
|
As we
enter into AMI agreements to deploy our OpenWay® meter and communications
system, we include these contracts in bookings and backlog when regulatory
approvals are received or certain other conditions are met. At March 31,
2009, three of our four signed AMI contracts were included in bookings and
backlog. Bookings and backlog for the first quarter of 2009 included $257
million related to the San Diego Gas & Electric AMI contract. During
the third quarter of 2008, $480 million was booked related to
the Southern California Edison AMI contract and during the fourth
quarter of 2008, $334 million was booked related to the CenterPoint Energy AMI
contract. A significant portion of these AMI contracts is not included in
12-month backlog as these are multi-year contracts.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
%
of Revenue
|
|
|
2008
|
|
|
%
of Revenue
|
|
|
|
(in
millions)
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
Sales
and marketing
|
|
$ |
37.0 |
|
|
|
10%
|
|
|
$ |
42.0 |
|
|
|
9%
|
|
Product
development
|
|
|
31.1 |
|
|
|
8%
|
|
|
|
29.0 |
|
|
|
6%
|
|
General
and administrative
|
|
|
29.0 |
|
|
|
7%
|
|
|
|
33.0 |
|
|
|
7%
|
|
Amortization
of intangible assets
|
|
|
23.5 |
|
|
|
6%
|
|
|
|
31.3 |
|
|
|
7%
|
|
Total
operating expenses
|
|
$ |
120.6 |
|
|
|
31%
|
|
|
$ |
135.3 |
|
|
|
28%
|
|
Operating
expenses decreased in the first quarter of 2009, compared with the first quarter
of 2008, primarily due to the strengthening of the U.S. dollar against other
currencies and lower amortization of intangible assets, partially offset by an
increase in product development costs. As a percentage of revenues, operating
expenses increased 3% in the first quarter of 2009, compared with the same
period in 2008, as a result of lower revenues.
Other
Income (Expense)
The
following table shows the components of other income (expense):
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Interest
income
|
|
$ |
535 |
|
|
$ |
1,424 |
|
Interest
expense
|
|
|
(16,845 |
) |
|
|
(28,537 |
) |
Loss
on extinguishment of debt
|
|
|
(10,340 |
) |
|
|
- |
|
Other
(expense) income, net
|
|
|
(2,034 |
) |
|
|
188 |
|
Total
other income (expense)
|
|
$ |
(28,684 |
) |
|
$ |
(26,925 |
) |
Interest income: Interest
income decreased 62% in the first quarter of 2009, compared with the same period
in 2008, primarily due to lower interest rates in the first quarter of 2009,
compared with the same period in 2008. The decrease in interest rates was
partially offset by an increase in our average cash and cash equivalent balance,
which was $120.8 million for the first quarter of 2009, compared with $84.8
million for the same period in 2008.
Interest expense: Interest
expense decreased 41% in the first quarter of 2009, compared with the same
period in 2008 primarily due to the decline in our principal borrowings and the
reduction in the additional interest rate margin on our term loans from 2% in
the first quarter of 2008, compared with 1.75% in the first quarter of 2009.
Inclusive of our interest rate swaps, 85% of our borrowings are at fixed rates
at March 31, 2009. Average outstanding principal borrowings were $1.1 billion in
the first quarter of 2009, compared with $1.6 billion for the same period in
2008.
Loss on extinguishment of
debt: During the first quarter of 2009, we entered into exchange
agreements with certain holders of our convertible notes to issue, in the
aggregate, approximately 2.3 million shares of common stock, valued at $132.9
million, in exchange for, in the aggregate, $121.0 million principal amount of
the convertible notes, representing 35% of the aggregate principal outstanding
at the date of the exchanges. All of the convertible notes we acquired pursuant
to the exchange agreements were retired upon the closing of the
exchanges.
In
accordance with Financial Accounting Standards Board (FASB) Staff Position (FSP)
APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement), (FSP 14-1), the exchange agreements
were treated as induced conversions as the holders received a greater number of
shares of common stock than would have been issued under the original conversion
terms of the convertible notes. At the time of the exchange agreements, none of
the conversion contingencies were met. Under the original terms of the
convertible notes, the amount payable on conversion was to be paid in cash, and
the remaining conversion obligation (stock price in excess of conversion price)
was payable in cash or shares, at our option. Under the terms of the exchange
agreements, all of the settlement was paid in shares. The difference in the
value of the shares of common stock issued under the exchange agreement and the
value of the shares used to derive the amount payable under the original
conversion agreement resulted in a loss on extinguishment of debt of $23.3
million (the inducement loss). As required by FSP 14-1 upon derecognition of the
convertible notes, we remeasured the fair value of the liability and equity
components using a borrowing rate for similar non-convertible debt that would be
applicable to us at the date of the exchange agreements. Because borrowing rates
have increased, the remeasurement of the components of the convertible notes
resulted in a gain on extinguishment of $13.4 million (the revaluation gain). As
a result, we recognized a net loss on extinguishment of debt of $10.3 million,
calculated as the inducement loss, plus an allocation of advisory fees less the
revaluation gain.
Other income (expense): In
the first quarter of 2009, other expenses, net, resulted primarily from net
foreign currency losses due to balances denominated in a currency other than the
reporting entity’s functional currency and consulting and legal fees associated
with the amendment to our credit facility, which was finalized in the second
quarter of 2009. In the first quarter of 2008, foreign currency gains were
partially offset by banking fees.
Income
Taxes
Our tax
provision (benefit) as a percentage of income (loss) before tax typically
differs from the federal statutory rate of 35%. Changes in our effective tax
rate are subject to several factors, including fluctuations in operating
results, new or revised tax legislation and accounting pronouncements, changes
in the level of business conducted in domestic and international jurisdictions,
research credits, state income taxes, changes in valuation allowance and
interest expense and penalties related to uncertain tax positions, among other
items.
Estimated
foreign exchange rates, the forecasted and realized mix of earnings in different
tax jurisdictions, and foreign interest expense deductions have decreased our
effective tax rate for 2009, as compared with 2008. For the three months ended
March 31, 2009, our tax benefit as a percentage of loss before tax
was minimal.
Unrecognized
tax benefits in accordance with Financial Accounting Standards Board (FASB)
Interpretation 48 (FIN 48), Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109, were $35.9 million and $37.6
million at March 31,
2009 and December 31, 2008, respectively. The decrease in the balance of
our unrecognized tax benefits was primarily due to currency exchange rates. We
classify interest expense and penalties related to unrecognized tax benefits and
interest income on tax overpayments as components of income tax expense.
Interest and penalties related to unrecognized tax benefits for the three months
ended March 31, 2009 and 2008 were $687,000 and $477,000, respectively. At
March 31, 2009 and December 31, 2008, accrued interest was $3.4
million and $3.2 million, respectively, and accrued penalties were
$2.9 million in each period. The amount of unrecognized tax benefits that
would affect our tax provision at March 31, 2009 and December 31, 2008
were $35.4 million and $37.0 million, respectively. At March 31, 2009, we
expect to pay no income taxes, interest, or penalties related to FIN 48
over the next twelve months. We are not able to reasonably estimate the timing
of future cash flows relating to the remaining balance.
Financial
Condition
Cash
Flow Information:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Operating
activities
|
|
$ |
42.7 |
|
|
$ |
56.4 |
|
Investing
activities
|
|
|
(14.3 |
) |
|
|
(12.3 |
) |
Financing
activities
|
|
|
(67.4 |
) |
|
|
(40.6 |
) |
Effect
of exchange rates on cash and cash equivalents
|
|
|
(3.3 |
) |
|
|
- |
|
Increase
(decrease) in cash and cash equivalents
|
|
$ |
(42.3 |
) |
|
$ |
3.5 |
|
Cash and
cash equivalents decreased to $102.1 million at March 31, 2009, compared
with $144.4 million at December 31, 2008. The decrease was primarily due to
the result of our financing activities.
Operating
activities
Cash
provided by operating activities decreased by $13.7 million to $42.7 million for
the first quarter of 2009 compared with the corresponding period in 2008. The
decrease was primarily due to the strengthening of the U.S. dollar against other
currencies.
Investing
activities
Cash used
in investing activities increased 16% in the first quarter of 2009, compared
with the same period in 2008, due to the payment of contingent consideration
totaling $1.2 million related to our 2006 acquisitions of ELO Sistemas e
Tecnologia Ltda and Quantum Consulting, Inc.
Financing
activities
During
the first three months of 2009, we repaid $67.6 million on the credit facility,
compared with $46.8 million during the same period in 2008. Cash generated from
the exercise of stock-based awards was $724,000 during the first quarter of
2009, compared with $2.6 million during the same period in 2008.
Effect
of exchange rates on cash and cash equivalents
The
effect of exchange rates on the cash balances of currencies held in foreign
denominations for the first quarter of 2009 was a decrease of $3.3 million,
compared with an increase of $40,000 for the same period in 2008.
Non-cash
transactions
During
the first quarter of 2009, we entered into exchange agreements with certain
holders of our convertible notes to issue, in the aggregate, was approximately
2.3 million shares of common stock, valued at $132.9 million, in exchange for,
in the aggregate, $121.0 million principal amount of the convertible notes. (see
Note 6 of the condensed consolidated financial statements)
Off-balance
sheet arrangements
We have
no off-balance sheet financing agreements or guarantees as defined by Item 303
of Regulation S-K at March 31, 2009 and December 31, 2008 that we
believe were reasonably likely to have a current or future effect on our
financial condition, results of operations or cash flows.
Liquidity,
Sources and Uses of Capital:
Our
principal sources of liquidity are cash flows from operations, borrowings, and
sales of common stock. Cash flows can fluctuate and are sensitive to many
factors including changes in working capital and the timing and magnitude of
capital expenditures and payments on debt.
Credit
Facility
The
Actaris Metering Systems SA (Actaris) acquisition in 2007 was financed in part
by a $1.2 billion credit facility. The credit facility, dated April 18,
2007, was composed 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) (see the Subsequent Event section for a discussion of the amendment
to the credit facility dated April 24, 2009). Our loan balances denominated
in currencies other than the U.S. dollar fluctuate due to currency exchange
rates. The principal balances of our euro denominated term loan at
March 31, 2009 and December 31, 2008 were €238.3 million and €254.1
million, respectively. Interest rates on the credit facility are based
on the respective borrowing’s denominated London Interbank Offered
Rate (LIBOR) or the Wells Fargo Bank, National Association’s prime rate, plus an
additional margin of 1.75% subject to factors including our consolidated
leverage ratio. Our interest rates were 2.23% for the U.S. dollar denominated
and 4.72% for the euro denominated term loans at March 31, 2009. Scheduled
amortization of principal payments is 1% per year (0.25% quarterly) with an
excess cash flow provision for additional annual principal repayment
requirements. Maturities of the term loans and multicurrency revolver are seven
years and six years from the date of issuance, respectively. The credit facility
is secured by substantially all of the assets of Itron, Inc., our operating
subsidiaries, except our international subsidiaries, and includes covenants,
which contain certain financial ratios and place restrictions on the incurrence
of debt, the payment of dividends, certain investments, incurrence of capital
expenditures above a set limit and mergers. We were in compliance with these
debt covenants at March 31, 2009. At March 31, 2009, there were no
borrowings outstanding under the revolver and $50.4 million was utilized by
outstanding standby letters of credit resulting in $64.6 million being
available for additional borrowings.
We repaid
$67.6 million of the term loans during the first three months of 2009. These
repayments were made with cash flows from operations and cash on hand.
Repayments of $46.8 million were made during the first three months of
2008.
Senior
Subordinated Notes
In
May 2004, we issued $125 million of 7.75% senior subordinated notes
(subordinated notes) due in 2012, which were discounted to a price of 99.265 to
yield 7.875%. The subordinated notes are registered with the SEC and are
generally transferable. Fixed interest payments are required every six months,
in May and November. The notes are subordinated to our credit facility
(senior secured borrowings) and are guaranteed by all of our operating
subsidiaries, except for our international subsidiaries. The subordinated notes
contain covenants, which place restrictions on the incurrence of debt, the
payment of dividends, certain investments and mergers. We were in compliance
with these debt covenants at March 31, 2009. From time to time, we may
acquire a portion of the subordinated notes on the open market, resulting in the
early extinguishment of debt.
We did
not acquire any subordinated notes during the first three months of 2009 or
2008. The balance of the subordinated notes, including unaccreted discount, was
$109.2 million at March 31, 2009 and December 31,
2008. Currently, some or all of the subordinated notes may be redeemed at our
option at a redemption price of 103.875% of the principal amount, decreasing to
101.938% on May 15, 2009 and 100.000% on May 15, 2010.
Convertible
Senior Subordinated Notes
On
August 4, 2006, we issued $345 million of 2.50% convertible notes due
August 2026. Fixed interest payments are required every six months, in
February and August. For each six month period beginning August 2011,
contingent interest payments of approximately 0.19% of the average trading price
of the convertible notes will be made if certain thresholds and events are met,
as outlined in the indenture. The convertible notes are registered with the SEC
and are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in FASB Emerging Issues Task Force
(EITF) 05-2, The Meaning of
“Conventional Convertible Debt Instruments” in Issue 00-19, as the number
of shares, or cash, to be received by the holders was not fixed at the inception
of the obligation. We have concluded that the conversion feature of our
convertible notes does not require bifurcation from the host contract in
accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133) as the conversion feature
is indexed to our own stock and would be classified within stockholders’ equity
if it were a freestanding instrument as provided by EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.
The
convertible notes may be converted at the option of the holder at a conversion
rate of 15.3478 shares of our common stock for each $1,000 principal amount of
the convertible notes, under the following circumstances, as defined in the
indenture (filed with the SEC on November 6, 2006 as Exhibit 4.16 to our
Quarterly Report on Form 10-Q):
o
|
during
any fiscal quarter commencing after December 31, 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
amount payable upon conversion is the result of a formula based on the closing
prices of our common stock for 20 consecutive trading days following the
date of the conversion notice. Based on the conversion ratio of 15.3478 shares
per $1,000 principal amount of the convertible notes, if our stock price is
lower than the conversion price of $65.16, the amount payable will be less than
the $1,000 principal amount and will be settled in cash. Our closing stock price
at March 31, 2009 was $47.35.
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.
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 100% of the
principal amount, plus accrued and unpaid interest.
On or
after August 1, 2011, we have the option to redeem all or a portion of the
convertible notes at a redemption price equal to 100% of the principal amount
plus accrued and unpaid interest.
The
convertible notes are unsecured, subordinated to our credit facility (senior
secured borrowings), and are guaranteed by all of our operating subsidiaries,
except for our international subsidiaries. The convertible notes contain
covenants, which place restrictions on the incurrence of debt and certain
mergers. We were in compliance with these debt covenants at March 31,
2009.
As our
stock price is subject to fluctuation, the contingent conversion threshold may
be triggered during any quarter, prior to July 2011, and the notes become
convertible. At March 31, 2009 and December 31, 2008, the contingent
conversion threshold was not exceeded and, therefore, the aggregate principal
amount of the convertible notes is included in long-term debt.
On
January 1, 2009, we adopted FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement), (FSP 14-1). FSP 14-1 requires the convertible debt to
be separated between its liability and equity components, in a manner that
reflects our non-convertible debt borrowing rate, determined to be 7.38% at the
time of the issuance of the convertible notes, and must be applied retroactively
to all periods presented. See Note 1 of the condensed consolidated financial
statements for disclosure about the financial statement impact of our adoption
of FSP 14-1.
The
carrying amounts of the debt and equity components are as follows:
|
|
At
March 31,
|
|
|
At
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Face
value of convertible debt
|
|
$ |
223,604 |
|
|
$ |
344,588 |
|
Unamortized
discount
|
|
|
(22,537 |
) |
|
|
(38,251 |
) |
Net
carrying amount of debt component
|
|
$ |
201,067 |
|
|
$ |
306,337 |
|
|
|
|
|
|
|
|
|
|
Carrying
amount of equity component
|
|
$ |
31,831 |
|
|
$ |
41,177 |
|
For the
three months ended March 31, 2009 and 2008, the effective interest rate on
the liability component was 7.38% and interest expense relating to both the
contractual interest coupon and amortization of the discount on the liability
component was $4.2 million and $5.4 million, respectively. Due to the
combination of put, call, and conversion options, that are part of the terms of
the convertible note agreement, the remaining discount on the liability
component will be amortized over 27 months.
During
the first quarter of 2009, we entered into exchange agreements with certain
holders of our convertible notes to issue, in the aggregate, approximately 2.3
million shares of common stock, valued at $132.9 million, in exchange for, in
the aggregate, $121.0 million principal amount of the convertible notes,
representing 35% of the aggregate principal outstanding at the date of the
exchanges. All of the convertible notes we acquired pursuant to the exchange
agreements were retired upon the closing of the exchanges. (see Note 6 of the
condensed consolidated financial statements)
Other
Sources and Uses of Capital
We are
often required to obtain letters of credit or bonds in support of our
obligations for customer contracts. These letters of credit or bonds typically
provide a guarantee to the customer for future performance, which usually covers
the installation phase of a contract and may on occasion cover the operations
and maintenance phase of outsourcing contracts. At March 31, 2009, in
addition to the outstanding standby letters of credit of $50.4 million issued
under our credit facility’s $115 million multicurrency revolver, our Itron
International operating segment has a total of $30.1 million of unsecured
multicurrency revolving lines of credit with various financial institutions with
total outstanding standby letters of credit of $7.7 million. At
December 31, 2008, Itron International had $28.8 million of unsecured
multicurrency revolving line of credit with total outstanding standby letters of
credit of $6.7 million. Unsecured surety bonds in force were $33.5 million and
$33.1 million at March 31, 2009 and December 31, 2008, respectively.
In the event any such bonds or letters of credit are called, we would be
obligated to reimburse the issuer of the letter of credit or bond; however, we
do not believe that any currently outstanding bonds or letters of credit will be
called.
Our net
deferred income tax assets consist primarily of accumulated net operating loss
carryforwards, hedging activities, and tax credits that can be carried forward,
some of which are limited by Internal Revenue Code Sections 382 and 383. The
limited deferred income tax assets resulted primarily from acquisitions. Based
on current projections, we expect to pay $1.9 million in U.S. federal and
state taxes and approximately $22.2 million in local and foreign taxes in
2009.
We
sponsor both funded and unfunded non-U.S. defined benefit pension plans offering
death and disability, retirement, and special termination benefits to employees
in Germany, France, Spain, Italy, Belgium, Chile, Portugal, Hungary, and
Indonesia. These plans were assumed with the acquisition of Actaris on
April 18, 2007. Our general funding policy for these qualified pension
plans is to contribute amounts sufficient to satisfy regulatory funding
standards of the respective countries for each plan. Our expected contribution
assumes that actual plan asset returns are consistent with our expected rate of
return and that interest rates remain constant. At December 31, 2008, we
expected to contribute a total of $400,000 in 2009. For the three months ended
March 31, 2009, we contributed approximately $26,000 to the defined benefit
pension plans compared with $60,000 for the same period in 2008.
Working
capital, which represents current assets less current liabilities, was $237.6
million at March 31, 2009, compared with $293.3 million at
December 31, 2008. The $55.7 million decrease in working capital resulted
primarily from the use of cash and cash equivalents to pay down
debt.
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 sale of common
stock or other securities. We believe existing sources of liquidity will be
sufficient to fund our existing operations and obligations for the next 12
months and into the foreseeable future, but offer no assurances. Our liquidity
could be affected by the stability of the energy and water industries,
competitive pressures, international risks, intellectual property claims,
capital market fluctuations, and other factors described under “Risk Factors”
within Item 1A of Part 1 of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008, which was filed with the SEC on February 26,
2009, as well as in our “Quantitative and Qualitative Disclosures About Market
Risk” within Item 3 of Part 1, included in this Quarterly Report on
Form 10-Q.
Contingencies
We are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood of
any adverse judgments or outcomes related to legal matters, as well as ranges of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue in
accordance with SFAS 5, Accounting for Contingencies,
and related pronouncements. In accordance with SFAS 5, a liability is
recorded and charged to operating expense when we determine that a loss is
probable and the amount can be reasonably estimated. Additionally, we disclose
contingencies for which a material loss is reasonably possible, but not
probable. Legal contingencies at March 31, 2009 were not material to our
financial condition or results of operations.
PT
Mecoindo is a joint venture in Indonesia between PT Berca and one of the Itron
International subsidiaries. PT Berca is the minority shareholder in PT Mecoindo
and has sued several Itron International subsidiaries and the successor in
interest to another company previously owned by Schlumberger Limited
(Schlumberger). PT Berca claims that it had preemptive rights in the joint
venture and has sought to nullify the transaction in 2001 whereby Schlumberger
transferred its ownership interest in PT Mecoindo to an Itron International
subsidiary. The plaintiff also seeks to collect damages for the earnings it
otherwise would have earned had its alleged preemptive rights been observed. The
Indonesian courts have awarded 129.6 billion rupiahs ($11.2 million) in damages,
plus accrued interest at 18% annually, against the defendants and have
invalidated the 2001 transfer of the Mecoindo interest to a subsidiary of Itron
International. All of the parties have appealed the matter to the Indonesian
Supreme Court. In addition, Itron International has notified Schlumberger that
it will seek to have Schlumberger indemnify Itron International from any damages
it may incur as a result of this claim.
During
the first quarter of 2009, all of the parties agreed to settle the litigation,
including the indemnification claims against Schlumberger. Pursuant to
Indonesian law and regulations, the settlement could take several months to
become final. This settlement is not expected to have a material impact on our
financial condition or results of operations.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages, and attorney’s fees awarded against a
customer with respect to such a claim provided that (a) the customer
promptly notifies us in writing of the claim, and (b) we have the sole
control of the defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments. We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue Recognition: The
majority of our revenues are recognized when products are shipped to or received
by a customer or when services are provided. For arrangements involving multiple
elements, we determine the estimated fair value of each element and then
allocate the total arrangement consideration among the separate elements based
on the relative fair value percentages. Revenues for each element are then
recognized based on the type of element, such as 1) when the products are
shipped, 2) services are delivered, 3) percentage-of-completion when
implementation services are essential to other elements in the arrangements, 4)
upon receipt of customer acceptance, or 5) transfer of title. Fair values
represent the estimated price charged when an item is sold separately. We review
our fair values on an annual basis or more frequently if a significant trend is
noted.
We
recognize revenue for delivered elements when the delivered elements have
standalone value and we have objective and reliable evidence of fair value for
each undelivered element. If the fair value of any undelivered element included
in a multiple element arrangement cannot be objectively determined, revenue is
deferred until all elements are delivered and services have been performed, or
until fair value can objectively be determined for any remaining undelivered
elements.
If
implementation services are essential to a software arrangement, revenue is
recognized using either the percentage-of-completion methodology if project
costs can be estimated or the completed contract methodology if project costs
cannot be reliably estimated. The estimation of costs through completion of a
project is subject to many variables such as the length of time to complete,
changes in wages, subcontractor performance, supplier information, and business
volume assumptions. Changes in underlying assumptions/estimates may adversely or
positively affect financial performance. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance
period.
Unearned
revenue is recorded when a customer pays for products or services where the
criteria for revenue recognition have not been met as of the balance sheet date.
Deferred cost is recorded for products or services for which ownership
(typically defined as title and risk of loss) has transferred to the customer,
but for which the criteria for revenue recognition have not been met as of the
balance sheet date. Previously recorded unearned revenue and deferred costs are
recognized when the applicable revenue recognition criteria are met. Shipping
and handling costs and incidental expenses billed to customers are recorded as
revenue, with the associated cost charged to cost of revenues.
Warranty: We offer standard
warranties on our hardware products and large application software products. We
accrue the estimated cost of projected warranty claims based on historical and
projected product performance trends and costs. Testing of new products in the
development stage helps identify and correct potential warranty issues prior to
manufacturing. Continuing quality control efforts during manufacturing reduce
our exposure to warranty claims. If our quality control efforts fail to detect a
fault in one of our products, we could experience an increase in warranty
claims. We track warranty claims to identify potential warranty trends. If an
unusual trend is noted, an additional warranty accrual may be assessed and
recorded when a failure event is probable and the cost can be reasonably
estimated. Management continually evaluates the sufficiency of the warranty
provisions and makes adjustments when necessary. The warranty allowances may
fluctuate due to changes in estimates for material, labor, and other costs we
may incur to repair or replace projected product failures, and we may incur
additional warranty and related expenses in the future with respect to new or
established products. The long-term warranty balance includes estimated warranty
claims beyond one year.
Inventories: Items are
removed from inventory using the first-in, first-out method. Inventories include
raw materials, sub-assemblies, and finished goods. Inventory amounts include the
cost to manufacture the item, such as the cost of raw materials, labor, and
other applied direct and indirect costs. We also review idle facility expense,
freight, handling costs, and wasted materials to determine if abnormal amounts
should be recognized as current-period charges. We review our inventory for
obsolescence and marketability. If the estimated market value, which is based
upon assumptions about future demand and market conditions, falls below the
original cost, the inventory value is reduced to the market value. If technology
rapidly changes or actual market conditions are less favorable than those
projected by management, inventory write-downs may be required. Our inventory
levels may vary period to period as a result of our factory scheduling and
timing of contract fulfillments.
Goodwill and Intangible
Assets: Goodwill and intangible assets result from our acquisitions. We
use estimates, including estimates of useful lives of intangible assets, the
amount and timing of related future cash flows, and fair values of the related
operations, in determining the value assigned to goodwill and intangible assets.
We test goodwill for impairment each year as of October 1 under the
guidance of SFAS 142, Goodwill
and Other Intangible Assets, or more frequently if a significant
impairment indicator occurs. Our Itron North America operating segment
represents one reporting unit, while our Itron International operating segment
has three reporting units. We forecast discounted future cash flows at the
reporting unit level based on estimated future revenues and operating costs,
which take into consideration factors such as existing backlog, expected future
orders, supplier contracts, and general market conditions. Changes in our
forecasts or cost of capital may result in asset value adjustments, which could
have a significant effect on our current and future results of operations and
financial condition. Our intangible assets have a finite life and are amortized
over their estimated useful lives based on estimated discounted cash flows and
are tested for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.
Stock-Based Compensation:
SFAS 123(R), Share-Based Payment, requires
the measurement and recognition of compensation expense for all stock-based
awards made to employees and directors, based on estimated fair values. We
record stock-based compensation expense under SFAS 123(R) for awards of stock
options, our Employee Stock Purchase Plan (ESPP), and issuance of restricted and
unrestricted stock awards and units. The fair values of stock options and ESPP
awards are estimated at the date of grant using the Black-Scholes option-pricing
model, which includes assumptions for the dividend yield, expected volatility,
risk-free interest rate, and expected life. For restricted and unrestricted
stock awards and units, the fair value is the market close price of our common
stock on the date of grant. We consider many factors when estimating expected
forfeitures, including types of awards, employee class, and historical
experience. Actual results and future estimates may differ substantially from
our current estimates. We expense stock-based compensation using the
straight-line method over the vesting requirement. A substantial portion of our
stock-based compensation cannot be expensed for tax purposes. When we have tax
deductions in excess of the compensation cost, they are classified as financing
cash inflows in the Consolidated Statements of Cash Flows.
Defined Benefit Pension
Plans: We
sponsor 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 recognition
of 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 the funded status of their defined benefit
pension plans on their consolidated balance sheet and recognize as a component
of other comprehensive income, net of tax, the actuarial gains or losses, and
prior service costs or credits, if any, that arise during the period but are not
recognized as components of net periodic benefit cost.
Several
economic assumptions and actuarial data are used in calculating the expense and
obligations related to these plans. The assumptions are updated annually at
December 31 and include the discount rate, the expected remaining service
life, the expected rate of return on plan assets, and rate of future
compensation increase. The discount rate is a significant assumption used to
value our pension benefit obligation. We use the average 15 year corporate bond
yield curve from the central banks of each respective country in which we have
an established benefit pension plan. The weighted average discount rate used to
measure the projected benefit obligation as of December 31, 2008 was 6.52%.
A change of 25 basis points in the discount rate would change our pension
benefit obligation by approximately $2 million. The financial and actuarial
assumptions used at December 31, 2008 may differ materially from actual
results due to changing market and economic conditions and other factors. These
differences could result in a significant change in the amount of pension
expense recorded in future periods. Gains and losses resulting from changes in
actuarial assumptions, including the discount rate, are recognized in other
comprehensive income in the period in which they occur.
Bonus and Profit Sharing: We
have various employee bonus and profit sharing plans that provide award amounts
for the achievement of annual financial and nonfinancial targets. If management
determines it probable that the targets will be achieved and the amounts can be
reasonably estimated, a compensation accrual is recorded based on the
proportional achievement of the financial and nonfinancial targets. Although we
monitor and accrue expenses quarterly based on our progress toward the
achievement of the annual targets, the actual results at the end of the year may
require awards that are significantly greater or less than the estimates made in
earlier quarters.
Convertible Debt: FSP 14-1
requires our convertible debt to be separated into its liability and equity
components in a manner that reflects our non-convertible debt borrowing rate,
which we determined to be 7.38% at the time of the issuance of the convertible
notes issuance in August 2006. As required by FSP 14-1 upon derecognition
of the convertible notes, we remeasure the fair value of the liability and
equity components using a borrowing rate for similar non-convertible debt that
would be applicable to Itron at the date of the derecognition. Any increase or
decrease in borrowing rates from the inception of the debt to the date of the
derecognition could result in a gain or loss, respectively, on
extinguishment.
Income Taxes: Income taxes
are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes.
We estimate income taxes in each of the taxing jurisdictions in which we
operate. Changes in our effective tax rate are subject to several factors,
including fluctuations in operating results, new or revised tax legislation and
accounting pronouncements, changes in the level of business performed in
domestic and foreign jurisdictions, research credits, and state income taxes.
Significant judgment is required in determining our annual tax rate and in
evaluating our tax positions. We assess the likelihood that deferred tax assets,
which include net operating loss carryforwards and temporary differences
expected to be deductible in future years, will be recoverable.
We record
valuation allowances to reduce deferred income tax assets to the extent we
believe it is more likely than not that a portion of such assets will not be
realized. In making such determinations, we consider all available positive and
negative evidence, including scheduled reversals of deferred income tax
liabilities, projected future taxable income, tax planning strategies, and our
ability to carry back losses to prior years. We are required to make assumptions
and judgments about potential outcomes that lie outside management’s control.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward periods are
reduced.
We are
subject to audit in multiple taxing jurisdictions in which we operate. These
audits can involve complex issues, which may require an extended period of time
to resolve. We believe we have recorded adequate income tax provisions and FIN
48 reserves.
We
provide reserves for unrecognized tax benefits as required under FIN 48. In
applying the standards of FIN 48, we consider the relative risks and merits of
positions taken in tax returns filed and to be filed, considering statutory,
judicial, and regulatory guidance applicable to those positions. FIN 48 requires
us to make assumptions and judgments about potential outcomes that lie outside
management’s control. To the extent the tax authorities disagree with our
conclusions and depending on the final resolution of those disagreements, our
effective tax rate may be materially affected in the period of final settlement
with the tax authorities.
Derivative Instruments: We
account for derivative instruments and hedging activities in accordance with
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. All derivative
instruments, whether designated in hedging relationships or not, are recorded on
the Consolidated Balance Sheets at fair value as either assets or liabilities.
The components and fair values of our derivative instruments, which are
primarily interest rate swaps, are determined using the fair value measurements
of significant other observable inputs (Level 2), as defined by SFAS 157, Fair Value Measurements. We
include the effect of our counterparty credit risk based on current published
credit default swap rates when the net fair value of our derivative instruments
are in a net asset position and the effect of our own nonperformance risk when
the net fair value of our derivative instruments are in a net liability
position. If the derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded as a component of other comprehensive income and are
recognized in earnings when the hedged item affects earnings. If the derivative
is a net investment hedge, the effective portion of any unrealized gain or loss
is reported in accumulated other comprehensive income as a net unrealized gain
or loss on derivative instruments. Ineffective portions of fair value changes or
the changes in fair value of derivative instruments that do not qualify for
hedging activities are recognized in other income (expense) in the Consolidated
Statement of Operations. We classify cash flows from our derivative programs as
cash flows from operating activities in the Consolidated Statements of Cash
Flows. Derivatives are not used for trading or speculative purposes. We have one
counterparty to our derivatives, which is a major international financial
institution, with whom we have a master netting agreement; however, our
derivative positions are not disclosed on a net basis. There are no
credit-risk-related contingent features within our derivative
instruments.
Foreign Exchange: Our
condensed consolidated financial statements are reported in U.S. dollars. Assets
and liabilities of international subsidiaries with a non-U.S. dollar functional
currency are translated to U.S. dollars at the exchange rates in effect on the
balance sheet date, or the last business day of the period, if applicable.
Revenues and expenses for these subsidiaries are translated to U.S. dollars
using a weighted average rate for the relevant reporting period. Translation
adjustments resulting from this process are included, net of tax, in accumulated
other comprehensive income in shareholders’ equity. Gains and losses that arise
from exchange rate fluctuations for balances that are not denominated in an
entity’s functional currency are included in the Consolidated Statements of
Operations. Currency gains and losses of intercompany balances deemed to be
long-term in nature or designated as hedges of the net investment in
international subsidiaries are included, net of tax, in accumulated other
comprehensive income in shareholders’ equity.
New
Accounting Pronouncements
In
December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets, which amends SFAS 132(R), Employer’s Disclosures about
Pensions and Other Postretirement Benefits, to require additional fair
value disclosures about assets held in an employer’s defined benefit pension or
other postretirement plan. This FSP is effective for our December 31, 2009
Annual Report on Form 10-K.
In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP is effective for our
June 30, 2009 Quarterly Report on Form 10-Q.
Subsequent
Event
On
April 24, 2009, we completed an amendment to our credit facility dated
April 18, 2007. The amendment adjusts the maximum total leverage ratio and
the minimum interest coverage ratio to increase our operational flexibility. The
amendment also provides us with the uncommitted option to increase the $115
million multicurrency revolving line-of-credit by an additional $75 million
without a further amendment to the credit facility. Interest rates on the credit
facility will continue to be based on the respective borrowing’s denominated
LIBOR, plus an additional margin. The additional margin will increase and is
dependent on our total leverage ratio, in accordance with the terms of the
amendment. The additional margin was 1.75% at March 31, 2009, increasing to
3.5% on April 24, 2009. Debt fees of approximately $3.7 million were
incurred for the amendment, as well as other legal and advisory
fees.
ITEM 3: Quantitative and Qualitative
Disclosures about Market Risk
In the
normal course of business, we are exposed to interest rate and foreign currency
exchange rate risks that could impact our financial position and results of
operations. As part of our risk management strategy, we use derivative financial
instruments to hedge certain foreign currency and interest rate exposures. Our
objective is to offset gains and losses resulting from these exposures with
losses and gains on the derivative contracts used to hedge them, therefore
reducing the impact of volatility on earnings or protecting fair values of
assets and liabilities. We use derivative contracts only to manage existing
underlying exposures. Accordingly, we do not use derivative contracts for
speculative purposes.
Interest
Rate Risk
The table
below provides information about our financial instruments that are sensitive to
changes in interest rates and the scheduled minimum repayment of principal and
estimated cash interest payments over the remaining lives of our debt at
March 31, 2009. As a result of our interest rate swaps at March 31, 2009,
85% of our borrowings are at fixed rates. Weighted average variable rates in the
table are based on implied forward rates in the Bloomberg U.S. dollar and euro
swap yield curves as of March 31, 2009, our estimated leverage ratio, which
determines our additional interest rate margin, and a static foreign exchange
rate at March 31, 2009.
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Beyond
2013
|
|
|
Total
|
|
|
|
(in
millions)
|
|
Fixed
Rate Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal:
Convertible notes (1)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
223.6 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
223.6 |
|
Interest
rate
|
|
|
2.50 |
% |
|
|
2.50 |
% |
|
|
2.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal:
Subordinated notes (2)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
109.6 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
109.6 |
|
Interest
rate
|
|
|
7.75 |
% |
|
|
7.75 |
% |
|
|
7.75 |
% |
|
|
7.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate Debt
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal:
U.S. dollar term loan
|
|
$ |
4.5 |
|
|
$ |
6.1 |
|
|
$ |
6.1 |
|
|
$ |
6.1 |
|
|
$ |
6.1 |
|
|
$ |
300.3 |
|
|
$ |
329.2 |
|
Average
interest rate
|
|
|
2.90 |
% |
|
|
3.72 |
% |
|
|
3.12 |
% |
|
|
3.41 |
% |
|
|
3.71 |
% |
|
|
3.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal:
Euro term loan
|
|
$ |
3.3 |
|
|
$ |
4.5 |
|
|
$ |
4.5 |
|
|
$ |
4.5 |
|
|
$ |
4.5 |
|
|
$ |
295.3 |
|
|
$ |
316.6 |
|
Average
interest rate
|
|
|
3.32 |
% |
|
|
3.56 |
% |
|
|
3.56 |
% |
|
|
3.89 |
% |
|
|
4.17 |
% |
|
|
4.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps on U.S. dollar term loan
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Pay)
|
|
|
2.79 |
% |
|
|
2.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Receive)
|
|
|
1.15 |
% |
|
|
1.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net/Spread
|
|
|
(1.64 |
%) |
|
|
(0.71 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap on euro term loan
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Pay)
|
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
6.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest rate (Receive)
|
|
|
3.57 |
% |
|
|
3.81 |
% |
|
|
3.81 |
% |
|
|
4.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Net/Spread
|
|
|
(3.02 |
%) |
|
|
(2.78 |
%) |
|
|
(2.78 |
%) |
|
|
(2.45 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
$223.6 million of 2.50% convertible notes due August 2026 have fixed
interest payments due every six months, in February and August. Due
to the combination of put, call, and conversion options that are part of
the terms of the convertible note agreement, the remaining discount on the
liability component will be amortized over 27
months.
|
(2)
|
On
January 1, 2009, we adopted FSP 14-1 that resulted in a change to the
way we account for the convertible notes. See Note 6 of the condensed
consolidated financial statements for the reconciliation between the face
value and the carrying amount of the convertible
notes.
|
(3)
|
The
$109.6 million aggregate principal amount of 7.75% subordinated notes, due
in 2012, was originally discounted to $99.265 per $100 of principal to
yield 7.875%. The balance of the subordinated notes, including unaccreted
discount, was $109.2 million at March 31, 2009 (see Note 6 of
the condensed consolidated financial
statements).
|
(4)
|
Our
senior secured credit facility has a remaining balance of $645.8 million
at March 31, 2009 (see Note 6 and Note 14 of the condensed
consolidated financial statements).
|
(5)
|
Interest
rate swaps to convert $200 million of our $329.2 million U.S. dollar
denominated term loan from a floating one-month LIBOR interest rate, plus
an additional margin, to a fixed 3.01% interest rate through June 30,
2009, and a fixed 2.68% interest rate for one year beginning on
June 30, 2009, plus the additional margin. These variable-to-fixed
interest rate swaps are considered/expected to be highly effective cash
flow hedges (see Note 7 of the condensed consolidated financial
statements).
|
(6)
|
Interest
rate swap to convert a significant portion of our €238.3 million euro
denominated variable rate term loan to a fixed-rate debt obligation at a
rate of 6.59% for the term of the loan, including expected prepayments. As
a result of expected prepayments, the interest rate swap will terminate
before the stated maturity of the term loan. This variable-to-fixed
interest rate swap is considered a highly effective cash flow hedge (see
Note 7 of the condensed consolidated financial
statements).
|
Based on
a sensitivity analysis as of March 31, 2009, we estimate that if market
interest rates average one percentage point higher in 2009 than in the table
above, our earnings before income taxes in 2009 would not be materially impacted
due to our interest rate swaps in place at March 31, 2009.
We will
continue to monitor and assess our interest rate risk and may institute
additional interest rate swaps or other derivative instruments to manage such
risk in the future.
Foreign
Currency Exchange Rate Risk
We
conduct business in a number of countries and the majority of our revenues and
operating expenses are denominated in foreign currencies; therefore, we face
exposure to movements in foreign currency exchange rates that could have a
material effect on our financial results. Our primary foreign currency exposure
relates to non-U.S. dollar denominated transactions in our international
subsidiary operations, the most significant of which is the euro. International
revenues were 65% for the first three months of 2009, compared with 66% for the
same period in 2008.
We have
designated our euro denominated term loan as a hedges of our net investment in
international operations. Net unrealized gains of $22.9 million ($14.2 million
after-tax) and net unrealized losses of $32.4 million ($20.0 million after-tax)
were reported as a component of other comprehensive income for the three months
ended March 31, 2009 and 2008, respectively. We had no hedge
ineffectiveness.
We are
also exposed to foreign exchange risk through our intercompany financing
transactions. At each period end, foreign currency monetary assets and
liabilities, including intercompany balances, are revalued with the change
recorded to other income and expense. In the second quarter of 2008, we began
entering into monthly foreign exchange forward contracts, not designated for
hedge accounting under SFAS 133, with the intent to reduce earnings volatility
associated with certain foreign currency balances of intercompany financing
transactions. During the three months ended March 31, 2009, the notional
amount of our outstanding forward contracts ranged from $2 million to $12
million offsetting exposures from the euro, British pound, Czech koruna, and
Hungarian forint.
In future
periods, we may use additional derivative contracts to protect against foreign
currency exchange rate risks.
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 as of March 31,
2009, the Company’s disclosure controls and procedures were effective to
ensure the information required to be disclosed by an issuer in the
reports that it files or submits under the Securities Exchange Act of 1934
is accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of
human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control
objectives.
|
(b)
|
Changes in internal controls
over financial reporting. There have been no changes in internal
control over financial reporting during the quarter ended March 31,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial
reporting.
|
PART
II: OTHER INFORMATION
There
were no material changes as defined by Item 103 of Regulation S-K during the
three months ended March 31, 2009.
We review
our risk factors each quarter and update them for any material changes from risk
factors as previously disclosed in our Annual Report on Form 10-K. Therefore,
the following risk factors should be read in conjunction with the risk factors
included in our Annual Report on Form 10-K filed with the SEC on
February 26, 2009.
We are exposed to counterparty risks
with our third party depository institutions and insurance
providers.
As the
worldwide fallout from the credit crisis persists, the financial strength of
some depository institutions has diminished, and this trend may
continue. If one or more of the depository institutions in which we
maintain significant cash balances were to fail, our ability to access these
funds might be temporarily or permanently limited, and we could face material
liquidity problems and potential material financial losses.
American
International Group, Inc. (AIG) provides a portion of our overall insurance
coverage. Recently, AIG has experienced significant financial issues associated
with the troubled credit markets, and has received financial support from the
U.S. Government. It is unclear whether the restructuring of AIG will cause AIG
to alter its coverage position or reimbursement policies. The inability of AIG,
or any of our other insurance providers, to provide coverage under our insurance
policies could materially and adversely affect our results of operations and
financial condition.
Item 4: Submission of Matters to a Vote
of Security Holders
No
matters were submitted to a vote of shareholders of Itron during the first
quarter of 2009.
(a) No
information was required to be disclosed in a report on Form 8-K during the
first quarter of 2009 that was not reported.
(b) No
applicable.
Exhibit
Number
|
|
Description
of Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
100.INS
|
|
XBRL
Instance Document *
|
|
|
|
100.SCH
|
|
XBRL
Taxonomy Extension Schema *
|
|
|
|
100.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase *
|
|
|
|
100.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase *
|
|
|
|
100.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase *
|
|
|
|
*
|
|
Pursuant
to Rule 401 of Regulation S-T, users of this data are advised that the
financial information contained in the XBRL (eXtensible Business Reporting
Language) related documents is unaudited and do not represent the official
publicly filed financial statements of Itron, Inc. The purpose of
submitting the XBRL related documents is to test the related format and
technology, and, as a result, investors should continue to rely on the
official filed version of the financial statements and not rely on the
XBRL related documents in making investment decisions.
In
accordance with Rule 402 of Regulation S-T, the XBRL related information
in Exhibit 100 to this Annual Report on Form 10-K shall not be deemed to
be “filed” for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, (the “Exchange Act”), or otherwise be subject to the
liability of that section, and shall not be incorporated by reference into
any registration statement or other document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference
in such
filing.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
ITRON,
INC.
|
|
|
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May 4,
2009
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By:
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/s/
STEVEN M. HELMBRECHT
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Date
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Steven
M. Helmbrecht
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Sr.
Vice President and Chief Financial
Officer
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